HOYA Corporation (OTCPK:HOCPY) Q2 2022 Earnings Conference Call October 27, 2022 2:00 AM ET
Company Participants
Eiichiro Ikeda – Representative Executive Officer and CEO
Ryo Hirooka – Representative Executive Officer and CFO
Conference Call Participants
Operator
[Foreign Language] Welcome to the Second Quarter Earnings. The transcript for this briefing will be posted on our IR site within a few business days. So please do not upload the script – tanscript of today’s meeting without our permission.
We have Eiichiro Ikeda, Director, Representative Executive Officer and CEO; and Ryo Hirooka, who is the Director and Representative Executive Officer. Today, there would explanation about the second quarter earnings, as well the overview of the business.
Those of you participating online, please take a look at the materials shared on the screen.
Now Mr. Hirooka will provide you the explanation.
Ryo Hirooka
I would like to start off with the results of the second quarter. The first point, the highlights has happened in the past three months compared to three months ago when I spoke to you, there was worsening of the situation. We believe that the situation may further worsen. So we are in a very difficult situation. So it is not a highlight, but this is something that we felt deeply in the past three months.
The second point is that the Life Care business maintained momentum under that environment. All major products achieved sales growth. Even under this environment, we have been able to post robust growth.
The third point, there are both aspect of positive and negative. So there has been some issues with the audio. I would like to test the audio. Can you hear my voice? Sorry about the audio issue. I hope that the participants would be able to hear me. Can you hear me? So in the Q&A session I have been able to hear from the beginning and that there some other people have said that they have been able to hear from the middle. And then you have overly hear, but I would like to start over just in case.
This is the key takeaways, three points. The first point, its not a real highlight for us, but the external environment was very bad. Second point is that even under that environment, Life Care business maintained momentum. All major product achieved sales growth. It has gone over the year-on-year levels on a substantive basis.
The third point, for Information Technology business, we have positives and negatives. And starting from the positives, the semiconductor blanks was doing well. And in Q2 and the current status, the EUV is doing well. The negative aspect as you see on the slide is HDD substrates and imaging-related business had declined on a substantive basis. With regards to HDD, I will be providing detailed explanation later.
Moving on to the next slide. This is the financial overview. Revenue was JPY184.1 billion, 13% up year-on-year, pretax profit, JPY61.8 billion, up 15% year-on-year. Net profit, JPY47.3 billion, up 10% year-on-year. As for the reference indicator, the operating profit was JPY53.9 billion, up 9% year-on-year.
There was yen depreciation, a significant yen depreciation. So because of that, there was a huge increase. But on the – at Forex-neutral basis, it was up 3% in terms of the revenue and pretax profit is a 5% plus year-on-year. And as for the operating profit, if we exclude the Forex impact, there was a slight positive.
As for the pretax profit and the net profit, there has been a huge difference. And one is the gain from the foreign exchange and because the interest rate is going up, the received interest is higher. The interest income was higher. And in the Information Technology, there was a decline. However, Life Care had grown, and it had offset the negatives in the Information Technology business.
But there was a change in the mix of the revenue. So if you look at the OP margin, there was a decline in the ratio. So that’s the Group overall situation.
Next is Life Care business. As for the revenue, JPY118.8 billion, up 20% year-on-year; pretax profit JPY27.4 billion, up 17% year-on-year; operating profit, JPY23.2 billion, up 17% year-on-year. There was a huge currency impact, and the constant-currency basis is stated here. But even on the substantial basis, revenue had grown 10%. So even under this current difficult environment, this business had posted double-digit growth.
Life Care business will face challenges under a difficult economic situation. However, under that difficulty, Life Care business has seen robust demand that enabled it to grow.
As for the operating profit margin, it was 19.5%. We are considering 20% as one benchmark. But we are aiming for a 20%, but we did not reach there. And on the other hand, compared to last year, sales promotion cost, R&D cost, including the clinical cost, we have increased investment and the growth investment had enabled us to get to this level.
