Shin Etsu Chemical : Q&A Summary (373 KB) pdf

Shin-Etsu Chemical Co., Ltd.

Summary of Telephone Conference on Financial Results for the Third Quarter Ended December 31, 2021

Date	January 27, 2022 16:00-17:00
Venue	Shin-Etsu Chemical Co., Ltd.
Attendees	・Yasuhiko Saitoh, Representative Director - President
from the	・Masahiko Todoroki, Senior Managing Director, In Charge of Semiconductor Silicon
Company	Business
	・Toshiya Akimoto, Managing Corporate Officer, In Charge of Public Relations
	・Toshiyuki Kasahara, Corporate Officer, General Manager of Finance & Accounting
	Department
	・Yukihito Adachi, General Manager of Public Relations Department
Reference	Consolidated Financial Results for the Third Quarter Ended December 31, 2021
material

* This memo is a summary of a dialogue exchange in the telephone conference.

[Greetings and summary of financial results (President Yasuhiko Saitoh)]

• In the first three quarters ended December 31, 2021 (April to December), the Company posted the following results:
  Consolidated net sales of ¥1,483.7 billion (up 36% year on year), Operating income of ¥480.1 billion (up 68% year on year), Ordinary income of ¥490.3 billion (up 67% year on year), and
  Net income attributable to owners of parent of ¥353.1 billion (up 66% year on year).
• All businesses achieved strong growth in both sales and profits compared with the results of the same period of the previous year. In particular, the Infrastructure Materials business contributed to profit growth, and the 3.3-fold increase in profits was largely attributable to Shintech. Behind this was the remarkable strength of demand.

[Status by segment]

• [Infrastructure Materials]:

The housing shortage in the U.S. has been severe. Demand for housing remains strong and supply is likely to be subdued. The Federal Home Loan Mortgage Corporation estimates the housing shortage at about 3.8 million units, with another estimate of as much as 5.5 million units. A similar situation is more or

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less evident in other major countries.

Meanwhile, looking at the situation in China which impacts the Asian market's conditions, the recent policy of the Chinese government seems to have a restraining influence in terms of both supply and demand. As a result, there is no imbalance between supply and demand. Crude oil prices continue to be high, and coal prices are rising again. PVC prices hit the bottom after the recent fall. Caustic soda has reversed.

• [Electronics Materials]:

The device shortage has not been resolved. An underlying factor is the full-scale development of the IoT, IoH, AR, VR, Metaverse and such like, i.e., the process of "making the world ubiquitous." These are followed by demand for semiconductors as essential products for realizing carbon neutrality and double-tracking the semiconductor supply chain for economic security. A similar vector applies to rare earth magnets. The plan for promoting EVs has been moved up, and electrification will be accelerated not only for cars but also for other applications. From the viewpoint of economic security, studies on local production for local consumption are underway in the EU and the U.S.

• [Functional Materials]:

We have been able to raise prices for silicone products in stages and are continuing to pursue raises. At the same time, we will increase the number of new products and further tilt the product mix toward specialties. The Company is also working hard to raise prices of cellulose products.

• Given the above circumstances, we will steadily implement investments in all areas.

[Full-year operating performance]

• The Company made upward revisions to its full-year operating performance forecast, taking into account the results for the first nine months and the January- March outlook. By posting higher profits for eight consecutive quarters from the January-March quarter of 2020 to the January-March quarter of 2022, we will strive to achieve the highest annual profit projected. The annual dividend forecast was also revised upward to be ¥400 per share, an increase of ¥100. Efforts are also underway for the next fiscal year.

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[Supplementary explanation (Yukihito Adachi, General Manager of Public Relations Department)]

• Capital investment in the fiscal year ending March 31, 2022 is estimated to be
  ¥220 billion, and the level of depreciation and amortization is expected to be ¥160 billion (no change).
• Assumed foreign exchange rates for operating forecasts: US$1 = ¥114 and €1 = ¥130 for the January-March quarter.
• Foreign exchange sensitivity of ordinary income: ¥4.9 billion per year for the U.S. dollar and ¥0.3 billion yen per year for the euro, at a fluctuation of ¥1.

[Q&A Session]

1. What is your outlook for PVC in 2022?

・We are of the view that the market price decline seen in Asia has bottomed out.

