Showa Denko (SDK) Maps Out "PEGASUS Phase II" Business Plan

Showa Denko (SDK) Maps Out "PEGASUS Phase II" Business Plan 
Tokyo, Dec 13, 2013 - (JCN Newswire) -  Showa Denko (SDK) (TOKYO:4004)
announces its business plan "PEGASUS Phase II" for the 2014-2015
period, the latter part of the five-year business plan launched in 2011. 
1. Outline of PEGASUS Phase II 
SDK's current medium-term business plan is named after a "Winged
Horse" from Greek mythology. The HD media and graphite electrode
businesses serve as "Wings" to drive the Group's growth. 
In Phase II under PEGASUS, HD media and graphite electrodes will continue to
serve as the Group's main businesses. In view of the drastic changes in
business environment, however, we will consolidate the foundations of the two
businesses in preparation for the Post-PEGASUS period. 
Business portfolio in Phase II 
This time, we have modified our business categories. Specifically, we have
changed the three existing categories of Growth & New Growth, Base (Growth)
and Base (Stable) into the four categories of New Growth, Growth, Base (Growth)
and Base (Stable) - (see diagram). Under Phase II, we will focus our efforts on
improving overall profitability based on the new business portfolio. 
2. Financial goals under PEGASUS Phase II 
Business results in Phase I (2011-2013) fell significantly short of initial
goals due to the appreciation of the yen at historically high levels and the
rise in energy costs following the Great East Japan Earthquake, as well as the
decline in shipment volumes, reflecting the worsening supply-demand situation
due to the stagnation in advanced countries and the slowdown of growth in
emerging countries. Despite the initial plan of recording an operating income
of JPY80 billion on consolidated net sales of JPY1 trillion in 2013, we had to
announce, on July 29, 2013, a revised forecast of an operating income of JPY26
billion on consolidated net sales of JPY850 billion. 
In 2015, the last year under Phase II, we will aim to record an operating
income of JPY50 billion (up JPY24 billion from the estimated results in 2013)
on consolidated net sales of JPY950 billion (up JPY100 billion). (As for a
breakdown by segment of consolidated net sales and operating income for 2015,
please refer to the table attached at the end of this news release.) 
The planned JPY24 billion increase in operating income will be realized by
such positive factors as cost reductions (JPY20 billion), an increase in
shipment volumes (JPY9 billion) and a favorable exchange rate (JPY4 billion),
which will be partially offset by such negative factors as a decrease in
selling prices (JPY4 billion) and others (JPY5 billion). The exchange rate and
naphtha price during Phase II are estimated at JPY100 to the US dollar and
JPY65,000 per KL, respectively. 

                         2013 Revised     2014     2015
                           forecast**     Plan     Plan
Net sales                       8,500    8,800    9,500
Operation income                  260      320      500
Net income                        100      140      250
ROA(%)*                           2.7      3.2      5.0
*Operating income/Total assets
**Announced on July 29, 2013