Revenue has grown as well. In that sense, we have been able to achieve what we aimed to achieve to a certain extent.
Now I would like to explain more details about each business. First is endoscope. This shows the constant-currency basis. As for endoscopes, compared to last year, it was plus 2%. Regrettably, because of the shortage of semiconductors, it had negatively impacted us and there would be a continuation of semiconductor shortage.
Compared to three months ago, there is a gradual improvement in the situation. Number of shipment of processors is increasing. After – however, the orders as well as the shipments are not where we want to be. We do have orders, but the amount of shipment is capped. And because of that, the revenue itself will be capped. Under that environment, we were able to sell robustly in Asia and Europe and we have been able to grow 2%.
Next is intraocular lens. On a year-on-year basis, there was a growth of 15%. So this is a significant growth. There was a negative impact from COVID the previous year, so there was a recovery. The biggest recovery was seen in Japan. It was not up to 20%, but it was bigger than 15% year-on-year growth. Japan was lagging behind in the recovery, so now it’s catching up. We would like to conduct the sales activities according to the recovery. And we – so far, we have been able to do that.
Artificial bones and others. The number here is small, but it is growing in double digits. The healthcare-related products, eyeglass lenses, on a constant-currency basis, went up 10% year-on-year. There was an M&A as well. And if we look at the internal growth, it is in the – it is around 7% to 8% growth, but we have been able to grow inclusive of the M&A for the eyeglass lenses area.
Asia, including Japan, is doing well. And especially in China, there was a robust growth. Due to COVID, there was a time when the sales had been stagnating in China, but it rebounded. In the United States, the economy is not good, and the ECP market was very soft. And because of that, that negatively impacted the eyeglass lenses. It did grow double digits, but we wanted to see more growth.
Last but not least are the contact lenses. In July and August, there was a huge increase of COVID in Japan, and there was a significant impact from that. But starting from September, there, we have a sustaining recovery, and we have been able to grow in double digits year-on-year.
From July to September last year that was when we were impacted most by COVID. And of course, compared to that, we should be in the positive year-on-year, but we have not gotten to the pre-COVID levels yet. We will continue to capture the demand from the market to grow further.
There were regional issues, like component shortage issues in endoscopes. There may be some expansion of COVID cases in the future. However, the fact that we have been able to substantively grow on year-on-year levels, we feel very confident by our performance.
Next is Information Technology. This is the result. Revenue is JPY64.2 billion, up 4% year-on-year; pretax profit, JPY34.4 billion, up 11% year-on-year; operating profit, JPY31.7 billion, up 5% year-on-year. This is on a yen basis. And on a constant-currency basis, the revenue was negative 7% year-on-year.
And on the operating profit basis, and on a constant-currency basis, it’s negative. But what we have been able to do is that there were some areas where we have grown, and there were some negative areas. But even in the negative areas, we have been able to control the cost, and we have been able to maintain the margin. Because of that, operating profit margin was maintained at 49.3% as a result of it.
Next, let me show you the breakdown of the IT business. Once again, this is on currency – constant-currency basis. First, for imaging, year-on-year minus 19%. As explained, there is the impact from China and economic slowdown as well. So the sales have decreased for the imaging business. However, imaging business is not so large within our group revenue, and we do not have high expectations for its growth either.
So what is important here is that there’s going to be some ups and downs in the imaging business, but we would like to maintain a high level of profit margin. We were able to maintain the profitability, even though revenue decreased by around 20%.
Next, for masks and blanks, up 17% year-on-year. As I touched upon in the highlights slide, EUV continues strong performance growing year-on-year. And looking at the recent situation, the demand remains robust.
The semiconductor industry as a whole is seeing volatility. However, our EUV blanks are mainly for R&D purposes, so we are not as impacted by the volatility and the demand for EUV remains strong.
Of course, there could be some fluctuations because of the current environment, which we need to watch out for. However, in the long term, we remain firmly confident that the demand will continue to grow.
