Tokai Carbon : Newsletter for shareholders Autumn 2022(4MB)

Newsletter for Shareholders	Autumn 2022
January 1, 2022-June 30, 2022

Special feature

Strengthening

Resilience to

Market Volatility

Tokai Carbon's

Growth

Potential

Contents

01. Message from the CEO 05. Feature Tokai Carbon's Growth Potential-Strengthening Resilience to Market Volatility

11. Shareholder Benefit Information 13. Segment Overview

(Message from the CEO)

Message from the CEO

Various measures for recovering business results are bearing fruit

Business results for H1 2022

In the first six months of 2022, countries around the world made progress on balancing economic activity with anti-infection measures. On the other hand, uncertainty in the global economy is increasing again as global inflation and the resulting monetary tightening have become major downward factors driven by supply chain disruptions triggered by the situation in Ukraine.

Within this environment, we continued to develop our business in accordance with the basic policies of T-2024, our rolling medium-term management plan. The three basic policies are "returning core businesses to a path of growth," "optimizing the business portfolio (selection and concentration)," and "strengthening the consolidated governance structure." We are ensuring reasonable profits by reflecting the increase in cost prices in sales prices in our graphite electrode, carbon black, and other businesses. We are also working to reinforce production capabilities to meet growing demand. As part of our selection and concentration efforts, in February 2022, we completed the transfer of all shares of the specified subsidiary Tokai Carbon

(Tianjin) Co., Ltd., our carbon black business in China to Cabot (China) Limited and in May 2022, we acquired an additional 350,000 shares of our consolidated subsidiary Tokai Carbon Korea Co., Ltd.

As a result, in H1 2022, net sales rose 33.8% year on year to 157.0 billion yen, operating income increased 52.7% to 16.7 billion yen, and net income attributable to owners of the parent company increased 62.1% to 9.2 billion yen. The graphite electrode business returned to profitability after recording an operating loss in the previous year. In addition to this, the carbon black, fine carbon, smelting and lining (S&L), and industrial furnaces and related products businesses all recorded year on year increases in earnings and profits, meaning that all five of our main businesses achieved growth. ROS, which is one of our main management indicators, also improved significantly from 9.3% to 10.6%. As a result of our M&A activities over the past few years, I think we have moved a step closer to realizing a resilient business portfolio that can withstand a certain amount of volatility in the markets.

Our forecast for the full-year consolidated results is for net sales to increase 17.8% year on year to

Hajime Nagasaka

President& CEO

H1 2022 Highlights

February Completed the transfer of the Chinese carbon black subsidiary

February Disclosed our target of achieving net zero CO2 emissions by 2050 (establishment

of carbon neutral promotion infrastructure)

February Released theT-2024 rolling medium-term management plan

May Acquired additional shares of Tokai

Carbon Korea Co., Ltd.

June Issued Integrated Report 2021

Overview of Business Results

Net sales	Operating income
(Billions of yen)	(Billions of yen)
157.0	16.7
117.3	10.9

2021	2022	2021	2022
H1	H1	H1	H1

01

02

We are aiming for ROIC of over 10% by 2024.

(Message from the CEO)

1. billion yen, operating income to increase 42.0% to 35.0 billion yen, and net income attributable to owners of the parent company to increase 24.2% to

1. billion yen.

Optimizing the business portfolio (selection and concentration)

In November 2021, the Board of Directors set our Business Portfolio Management Basic Policy. Targets for profitability and capital efficiency, which are based on

a long-term perspective, we will work to realize our	The Carbon Neutral Committee established in February
vision of "contribute to a sustainable society through	is taking the lead on initiatives to strengthen our
advanced materials and solutions."	competitiveness in the medium to long term.

Return core businesses to a path of growth

The crisis in the Ukraine has made it difficult to predict the business environment, including the impact on our businesses. While we must keep a close watch on how the situation unfolds, our highest priority is to properly respond to growing demand in the industries that our core graphite electrode and carbon black businesses are engaged with. Rises in raw material prices are a concern and we must be careful to agilely reflect these in sales prices to ensure reasonable profits, but if we can firmly capture anticipated growth in demand, we will be able to return both businesses to a path of growth, leading to a large improvement in business results.

capital cost, are set and monitored by the Board, and each year it will deliberate on the direction of business portfolio management, while taking both consistency with our long-term vision and medium- to long-term growth into consideration. We approach selection and concentration from various angles, including businesses, products, product types, and location, in pursuit of a business portfolio that will sustainably enhance corporate value. Our target is to achieve a return on invested capital (ROIC) of over 10% by 2024.

