Olympus Corporation (7733) Earnings Call Transcript & Summary

[Interpreted] Hello. I am Representative Execute Officer, Takeuchi. I would like to start with the representation for the consolidated financial results for the second quarter of fiscal year 2025. Thank you for participating. Before turning to the results presentation, I want to first address the recent reports regarding our previous representative Executive Officer and CEO, Stefan Kaufmann. I want to start by sincerely apologizing for the inconvenience and concern caused by this matter. As we have announced on October 28, 2024, upon receiving an allegation that Mr. Kaufmann had purchased illegal drugs. We immediately launched an investigation, which determined that Mr. Kaufmann likely engaged in behaviors that were inconsistent with the global code of conduct, our core values and our corporate culture. The matter was swiftly passed to the authorities and Olympus has been and will continue to cooperate fully with their investigations. As these investigations are ongoing, we are limited in what we can say on the matter here today. We appreciate your understanding. We will promptly announce any events that should be disclosed in the future. Since Mr. Kaufmann's resignation, I took on the role of interim CEO and will lead the company in the execution of our strategy and continued delivery of essential products and services to patients worldwide, fully embodying our purpose of making people's lives healthier, safer and more fulfilling. Olympus is strongly opposed to the use of illegal drugs. We regularly provide training to management teams and employees to ensure that they are fully aware of the global code of conduct and company policies. We'll further continue to strengthen this in the future. In addition, the management team remains resolutely focused on our long-term strategy and execution for sustainable growth. Going to the second quarter's consolidated financial results. First, our business continued to grow steadily in the second quarter following from the first quarter. Revenue increased by 10% year-over-year on a consolidated basis, accelerated by a tailwind of yen depreciation. Of particular note was a strong performance in North America, where we achieved 24% growth year-to-year with double-digit growth in all 3 focus areas of GI, urology and respiratory. Strong core customer demand, particularly in the U.S., drove overall growth mitigating headwinds, particularly in China, including the continued impact of the anticorruption campaign, volume-based procurement and increasing local competition. Due to factors such as tight SG&A control, the adjusted operating margin reached approximately 18% for the 6 months and 20% for the 3 months, in line with our company strategy. The ongoing remediation and quality transformation program, Elevate is continuing to progress well to meet our commitments to the U.S. Food and Drug Administration, FDA. In the next slide, I will explain the progress to date and the outlook for the Elevate program. Our forecast for the fiscal year 2025 remain unchanged from the previous announcement. Although the business environment remains uncertain, we will continue to monitor the situation closely and respond appropriately and promptly, working towards achieving the initial forecast announced in May. Finally, I would like to inform you of two topics that will support our future growth. The first point is that we received clearance and approval for cloud-based AI endoscopy devices into U.S. and Europe. I will talk about the details later in this presentation. Next, on November 1, 2024, the U.S. Centers for Medicare and Medicaid Services issued in the calendar year 2025 Medicare Physician Fee Schedule Final Rule. The rule finalized establishment of a new current procedural terminology, CPT code and reimbursement rates specific to iTind, which will go into effect in January 2025. The addition of CPT code with appropriate reimbursement rates, not only creates the systematic process for providers to bill and collect for the iTind procedure, but makes it economically viable in the hospital outpatient, ambulatory surgery center and physicians office sites of care, increasing access for patients seeking this minimally invasive therapeutic option for BPH. In fiscal year 2024, we launched a multiyear program focus on a quality transformation called Elevate. The program is an initiative to meet our regulatory commitments, acknowledging the FDA warning letters we received in 2022 and 2023, build for our future and strengthen our culture foundations led by a strong global and cross-functional team. Progress to date has been very good with over 95% of our commitments to the FDA completed. Regarding the global complaint handling system, one of the key milestones, we completed the transition to the global system in October '24 in the U.S., Europe and Japan. The transition in China and other markets in Asia is scheduled to be completed by the end of November. This will allow us to harmonize complete handling processes globally and improve our ability to quickly detect and correct issues. In addition, we successfully completed third-party audits of remediation activities at Aizu, Hinode and Hachioji facilities. And the feedback confirms successful implementation of corrective actions. By fiscal year 2026, we expect to complete our remaining commitments to the FDA and move on to the next phase of Elevate in further improving and standardizing key elements of a quality system. Accordingly, expenses related to Elevate will decrease, but some will transfer to SG&A enhancing QARA organizational capabilities from fiscal year 2027 onwards. Through Elevate, we will not only comply with the regulatory requirements, but also continue embedding the principles of quality, patient focus and customer centricity further into our DNA as we embody a culture of excellence and continuous improvement. This gives us a strong sense of purpose as a company and will become a source of competitive advantage. Next, I would like to highlight our 3 new cloud-based AI medical devices that recently received approval as CE-marked medical devices in Europe under the Medical Device Regulation, EU MDR. They represent the first phase in our effort to commercialize the first intelligent endoscopy ecosystem. Additionally, in July 2024, Odin Medical Limited and Olympus Company received FDA 511(k) clearance for the first cloud AI technology designed to assist gastroenterologists and to -- gastroenterologists in detecting suspected colorectal polyps during colonoscopy procedures, the CADDIE, computer-aded detection device. In August 2024, we received CE approval for 3 AI medical devices in Europe under the MDR. CADDIE, which can be used to detect and characterize suspected colorectal polyps, CADU, which is intended to aid in analyzing dysplasia in patients with Barrett's Esophagus during endoscopy procedures and SMARTIBD, which is designed to aid clinicians in analyzing ulcerative colitis during colonoscopy procedures. All 3 products use AI algorithms that utilize innovative cloud technology, allowing data to be analyzed in real time via the cloud with the most up-to-date software. The 510(k) clearance CADDIE and the CE approvals in Europe mark a significant milestone in our efforts to enhance clinical outcomes and operational efficiency in endoscopy and allow us to accelerate the launch of the platform with these CAD digital products. We belive several key achievements in fiscal 2025 have prepared as well for the commercial launch year 2026 for the intelligent endoscopy ecosystem. Recent roadshows and product demonstrations with customers generated strong feedback on the vision and the architecture of our intelligent endoscopy ecosystems. We are piloting this cloud AI endoscopy systems in selected European hospitals. This co-creation approach enables real-world clinical evaluation, ensuring the systems meet the needs of healthcare providers and patients. Early customer feedback on initial offering has been very positive. We will begin commercializing the first AI solutions in the first quarter of fiscal year 2026 in the U.S. and selected countries of the EMEA region. Additional digital products of the intelligent endoscopy ecosystems will follow during fiscal year 2026 in selected countries of the EMEA region. With the anticipated growth in AI offerings, Olympus is uniquely positioned to shape the future of healthcare, improving outcomes and efficiency by leveraging data and a strong presence across all endoscopy suite components: capital equipment, consumables, infection prevention and service. Our ambitious goal is to connect 40,000 of a globally installed base of GI image processors by the end of this decade. I'll hand it over to CFO, Izumi, who will lead you through our detailed financials for the second quarter.