Now for FPD, large-size panels. We have established the joint venture with BOE, as has been announced. So it’s going to take time for the plant to be built and in operation. However, thanks to the joint venture, we have a strong relationship with BOE and that’s going to aid us in our future activities. So we are able to see good perspectives for FPD.
And lastly, for HDD substrates. Let me start from Q2. So year-on-year down by 28%. So HDD substrate business is all US dollar basis. And on a dollar basis, this was down 28%. So Q1 was weak to begin with. And so there’s 2.5 and 3.5 inch for HDD substrates.
2.5 inch had abnormally high demand last year, so on a year-on-year level, Q1 declined. And the same trend for Q2. On a year-on-year basis, there was a large decline for the 2.5 inch, and this will continue going forward.
So what is different for between Q1 and Q2? Looking at the Q2 result, 3.5 inch was down year-on-year. I mentioned in the Q1 announcement that there may be some adjustment for the 3.5 inch in the short term. And this concern actually materialized in Q2. As a result, HDD substrates as a whole declined by 28% year-on-year. However, we did control the cost, and we aim to maintain the profit margin.
However, for Q2, revenue declined by 28%. And we were able to maintain the profit margin, even though, of course, the profit in terms of value is down year-on-year. So this has been the Q2 result update.
Now looking towards the future, we do not change our outlook for the long term. With data center business, the demand for the 3.5 inch will grow in the future, but let me talk more about the short-term perspective.
Looking at Q3, to be honest, it is very bad. In Q3, there has been a large inventory adjustment that is already incorporated. In US dollar basis, we are expecting 80% reduction. It’s not 80% against last year. We’re expecting 80% decline. So that is the scale of the inventory adjustment that we are expecting in Q3.
But this is, of course, short term. And of course, it is painful, but rather than having a prolonged situation, we are able to sharply reduce the cost or stop the production at the factory and our focus will be on controlling the cost.
However, as I mentioned for Q2, 28% reduction, but we were able to maintain the profitability through various cost-reduction measures. However, if – for Q3, with 80% down year-on-year, its going to be extremely difficult to maintain the profitability with such a sharp decline.
And compared to the imaging business, our HDD substrates comprises a larger part of our group sales. To be more specific, for the group as a whole for Q3, we expect year-on-year decline in profit.
So when do we expect a recovery? With this large scale inventory adjustment and looking at various external data, with such large inventory adjustment in Q3, we would not be surprised if there is a recovery in Q4.
However, in the short term, we do not know whether such a recovery will be realized. Therefore, we don’t want to have too much of an optimistic scenario for Q4, but rather, be prepared in the event that the recovery does not occur in Q4 and control the cost and production, but still be prepared to boost production once recovery happens.
So we will make such – we will monitor the situation, not on a monthly basis, but on a weekly basis so that we can take prompt action. So we do have visibility that there will be a big drop in Q3 for this business.
And this is talking about the balance sheet and cash flow. No major changes. We conducted the share buyback, which has been completed. And in today’s Board of Directors’ meeting, the shares – the buyback shares have been cancelled. And that’s it for my explanation.
Next, we would like to share with you some topics with regards to the private brand contact lens. We have 360 contact lens retail sales stores, Eyecity. And in Eyecity, most of the business has been focused on selling third-party products.
However, in order to differentiate ourselves from competing retailers and increase consumer retention, we launched two private brand products, hoyaONE PREMIUM and hoyaONE comfort, this March. Both products have been well received by the customers and the repurchase rate is very high.
So the two products that I introduced are OEM products being produced by another company. However, we plan to launch hoyaONE treasured, which we manufacture in our own factory. With this, hoyaONE will have three product lineups.
For hoyaONE treasured, of course, the eye needs oxygen. And this product has high oxygen permeability, and it also collects moisture on the lens surface as a result, realizing a very comfortable feeling.
