Showa Denko KK

TSE:4004

Earnings Call Transcript 2020-Q2

[Kohei Morikawa, executive]

Ladies and gentlemen, thank you very much for joining us. This is Kohei Morikawa, President and CEO of Showa Denko. Thank you for joining us for the financial results briefing.

Page 2 shows the content of today's briefing. Special factors of this year include drastically lower production in graphite electrodes business due to the reduced steel production, impact of COVID-19, lower naphtha prices and others. In addition, there were onetime expenses related to the integration of Hitachi Chemical. Due to these content of the first half financial results and full year forecast is tough, but we will try to quickly realize the integration effect of Hitachi Chemical and execute various measures as planned for next evolution.

Motohiro Takeuchi, our CFO, will present the details of financial results.

This is Page 3. 2020 global economy has recorded bigger negative growth rate than after the Lehman shock, mainly in the United States and Europe due to the COVID-19. As U.S. economy starts to reopen, there are some signs of recovery. However, due to the risk of resurgence of infection situation which is dependent on the financial easing is quite unstable.

Chinese economy has shown gradual recovery after hitting the bottom in Q1 but full-fledge to growth recovery is expected next year and onwards. Same goes for Japanese economy, which recorded a rapid deceleration in the first half and is in the recovery trend from the second half. But we must say that there is lack of clarity and recovery contains uncertainties.

Page 4, this shows 2020 first half financial results. Sales and profit declined significantly year-on-year. First half, some of the effect of special factor was JPY 58.5 billion. Operating expenses were JPY 36.5 billion. These include JPY 21.7 billion impact of lower of cost or market or LCM in graphite electrodes. JPY 8.5 billion feedstock cost adjustment in petrochemicals, JPY 2 billion impact of COVID-19 and JPY 4.3 billion related to acquisition of Hitachi Chemicals shares. As for nonoperating expenses, JPY 17.3 billion were booked, including the fees for integration of Hitachi Chemical. Extraordinary loss was JPY 4.7 billion for closure of Meitingen plant in Germany, which is in graphite electrode business. Because of these, no dividend will be paid at the end of Q2.

Page 5. This shows 2020 full year performance forecast. With the inclusion of Hitachi Chemicals from the second half, higher sales and lower profit year-over-year are expected. Onetime negative factor on operating income unique to STK is JPY 26 billion. This includes JPY 10.7 billion full year impact of LCM in graphite electrodes business, JPY 15.3 billion integration expenses with Hitachi Chemical. Nonoperating onetime negative factor unique to SDK is JPY 20.8 billion. This includes JPY 16.1 billion integration related expenses, JPY 4.7 billion for closure of Meitingen plant. Impact of COVID-19, naphtha prices and market conditions as well as ongoing expenses for integration with Hitachi Chemical are not included in those onetime negative factors. If next year's impact of COVID-19, lower naphtha prices and market conditions are the same as this year, our current forecast is operating loss of JPY 4 billion after the amortization of goodwill. Negative impact of COVID-19, lower naphtha prices and market conditions on annual operating income number is expected to be about JPY 70 billion. As business environment is uncertain, we cannot forecast how much we can recover from minus JPY 70 billion or how much positive factors we can expect. Therefore, annual dividend payment remains undecided. As soon as we can make a good forecast for the next year, we will disclose our view on the annual dividend.

Next is Page 6. In addition to hoping for the end of pandemic and recovery of naphtha price and market conditions, we would take our own countermeasures against bad economy to improve our resilience.

Let me first explain the company-wide common measures. Specifics for each business will be explained later. First is to reduce assets by careful investment selection. We will reduce the total combined CapEx plan with Hitachi Chemical based on 2020 decision by JPY 50 billion. However, we will continue to invest in growing businesses such as semiconductor-related business and others by streamlining working capital such as reduction of inventories and others and the sale of the cross-holding shares, assets will be reduced by more than JPY 45 billion (sic)[ JPY 450 billion ]. And the business portfolio reform, we will promote sales of noncore business with a target of JPY 200 billion. Also in order to drastically improve earnings structure, we will realize more than JPY 20 billion cost reduction by realizing synergy effect of integration with Hitachi Chemical. Through the promotion of teleworking, about 20% of the employees of the headquarters are coming to their office from March. We also started to utilize satellite offices. We plan to unify headquarters of 2 companies in the future, which will also contribute to lower cost. We will promptly implement these measures in 3 years to come in order to improve our resistance against the poor economy. Page 7. Showa Denko Group is in the midst of changes, such as economic change where use of IT was accelerated by COVID-19. Social change, where we see new lifestyles and our own change through the integration with Hitachi Chemical. This timing of 3 changes happening simultaneously, present an opportunity for an evolution for our group. Our group, which has wide-ranging products from materials to modules will evolve into a one-stop solution company.

