Hello everyone, I am Takeuchi, Representative Executive Officer. I'd like to thank you all for participating in this conference. There were numerous challenges in fiscal year 2025, including supply chain disruptions due to the Noto Peninsula Earthquake, a difficult business environment in China, and unexpected departure of our former CEO. Despite these headwinds, our business performance remained solid, driven by strong sales of EVIS X1 GI endoscopy system in North America throughout the year. Revenue achieved close to the forecast announced in February. Adjusted operating profit was JPY 188.5 billion, and adjusted operating margin was 18.9%, both exceeding the forecasts. Our quality and regulatory transformation project, Elevate, is continuing to progress well to meet our commitments to the U.S. FDA. We expect to complete all commitments to the FDA by the end of fiscal year 2026.
Our three strategic guiding principles of patient safety and sustainability, innovation for growth, and productivity presented in our company strategy are progressing steadily. We made great progress with Elevate, building a solid foundation and further strengthening our corporate culture to achieve quality management that truly prioritizes patient safety. For fiscal year 2026, revenue is expected to grow steadily by 4% after FX adjustment. Adjusted OP is expected to be JPY 175 billion, with an adjusted operating margin of 17.5%. This is due to strategic investments to strengthen our organizational structure for future sustainable growth and improved profitability. The impact of U.S. tariff policy is not included in our forecast due to the fluidity of the situation. We will continue to take measures to mitigate the impact while prioritizing the continuous provision of our products and services to the medical field.
As for FY 2026 dividend, we plan to pay JPY 30 per share, up JPY 10 from the previous year. As a result of our transformation over the past few years, we have become a pure medtech player. Stable cash generation is expected. In light of this, we have decided to significantly increase the dividend level. We have also decided to undertake a share buyback of JPY 50 billion. Finally, I'm pleased to name Bob White, our new Representative Executive Officer, President and CEO, effective June 1st. In addition, Bob is a candidate for our BOD at Olympus General Meeting of Shareholders, scheduled to be held in June this year. I am confident that Bob's wealth of experience, exceptional leadership, and deep expertise in the medtech industry will help Olympus unlock its potential to cultivate innovation and drive further growth, benefiting rather befitting a global leader in the industry.
Next, I will discuss the key strategies for each business segment for FY 2026. As explained at Q3 earnings score, from April, we realigned our divisional structure to be more efficient, patient, and customer-centric. As part of this evolution, the ESD and TSD transitioned into the new divisions of the Gastrointestinal Solutions Division, GIS, and the Surgical and Intervention Solutions Division, SIS. We will continue to invest mainly in three focus areas: GI, Urology, and Respiratory. First, in GIS, we are focusing on accelerating global market penetration and revenue growth with EVIS X1 GI endoscopy, as well as expanding intelligent endoscopy ecosystem with OLYSENSE, our new sub-brand for our primary cloud-based integrated suite of endoscopic applications and solutions.
In GI endoscopy, as part of phase two of the EVIS X1 U.S. launch, we plan to launch a flagship microscope of the EVIS X1 GI endoscopy, equipped with EDOF technology in FY 2026. We work to shorten the lead time with the aim of bringing them to market as soon as possible. In emerging markets, we promote initiatives to expand the market share sustainably, while in China, we accelerate preparation for local production of GI endoscopy. We also drive the expansion of endoscopic ultrasound platform market. Additionally, we plan to launch the first CAD/ AI products of OLYSENSE in Europe and the U.S. I will provide details later. In GI endotherapy, we continue to expand clinically differentiated product offerings in key areas of focus: ERCP, ESD, metal stent, and hemostasis devices.
We aim to launch more than 10 new products regionally, including key markets of the U.S., Europe, and Japan. In medical service, we are committed to delivering industry-leading services that meet customer needs in areas such as uptime, budget security, and operational support.
As noted earlier, expanding our intelligence endoscopy ecosystem with the OLYSENSE platform is a key pillar of our GIS strategy. Let me walk you through what we focus on in the fiscal year 2026. The first in the OLYSENSE portfolio to launch will be CAD/ AI software applications designed to detect, characterize, and analyze lesions in the upper and lower GI tracts. Following that, the mixed 2025 CADe guidelines and recommendations from the ESGE, AGA, and BMJ, we are confident in our unique approach. Our AI-powered cloud-based design allows us to frequently improve the performance of our algorithms and continuously add new capabilities for the gastroenterologists. That AI polyp detection algorithm of the CADDIE was trained on the sessile serrated lesions, SSLs, and the larger polyps that open the mist and are more likely to progress to cancer.