[Interpreted] Hello, everyone. I'm Tatsuya Izumi, CFO. Let me explain our consolidated financial results and the business review for the second quarter of fiscal year 2025. Consolidated revenue increased by 10% year-over-year to JPY 474 billion with yen depreciation serving as a tailwind. Revenue growth was driven by North America, which achieved double-digit growth in all 3 focus areas, led by is EVIS X1 GI endoscopy system. Revenue reached a record high for Q2 and for the sixth month. Operating profit increased significantly year-on-year to JPY 70.5 billion due to a decrease in losses related to Veran Medical Technologies, which were recorded in the previous fiscal year, tight SG&A control and tailwind from FX. Adjusted operating profit increased by 28% year-on-year to JPY 85.1 billion with an adjusted operating margin improving 2.5 points to 17.9%. In addition, looking only on the quarterly basis, the adjusted operating margin was 20%, achieving the financial guidance set forth in our company strategy. These financial results were largely supported by FX. However, even after adjusting for FX, revenue increased by 3% and adjusted operating profit increased by 4%. The full year forecast remain unchanged. And from the previous announcement, although the business environment is by no means optimistic, we will continue to work toward achieving on our initial forecasts. Again, our full year forecast remain unchanged. Although the business environment is by no means optimistic, we will continue to work towards achieving our initial forecast. Next, let me take a look at overview of each segment. First is Endoscopic Solutions division. Revenue grew 10% year-on-year. Adjusted operating profit, excluding other income and expenses, significantly increased year-on-year to JPY 71.5 billion with an adjusted operating margin of 23.9%, an improvement from the same period of the last fiscal year. Next is each subsegment in GI endoscopy. Sales in North America grew 44%, led by strong sales of EVIS X1 GI endoscopy system. On the other hand, sales declined in China due to the impact of the anticorruption campaign and other factors. In surgical endoscopy sales declined in China and increased in Europe. Growth was driven by solid performance of VISERA ELITE III, surgical endoscope system and others, combined with favorable FX effects. In medical service, we saw steady growth across all regions, especially in Europe and North America due to stable revenue streams based on service contracts, including maintenance services and increase in new accounts. Next, in the Therapeutic Solutions division, revenue grew 10% year-on-year. Adjusted operating profit, excluding other income and expenses, significantly increased year-on-year to JPY 32.7 billion with an adjusted operating margin of 18.7%, an improvement just like ESD. Now looking at the each subsegment. All 3 focus areas, GI EndoTherapy, urology and respiratory grew primarily in North America and Europe. In GI EndoTherapy, sales increased in HPB or hepato-pancreato-biliary-related products and others. In Urology, the growth was led by SOLTIVE SuperPulsed Laser System for urinary tract stone management and resection electrodes for BPH treatment. In respiratory, we saw strong performance in the EBUS scopes and therapeutic devices, mainly used for EBUS-TBNA. Next is the balance sheet. As of the end of September total assets decreased by JPY 167.6 billion from the end of the previous fiscal year due to the decrease of cash and cash equivalents and FX impact. Additionally, interest-bearing debt, that is bonds and loans payable decreased due to the repayment of debt balance as of the end of September, JPY 245.5 billion. The equity ratio rose to 51.4%, up 2 points from the end of previous fiscal year. Next is cash flow. At first glance, cash flow may appear to have decreased significantly because the impact of the transfer of Evident was included in the same period of the previous fiscal year. But adjusted free cash flow, excluding the extraordinary factors improved year-on-year. Cash flow from operating activities was plus JPY 93.7 billion. It increased significantly year-on-year due mainly to an increase in profit before tax and corporate income tax refund. Cash flow from investing activities was minus JPY 30 billion due mainly to expenditures associated with the acquisition of tangible fixed assets and intangible assets. Free cash flow stood at plus JPY 63.7 billion. Adjusted free cash flow was plus JPY 39.3 billion, excluding extraordinary factors, such as acquisitions, transfer reorganizations of businesses. Cash flow from financing activities was minus JPY 156.7 billion due mainly to share buyback, the repayment of the long-term debt and dividend payout. As a result, cash and cash equivalents stood at JPY 245.9 billion as of the end of September '24. That concludes my presentation. Thank you for your attention.

