Resonac Holdings Corp

XMUN:SWD

Earnings Call Transcript 2019-Q2

[Kohei Morikawa, executive]

[Interpreted] Ladies and gentlemen, good morning. This is Kohei Morikawa, President and CEO of Showa Denko.

Thank you for taking the time out of your busy schedule to join us at the financial results briefing. I will explain 2019 Q2 financial results full year forecast and overview of major businesses.

This slide shows the content of today's briefing. Our CFO, Motohiro Takeuchi, will present the details of financial results later. First, let me start with business environment that we are in. Compared to the beginning of the year, the global economy is clearly slowing down. Our major markets, such as electronic materials, automobile and FA and industrial equipment are facing serious reduction of production and inventory adjustments of raw materials.

Recovery is expected for a part of the electronic materials in the second half, but we believe full-fledged recovery will start in the next year. However, there is no doubt that these 3 markets will grow in the mid- to long-term with the progress of 5G and case.

Another market that impacts our business performance is graphite electrode. This market continued to show strength until the first half of this year. But in the second half, demand appears to decline as our customers, electric steel manufacturers use their stocks. In order to respond to apparent reduction of demand, we decided to decrease our production. Because of this, despite high level of market conditions, the volume will be lower than the plan, and the profit will decline in the second half. However, this lower demand due to the inventory adjustments will come to an end in the second half and the demand is expected to recover next year.

The worst period of the business environment for electronic materials, automobile, FA and the industry equipment was the first half of this year. And we believe the worst period for the graphite electrode market is in the second half of this year.

This shows 2019 first half financial results. Strong graphite electrode business offset the tough business conditions of electronic materials, automobile, FA and industrial equipment. All first half profit were record high numbers.

In the first half, extraordinary loss was booked in relation to the streamlining of domestic aluminum can production lines. This shows 2019 full year forecast. Compared to the beginning of the year, operating income forecast is 23.7% lower at JPY 145 billion. Net income forecast is 25% lower at JPY 90 billion. As I mentioned under the business environment, despite the partial recovery in electronic materials, automobile, FA and industrial equipment, we will reduce the production of graphite electrode by 15% from the plan based on the demand. Due to this, despite higher level of graphite electrode market, lower volume will lead to reduced profit.

The second half is expected to be the toughest 6 month. However, if you look at this from the opposite perspective, we can now confirm that 6-month operating income of JPY 60 billion is at our minimum profit level. Although we do not reach our original plan, if you look at the period of the medium-term business plan, even in the worst environment, we can secure the operating income of JPY 60 billion for 6 months and JPY 145 billion for full year. And we can expect a recovery from the next year. So this is not necessarily betraying your expectations. Extraordinary loss of JPY 20 billion is expected to promote the business reform.

This slide shows the factors affecting forecast for 2019 operating income. Biggest factor is shipment volume due to the reduced production of graphite electrode. To give you the rationale behind the minimum 6-month profit of JPY 60 billion, I would like to explain the graphite electrode business, which has the biggest impact on our performance.

Starting with demand. In the second half, mainly in Europe, demand appears to go down. As you can see on this slide, last year, in addition to the actual demand, our customers increased their inventories. But in contrast to that, this year, they are using their stocks.

Volume of orders are lower than the actual demand. Based on this order forecast, full year production is going to be reduced by 15%. In the mid to long term, the percentage of the electric arc furnace and electricity production will increase. And inventory adjustments will come to an end and supply-demand balance is expected to tighten next year.

Next is prices. Although the volume reaches the bottom, thanks to our sales policy of not pursuing the volume, the second half sales prices, after negotiations, remain at high level, a little less than 5x that of 2017. Rise of the needle coke price has come down and spread is expected to stabilize next year onwards.

Next is tasks and measures for graphite electrode business. Let me give you some details about this market in order to clarify the situation. The products can be divided into 2: UHP and HP. UHP electrodes are used to liquefy scraps in electric furnace. Stringent physical requirements of high-impact properties and strength must be met. HP is used to maintain molten state of steel. Therefore, those stringent requirements do not apply.

