Olympus Corporation (OTCPK:OCPNY) Q3 2022 Earnings Conference Call November 11, 2022 4:00 AM ET
Company Participants
Yasuo Takeuchi – President and Chief Executive Officer
Chikashi Takeda – Chief Financial Officer
Nacho Abia – Chief Operating Officer
Stefan Kaufmann – Chief Administrative Officer, Chief Strategy Officer and ESG Officer
Yasuo Takeuchi
Thank you very much for joining us. I am Takeuchi, CEO. On October 21, we made a timely disclosure on the management team change starting next April. Today, I would like to expand the background, the intent behind the new structure and briefly describe the reasons for the new appointments.
In 2019, we announced Transform Olympus corporate transformation plan. In our corporate strategy, we indicated that we aim for sustainable growth as a truly global medtech company, ensuring adequate profitability. We have made a concerted company-wide effort over the past 3.5 years, undaunted by the uncertainties brought on by the COVID-19 and others. As a result, achieving the strategic goal laid out in 2019 is now insight, and our business foundations and corporate culture have been strengthened beyond comparison with when Transform Olympus was launched. We are now ready to move into the face of accelerating growth by truly fulfilling our potential as a global metric company to further contribute to the development of health care.
This is the management structure effective next year. The number of executive officers will increase to 10 with the addition of ESD Head, Frank Drewalowski; TST Head, Gabriela Kaynor; HR Head, Shigeto Ohtsuki; and Chief Quality Officer, Pierre Boisier. The COO and CIO positions that have contributed to our transformation so far will be eliminated in a constructive manner, while executive officers needed for sustainable growth will be increased. The team led by the CEO, will be planned to enhance speed and agility to take actions. For these structural changes today, I will briefly introduce three new appointments effective next April. Stefan Kaufmann, newly appointed as CEO, Nacho Abia, who will focus on formulating corporate strategy to accelerate growth as a global med tech company and Pierre Bossier will be appointed as an Executive Officer for the first time to head product safety and quality assurance, the key elements in a medical device manufacturer.
First, new CEO, Stefan Kaufmann. After gaining experience overseeing our operations in Europe for many years, Stefan relocated to Japan in 2019 and has driven Transform Olympus with powerful leadership, successfully improving the management efficiency. He not only respect Japanese culture and the history of Olympus, but is also passionate about boosting the competitiveness as a global company. I believe he is the best person to serve as CEO as we reach the new milestones in greater management efficiency and accelerated growth. This appointment follows a very careful review by the Nominating Committee.
Nacho Abia, who has served as COO to date will assume the new post of Chief Strategy Officer. Olympus has been consolidating its business portfolio over the last 3.5 years. And following the transfer of Scientific Solutions business next year, it will become a dedicated medical device company. It is clear that Nacho’s experience in driving efforts in the medical field and M&A will be important for the development of company-wide growth strategy. Thus, he is to assume the post of Chief Strategy Officer.
Pierre Boisier, Chief Quality Officer, will be a newly appointed Executive Officer. He held key positions related to quality and safety assurance at Boston Scientific and [indiscernible] and others before joining Olympus in 2021, when the Transform Olympus was underway, as he agreed with initiatives and potential. Over a short time, he has demonstrated his experience, passion, and outstanding leadership in achieving a range of improvements. As for myself, in my new capacity as Director, Representative Executive Officer and Executive Chairman starting next fiscal year, I will throw my full support behind Stefan and the new leadership team.
We are announcing the new management structure at this juncture to ensure that the new corporate strategy and system development, which are to be announced early next fiscal year, will be carried out under the new management. Well, the number of executive officers will increase the global governance and speed of decision-making, enhanced over the last 3.5 years have now taken root as our corporate culture, and I’m confident that swift management decisions will continue under the new management.
And now I would like to ask Stefan to briefly introduce himself. Stefan, over to you.