[Interpreted] We'd like to take questions from this point onwards. First, Mr. Takeuchi.

[Interpreted] As we have explained at the beginning, I would like to ask my question about your point. So I understand it's difficult to answer things related to the investigation, but please answer where possible. If you look at the reports, the Mr. Kaufmann, in terms of the management of these type of crisis. Maybe it was a bit lax. I think basically, Mr. Kaufmann's behavior and words, but based on the lax management. So I don't know how whether this media report was true or not. So basically, in terms of the expense or spending, Mr. Kaufmann, in terms of control of the spending by Mr. Kaufmann, have you conducted any review because it seems to be lax. So Mr. Takeuchi, you are the interim CEO. So in terms of the nomination committee discussions, what will be this roadmap for the succession planning going forward? I would like to ask about that.

[Interpreted] Thank you very much for asking your question, and I would like to answer. Well, the investigation is ongoing. So there's nothing that I can say definitely. In terms of the expenses, in terms of lax management of the company expenses, I think that was a point of your question. For this incident -- well, more broadly, so not just trying to limit the timing. The former CEO himself privately utilizing the company asset under our investigation, we have not found that type of allegation to be true. The internal audit is ongoing, but currently, I think we can say that point. So in that sense, this has been a personal matter for him. And that's what we think as of now. In terms of the succession planning for the next CEO, the nominating committee and the Board of Directors will decide about this. So I cannot give you any formal comment. Currently, what I can say at this point, we are trying to select the best candidate taking a broader perspective, so that will be a basic policy. That is how we are approaching this matter.

[Interpreted] Understood. So a simple follow-up on my side. So the current midterm management plan. So it was announced in 2023. And at the timing, it was right after the warning letters has been issued. And after that, Mr. Izumi has joined the company as a CFO and the Board members have changed dramatically. And Takeuchi-san you had explained at the beginning. The FDA issue is moving forward toward the solutions and the CEO has changed. In terms of the midterm plan, is it you're going to continue on this drug? Or is it going to update that for the -- because of the change in environment, external environment, the change in your internal situation? Can you give us some guidance on that.

