Showa Denko K.K. (SDK; TSE:4004) has formulated its future "Long-term Vision (2021-2030) for Newly Integrated Company"
(Long-term Vision) following integration with Showa Denko Materials Co., Ltd. (Showa Denko Materials).
Since making Showa Denko Materials a consolidated subsidiary on April 28 of this year, Showa Denko has been developing
its Long-term Vision in order to integrate the two companies as soon as possible and establish a foundation for future
growth.
Showa Denko and Showa Denko Materials are committed to providing new functions and value as an integrated company (the
Company) in the chemicals industry where intensification of global competition and changes in market structure are
expected to go forward, thereby contributing to the realization of a sustainable society.
1. Long-term Vision and synergy for Newly Integrated Company
(1) Purpose and Ideal state
In terms of purpose, the Newly Integrated Company will seek to "change society through the power of chemistry." This
includes contributing to the sustainable development of global society by creating functions required of the times as an
advanced material partner. In addition, the Company will strive to become a company with a "strong presence in the
global market" and that "contributes to a sustainable global society," which are the two things the Company aims to
achieve in terms of its Ideal state in order to fulfill its purpose.
Currently, global demand for solutions to environmental and social issues and contributions to SDGs is driving the need
for the renewal of various social infrastructure such as digital infrastructure, mobility and energy. In this context,
expectations for innovation by materials manufacturers are growing.
By integrating the two companies, the Showa Denko Group (the Group) will meet these societal demands and expectations of
its customers head on. It will provide onestop solutions and new functions to its customers and contribute to a
sustainable society as a whole as a "global top-level functional chemical manufacturer" that will realize a breakthrough
by fusing Showa Denko's midstream materials technologies, Showa Denko Materials' downstream application technologies and
both companies' evaluation and analysis technologies.
(2) Portfolio management
To realize its Ideal state, the Showa Denko Group will leverage its highly complementary business portfolio built
through the integration of the two entities. It will continue to provide new functions to the market and realize
continuous growth by having its four business categories - "Core Growth" business, "Next-Generation" business, "Stable
Earnings" business and "Fundamental Technologies/Materials" business - each plays a different role with a competitive
advantage commensurate with their respective roles.
"Core Growth" business - Electronics, Mobility
Business that possesses overwhelming scale/top-share products in growing markets and which will sustain the Group's
future growth
"Next-Generation" business - Life Science
Business in an advantageous position that can lead to future growth in promising markets, and that will be developed
into a next-generation pillar
"Stable Earnings" business - Carbon, Petrochemicals, Device Solutions, Industrial Gases, Basic Chemicals, Aluminum
Rolled Products, Aluminum Cans, Coating Materials, Electronics Materials, Energy
Business which earns a stable profit and generates investment capital with competitiveness/high share in markets where
competitive landscape is stabilizing
"Fundamental Technologies/Materials" business - Ceramics, Functional Chemicals, Aluminum Specialty Components
Technology platform business to support innovation of other businesses with a wide range of inorganics, organics and
aluminum technologies that support the competitiveness of the other three business categories
In particular, by strengthening the competitiveness of each of the business categories with the wide range of
technologies and materials offered by the "Fundamental Technologies/Materials" business, and by continuing to refine
such technologies and materials across a variety of businesses, the Group will expand its presence in new and promising
future markets.
(3) "Core Growth"/"Next-Generation" businesses
The "Core Growth" and "Next-Generation" businesses will drive the Showa Denko Group's future growth. The Group will
pursue business development with a good understanding of differences in market stages and our position in each business.
Electronics:
With the prospect of continuous technological innovation and market growth, the market is expected to remain fiercely
competitive. However, the direction of technological development is set and rapid structural changes and new entries in
the industry are less likely to occur. As the world's No. 1 semiconductor materials manufacturer[1], with sales of
around 200 billion yen, the Showa Denko Group is in the top position, far ahead of all other players in terms of
business scale, and offers a broad product portfolio that boasts global top-level competitiveness and share in both
wafer and packaging processes. Through the integration of the two companies, the Group will meet the expectations of its
customers and win in growth markets by continuing to develop cutting-edge products and provide one-stop solutions with
its enhanced technological capabilities.