Page 8 shows our company's tasks trying to evolve, namely a sound present and promising future. In the short term, by promoting measures I explained earlier, we will focus on the improvement of management structure and to put the finances on a healthy footing.

In the mid- to long-term by generating synergy effect through the integration of Hitachi Chemical, optimizing business domains and shifting to solution-based business model to respond to advanced customer needs, we will realize innovations towards the evolved company group.

Page 9. Next is current status and the prospect of major businesses. Although market environment for graphite electrodes and mobility are tough in 2020, semiconductor and electronic businesses are showing strength. In 2021, while there are some differences depending on businesses with the improved market environment, effect of cost and inventory reduction and others, better business performance is expected.

Next is graphite electrodes. Let me now explain each business, starting with the graphite electrodes. 2020 global crude steel production is expected to drastically decline due to the impact of COVID-19. Also customers' inventory adjustments, which started in the second half of 2019 are likely to continue until the end of 2020. Under these tough circumstances, we closed Meitingen plant in Germany and optimized production capacity through furloughs at plants and promoted measures such as recording loss on valuation of inventory in accordance with the LCM. In the second half, we will realize the operation with the breakeven point at 60,000 tons of sales in 6 months. In 2021 and onwards, with the recovery trend of the steel production and the end of customers' inventory adjustments, we expect earnings to significantly improve. And mid to long term, steady increase of the percentage of electric furnace steel will be a tailwind.

Page 11. As for hard disk business, despite lower demand for PCs, demand for near-line for data centers is expanding with the progress of 5G as well as impact of COVID-19, where teleworking and stay-at-home increased. Hard disk business as a whole is trending strongly. Continuing to develop and supply leading edge best-in-class products will prepare for mass production of next-generation MAMR technology media and the development of HAMR technology media. In 2021 and onwards, investment for data centers will expand further, and we expect highest ever shipment volume. We will build the production systems to accommodate this increase.

Next is petrochemicals. As oil prices plummeted, naphtha price went below $200 per ton at one time. First half performance was impacted from large feedstock cost adjustment, but now the naphtha price has recovered to $400 per ton level.

In the first half, utilization rate lowered temporarily due to the stagnant automobile market and has recovered since and reached a full operation from July. Our Oita Complex is very competitive with major derivative products and is strong in export with its geographic characteristics. This enabled early recovery of utilization rate. We expect to generate above JPY 5 billion profit in the second half. In 2021, although additional plants will be established in Asia and Middle East, we expect the recovery of economic activities will absorb these additions.

Next slide 13. Sales of high-purity gases for electronics are expected to increase by almost 15% year-on-year with the recovery in the semiconductor market and increased demand for etching applications on increased memory production centering on 3D NAND.

It is expected that the amount of gas used per chip will increase due to further multi layering of 3D NAND and the annual growth rate in 2021 is expected to be maintained at 10%. Semiconductor manufacturers are increasing production capacity in the Asian region. And we will continue to strengthen our stable supply system to respond to the market growth such as by establishing additional production facilities in China and Taiwan.

Starting on Slide 14 are businesses that will be presented as the Showa Denko Materials segment. Hitachi Chemicals information and communication business has high-performance product base, enjoying large global market share. This is an area where we expect strong synergy with Showa Denko's semiconductor-related business.

In 2020, demand for semiconductors for servers such as data centers are to remain firm, which should allow us to secure a certain level of operating results. As demand 5G-enabled model is expected to begin in earnest in the second half, the full-scale operation of new factory in Taiwan will respond to the increased demand and contribute significantly to earnings. Continued growth of the semiconductor business is expected for 2021 and beyond. We will keep developing next-generation products using our packaging solutions center and continue with aggressive investment to expand the business scale.

Mobility business is next, which is affected by the slump in the automobile market due to COVID-19 and the delay in the start-up of new models. But we expect a gradual recovery in the second half starting with China. We will ensure growth that exceeds the market recovery by ensuring steady start of back doors and copper free disc pads for new models that have already been adopted. And by accelerating expansion to EVs and other models that are expected to grow in the future. We plan to launch new products for new models in and after 2021.

Next, Slide 16. Currently, the oligopoly by downstream users represented by GAFA and the integration of supply chain are advancing and the high level requirements and needs from customers are bypassing the conventional supply chain and reach us directly. In order to show value as a material company in such an environment, we should not be complacent with simple integration with Hitachi Chemical. But we need to evolve into a one-stop advanced material partner responding to a wide variety of customer requirements through further innovation.

Using Slide 17, I will go over main pillars for integration. We will strengthen our business from 4 perspectives. First, we will offer a wide range of materials and products to growth markets and improve our ability to respond to customer requirements, indicated as A in the slide.