As the world trends toward decarbonization, in the medium-term it will be important to continue focusing on carbon-related businesses, such as graphite electrodes, while also adding new businesses to the portfolio that are not reliant on fossil fuels. From

Strengthening the consolidated governance structure

As a company that is growing its overseas subsidiaries, strengthening our consolidated governance structure remains a short-term issue that we need to address urgently. We intend to implement every conceivable measure, including strengthening the governance structures of the subsidiaries themselves, strengthening the Group's cross-organizational functions, and dispatching a greater number of employees overseas. At present, we are also focusing on becoming carbon neutral, so our efforts to collect and manage non-financial data on a consolidated basis, which had been lacking in the past, will also contribute to strengthening the consolidated governance structure.

Maintaining an annual dividend of 30 yen

Over the three years of the T-2024 plan, we aim to generate 185.0 billion yen in cash flow from operating activities, and 114.0 billion yen of this will be allocated for investment in growth and business continuity. This includes renewing equipment and facilities in preparation for the future, upgrading fine carbon and industrial furnace equipment and facilities, and carrying out environmental investments.

In 2022, we plan to maintain stable and continuous shareholder return by paying an annual dividend of 30 yen, the same amount as in 2021. I look forward to your continued understanding and support in the future.

Hajime Nagasaka

President & CEO August 2022

T-2024 Quantitative Targets

We aim to achieve these targets by returning core businesses to profitability and continuing to invest in growing markets

Net sales		Operating										EBITDA
	income				ROS				ROIC
(Billions of yen)										(Billions of yen)
	(Billions of yen)			16%				10%
	356										91
			57
			356.0								16%								91.0
		305.0
258.9				57.0			11%								66.0
					10%					10%	54.5
				24.6	35.0						4.8% 6.5%
2021		2022	2024	2021	2022	2024	2021	2022	2024	2021	2022	2024	2021	2022	2024
	(forecast)				(forecast)				(forecast)				(forecast)				(forecast)

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

ROIC (Return on Invested Capital): Ratio of income on invested capital = Operating income after tax/(working capital + fixed assets)

Business portfolio management

The Board of Directors will discuss how to optimize management of

the entire Group from various angles to maximize medium- to long-term corporate value.

Perspective	Reflection in management strategy
Consistency with vision	Revisions to businesses, products,
Management environment	product types, and business locations
ROIC/WACC	New business development, M&A
Synergies	Reflection in equipment and
Potential	facility investment plans

03

04

Feature

Tokai Carbon's Growth Potential

-Strengthening Resilience to Market Volatility

ESTI
U	O
N
Q			We have eliminated
Q	What does business restructuring involve?
an over-reliance on
	specific businesses

A	We have shifted to a structure of multiple businesses that engage
	different industries and cover for each other during downturns

Over the last few years,Tokai Carbon has been restructuring its business. The social and economic environments are transforming at a dizzying pace, so in this feature we respond to shareholders' questions

about our current and future responses and showcase

how we have strengthened.

Our restructuring efforts are a strategy to avoid an over-reliance on our core graphite electrode and carbon black businesses. A long-term issue we have faced is that these two businesses mainly cater for the steel and auto industries, so they are easily affected by changes in market conditions. To address this, we have been building up our smelting and lining(S&L) and fine carbon businesses, which engage different industries,in order to stabilize revenues.

In actual fact, from 2020 to 2021, the COVID-19 pandemic and economic downturn that accompanied

it heavily impacted our two core businesses. However, in 2021, our fine carbon and industrial furnace businesses, as well as the recovering S&L business, contributed to lessening the downward pressure on business results. By increasing the number of strong sources of revenue, we have realized an overall structure that offers resilience to market volatility.

Furthermore, we have withdrawn from our carbon black business in China. This decision was based on factors such as increasingly fierce competition and operational limitations from

What is	How about	What is the
the impact of
the situation	outlook regarding
the COVID-19

Sales and Profit Composition Comparison

Before	We are targeting growth markets such as steel and semiconductors	After
to realize a structure that is resilient to sudden changes
Over-reliance on the	in the business environment!	Diverse sources of
two core businesses		revenue

pandemic?	in Ukraine?	business results?

