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SDK Proceeding with Implementation of “SPROUT Project”

December 14, 2004

Showa Denko K.K. (SDK) announces the progress it made in the second year of its growth-oriented consolidated business plan, the “Sprout Project,” that extends from 2003 through 2005.

Under the project, SDK aims to establish itself as an “individualized chemical company” by fully utilizing technical advantages to be created through interconnection of its proprietary inorganic/aluminum and organic chemical technologies. As part of that strategy, SDK has identified 12 strategic market units (SMUs): the business segments in the electronics, automotive parts, and personal care/environmental goods markets where SDK can expect high growth as a result of the said technological synergies.

SDK is allocating its resources preferentially to SMU Projects corresponding to these specific market segments in order to develop individualized, competitive, high-value product lines.

This year, SDK has almost completed its restructuring program that started under the “Cheetah Project,” the previous consolidated business plan for the 2000-2002 period. Specifically, the hard disk (HD) media operation has recovered its status as a strategic growth business and the petrochemicals operation has become a base business.

Our growth strategy also made a great step forward with the development and commercialization of blue light-emitting diode (LED). Furthermore, SDK is going to achieve the financial goals under the Sprout Project one year ahead of schedule. The following outlines how SDK is proceeding with implementation of the Sprout Project.

Part 1 Financial goals achieved one year ahead of schedule

1. Performance forecast for 2004 (as announced on November 16, 2004)

(Billions of yen)

2004
(Forecast)
2003
(Actual)
Increase/
decrease
2005
Sprout targets
Net sales 735 689.4 45.6
(+6.6%)
680
Operating income

[Operating income/net sales ratio]
50
6.8%
38.5
5.6%
11.5
(+29.9%)
(+1.2 points)
50
Recurring profit 37.5 23.8 13.7
(+57.6%)
 
Net income 7 10.3 -3.3  
Interest-bearing debt 510 527.4 -17.4 520
Dividend (per share) ¥3 ¥2 UP ¥1  

*In 2004, SDK implemented the “accounting for the impairment of fixed assets” two years earlier than the deadline required by law.

2. Substantial improvement in financial strength

  • (1)Operating income
    Operating income for 2004 is now expected to amount to ¥50 billion. This means that the operating income target for 2005 will be achieved one year ahead of schedule.(Operating income for 2003 was ¥38.5 billion.)
  • (2)Operating income/net sales ratio
    The ratio is expected to rise to 6.8% in 2004 from 5.6% in 2003 due to progress in restructuring and expansion of high-value products businesses.

3. Interest-bearing debt:

Interest-bearing debt at the end of 2004 will be ¥510 billion, down ¥17.4 billion from the 2003-end level. Thus, the 2005 target under the Sprout Project (¥520 billion or less) will have been achieved one year in advance.

Part 2 Implementation of growth strategy

SDK has classified its businesses into three categories: strategic growth businesses, base businesses, and businesses that need restructuring. The roles of respective categories have been clarified and their specific business strategies have been established.

In the petrochemicals, HD and commodity ceramics operations?all initially classified as businesses that need restructuring, reforms have been completed through various means taken in the past two years, including drastic cost reductions, technical development, and alliances.

The HD business is now included in the category of “strategic growth businesses,” while the petrochemicals and commodity ceramics businesses are part of “base businesses.”

With regard to the operations included in the category of “strategic growth businesses,” the company is making progress with the 12 SMU projects based on the customer-oriented approach. SDK has established the road map (growth scenario) for the HD business and various new products in line with the SMU strategy.

1.Establishment of “road map”

  • (1)HD: Becoming a world leader
    Demand for HD is expected to grow ¥200 billion by 2010. Half of the growth will come from very small media?less than one inch in diameter?to be installed in small video cameras and cellular phones.

    The production of very small media requires even higher memory density. SDK will take full advantage of its thin film deposition and precision processing expertise to develop such next-generation technologies as vertical media, discrete media and patterned media.

    With the acquisition of the HD operation in Singapore last year and the consolidation of Trace in Taiwan this year, the SDK Group now has a 25% market share (note) and has become the world’s largest OEM supplier of HDs. SDK is committed to meeting customer requirements by fully utilizing the capacities at its three production sites (Japan, Taiwan, Singapore) based on its most advanced technologies.

