Tokai Carbon : Newsletter for shareholders Autumn 2021(5MB)

C O N T E N T S

Message from the CEO

We will carefully monitor market recovery while advancing a management plan targeting further growth.

Business results for H1 2021

In the first six months of 2021, the overall global economy continued its recovery from the downturn caused by the novel coronavirus (COVID-19) pandemic. However, the extent of this recovery has varied depending on country and region. In the U.S., where progress has been made administering vaccines, the recovery has been steady, but in Japan and developing countries, which are falling behind with their vaccine programs, the recovery is looking more fragile. Additionally, factors such as the spread of the COVID-19 Delta variant and increases in infection rates following attempts to open up the economy are affecting some countries and regions, meaning the outlook for the global economy as a whole remains unclear.

Within this environment,Tokai Carbon recorded increases in revenue and profit compared to the same period of the previous year. This included net sales of 117.3 billion yen (up 25.2% year on year), operating income of

10.9 billion yen (up 88.1%), and net income attributable to owners of the parent company of 5.7 billion yen (up 164.4%).These results also significantly exceeded our initial forecasts so our consolidated results forecasts for the full year have been revised upward accordingly.

Strengthening our business foundation as a platform for the next stage of growth

While Japan has yet to break free from the effects of the pandemic, the global economy, and particularly the economies of the U.S. and China, have entered an uptrend. Accordingly, the Group's business results bottomed out in the first half of 2020 and are now showing signs of recovery. As the business environment continues to recover, we will focus on capturing business opportunities.

We have managed to stay profitable over the past two years, despite facing adversity as market conditions for our core businesses deteriorated and the pandemic spread. This is the result of efforts to diversify our portfolio over the last few years.

Looking back over the period since I became CEO in 2015, we have worked to carry out restructuring and change the mindsets of our employees, while also implementing measures aimed at freeing us from long-term issues that were holding us back, such as reducing production capacity to eliminate excess, streamlining personnel requirements, and withdrawing from non-core businesses. In addition to this, over the four years

Hajime Nagasaka

President & CEO

H1 2021 Highlights

Overview of Business Results

• February

Selected to receive funding as a

Net sales

Operating income

(Billions of yen)

(Billions of yen)

member of an EU battery development

250.9

project (Tokai COBEX Savoie SAS)

23.6

(forecast as of Aug)

• May

Rolling Mid-term Management Plan

201.5

(forecast as of Aug)

T-2023 announced

• May

Carbon Neutrality Promotion

93.7

117.3

10.9

7.8

Project launched

• June

Price revisions for carbon black in

5.8

the U.S. announced

Interim Year-end

Interim Year-end

Interim Year-end

Interim Year-end

(to be applied from July)

(result) (result)

(result) (forecast)

(result) (result)

(result) (forecast)

2020

2021

2020

2021

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02

since 2017 we have focused on realizing growth through M&As. We have invested a total of around 180 billion yen to expand operations, including purchasing North American business sites for two of our core businesses, making Tokai Carbon Korea a consolidated subsidiary, whose end customers operate in the growing semiconductor industry, and acquiring a smelting and lining business.

In May 2021, we built on these efforts by launching the Rolling Mid-term Management Plan T-2023.

In this plan, we think that it will be necessary to pause our forward movement and spend a moment reinforcing our business foundation so that we can survive the intense global competition anticipated in the coming years. While the post-merger integration following the M&As we have carried out over the last few years is progressing smoothly, we will continue to focus on creating integration effects.

Rolling Mid-term Management Plan T-2023 with proactive and solid measures

T-2023 has three basic policies. The first of these is "returning core businesses to a path of growth." Over the plan period of 2021 to 2023, we expect to see overall recovery and growth in all of the end-customer industries* with which the Group does business, so we will use this as an opportunity to improve profitability and stabilize revenues in our core graphite electrode and carbon black businesses. The second policy is "optimizing the business portfolio (selection and concentration)." We will concentrate our limited business resources in businesses that have growth potential or that are highly competitive in order to further increase our presence in the fine carbon, smelting and lining, and industrial furnaces markets. On the other hand, we think it is important that this is accompanied by adjustments to businesses that are not expected to see significant growth or profitability. You could say that this is the second phase of the restructuring that I mentioned earlier. Finally, the third

policy is "strengthening the consolidated governance structure." The Group is currently undergoing rapid globalization, so this policy will raise our ability to implement strategy on a Group-wide basis.

We have been working to create integration effects from M&As carried out over recent years through measures aimed at overall optimization, such as concentrating production at sites closest to the relevant target market and selecting which products will be produced at which site in a way that improves overall efficiency. As a result, we expect to see these integration effects manifest from 2021 onward.

Based on this outlook, in 2023, the final year on the plan, we are targeting net sales of 320 billion yen and operating income of 57 billion yen. The net sales target represents a record high, and it has been set taking into account the uptrend in the markets. The operating income target is also based on levels that follow on from 2018, when there was a tight supply-demand balance in the graphite electrode market due to the convergence of various

extraordinary factors.