Note 1: The Showa Denko Group statistics; does not include silicon wafers
Mobility:
With both future areas of high certainty and areas of uncertainty co-existing in the changing marketplace, the Showa
Denko Group envisages that competition for the top position by multiple materials manufacturers will continue. The Group
will manage certainty and uncertainty with its portfolio of businesses, by leveraging global top share products and its
product line-up enhanced through integration, such as businesses that capture the highly certain trend of vehicle weight
reduction against the backdrop of greenhouse gas reduction (multi-materials/resin molded automotive module business),
businesses that capture the shift to electrification which is a trend that ranks alongside weight reduction (heat
management materials packages business for Si power devices), and among the shift, businesses that seek to prepare for
uncertainty of outlook for penetration of each powertrain which is driven by national policies in each country (LiB
materials business, heat management materials packages business that maximizes performance of SiC power module) etc.
Life Science (Regenerative Medicine):
While the market is expected to grow significantly in the future, there is a wide range of views when it comes to
expansion timelines and segments, and there are still a limited number of players in the market. Amid this, the Showa
Denko Group will not only pursue growth by leveraging its first-mover advantage, including its global top-class
contracting track record and know-how, global production structure that includes three sites in Europe, Asia and North
America and was established ahead of other players, and development of pioneering manufacturing technology aimed at cost
innovation, it will also build a medium-to-long-term competitive advantage by swiftly capturing future changes in the
market.
Among "Core Growth" and "Next-Generation" businesses, the Showa Denko Group has positioned the following five businesses
as "growth businesses" that will drive the Group's growth over the medium to long term.Electronics: Semiconductor wafer process business, semiconductor packaging process businessMobility: Multi materials/resin molded automotive module business, heat management (power module) businessLife Science: Regenerative medicine business
Cumulative sales for the above five growth businesses totaled approximately 230 billion yen in 2020, and the Group will
seek to expand business scale to 600 billion yen by 2030 while achieving CAGR of 10% through innovations including
technological synergies. In addition, it will generate an additional 18 billion and 48 billion yen in operating income
in 2025 and 2030, respectively, through innovations that includes synergies across these five businesses.
(4) Technology fusion through integration
As a hybrid advanced material company combining midstream materials technology and downstream application technology,
the Showa Denko Group will realize innovations centered on its growth businesses by integrating the technologies of both
companies after integration. In addition to strengthening and creating businesses through the ongoing provision of a
wide range of functions to the market through the fusion of three chemical technologies, namely "chemistry to
synthesize," which encompasses Showa Denko's midstream materials, "chemistry to formulate," which constitutes Showa
Denko Materials' downstream applications, and "chemistry to think," which includes both companies' evaluation/simulation
technologies, structure analysis and computational science, the Group will continue to enhance its technology through
its businesses, and with this virtuous cycle achieve self-directed portfolio reform and sustained high growth.
In order to increase earnings, with a focus on the five growth businesses mentioned above, the Showa Denko Group will
work to realize synergies through the integration of products and technologies of the two companies, as exemplified by
the following examples, and achieve business growth rates that exceed market growth in each business.
Semiconductor wafer process business: With performance of semiconductors becoming faster and higher than ever before,
there is a need for technological innovation in semiconductor materials. While players such as GAFA have started to
approach material manufacturers as they seek to manufacture key devices in-house, indicating that the growing importance
of materials-related innovation, achieving breakthroughs in materials technology is becoming increasingly difficult each
year. In this context, the Showa Denko Group will continue to meet the needs of its customers by breaking through
technology trade-offs through the combination of technologies of both companies. For example, in the case of CMP slurry,
a material used for smoothing and flattening semiconductor substrates in the semiconductor device manufacturing process,
the Group is developing a next-generation product that combines a high removal rate and scratch reduction by utilizing
Showa Denko's abrasive technology for Showa Denko Materials' "ultra-low-scratch Nano-ceria Slurry."
