Showa Denko KK

TSE:4004

Earnings Call Transcript 2018-Q3

[Toshiharu Kato, executive]

Ladies and gentlemen, I am Toshiharu Kato, CFO of Showa Denko. Thank you very much for your interest in the performance of our company.

Now let me present the financial results for Q3 of fiscal 2018. Accounting procedure for the acquisition of SGL GE Holding GmbH Q4 last year was finalized.

When we closed fiscal 2017, various factors were not final. Therefore, provisional accounting was done based on the reasonable information available at the time.

The business combination accounting standards require provisional accounting procedure to be finalized within 1 year after the business combination. And if it is done in the next fiscal year, accounting procedure should be done to show the finalization was done in the same fiscal year as the business combination.

In Q3 2018, all factors were finalized, and this is reflected retroactively to fiscal 2017. Negative goodwill, which was JPY 3.1 billion, is finalized at JPY 7.1 billion, increase of about JPY 4 billion in fiscal '17.

Depreciation increased by about JPY 100 million in Q4 2017, Q1 and Q2 of 2018, respectively, pushing down the operating income of each quarter.

Now please turn to page 2. Number of consolidated subsidiaries decreased by 2 from the end of 2017 to 60. Baotou Showa Rare Earth Hi-tech New Material Company Limited was liquidated in Q2. BE International Corporation was merged by SHOKO Co., Ltd. in Q3. Number of companies and our equity method increased by 1 from the end of 2017 to 12.

In Chemicals segment, SK Showa Denko Co., Ltd. joint venture with SK Materials Co., Ltd., manufacturer of high-purity gases for electronics in Korea, was added in Q3.

January to September average exchange rate was JPY 109.6 to the dollar. Yen appreciated by JPY 2.3 year-on-year from JPY 111.9 to the dollar. End of term exchange rate used to evaluate assets and liabilities was JPY 113.6 to the dollar at the end of September. Yen depreciated slightly by JPY 0.6 from JPY 113 at the end of 2017.

As for ForEx sensitivity, JPY 1 appreciation against the dollar pushes down the operating income by JPY 600 million per year. With higher oil prices from second half of 2017, January to September average domestic naphtha price was JPY 50,050 per kiloliter, up 28.2%, or JPY 11,000 year-on-year from JPY 39,050 per kiloliter.

Our second half forecast is JPY 48,600. Q3 average went up to JPY 53,500 per kiloliter. As aluminum metal supply tightened due to reduced production in China and impact of U.S. trade policies and others, aluminum LME price increased by $230, or 11.9% year-on-year, from $1,933 to $2,163 per ton. However, the recent supply-demand balance has loosened somewhat and the price is trending around $2,000.

Japan premium was $118 per ton in Q3 last year, and declined towards the end of the year and rose to $132 in Q3 this year, and is $103 per ton in Q4. January to September average Yen-based market price increased JPY 25,000, or 9.2% year-on-year, from JPY 271,000 to JPY 296,000 per ton.

Please turn to Page 3. This shows the summary of Q3 consolidated results. Net sales were JPY 724.9 billion, up JPY 161.1 billion, or 28.6% year-on-year. Details are shown on Page 5.

Mainly inorganic sales grew significantly with the integration of graphite electrode business with SGL GE of Germany in the second half of last year and international market improvements.

Operating income was JPY 134.5 billion, up JPY 78.6 billion, or 140.4% year-on-year. Q3 operating income, ordinary income and net income attributable to owners of the parent were record high quarterly numbers as well as January to September number. I will explain the details on Page 6.

Although profits of 3 segments, Petrochemicals, Electronics and Aluminum decreased, profits of other 3 segments, Inorganics, Chemicals and Others increased. Especially Inorganics profit showed a major increase because of the integration of graphite electrode business and market improvements in Others.

Ordinary income was JPY 134.2 billion, up JPY 91.8 billion, or to 216.6% year-on-year. Under nonoperating income and expenses, as we booked about JPY 10 billion, which draw loss related to PT Indonesia Chemical Alumina in Q2 last year, equity in earnings of affiliates improved JPY 9.4 billion year-on-year.