Next, through the maximum utilization of Showa Denko's specialty technology to synthesize and Hitachi Chemicals specialty. Technology to formulate, we will realize the development of high-performance products by integrating the supply chain that incorporates the material design. That is B in the slide. Furthermore, we will accelerate material development and field deployment by applying the most advanced AI analytics process to the products of both companies. This is shown as C in the slide.

Lastly but not the least, we will develop a technology road map based on market and consumer trends and optimize R&D and marketing resource allocation so that results can be generated effectively and efficiently. This is shown as D in the slide. A, B, C, D, with these 4 viewpoints as the pillars of the groups overall strategy, we will strongly advance innovation and evolve. This has become possible by the integration with Hitachi Chemical.

Slide 18 describes the ideal image of the integrated company. The goal of the integration is to be the world's top-level functional chemical manufacturer. This will be realized through evolving into one-stop advanced material partner by integrating chemistry to synthesize and chemistry to formulate through materials portfolio strategy, supply chain integration strategy, AI/IoT strategy and the strategy that combines this for innovation into a business model that can meet customer needs.

Starting with Slide 19. You can see some examples. First, semiconductor materials. This is a material portfolio strategy for a wide range of materials and products under integration strategy A. In the semiconductor manufacturing process, the 2 companies provide products that boast the world's top market share, such as high-purity gases and CMP slurry. This can cover customers' needs in a wide range of semiconductor process and provide solutions flexibly.

Next is materials for automobile, Slide 20. As with semiconductor materials, this is also a material portfolio strategy under integration strategy A. We will extend the product portfolio by combining the products of both companies. In addition, by promptly feeding back the needs of end users to materials, it is possible to achieve breakthroughs by combining materials. Furthermore, we can expect the development of lightweight and high-performance exterior module parts by integrating the expertise of both companies. We will start studying these possibilities.

Next is lithium-ion battery materials. This is also an example of material portfolio strategy under strategy A. This is an area where demand is expected to grow in the mobility and transportation field and information and communication field. The portfolio will be enhanced by the integration of the products of the 2 companies, which will provide an overwhelming advantage by effectively combining the products and technologies of the both companies and developing integrated solutions we will further strengthen our ability to solve challenges faced by customers.

CMP slurry is on the next page, which is one of Hitachi Chemical's products. This corresponds to the supply chain integration strategy of the chemistry to synthesize and chemistry to formulate under Strategy B. Utilizing Showa Denko's chemistry to synthesize in this field, such as ceramic technology, slurry technology and high-purity additive manufacturing technology, we aim to advance the performance of CMP slurry developed by Hitachi Chemicals based on its chemistry to formulate of surface and interface control technology. In addition, we will work to optimize production capacity as a group by flexible sharing of facilities.

Slide 23, development of the copper-clad laminates, a Hitachi Chemicals products. This corresponds to supply chain integration strategy under Strategy B. By making use of Showa Denko's chemistry to synthesize, such as organic molecule design technology and polymer related technology to further improve the performance of resin used for the substrates. We aim to add high-performance characteristics to Hitachi Chemical's copper-clad laminates that demonstrates the strength of chemistry to formulate, which should then be translated into solutions provided to customers.

Synergy related to computational science. This corresponds to AI and IoT strategy under Strategy C. Showa Denko has conventionally been using computational science and AI to develop chemistry and has a track record of technology accumulation and practical applications. We will apply this to Hitachi Chemicals chemistry to formulate and conversely apply the statistical analytics that Hitachi Chemical uses in chemical design to Showa Denko's chemistry to synthesize. Through this, we are aiming to strengthen our R&D platform and greatly shorten the development cycle. We are about to start the execution.

Lastly, but not the least, this is the road map towards the full integration with the completion of TOB in April and turning to wholly owned subsidiary in June, things are largely progressing as planned. We plan to announce our long-term vision for the group on December 10 to present how we are to evolve as a new corporate group with the potential for innovation, which should excite all stakeholders. This shall be followed by substantial integration targeted for the autumn of next year towards the complete integration at the beginning of 2023.

Slide 26. As I just mentioned, we are scheduling a long-term vision briefing on December 10. Both companies are currently in the process of developing the content to be presented. We will describe with details what we envision as the top level of functional chemical manufacturer, together with the group integration strategies to realize that based on innovation, addressing both the strategic and financial aspects.

That concludes my presentation. Thank you for your kind attention.

[Motohiro Takeuchi, executive]

This is Motohiro Takeuchi, the CFO of Showa Denko. Thank you very much for your interest in the performance of our company. First, we would like to express our deepest sympathy to those who contracted COVID-19, and those who are faced with a difficult living environment due to the virus.