Semiconductor packaging process business: As a result of trends such as the adoption of 5G and laminates, two aspects of
technological innovations are required simultaneously - functional sophistication of individual semiconductor-related
materials, and new packaging configurations and processes. The Showa Denko Group will leverage its "Packaging Solution
Center," which is highly regarded by semiconductor manufacturers, to provide new value to its customers by combining
materials based on evaluation technology, and will undertake the development of cutting-edge, next-generation products
that combine technologies from both companies. For example, when it comes to laminate materials, the Group will develop
next-generation products that combine Showa Denko Materials' copper clad laminates with Showa Denko's resin design
technology and filler technology.
Heat management (power module) business: With a shift to electronic control of vehicles, it is expected that new heat
control challenges will occur and partial outsourcing by power module manufacturers will begin. The Showa Denko Group
will address the technological challenges and needs of its customers by expanding its lineup of heat management
materials and combining materials leveraging analysis and module evaluation technologies. Going forward, the Group will
also consider promoting heat management materials packages that draw out the potential of SiC by leveraging SiC
epitaxial wafer business.
(5) Contribution to SDGs
The Showa Denko Group has established and follows Our Code of Conduct, which defines what each and every employee should
do for the sustainable development of the international community and the Group itself. In addition, the Group will
pursue business activities in accordance with the 17 Sustainable Development Goals (SDGs), will contribute to SDGs
through various technologies and businesses, and further strengthen ESG efforts.
Examples of post-integration contribution to SDGs through various technologies and businesses:Optimize electric-power/resource consumption by offering next-generation semiconductor materials etc.Increase resources efficiently/reduce greenhouse gases through chemical recycling of used plasticsContribute to CO2-free energy creation through hydropower generationPromote effective use of iron resources by supplying graphite electrodes for electric furnacesReduce greenhouse gases through mobility weight reduction/electrificationImprove QOL through Life Science business
2. Long-term numerical targets
(1) Thinking behind long-term numerical targets
Showa Denko's business philosophy aims to enhance value provided by the Group with the aim of satisfying all
stakeholders, such as employees who drive value creation, shareholders, customers, and business partners.
Showa Denko Group Business Philosophy
"We at the Showa Denko Group will provide products and services that are useful and safe and exceed our customers'
expectations, thereby enhancing the value of the
Group, giving satisfaction to our shareholders, and contributing to the sound growth of international society as a
responsible corporate citizen."
In creating its Long-term Vision, Showa Denko has set Total Shareholders Return (TSR), which is a comprehensive
indicator of corporate value enhancement, EBITDA margin, net D/E ratio, and other indicators as long-term numerical
targets for the newly integrated company, and is committed to their achievement.
(2) Long-term numerical targets
(3) Profit improvement drivers through 2025
Although Showa Denko anticipates 2020 EBITDA margin of 8% (which it is on track to achieve; on an annualized basis),
from 2021 onwards, the company will raise EBITDA margin to 15% by 2025 through business growth centered on Electronics
and Mobility, aforementioned innovation initiatives, and structural reforms. In addition to these efforts, it aims to
achieve EBITDA margin of 20% that factors in recovery from the impact of COVID-19 and market fluctuations. Even if
market conditions deviate from expectations, the company will recover through business restructuring and additional
structural reforms to achieve EBITDA margin of 20%.
(4) Shareholder return policy
In regards to distribution of cash generated through future business growth, the Showa Denko Group will factor in the
situation after integration, and for the time being, strive to pay out dividend as stably as possible, while
prioritizing growth investment for profit growth and bringing net D/E ratio close to 1.0 times. In addition, the company
will aim for total return ratio of 30% over the medium to long term.
