Resonac Holdings Corporation (4004) Earnings Call Transcript & Summary

Ladies and gentlemen, this is Kohei Morikawa, President, and CEO of Showa Denko. Thank you very much for joining us today at the financial results briefing. We are very happy to see many of you here with us today. Yesterday, we announced very tough fiscal 2020 forecast. I will mainly talk about the reasons behind those tough numbers and measures for recovery for fiscal 2021 and onwards, and progress of the important policies of medium-term business plan. As for the details of the 2019 financial results, our CFO, Motohiro Takeuchi, will present later. As a background of tough 2020 forecast, there are 2 factors. First, is inventory adjustments of graphite electrodes business in Europe, which linger more than our expectations. Our decision to reduce production and its capacity led to lower volume. I will discuss the graphite electrodes business later. Second, is the severe impact of new coronavirus started in China on the global economy, which had been recovering. We expect this virus to have very serious impact on global economy. Before the spread of the virus, 2020 Chinese GDP growth forecast was about 6% by IMF. But now depending on the impact, the growth could be revised down to about 5%. The Hubei province is a core of automobile production in China and it's becoming new industrial center for semiconductor and display. We have no choice but to include the impact of the virus on our business. This slide shows the business environment of SDK's major markets electronic materials, automobile, FA and industrial equipments and graphite electrodes. Inventory adjustments of high-purity gases for electronics ended and signs of recoveries were seen from Q4 last year. However, the spread of this new virus is expected to have a negative impact on Chinese semiconductor and display market, which could lead to a delay in for recovery, especially the major impact on automobile market is expected, which could push back the recovery until the year-end. Recovery of FA and industrial equipments is also expected to be delayed. In the graphite electrodes market, which influences our business results, sales continue to be sluggish as electric steel manufacturers use their stocks due to the reduced steel production since second half of last year, especially the deceleration of the European economy had a severe impact on steel production. Sluggish sales due to customers' inventory adjustments of electrodes changed more than our expectation at the end of last year and will take time to recover. In order to quickly resolve inventory adjustments, we reduced production and optimize our production capacity in Europe, including the utilization level adjustments, but these are onetime factors of 2020. 3 markets of electronic materials, FA and industrial equipments and automobile are clearly on the growth track in mid to long-term because of the progress of 5G and CASE. As Chinese market recovers in 2021, major demand recovery is expected, we would take measures to prepare for the future. As for graphite electrodes, after customers inventory optimization, shipment volume will increase in resolution of feedstock cost adjustment will lead to much higher profit in 2021. This slide shows the 2019 financial results and forecasts for 2020. With slower electronic materials, FA in industrial equipments in automobile markets and deceleration of the graphite electrodes from second half of 2019, operating income decreased by 33% year-on-year. JPY 120.8 billion operating income was the second highest following the record high of 2018. 2019 dividend will be JPY 130 per share, JPY 10 higher than last year and the same as what we had announced. As for 2020, although it is very regrettable, we have no choice, but to expect much lower operating income of JPY 50 billion. At the end of last year, we had much higher forecast. But with a delayed recovery of graphite electrodes business and negative impact of the virus, we lowered the forecast to this tough level. However, as I said, these are onetime factors, and recovery is expected in 2021. We are keeping the 2020 dividend at JPY 130 per share, same as this year. Instead of being perplexed with onetime factors, we will aggressively implement major structural reform. I would explain the details later. This slide shows the factor analysis comparing 2019 and 2020. In graphite electrodes business, volume was down and price decline and feedstock cost adjustments were higher. Shipment volume factor includes recovery of hard disk and high-purity gases businesses in the second half. As our earning power started to improve in 2017, we increased a dividend payment, although we expect a profit decline this year. This is due to the onetime factors. In 2021, end of inventory adjustments in graphite electrodes business and improved feedstock cost adjustment will bring much higher operating income. With the progress of leading-edge technologies such as 5G and CASE and a recovery of global economy, our major markets will return to the full-fledged growth track. We are confident that our operating income will recover to exceed JPY 100 billion level in 2021. We keep the higher dividend level same as last year in 2020. Major businesses strategy for 2020 and outlook for 2021 are shown on this slide. First, graphite electrodes business. Due to the lower steel production, mainly in decelerating European economy, inventory adjustments are still lingering. We have decided to drastically reduce production further and optimize capacity of European plants. Compared to the assumption at the end of last year, there are 3-month delay in inventory adjustments completion. Recovery will start in Q4. Full-fledged recovery is expected in 2021. There are no changes to the expansion trend of electric steel production. Next is hard disk business. Last year, demand for mobile declined significantly and overall results plateaued. However, global data generation growth will exceed 40% per year, and investments in data centers will increase in a full-fledged manner this year. We will continue to develop latest high capacity media for MAMR and HAMR and proceed with high-quality and stable full mass production. Next is high-purity gases for electronics. Recovery trend of semiconductor production, mainly memory started