I will now explain the current situation and outlook for each of our core businesses that were factors for formulating the plan's targets.

* An industry in which Tokai Carbon's customers are engaged.

• Graphite Electrode Business

In the past, we exported a set amount of graphite electrodes from Japan and Germany to the U.S., which is the main market for our products. However, we are currently increasing the production capabilities of our sites in North America to establish a structure of local production for local consumption.

Following the positive results from the high supply-demand balance of 2018, we experienced a two-year period of stagnation, which impacted our business results for that period; however, the conditions for a recovery, such as the completion of inventory adjustments and an increase in steel production using electric arc furnaces, are coming to fruition. As various countries adopt carbon neutral policies, we anticipate further growth in demand for arc furnace steel, leading

Business Environment Forecast for End-customer Industries (2021-2023)

We expect to see overall recovery and growth in the end-customer industries of steel,

Projected EBITDA Growth by Business During the T-2023 Period

automobiles, semiconductors, and aluminum

Area	Environmental outlook	Relevant Tokai Carbon
business
	• Crude steel production to grow by 3%
Steel production	• Increase in steel production using	Graphite Electrodes
	electric arc furnaces in the U.S.
Automobile production	• Gradual recovery from 2021 onward	Carbon Black
• Annual growth of 3-5%
Semiconductor demand	• Annual growth of 5-7%	Fine Carbon
Aluminum demand	• Continued annual growth of 3-4%	Smelting and Lining
• Steady market conditions

Source: Estimates by the Company based on references including GDP growth rates, WSA, Notch, MarkLines, WSTS, and CRU.

2021-2023

EBITDA (Billions of yen)

35	*Circle size represents amount of sales
30		Graphite
25		Electrodes
20		Smelting
Carbon	and Lining
15	Black	Fine
		Carbon
10
5		Industrial Furnaces
	Other Businesses

0 (Friction Materials, Anode Materials)

0%	10%	20%	30%	40%
-50		EBITDA margin

Target

Graphite Electrodes

Raise production smoothly as markets recover

Carbon Black

Optimize spread between costs and sales prices

Smelting and Lining

Raise profitability through integration

Fine Carbon

Increase supply of competitive products and develop next-generation products

Industrial Furnaces

Maintain high profitability through new furnace development

Other Businesses

Improve profitability and propose new product development

Aim

Revenue base

Create stable cash flows

Concentrate on high-quality markets

Growth business

Raise production of

high added value products

Maintain competitiveness through product development

Restructuring

Transform to improve profitability

Reconsider business models

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04

to a full recovery in volumes and sales prices in the Graphite Electrode Business from 2022 to 2023. We are strengthening support for users of high-quality products in terms of supply, quality, and technical services so that we can capture medium-term growth in demand.

• Carbon Black Business

The main end-customer market for carbon black is automobile tires. Global tire production is forecasted to maintain a growth rate of 7% per year in response to demand for vehicles, so we anticipate that the Carbon Black Business will continue to perform steadily.

We will work to optimize profit margins by keeping operating rates at our plants high to meet the need for stable supplies and by reflecting raw material prices and the cost of capital expenditure in sales prices.

• Fine Carbon Business

In the Fine Carbon Business, we expect to see continued growth in demand for use in semiconductors and solar power generation. Tokai Carbon Korea, which produces Solid-SiC (silicon carbide) focus rings, a component used in semiconductor manufacturing equipment, has been performing particularly well, so we will enhance production capabilities in a timely manner to

take maximum advantage of this market growth. Our business strategy is to raise competitiveness by realizing overall optimization with a focus on added value products through a process of selection and concentration.

In terms of structure, we are raising efficiency by reorganizing processing and sales sites in Europe. We will also increase cost competitiveness by transferring the entire extrusion material production operations of our Tanoura Plant in Japan to Tokai COBEX Savoie SAS in France.

• Smelting and Lining Business

In the Smelting and Lining Business, we expect to see the stable growth of the end-customer aluminum market. In particular, we will expand sales of our high-quality product RuC® (Ready-to-Use Cathode) in order to respond to demand for graphitized cathodes that offer superior production efficiency and environmental performance.

Regarding the post-merger integration of the two companies that we acquired in 2019 and 2020, we have been making smooth progress on sharing manufacturing technology and integrating various operational systems, and we will aim to generate

effects in terms of revenue by continuing to optimize product production at each location. Tokai COBEX Savoie SAS will take on some of the Fine Carbon Business's production operations and we are also advancing research and development into the manufacture of anode materials for lithium-ion batteries. As these anode materials will be able to respond to future growth in demand for electric vehicles, in February 2021 we were selected to receive funding as a member of an EU battery development project.