Initial trial data shows OLYSENSE assisted colonoscopies significantly improved the detection of the clinically relevant lesions without increasing unnecessary resections. Currently, the OLYSENSE hub and CAD/ AI products are being piloted in selected U.S. and EU hospitals, receiving positive feedback at DDW and ESGE days. I know that from the relevant investors. We anticipate the strong long-term potential, enhancing customer engagement and recalling revenues and the market share. The phase of the rollout of OLYSENSE and CAD/ AI begins in the second half of fiscal year 2026 with subscription model. Next, the SIS develops to endoscope the laparoscopy, the basic ecosystem for the procedures and Urology, Respiratory, and Surgery. To build the leading ecosystems, we will actively manage our portfolio and scale major innovations into our core markets.
In Urology, we expand the leadership in BPH through the iTINE market development while increasing the penetration of the core visualization and plasma technologies. I would like to introduce that the SOLTIVE SuperPulsed Laser System for urinary tract stone management, which drives that laser lithotripsy growth. The next slide. In Respiratory, we continue to focus on driving adoption of EVIS X1, the bronchoscopy platform, and drive growth in lung cancer diagnosis and staging, with a stronger emphasis around the updated EBUS- TBNA offering. In surgical endoscopy, we aim to introduce the VISERA ELITE III surgical endoscopy system in the U.S. and China to improve market competitiveness. Among them, today, I would like to highlight the two products that we expect to be growth drivers for this fiscal year, along with the target diseases that we are focusing on.
First, urinary stones are a condition in which the substances contained in the urine crystallize over some reason and coalesce in the form of a stone. The prevalence of this condition has been rising in recent years, with an estimated 40% of the patients experiencing the recurrence within five years. For that treatment of the urinary, the stones would have a compelling and market-leading portfolio of the solutions. Olympus has advised the company to launch now the new thulium fiber lasers for that laser lithotripsy, and we commend that the top market share in this category. For both that laser systems, as well as that consumable fibers, the SOLTIVE SuperPulsed Laser System is already available in the U.S. and Europe and the APAC, and achieved double-digit growth in these regions during fiscal year 2025.
We plan to launch the system in Japan and expect it to contribute further to our sales. Next, lung cancer. This is the disease with an estimated more than 4 million patients and the highest mortality rate among all cancers worldwide. When detected at an early stage, lung cancer is highly treatable by surgery. Our market-leading endobronchial ultrasound scope has contributed to and decided that the treatment policy by supporting that the diagnosis of lung cancer type and the staging in combination with other diagnosis results. Our new, the slim EBUS scopes extended this capability to the peripheral regions of the lung, supporting visualization and real-time sampling of a lymph node and a lesion. We aim to launch the scopes in Europe, APAC, and Oceania and in Japan in this fiscal year. Finally, I would like to briefly introduce our new CEO, Mr. Bob White.
That is in the medtech industry that Mr. Bob White has been also for the globally and for the regionally have that and very good experience and expertise. Mr. Bob White, until April 24th, has worked as an Executive Vice President and the President of the Medical Surgical Portfolio for Medtronic. Before then, he was a Senior Vice President and President of Medtronic Asia Pacific based in Singapore, where he had responsibility for APAC as well as Japan. That is why he has experience in Asia. His proven track record spans large multinational organizations as well as the entrepreneurial ventures in which he consistently delivered exceptional results. Mr.
White has seen the numerous innovation programs and also for that and revitalizing Medtronic's respiratory and modeling portfolios, advancing his GI portfolio and spearheading his robotics program and led several R&D initiatives and M&A transactions to drive strategic growth and the value creation. His close engagement with the market and customers has enabled him to maintain a strong understanding of the physician needs. Prior to joining Medtronic, Bob held leadership positions at GE Healthcare and the healthcare divisions of IBM. Throughout his career and in the medtech industry, he has played a pivotal role in improving the lives of patients around the world through that transformation of healthcare delivery. I'm truly pleased that he is bringing his extensive industry knowledge and insights to Olympus with him.