Capital investment under Phase II will total JPY105 billion (JPY60 billion in
2014, and JPY45 billion in 2015), and depreciation expenses for the period will
amount to JPY80 billion. About 55% of the total capital investment budget will
be allocated to Base (Growth) and Growth businesses. 
Interest-bearing debt at the end of 2015 will be about JPY370 billion, up
JPY10 billion from the end of 2013, as a result of capital investment for
future growth and higher demand for funds related to M&A. D/E ratio will be
1.1 at the end of 2015. We will aim to create JPY30 billion of free cash flow
in 2015. 
3. Business strategy under PEGASUS Phase II 
To achieve the planned increase of JPY24 billion in operating income versus
2013 results, we will strengthen our overseas operations, improve profitability
of Base (Stable) businesses, reduce costs, and take measures for M&A and
alliance. We are planning to increase operating income from overseas operations
by JPY9 billion, and operating Financial goals and assumptions (JPY100 million)
income from domestic operations by JPY15 billion. 
We will strengthen our overseas operations to realize the said JPY9 billion
increase. A breakdown by business category of the planned JPY24 billion
increase in operating income will be Base (Stable) JPY11 billion; Growth JPY7
billion; Base (Growth) JPY2 billion; and New Growth JPY4 billion. We will take
measures to improve the profitability of Base (Stable) businesses to realize
the said JPY11 billion increase. 
As mentioned before, positive factors will be cost reductions (JPY20 billion),
an increase in shipment volumes (JPY9 billion), and a favorable exchange rate
(JPY4 billion), while there will be such negative factors as a decrease in
selling prices (JPY4 billion) and others (JPY5 billion). 
(1) Accelerate penetration into overseas markets 
In Phase I, we acquired a graphite electrode plant in China, and established a
new production site in China for the high-purity aluminum foil business. In
Phase II, we will strengthen our presence in overseas markets for such
businesses as semiconductor-processing high-purity gases and aluminum cans.
Through such overseas activities, we will increase operating income by JPY9
billion from the 2013 level. 
(2) Improve profitability of Base (Stable) businesses 
In view of the fact that the profitability of Base (Stable) businesses has
declined during Phase I, we will work hard to improve the profitability.
Specifically, we will develop high-quality products and advanced technologies;
develop new demand and market; consolidate operation sites; strengthen
competitive power through renewal of production facilities; and fully utilize
our electric power resources. 
In particular, we will focus our efforts on developing dysprosium-free
magnetic alloys and a new butadiene manufacturing process. Furthermore, we will
reorganize small production sites within our Group. Through these measures, we
will increase operating income from domestic operations in the category of Base
(Stable) businesses by JPY7.5 billion, and operating income from overseas
operations in the same category by JPY3.5 billion. 
(3) Continue to reduce costs 
The key element of the planned JPY24 billion increase in operating income
versus 2013 results will be cost reductions totaling JPY20 billion. We will
steadily promote the cost reductions. In addition to cost reductions of JPY7
billion on a regular basis, we will take strategic measures to further reduce
costs by JPY13 billion. Major items will be improvement in productivity in the
Electronics segment, including the HD media business (JPY4 billion), and
restructuring of the alumina business (JPY3 billion). 
(4) M&A and alliance 
To catch opportunities for new businesses, we will continue to pursue M&A
and alliance. In Phase I, we realized M&A and alliance in the fields of
graphite electrodes, chemicals, petrochemicals, and ceramics. In Phase II, we
will proceed with new M&A and alliance projects, covering other areas as
4. Strategies for major businesses under PEGASUS Phase II 
(1) Base (Growth) businesses 
Under Phase II, the HD media and graphite electrode businesses will be
prepared for the next jump in the Post-PEGASUS period. 
Demand for hard disk drives (HDDs) is decreasing due to the shift in
applications from PCs to servers. In the short term, this trend has caused
stagnation in demand for HD media. However, demand for HD media will increase
in a medium term, reflecting the growth in server applications that require a
larger number of HD media per HDD. To meet the growing demand for HD media for
server applications, we will increase productivity by fully taking advantage of
our strength as an integrated producer of aluminum substrates and media.
Furthermore, we will promote technical development to prepare for the volume
production of higher-capacity HD media based on shingled magnetic recording
(SMR) and thermally assisted magnetic recording (TAMR) technologies. 
In the graphite electrode business, we will complete the expansion work at
SDKC by the second half of 2014 as scheduled, and start commercial shipments.
Due mainly to the overproduction of steel in China, the unfavorable
supply-demand situation will continue in the Chinese and ASEAN markets.
However, steel demand is expected to recover gradually because the European
economy is hitting the bottom and the U.S. economy remains steady. Thus,
SDKC's production volume will gradually increase, and its operating rate
will improve. SDKC's new facilities, scheduled for start-up next year,
will contribute to the increase in production. 
(2) Growth businesses 
In the aluminum cans business, the domestic market is matured due to the
declining birth rates and the aging population. However, demand will continue
to grow in Asian countries, reflecting the increase in population and
improvement in personal income. We will promote the business, targeting the
growing new markets in Asia. 
In the high-purity aluminum foil business, we started up a new production site
in China this year to meet growing demand. We will step up marketing activities
in China. In the areas of semiconductor-processing high-purity gases and
functional chemicals, we are in the process of expanding capacities and
establishing new sites. 
In Phase II, we will start up the new facilities as scheduled, and expand
(3) Base (Stable) businesses 
In the Petrochemicals segment, we will accelerate the development of
innovative technologies, including the new butadiene manufacturing process. We
will also promote the diversification of raw materials, increase the value of
cracker by-products, and strengthen tie-up with refinery. 
In the Chemicals segment, we will solidify the existing material chain of
ammonia, acrylonitrile, etc., and improve the operating rate of the plant based
on used plastic. 
In the rare earths business, we will strengthen our competitive power by
increasing the use of recycled materials produced at our site in Vietnam.
Furthermore, we will do aggressive marketing to sell our magnetic alloys
produced in China to magnet producers in China. In the Shotic business, we will
start up our casting plant in Malaysia as scheduled, and develop new grades for
automotive applications. 
(4) New Growth businesses 
In Phase I, we strengthened our production system for LIB packaging materials
to meet growing demand for use in smartphones and tablet PCs. We will continue
to expand production capacity step by step in response to demand growth. 
Demand for SiC power devices is expected to grow for a medium- to long-term
period as the key to energy conservation. SDK is producing and supplying
top-quality SiC epitaxial wafers for use in SiC power devices. We will continue
to improve the product quality, and strengthen our supply system through volume
production of six-inch wafers (launched in October 2013) and expansion in
production capacity, thereby contributing to full-scale commercialization of
SiC power devices. 
5. Summary 
Phase II is a period for next jump in the Post-PEGASUS period as well. We will
therefore take strong measures to improve the profitability of the HD media and
graphite electrode businesses, which will continue to serve as main businesses
in the Post-PEGASUS period. Meanwhile, we will work to develop and strengthen
Growth businesses that will become the next main businesses. We will also carry
out restructuring of Base (Stable) businesses whose profitability has
Through these measures, the Showa Denko Group aims to return to a growth track
soon and contribute toward creating a society in which affluence and
sustainability are harmonized. 
About Showa Denko 
Showa Denko K.K. ('SDK'; TSE: 4004, US: SHWDF) is a major
manufacturer and marketer of chemical products serving a wide range of fields
ranging from heavy industry to the electronic and computer industries. SDK
makes petrochemicals (ethylene, propylene), aluminum products (ingots, rods),
electronic equipment (hard disks for computers) and inorganic materials
(ceramics, carbons). The company has overseas operations and a joint venture
with Netherlands-based Montell and Nippon Petrochemicals to make and market
polypropylenes. In March 2001, SDK merged with Showa Denko Aluminum Corporation
to strengthen the high-value-added fabricated aluminum products operations, and
is today developing next-generation optical communications-use wafers. For more
information, please visit . 
Showa Denko (SDK)
Public Relations Office
Phone: 81-3-5470-3235 
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