in Q4 last year. Forecast for first half this year includes the delay of recovery of Chinese semiconductor market due to the virus, but after it subsides recovery will catch up and full-fledged demand for 5G is expected from the second half. In order to handle the expanding demand of etching gas, especially higher demand for Chinese semiconductor and display manufacturers, we plan to invest in the construction of second plant in Shanghai and others as planned and expand our production supply and delivery capacities. Next is SiC epitaxial wafer for power devices. As customers increased their inventories in 2018, volume growth slowed last year. During 5 years from 2016, the average market growth has been above 50%, especially the demand for railcars has been strong. From now on with the higher consumption for CASE, demand of high value-added products such as MOSFET will increase. With that, lower surface defect density of epitaxial wafer will be required. Therefore, we developed high-quality epitaxial wafer, HGE second-generation last year. We continue to respond to growing market by providing high-quality SiC epitaxial wafer in a stable manner. Next is aluminum cans business. Business reform in Japan includes streamlining of production capacity. Introduction of formulae linked to aluminum metal prices and others. We would establish efficient production system to produce multiple models in smaller lots. As for overseas, third factory in Vietnam will be operating fully in 2021, pushing up the profit significantly. As for aluminum road products, FA and industrial equipments market will be impacted by the new virus. We will prepare for the demand recovery in 2021 with high-end products for high-voltage expansion and integrated production in China. Aluminum specialty components are under the influence of auto production adjustments now. But as our product is selected for heat radiators for power control unit of EV and HP, we focus on lighter weight components such as cooling unit suspensions and others. Thus, we will respond to the market recovery without delay. Petrochemicals business is in tough environment due to the deceleration of Chinese economy. However, we expect relatively stable profitability, with the effect of highly efficient production system we have established. Last year, production facility for new derivative, 1, 3-butylene glycol was built. We continue taking measures to stabilize profit. Next is investment and structural reform. Without being perplexed by onetime factors, we will continue carefully selected investments in growing markets and try to accelerate the business growth. Prior to the integration with Hitachi Chemical, we will implement board structure reform to enhance business competitiveness. As a first initiative, we announced the graphite electrodes production capacity reduction in Europe the other day. We will also effectively withdraw from carbon anode material business and concentrate the domestic production of functional polymer business to build a lean structure. Although not listed on the slide, we plan to sell a large business in unprecedented scale. Under the guideline of 2 companies to become a global leading functional chemical manufacturer, we will also take a bold step. Now let me explain the midterm business plan, The TOP '21. With this midterm plan, we draw a road map of growth to realize vision of KOSEIHA Company in 2025. This year, with the integration with Hitachi Chemical, the largest initiative to realize this vision, we will promote the enhancement of competitiveness and the structural reform. This slide shows the overview of the midterm plan. I will explain the important policies, customer experience and progress in R&D. This slide shows important policies. In this midterm plan, we will make aggressive capital investment, while applying strict hurdle rate and promote that progress in each business towards KOSEIHA business. I'd like to show you the specific example of customer experience, CX, the source of competitiveness of each business. In graphite electrodes business, only Tier 1 makers, which have accumulated know-how can customize products to meet the needs of customers' furnace and way to use. Our customers' products are highly appreciated by customers and have become the first choice by the value, not by price. In high-purity gases for electronics, we have the dominant competitiveness by the extensive gases products lineup and distribution channel, which enable us to deliver high-quality product to the placing needs in a timely manner. In aluminum specialty components, with time-honored technology of advanced simulation of heat radiation and material analytic technology, which adopts the latest variation equipment, we can offer a solution, which can be embedded in the customers' development design. We will offer customer experience, which goes beyond the customer's expectation in each business and develop into the group of KOSEIHA businesses. This shows how we will enhance marketing function which will lead to the improved CX. This slide shows 5 growth drivers in 7 business domains set forth in the midterm business plan. In the previous year, first, we worked on transportation represented by CASE and electronics, including 5G and IoT. In the area of transportation, we launched a project of new composite materials for automotive. Let me explain how we will provide solutions for challenges of automotive sector, utilizing our original materials and technologies to the maximum. First, we worked on structure. Given the extensive product and business domains, we set up the cross-functional marketing team in the corporate strategy department. And they implement a market-oriented marketing strategy and the company-wide marketing platform was established. In automotive composite materials project, one of the automotive industry social issues, reduction of CO2 emission was highlighted. And for the solutions through electrification and weight reduction, we materialize the value through our contribution. This is our approach for electrification. Many issues remain unsold before the spread of complete EVs, including short cruising range and long charging time. In many cases, solution will face trade-offs, but our sheet management solution can provide a key to solve those issues concurrently and meet the