We aim to achieve sustainable growth and enhance the corporate value by continuing to deliver innovative medical value that only we can provide. Okay, with that introduction, I would like to hand it over to the CFO, Mr. Izumi, who will lead you through our detailed financials for fiscal year 2025.
Hello everyone. I am Izumi, CFO. I'd like to provide a consolidated financial results and business review for FY 2025. FY 2025 faced some challenges due to the external environment and others, but compared to the February forecast, although the yen appreciated, the revenue achieved roughly the forecast level, and both operating profit and adjusted operating profit exceeded the forecasts. Consolidated revenue increased by 8% year on year to JPY 997.3 billion, with weaker yen serving as a tailwind. Revenue reached a record high for both the single quarter and the full year. The revenue growth was driven by North America, which achieved double-digit growth in all three focus areas, GI, Urology, and Respiratory, led by sales of the EVIS X1 GI endoscopy system.
On the other hand, in China, the competitive environment has intensified due to the Buy China policy and others, resulting in the tough results for the full year. In Q4, we achieved a growth of 12% year on year. The business environment remains uncertain, but we will continue to closely monitor the situation and accelerate preparation for the local production in China. Operating profit increased year on year to JPY 162.5 billion due to the decrease in losses related to Veran Medical Technologies, which were recorded in the previous fiscal year, and the tailwind from FX. Adjusted OP increased by 25% year on year to JPY 188.5 billion, with an adjusted operating margin improving 2.6 percentage points to 18.9%. Profit attributable to owners of the parent was JPY 117.9 billion due to stable earnings space, with EPS of JPY 103.
We plan to issue a year-end dividend for fiscal year 2025 of JPY 20 per share, up JPY 2 year on year, unchanged from the forecast previously announced. Now let me look at each segment. First is the ESD. Revenue grew 8% year on year. Adjusted OP, excluding other income and expenses, increased year on year to JPY 158.8 billion, with an adjusted operating margin of 25%, an improvement from the last fiscal year. Now looking at each subsegment in GI endoscopy, sales in North America grew 27%, led by strong sales of EVIS X1 GI endoscopy system. On the other hand, sales declined in China, with its competitive environment intensifying due to the impact of Buy China policy and others. In surgical endoscopy, sales decreased in China while they increased in North America and APAC.
Growth was driven by strong performance primarily in North America, led by new products associated with OR system integration. 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 the manufacturing maintenance service, rather, and an increase in new accounts. Next, in Therapeutic Solutions Division, revenue grew 7% year on year. AOP, excluding other income and expenses, increased year on year to JPY 69.8 billion, with an adjusted operating margin of 19.3%, an improvement similar to ESD. Moving on to the performance for each subsegment, all three focus areas, GI, Endotherapy, Urology, and Respiratory, grew primarily in North America and Europe. In GI, endotherapy sales increased in HPV-related products and others. In Urology, the growth was led by resection electrodes for BPH treatments and SOLTIVE SuperPulsed Laser System for urinary tract stone management.
In respiratory, we saw strong performance in the EBUS scopes, therapeutic devices mainly used for EBUS- TBNA. Next is balance sheet at the end of March 2025. Total assets decreased JPY 101.4 billion from the end of previous fiscal year. The main reason for this was a decrease in cash and cash equivalents due to the share buyback and repayment of debts. Equity decreased slightly due to share buyback and dividend payouts, while an increase in profit was posted as a positive factor. The equity ratio rose to 52.5%, up 3.1 percentage points from the end of the previous fiscal year.
Now, next to the status of cash flows, at the first of the glass, the cash flow may appear to have decreased significantly because the impact of the transfer of Evident was included in the last fiscal year, but adjusted free cash flow and excluding external factors improved year on year. The cash flow from the operating activities was a positive one at JPY 90.5 billion. It increased significantly year on year mainly due to the increase in the profit before tax and corporate income tax refund. Cash flow from the investing activities was JPY -65.5 billion mainly due to the expenditures associated with the acquisition of tangible fixed assets and intangible assets. Free cash flow stood at a JPY +125 billion. Adjusted free cash flow was a positive one at JPY 9.4 billion, excluding extraordinary factors such as acquisitions, transfers, and organization of the businesses.