Stefan Kaufmann
Thank you very much, yes, for your very friendly and warm words and hello, everybody. My name is Stefan Kaufmann, and I would like to use the opportunity of this earnings call to briefly introduce myself to all of you. I mean as you can imagine, I’m very honored and humbled that yes, the Nomination Committee and the Board has selected me as the next CEO and I think I should still say tentatively, to lead Olympus into the next phase of growth and Olympus is a Japanese company with a more than 100-year history. So I think that explains why I feel very humbled and honored that have been chosen to enter with the company into the next chapter of our involvement as a leading global med tech firm. As you are aware, in 2019, under the leadership of [indiscernible], we have started our transformation – and I think we can be extremely proud of what we have accomplished so far. And while this is certainly not the time to present to you our next company strategy, I would like to reassure you that also under my leadership, our journey to be a leading global med tech company will continue.
Now our next phase of growth, we will put a strong focus on elevating the standard of care to create value for society, for our customers, for our patients and for our shareholders. And we will continue to communicate transparently or constructively with our shareholders, our investors and with all of you. So thank you very much for your trust and your continued support of Olympus.
Chikashi Takeda
Hello. I’m Chikashi Takeda, CFO. I would like to give an overview of our consolidated financial results for the second quarter of fiscal 2023 as well as full year forecast.
First, Slide 8. I’d like to describe changes in reporting structure. On August 29th, we disclosed the transfer of all shares in Evident Corporation, which engages in Olympus Group’s Scientific Solutions business. In accordance with IFRS, the Scientific Solutions business is classified as a Discontinued Operation from this second quarter. So our briefing today will focus on continuing operations that excludes the Discontinued Operations. Please refer to appendix for more details on Discontinued Operation.
Now gains on the transfer of Scientific Solutions business will be recorded as discontinued business. On Slide 17, there is a revised forecast and profit from discontinued operations of JPY230 billion includes the gain on the transfer of scientific solutions. So this is the highlight of the Q2 results. In light of impact of the lock down in Shanghai, the war in Ukraine, supply shortages of semiconductors and other components and rising material costs, which were identified at the start of the fiscal year, we continued to take countermeasures to minimize the various risks during the first half of this fiscal year.
Revenue was up 16% on a consolidated basis with a double-digit growth for both ESD and TSD, setting record highs for both the second quarter and the first six months in the medical business. Operating profit and operating margin also set record highs for both the second quarter and the first six months. EPS of continuing operations stood at JPY55, up 20% year-on-year.
As for full-year forecasts for fiscal 2023, we have revised revenue upward from the August forecast due mainly to a change in FX assumptions. Again, we’re just focusing on the continuing operations. And this revenue upward revision is mainly due to the changes in foreign exchange assumptions. Based on the results up to the second quarter, we have slightly increased expenses as well. With these revisions, profit has been revised slightly downward. But we are still on track to achieve adjusted operating margin of over 20%.
Our target in the corporate strategy, we expect revenue to achieve JPY892 billion, up 19% year-on-year and operating profit to achieve record highs for both amount and ratio. Profit as the sum of continuing and discontinued operations is also expected to reach a record high of JPY387 billion due to a gain on transfer of scientific solutions with EPS of JPY305, up 238% year-on-year. Profit, as the sum of continuing operations and discontinued operation, is also expected to reach JPY387 billion with EPS of JPY124, up 44% year-on-year. As we announced in a timely disclosure today, we plan to implement a share buyback of approximately JPY50 billion based on our capital allocation policy. For EPS calculation, we are assuming that the share buyback has been implemented.
I will now explain the consolidated financial results and provide a business review for Q2. Slide 11, this is an overview of the consolidated financial results. First, changes in reporting structure in the profit and loss statements. On the left-hand side, from revenue down to profit from continuing operations, figures represent continuing operations that excludes Discontinued Operation. The results of FY ‘22 also been reclassified to allow year-on-year comparison.
Consolidated revenue amounted to JPY417.1 billion and for six months, up 16% year-on-year. Revenue in the medical business represents record highs for Q2 and the first six months with double-digit growth in both ESD and GST. Gross profit was JPY277.5 billion, with gross profit margin deteriorating by 0.5 points. The impact of rising materials costs and a change in regional sales mix due to a decline in China were key factors.