[Interpreted] Thank you for your question. So what I can say at this point is that the incidents around the [indiscernible] CEO. And we're reviewing the direction of the strategy of the company, we will not do so. We will basically go forward with our -- what we have set forward as general strategy. But putting that aside, whether we should review the strategy or not, this is something ongoing discussion. So depending on the change in the environment, if necessary, of course, we will review our strategy. So always, maybe to say that we always have that in mind, but there is a possibility that the strategy can -- maybe changed but I repeat, this is not related at all with the former CEO. This is purely a management matter that we are taking into account.

[Interpreted] So from my side, I have a question on succession. And of course, who is going to be the new CEO. I'm sure that you cannot comment on that at this moment. Especially Mr. Takeuchi is here. So looking back when there was a financial scandal, you were the one of the executive officers. So the candidates for the CEO as far as I know, have probably retired or left the company mostly. So right now, the people coming from the medical area, and also people joining from outside consists of the current management team. My personal impression probably is that because of this past scandal, person who would have included in the succession plan, there is a shortage of that. So from now on, I don't know whether the person would come from inside or outside, I'm sure you cannot talk about it, but is that something that is possible? Because you only have a limited pool of talent. And if you are to make the succession plan, maybe it would be very difficult. So the nomination of the next CEO after this incident, is drawing a lot of attention in the equity markets. So I would like to know whether there are any concerns about the lack of the talent pool?

[Interpreted] Well, as a concern, of course, it's one of our challenges, I think. But historically speaking, the CEO candidates in the past -- of course, they existed. And as of now, the current status of the company is very different. So it doesn't mean that somebody who were successful in the past can be the candidates for the future CEO, we have to really look at this from the job-by-job perspective. So I think that will be from what you described. So with the development of the company and a Japanese company becoming a global company in a true sense, and we are heading toward that direction. So the mission of the CEO is becoming more and more difficult. And that, I think, is something that we can say. And it is not the case when we have abundant of the talent, not only for Olympus, but also for other companies. The true candidates for the CEO position. I think you have to have a certain amount of experiences, and that is becoming more and more difficult, I think.

[Interpreted] I see. So just one follow-up question. It's not just Olympus, but it's difficult for all the companies. But with this incident, you have to choose the next CEO and in terms of the time frame, Mr. Takeuchi, you are just serving as a temporary CEO or when do you think that you will announce the next CEO, if possible you can comment on that.

[Interpreted] Well, this happened all of a sudden. And so it is a very unusual situation, I think. So I'm an interim CEO. So I'm an acting CEO. And the former CEO and we have not had the clear progress in terms of the succession plan. So it is not appropriate for us to choose the permanent next CEO. So as of now, who is the best person to be the CEO at this moment, and I was nominated based on that kind of a question. So what would happen in the near future, I cannot say. And as a company, we have not made any decisions on that point.

[Interpreted] So I would like to ask about the endoscopy business and ask about the top line trend by region, I would like to ask about that. For this fiscal year's guidance is you have not changed your outlook for this fiscal year. For instance, U.S. is good. China is weaker than expected. What is the by region color? Can I ask about that first?

[Interpreted] Thank you very much. So Drewalowski, would you please answer your question?

Yes. Thanks a lot for your question. You already pointed to two of the most important elements, which is a very strong American-based business and a slightly weaker-than-expected Chinese business. We have, in both in Europe or EMEA and in Japan, low single-digit growth at the moment. And we are expecting a slightly higher single-digit growth in APAC, where we are still suffering from the Korean doctor situation. And we also are dealing with a few quality-related issues in Australia, but we are optimistic that the American overachievement or strong growth rates, which are, as you've heard before, in the range of 24%, that they can compensate a Chinese business that we also expect to slowly recover. We just got the latest sales for also the first month of the second half year in, and they confirmed our optimism that we can recover in the second half of the year. I hope that gives you a bit of an overview.

[Interpreted] Towards the next fiscal year, so China, when do you think that the China market is going to recover? And you announced about the intelligent endoscopy system. So if this is commercialized, the developed countries are going to install the system. Is this will stimulate the further demand for endoscopes. May you ask about that?