Cash flow from the finance activities were JPY -112.5 billion due mainly to the share buybacks, that the payment with that stated redemption of corporate bonds and the dividend payouts. As a result, cash and cash equivalent stood at JPY 252.52 billion at the end of March 2025. Next is that for the full year forecast for the fiscal year 2026. The FX assumptions that are the basis for the forecast are JPY 145 to the US dollar and JPY 161 to the euro, based on average rates ended the past one month. Revenue is expected to be JPY 999 billion on the par with the last year, the rate expected at the stable growth of 4% compared to the previous year after FX adjustment.
Adjusted operating profits expected to be JPY 175 billion with an adjusted operating margin of 17.5%, which shows an increase in long-term strategic investments such as R&D expenses for future growth. Profit attributable to owners of the parent is expected to be JPY 105 billion with EPS of JPY 94. I will explain about the shareholder returns later. Note that these forecasts do not include the impact of U.S. tariff policies, as Mr. Takeda mentioned earlier, due to the fluidity of the situation. We will continue to closely monitor the situation and take measures to mitigate the impact. Next, the focus by business segments. Let me just explain by each business segment by segment.
GIS, both revenue and profit are expected to increase after FX adjustment driven by new products in EVIS X1 in North America, despite an increase in the long-term strategic investments such as R&D expenses for future growth. In SIS, both revenue and profits are expected to increase after FX adjustment driven by the sales growth centered on the focus areas. Corporate expenses such as basic research included in the elimination and the corporate have been reviewed. Starting from this fiscal year, a portion of these expenses are allocated to GIS and SIS. Lastly, let me just talk about the shareholder returns. Our capital allocation policy of prioritizing investment and growth drivers remains unchanged. However, we are happy to tell you that through corporate transformation over the past few years, we have become a pure medtech player, improving and stabilizing cash generation capabilities.
In light of this situation, we have decided to significantly raise our dividend level. We plan to increase annual dividend by JPY 10 per share compared to the last fiscal year to JPY 30 per share for fiscal year 2026. Furthermore, as announced today, we decided on the share buyback of JPY 50 billion after securing sufficient liquidity on hand for working capital and investments based on capital allocation policies. This represents the fifth consecutive years of a share buyback. Going forward, we continue to prioritize business investments that enhance shareholder values and allocate capital to ensure stable returns to shareholders. We anticipate the business environments to remain uncertain this fiscal year, including U.S. tariff policies and the like. However, under the new management team that will be placed end of June, we will work hard to achieve sustainable business growth. That's all my presentation. Thank you very much.
Thank you very much. Now I'd like to take questions.
First question, the impact of the tariffs. You did not show that at all, so could you explain the reason? There have been some earnings call of the different companies, and I think each company makes a decision whether to include it or not. There are some qualitative guidance, but if you say that there's nothing included in terms of the tariff, if you can talk about some qualitative impact. Of course, it is fluid. I understand that reason, but starting from April, the 10% tariff is already applied for the shipment from Japan. Concerning that, that is not included at all in the plan or forecast. Is that the case? Could you respond?
Thank you for your question. Izumi, CFO, would like to answer that.
Yoshiharasan, as you know very well, we have factories in the United States, and the products that we sell in the United States, most of them are manufactured mainly in Japan and other countries. We do have an impact from tariffs. As of now, the impact probably will be about JPY 20 billion in gross terms. Already, we have established a cross-functional team, sales, supply chain, and mainly the North American region. We are trying to take the measures to alleviate that. Most of the JPY 20 billion can be alleviated, but how much would that be, we are not ready to say. Also, the assumptions for the tariffs, as you saw in the negotiation between China and the U.S., we do not know. It is difficult to factor that in. That is the reason why we did not include that.
To your question, the gross impact of JPY 20 billion, and most of them can be alleviated, but we cannot say how much as of now.
I see. Follow up one point detail, 10%, 24%. So JPY 20 billion, 90 days, 10%, and then 24% later on. Is that the assumption? Or your competitors, the peers and the Japanese companies and US peers? I think that you would use the inventory, and many companies said that the impact will occur later on. This JPY 20 billion in gross, so is that for nine months? You said that that can be alleviated. Regardless of 10% or 24%, you can fully reflect that into the selling prices?
