Olympus Corporation (OTCPK:OCPNY) Q1 2023 Earnings Conference Call August 9, 2022 2:00 AM ET
Company Participants
Chikashi Takeda – Executive Officer & CFO
Nacho Abia – COO & Executive Officer
Conference Call Participants
Chikashi Takeda
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 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 set a record high in the first quarter. Operating profit hit record highs in terms of both amount and ratio for our first quarter. EPS was JPY20, up 34% year-on-year. We took measures to minimize some risks that had been identified at the start of the fiscal year and managed to keep them within expectations while capturing growth.
Moving on to our full year forecasts. Having revised our foreign exchange assumptions, we have revised revenue and all profit levels upward from the May forecast. We expect revenue to achieve JPY1,019 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 JPY172 billion with EPS at JPY135, up 50% year-on-year. These factors assume business operations while controlling 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 consolidated financial results. Consolidated revenue amounted to JPY214.1 billion, up 12% year-over-year with record 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 JPY137.2 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 lockdowns as well as rising material cost, et cetera. SG&A expenses were JPY108.9 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 operation infrastructure such as the QARA function, coupled with increase in personnel costs for strengthening our operational infrastructure associated with the reorganization of SSD.
In other income and expenses, again, JPY12.5 billion was posted. Other expenses included approximately JPY2.4 billion as expenses for the reorganization of SSD. Other income included approximately JPY16.4 billion as a gain on the sales of land in Tokyo. Operating profit amounted to $40.8 billion, an increase of JPY13.2 billion, or a 48% increase year-over-year with operating margin improving 4.7 points to 19.1%. Please note that 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 in Shanghai, global supply shortages of semiconductors and other components and the war in Ukraine, we worked to minimize these impacts by having each employee fulfill their roles on global scale in order to meet expectations of all our 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 to 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 three quarters. However, having revised our ForEx assumptions, we have revised our full-year forecast upward for fiscal 2023. The forecast assumptions for the forecast are JPY134 to the dollar and JPY140 to the euro. For more details in ForEx sensitivity, please refer to Page 27 in appendix.
We expect revenue to achieve JPY1,019 billion, up JPY51 billion from the previous forecast. We also revised operating profit upward by JPY25 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 JPY172 billion, with EPS of JPY135, up 50% year-over-year.
Regarding dividends for fiscal 2023, we plan pay a dividend of JPY16 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 aftermath with the Shanghai lockdown and the war in Ukraine. So that’s all from me.
Next. COO, Nacho Abia will continue the presentation.
Nacho Abia
Thank you, Chikashi. 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 diseases 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 and bladder cancer; and in lung cancer in the Respiratory area.
Next slide, please. GI-Endotherapy business competes in a total addressable market of JPY300 billion to JPY350 billion, growing at the 5% to 7% CAGR. This is a market where Olympus continues to leverage its 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’re in a very strong position as the number second in the Endotherapy market, and we will continue building on our number one position in the GI endoscopy market.
Today, I’d like to highlight two examples of business success. The first establishes a strong condition for current predictable growth, while the second highlights a very high growth rate opportunity. First one, in the ERCP market which has a single-digit growth rate. Olympus is highly differentiated with two 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, the Endoscopy Submucosal Dissection, ESD procedure is another exciting opportunity growing at double-digit rate. Olympus is number one in this segment highlighted by its 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 products across the various GI clinical procedures.
Next slide, please. In Urology business, Olympus competes in a market of approximately JPY280 billion [Technical Difficulty] which is growing at 5% [Technical Difficulty]. For discussion purposes, we can think of urology [Technical Difficulty] Again translation listen in the English channel. Sorry. For discussion purposes, we can think of urology having two areas of anatomical focus: upper tract and lower tract. Stone management is a condition of the upper tract and represents a market opportunity of JPY180 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 have been enjoying high growth in stone management with our new Soltive laser lithotripsy systems and lithotripsy 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 two clinical conditions, BPH and bladder cancer, which together comprise a JPY125 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 the accompanying bipolar electrodes. And for future growth, Olympus is developing the market for its iTind minimally invasive BPH treatment which is showing very encouraging clinical feedback.
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 staging. Olympus is the global leader in the reusable bronchoscope market with a market leading portfolio of bronchoscopes 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 position in the growing field of lung cancer staging and diagnosis. Lung cancer is the leading cause of cancer deaths in the world today and Olympus has been a pioneer and leader in staging and diagnosis since 2004, when it introduced the world’s first endobronchial ultrasound bronchoscope and associated Transbronchial Needle Aspiration needles for direct sampling of suspected cancerous tissue. EBUS bronchoscopes and EBUS-TBNA together are growing at double digit rates.