First, let me comment on your question about China and the recovery. I think we all, meaning the whole med tech industry, we're expecting recovery and clarification of the anticorruption campaign in the second half of the year. We also expected that the additional stimulus coming from some packages that the government were presenting and preparing for acquisition of major equipment could help in the second half of the year. You probably also have seen over the last weeks quite a lot of med tech industry players announcing that the Chinese sales is not recovering yet as expected. We foresee a slow recovery, as I mentioned, in the second half of the year still. We've seen first signs in the last 2 months. In some provinces, the additional funds from government are starting to arrive in bids and tenders, but a strong recovery is at the moment not visible. So we are projecting, as I mentioned before, for this year, flat or very small single-digit growth compared to last year. But at the moment, we are still behind last year in China. To your second question and comment about the intelligent endoscopy system. Yes, once we start to roll this out, it will help to stimulate additional sales of systems and scopes. But to a big extent, it is also market share protection project. You must imagine that our installed base will be upgraded with these additional features and it will allow us then to secure the installed base to then continue to expand our endoscope sales towards the installed base of video towers. Because every single scope that will be used will benefit from the additional AI support tools. And this will also allow us to expand the technology around not only clinical support, but also report writing and workflow support, which will then coming for -- according to the feedback we received from customers will make the utilization of our video tower more easy and more successful for them so that we see this as a very strong tool to keep and protect our already very high market share in, as you know, the GI business. That will conclude my answer for now.

[Interpreted] On Page 5, QARA FDA Elevate, this project, I have a question. So the expenses, when you look at expenses, '26 March, you plan to achieve the commitment. And what would be the expenses for that and '27 -- FY '27 and onwards, the expenses would decline. So does that mean that the expenses will be about the same level before that? So this in this QARA and SG&A, could you talk about the level of the expenses in FY '26 and '27 -- '25, '26 and '27.

[Interpreted] So about ELEVATE, it is the quality program and a question on the expenses. So I would ask Mr. Izumi, CFO, to answer.

[Interpreted] Yes, Izumi speaking. Let me explain First of all, for this fiscal year, FY '25 Elevate cost, JPY 32 billion is expected. For the second quarter, SG&A JPY 5.2 billion and JPY 11 billion for others. So the total is JPY 16.2 billion for Elevate. So the progress is on track. For FY '25 total is JPY 32 billion as we planned. That is our forecast. FY '26 for the next fiscal year, as of now, we cannot say definitively because next fiscal year, the budget is being formulated. So it's difficult to say. And another thing is that about Elevate, as it was mentioned, it is not to just respond to the warning letters. It includes the change of our culture in others. So the QARA, it has become the part of the QARA. So which part is Elevate in which part is not Elevate? Now it's very difficult to distinguish. And about the finance work, we struggle to come up with the numbers. So because of that situation, what would happen in next fiscal year, it's difficult to say. But FY '26, from our perspective, to achieve our commitment to what we are trying to do under Elevate is of top priority. So next fiscal year, this cost coming down probably is very difficult. So what I can say at this moment is that.

[Interpreted] Follow-up question. So 3 years about the JPY 70 billion is the number that you have shown to us. So your comment and also the Elevate cost will come down -- start to come down from '27 March. So that means that it's not going to drastically come down. But probably JPY 32 billion or JPY 20 billion or JPY 15 billion, that would be the size that we should be expecting. Is that correct? I'm sure that not all the numbers are finalized, but in terms of direction.

[Interpreted] Yes, the size, it's difficult to mention the size, but JPY 70 billion, and to keep it under JPY 70 billion might be difficult. So as I said, in order to maintain it below JPY 70 billion, we are not going to reduce the level of the activities. So there is a risk that we cannot -- we could exceed the JPY 70 billion.

So this is a question related to Mr. Kaufman. So he has not reported, he has been arrested. I think basically, in some cases, he can be under house arrest if the case that he has been -- actually, the charge is already confirmed. Well, for this matter because the investigation is ongoing, we cannot answer to your question at this point.

So is it the case that he would not be charged?

Well, I do not think that this is a matter that we should be answering your question. We are not in a position to reply to your question.

[Interpreted] Related to this, so your response to the FDA, Mr. Kaufman is the non-Japanese and he has been a person to directly communicate with the FDA. So he has left. Is there any change in communication with the FDA?