Thank you. First of all, our assumptions are that, for example, in Japan, 10% tariff continuing for one year.
That is the assumption that we have before coming up with this JPY 20 billion. Our inventories is usually for two months. This impact will happen in June and onwards. As for reflecting that into the selling prices, when you consider the impact on the medical of the institutions, it would be very difficult for us to charge the extra by the way. We would like to take other measures, for example, improvement of the supply chain. It is not going to be a simple reflection to our selling prices. We will take various measures.
I see. Thank you.
I have two questions. First question is a cost. This time, when I look at the documents and so forth, that long-term strategic investments, setting from that last quarter, you have studied these strategic investments. This means that, for example, about the 72% for that R&D expenses, it will be a little bit just higher than the average of the medtech included in Japan. That is what happens with that, about the proportion of this and percentage of the R&D expenses can be the strategic. That is why I think that we should also continue and this be sustainable. Also, this is particularly higher in this R&D cost. Let me just talk, let me ask about this, your prospect about R&D expenses in the n ear future.
Okay. Thank you very much. Okay. I'm Izumi. I'm a CFO. I answered your question.
The basic idea is that we are on a mid and long-term basis, we needed to just invest for the R&D as a strategic investments. Therefore, this time and March 2026, we increased R&D expenses. This is not the one-time increase. For example, it's difficult to be more specific about how much after the next year and all. Anyway, it's not that we'll go down or go back down to that level. At least we maintain the similar level, and also it can be increased further. It's not that we just drop and get back to that level that's in some time in the past.
Okay. Thank you very much. Let me just also about another follow-up questions about the cost in the past couple of years. You are implementing the quality programs including for the dealing with the FDA requirements. How much of the cost of it this is? This year it seems like it will just go down a little bit. What is your plan of a specific cost for this and Elevate the quality assurance programs? What happens after for it would be getting into for that including about this specific cost for the assurance will be included in also for the other expenses.
Okay. Thank you very much. First of all, when it comes to the cost for Elevate in FY 2025, this is JPY 11 billion for SA and the other cost is the 11th. For the JPY 30.5 billion as a total cost, it will be almost in line with our forecast and plan in FY 2026.
It will be, I mentioned it will go down a little bit because, for example, for other costs, it will be about JPY 19.4 billion to that JPY 10.1 billion related to that level and for SGA and JPY 9.4 billion in total and JPY 19.9 billion. It will be below that JPY 20 billion. This is a plan for this year. Going farther in FY 2027, and the farther is very difficult to talk so clearly, but this is the Elevate program. This quality program is a three-year program. This will be ended this FY 2026. That is also that no cost will be included in other costs.
After that, for the SG&A, it's still about JPY 10 billion of the cost will be included, but it's not that so dramatically go down, but when you try to make it as efficient as possible.
Okay. Understood. Thank you very much. That's all for me. Thank you.
The impact of the tariffs, I'd like to know more details. You said that the cross-functional team was established and you are coming up with different countermeasures. More specifically, what kind of measures are being looked at? Could you give us some examples? Thank you.
It is difficult for us to talk about the details, but one thing is the supply chain optimization. For example, something that goes via the U.S., some products will go to other regions, so sending them directly and also the strategic price setting. It is difficult to reflect it to the prices, to adjust the prices or adjusting the discounts. The inventory, the increase in July and onwards, if the tariffs would go up, we would proactively increase the inventories in the United States. That is another thing that we are thinking about.
Thank you. Follow-up question. On the demand side in the U.S. market, the impact of the tariffs or new administration impact, endoscopy demand, would there be a risk that demand would be impacted in your view?
As of now, at least our numbers, the forecast, we do not include that impact, but the impact of the tariffs, if the economy as a whole goes through that stagflation or inflation and it worsens, even with the medical equipment, it could be impacted. That is not factored in yet, but we need to closely watch what would happen.
Thank you very much. That is all.
Yeah. Let me just answer directly to that question, but probably many people are aware that at least when it comes to medical equipment, and since the 1990s, both Japan and the U.S. have offset the tariff with each other. This is our basic rule since then. This meant, for example, that because this is medical equipment, it's cost-related to this, but the medical services for each of citizens for both countries, that basic rule will not change. For us, we're convinced that this is also to the governments. I think that the U.S. government, we share the exactly same concept. Basically, we strongly hope that the tariffs should be zero.