And UHP can be divided into Tier 1 and Tier 2. Tier 1 electrodes are customized for each customer based on the size and usage of electric furnace. And therefore, the customers, when they use the different electrodes, that would affect the unit consumption and deteriorates the product quality.

Tier 2 is not customized, standardized products. The customers cannot differentiate one product to another. And there are several Tier 1 manufacturers in the world, and Tier 2 manufacturers in India and Russia. Global production capacity, excluding China, is estimated to be 550,000 to 600,000 tons in -- for Tier 1 and 200,000 to 250,000 tons for Tier 2.

Now let's look at the different regions. Most of the customers in the United States and East Asia are Tier 1 customers. In Europe, there are more Tier 2 customers than Tier 1 customers. So let me explain the reason behind those differences between U.S., East Asia and Europe. The former SGL could not customize sufficiently in European market. Therefore, the European customers do not understand advantages of the customized products. So they do not distinguish Tier 1 from Tier 2. They tend to use inexpensive electrodes.

If the Indian and Russian Tier 2 manufacturers lower their prices, the market will shift to our direction. Our task is to promote the customization in the European market, so that we can increase the number of customers who understand the advantages of the UHP.

The announcement that we made in May about the investments in the European plant is to prepare ourselves so that we can do the customization in Europe. Chinese market is quite different and special. Since there are many hybrid electric furnaces, which is a combination of the blast furnace and the electric furnace, the main market is for HP. The number of UHP customer is limited and not so many customization is done.

However, the Chinese government is now focused upon the environment as well as there will be a much high-quality steel scraps generated. Large-sized new electric arc furnaces will be built and in several years, it is clear that the value of customized electrodes will be understood. So our task is to establish a system to provide Tier 1 UHP to Chinese market.

Graphite electrode demand will be the lowest in the second half. And based on the order forecast, we are reducing the production by 15%. Despite the low orders, market price is a little less than 5x than of the period when the demand was at its bottom. And the needle coke trend is almost stabilized. In Europe and China, by increasing the number of the Tier 1 users, we will be able to stabilize our earnings at a higher level.

In our business for electronics market. I will go through the high-purity gases for electronics, hard disc, SIC and the ceramics. Let me start with high-purity gases for electronics. In the first half of this fiscal year, due to the slowdown in the investment for semiconductors, the business was leveling off. Recovery is delayed from the initial forecast, but it is expected that demand will return to recovery in the fourth quarter of this year at the earliest and improved rates of the recovery will start from the next year. This view is endorsed by customers' forecast.

In the mid- to long run, consumption of high-purity gases for electronics will increase with further digitalization and the demand expansion for 5G.

As for hard disk business, the areas to recovery is expected here in our business for electronics market. Shipment for data centers will recover from the third quarter. And in the fourth quarter, the record high shipment for near-line is expected.

Investment for data centers will increase due to 5G expansion and further use of big data. By leveraging our strengths of technological development capability to the maximum, we developed next-generation MAMR or M-A-M-R media. In the second half with the mass production of 1.8 terabyte products, we are prepared for the mass production of MAMR media. Further development in high capacity products makes our technological edge in media more conspicuous. And in the second half, delivery for new customer is in our scope.

As I see the production wafers for power devices, shipment for using solar power systems was affected by reduced subsidies in China in this year, but solid market expansion has been ongoing with increased adoption by railcars.

In RE 2020s, they will be fully mounted to EV power control unit and further market expansion is expected. We are supporting demand expansion through development and the supply of high-grade epitaxial wafers. In particular, to contribute to demand expansion of inverter motor, with motor drive for EVs and railcars, we developed HGE-2G, the second-generation of high-grade SIC epitaxial wafers, which is indispensable for a larger chip. We'll continue to make active investment for capacity expansion and respond to rapidly expanding market.

Ceramics business. By withdrawing from general purpose aluminum business in the previous year, Ceramics business achieved double-digit operating margin. In the first half, this business was affected by production adjustment in semiconductors and smartphones. But by electrification of cars, 5G and progressing home appliances, IoT, miniaturization and further technological advances of electronics equipment are progressing. And the news for heat radiation and voltage stability are increasingly advanced, while the growth of heat radiation fillers as well as high-purity titanium oxide is expected.