I will lead our decarbonization efforts

In 2020, decarbonization efforts gained momentum rapidly on a global scale. This is a trend that the Tokai Carbon Group must address.

We consider carbon materials to be "materials that spread joy" which are essential to humanity, and we have been engaged in the carbon industry for over 100 years. However, as the world trends toward decarbonization, we must think carefully about how we can contribute to society and the earth in the long term.

Therefore, we have established the Carbon Neutrality Promotion Project that I will personally lead.

This project is being advanced as a Group-wide initiative and we are also disclosing our climate change risk analysis in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures.

Maintaining an annual dividend of 30 yen

Over the three years of T-2023, we expect to create a cumulative operating cash flow of 150 billion yen. About 66 billion of this will be used to upgrade facilities and for environmental and growth investments, and 37 billion will be used to service debt. We plan to allocate the remaining 47 billion to shareholder returns and strategic investment. We are focused on returning profits to shareholders through the continuous payment of stable dividends based on a dividend payout ratio of 30%. Therefore, the annual dividend for 2021 will remain at 30 yen per share.

I look forward to your continued understanding and support.

Hajime Nagasaka

President & CEO

August 2021

T-2023 Numerical Targets

Aim to improve the profitability of core businesses and return them to a path of growth

while optimizing the business portfolio by focusing on growth markets

Net sales		Operating income		ROS		EBITDA
(Billions of yen)		(Billions of yen)		18%		(Billions of yen)
320		57			86
		Reference: ROIC 12%, ROE 15%

Release of a Company Briefing Video for Individual Investors

In July 2021, we released a company briefing video through the Okasan Securities website in order to make Tokai Carbon' s business, mid-term management plan, and shareholder return policy more widely known.

As a company that primarily engages in B-to-B business, we have relatively low name recognition

		320.0
201.5 227.9
2020	2021	2023
	(forecast)

		57.0
	18.1
7.9
2020	2021	2023
	(forecast)

		18%
	8%
4%
2020	2021	2023
	(forecast)

		86.0
35.3	47.0
2020	2021	2023
	(forecast)

among individual investors, so we welcome any opportunity to make our company and our business known to even just one more person to try and win their support.

Going forward we will increase opportunities to interact with the market and continue to share information aimed at individual investors.

The video will be available to watch at the following address until December 2021 (in Japanese only). https://www.okasan.co.jp/corporation/irmovie/

ROS (Return on Sales) = Ratio of operating income on sales (operating income/net sales)

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06

Feature

Carbon Neutrality and

1	Movement toward achieving carbon neutrality is
accelerating in Japan and around the world

the Future of Tokai Carbon

In 2020, measures to tackle climate change gained momentum on a global scale.

Various countries formulated policies aimed at curbing emissions of greenhouse gases, particularly carbon dioxide (CO2), and in October 2020, the Japanese government also made a commitment to

making the country carbon neutral by 2050. A wide range of industries are being expected to take action in order to realize a decarbonized society. Therefore, companies are working to reduce their own environmental impact while pursuing innovation that will reduce CO2 emissions across society.

China

Japan

Have emissions peak

Reduction of at least 46%

U.S.

UK

and achieve a reduction

(compared to 2013 levels)

of CO2 emissions per

by 2030

Rejoined the Paris

Reduction of at least 68%

unit of GDP by 65%

Agreement on February 19,

compared to 2005

(compared to 1990 levels)

2021, having previously

levels by 2030

by 2030

withdrawn

*Equivalent to a reduction of

125 countries,

President Biden

55.2% compared to 2013 levels

includingJapan, and

announced the target of

EU

one region have

achieving net zero greenhouse

committedto

gas emissions by 2050

achieving

Reduction of at least 55%

carbon neutrality

(compared to 1990 levels) by 2030

(as of April 2021)

*Conclusion of the European Council

meeting held on December 10 and 11

*Equivalent to a reduction of 44%

Reference: Ministry of Economy, Trade and Industry website

compared to 2013 levels

Addressing climate change is an urgent issue and the worldwide spread of initiatives that aim to reduce greenhouse gas emissions, one of

What is Carbon Neutrality?

Realizing net zero emissions by offsetting emission volumes with an equal volume of emissions absorbed or removed

CO2 emissions

CO2

	CO2 absorption
	or removal
Offset to	CO2
achieve
net zero

the main factors behind climate change, to achieve carbon neutrality is accelerating.

Tokai Carbon will fully engage in tackling this issue. Here we share information about carbon neutrality and the environment surrounding the Group.

It would be very difficult to completely eliminate greenhouse gas emissions, so carbon neutrality aims to achieve net zero emissions by absorbing or removing CO2 at an amount equal to the volume of emissions generated, while also realizing this greatly depends on reducing overall emissions by a significant amount.

		CO2 absorption
Unavoidable		by forests, etc.
Carbon	CO2 reduction
CO2 emissions
	neutrality	activities such
		as energy-saving

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