[Interpreted] It is true that up to now, our former CEO with the device top person with the FDA, in some cases, as necessary, directly had a contact with them. That's true. But the company and FDA communications between the company -- the FDA and the company, if you look at in totality, so the team, we have a team, and they are from the quality team. So they take in communication. So Mr. Shkolnik. So I think Mr. Kaufman just took communication with the FDA when -- in some important points when it was necessary. And this is a personal opinion. So I will ask Mr. Shkolnik, what he thinks. So after Mr. -- our CEO has left, I don't think the relationship at the FDA will be undermined. I do not think so. And if necessary, I myself, as a top of the organization, as long as I am in this position, I will directly communicate with the top person of the device.

And I -- and of course, I understand that's necessary. That's all from me.

So maybe I should ask Mr. Shkolnik to respond to your question. I'm sure you got my message and his question. Could you make some comments for that?

Yes. Thank you very much for your question and Mr. Takeuchi, thank you for the opportunity to speak. Of course, as you mentioned, the relationship with the FDA is managed more than one person. And while Mr. Kaufman was in front of the FDA, so was I and so are many other people in the organization at very different levels. We've maintained both of that relationship through very open, very honest communication with the agency, but most importantly, the relationship with the FDA depends on our actions, what we're able to accomplish, our ability to meet commitments, our ability to change our quality system and ultimately will depend on the follow-up inspections and our ability to demonstrate to the agency that the changes that we're making are effective. And this is what we're focused on. We're continuing with our Elevate program. We're continuing with changing our quality system. We're continuing with improving how we are responding to complaints, how we conduct our management reviews, how we do our CapEx and overall, how we manage the overall company from a quality system standpoint of view. And this is what we're focused on. And this is something that I believe that we continue on this track will help us tremendously with demonstrating to the agency that we're very serious about patient safety. We're very serious about improving our quality and ultimately demonstrating our compliance. Again, thank you very much for your question.

[Interpreted] From Q1 to Q2, the business performance trend, I have a question on that. So this quarter, I think that the gross margin has been improving. Is this due to the FX? Or when you look at the segments, we do not see that much change of the direction. So could you talk about the background of that? Also, based upon your forecast, I think you are basically on track, the sales and the cost of goods percentage and SG&A, could you talk about the trend of those items?

[Interpreted] Yes, Ueda-san, thank you very much. So I would ask Mr. Izumi, CFO, to respond.

[Interpreted] Yes, Izumi speaking. Let me explain. First of all, about the cost of goods sold, yes, there was an impact of the ForEx. So on the consolidated basis, the unrealized depreciation of the inventory, for the 2 months of the turnover of the inventory. So in comparison to the previous term, August/September yen strengthened. So because of this, the previous term, August/September, yen was weaker. So because of that, due to the FX impact, there was quite a big unrealized FX impact that improved or made the COGS better. And what was your second part of your question?

[Interpreted] Compared to the plan or the forecast at this percentage of the COGS and the SG&A what have been the progress?

[Interpreted] Well, the internal plans is not something that we announce. So the specifics cannot be really discussed. But compared to our plan, basically, we are on track.

A follow-up question. For this fiscal year to achieve your plans, what are the risks that you are considering? Earlier, you said that it's not too optimistic, but compared to Q1, is it more difficult? Or as a management team, which KPIs are the ones that you are more committed to? If you can comment on that.

[Interpreted] Yes. I would like to answer to that question. Well, mostly, as you said, up to Q2, well, the -- in comparison the internal plan, that is not only the one perspective, but I think basically, the progress has been what we expected. And expenses and cost control concerning that point, compared with the previous year, I think we are containing cost way better, and we are controlling the cost better than the previous year. And looking into the future, we talked about the endoscope Frank comment, as he commented, U.S. strength is likely to continue. And other markets in Q1, especially China, suffered. There were difficulties, but the medical or rather medical expenses in China to kind of support and stimulate is something that the Chinese government is trying to do. And also, towards the end of the year, there is a demand. And in the second half of the year there is -- we expect that the recovery will happen. So about the cost control. We would continue to control this well. And so unless there is an extraordinary or special items, I think that the current guidance that we are showing is quite reasonable and appropriate.