05

Other Businesses
7%
Industrial Furnaces
and Related
Products Business
5%
Fine Carbon	2018
Business
11%
Carbon Black
Business
33%

Graphite

Electrode

Business

44%

Other Businesses
5%
Industrial Furnaces
and Related
Products Business
7%
Smelting and	2021
Lining Business
19%
Fine Carbon
Business
15%

Graphite

Electrode

Business

16%

Carbon Black

Business

38%

06

tightening environmental regulations. Also, while	business results is insignificant. Some of our raw
there is worldwide concern regarding the situation in	materials are imported from Russia, but we are
Ukraine, our sales to Russia account for less than one	working to swiftly identify and switch to alternative
percent of overall sales, so at present, the effect on	procurement routes.
ESTI
U	O
N
Q		A leap forward
Q

ESTI
U	O
N
Q		We are working
	In recent years, there has been an increase in
	to significantly
Qunexpected events. How are you preparing for these?	improve
		production agility!

A	We are growing as a global manufacturer that is resilient to change
	through a production structure that can respond swiftly to market change

What is your outlook for the future?	in each
	business!

A	We are reinforcing our bases in two core businesses to raise
	profits and realize a huge increase in revenues in 2024

Alongside restructuring to improve resilience to economic downturns, we are also optimizing our global production and supply structures. This includes raising adaptability through an agile structure that can respond swiftly to changes in the markets and society and that addresses local production for local consumption needs.

of the graphite electrode, fine carbon, and S&L businesses, which means we are able to respond to changes in demand by adjusting production processes between businesses and regions. We are also creating technological synergies among business locations, such as by sharing anode material production

Following a path of growth and recovery from 2022, we forecast record high sales in 2024.

As the semiconductor market grows, driven by the spread of 5G and IoT and a shift to EV in the auto industry, we are expanding stable revenue bases in

market and is forecast to record an operating profit before the amortization of goodwill of about 13 billion yen in 2022. We will also be able to factor in revenues from the graphite electrode and carbon black businesses, which are recovering rapidlyfrom the

For example, one of our strengths is that we have 10 locations that are equipped to carry out high temperature heat treatment in Japan, the U.S., and Europe. This is a shared process that is used by each

expertise with our locations in France to respond to the sudden increase in demand for EV battery production in Europe. We will accelerate growth by leveraging our global network in this manner.

the fine carbon and industrial furnace businesses.We can also expect long-termgrowth in the S&L business, which is performing well in the aluminum

COVID-19 pandemic. If we can reflect global cost price increases in sales prices, we will be in a position to achieve a leap forward in terms of business results.

A worldwide network of carbonization and graphitization heat treatment locations

Outlook for Each Business

Business	Environmental recognition	Strategy
Graphite Electrode	Steel industry	Increase the ratio of supersized
Global growth in production using electric furnaces	electrodes, one of our strengths
	Auto industry	Withdraw from the Chinese market
Carbon Black	and concentrate business resources
Stable market growth in the U.S. and Asia
	in the U.S. and Asia

We are able to utilize ourunique heat treatment technology, whichcan reachtemperatures of 3,000˚C,at each site.Byleveraging this strength and

expandinginthethree regionsof

Japan, theU.S.,and Europe, wecanfirmly respond to global demand.

Japan (three locations)
Graphiteelectrodes (2)	26,000 tons
Fine carbon materials	8,000 tons
LIB anode materials	10,000 tons
(electrode facilities)
Total	44,000 tons

Fine Carbon	Semiconductors	Increase production and grow
Growth in demand due to 5G, IoT, and shift to EV	our market share
Smelting and Lining	Aluminum	Improve the profitability of
Growth in demand forecast	our locations in France
Industrial Furnaces	Energy sector	Expand production capabilities
Stable growth of demand accompanying
	expansion of the semiconductor market

07

U.S. (two locations)
Graphite electrodes (2)	Europe(five locations)
40,000 tons	Graphiteelectrodes Germany	30,000 tons
	Smelting and lining	Poland (2)	125,000 tons
		France (2)
	Total		155,000 tons

08