Hoya Corp

The transcript for this briefing will be posted on our IR site within two business days. Please do not upload the transcripts 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 be explanation about the second quarter earnings, as well as 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. I would like to first start out with the results of the second quarter. The first point, the highlights, what 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 aspects of positive and negative but there has been some issues with the audio

Oh, hi there. And everyone here.

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, it says I have been able to hear from the beginning and that some other people have said that they have been able to hear from the middle.

Something you have already heard, but I would like to start over just in case.

This is the key takeaways. Three points. The first point is 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 products 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 this slide, is HDD substrate 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 184.1 billion yen, 13% up year on year. Pre-tax profit, 61.8 billion yen, up 15% year on year. Net profit, 47.3 billion yen, up 10% year on year. As for the reference indicator, The operating profit was 53.9 billion yen, 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 Forex neutral basis, it was up 3% in terms of the revenue and pre-tax 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 pre-tax 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, 118.8 billion yen, up 20% year-on-year. Pre-tax profit, 27.4 billion yen, up 17% year-on-year. Operating profit, 23.2 billion yen, 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 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 20%, but we did not reach there. On the other hand, compared to last year, sales promotion cost and the 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 aim to achieve to 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 continuation of semiconductor shortage. Compared to three months ago, there is a gradual improvement in the situation. Number of shipment of processors is increasing. However, the order as well as the shipment 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 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, it went up 10% year on year. There was an M&A as well. And if we look at the internal growth, 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 ECB 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 is 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, we have seen a 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. So there were regional issues like the component shortage issues in endoscopes. There may be some expansion of the COVID cases in the future. However, the fact that we have been able to substantively grow on an year-on-year level, we feel very comforted by our performance. Next is information technology. This is the results. Revenue is 64.2 billion yen, up 4% year-on-year. Pre-tax profit, 34.4 billion yen, up 11% year-on-year. Operating profit, 31.7 billion yen, 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, on the 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 a 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. And we were able to maintain the profitability even though our revenue decreased by around 20%. Next, for masks and blanks, up 17% year on year. As I touched upon in the highlight 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. 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 stable. firmly confident that the demand will continue to grow. Now for FPG, large-scale 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 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 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 aimed 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 toward the future we do not change our outlook for the long-term with data center business the demand for 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 in US dollar basis we are expecting eighty percent reduction it's not eighty percent against last year we're expecting eighty percent 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, it is going to be extremely difficult to maintain the profitability with such a sharp decline. And compared to the imaging business, HD substrates comprises a larger part of our group sales. so 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 laws inventory adjustment in q3 we would not be surprised if there is a recovery in q4 however in the short time 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 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 is 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 scores, ICT. And in ICT, 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, Hoya One Premium and Hoya One 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 Hoya-1 Treasure which we manufactured in our own factory. With this, Hoya-1 will have three product lineups. For Hoya-1 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 science business. Lastly, let me invite the CEO Ikeda to talk about the summary of the second quarter results and outlook. As Hirooka-san said, the HDD substrate 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 declining HDD business can be offsetted by the other businesses. And on the constant currency business, we were able to realize higher profit and revenue. Thus, our portfolio diversification is working. Now, looking toward the future, the HDD business 3.5-inch business, will continue to face difficulties in the second half of the year, especially for Q3, 80% decline year-on-year. Therefore, on a quarterly 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 So yeah, 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 volume of HDD substrates will increase. And so this trend itself remains unchanged. Therefore, once 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.

We would like to move on to Q&A. 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. And also, those of you participating via phone, please press star nine. And also, please state your affiliations before you ask your question. So we would like to limit the question to two each. due to contrast in time first. Yoshida-san. This is Yoshida. Thank you for taking my question. Related to HDD substrate, the 80% down in the third quarter, that is including 2.5 inches. That's my first question. And in fourth quarter, you said that you're not too optimistic, but But how conservative are you in your prospects for this area? I would like to know your scenario. So it includes 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 adjustment 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. 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 the second half, how would it grow? Could you give us your view? In terms of the performance, it grew by 30%. In terms of the EUB 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 EUB 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 it's 30% growth year on year. I would like to make a supplementary comment on that. Thank you very much.