SG&A expenses were JPY198.5 billion, with SG&A ratio deteriorating 0.7 points due primarily to an increase in expenses associated with sales activities and strengthening of operational infrastructure, such as QARA. In other income and expenses, a gain of JPY14.6 billion due mainly to a gain of JPY16.4 billion on the sale of land in Tokyo in Q1 as other income.
Operating profit was JPY93.6 billion, up JPY22.9 billion or 32% year-on-year. Operating margin improved 2.8 points to 22.4%. Adjusted operating margin, excluding other income and expenses, which is a milestone in our corporate strategy was 19%.
Profit from continuing operations was JPY69.5 billion with EPS of JPY55, up 22% or 20% year-on-year. Our total profit, including both continuing and discontinued operations was JPY66.9 billion with EPS of JPY53, up 8% year-on-year. Even in an uncertain environment, the performance of continuing operations in Q2 was trending positive quarter-on-quarter.
I would like to skip to the outlook, Page 17. I explained in May that some growth inhibitors due to changes in the external environment have been factored into the full year forecast. We have worked, as I mentioned in the beginning to get through these factors, which were as expected, negative – we have implemented measures. And as for these measures, we would like to continue to implement them since this environment is expected to continue for some time.
And for the continuing operations we have separated the Discontinued and Continuing operations. And we haven’t made upward revision, mainly due to the exchange rate change. We expect revenue to achieve JPY892 billion, up 19% year-on-year. The forecast assumptions for FX is JPY140 to the dollar and JPY130 to the Euro. For more details, please refer to Page 33, which includes FX sensitivity.
Based on the results to the second quarter, we have slightly increased expenses. For example, we had factored a certain increase in raw material prices in our original forecast, but we decided that it could be appropriate to add more. With these revisions, profit has been revised slightly downward, but are still on track to achieve adjusted operating profit margin of more than 20%, our target in corporate strategy.
We expect operating profit to achieve JPY212 billion, up 45% year-on-year, record highs of both amount and ratio and adjusted OPM is expected to reach 22.5%. Profits are also expected to reach record high of JPY387 billion due to gain on transfer of Scientific Solutions business with EPS of JPY305, up 238%. Profit of continuing operations is expected at JPY157 billion with EPS of JPY124, up 44% year-on-year.
In fiscal ‘23, we plan to pay a dividend of JPY16 per share, unchanged from the announcement in May. As we announced in a timely disclosure today, we have planned to implement a share buyback of approximately JPY50 billion and the EPS is reflective of this share buyback.
Lastly, Page 18, forecast by segment. We expect both ESD and TSD to grow double-digit year-on-year. As a result, the combined revenue of the two divisions in the medical field is expected to reach record highs again. We are seeing continued recovery in precision volume around the world. Even in China, hit hard by the impact of Shanghai lock down, we expect a shift in growth in the second half of the fiscal year due to recovery in the number of tenders since August and the policy support, such as our interest loan program for medical devices.
We expect further contributions from growth driver products. EVIS X1 in ESD will accelerate the penetration in Japan, Europe and Asia and will be launched in the U.S. Sales of VISERA ELITE III are also expected to expand since it’s been launched in Japan and Europe. TSD’s growth continue to be centered around these three focus areas. For both divisions, we have revised our operating profit forecast from the previous forecast with the impact of rising material costs being taken into account. In the meantime, we have seen an improvement in the situation of part supply shortages, including semiconductors since October. Also, we are already implementing tighter cost controls such as hiring strength, review of various projects, limited non-essential overseas trips, and review of R&D priorities. While we anticipate that business environment will remain unstable and uncertain, the management team will continue to take a lead in company-wide collaboration to achieve the goals.
Discontinued Operation is expected to achieve a significant profit increase due to the gain on transfer – that concludes my financial part.