requirement of consumers. Leveraging the wide product lineups and technology and expertise of heat radiation design that we have built up, we selected battery module and power module as their market size will be in line with our expectation. This is a specific example of battery module. Heat radiation in battery is necessary to prevent the deterioration of battery and to minimize the impact on charging functionality, but trade-off between effective heat radiation and downsizing batteries needs to be addressed. In order to overcome this, the combination of materials, including heat-conductive aluminum materials and heat radiating ceramics insulator and heat management design technology is required. For the heat management design, heat radiation stimulation system, which was developed by our basic research of computational science, reinforce our solution capability. Similarly, in power module also, trade-off exists between high operational temperature and high reliability. But our company can provide solutions through the combination of materials, including silicon carbide epitaxial wafers with low defect density, heat radiance ceramics, and high heat-conductive aluminum. Here also, heat radiation submission served as a key for module performance. This shows approach for weight reduction. Lightweight materials or plastic and aluminum have been used, but on the extension of the convention technology, it is becoming increasingly difficult to achieve better productivity, cost, and property concurrently. Multi materials is highly expected as a solution. But in terms of technology to bond different materials as a key technology, many problems exist, including those of bonding methodology and the internal stress due to different linear expansion coefficient. But taking advantage of our competitive edge of having both of aluminum surface-treatment technology and polymer technology, we started to develop technology to bond different materials. We announced the aluminum, plastic direct bonding technology in August in the previous year. And that realized a solid bonding between amorphous engineering plastic and some setting resins, which was regarded as commercially difficult before. Leveraging this unique technology, we'll accelerate the offering of the new potentials of multi-materialization. We applied success factors in automotive composite materials to 5G mobile communication. As for 5G, high-speed, large-capacity service will be launched from this year. But regarding the millimeter-wave or the EHF, extremely high frequency, still has some issues, including transmission loss and radio interference. So full-fledged 5G will start from 2022. Our company will promote the development of solution concept in 5G as well, and we'll announce the results in December. In R&D, we identified 10 focus technical fees corresponding to priority domains. Let me explain the research on heat management and the sensors IoT, which are essential for the progress of digitalization. We position computational science technology as basic research. And through AI application, we are promoting research to improve productivity and the quality of our own production or offer solution to optimize materials for customers. We use AI to analyze big data obtained through sensing technology and IoT from on-site and improved productivity and product quality. In ethylene plant, AI was introduced to optimize the timing of decoking to improve productivity and to visualize the know-how of skewed operator, and they are already in verification phase. In Petrochemicals segment, AI is used to enhance one of the highest cost competitiveness in Japan further. In aluminum can plant, where production lines are long and high-speed production has continued, AI image analysis shortened the check time upon switching the product SKU from previous 30 minutes to 1 minute. Product switch takes place more than 1,300 times in a year in Japan, and AI will improve the productivity by 3%. This is a part of building manufacturing structure to respond to the needs of small lot, large product variety in Japan. In production line of casted aluminum rod by introducing sensing technology to cutting process, poor cutting will be predicted, and by suspending line, defect ratio will be reduced to 0. As for image analysis to examine spherical aluminum, AI judgment was equivalent to that of skilled inspector. Feedback of the analysis result to the production process will enable the optimization of operational condition and the facility maintenance, as well as ensuring stable quality. These AI and IoT in production technology will be deployed by the end of the year, and they will make profit contribution in 2021. This is an evaluation package for heat radiation simulation for power module, which can be also used for marketing. This tool is used to propose the optimized combination of various materials that we keep for power module. Computation science and analytic technology add a capability to translate the requirement of customers into the language of chemistry by simulation before customers prototyping, the effect of new heat radiation materials will be confirmed and that will accelerate the development of both of the customers and our company. So far, I have been explaining our strategy to aim KOSEIHA business on our own. But this year, we plan to integrate with Hitachi Chemical. We are in the same business field and are close to each other and working together, we have seamless value chain covering all the way from downstream to upstream with Hitachi Chemical, we will aim to be a global leading functional chemical manufacturer. We use our marketing function and computational science as integration pillar to connect businesses, products and technologies and provide solutions that will be beyond customer's expectation. I hope you keep on counting on us for the future of Showa Denko. Showa Denko group revised CSR policy in the previous year and established 3 core issues integrating materialities, including contribution to SDGs through business activities. Based on the CSR Policy and code of conduct by united effort of the whole group and contribution to SDGs through business activities will create economic and social values and contribute to the sustainable development of global community. Thank you very much for your attention.