Aluminum business for auto and FA market. Due to stagnant auto production and FA business. This business is in tough condition this year. We believe that this is a time to steadily implement initiatives with a future scope to market recovery.

In Rolled Products, we have the top share in high-purity aluminum foils for capacitors to be used in FA, solar panels and the consumer electronics. In addition to the development and the sales expansion of foils for large capacity-type capacitors, we will consider integrated production in China.

The aluminum specialty components, development to meet the margin is ahead of others will continue, including those for lightweight components and heat radiation to be required for EVs and auto electrification by concentrating our technology and the materials. Another topic in aluminum segment is that of aluminum chem business. We are streamlining its production capacity to be in line with shrinking domestic market, and promoting the introduction of formulae that links retail price with aluminum metal price, and the negotiation has been making progress.

In overseas business, including the Ford factory in South of Vietnam, we will strive to fully materialize the capacity expansion effects.

Finally, on petrochemicals. In the first half, due to the drastic drop in crude and the naphtha price, feedstock adjustment was booked, but we continue the full operation. In the first half, with a firm Asian demand in general, Asian production in our industrial complex has been in full operation and the derivatives utilization has been also high. However, due to sluggish Chinese economy, demand for restocking is weak and the market prices of SLM, propylene and butadiene have been weak.

In an effort to establish business foundation that withstands the market condition, we'll strengthen competitiveness of SLM plant and expand derivatives.

So far, I explained the stable earning power that generates profit even in a weakening market condition and the majors and prospects of each business.

Now I will explain cash use. In the midterm business plan, that TOP '21, which return to shareholders with earned cash and positive reinvest them in Koseiha businesses so that earning power and cash flows will be expanded further.

This is the shareholder return policy during the mid-term business plan. We aim to achieve total return ratio of 30% in 2021, the final year of the midterm plan. We will strive to maintain and improve a high level of dividend.

In the TOP '21, we will invest actively, but any surplus after capital investment and M&A will be allocated to shareholder return.

Dividend for 2019 this year will be JPY 130 per share, and total return ratio will be no lower than that of the previous year.

Another way of cash use is to spend on capital investment and M&A. In the first half, we invested on the improvement of graphite electrode businesses in Europe. Construction of the third base of aluminum can business in Vietnam and the acquisition of non-stick coating business of ILAG.

In the second half, we will increase capacity in Europe for onboard lithium-ion battery materials production. In electronic chemicals, we plan to increase capacity for future demand increase in the next year, driven by 5G, among others.

New development is progressing in targeted areas of 5G and CASE. We are taking on challenges to enable what was deemed almost impossible before: To join aluminum and resins directly. Our recent announcement of technology to join aluminum and resins directly is one major achievement of inter-business collaboration. Starting from digital equipment application, we aim to commercialize the technology to be applied into auto parts in future. Your expectation on our development progress will be highly appreciated.

Finally, let me comment on our CSR activities. We revised our CSR policy this year. We renewed our awareness for economic and the social value creation based on safety and the compliance. We will promote businesses focusing on contribution to achievement of SDGs through business activities, tackles all environmental issues and establishment of sustainable methods for HR development and improvement in working environment.

On the vision of satisfying all stakeholders, we will endeavor to solve various social issues through business activities and achieve further growth as a company that generates stable profit for many years.

Thank you very much for your attention.

[Motohiro Takeuchi, executive]

Thank you. This is Motohiro Tekeuchi, CFO of Showa Denko. Thank you very much for your interest in the performance of our company. Let me explain the overview of financial results for Q2 of fiscal 2019.

Please turn to Page 2. Number of consolidated subsidiaries decreased by 2 to 56. In electronics, Shoko Electronics, LED production subsidiary was newly consolidated. At the same time, 3 subsidiaries were liquidated. In inorganic, Showa Denko Carbon in Shanghai, which had been consolidated through the integration of former SGL GE was liquidated as its importance diminished. And in Aluminum, SHOTIC Singapore was transferred to SHOTIC Malaysia and was liquidated. And in petrochemicals, Showa Esterubdi Indonesia was liquidated in Q2.