・(North America) A company proposed its PVC price increase by 3 cents in February, but so far no other company has followed that approach. However, it was reported this morning that there was a tank explosion at a competitor. Although we have not been able to obtain details of the level of the accident, if the start-up of the operation at the factory where the accident occurred is delayed, there might be a supply constraint like that of last year. We are paying close attention to the status.

・Demand continues to be strong. There was a situation in December and

1. January where customers had no choice but to adjust production due to the

temporary spread of infection that caused difficulty in human resource management. However, this situation will gradually be resolved and normalized, and there will be moves to stock up toward the beginning of spring. Hence, we are not worried about demand. Comparing prices in Asia with prices in North America, there are notable differences. But looking at the supply-demand relationship in North America, we are of the view that prices will not enter a correction phase for some time.

・Demand is strong, but supply conditions have eased from last year. There are factors, such as the extent to which the strength of demand will continue, the tightening of monetary policy, and the progress of inflation,

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but it is unlikely that price adjustments will occur suddenly.

・In North America, we are starting the year with a significantly higher price than the level of last year, and the new plant that began operation in December last year will contribute fully (approximately 400,000 tons) this year. We are confident we can sell everything.

1. What is the status of Shintech's new plant?

・The capacity of PVC production at the new plant is 290,000 tons/year, but the capacity of VCM is larger. There has been a shortage of monomers so

A far, but since we will be able to apply the new VCM capacity fully to PVC, the volume will increase by approximately 400,000 tons.

1. Please describe the conditions for caustic soda.

[Market prices]

・The North American market is on an upward trend. There is strong demand, and there was an increase in Shintech's capacity. But there was also capacity that was closed or will be shut down (in the industry), and deducting this amount shows there is no increase in supply capacity. Therefore, the supply-demand relationship is good.

・As the disruption of marine transportation continues, it is still difficult for

1. Asian market conditions to be brought into North America as they were in the past, and we expect this situation to continue going forward.

[Demand]

・With the review of the supply chain, it is quite possible that minor metals (such as lithium) will be produced in large numbers in the U.S., and we are hopeful. Whether or not caustic soda will be in short supply depends on how well the capacity of minor metals will be established in the U.S., so we are closely watching.

• What is your outlook for wafers in 2022?
  ・There are three points. The first is the macro environment trend, including

geopolitical factors. The semiconductor industry is directly linked to the

• economy, but it is not yet clear whether it will continue to do well or if there will be any problems.
• • The second point is customers' inventory policy. Amid the shortage of

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semiconductors, inventory accumulation is pursued in various parts of the supply chain, and the key is when the target inventory level will be reached. The timing of reaching the target will vary depending on the diameter of the wafer, but we do not expect device manufacturers to draw down the accumulated inventory due to economic fluctuations. We expect that the inventory level will be built up to a higher level from the current standard level, and once a certain number of months in stock is reached, that level will likely be maintained.

・The third point is that there will be a lot of new demand for devices in 2022. In addition to high-speed communications, EVs, and green investment, we expect this year to be one when new investment for the future Metaverse begins.

• What is your view on capital investment in 300 mm wafers?

・We have not changed our policy at all to gradually increase capacity based on contracts.

・Currently, the Company continues to operate at full capacity, but we are unable to completely meet demand. In 2022 and 2023, brownfield investments will be limited while greenfield investments will contribute only from 2024 or thereafter. Therefore, the shortage of 300 mm wafers is expected to continue for some time.

Ａ ・The prices of construction materials, manufacturing/inspection equipment and materials, and raw materials are rising, and the amount of investment per unit is considerably higher than when we considered investment a year ago.

・It is difficult to significantly increase production capacity in the short term, because many types of wafer manufacturing equipment are unique to each company and the manufacturing capacity of equipment manufacturers is also limited.

• How about the prices in 2022 and beyond?
  ・In 2022, there are cases where we agreed to a volume increase in conjunction with the price increase in addition to the contracts already concluded.

・In 2023, the ratio of long-term contracts concluded in the past will be lower Ａ than the level of 2022, and the price will increase in proportion to the volume increase. From 2024 onwards, we expect price increases to step up further

as the capacity is enhanced with the launch of new lines.

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