Looking towards future growth, Olympus continues developing the market with its 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 our potential in the Therapeutic Solutions Division area.
Thank you and this concludes my presentation.
Question-and-Answer Session
A – Unidentified Company Representative
So we’ll now move to the Q&A session. But before that, we’d like to go over the questions that we received in advance, especially the frequently asked questions. The full year forecast, as then 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? That is the question. Thank you. Can you hear me? Takeda, would like to respond.
Chikashi Takeda
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 a 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.
Unidentified Company Representative
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?
Chikashi Takeda
I think it’s another area that you might be interested in. internal analysis indicate the following at the high level. In terms of revenue, over 10 billion plus, maybe 15 as much as 15 billion at least over 10 billion additional gross profit impact. That’s what the calculation shows.
Unidentified Company Representative
No. It doesn’t mean that the result of this analysis would be additional the revenue that we could have achieved?
Chikashi Takeda
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.
Unidentified Company Representative
Next, let’s go into the Q&A session, taking questions from the participants. The first quarter results and you 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 second quarter to the second quarter, three quarter cumulative is up a 36% margin. I think basically you have to reach 36% margin to reach the level.
So 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 through your transformer inputs some initiatives. So what are the things that you can do to improve the margin?
Chikashi Takeda
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, the first quarter, there was a substantial decline in our revenue. On the [indiscernible], 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, there will be a 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 will be the one major assumption that we are factoring into our outlook.
And looking it in more detail, so excluding the ForEx impact that is, for the ESD, the next nine months, year-over-year, basically, the growth rate will be the same as the first quarter at least that is the minimum level of the growth that we are anticipating. In terms of cost, that will be the same level as last year. I think that we’ll be able to use that SG&A for the ESD business. The spending of our expenses for the first quarter was at high level. So we want to control that for the following nine 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 when I’m calling nine months, we can double the growth. That is due to the recovery of China. On top of that, the growth driver for Urology area will be accelerated. So in terms of the region, it will be Europe, the U.S. and Japan. And 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 of the progress compared to normal year, first quarter was basically at the same level. So I think as soon as long as we use SG&A like previous years, I think that will be okay.
So going to SSD, it’s a bit behind, but we are just focusing on — I think we should focus on the revenue. So we had the Shanghai lockdown. And in terms of — there has been challenging in terms of the procurement of the parts and material, we haven’t able to ship our products On the other hand, in terms of the backlog of orders compared to last year is double. The order backlog is double compared to the previous year. So be able to get our hands on the materials and components, we’re now on. So based on the improvement of the environment, the backlog will turn into sales and then basically, we’ll see volumes and then ship our products as normal. Meaning that with the remaining nine months, we’ll be able to catch up for the SSD business.
Unidentified Company Representative
Thank you. So one follow-up, with this I want to hear more detail about China. So China for April, May, June, what type of momentum was there? Specifically, maybe April to May was stagnant, but in June? How much catch up were you able to ship in June? So the recovery in June was it stronger than expected. Can you explain? And if you look at the full year forecast, so during 2022, China capital spending. In terms of 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
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, in terms of the numbers, I would like to respond to that. First of all, April, basically in terms of the shipment, it was zero. 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 revenues has been trending in line with the lifting of the lifetime. So that’s all for me.
Unidentified Participant
And then I would like to take the second question from [indiscernible] 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
Yeah. Thank you, Chikashi. Just to complement with 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, as I mean, the income in orders, but also impacted the rest of the country because for these two months, product demonstration was literally almost impossible to do because of the non-possibility to ship products from Shanghai warehouses to the customers, which delayed in all over the country that’s under 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 ourselves 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, that those tenders will reactivate. And we’re seeing a strong GI Endoscopes activity in China. And it although is 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 reactive. So we are positive about the situation in China. We are contacting customers there and they expect as well their business as to come to market. So that’s what I can add to the Chikashi’s explanation. Thank you.
Unidentified Participant
Okay. Excellent. Can I just double check that you are not really seeing any signs of project cut by Chinese hospital at this moment?
Nacho Abia
The situation in Chinese hospitals in the last two years or three years with COVID situation has been a little bit strange with its ups and downs. I think that we were expecting some recovery on the budget this month and the direct impact on hospital budgets of the lockdowns in April and May is still difficult to predict. What we see is that somewhere patients [indiscernible] and at least for the GI business, we see that there is a lot of activity in the market. So we are confident that this area will recover strongly.