Number of companies under equity method is 11, unchanged from the end of last fiscal year. January to June average exchange rate was JPY 110.1 to the dollar. Yen appreciated JPY 1.4 year-on-year from JPY 108.7. End-of-term exchange rate used to evaluate assets and liabilities was JPY 107.8. Yen appreciated JPY 3.2 from JPY 111 at the end of December. As for euro, January to June average was JPY 124.3 to the euro. Yen appreciated 7.3% year-on-year from JPY 131.6.

As for FX sensitivity, including the FX translation adjustment of overseas subsidiaries, JPY 1 change against the dollar is JPY 1 billion impact. As a result of the review of euro-yen impact on consolidated results, JPY 1 change against the euro is about JPY 0.3 billion impact.

With lower oil prices, domestic naphtha price was JPY 43,300 per kiloliter, down JPY 5,050 or 10.4% year-on-year from JPY 48,350 per kiloliter. As the slowdown of Chinese economy lowers the demand, aluminum LME price decreased $361 or 16.3% year-on-year from $2,210 per ton to $1,850 per ton.

In the middle of last year, Japan premium went up to $130, but as supply-demand balance weakened, especially due to the concerns for economic slowdown, it decreased to $85 in Q1, then went up to $105 in Q2 and $108 in Q3.

January to June average yen-based market price decreased JPY 44,000 or 14.7% year-on-year from JPY 299,000 per ton to JPY 255,000 per ton.

Please turn to Page 3. This is a summary of first half consolidated results. Net sales were JPY 475.5 billion, up JPY 19.6 billion or 4.3% year-on-year.

Details are shown on Page 5. Sales of 4 segments, namely electronics, aluminum, chemicals and others decreased. Inorganic sales grew on rising international market of graphite electrode business. In petrochemicals, once every 4 years, shutdown maintenance was done last year. And this year, a full operation led to higher sales, and overall sales grew.

Operating income was JPY 85.5 billion, up JPY 7.6 billion or 9.8% year-on-year. The details are shown on Page 6. Profits were lower in electronics, aluminum, chemicals and others. Profit of inorganics increased significantly. Petrochemicals profit also grew, overall profit increased. Operating income, ordinary income and net income attributable to owners of the parent were all record highs as first half results.

Ordinary income was JPY 84.8 billion, up JPY 7.3 billion or 9.4% year-on-year. And the nonoperating income and expenses with the repayment of subordinated loan last year. Interest, dividend, income and expenses improved JPY 0.7 billion and foreign exchange gains and losses improved. However, other expenses, including environmental expenses for plants increased. And due to JPY 0.3 billion increase in expenses, net nonoperating income and expenses was minus JPY 0.6 billion.

Extraordinary profit and loss are shown on the next slide, extraordinary loss decreased JPY 0.3 billion year-on-year. With higher profits, income taxes increased JPY 0.9 billion. Effective tax rate was 19.4%, same as the year before, mainly with lower profit offshore Denko Sichuan Carbon. Net income attributable to noncontrolling interest increased JPY 1.3 billion year-on-year to minus JPY 1.7 billion. As a result, net income was JPY 65.8 billion, up JPY 7.9 billion or 13.6% year-on-year.

Now Page 4. As we consider sales of shares held by divisions, JPY 1.2 billion gain on sales of the investment securities was booked in first half. As a result, extraordinary profit increased by JPY 1.3 billion year-on-year to JPY 1.8 billion.

As we decided to streamline domestic aluminum can production lines, part of the lines of Hikone plant was suspended, and JPY 1.1 billion impairment loss was booked. JPY 0.6 billion loss on liquidation of Showa Esterindo Indonesia was booked. Extraordinary loss increased by JPY 1 billion to JPY 3 billion. Net extraordinary profit and loss improved JPY 0.3 billion to minus JPY 1.2 billion.

Page 5. This shows consolidated sales by segment. Sales of chemicals, electronics, aluminum and others decreased year-on-year. Sales of inorganics and petrochemicals increased. Overall sales were higher.