This is Motohiro Takeuchi, CFO. Thank you very much for your interest in the performance of our company. I'd like to explain the overview of 2019 financial results. Number of consolidated subsidiaries is 61, 10 were newly consolidated, 7 were excluded. In Chemicals, in relation to coating materials business, 8 companies of ILAG and GMM groups were added in July. In Electronics, SHOKO Electronics LED production company was added. In others, for the acquisition of Hitachi Chemical, special purpose company, HC Holdings was added and consolidated in December. In petrochemicals, SHOWA Esterindo Indonesia was liquidated, and Nippon Polytech in Chemicals was sold. In Electronics, Ganzhou Zhaori Rare Earth New Materials were sold. In Inorganics, SHOWA DENKO CARBON, Shanghai, which had been consolidated through the integration of former SGL GE was liquidated as its importance diminished. SHOWA DENKO Carbon, Canada, was also excluded. In Aluminum, SHOTIC Singapore was liquidated after the completion of transfer to SHOTIC Malaysia. Showa Aluminum Corporation of America was excluded as it merged to SHOWA DENKO America, total of 7 companies were excluded. Number of companies and the equity method is 11, unchanged from the end of last fiscal year. January to December average exchange rate was JPY 109.1 to the dollar. JPY appreciated JPY 1.4 year-on-year. End-of-term exchange rate used to evaluate assets and liabilities was $109.60, JPY appreciated JPY 1.4. As for euro, January to December average was JPY 122.1 to the euro. JPY appreciated JPY 8.4 year-on-year. With lower oil prices from the beginning of the year, January to December average domestic naphtha price was JPY 42,000 per kiloliter, down JPY 9,100 or 17.8% year-on-year from JPY 51,100. As the slowdown of Chinese economy lowers the demand, aluminum LME price decreased $304 or 14.4% year-on-year from $2,116 per ton to $1,811 per ton. This slide shows a summary of 2019 consolidated results. Net sales were JPY 906.5 billion, down JPY 85.7 billion or 8.6% year-on-year. The details are shown on Page 5. Except for the Chemicals segment, which showed a small increase, sales decreased in 5 other segments. In Inorganics, sales were drastically lower with lower sales volume due to reduced graphite electrodes production. Operating income was JPY 120.8 billion, down JPY 59.2 billion or 32.9% year-on-year. Details are shown on Page 6. Except for others, which showed small increase, operating income decreased in 5 segments, decline was biggest in Inorganics. Ordinary income was JPY 119.3 billion, down JPY 59.5 billion or 33.3% year-on-year. Under non-operating income and expenses, interest and dividends improved JPY 0.9 billion with the repayment of subordinated loan last year. Foreign exchange gains and losses decreased JPY 0.4 billion, equity earnings declined JPY 0.5 billion with slow synthetic resin market conditions with higher other expenses, overall expenses increased JPY 0.3 billion to reach the net figure of JPY 1.5 billion. Extraordinary profit and loss are shown on the next slide. Net extraordinary profit and loss improved JPY 11.9 billion to minus JPY 21.4 billion. Income taxes decreased JPY 6.2 billion. With lower profit of Showa Denko Sichuan Carbon and others. Net income attributable to noncontrolling interest improved JPY 3 billion year-on-year. Net income was JPY 73.1 billion, down JPY 38.4 billion or 34.5% year-on-year. Page 4, as we promote sales of shares, JPY 1.7 billion gain on sales of investment securities was booked. With JPY 0.7 billion gain on sales of noncurrent assets, total extraordinary profit was JPY 2.9 billion, up JPY 0.8 billion year-on-year. JPY 5.2 billion loss on sales and retirement of noncurrent assets for Yokohama and Kawasaki plants was booked. With JPY 15.7 billion impairment loss, total extraordinary loss improved JPY 11.1 billion year-on-year to JPY 24.3 billion. Impairment loss breakdown is shown at the bottom. As we said in the January 20 news release this year, in functional chemicals, unsaturated polyester resin production at Isesaki plant was integrated to Tatsuno plant. For this and for Oyama plant of aluminum specialty components and Oyama and Hikone plants for aluminum can business, where production capacity was streamlined, total of JPY 15.7 billion impairment loss was booked. As a result, net extraordinary number improved JPY 11.9 