Let me now present the overview of 2020 Q2 financial results. Please turn to Page 2. Number of consolidated subsidiaries increased by 91 to 152 in relation to the consolidation of Hitachi Chemical from the end of the previous term. Equity method is applied to 13 companies, including 2 Hitachi chemicals related companies. January to June average exchange rate was JPY 108.3 to the dollar. Yen appreciated JPY 1.8 year-on-year. End of the term exchange rate used to evaluate assets and liabilities was JPY 107.7 at the end of June. Yen appreciated JPY 1.8 from the end of previous term.

As for euro, January to June average was JPY 119.3 to the euro. Yen appreciated JPY 5 year-on-year. Spot naphtha price plummeted due to the rapid decline of oil prices because of the time lag, January to June average was JPY 34,900 per kiloliter, down JPY 8,400 or 19.4% year-on-year.

Feedstock cost adjustment due to the drop in domestic naphtha price and the time lag due to the plummeting spot price led to much lower operating income number of petrochemicals. As the slowdown of Chinese economy lowers the global demand, aluminum LME price decreased by $231 or 12.5% year-on-year to $1,619 per ton.

Please turn to Page 3. This is the summary of 2020 first half financial results. Net sales were JPY 326.6 billion, down JPY 148.9 billion or 31.3% year-on-year. Electronics sales were flat year-on-year. In petrochemicals, product market prices decreased due to plummeting oil prices. In inorganics, volume of graphite electrodes business was down because of global production decrease of steel industry and lower market prices. In chemicals, aluminum and other segments, shipment decreased significantly due to the COVID-19. Overall sales declined. Operating loss was JPY 25.8 billion, a major decline of JPY 111.3 billion year-on-year. While electronics profit increased on higher volume of hard disks, inorganics profit decreased significantly due to the lower volume in graphite electrodes business and loss of valuation of inventory based on LCM. Overall profit decreased.

I will explain the details of sales and operating income on pages 6 and 7. Ordinary loss was JPY 43.2 billion, a major decline of JPY 128.1 billion year-on-year. Under nonoperating income and expenses, equity earnings and foreign exchange gains and losses were about the same as the year before. In interest, dividends, income and expenses, acquisition of Hitachi Chemical shares led to higher interest-bearing debt. Expenses increased by JPY 1.1 billion year-on-year. Under other, onetime fees and others were recorded in relation to the acquisition of Hitachi Chemical shares. Expenses rose JPY 15.5 billion year-on-year. Net nonoperating income and loss expenses were minus JPY 16.8 billion. Special factors, which impacted on the first half results will be shown on the next page. Extraordinary profit and loss will be shown on Page 5.

Because of the business restructuring expenses and others in relation to the closure of German plant, extraordinary loss increased by JPY 5.5 billion. With smaller profits, income tax payments decreased JPY 14.5 billion to JPY 1.7 billion. Net loss attributable to owners of the parent was JPY 54.6 billion, down JPY 120.4 billion year-on-year.

Please turn to Page 4. Multiple major special factors led to extremely tough first half results. These are the special factors impacted in the first half. In petrochemicals, lower naphtha prices reflecting lower oil prices worsened the feedstock cost adjustment by JPY 8.5 billion. In graphite electrodes, JPY 21.7 billion was recorded as a result of devaluation of inventory based on LCM.

First half total negative impact of COVID-19, excluding Petrochemicals and Inorganics, was JPY 2 billion. As for integration expenses with Hitachi Chemical, total operating expenses were JPY 4.3 billion, including JPY 3.5 billion advisory fees and others and JPY 0.8 billion PMI expenses. Total non-operating expenses were JPY 17.3 billion, including JPY 16.1 billion expenses related to the fundraising and others and JPY 1.2 billion interest on borrowing. As an extraordinary loss, JPY 4.7 billion was recorded for closure of German plant in graphite electrodes business.

Page 5. As we explained in Q1, extraordinary profit increased JPY 0.3 billion year-on-year with gain on sales of noncurrent assets at SHOKO Company Limited. As JPY 4.7 billion business restructuring expenses were recorded in relation to the closure of Meitingen plant in Germany in graphite electrode business, extraordinary loss increased by JPY 5.5 billion year-on-year to JPY 8.5 billion. As a result, net extraordinary profit and loss worsened, JPY 5.2 billion to minus JPY 6.4 billion.

Please turn to Page 6. Let me explain sales and operating income by segment on Pages 6 and 7. Petrochemical sales decreased JPY 31.7 billion year-on-year to JPY 95.7 billion. Operating loss was JPY 3.7 billion, down JPY 12.1 billion. COVID-19 decelerated Chinese demand of olefin, especially in Q1. Supply-demand balance weakened in Asia and production trended at a low level until May. Lower oil prices led to lower material naphtha prices, market prices of major products such as ethylene decreased pushing down olefin sales. Olefin profit declined due to the worsening feedstock cost adjustment and smaller spread.