Petrochemicals sales were JPY 127.5 billion, up JPY 12.1 billion year-on-year. Once every 4 years, ethane plant shutdown maintenance was done in the first half last year. And this year, full operation continued for olefin.

Higher sales volume of ethylene, propylene and others led to higher sales. With higher sales volume of vinyl acetate and ethyl acetate, organic chemical sales increased. As high utilization continued, SunAllomer grew.

Chemicals sales were JPY 73.5 billion, down JPY 1.1 billion year-on-year. Core premium rubber sales grew slightly, ammonia was flat, acrylonitrile sales declined on lower market price. Overall, basic chemicals sales slightly decreased.

Adjustments in semiconductor and display industry led to lower volume and electronic chemicals sales decreased. Despite lower shipment volume, functional chemicals sales slightly increased with product mix change, industrial gases sales also increased slightly.

Electronics sales were JPY 44.6 billion, down JPY 12.1 billion year-on-year. Global slowdown of IT investments led to major production adjustments of Hard Disk drive for data centers. Our Hard Disk media sales volume hit at the bottom in Q1, decreasing about 20% year-on-year. Sales declined significantly.

As for the media shipment for data center, the planned shipment of media for 14-terabyte drive in Q1 was delayed to Q2. But Q2 sales increased about 15% from Q1 and the full-fledged recovery has already started.

Compound semiconductors and rare earth magnetic alloy sales decreased significantly. Lithium-ion battery material sales declined on lower volume for EVs in China. As the demand of SIC production wafer expanded for rail cars and others, capacity was expanded and sales increased on higher volume.

Inorganic sales were JPY 142.7 billion, up JPY 26.3 billion year-on-year. Ceramic sales decreased on lower volume of general purpose alumina due to business reform implemented last year.

As for graphite electrode, in Europe, steel production slowdown and supply-demand balance softened due to the use of stock by customers. In China, electric furnace steel production decreased early spring and medium-grade electrode increased and market softened. However, with the strong electric furnace steel production in U.S. market and others, global market improved and sales increased significantly. January to June, our average sales price was 5x that of 2017, as planned at the beginning of the year. July to December price is expected to be high at a little lower than 5x that of 2017 level.

Aluminum sales were JPY 49 billion, down JPY 4.3 billion year-on-year. Rolled product sales decreased on lower shipment of high-purity foils for capacitors due to production adjustment for industrial equipment, data centers and others. Aluminum specialty components sales declined on lower volume for automotive components and industrial equipment. Aluminum can sales grew slightly with higher shipment volume.

Shoko Company Limited sales decreased slightly. Sales of others were JPY 64.3 billion, down JPY 2.9 billion year-on-year.

Page 6 shows the consolidated operating income by segment. While profits of 4 segments, including electronics declined, inorganics profit showed a major growth and petrochemicals profit also increased. Total profit increase was JPY 7.6 billion. Petrochemicals profit was JPY 8.5 billion, up JPY 1.1 billion year-on-year. As for olefin, once every 4 years, shutdown maintenance was done in last year. Compared to that, the volume increased, pushing up the profit by JPY 6 billion.

Due to the lower naphtha price, JPY 2 billion feedstock cost with adjustment was booked. Ethylene, propylene and cracked gasoline spread tightened JPY 5 billion, pushing down the profit. Organic chemicals profit increased on higher volume of vinyl acetate and ethyl acetate.

SunAllomer profit grew with continued full operation of polypropylene. Chemicals profit was JPY 5.5 billion, down JPY 2.2 billion year-on-year. Basic chemicals profit decreased on lower acrylonitrile market prices, mainly in Q1.

In electronic chemicals, production adjustment of semiconductor and display industry led to lower shipment volume of high-purity gases for electronics. Profit decreased also due to product mix change.

Industrial gases profit declined on lower shipment volume and the higher transportation cost. Profit of functional chemicals was about the same as the year before.

Electronics profit was JPY 0.9 billion, down JPY 5.1 billion year-on-year. Due to the production adjustments of hard disk drives for data centers, shipment volume reached the bottom in Q1 and profit decreased. Compound semiconductor profit declined significantly on lower volume. Rare earth magnetic alloy profit was about the same as last year. Lithium-ion battery material profit decreased on lower shipment volume for China.