As New Taiwan dollar weakened against U.S. dollar, ForEx losses of hard disk subsidiary in Taiwan turned to ForEx gains. Foreign exchange gains and losses improved JPY 3.1 billion year-on-year. Net nonoperating number improved JPY 13.3 billion as a whole.

Extraordinary profit and loss are shown on the next slide. Net extraordinary profit and loss improved JPY 6.9 billion, with higher profits, income taxes increased by JPY 20 billion to JPY 27.9 billion. Mainly with higher profit of Showa Denko Sichuan Carbon Inc., net income attributable to noncontrolling interest increased by JPY 2.9 billion year-on-year to JPY 4.5 billion. Net income attributable to owners of the parent was JPY 99.3 billion, up JPY 75.8 billion, or 323.6% year-on-year.

Please turn to Page 4. There were no major items under the extraordinary profit. Extraordinary profit increased JPY 0.2 billion year-on-year to JPY 0.5 billion. In the first half last year, JPY 9.8 billion extraordinary loss, including about JPY 6 billion for provision for loss on guarantees and provision for allowance for doubtful accounts in relation to the withdrawal from the ICA was booked. Although, loss on sales and retirement of the noncurrent assets increased due to the shutdown maintenance in Ota and Others, extraordinary loss improved JPY 6.8 billion year-on-year to JPY 3.1 billion (sic) [ minus JPY 3.1 billion ]. As a result, net extraordinary profit and loss improved JPY 6.9 billion to minus JPY 2.5 billion.

Please turn to Page 5. It shows the consolidated sales by segment. Electronic sales decreased on lower shipment of hard disk media for mobile PCs. Inorganic sales showed major increase due to integration of graphite electrode business and a rise in international market prices.

Petrochemicals sales declined up to Q2 because of once-every-4-year shutdown maintenance, but from Q3 with rising naphtha price, positive factor more than offset the negative factor of shutdown maintenance.

Three other segments, including Chemicals, grew in sales. Petrochemicals sales were JPY 191.6 billion, up JPY 8.5 billion year-on-year. Due to once-every-4-year shutdown maintenance of ethylene plant in the first half, polythene volume decreased. After the maintenance, ethylene plant continued to operate fully. Rising naphtha price led to the improvements of the international market, January to September sales grew. With higher market prices of buying vinyl acetate and ethyl acetate, organic chemical sales increased.

SunAllomer Ltd. sales increased on higher prices, reflecting rising materials costs. Chemicals segment sales were JPY 115.1 billion, up JPY 6.6 billion year-on-year.

In basic chemicals, chloroprene rubber sales slightly grew with tight supply. Acrylonitrile and caustic soda sales increased on higher market prices. Production increase of semiconductor and display industry led to higher shipment of high-purity gases for electronics, mainly etching gases. Electronic chemical sales increased.

With tight supply of liquefied carbon dioxide and dry ice, industrial gases sales increased slightly. With higher sales prices of polyester and amalgam reflecting rising materials cost, functional chemical sales grew.

Electronic sales were JPY 81.4 billion, down JPY 13.8 billion year-on-year. Hard disk volume decreased 15%-plus year-on-year. Hard disk for near-line server was solid. However, with weak PC shipment and transition to new products in the first half of this year, hard disk media for mobile PCs declined in shipment and sales decreased.

Compound semiconductors and rare earth magnetic alloy sales increased on higher shipments. As subsidies in China was reduced, shipment of lithium-ion battery material was lower than our expectation. Higher shipment to China led to increased sales year-on-year.

Inorganic sales were JPY 192.2 billion, up JPY 149.6 billion year-on-year. Shipment of fine ceramics such as fillers for electronic materials and titanium oxide increased, but lower volume of general-purpose alumina due to the withdrawal from ICA led to lower ceramic sales. China's more stringent environmental policies and brisk demand in solid U.S. market led to the production increase of electric furnace steel.

With tight supply, international market prices continued to rise. As SHOWA DENKO CARBON Holding GmbH was consolidated in the second half of 2017, graphite electrode sales grew significantly. Aluminum sales were JPY 81.1 billion, up JPY 3.8 billion year-on-year.