Because of once every 2 year shutdown maintenance this year for ethyl acetate and vinyl acetate, volume decreased. With lower market prices, sales and profit of organic chemicals declined. SunAllomer sales and profit also declined with lower volume as a result of shutdown maintenance and others. Chemicals sales decreased by JPY 1.5 billion year-on-year to JPY 72 billion. Operating income decreased by JPY 0.5 billion year-on-year to JPY 5 billion.

In basic chemicals, ammonia volume was down with stagnant domestic demand. Acrylonitrile market prices declined and chloroprene rubber export volume decreased. Basic chemical sales were lower.

While ammonia profit increased, overall profit was down due to the lower profits of acrylonitrile and chloroprene rubber. Sales and profit of electronic chemicals were up as production of mainly memory recovered after the adjustment phase of semiconductor industry in 2019. Sales and profit of industrial gases decreased on lower volume for beverages due to COVID-19. Sales and profit of functional chemicals decreased on lower volume for Japan and China due to COVID-19. Coating materials were nearly consolidated in the second half of last year. Electronics sales were JPY 44.6 billion, about the same as the year before. Operating income was JPY 1.8 billion, up JPY 0.8 billion year-on-year.

Hard disk shipment for PCs was down but media shipment for data centers increased. Hard disk sales were up slightly. COVID-19 led to lower production in first half pushing down the profit. Although volumes were up year-on-year with higher media volume for data centers from April, restriction on movements in Southeast Asia led to the lower production of our customers. Total January to June shipments slightly increased year-on-year. Sales and profit of compound semiconductors increased on higher export volume. With higher shipment volume of packaging materials SPALF, sales and profit of lithium-ion battery materials increased. SiC epitaxial wafer business was solid in Japan but lower exports led to the lower sales and profit.

Page 7 shows the Inorganics. Inorganic sales dropped significantly by JPY 99.7 billion year-on-year to JPY 43 billion. Operating income also showed a major decline by JPY 94.7 billion to minus JPY 22.9 billion. In ceramics, decreased production in automobile and steel industry led to lower shipment of abrasives and sales were lower. However, ceramics profit was flat year-on-year. In graphite electrodes, global slowdown of steel production delayed normalization of customers' inventory level. Much lower volume led to lower sales as we reduced our production further. Because of the loss on valuation of inventory based on LCM, reflecting lower market prices, profit was considerably lower. First half sales volume saw a major decline from 100,000 tons last year same period to more than 40,000 tons. Aluminum sales were JPY 38.8 billion, down JPY 10.2 billion year-on-year. Operating loss was JPY 0.2 billion, down JPY 0.7 billion year-on-year. As aluminum capacitor industry adjusted its production, volume of high-purity foils for capacitors decreased and rolled product sales declined. With improved product mix for Japan, operating income increased. Aluminum specialty component sales and profit decreased on lower volume of automotive components reflecting reduced global production of automobiles due to COVID-19. As for aluminum cans, domestic production capacity was reduced and production saw a major drop in April to May in Vietnam as a result of stay-at-home measure to counter COVID-19. Sales and profit declined. As for others, lower market prices of metal and ceramic business and others at SHOKO Company Limited led to lower sales and operating income.

Please turn to Page 8. This shows the operating income breakdown by factor comparing first half 2019 and 2020. Major operating income decrease of JPY 111.3 billion year-on-year was recorded. Volume factor, JPY 55.1 billion account for about half of the decrease. Mainly lower production in electric steel industry due to the COVID-19 impacted greatly on the graphite electrodes in Inorganic segment. Significant drop in sales volume and others, mainly in Europe and U.S. market pushed down the profit by about JPY 47 billion. As for price changes, much lower international graphite electrodes market prices in Inorganics segment pushed down the profit by JPY 24 billion. Company-wide impact was JPY 20.6 billion. Cost reduction includes JPY 2.8 billion for review of repair expenses of graphite electrodes business in Inorganics and reduced labor cost and others with lower production, reflecting 30% to 40% utilization rate. JPY 1.2 billion hard disk productivity improvement and others.