Nacho Abia
Thank you, Chikashi. My name is Nacho Abia, Chief Operating Officer of Olympus Corporation and today I would like to provide you some information about our Gastrointestinal Endo therapy business current and future growth drivers. Next slide please. So last quarter, we presented to you the three therapeutic areas where TSD is focused for growth: GI Endotherapy, Urology, and Respiratory. And we also discussed about the targeted clinical areas and procedures where each of these Olympus business units are focused and where we believe we can elevate the standard of care as the core of our strategy.
Today we are going to proceed with a bit of a deep dive in our Endotherapy business and in how Olympus is planning to continue growing this segment. Next slide please. The GI Endotherapy business focuses on both major GI diseases areas: pancreaticobiliary disease, often referred to by a common procedure of ERCP, and gastric diseases, which could be either colorectal or gastric. In addition to these diseases, Olympus offers solutions that are used across GI diseases, most notably our visualization portfolio and our Hemostasis portfolio.
Collectively, the worldwide opportunity for GI Endotherapy solutions is in excess of JPY300 billion, growing annually at mid single digits. This is a great market segment for Olympus to be competing in and where we believe we have a strong ‘right to win’. Here are few things to consider: Pancreaticobiliary disease affects 60 million patients annually, representing an estimated larger than JPY100 billion worldwide opportunity. Colorectal cancer is the second leading cause of cancer death, with more than 50 million colonoscopy procedures performed annually to detect and diagnosis cancer. Most of you will recognize Olympus as the market leader in visualization and it goes without saying, that you must first be able to see inside the body in order to conduct any kind of minimally invasive therapy, and the demand for novel and improved visualization features and solutions is ever present. This offer us strong synergies and opportunities to maximize value to our customer in both visualization and Endotherapy solutions.
Additionally, the Hemostasis segment, to control and stop bleeding, is the number one expense of a typical GI endosuite; an opportunity worth more than JPY100 billion globally. Hemostasis is one place where there are significant pressures to improve both clinically and economically. So, hopefully you can share our view that the Olympus GI Endotherapy business is involved in some very exciting market segments and our experience and customer relations in GI field, offer us a great opportunity to succeed.
Next slide please, we stated on the previous slide that the GI Endotherapy business is involved in very attractive markets. What we are going to discuss now is about some of the specific products and solutions we successfully have introduced in those markets. In totality, Olympus is the number two player in the market, which represents approximately 30% of Therapeutic Solutions Division revenues. Thinking about the GI diseases first, we spoke last time about the strong position that Olympus has in guide wires and sphincterotomes in pancreaticobiliary disease. Visiglide and CleverCut3V are the global market leaders for each of those categories respectively.
When you consider the rest of the portfolio of products needed to complete an ERCP procedure, Olympus has a highly differentiated and extensive portfolio including Fine Needle Aspiration & Biopsy needles, endoluminal balloons and baskets, among other devices.
Moving to the GI tract, let’s first talk about EndoCuff which Olympus acquired as part of the Arc Medical acquisition. This innovation enables GI physicians to recognize a polyp when performing a colonoscopy more quickly and easily. This single use device is opening a whole new product category because it has been clinically proven to improve Adenoma Detection Rate, an important quality metric for measuring polyp recognition that has been adopted globally by the leading clinical guidelines.
Endoscopic Submucosal Dissection or ESD is a high growth procedure for GI tract diseases and Olympus was an early innovator in ESD and continues to have the number one market position. Olympus has the broadest portfolio of ESD products including knives, forceps, injection needles, and traction devices. In visualization, Olympus is the undisputed number one market leader, and we are also developing a single use cholangioscope which will further build out our broad portfolio of ERCP tools while giving physicians another differentiated imaging solution.
Lastly, in the Hemostasis segment, Olympus offers a comprehensive portfolio of endoscopically delivered products designed to stop bleeding quickly and effectively. Olympus has the broadest portfolio of products in this category and is also the only supplier that offers both reloadable and pre-loaded clips to address a variety of physician preferences and patient conditions. Since this segment is an area of Olympus that may not be well known to many of you, let’s take a deeper look into our Hemostasis strategy.