As mentioned, our company’s contact lens business was mainly focused on retail sales thus far. However, with the private brand products, including OEM products, we are transitioning to a vertically integrated model for the contact lens business. So this was a very, very brief introduction of the private brand expansion in the contact lens business.
Lastly, let me invite the CEO, Ikeda to talk about the summary of the Q2 results and outlook.
Eiichiro Ikeda
As Hirooka-san said, the HDD substrates business is facing negative growth against last year. Thus far, 2.5 inch decline was covered by the 3.5 inch. However, the 3.5 inch is also decelerating and cannot cover for the 3.5 inch decline.
However, within the IT business, there is a continued growth of EUV business. And also for the Life Care business, we are seeing double-digit growth. Therefore, the decline in HDD business can be offset by the other businesses. And on a constant-currency basis, we were able to realize higher profit and revenue. Thus, our portfolio diversification is working.
Now looking to the future, the HDD business, 3.5 inch will continue to face difficulties in second half of the year, especially for Q3, 80% decline year-on-year. Therefore, on a quarter basis, we will not be able to cover the decline of the HDD business by the other business as we did for Q2 on a Q3 basis.
However, for the full year, we should be able to cover more or less. And once the inventory adjustment has settled and the data center investment recovers, the HDD demand will continue to be robust.
And in the long term, the drive capacity expansion will be required. Therefore, the number of the – the volume of the HDD substrates will increase. And so this trend itself remains unchanged. Therefore, whilst recovery materializes, more of our substrates will be used. So this is not any change in the business structure but more of a short-term impact. So I would like to stress that this continues to be a growth business in the mid to long term. So there is no need to be concerned for the long term. Thank you. Now we would like to move on to Q&A.
Question-and-Answer Session
And those of you who have selected Japanese, please ask in Japanese. And those of you selecting the English channel, please ask in English for interpretation purposes. [Operator Instructions] Yoshida-san, please.
Q – Unidentified Analyst
This is Yoshida. Thank you for taking my question. Related to HDD substrate, the 80% down in the third quarter, that is including the 2.5 inches? That’s my first question. And in fourth quarter, you said that you’re not too optimistic, but how conservative are you in your prospects for this area? I would like to know your scenario?
Ryo Hirooka
So it includes the 2.5 inches. That’s overall HDD substrate business, including 2.5 inches. To your second question, as I have said earlier, in the third quarter, the inventory adjustments that is coming in the third quarter, we believe that there would be progress in the inventory adjustment because of it.
So we believe that there would be a recovery in the future, but we are not sure yet when that recovery would start, that’s too uncertain. We don’t know whether it will be coming back in January or February. It’s too early to make a guess on that.
The third quarter will be significantly dropping. We believe that we can make recovery from that. But when recovery starts, we cannot be too optimistic about the timing. So we will continue to monitor the situation and wait and see when it will recover.
Unidentified Analyst
Thank you very much. I have a follow-up question. In the EUV blanks in the Information Technology area, in the second quarter, if you look at EUV, how much was the growth rate? And towards second half, how will it grow? Could you give us your view?
Ryo Hirooka
In terms of the performance, it grew by 30%. In terms of the EUV prospect for the future, the HDD situation is, as I have explained, and the semiconductor situation is also difficult. So we are communicating very closely with the customers. But as for the EUV blanks, the demand is not dropping, it is strong in terms of the demand.
Next year, two years from now, three years from now, we are talking about the volume with the customers, and we are planning the CapEx that we will be doing within our company, and we don’t see any drop in that demand, so EUV is strong. So a 30% growth year-on-year, I would like to make a supplementary comment on that.
Unidentified Analyst
Okay. Thank you very much.
Operator
Next, Shibano-san, please.
Unidentified Analyst
I’m Shibano from Citigroup. Thank you for taking my question. With regards to the hard disk, year-on-year dollar-based, 80% down in Q3. So for this, as memory disk business, will this be loss-making? Or will you be able to achieve maybe half of the profit margin before, but still be profit-making?