Aluminum productivity improvement and others was JPY 1.4 billion. Overall, cost reduction pushed up the profit by JPY 6.8 billion. Others were minus JPY 42.4 billion as a total, including JPY 7.5 billion worsening feedstock cost adjustment due to the lower naphtha market prices for olefin in petrochemicals. JPY 21.7 billion from loss on valuation of inventory based on LCM due to the lower graphite electrodes market prices in Inorganics. Please turn to Page 9. Consolidated balance sheet incorporates Hitachi Chemical as a consolidated subsidiary considering the end of Q2 as acquisition date. With the consolidation of Hitachi Chemical, mainly cash and deposits, notes and account receivables, inventories, tangible fixed assets and goodwill increased. Total assets were up JPY 1.029915 trillion and reached JPY 2.106297 trillion with increased interest-bearing debt in relation to the acquisition of Hitachi Chemical shares. Total liabilities were up JPY 8.21847 billion and reached JPY 1.378795 trillion. Interest-bearing debt balance increased by JPY 6.99114 billion to JPY 9.97638 billion with net loss attributable to owners of the parent and dividend payment of the previous term, retained earnings declined. However, noncontrolling interest increased with the preferred share issuance to noncontrolling shareholders in relation to the acquisition of Hitachi Chemical shares. Total net assets increased by JPY 2.08068 billion from the end of 2019 to JPY 7.27501 billion.

Please go to Page 10. This shows the breakdown of influence of the integration with Hitachi Chemical to balance sheet. We are currently working on the PPA, purchase price allocation or recognition of intangible assets and market valuation of various assets. Our target is to finalize them at the fiscal year-end financial results announcement.

Please turn to Page 11. With the acquisition of Hitachi Chemicals shares, interest-bearing debt increased by JPY 699.1 billion from the end of 2019 to JPY 997.6 billion. Debt-to-equity ratio also increased 1.77 points from the end of 2019 to 2.37x. Stockholders' equity ratio declined 26.4 points to 20.0%. As you see in the note at the bottom, because of the implementation of the scheme to acquire, Hitachi Chemical shares with issuance of preferred stocks from Q3, debt equity ratio calculation method will be changed based on the consideration that 50% of the total value of issued preferred stocks as equity capital. And we will use the net debt-to-equity ratio, excluding cash and deposits in our explanation. For your reference, if we use this new method, end of June debt-to-equity ratio will be 1.72x.

Page 12 shows changes in consolidated interest-bearing debt and the debt-to-equity ratio. The dashed line in blue is the adjusted net debt-to-equity ratio applied starting the third quarter taking into account the 50% equity capital of preferred stocks.

Please turn to Page 13. Net cash provided by operating activities deteriorated significantly due to the recording of a quarterly net loss, resulting in a year-on-year decrease of JPY 35.3 billion at JPY 5.2 billion. Net cash used in investing activities was JPY 792.6 billion, which was a large increase of JPY 774.7 billion year-on-year due partly to the expenditure for the acquisition of shares in Hitachi Chemical. As a result, free cash flow decreased by JPY 810 billion year-on-year at minus JPY 787.4 billion.

Net cash provided by financing activities totaled proceeds of JPY 864.7 billion an increase of JPY 883.4 billion due to an increase in borrowings related to the Hitachi Chemical acquisition and the issuance of preferred stocks. Cash and cash equivalents at the end of June increased by JPY 75.8 billion from the end of December at JPY 197.5 billion, including the effects of foreign exchange fluctuations.

Please turn to Page 14. These are some items related to financial income and capital investment. The number of employees at the end of June increased by 23,202 to 33,805 people due to the consolidation of Hitachi Chemical. Other items are not included in the first half as the figures for Hitachi Chemical group will be included in the second half.

Please turn to Page 15. Capital expenditures and depreciation by segment. Again, figures for the Hitachi Chemical group are not included. In response to the slowdown in demand under COVID-19, we made careful review of projects and managed to make a large reductions in capital expenditures on a decision-making basis. But on a fixed asset booking basis, the amount increased slightly due to the timeline. Capital expenditures increased for chemicals due to the investment for expansion of high-purity gases for electronics and capacity expansion in functional resin business. Aluminum increased on the establishment of the third aluminum can plant in Vietnam. All in all, increase totaled JPY 2.5 billion. Depreciation increased by JPY 800 million, mainly due to the start of depreciation associated with the operation of S/4HANA, the ERP system at the headquarters.

Page 16. This is the graph that shows changes in total number of employees. As of the end of June 2020, the consolidation of Hitachi Chemical increased the headcount by 23,038 to total 33,805. Of these, 18,203 are overseas and 15,602 are in Japan.

Please turn to Page 17. From here, I would like to go over the full year forecast for 2020 that we announced on August 12. First, the main assumptions for this forecast. As for domestic naphtha price, we are making a slightly conservative assumption for the revised second half forecast at JPY 25,100 per kiloliter, similar to the level in the second quarter. The year-end interest-bearing debt is expected to be JPY 1,115.5 billion.