Aluminum rolled product sales increased on higher shipment of high-purity foils for capacitors for industrial machineries and automobiles. Production of large extruded products continued strongly. Aluminum specialty components sales increased on higher market prices along with rising aluminum metal prices.

Despite higher volume of aluminum cans in strong Vietnamese market, volume declined for beer in Japan and overall sales slightly decreased. As for Others segment, SHOKO Co., Ltd. sales increased on higher volume of Petrochemicals and Others. SiC epitaxial wafers sales grew on higher volume of 6-inch high-grade AP. Sales of Others were JPY 105.6 billion, up JPY 7.5 billion year-on-year.

Please turn to Page 6. This shows consolidated operating income by segment. While profits of 3 segments declined, profits of other 3 segments grew, especially Inorganics profit showed a major increase. Petrochemicals profit was JPY 15.5 billion, down JPY 8.6 billion year-on-year. Despite brisk market conditions with tight supply in East Asia, olefin volume decreased due to once-every-4-year shutdown maintenance. Steep rise of butadiene market in first half of 2017 was not repeated, as a result olefin profit declined. High level operation of vinyl acetate and ethyl acetate continued, but with higher market prices of acetate gases, ethylene and others and the time lag of sales prices revision, organic chemicals profit slightly decreased.

SunAllomer Ltd. profit declined due to the time lag between the material cost increase and sales price division. Chemicals profit was JPY 12.6 billion, up JPY 1.3 billion year-on-year. Mainly with higher international market prices of acrylonitrile, higher domestic market price of caustic soda and strong shipment of chloroprene rubber, basic chemicals profit grew. Electronic chemicals profit increased on higher volume of high-purity gases for electronics used in semiconductor industry, where 3D NAND production grew and display industry.

Industrial gases profit increased on higher volume with tight supply of liquefied carbon dioxide and dry ice. Functional chemicals profit declined due to higher petrochemical-based material prices, such as styrene monomer, vinyl acetate, acrylic acid and others, and the time lag before the sales prices revision. Electronics profit was JPY 10.1 billion, down JPY 8.3 billion year-on-year. Hard disk profit decreased on lower shipment of hard disk media for mobile PCs.

Compound semiconductor and rare earth magnetic alloy profits grew slightly with higher volume. Lithium-ion battery material profit increased on higher volume for China. Inorganics profit was JPY 97.9 billion, up JPY 95.5 billion year-on-year.

Ceramic profit improved with lower volume of general-purpose alumina through the withdrawal from ICA. High volume of high value-added products, such as fillers for electronic materials and titanium oxide, ceramics profit increased. Graphite electrodes profit showed a major increase on rising international market prices due to the tight supply and the effect of the consolidation of SHOWA DENKO CARBON Holding GmbH in the second half of 2017.

July to September, graphite electrode international market prices are more than 4x of the year before, which is slightly higher than August forecast. Q4 negotiations for Japan and Korea ended, and prices are more than 5x of last year.

Q4 export price for Asia is settled at a little bit higher price. Second half needle coke price is about 5x that of last year, which is the same as August forecast.

Aluminum profit was JPY 4 billion, down JPY 0.8 billion year-on-year. Aluminum rolled products profit slightly increased on higher shipment of high-purity foils for capacitors. Aluminum specialty component profit slightly decreased. Despite higher profit of Hanacans Joint Stock Company in Vietnam with higher volume, aluminum can profit decreased on lower volume for beer in Japan and higher aluminum metal price.

As for Others segment, SHOKO Co., Ltd. profit increased, and volume of SiC epitaxial wafers grew. Profit of Others was JPY 2.1 billion, up JPY 1.7 billion year-on-year.

Please turn to Page 7. This shows the operating income breakdown by factor, comparing fiscal '17 and '18. As for volume factor in electronic chemicals, higher volume of high-purity gases pushed profit up by JPY 2.1 billion. Inorganics, up by JPY 3.8 billion. Aluminum and Others were also up. But in Electronics, lower volume of hard disk for notebook PCs pushed the profit down by JPY 8.3 billion. Overall volume factor was minus JPY 0.7 billion.

As for price changes factor in Inorganics, tight supply of graphite electrodes led to significant rise in international market prices, pushing profit up by JPY 90.5 billion. Overall positive impact was JPY 88.3 billion.