There is not so much on that, just our business performance, but we would like to avoid any possibility that these medical services and practices will be hampered with this tariff.
Okay. Understood. Thank you very much. My question about your business in China. When I look at your numbers, it seems like you recovered substantially in your Q4, but until the end of Q3, your business of about, for example, and the concentrated and the purchases, the China first policies, those are the negative factors there until the end of Q3 last year. That is why. Currently, what is the current status of your business in China? I would like to know about it. Also, for last year, it seems like the gross profit margin is better than your forecast.
That does mean that you would have recovered in the business in China last year was better than your forecast? I'd like to know about the comment, please.
Okay. Thank you very much. First off, let me just answer to your question for me. For Q3, at the time, we had the earnings call and the last time of February. I would mention about the we see that the sign of recovery after getting into this fiscal year and this year. This meant that December is the end of fiscal year in China. Going towards the year end of the fiscal year. It seems like some of the stored and realized that the demand gushed out or just comes out. That will lead to our incremental and substantial recovery, it seems like. This is one of the background.
Currently, we do not think that this is really the sign of any full recovery after this hour. It is still too early to make any kind of conclusion on that. We are really carefully watching it. Still, it is quite uncertain and unforeseeable when it comes to the business in China. Particularly, this has an impact for both of our businesses, but particularly for the electrosurgical, that is the comment from Frank and for the GIS.
Sorry. Yose, did you ask me to comment?
Yeah, if you have.
Yeah. The audio was gone for a second. We had a recovery which we were expecting already in the second half of last year was delayed, as we all noticed. The last quarter of the last fiscal year showed that we were for the first time seeing a positive trend. If you compare that to two years ago, we are still not in a very positive momentum. We are predicting that for the next fiscal year, we are going to see a recovery that will slowly continue to evolve, but will only show full effect in the second half of the year, which will coincide also with our efforts to start launching locally manufactured products, which is one of the factors that is typically influencing our ability to win tenders at the moment.
Okay. Thank you very much. Okay. I have one and the follow-up questions. How did you just what kind of assumption you have for this your planning and the business in China? It seems like that we expect about a gradual recovery this fiscal year, but for example, what happens with your new products launch or the last fiscal year, but the downside and the business in China have alluded to some kind of a downward revision of a business plan. That's why you tended to be a little more conservative than last year or something like that.
Yes, that's correct. We are currently working on the assumption that we will be able to grow compared to FY 2025 in the lower single-digit range, which is less optimistic than we used to be. Obviously, China was one of our double-digit percentage growth drivers for many, many years, but we are expecting recovery now. With the local manufacturing, the continued anti-fraud campaign, and the other influencing factors, we believe low single-digit is the right number for us at the moment.
Okay. Thank you very much. That's all for me. Thank you.
Thank you very much. To your first question, I think the COGS-related impact of the improvement in China, I think you mentioned that. Do you still want the answer to that?
Yes, if possible. Sorry, I forgot to answer that. Of course, China as a whole, the gross margin rate, there is a major contribution globally. As it recovers, we are seeing the improvement. Because of that, overall gross margin is improving. We have not seen such impact. There are other factors. Because of the composite of those factors, we are seeing the improvements.
Thank you very much. About R&D, about JPY 20 billion in terms of profit and loss, it has increased. The headcount is not quickly increasing. How would you be spending that? Could you explain the background for increasing the R&D budget?
How do you plan to use this increased part of the R&D?
About the specific breakdown, we do not disclose that, but major ones. For example, the endoscopy, next generation endoscopy. Right now, as we say, the competition is intensifying. To recover our competitiveness, we need to enhance our competitiveness. From now on, digital or robotics, the new technologies need to be worked on. As for the single use, yes, we need to develop that. We would need R&D budget for that. I cannot give you the breakdown, but those are the areas that we expect to work on. The consigned R&D, and for example, JPY 20 billion is used for the R&D outside of the company or R&D, the consigned R&D budget would also increase, yes. We do expect that to increase, the R&D that is outsourced to our side.
I think that you have been working on the R&D on your own, but that's no longer sufficient. You'll be using money for the outside capabilities so that you can improve the competitiveness?
We are not saying that our competitiveness is weakening. We need to have more options, I think. We are not sticking with doing the R&D on our own. Thank you.