Please turn to Page 18. Here, you can see the revised consolidated financial forecast for full year 2020. With the consolidation of Hitachi Chemical, we are incorporating increased profit from the second half. Since Hitachi Chemical will change its trade name in October, the segment is shown as Showa Denko Materials. Sales are projected to increase by JPY 53.5 billion year-on-year, including JPY 280 billion for the Showa Denko Materials segment for the second half.

On the basis of former SDK businesses, we expect sales to decline by over JPY 220 billion. Sales are expected to decline in all segments, except for the electronics, which expects an increase of JPY 30.6 billion with a decrease of JPY 139.1 billion in Inorganics and a decrease of JPY 64.7 billion in Petrochemicals.

There are some special factors for operating income. Details are given on pages 19 and 20. Special factors on operating expenses associated with the integration of Hitachi Chemical is projected to be minus JPY 38.6 billion. The breakdown is advisory and attorney fees, minus JPY 3.5 billion; PMI cost, minus JPY 4.6 billion; amortization of goodwill, minus JPY 18.7 billion and consolidated cost of sales adjustment due to the mark-to-market valuation of inventories at the time of consolidation, amounting JPY 11.8 billion -- minus JPY 11.8 billion.

Other major special factors include the impact of inventory valuation gain and loss in Petrochemicals, minus JPY 8.5 billion. The impact of the LCM method in the graphite electrode business in the Inorganics is projected to be minus JPY 10.7 billion for the full year due to some reversal in the second half. As for the impact of COVID-19, we are projecting minus JPY 20 billion for segments other than Petrochemicals and Inorganics. Showa Denko, JPY 7 billion; and Hitachi Chemical, JPY 13 billion.

Compared to the first half of the year, we expect special factors in the 5 Showa Denko original businesses to have bottomed out in the first half and profits to increase significantly in the second half. Ordinary income is forecast to decline by JPY 174.3 billion from the previous year to JPY 55 billion with minus JPY 16.1 billion as capital procurement related onetime expenses associated with the consolidation of Hitachi Chemical. Negative JPY 5.3 billion for interest expenses and negative JPY 21.4 billion for nonoperating expenses and a deterioration of nonoperating income and loss of JPY 23.5 billion at minus JPY 25 billion. Net of extraordinary profit and loss is expected to be minus JPY 24 billion due to the recording of extraordinary loss related to the restructuring of various businesses following the closure of German plant for graphite electrode business in the first half. As a result, net income attributable to owners of the parent is expected to be minus JPY 90 billion.

Regarding the year-end dividend forecast, as we still cannot foresee how COVID-19 will be brought under control, we would like to make the decision based on the business environment for the second half and next fiscal year.

Slide-19. This is a list of special factors for full year described on Page 18, for your reference. Please note that the amortization goodwill is for 6 months. But it is a provisional value because PPA is in progress. The preferred stock dividend is expected to be JPY 8.8 billion, which is required to be recognized as net income attributable to noncontrolling shareholders.

Please turn to Page 20. Here are factors in Slide 19, divided into temporary expenses specific to the company for the current year and ongoing expenses that will be incurred next year onward. It is also a statement of operating income, excluding onetime factors specific to the company shown under the full year earnings forecast that President, Morikawa talked about in his Slide 5.

One-time expenses for the current year are JPY 101.3 billion, of which JPY 44.1 billion is in graphite electrode business, including an extraordinary loss of JPY 4.7 billion. JPY 31.4 billion is in relation to the integration with Hitachi Chemical and JPY 20 billion in relation to COVID-19 and inventory valuation gain and loss in Petrochemicals, JPY 8.5 billion. Ongoing expenses are JPY 37.4 billion. It is expected that PMI expenses will be incurred over several years, but the amount will change depending on the future PMI activities. Goodwill amortization is for the second half, 6-month period. Please note that the interest on borrowings and the preferred stock dividend in relation to the acquisition of shares are for approximately 8 month period since TOB.

Please turn to Page 21. Sales and sales forecast by segment. As for Petrochemicals, the naphtha price for the second half is assumed to be around the same as in the second quarter. The negative effect of market conditions by a decrease in naphtha price in the first half will remain resulting in a year-on-year decrease in sales of JPY 64.7 billion. Operating income is expected to decline significantly by JPY 16.2 billion due to the effect of raw material inventory valuation gain and loss in first half. The amount is expected to be minus JPY 8.5 billion, but the operating income in the second half is expected to increase by JPY 8.4 billion over the first half of JPY 4.7 billion.

Our ethylene plant has been in full operation since July. In Chemicals, we forecast a year-on-year decrease in sales of JPY 155 billion, and an operating income of JPY 13 billion, down JPY 0.7 billion. Electronic chemicals, memory production will continue to be strong, and we expect higher sales and profits. For basic chemicals, industrial gases and functional chemicals, we expect a slight decrease in sales and profit as volume declined in the first half due to COVID-19. It's not likely to be recovered in the second half.