In Petrochemicals, although ethylene price was solid due to tight supply, a steep rise of market price, C4 fraction, which is butadiene material, went back to normal, pushing profit down by JPY 2.4 billion. Cost reductions factor pushed Electronics profit up by JPY 1.7 billion with higher hard disk productivity in Inorganics.

Partial contribution of graphite electrodes integration pushed profit up by JPY 1.6 billion. In Aluminum, higher productivity pushed profit up by JPY 1 billion. Overall, positive impact was JPY 5.8 billion.

As for Others, in Petrochemicals, negative impact of ethylene plant shutdown maintenance was JPY 6.1 billion. In Electronics, hard disk feedstock cost adjustment and rare earth pushed profit down by JPY 2.5 billion. Under adjustments, higher labor cost and shared R&D cost pushed profit down by JPY 2.1 billion. Overall, negative impact was JPY 14.9 billion.

Please turn to Page 8. It shows comparison of consolidated Q3 results between 2017 and '18. Net sales were JPY 269.1 billion, up JPY 77.5 billion, or 40.4% year-on-year. Details are shown on Page 9. Major increase was due to the effect of consolidation of graphite electrodes business, higher international market prices and rising market prices in Petrochemicals.

Operating income was JPY 56.6 billion, up JPY 35.7 billion, or 170.7% year-on-year. This is the highest quarterly figure since quarterly disclosure started in 2004. Also, the record was renewed 3 quarters in a row. Details are shown on Page 10. In particular, the operating income of Inorganics grew considerably.

Ordinary income was JPY 56.6 billion, up JPY 36.5 billion, or 181.04% year-on-year. Net nonoperating income and expenses improved JPY 0.8 billion year-on-year to JPY 20 million, due mainly to lower foreign exchange losses.

In Q3, there were no major extraordinary profit and loss items. Net figure worsened JPY 1 billion year-on-year to minus JPY 1 billion. With higher profits, income taxes increased by JPY 9 billion year-on-year to JPY 12.7 billion. As a result, net income attributable to owners of the parent increased JPY 25.7 billion, or 164.7% year-on-year to JPY 41.3 billion.

Page 9, shows consolidated sales by segment. In Q3, Electronics sales decreased year-on-year, but Inorganic sales grew significantly. Four other segments, including Chemicals, also grew in sales.

Petrochemicals sales were JPY 76.2 billion, up JPY 17 billion year-on-year. Ethylene plant continued to operate fully. Higher naphtha price led to higher international market prices of ethylene and propylene. Olifins sales grew considerably. Market prices of vinyl acetate and ethyl acetate rose, and volume of n-propyl acetate increased.

Organic chemical sales increased. SunAllomer Ltd. sales increased on higher market prices. Chemicals sales were JPY 40.5 billion, up JPY 2 billion year-on-year. One of the 2 major drivers was electronic chemicals. Higher shipment of high-purity gases, especially etching gases for Electronics, such as 3D NAND, memory and LCDs, led to increased sales.

Another driver, basic chemical sales grew on rising acrylonitrile market prices and higher volume of chloroprene rubber. Overall sales increased. Electronics sales were JPY 27.1 billion, down JPY 5.2 billion year-on-year.

Hard disk sales decreased on continuously lower shipment of hard disk media, especially for mobile PCs. Compound semiconductors sales increased on higher volume.

Rare earth magnetic alloy sales decreased on lower volume. Lithium-ion battery material sales grew on higher volume. Inorganics sales were JPY 75.7 billion, up JPY 59.7 billion year-on-year.

Ceramic sales decreased on lower volume due to withdrawal from general-purpose alumina business. Graphite electrodes sales increased considerably on the effect of consolidation of SHOWA DENKO CARBON Holding GmbH and rising international market prices.

Aluminum sales were JPY 27.8 billion, up JPY 1.4 billion year-on-year. Aluminum rolled product sales increased on higher volume with continuously solid shipment of high-purity foils for capacitors. Aluminum specialty component sales slightly grew on higher shipment of large extruded aluminum products and forged aluminum products. Aluminum can sales increased slightly.