My first question is about this. Is a gross profit margin 70.8%, 70.8%? The ism is on. I'd like to discuss with you about the accuracy of this focus in Q3. Yes, your endoscopy business in China would decline. That's why you made the downward revision. Other than that, endoscopy and in China, the other part of the business did not have any impact on the gross profit.
I think that this number cannot be explained only by just the decline in China and the rebound in China in Q4. Also, what happens in Q4, including this gross profit, it seems like you tend to be really conservative because there would be some other factors in this fiscal year. One is that this upside, expected upside in Q4, what is that reason? Would you be more specific about it? What do you think about the factors in the next fiscal year?
Okay. Yes, in Q4. There are two specific factors for the COGS. First one is the reversal of JPY 3.6 billion of that recall-related provision. Also, JPY 2.2 billion for the suppliers. These are the two one-time impacts.
That as of February, we have some kind of a possibility of that by the end of March, it can be realized. By the end of March, it was not, we're not for sure, but 100% we recognize it. That's why our forecast as of February, well, say conservative. These are two factors that one off. That's why I did not have in this fiscal year. Other than that, for that, when it comes to accuracy of the COGS forecast, yes, we have some of the challenges to make it all the more accurate.
About that, the sales did not change so much, but the scope have changed a lot, right? That is not that. Is not that. Okay.
Okay, then when it comes to the next fiscal year, when it comes to this, it is about increase of R&D is much too substantial. Yes, for the new developing next generation endoscopy, but sometimes you will be sometime in the future will capitalize on that, capitalize that. That's why I think that's my question is about you explained about you mentioned about robotics is also part of it. This is you also consider about some of the possibility of M&A because you make a lot of investments to the innovation ventures. Taking all this, not only for the organic, but also for the M&A, you have increased that the level of R&D costs, right?
When it comes to the M&A, yes, we are interested in that M&A for the growth, but it's not the part of the R&D. It's separate.
Okay, I understood.
Okay. This is only for the organic R&D efforts, right?
Yes. Yes. Yes, you're right.
When it comes to AI and robotics, these are topics that concern—I'm sorry that I could not explain so clearly—but it's not that all of these innovative technology can be done in-house alone, but also for the alliance or the outsourcing or the device for the way we're thinking about for the R&D. I'm sorry.
You have quite an ODEM for the AI and also for you having the alliance with the other partners. That's why I cannot understand why you need this kind of increase this year. If you are just getting on the new area like robotics, I understand it. What happens?
It's not the news, the topic, rather EVIS X1 now currently is already matured and technology.
Getting into the next generation of the endoscopy developments and also for including them in digitalization, digitalizations, and manufacturing approach. That are all included here in the R&D.
Okay. This is Takeuchi, which is speaking. Morrison's and Nomura Securities questions, and we have also, and that's related to his question, but when it comes to that, how to spend these expenses and costs.
For dndoluminal and we have the challenges in the future. We need to increase the investment for that. That may be also possible, but also if we make that investments that this is the R&D and by our organic and internal R&D or that outsourcing. We have both.
In the sense that, and also the question from Morrison was, is that an outsourcing cost and will that be included in the R&D or is that our internal or organic efforts? That was a question from Morrison, but we included both. Anyway, this is when it comes to our competency and we need for that, and we need to make that kind of additional and nominal investment, but we needed to have another explore in the new areas. That's why we need to make some kind of strategic investments so that this is about the broader definition of R&D activities. It's very difficult to elaborate and specify what we will do, but all these elements are included in R&D. We hope that you understand that.
Okay, understood. Thank you very much.
Thank you for the opportunity, first time asking questions. I just want to ask you something about your China situation again. You mentioned that the competition is becoming increasingly fierce. Could you perhaps provide a little bit more details, which competitors in which product categories? You guys give reason for China decline, but you did not mention volume-based procurement or pricing pressure. That is what, for example, Roche mentioned. Roche Diagnostics mentioned that in their recent results. I think you guys did mention anti-corruption. I think Mr. Drewalowski mentioned anti-corruption. I just want to hear a little bit more about that. Yeah, thank you.
Okay. Thank you, Mr. Lin. I would like to ask Frank to have the initial response to your question. If there is any additional supplemental comment, it can be made by Seiji, which is for the TSD area.