[Interpreted] So this is about the selection of the next CEO. So I would like to ask the question to Mr. Takeuchi. So I think your company is kind of an extraordinary company for -- TSD is more focused on U.S. and ESD is focused on the Japan endoscopy market. So in terms of the people who can understand both businesses, I think it's very difficult to find that externally. So I understand in the U.S., even if you bring a top management of the U.S. and European medical devices, but in terms of -- I think it's very difficult for them to understand the way these R&D is conducted in Japan. So I think it's appropriate to have a Japanese top leader right now. So if that is the case, in terms of the direction to aim to become a global medtech that will be delayed or derailed, if you have any argument against me, please, I would like to hear that.

[Interpreted] Thank you very much for your valuable opinion. With what you have said right now whether you are right or trying to point out some debate what you have said. To be honest, I have no response to make from my side because, of course, this is a thing that we have to think comprehensively. And I said the strategies have -- always have to be reviewed. So one of the most important strategies going forward would be where to be focused on, what type of capabilities -- in terms from the perspective of the management, what type of capabilities are required. I think we have to take a broad perspective. So in terms of the -- we would like to get the feedback from the Board, from the independent directors. And through that, we would like to choose the best candidate. Well, for instance, for the time being, the only way we -- I think your intention was that the only way right now is to select someone internally, but it's not the case. I think basically, we are not just saying that it should only be internal candidates.

[Interpreted] Well, my follow-up is that I have been researching your company but -- so in terms of your BHP, maybe you should highlight that because I think this is the second good business after endoscopy. So when men go over 60 years, so BHP, well, there are the people suffer from BHP. And basically, there's a limit in terms of how you can treat with drugs. So to this, I think you have the top share in the [ golden ] [indiscernible] you have the thulium laser. So you have this very unique laser technology. So you basically have the technology that needs -- for the people on the hospitals. But maybe ED will be some of the side effects. So [indiscernible] of the Boston Scientific, this is outpatient. So there was a stent-like device that you used for the outpatient treatment. And so for this iTind, your iTind, I think you have been able to get the ICPT code. So the -- in 2023, the Medicare has got the ICPT code, but that was kind of a experiment. But if it's a CPT code, this means that antibody can utilize this and reimbursement will be more easy to do. So I think this will be a full-fledged release. So I think your competitors of [ $3 million ] or so of the peak sales maybe will -- basically peak sales, JPY 10 billion if you -- TSD business wasn't highlighted that much. So if you can give us a comment, maybe investors will be more interested in the TSD business. Can you comment about that?

[Interpreted] [ Kota-san ], thank you very much. For the urology business, so BHP -- not only BHP, but overall, I think this will be the second largest business area for us. And as have already said, the iTind ICPT code. I think this is very good news for us. So going to your questions, Mr. Kuramoto, who is leading the TSD division, I would let him answer your question.

[Interpreted] [ Kota-san ], thank you very much, and thank you very much for taking interest in BHP treatment. As you have pointed out, the iTind have been given the ICPT code from January next year, it means that in the U.S. we will be able to accelerate -- we are going to accelerate the sales of our business. As you have said, peak JPY 10 billion sales. Well, specific numbers, we have not announced yet. So iTind is a very easy-to-use and convenient device, treatment is easy. And so I haven't tried this procedure. But the implanting iTind is very short. And now as -- if this is necessary and a follow-up after the treatment is easy compared to other devices, it's very convenient and easy to use. However, that said, in terms of the -- what the size of the BHP it is limited. But for people who are taking drugs for treatment towards those type of people, if this iTind can be used for the treatment of those people and by decreased the number of cases and expand the sales. And that is one of the marketing strategies that we are considering. Thank you.

[Interpreted] So competitors, your competitors? So the UroLift is not going to increase because there's a kind of a headwind against urology, that's what your competitors are seeing. Do you think that you are difficult to grow in urology area?

[Interpreted] Well, I have talked with the doctors and this low invasive treatment when they start that. There is some level of complications, some follow-ups are necessary, so that happens. But as I have said, this is a very comfortable device. So in that sense the -- and we are expecting for this device. And there is a certain limit because the drug treatment, patients undergoing drug treatment, we want to target those patients in terms of our sales activity.

[Interpreted] Next-generation endoscope technology was introduced. So EVIS X1 about the next model, EVIS X1 there was the information meeting. So there'll be a large-scale information meeting for the next generation. And when would that be held or what is your target to have such meeting?

[Interpreted] Thank you, Saito-san, for your question. So I would ask Frank Drewalowski to respond to that question. Frank, please.