Next slide please, Olympus has been innovating in the hemostasis segment for a long time. Over the years, Olympus has a developed a broad portfolio of hemostasis solutions to serve the various clinical needs of physicians, such as our first-to-market, and popular QuickClip family of pre-loaded clips. But we want to talk today about our more recent innovations as there is a lot that has been done in this area.
In 2019, Olympus introduced its Argon Plasma Coagulation probes which use the proprietary SmartArgon algorithm to automatically detect the distance of the probe to the tissue and precisely adjusts the power level for optimal hemostasis. In 2020, Olympus was also the first company to offer a reloadable clip in the U.S.A. when it launched an updated EZ Clip. A reloadable clip can improve procedural efficiency and be more cost-effective as the applicator handle can be reused with multiple clips, instead of having to use a new handle with each new clip and this can [indiscernible] healthcare facility save a hospital money on GI procedures which requires more than one clip.
And more recently this year, in 2022, we have launched two new products to the market: SutuArt, which is now available in Japan and Europe, the first product of its kind for suturing through an endoscope; and EndoClot, also now available in the U.S.A., is a powder that is delivered through the endoscope to stop bleeding. EndoClot is exciting as the hemostasis powder market is in its early days and growing very quickly. Clinical studies have shown EndoClot to be effective at stopping small bleeds on its own, as well as stopping any residual bleeding when used with other hemostasis products, such as our clip family. One factor speeding our U.S.A. customers to adopt EndoClot is that it is eligible for additional reimbursement thru December 2023 with the CMS Transitional Pass-Through Payment program.
That’s all from me today, but I hope from this overview, you can clearly see that Olympus has many opportunities to leverage its strong position in GI endoscopes to also provide complementary and innovative endotherapy devices that help elevate the standard of care. Thank you very much.
Question-and-Answer Session
Operator
We will now move to the Q&A session. But before we do that, we would like to answer the questions that have been brought to us before. During the first half compared to the internal plan, how was the results? And what is your view for the second half? On this particular question, our CFO, Takeda, would respond.
Chikashi Takeda
But as I said, semiconductor supply shortage risk and Shanghai lockdown and Ukraine situation. We were impacted by these factors during the first half as anticipated. So, if we exclude those hypothetically, we did calculate that, maybe 5% or 6% without – if we exclude those factors, the growth rate should have been 5% or 6%. But as expected, the growth may seem low year-on-year, but this is due to the external factors, external risk factors. That was the biggest factor and for the second half revenue for the second half. First, globally, the number of procedures is recovering, and we expect to return to the pre-COVID level. And for EST, the effect of X1, the new launch in Japan, Europe and Asia, the launches have been made and they are still growing. And in the U.S. in the second half of this fiscal year, the launch will be made. And VISERA ELITE III, launched in Japan and Europe for surgical therapy. So, we believe this will be another positive. And AST again, increased recovery and procedure and new products, [indiscernible] they are driving the growth, and we continue to expect. The effect of Shanghai lockdown, in the first half, we saw a severe impact. But for the second half, what was not executed in the first half of the budget, we expect it to be executed. And we expect some restrictions on supply will be recovered. In fact, in terms of the bidding, we see year-on-year growth expected. And more recently, the Chinese government is expected to provide low interest rate loans to some companies. So, we expect a budget to be executed in Q3 to Q4. For the second half, 2% on a constant currency basis is 2% in the first half to be raised to 6% on a full year basis, and this should come from the recovery in the second half, and we expect this could be achieved given the reasons I cited. In terms of expenses, the cost of sales more or less we were expecting the materials prices to go up, but it was going up faster than we expected. And as for expenses, there are many factors for increase and decrease. But with those ups and downs, it looks like the flexibility of that has changed. Not a big issue on a company-wide basis, but more individually, the inflation is affecting. And with that effecting, we are losing flexibility in operation, which is pushing up expenses somewhat. So, overall, it is within our expectation, but we need to keep an eye on that. And that was a trigger for the increase in expenses in our revised forecast. So, one of the assumptions for achieving the forecast is there are some cost increases that we need to accept, but at the same time, cost reduction measures are to be enhanced further. The four items that I mentioned in my presentation, we will be focusing on those over the remaining five months to keep the optimal level of expenses. I apologize for the long response.