Unidentified Participant
Thank you so much. The first quarter China is a concern, but I would defer that to other questioners about China that is. ESD segments, Japan, Europe usually, excluding the foreign exchange impacts presented big growth in revenue. And I think that’s where the focus is usually. I think EVIS X1was an impact. But can you explain what the reason was for this big growth in revenue other than EVIS X1, what was the beneficial of factors that contributed to growth in revenue?
Chikashi Takeda
Okay. Let me first answer that and, Nacho, if you have anything to add, please do so. First Europe and Japan, EVIS X1 effect, X 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, I guess, EVIS X1 is part of the picture, but in U.K. NHS, the budgets that was executed that benefited us, especially for GI, ESD 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 or…?
Nacho Abia
No, not much to add. I think that we’ve seen very solid business in Japan, in the U. S. and in Europe. In Europe and U.S. there is regional factor one is then the NHS in UK continue with a strong purchases plan. As you say, the other is that overall in Europe, EVIS X1 is really driving the growth the same amount in Japan. So we are seeing very strong businesses there. In the United States, even 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’re having a very strong Q1.
Q1 market also provoked by the last, again, three years, a COVID situation the probability is strange and puts its behaviors. But I think altogether, the GI business continue being very strong in all geographies with obviously the exception of China because of lockdown situation and TSD, specifically urology and respiratory and in the therapy. are showing very nice growth in all geographies, across all geographies, I also think that this is the situation we are seeing in Q1 and what we expect to continue in Q2. Thank you.
Unidentified Participant
I see. Thank you. I have a follow-up question. Looking at the current situation in Japan, semiconductor has been secure already. And therefore, the shipments would return to normal level instead of 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
Thank you. I would like to answer that. First, did we secure all these semiconductors necessary? Well, compared to what we were anticipating initially, how should I put it? Their risk had been lessened. To a large extent, we have been able to secure the necessary supply. That was for Q1. Having said that, why 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 three months ago, things are looking better is the way I see it. And price for the last three months, from the so called spot market, if we are to purchase from the spot market, we knew that the prices couldn’t be exorbitant that’s what the media had been reporting. And to secure the amount, we started to source from the spot market. And in Q1, maybe 1 billion to 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, in 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 it 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.
Unidentified Participant
I see. Thank you. That’s all. Thank you very much. So the Europe, it is the strength. I can understand that. But one thing was concerned is the US 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 in plasma, you had the growth [indiscernible] is it in the first 1% growth in the first quarter. I’d like to know the background. And Takeda has talked about ESDs — in terms of the margin is lower, but they maybe assume spending is higher to pry. I would like to know about that. So can you continue that in the second half? That’s my question.
Nacho Abia
I think overall, TSD have been obviously — and the global has been impacted by general, mostly they impact in China and this has impacted their growth, the overall business. The situation in the U.S. has been more 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 provoked some delays. We’ve been dealing with those situations diligently and step by step, we are recovering those business. But I think this have had some short term impact in Q1 and we will continue working on that in order to recover from Q2. So from a particular point of view, we are seeing we are seeing good activity and there is nothing to worry on that sense. So I think one of the supply chain will stabilize. I think we will see normal rates of growth in TSB. Thank you.
Chikashi Takeda
Hi. So going to your second — as part of the question about SG&A, I think this is a kind of a — I mean, some of the multiple items like outsourcing is increasing. It’s a QARA response, expenses, personnel costs 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 shows that SG&A is higher a bit higher in first quarter. So in the following nine months, whether them specifically doing something in some areas, I think it’s kind of in totality we want to optimize SG&A in the following nine months.
Unidentified Participant
Can I just ask a question about the TSD business? I think, well, thank you, first of all, for talking about TSD business in general because once EVIS X1 launches in the U.S. this year, I think there’s probably not going to be much to talk about the EVIS X1 for a while. So it really helps to talk about this. But my question is about the ERCP. So you’re saying the ERCP market grows 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 JPY20 billion I say you are correct. You pointed out guidance our guiders [indiscernible], as areas of strength, I believe the Visiglideseries, made by Terumo, the Guidewire, has been a differentiation factor versus the competitors’ offering.
So I don’t have, you know, there’s not 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 expense 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? That’s my last question. Thank you.
Nacho Abia
Yeah. Thank you for your question, which is very detail, and I’m not sure, if I could be able to answer to the level of the detail you’re expecting. But what I could say is that, in our positioning current in the therapy and generally is much stronger in the — the more complicated the procedure is, the better our 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 have indications that we’re 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 — the technology, why some products are better than others in a market, which is tight. In many cases, it depends as well of the taste of our customers. And this is when we are indicated that in our Guidewares and Sphincterotomes are being very well accepted and they are considered by our customers that they are doing a good job there.