Thank you, Saito-san, for the question. And also Yasuo for handing it over to me. The next generation of our GI endoscopy center, so the successor of X1 is still under development. And as you probably know, we have also launched X1 in some countries, Japan and Europe already about 4 years ago. but we are still very fresh for that product in some other places due to the regulatory hurdles we had to overcome. So I think we are targeting a launch in about 3 to 4 years. So therefore, we are fully focusing on the current X1 upgrading activities because we feel that we have a huge potential of installed bases that are still not benefiting from the beautiful capabilities that X1 is offering and therefore, upgrading the processor, but also then upgrading all installed base units with our X1 generation endoscopes is going to still give us a lot of potential and a lot of work to do over the next years until the next generation will be launched.

[Interpreted] Just one simple follow-up question, if I may. So the endoscope procedure or depending on the part of the body, there could be some fatal incidents. For the next endoscope, in addition to the better diagnosis, would it be more secure and safe? So compared with the current model, is it possible to develop such a model in the future?

I guess I should take that question as well. Very fortunately, the number of fatal incidents connected to Flexo endoscopy is extremely small. And typically, they are a very unfortunate combination of special anatomical medical conditions of the patient and maybe also unfortunate procedural events. So the direct connection between scope designs, endoscope design and technology and fatal incidents is extremely small. And I think we rather continue to invest a lot of time in training and education. And obviously try to make scopes safer, but as I mentioned, that is a low incidence already today for sure.

[Interpreted] So the incident, yes, it is low. But when I talk with the investors, there are some investors are concerned about it. And when I hear about the death of fatal incidents, would probably reduce the number of the people who go through the endoscopy procedures. So that's why I asked this question. That's all the questions that I had.

[Interpreted] So this is about the financial matters. I have 2 questions about financial matters. So the performance is good. Your cash has accumulated. But -- and the -- under the current management situation, taking that into account the 2 questions. One is about M&A. M&A because actually this matter has become more stabilized, are you going to accelerate M&A activities? And I think basically, you have made the comments about accelerating M&A activities. Has that -- has your attitude not changed because you're -- the CEO is not decided yet, even that kind of situation can -- are you still going aggressive about M&A? And I will follow-up by capital allocation. So from last fiscal year, you have been proactively conducting share buybacks and enhancing shareholder return, that's very good. But in terms of the quantitative guidelines is not present. So it's very difficult to predict as the predictability is very low. So I think the TSE has some guidelines. I think basically have -- personally, I think they should discuss some guidelines in conducting share buybacks. So in terms of the capital allocation policies for M&A, there has been various confusion in the management. Has anything changed or what -- in terms of the time line, when can you release the capital allocation of shareholder return policies?

[Interpreted] Kohtani-san, thank you very much for your question. Mr. Izumi, the CFO, will respond.

[Interpreted] Allow me to answer your question. First of all, in terms of the -- our stance on M&A being proactive in M&A. As you can see in the slide about our capital allocation policy, the first priority is to invest in the growth driver and invest in our profitable business and flexible share buybacks. But although we have -- our CEO has left, and it is not -- we should not put a break on our M&A activity. That is the total will of the management. So we will not slow down our M&A activities based on this incident. Another point I want to make is that, in terms of the quantitative guideline is lacking for shareholder return. Yes, I think that's typical from our point of view. So capital allocation should be upheld and then invest in a growth driver. And the second priority with dividend and then share buybacks. I think being flexible is very important because the shareholder return ratio a certain percentage point. So in that type of guideline, I think that's understandable. But that means that including flexible M&A, the management that matches the situation of the times will actually tie our hands. So I'm not considering showing any guidelines. But based on your feedback, we will continue to deliberate the possibility whether we should have those type of guidelines. And of course, we'd like to have a conversation with the investors about that. But at this point, we have no intention to have the policy.

[Interpreted] So in terms of the leverage on your balance sheet, are -- so it will be net debt to EBITDA, whatever indicators that you can use, it's very -- you have room, but what is your comfortable level of the balance sheet for in terms of leverage level, for instance?

[Interpreted] Well, in terms of the balance sheet, so I think the credit rating is one indicator. So S&P, BBB+, that is an absolute level that we want to maintain. So in terms of the quantitative indicator, net debt to EBITDA multiple at the most 1.5x. In terms of the working capital at hand, the 1 month worth, that's a minimal level. So that will be the quantitative target. So if we look at our current balance sheet, I think there's -- it is true that we have room for using our balance sheet for investment. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]