(5) Thinking behind compensation system
To ensure that the Showa Denko Group's management team is committed to collectively achieving Group objectives and
enhancing corporate value, Showa Denko intends to link a portion of executive compensation to management indicators.
Although specific indicators and weighting for each item are under consideration, the company anticipates linking
compensation to KPIs such as TSR, EBITDA margin, ROE and net D/E ratio.
3. Short-term synergy
In order to realize continuous growth of the Showa Denko Group, it is important for the Group to carefully select its
business portfolio and maximize organizational productivity.
As part of these efforts, the company will steadily restructure its business portfolio, improve profit structure,
streamline assets, and fully integrate organizations over the short-to-medium term between now and 2023.
(1) Business portfolio restructuring
As part of business portfolio restructuring, Showa Denko is considering and negotiating the sell-off of multiple
business. In terms of sale price, it envisages the
equivalent of 200 billion yen on an enterprise value basis.
(2) Profit structure improvement initiatives and asset streamlining
1) Profit structure improvement initiatives
As profit structure-related synergies arising from integration of the two companies, Showa Denko Group is considering a
series of six key initiatives, including reducing procurement and logistics costs, improving productivity, and reducing
operational headcount by about 1,500 employees, in addition to improving sales-related profit, with the aim to achieve
an impact of 28 billion yen on the current profit structure by the end of 2023.
Sales-related profit improvement (Review sales policy for customers/agents, etc.) Approx. 3 bil. yen
Procurement/logistics cost reduction (Consolidate common materials/logistics-related suppliers) Approx. 3 bil. yen
Productivity improvement (Improve productivity of production lines) Approx. 2 bil. yen
Rent reduction (Reduce rent by consolidating head offices) Approx. 1 bil. yen
Reduction of other costs (Reduce common costs, SG, etc.) Approx. 7 bil. yen
Operational optimization (Carry out structural reforms through organizational integration and operational efficiency
improvement) Approx. 12 bil. yen
Showa Denko will achieve a cumulative impact by also steadily implementing initiatives such as increasing profit through
new product development and crossselling as well as the consolidation of operation sites, which have not been
incorporated into the above initiatives.
2) Asset streamlining
As part of initiatives toward greater financial health aimed as recovery from the impact of the deteriorating economic
environment, Showa Denko is steadily streamlining assets, and forecasts 50 billion yen for immediate countermeasures
through 2021. At the same time, the company also intend to consider additional initiatives over the medium to long term.
Reduction of working capital (Compress inventory through supply chain improvement, etc.) Approx. 25 bil. yen
Sell-off of marketable securities (Sell off cross-shareholdings) Approx. 20 bil. yen
Sell-off of other assets (Sell off shares of affiliates and excess assets) Approx. 5 bil. yen
(3) Organizational/business integration and restructuring
Showa Denko will integrate and restructure its own businesses as well as Showa Denko Materials' businesses, based on the
respective strategic business positioning of the above-described Core Growth, Next-Generation, Stable Earnings, and
Fundamental Technologies/Materials businesses.Core Growth: Electronics, MobilityNext-Generation: Life ScienceStable Earnings: Carbon, Petrochemicals, Device Solutions, Energy, etc.Fundamental Technologies/Materials: Functional Materials
In addition, the Showa Denko Group is leveraging its global research and development hub "Stage for Fusion" (Kanagawa
Ward, Yokohama City), construction to be completed in spring of 2022, to conduct a joint initiative between head office
functions aimed at creating and promoting new ESG-oriented research and development themes by fusing diverse
technological specialties of both companies.
The Showa Denko Group is making steady progress on PMI toward integration, with the milestone of integration as a
corporate entity in January 2023, following substantive integration in July 2021 (unification of chain of
command/integration of corporate functions) and integration of head offices in October of the same year.
Long-term Vision for Newly Integrated Company (2021-2030)