In the Visiglide is one of our more successful products as well and is doing well. But I think overall the portfolio is growing. There is two reasons for that. One is, which obviously we believe that our products are at the very least at the same level, our competitors, if not superiors, but also I think that over the last years, not only recently, we’ve been very active in the market from a commercial standpoint. I mean, growing the number of interactions with customer 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 have complete having a more complete portfolio for ERCP. So I think these are altogether 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 is somehow your question. Thank you very much.
Unidentified Participant
Thank you very much. Our first question, 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? Is it 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 effect you did mention something could you elaborate, please?
Chikashi Takeda
Thank you. JPY1 billion to JPY1.5 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 as 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 single global entity. We did not do that much, but we reinforced 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 customer’s patience and healthcare 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 their route — transportation route that will get our products to our customers. That’s just one example, but one specific example of the mitigation measures. So that’s very random examples of what we did. Thank you.
Unidentified Participant
A follow-up question. different subject. Looking at China, Q2 onward, 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 products purchase and orders in China? In TSD, maybe it’s declining, EST some of the products are decline. What about the situation right now June, July? In orders in China?
Nacho Abia
So the situation in China, as I mentioned in previous question, is that, for April and May, I mean, situation is slowdown in terms of demonstrations and the tendering process has been delayed. So when needs about or there’s no related to tenders, we see that there is a strong recovery on procedure, which is driving already in coming out of the site. And at the same time, we see that there is more activity in tenders that will have not yet materialized, but we hope will materialize starting from September of 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. Thank you.
Mostly because of the tenders that today, we are being discussed with our custom. As I say tender, tendering process was delayed because of the lockdown, and we expect some of the tenders to materialize in Q3 this year. There has been certain delay in all the tendering processes in China due to the lockdown.
Unidentified Participant
I see. Thank you. So this is about the SSD business. For first quarter’s performance was bad. So this bad performance, will they have an impact in the plan to sell this business or if this impact the business plan of this business?
Chikashi Takeda
So in terms of the outlook, the SSD business, the first quarter, because of the information that we have shared, it 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 – there is no impact, so you’ll 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 on in timely manner, we would like to communicate the information if necessary.
Unidentified Participant
Understood. Thank you. Just one question I understand about the upward revision. Upward revision at this point in time is really good news. But the fact that you implemented that especially 51.5 billion revenue and revenue to profit 2.5 billion semiconductor, okay, Ukraine, not as serious as anticipated, and China’s is recovering. Are these are the reasons why you are revising upward at this point in time? And to understand correctly that foreign exchange assumptions would account for this amount of upward revision?
Chikashi Takeda
Let me take that question basically, the May announcement of the guidance, the underlying plans 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.
Unidentified Participant
Yes. Clear. So China, RMB20 it’s not just foreign exchange, but the volume as well. June, July, in Q3, are you assuming the value would be on par with your plan?
Chikashi Takeda
Well, we can’t really discuss on a monthly basis, but on a full year basis on the 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.
Unidentified Participant
Very clear. Thank you very much. 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 a strong. So meaning that the second quarter, because due to the impact of the lockdown, a delay of the tenders — there’ll be some impact remaining in the second quarter, is that the right way to look at this China business?
Nacho Abia
Yes. This is, I think, what I would — just to clarify that point, I think that we are seeing recovery versus business versus Q1 and Q2. I mean, it was some pent up demand in April and May that is catching up in June, July. So I think we’re seeing recovery and we’re doing better than our anticipated business plan in this months. The point of Q3 is that we expect some 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 tenders 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 strongly in Q3. That’s the point. Thank you.
Unidentified Participant
Thank you very much. So one quick follow-up. So last year, I think basically in May, there was a policy that China focused — said that chemistry done for national manufacturers, so by China policy, so June, Y-o-Y has we covered, you said that that, but maybe June was lower — was a low hurdle to clear considering what happened in June last year with the buy China campaign?
Nacho Abia
We’ve been commenting on this — in this China policy in the past. I think that — our policy in China is to continue working with our customers and then making sure that they appreciate the products and the technology that the product delivered 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 by China policy or orders. I think it’s something that that is an extent of October 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 that this 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 that has a massive contribution to the well-being of the Chinese patients, to our products, to our patients, to the different programs we have. So this is — the way we face the situation in China. Thank you.
Unidentified Participant
Thank you. The first quarter of last year, would there — June was weaker compared to this year, is that a question that you will not be able to answer?
Unidentified Company Representative
[indiscernible] will respond afterwards.
Unidentified Participant
Thank you. Understood.
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