I think when we look at the impact, we cut our product portfolio basically in two pieces. One is the capital goods, and the other one is the disposable therapeutic products like GI endotherapy. Typically, the value-based procurement hits the GI ET disposable products much more than the capital goods. That means we have also seen our GI ET business struggling over the last year. That will continue, but the way out of that is typically innovation and launching new products, and that's what we are focusing on. On the GI capital goods, which is obviously the lion's share of our overall turnover, we have a situation where the main competitors are our standard main competitor, Fujifilm, in the GI flexible endoscopy side. We are also seeing, especially in the lower segments of the hospital market, a growing trend for local manufactured flexible endoscopes in GI.
That means at the moment, we are seeing our major challenges in the low and mid-segment hospitals, while on the top segment hospitals, with our recent launch of the X1 platform, we are still very positively growing the market there. Maybe Seiji, if you want to comment a bit more on the GI ET piece and.
Yes. Thank you very much. Turn is exactly the same as the SIS. It has physically at TSD has ET business under the TSD. We pretty much sacrificed the impact by BPP program for the endoscopy business. For the BPP program itself, and also the significant competition with local manufacturers. In case of the SIS in this physical area, we still have to deal with some of the consumable business like surgical device, energy device. That is exactly the same situation under the BPP pressure. Gradually the business is very much tight situations. Capital, especially respiratory, that is exactly the same as competitor with GI like Fuji and other local competitors, segmentation-wise, it's the same as the GIS. That's my answer.
Okay. If I could just quickly, just a quick follow-up question about the anti-corruption, is that still a factor in China or is that largely over?
As I mentioned earlier, let me pick it up. We feel and see that the anti-corruption approach has moved into a more permanent anti-fraud activity. I think that's healthy. That's a normal good compliance standard. Therefore, we feel that that is not a major new impact on our future outlook.
Okay. Perfect. Yeah. Thank you very much.
This is a question to Takeuchi-san. This time and effective June 1st, now you have a new CEO and it's very good news, but now in this selection process there are a lot of discussions, I think, that you had before that as a candidate to dismiss the Bob White. Based on these discussions and for a corporate policy, what would be fine-tuned? What would be changed dramatically after you have this new CEO? You may have that kind of ideas if you can disclose them. On top of that, after this hour, for example, there's already disclosed the mid-term business plan or that corporate vision. When are you going to update all these policies and the plans in the near future?
Yes. Shimon-san, thank you very much.
For, and yes, in communication in the past, we mentioned about we considered and working on the new mid-term business plan and strategy. That is why you asked that question. Now that we have the new CEO and with this, getting this timing, there is a new CEO, it is effective June 1st. We are very happy that we can have the CEO in this early timing. After that, and for the new management policies or the strategies, still we are working on that because now still that CEO has not joined yet as a formal aid. That is why. Yes, we had about all the strategies and the mid-term business plan. So far, we have been working on.
Anyway, we need to just renew that staff once we have this new CEO so that it will be likely that we're going to have a lot of good input from this new CEO and from his own unique perspective. That is why we'd like to fine-tune and refine the current plan and strategies and so that we'd like to take the action as soon as possible. When it comes to the timing, we cannot mention any specific timing that when we can do that.
Okay. That's all. Thank you very much.
Already some questions were asked. In March, at the time of the CEO meeting, in the medium term, OP margin of 10% or more, and in the long run, 25% PE was mentioned. With the new management team, rather than OP margin, basically, you would try to increase R&D and to drive the top line growth in coming five, ten years. Is it possible for you to prioritize that or OP margin strategy, the priority to be changing that or become less important? That's my first question. About the new CEO, I think that the term of office is about three years. From now on, would that be longer? Thank you.
Thank you. What about OP margin target, what to do about it or the ideas of the investments to increase the top line or to focus more on the growth or not?
No new policy has been formulated. OP margin, we are not ready to say that we are not going for the 25% OP margin. As of now, in order to become the global med tech company and to have a strong leadership, I think that type level of the OP margin is necessary. That is what I think as of now. What was your second question about the term of office? About the term of office, our CEO every three years or so. We had new CEOs. I think that was your understanding, but that is not the case. Either in the past or now, Bob White in the search process for finding the new CEO.