SIC epitaxial wafer business was transferred to this segment and was included in the Device Solutions division from this year. Profit was down on higher development cost.

Inorganics profit was JPY 71.8 billion, up JPY 13.7 billion year-on-year. Ceramics profit increased after they withdraw from the general purpose alumina. Graphite electrode profit, excluding China, increased with rising international market because of the brisk demand in U.S. and Asia.

Chinese subsidiary profit decreased as market softened with the increase of blow and medium grade electrodes. Aluminum profit was JPY 0.5 billion, down JPY 2.2 billion year-on-year. Rolled products profit decreased on lower volume of high-purity foils for capacitors for industrial equipment and data centers.

Aluminum specialty component profit declined on lower shipment volume for automotive components and industrial equipment. Domestic aluminum can profit grew, profit of Hanacan Joint Stock Company in Vietnam was flat. Overall profit increased slightly.

Shoko Company Limited profit was up slightly, but overseas sales companies' profit were down. Overall profit of others was JPY 0.6 billion, down JPY 0.3 billion year-on-year.

Please turn to Page 7. This slide shows operating income year-on-year change breakdown by factor for the first half. As for volumes in inorganics, volume declines in graphite electrode in European and the Chinese market impacted us minus JPY 9.7 billion in electronics, due to volume decline mainly in Hard Disk in the first quarter. Impact was minus JPY 4.4 billion.

In Aluminum business, aluminum specialty component impact was minus JPY 2.4 billion. And in chemicals, in electronic chemicals, high-purity gases shipment went down, and this impact was minus JPY 0.8 billion. As a total, impact was minus JPY 16.2 billion.

As for price changes in petrochemicals due to market price decline of C4 fraction of butadiene materials and the crack to gasoline, this impact was minus JPY 4 billion. But in inorganics, international market price of graphite electrode increased substantially, affecting plus JPY 28 billion, and the total impact was plus JPY 24.3 billion.

As for cost reduction, in electronics hard disk, productivity improvement made a positive impact of JPY 0.8 billion, and productivity improvement of aluminum business was plus JPY 0.9 billion, and total impact was plus JPY 3.2 billion. As for others, in petrochemicals, the absence of shutdown maintenance of ethylene plant vis-à-vis the previous year with one made plus JPY 6 billion impact, but deteriorated feedstock adjustment caused by naphtha price made minus JPY 2 billion impact and the offset result was plus JPY 3.8 billion.

In inorganics, increase in headquarter cost and assembling direct costing graphite electrode business made minus JPY 1.5 billion impact, and unrealized cancellation of inventory due to time lag in sales of goods transferred between plants. At the end of the year, closed the minus JPY 1.6 billion. And in total, minus impact was JPY 4.9 billion. Electronics due to SIC business transfer and R&D cost increased through structure changing to division made a minus impact of JPY 1.5 billion. And as a whole company, the total impact was minus JPY 3.7 billion.

Please turn to Page 8. As for the total asset as of the end of June, notes and accounts receivable decreased substantially due to naphtha price in petrochemicals, but inventories increased mainly in inorganics due to price increase of graphite electrode price. And the total assets were up JPY 2.8 billion from the end of the previous fiscal year to JPY 1,077.8 trillion.

Total liabilities went down due to decreased interest-bearing debt and the notes and accounts payable, down JPY 42.7 billion to JPY 567 billion. Total net assets were up JPY 45.5 billion due to quarterly net profit to JPY 510.8 billion.

Please turn to Page 9. Interest-bearing debt was down JPY 1.8 billion from the end of the previous year to JPY 286.2 billion. Gross debt-to-equity ratio improved 0.04 point from the end of the previous year to 0.58x. Stockholders' equity ratio improved 4.1 points to 45.6%.

Page 10 shows interest-bearing debt and debt-to-equity ratio by chart. Indicating steadily -- are making the improvement in finance structure, as you see here.