Sales of Others increased on higher sales of SHOKO Co., Ltd. and higher volume of SiC epitaxial wafers for power devices.

Please turn to Page 10. This shows consolidated operating income by segment. In Q3, operating income of Electronics and Aluminum segments declined year-on-year, but that of Inorganics grew significantly. Three other segments, including Chemicals, increased year-on-year. Petrochemicals profit was JPY 8.1 billion, up JPY 0.1 billion year-on-year. Olefins profit slightly increased on full operation and rising market prices, reflecting higher naphtha price.

Organic chemicals profit grew on higher market prices of vinyl acetate and ethyl acetate. SunAllomer Ltd. profit decreased on time lag before the sales price revisions along with higher materials cost.

Chemicals profit was JPY 4.9 billion, up JPY 0.4 billion year-on-year. Electronic chemicals profit increased on higher volume of etching gases for 3D NAND and others. The profit of basic chemicals and functional chemicals grew slightly. Industrial gases profit increased on higher volume due to tight supply. Electronics profit was JPY 4.5 billion, down JPY 1.81 billion year-on-year.

Hard disk profit decreased on lower shipment of hard disk media for mobile PCs. Compound semiconductor profit declined slightly. Rare earth profit was flat year-on-year.

Lithium-ion battery material profit slightly increased. Inorganics profit grew considerably by JPY 37.5 billion year-on-year to reach JPY 39.8 billion. Ceramics profit increased on higher volume of fillers for electronic materials and others.

Profit of graphite electrode grew significantly on the effect of consolidation of SHOWA DENKO CARBON Holding and rising international market prices.

Aluminum profit was JPY 1.4 billion, down JPY 0.2 billion year-on-year. Profit of aluminum rolled products slightly increased on higher volume of high-purity foils for capacitors. Aluminum specialty and component profit decreased on lower volume of SHOTIC. Aluminum can profit decreased slightly on higher materials cost.

As for Others segment, SHOKO Co., Ltd. profit was flat year-on-year. Profit of Others increased JPY 0.4 billion year-on-year to JPY 0.8 billion on higher volume of SiC epitaxial wafers.

Please turn to Page 11. Higher sales of graphite electrodes business led to the increase of notes and accounts receivables and inventories. Total assets at the end of September were JPY 1,149,000,000,000, up JPY 122 billion from the end of 2017.

Interest-bearing debt was down by JPY 15.9 billion. With higher notes and accounts payables and income taxes, total liabilities increased JPY 9 billion from the end of last year to JPY 667 billion.

After booking net income attributable to owners of the parent and higher capital surplus through the sale of treasury shares in the first half, total net assets increased JPY 113 billion from the end of last year to JPY 481.9 billion.

Please turn to Page 12. Interest-bearing debt was JPY 330.9 billion, down JPY 15.9 billion year-on-year. Gross debt/equity ratio improved 0.25 points year-on-year to 0.69x. Stockholders' equity ratio improved 6 points to 40.3%.

Page 13 shows the trend of consolidated interest-bearing debt and D/E ratio in a graphic format. You can see that our financial standing is improving steadily.

Please turn to Page 14. Pages 14 and onwards are for your reference, showing the comparison of Q2 and Q3. I will not explain the details.

Except for the Aluminum segment, Q3 sales grew in all segments quarter-on-quarter. As for operating income, Aluminum segment was flat quarter-on-quarter, but all other segments increased. In Petrochemicals, higher sales and higher volume, with the absence of a shutdown maintenance, contributed. In Inorganics, higher market prices of graphite electrodes contributed.

Page 17, shows the quarterly summary, showing that the sales and profit continue to grow steadily.

Please turn to Page 18. Pages from 18 to 21 show bar graphs, showing quarterly operating income by segment.

Pages 22 to 25, show topics by segment. These are for your reference.

We are making a good progress towards the consolidated forecast revised on August 8. We are more confident in achieving the targets. We believe we will be able to exceed the medium-term business plan, Project 20+ (sic) [ Project 2020+ ]. We will continue to make our utmost efforts.

Currently, we are working on the new 3-year medium-term business plan, which will be explained to you on December 11 in the afternoon. It will be the busy time before the holiday season, but I hope you will join us then.

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