Ryo Hirooka
I am not able to talk about actual numbers, but we do not think that this will be loss-making. That’s about the level that we foresee.
Unidentified Analyst
Thank you. And my second question, for the Life Care business. As Hirooka-san mentioned, for Q3, Life Care remains strong, covering for the deceleration in the IT business. And on the operating profit margin basis, from Q2 to Q3, in order for Life Care to supplement for the decline in Information Technology, can you expect a higher profit margin for Life Care business in Q3?
Ryo Hirooka
To give you the answer, first, we basically would like to maintain the 20% or around 20% operating profit margin for Life Care, so basically, no change. So of course, because of HDD decline, we could try to raise the profit margin for Life Care business, but we don’t want to refrain or restrict the growth of the Life Care business just because the HDD business is showing difficulties.
So rather than trying to boost the profit of Life Care business by restraining the investment, we would like to try to maintain the operating profit margin of around 20%, especially because this business is showing recovery from COVID.
So in other words, the decline, we see it to be short term. So that is why we have maintained a similar profit target for Life Care. Of course, if the decline is going to be long term, we will not be able to take such action because it’s going to be more structural.
Unidentified Analyst
Thank you.
Operator
Thank you very much. Next is Nakamura-san.
Unidentified Analyst
Thank you for taking my question. I’m Nakamura from Goldman Sachs. Two questions. One is as Hirooka-san has mentioned that the external environment is quite bad. Aside from HDD, within your portfolio, is there – do you see slowdown in the demand in certain areas? Could you mention on that?
Ryo Hirooka
Imaging-related business is where we are seeing 20% decline. We don’t believe that it would be dropping significantly as HDD. However, at this point, we do not believe there will be a significant recovery in imaging-related business. The imaging business is easily affected by the economic situation.
Aside from that, if we look at the business overall, we don’t see any business that is declining significantly. However, there are some regional issues or the customer issues. For example, in the US, ECP, we are struggling, so that’s a struggle in the market itself. There is a deceleration in the US market.
In Europe, the independents are facing more difficulty than the chain customers. Even though we expect slight growth, so when the market environment is bad, it would be difficult for us to grow significantly. So that’s what we are feeling right now.
However, if we look at the specific numbers, it would be HDD and imaging, which are seeing significant decline.
Unidentified Analyst
Thank you. My second question, the third quarter operating profit will be coming down on a year-on-year basis. Hard disk will be significantly going down, I believe. So what’s the level of operating profit that you have in mind? I know that you don’t have a guidance, but if there’s anything that you can comment about it, I would like to hear that?
Ryo Hirooka
We don’t officially provide guidance. And our numbers will be released at the third quarter. But I know that we have to make calculations in business and in Q2, in Information Technology, OP margin was maintained. But that would not be possible going forward. It depends on the Forex. But in Information Technology, 40% will be quite difficult for Q3.
Unidentified Analyst
Thank you. For Life Care, that would be at the cruising speed in terms of the margin?
Ryo Hirooka
Right, we have not changed our view for Life Care.
Unidentified Analyst
Thank you very much for your response.
Operator
Thank you. Next, Damian-san, please.
Unidentified Analyst
Thank you. I just one question. So we talked about the hard disk inventory adjustment. So looking at the customers’ development roadmap, or the next-generation hard disk or glass substrates, has there been any plan in the customers’ roadmap?
Eiichiro Ikeda
For the drive, the plan to develop 11 from current date to 10, that discussion is still ongoing, and we plan to provide the substrates to the customers. The HAMR drive, mid or later next year will be released as some of the main customers have released. So no changes in the plan for the development.
Unidentified Analyst
I see. So there is an inventory adjustment, 80% down year-on-year. So it’s very much overall reduction. But looking at Q4, the next-generation model for the 20 terra hard disk, looking at the inventory, you don’t expect any build-up for that?