Page 11. In operating cash flow, despite the increase in quarterly net income by the increase in corporate tax payment, among others, cash inflow was down by JPY 11.7 billion to JPY 40.5 billion. Investing cash flow due to the increased sales of investment securities, among others, cash outflow was down by JPY 7.7 billion to JPY 17.9 billion. As a result, free cash flow was down JPY 4 billion year-on-year to JPY 22.6 billion.

In financing cash flow, due to increase in dividend payment, among others, cash outflow increased JPY 5.8 billion to JPY 18.7 billion. As a result, cash and the cash equivalent as of the end of the second quarter was partially affected by FX fluctuations, and it was down JPY 11.3 billion compared to the end of the previous year to plus JPY 0.6 billion.

Please turn to Page 12. This slide shows selected data of interest dividend income, less interest expenses and the CapEx. CapEx and the depreciation will be explained on Page 13.

Page 13 shows CapEx and the depreciation by segment. CapEx in petrochemicals is down compared with the same period in the previous year when we implemented shutdown maintenance.

In inorganics, to improve quality in European-based former SGL, we are renewing facility. In the aluminum business, the third plant of aluminum can production in Vietnam is under construction. And the others are due to the introduction of S/4HANA. In total, CapEx was up by JPY 1.6 billion. As for depreciation, depreciation in petrochemicals for investment for cracker newly built in 2010 was completed, and the total depreciation went down by JPY 1.2 billion.

Page 14 shows total number of employees by chart. As of the end of June, overseas employees increased due to the launch of the new aluminum can plant in Vietnam. But due to the headcount reduction in hard disk subsidiaries. Overseas employees decreased by 42. But in Japan, through new employment and others, headcount increased by 169. And in total, it went up by 127 compared to the end of the previous year to 10,603.

Please turn to Page 15. From here, I'll explained the 2019 forecast that was announced yesterday. Let me start with the selected data in the forecast. As for exchange rate, first half result was JPY 110.1 to a dollar, and the second half forecast was revised to JPY 110. For euro, it remains unchanged at JPY 126 to a euro. Naphtha price was revised to JPY 47,400 per kiloliter, and the aluminum LME price was revised to JPY 1,950 per ton. Year-end interest-bearing debt will be JPY 310 billion. As for a number of employees, due to expected headcount increase in 2 segments of inorganics and chemicals. As of the end of 2019, employees were increased by 236 to 10,712.

Please turn to Page 16. This is 2019 consolidated full year forecast, which was revised this time. As for net sales and operating income, as CEO Morikawa explained, due to graphite electrode destocking, built up inventory on the side of customers in 2019, apparent demand will be down year-on-year, and we will cut back the production.

Amid very difficult market condition with continued production reduction in semiconductor display and automotive industries, we revised down forecast for sales and profit from the initial forecast. Details will be provided on Page 17 and 18.

Extraordinary profit and loss will be unchanged at minus JPY 20 billion and net income also unchanged at JPY 90 billion. Dividend will be maintained at JPY 130 per share, kept unchanged from the initial forecast. Interim dividend is JPY 50, and it will be paid from September 9.

Please turn to Page 17. Page 17 is for net sales forecast by segment. Total net sales forecast is JPY 980 billion, down JPY 120 billion from the initial forecast. In petrochemicals, market price will be down due to naphtha price slip. And sales forecast is JPY 260 billion, down JPY 30 billion from the initial forecast.

Olefins full operation will continue backed by solid supply-demand balance in Asia market.

In chemicals, sales forecast is JPY 160 billion, down JPY 6 billion from the initial forecast, mainly in electronic chemicals. Sales will be down due to volume decline caused by prolonged production adjustment in semiconductor and display industries. In electronics, sales forecast is JPY 105 billion, down slightly JPY 1 billion from the initial forecast. Compared with the initial forecast held this -- sales will be up due to volume recovery from the third quarter, but we have tougher prospects for compound semiconductors and lithium-ion battery materials.

In inorganic sales, forecast is JPY 270 billion, down JPY 70 billion from the initial forecast. Graphite electrode demand for the U.S. and the Eastern Asian market continue to be firm. But due to economic slowdown in European market and cutback in procurement caused by customers graphite electrode destocking, we are reducing production and shipment will be down 15% from the initial forecast.