Operator
We would like to open the floor for questions. Maybe I should ask Takeda that on Page 26, there is a bridge analysis. And this is for the first half. And you don’t have one for second quarter. Second quarter, maybe the microscope is not included. And the cost fluctuation, this was about JPY4 billion in the first half. If we exclude this in the second quarter, JPY4.3 billion fluctuation in terms of costs and the mix improvement and also capacity utilization improvements are difficult to understand from an outside perspective. And sometimes we try to include that in analysis. So, endoscopy ESD sales ratio actually is increasing compared in Q2. So, I suspect that there was maybe a mix improvement. But the cost of sales fluctuation is not really changing. So, maybe you’re not really doing anything about the inflation impact. Can you please break this down for me? JPY1 billion to JPY1.5 billion was semiconductor price increase in the first quarter. And in China, first quarter, there was a big decline. I think there was a slight decline again in this quarter. But I am sure that you are making efforts on the other hand. So, the cost of sales changes. Can you please break this down for me? That’s my first question.
Chikashi Takeda
Thank you for your question. If you break this down, approximately half is related to raw materials. Cost increase, more than 50%, I would say, according to analysis. And then we have China. China is actually doing relatively well. So, in the consolidated statement, the sales ratio is still low. And maybe this is approximately JPY1 billion to JPY1.5 billion impact according to my memory. And the rest is made up of various factors. On the other hand, improvements have been planned, but we are talking about JPY1 billion or JPY1.5 billion in that range for the full year, which means that we don’t really see the impact of that on this slide yet. That would be the answer.
Operator
So, half of this is raw materials? So JPY4 billion – so this is not just semiconductor, but also other materials are going up in price. That’s correct. What are they and what will happen to them going forward? So, JPY1 billion to JPY1.5 billion improvement, maybe this is probably pass-through to your selling price. Is that correct?
Chikashi Takeda
First of all, this is cost of material and the majority of that, of course, is semiconductors, but other parts or components are also going up in price. So, that’s one point that I want to clarify. And then what was the rest of your question?
Operator
JPY1 to JPY1.5 billion, are you going to pass-through to your selling price? Are you going to improve the product mix?
Chikashi Takeda
Well, yes, volume and also improvement activities. Those are the things that have been planned, but it will be bunched under others here. And I cannot really provide you with a more detailed analysis. But this is something that we are doing as part of our normal activities. So, the raw material cost has gone up. And especially in the first half, well, structurally, if we see a decline in China, this ratio does deteriorate. That is the uniqueness of the company.
Operator
That’s very clear to me. Thank you.
Chikashi Takeda
As far as price increase – selling price increase is concerned, it will take time before we see the impact of the price hike. Contract-based business is about 80% of the total, which means that we have a 1-year, 2-year or 3-year contract. And we have to wait for the renewal of the contract in order to revise the pricing, which means that it will take some time according to assessment, but we believe that it will be effective in the future. So, the price is basically not included in this bridge slide.
Operator
That’s very clear to me. Thank you. I am looking at Slide 17. Looking from outside, what you are showing in terms of operating income, JPY231 billion, and you are saying that this has changed because you are just looking at the continuing operations. It says minus 15% here. Given the size of the operation, JPY1.5 billion reduction is only 0.7%. So, you could have make up for this through others. But you are showing JPY1.5 billion reduction. And that really catches our attention which sends out a wrong message I am afraid. Why did you do this? Thank you.