Eiichiro Ikeda
So the customers have made announcements of their financial results recently. And looking at their year-on-year result our expectation is down by 80%, so that is larger than theirs, which means that the inventory will be declining going forward for the customers’ side. But we don’t know the details, of course, but calculating from our expectation on the customers’ results, we expect that there will be a decline in the customers’ inventory level.
Unidentified Analyst
Thank you.
Operator
Thank you very much. Nakanomyo-san, please.
Unidentified Analyst
From Jefferies, my name is Nakanomyo. The first question is related to Information Technology. EUV blanks, the final demand compared to three months ago is coming down. But is there a link between the current trend and the EUV mask trend?
Eiichiro Ikeda
The current demand and the future demand for EUV, it is not coming down.
Unidentified Analyst
Thank you. Imaging is coming down by 20%. On the other hand, digital camera and the interchangeable lenses, it seems that there is a robust growth. How should I understand this?
Eiichiro Ikeda
In the imaging business, since five to six years ago, we had been shifting to something other than digital cameras, to things like CCTVs. The camera itself is not coming down, but CCTV, due to reduction in the public spending in China, CCTV demand had come drastically down. And because of that, there was a significant decline in the overall imaging business. I don’t think that there is a misalignment with the market trend.
Unidentified Analyst
Thank you very much. The second point, so JPY730 billion in the annual revenue has remained unchanged. And I think that HDD would be coming down, but the dollar rate is changing significantly. Last year, it was JPY120 to $1, but there is a significant change in the foreign currency. So could you explain about that?
Eiichiro Ikeda
JPY730 billion, and what we announced last year was – well, usually, we do not disclose the annual revenue. But because there would be an upward revision of more than 10%, we decided to disclose this JPY730 billion figure.
The update of the disclosure – updated disclosure, we will be showing the full-year results forecast in third quarter. And I think that the level that we are seeing would remain unchanged. The HDD is coming down, but the Forex has changed significantly from JPY125 to $1, so JPY730 billion, we believe we can reach. So that’s why we had not changed this figure.
Operator
So the last person, Tim, please.
Unidentified Analyst
Thank you very much. Its actually Tom [ph] Thank you very much for the time. I was wondering for the mask blank, you made a comment that at the moment, you’re not seeing any changes to plans. And I was wondering, is that true for both EUV and DUV?
And if you were to see, for example, your clients sort of pushing out some of their research processes or R&D CapEx because they need to save cost in the short term or things like that, sort of what would be the lead time on you realizing or you finding out about this?
Ryo Hirooka
As for the EUV blanks demand, the other people asked a question about that. But currently and for the future, we don’t believe that there would be a change in the demand. I understand your concern, but this is not something that would be included in the final product. And the sensitivity is different from other products. So the impact is smaller. And because of that, it remains unchanged.
Operator
Do you have a follow up questions?
Unidentified Analyst
Yes. Well, as part of my first question, I was wondering, is the outlook the same for both EUV and non-EUV? And do you have any kind of figures for the recent quarter’s growth for those two?
Ryo Hirooka
Looking at the revenue or demand or how should I say it? For EUV, as mentioned, we’re seeing continuous growth and strong demand continuing. And for non-EUV, not as much growth, but stable; all demand continues. So no change from the previous situation in any case.
Unidentified Analyst
Okay. And is your impression – your genuine impression that your clients won’t sort of delay some of their R&D processes? Or they won’t cut down on that type of spending in CapEx, even in this environment where everyone’s adjusting their production numbers?
Eiichiro Ikeda
So with regards to EUV, because this is more cutting edge, 2-nano node development is currently ongoing. And for this 2-nano development activity, looking at the EUV blanks demand, no, we are not seeing any impact in that. I hope this answered your question.
Unidentified Analyst
Yeah. Thank you. Thank you very much.
Operator
Thank you. And with this, we would like to close today’s earnings presentation. Thank you very much everyone for participating in spite of your busy schedule.
Ryo Hirooka
Thank you very much, everyone.
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