In China, production increased in low and medium grade graphite electrode weakened the market, and that impacted on us, average selling price of graphite electrode in the second half of 2019 is close to 5x of that of 2017.

The aluminum sales forecast is JPY 105 billion, down JPY 5 billion from the initial forecast. Aluminum cans business will improve, but servicing aluminum specialty components will go down due to lower shipment for FA and auto.

In others, sales forecast is JPY 135 billion, down JPY 7 billion from the initial forecast, mainly due to sales decrease in Shoko Company Limited.

Page 18 shows operating income forecast. Total operating income will be JPY 145 billion, down JPY 45 billion from the initial forecast. In petrochemicals, anticipating economic slowdown in China and market price decline in ethylene, propylene, C4 and cracked gasoline caused by troubles of overseas derivatives and the tighter spread, operating income forecast is JPY 15.5 billion, down JPY 2.5 billion from the initial forecast.

In chemicals, in electron chemicals, profit will be slightly down due to prolonged production adjustment in semiconductor and display industries. And in total, operating income will be JPY 14.5 billion, down by JPY 0.5 billion from the initial forecast.

In electronics, hard disk volume will be up 40% half-on-half in the second half due to full-fledged shipment of near-line media for hyperscale data center, but that cannot offset the volume decline in the first half. And operating income will be JPY 8 billion, down by JPY 4.5 billion from the initial forecast.

In inorganics, mainly in Graphite business, production will be down, and the shipment will be down 15% from the initial forecast.

Operating income will be down JPY 37 billion from the initial forecast to JPY 111 billion. Needle coke price in the second half is close to that of the first half.

In Aluminum, Aluminum Cans business continued to be firm and its initial forecast in profit remains unchanged. But the aluminum rolled products and aluminum specialty components will be affected by production adjustment in industrial equipment and operating income will be JPY 2.5 billion, down JPY 3 billion from the initial forecast.

In others, operating income will be JPY 1 billion, down JPY 0.5 billion from the initial forecast.

Page 19 for CapEx and the depreciation forecast. CapEx will be up JPY 15.9 billion year-on-year to JPY 57.6 billion. In Chemicals segment, capacity expansion and the delivery depot expansion in high-purity gases for electronic materials will be implemented. And in the aluminum segment, the third plant construction in Vietnam is ongoing.

In inorganics segment, improvement investment in European production basis in graphite electrode business is underway.

Compared with initial forecast, CapEx in Chemicals segment will be up JPY 7.4 billion, affected by production adjustment in semis and the display industries. In the Electronics segment, it will be down by JPY 2.7 billion. And in total, CapEx will be down by JPY 6.7 billion.

Depreciation is affected by investment growth. But also impacted by the impairment losses in our aluminum segment and others in 2018 and both in comparison with the previous year and the initial forecast, it will be down by JPY 0.9 billion to JPY 38.5 billion.

From Page 20, results in the first quarter and the second quarter are described. Now let me skip the detailed information regarding them.

But the operating income in inorganic segment is down in the second quarter due to a slight volume decline and the increase in inventory cost of major costs through time lag. But in electronics, chemicals and the Petrochemicals segment profit increased.

From Page 23, quarterly operating income by segment is shown by bar chart.

Page 27 and onwards shows topics by segment, so please refer to them later.

In summary, despite the record high profit in the first half, our business environment in semiconductors, displays and the automotive industry has turned much more difficult than our initial projection, and we decided to substantial production reduction in graphite electrode due to destocking impacts by customers, and that led to the revision this time.

But as CEO, Morikawa explained, we are still faced with a number of uncertainties, including U.S. trade issues, Chinese economic slowdown, IT investment slowdown among others. And the challenging environment will continue with concern for global economic slowdown.

Under such environment, we see enormous headwind. We transformed our structure to secure JPY 59.5 billion level operating income in the second half.

This second half is the bottom of IT-related business, and most of the businesses are in the moderate recovery track, bottoming out in the first quarter, except graphite electrode business.

Toward the business recovery of the entire company in the next fiscal year, we will make maximum effort to achieve new targets. Your continuous encouragement will be highly appreciated. Thank you for your attention.