Chikashi Takeda
This is Takeda. Well, every quarter, we review and revisit, forecast and try to have a good fidelity in terms of what we think would be a more accurate forecast, having said that, billions of yen difference. You are saying that maybe we should have kept the earlier revision. I think that’s what you are alluding to. But as I have said, I think in my presentation, especially materials prices and SG&A flexibility being lost. That was already felt and visible in the first half. And we felt that, that should be reflected in our full year forecast. And it is based on that thinking that we have made this revision. Of course, before getting to this number, there were pluses and minuses, which were very thoroughly studied. And we decided that this factor should be kept as a revised forecast, that’s minus JPY1.5 billion.
Operator
I see. Thank you. A follow-up question. Looking at Slide 18, for discontinued JPY17.5 billion operating profit, but for the first quarter, from what we can see, it was JPY26.5 billion for scientific solutions. JPY26.5 billion, but now you are saying it was JPY17.5 billion. Why is this disclosed figure different, the operating profit? Revenue, JPY45 billion, no change, so no change in revenue even with that three months difference?
Chikashi Takeda
And we will come back on this. Earlier from, there was a question, regarding the scientific solutions full year forecast. The August forecast JPY145 billion revenue, only profit has changed from JPY26.5 billion to JPY17.8 billion. Regarding this, this was just the forecast announced in August. So, we are talking about the full year forecast. So, we are including all four quarters. Initially on a consolidated basis, expenses and corporate, the cost related to divestiture or separation of scientific solutions that have been included retroactively. So, JPY26.5 billion operating profit was the forecast in August, but the cost for separation is now included in the discontinued and that’s why JPY17.5 billion.
Operator
Page 17, JPY1.5 billion operating profit revision, can you please do a factor analysis on this, negative impact from material cost and maybe JPY3 billion to JPY4 billion positive impact from FX and cost reduction measures, semiconductor market unrelated, for example, maybe you have made some strategic investments and invested into a stronger platform, perhaps. So, can you please do factor analysis on this JPY1.5 billion for us. Thank you.
Chikashi Takeda
JPY1.5 billion, we have discussed this to some extent with the earlier question. As far as the company management is concerned, FX impact excluded is the starting point when we do the calculation. This is billions of yen, which is not a large amount. So, we usually don’t really talk about this, but we have made a revision this time. So, therefore I would like to provide some simple explanation. After adjusting for FX, if we calculate this at constant exchange rate, JPY3.6 billion in revenue. This is 0.7% difference. And also gross profit is minus 36 I think – 3.6%. And the operating profit would be minus 8.7. And adjusted operating profit goes to the bottom is minus JPY8.3 billion. If we apply the same exchange rate as the previous time, this is the number and minus 1.5% operating profit and after adjustment, minus JPY1 billion. This is after applying the ForEx. Revenue is increased, but gross profit is decreasing. This is mainly due to increase in the materials cost among others and down to JPY8.7 billion. This is basically increase in SG&A. Increase of certain factors and increase of risk numbers, it’s not that simple in terms of relationship. We have many new projects and we have many old projects disappearing, and we have to face new challenges all the time. So, it is very difficult to pinpoint where these numbers are coming from. But QARA enhancement cost is one example. And also delayed development making some impact, but this is not the specific reason why the number is going up. There is not necessarily a very direct relationship.
Operator
One follow-up question. Materialize on quarter basis, JPY2 billion approximately. Is that the amount of increase that we should understand?
Chikashi Takeda
Yes. On a quarterly basis, that would be the right sensitivity level.
Operator
That’s all. Thank you. Takeda san, thank you for all your work. I know you are going to be there for a while. But I would like to take this opportunity to thank. So going – looking back on Transform Olympus and also the future, the Transform Olympus, especially when the corporate strategy was announced as focus and simplify, you said was what you need to focus on and focus and perform with another pillar. High-performance culture to take root and strengthening of functions, all of the initiatives that you were talking about then, I think have all been completed. But are there any remaining items that are not visible to us, any remaining items that need to be achieved? And also, Stefan, the new CEO, I have a question for you as well. As the next step to the past 3 years, compete to grow is the important phase, and you are thinking a proactive M&A, proactive investments that was indicated previously.
[Abrupt End]
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