    (note) Market share for the 2nd Q, 2004 estimated by SDK
  • (2)Solid conductive polymer aluminum capacitors: Expanding sales by establishing stable production technology
    SDK is set to increase the sales of these capacitors having high capacitance, high voltage and low-height characteristics to meet growing demand for applications in cellular phones, digital home appliances and cars.
  • (3)C4F6: A high-performance etching gas for IC processing at narrow line widths
    SDK has become the world’s first commercial producer of C4F6. The gas is increasingly adopted by major semiconductor manufacturers to realize IC processing at line widths of 90 nm or less.
  • (4)VGCFR: Developing composites
    This is the sole commercialized carbon nanofiber in the world, being used in lithium-ion batteries to increase their performances. In addition, SDK has developed VGCFR-S, a new grade for use in resin composites.

2.Sprouts

  • (1)Blue LED: Developed a proprietary technology, realizing the highest-level brightness on the market. Full-scale sales will start in 2005.
  • (2)AutoprepR @ series: A newly developed sample preparation cartridge for analysis of trace amounts of chemical substances. This will contribute to the environmental protection and food safety.
  • (3)Organic electroluminescent materials: Developed innovative phosphorescent polymer that ensures durability of 10,000 hours.

Part 3 Improved earning power through structural reform

1. Petrochemicals: Achieved a “simple and compact” structure, becoming a stable source of profit and cash flow

  • (1)ompetitive ethylene plant
    Our ethylene plant has become one of the most cost-competitive ethylene production facilities in Japan through optimization of production setup, drastic cost reductions, and higher diversification of feedstock.
  • (2)Shift to a business structure resistant to fluctuations in naphtha prices
    The shift has been achieved as a result of the non-consolidation of our polyolefins affiliates and introduction of a naphtha-linked price formula for olefins.
  • (3)Leading position in Asia in the acetyl chain
    SDK is advancing into the Chinese market with its competitive acetyl chain products, including ethyl acetate in which we have the largest share in the world market.

2. Chemicals: Striving to improve profitability

  • (1)Base businesses
    Improving the profitability of commodity chemical businesses through various measures, including alliances. Integrated the oxygen/nitrogen/hydrogen businesses with those of the Tokyo Gas Group. Strengthening the competitive position of the ammonia business by increasing the utilization rate of the waste plastic gasification plant.
  • (2)Growth businesses
    Accelerating the growth of such businesses as cosmetic raw materials (stabilized vitamins, UV shield, etc.), ShodexR (high-speed liquid chromatography columns), semiconductor processing materials (photoresist, etc.), and fluorescent nanoparticles.
  • (3)Aluminum: Restructuring to be completed in 2005 through drastic cost reductions and expansion of high-value

products operations

  • (1)Automotive heat exchangers
    Resuming growth through the development of next-generation products, establishment of a joint venture in China and drastic cost reductions.
  • (2)Rolled products / extrusions
    Restructuring will be completed through the shift to high-value products, establishment of optimum production setup, and reorganization of marketing/distribution channels.
  • (3)Fabrications business
    Striving to expand high-value products operations, including Shotic forgings, aluminum cylinders for laser beam printers (the world leader), high-purity foils for capacitors (the world leader), lithium-ion battery package (market leader in Japan), and aluminum cans.
  • (4)Others
    Consolidated the head office/marketing functions at Oyama, Tochigi Prefecture. The integration of production and marketing has increased the speed of decision making process.
    Established the Aluminum Technology Center to realize integrated control of core technologies common to the Aluminum sector.

Part 4 Plan for 2005

As 2005 is the final year for the Sprout Project, we will work hard to accomplish remaining tasks and lay the groundwork for the next “post-Sprout” medium-term consolidated business plan. In particular, we will further expand the growing businesses and speedily commercialize new products.

Under the “post-Sprout” plan, which is being prepared, we will further establish ourselves as a truly individualized chemical company through accelerated implementation of the growth strategy. At the same time, we will further improve our financial strength to achieve the status of a blue-chip company.

[Reference]
Yearly Sales and Operating Income Plan
* Revised on Nov. 16, 2004
(unit: billions of yen)
  2002 2003 2004
(forecast*)
2005
(Sprout)
Sales O.I Sales O.I Sales O.I Sales O.I
Petrochemicals 227.8 10.0 235.1 12.0 252.0 18.0 173.0 9.1
Chemicals 68.5 5.7 78.2 6.0 82.0 5.5 87.0 8.7
Electronics 75.2 6.2 94.7 10.7 114.0 15.0 116.0 14.6
Inorganic Materials 56.9 1.4 51.0 2.7 55.0 5.5 49.0 3.8
Aluminum 245.6 12.9 230.3 11.6 232.0 12.0 225.0 15.7
HQ costs   -4.8   -4.4   -6.0   -1.9
Total 674.0 31.3 689.4 38.5 735.0 50.0 680.0 50.0

Notes: Sprout target figures for respective segments were announced in January 2002.