Next, Shibano-san, please. I'm Sibano from CD Group. 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 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 thank you and my second question for the life care business as Hiroko-san mentioned for Q3 life care remains strong, covering for the deceleration in the IT business. And on the offering profit margin basis, from Q2 to Q3, in order for life care to supplement for the decline in the information technology, can you expect a higher profit margin for life care business in Q3? 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 profits 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 MD 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. Thank you.

Thank you very much.

Next is Nakamura-san.

Thank you for taking my question. I'm Nakamura from Goldman Sachs. Two questions. One is as Hiroko-san has mentioned that the external environment is quite bad. Aside from HDD, within your portfolio, do you see slowdown in the demand in certain areas? Could you mention on that? Imaging-related business. is aware we are seeing 20 percent decline and we don't believe that it would be drip dropping as significantly as HDD however at this point we do not believe there will be a significant recovery in imaging related business The image in 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 market, 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, when the

market environment is bad it would be difficult 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. 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 is 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. that we don't provide, 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, OPE margin was maintained. But that would not be possible going forward. It depends on the forex. But information technology, 40%, will be quite difficult for Q3. Thank you. For life care, that would be at the cruising speed in terms of the margins. Right, we have not changed our view of our life care. Thank you very much for your response.

Thank you. Next, Damian-san, please. Thank you.

I have just one question.

So we talked about the hard disk inventory adjustment. So, looking at the customer's development roadmap for the next generation hard disk or glass substrates, has there been any plan in the customer's roadmap? For the drive, the plan to develop 11 from current date 10 that discussion is still ongoing and we plan to provide the substrates to the customers and the hammer drive in 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 I see so there is an inventory adjustment

much wasn't on them 80 percent down here and yes it's very much overall reduction but yeah I'm keep it's been we can't you for you money don't need to tell the next generation model for the 20-terra my hard disk so that I what looking at the a inventory a you are you my game you don't expect any build-up for that all

So the customers have made announcements of their financial results recently. And looking at their year-on-year results, 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, of course, know the details. But calculating from our expectation and the customer's results, we expect that there will be a decline in the customer's inventory level. Thank you.

Thank you very much. Nakano Mio-san, please.

Yes.

From Jeff Rees, my name is Nakano Myo. 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? So the current demand and the future demand for EUV, it is not coming down. Thank you. Imaging is coming down by 20%. On the other hand, digital camera and the replacement lenses, it seems that there is a robust growth. So how should I understand this?

In the imaging business, since five to six years ago,

we had been shifting to something other than digital camera to things like CCTV. The camera itself is not coming down, but CCTV, due to reduction in the public spending in China, the CCTV demand had come drastically down, and because of that, there was a significant decline in the overall imaging business. So I don't think that there is a misalignment with the market trend. Thank you very much. The second point, so 730 billion yen in the annual revenue, has remained unchanged and I think that HED would be coming down but the dollar rate is changing significantly last year it was 120 yen to a dollar but there is a significant change in the foreign currency so could you explain about that 730 billion yen last year 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 730 billion yen figure. The update of the disclosure updated disclosure. We will be showing the full year result forecast in the 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 125 yen to a dollar. So 730 billion yen, we believe we can reach. So that's why we had not changed this figure. So the last person.

James, please.

Thank you very much. It's actually Tom, James' colleague. Thank you very much for your 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 when would you be, what would be the lead time on you realizing or you finding out about this?

As for the EUV blanks demand, the other people asked 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.

Do you have a follow-up question?

Yeah, sorry, 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?

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 a stable demand continues. So no change from the previous situation in any case.

Okay, and it's your impression, your genuine impression that your clients won't 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 down production numbers.

Well, with regards to EUV, because this is more cutting-edge, two-nano node development is currently ongoing. And for this two-nano development activity, looking at the EUV blanks demand, no, we are not seeing any impact in that. I hope this answered your question.

Yeah, okay. Thank you very much.

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. Thank you very much everyone.