In Electronics, the first half level was the same as in the previous year. But in the second half, we expect increased sales in each business for a full year increase in sales by JPY 3.6 billion. The HD business is expected to recover from the impact of COVID-19 for increased volume of near-line for data centers. Operating income is also expected to increase by JPY 4.1 billion. Inorganics, expect sales of approximately 60,000 tons of graphite electrode in the second half and sales will increase over the first half on volume increase. But year-on-year, we forecast a large decrease of JPY 139.1 billion at JPY 91 billion. Operating income is expected to reach 0 in the second half due to a slight increase in electrode sales volume by close to 20,000 tons over the first half and the reduction in the unit price of inventories due to application of the LCM method in the first half.

Slide 22. In the aluminum segment, we expect sales to decrease by JPY 12.5 billion to JPY 85 billion and operating income to decrease by JPY 200 million to JPY 1.5 billion due to negative factors in the first half. The Showa Denko Materials segment will incorporate operating results of Hitachi Chemical Group from the second half. Special factors related to consolidation include minus JPY 11.8 billion in consolidated cost of sales adjustment associated with the market valuation of inventories, which was one of the temporary factors explained earlier. Also included is minus JPY 18.7 billion in amortization goodwill in the second half.

In our core business, in the information and communication business, semiconductor materials are expected to be firm. But in the mobility business, recovery in automobile industry is taking a long time. Profit of about JPY 10 billion is expected on an actual basis. Excluding the amortization of goodwill, the recovery in the second half is expected to be moderate. The Others segment expects lower sales and profit due to the adverse impact of market conditions on each of SHOKO [ commercial ] business. The adjustment amount expected to deteriorate by JPY 4.7 billion to minus JPY 12.5 million due to the recording of M&A expenses and PMI expenses associated with the Hitachi Chemical consolidation.

In summary, in all 5 original businesses of the company from petrochemicals to Aluminum, operating income is expected to increase significantly over the first half. And excluding the petrochemicals, whose sales are affected by crude oil price, we expect a significant increase in sales as well.

Please turn to Page 23. Here, you can see the cash flow for the first half, second half and full year. Cash flow from operating activities is to improve significantly in the second half due to increased profits in each segment and is expected to reach JPY 65 billion for full year.

Regarding cash flow used in investing activities. In the first half, there was a major outflow related to the acquisition of Hitachi Chemical. In the second half, the outflow is to total JPY 157.4 billion, including a total of JPY 120 billion in relation to the squeezing out process for the payment to minority shareholders who are not eligible for TOB or who did not apply for TOB. On a full year basis, we forecast the outflow of JPY 950 billion. As a result, free cash flow will improve significantly in the second half, but for the full year, we are forecasting an outflow of JPY 885 billion. Net cash used in financing activities is projected to be JPY 970 billion due to the borrowing to fund acquisition of the left over balance from the first half in shares of Hitachi Chemicals mentioned earlier. Added with inflow of JPY 105.3 billion in the second half, we expect an inflow of JPY 970 billion. As a result, cash and cash equivalents at the end of the year are expected to increase by JPY 80 billion. Free cash flow for the second half is projected to be positive by over JPY 20 billion, excluding approximately JPY 120 billion to be paid in relation to the squeeze out.

Please turn to Page 24. We expect capital expenditures to increase by JPY 16.2 billion to JPY 66.4 billion. And in Inorganics, there will be a large decrease year-on-year as last year, we were investing to improve the European production basis of the graphite electrode business.

In Petrochemicals, we anticipate an increase in light of maintenance turnaround in derivatives and the new consolidation of the Showa Denko Materials segment. Depreciation is expected to increase by JPY 23.4 billion to JPY 61.1 billion. Despite a decrease in the Inorganics due to a structural change in the graphite electrode business, we expect an increase due to the new consolidation of Showa Denko Materials segment.

Please turn to Page 25. Pages 25 to 28 show changes in operating income by segments on a quarterly basis. From Page 29, we have posted topics by segment.

We will actively respond to the impact of COVID-19 in each business and strengthen our resilience, and we'll strive to realize the effect of integration with Hitachi Chemical as early as possible by driving full-scale integration. The business environment is severe, and the future is extremely uncertain, but we will present a new management policy at the end of the year. Through the integration with Hitachi Chemical, we have evolved into a stronger business portfolio that can survive in a new world of digitalization and online and remote operation mode following COVID-19. This severe environment, which can be set to exceed Lehman crisis and compare to the great depression, will persist, but we will endure it and promptly strengthen our competitiveness. We kindly ask for your continued support.

Thank you for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]