billion year-on-year to minus JPY 21.4 billion. Page 5 shows consolidated sales by segment, and Page 6 is consolidated operating income by segment. Petrochemicals sales were JPY 250.7 billion, down JPY 18.2 billion year-on-year. Petrochemicals operating income was JPY 17.2 billion, down JPY 3.1 billion year-on-year. Compared to the 2018 when once every 4-year ethylene plant shutdown maintenance was done, volume increased. But slowdown of Chinese economy led to the weaker supply-demand balance for petrochemicals product. With lower market prices, sales decreased. Ethylene, butylene and other materials are spread tightened. Olefins profit decreased as a result. Organic chemical sales decreased on lower market prices of vinyl acetate and ethyl acetate. Operating income was about the same as of the last year. SunAllomer sales decreased slightly with lower market prices and lower volume, but its profit increased because of the time lag between the material prices and market prices decline. With new consolidation of acquired coating materials company, chemical sales increased by JPY 0.9 billion year-on-year to JPY 157.5 billion. Mainly with lower volume of electronic chemicals business, chemicals profit decreased by JPY 3.7 billion to JPY 13.7 billion. Ammonia and chloroprene rubber sales were flat year-on-year. Acrylonitrile sales were down with lower market prices. Overall basic chemical sales slightly decreased, while profit was about the same as the year before. Due to the adjustment of semiconductor and display industry, sales and profit of electronic chemicals business decreased on lower volume. Sale of industrial gases and functional chemicals were flat year-on-year. Industrial gases profit was down with higher shipping costs due to the tight supply in Western Japan. Functional chemicals profit was down with lower shipment volume for electronic materials. Electronics sales were JPY 96.4 billion, down JPY 15.5 billion year-on-year due mainly to lower shipment volume of hard disks. Electronics profit was JPY 4.9 billion, down JPY 8.7 billion year-on-year. In hard disk business, the volume of hard disks for PCs decreased. Production adjustments of hard disk drive for data centers in the first half, led to the lower shipment volume, mainly in the first half. In the second half, we saw recovery in media shipment for data centers, but for full year, media shipment decreased 8% year-on-year. Sales and profit were down significantly. Lower volume due to IT industry adjustments led to decreased sales and profit of compound semiconductor business, where earth magnetic alloy sales saw major decline because of the structural reform, but its profit was flat year-on-year. Due to the sluggish Chinese EV market, sales and profit of lithium-ion battery materials decreased on lower volume. SiC epitaxial wafer shipment increased for railcars, but sales decreased with lower export. Profit decreased with higher development cost borne by this business division. With lower volume due to the production reduction of graphite electrodes, Inorganics sales decreased by JPY 36 billion year-on-year to JPY 230.1 billion. Inorganics profit was JPY 89.3 billion, down JPY 43.2 billion year-on-year. In ceramics, general purpose alumina volume decreased due to the structural reform implemented last year. Abrasives volume decreased, reflecting adjustments for automotive components. Production adjustments of electronic materials and component industry led to the decline in the fine ceramics for electronic materials. Ceramic sales and profit decreased. As for graphite electrodes in response to the customers' inventory adjustments following the slowdown of steel production in European market, we reduced the production drastically in the middle of the year. Sales and profit decreased significantly on lower volume. Our average selling price is 5x that of the reference year, 2017, as planned at the beginning of the year. From the July to December, the second half, a high-level price of more than 4x was maintained. In European markets, steel production was slow and supply-demand balance weakened. Graphite electrode market prices declined. Our subsidiary in Sichuan was influenced greatly from the low market prices due to the increased production of low to mid-quality graphite electrodes in Chinese domestic market. Because of sluggish auto production and production adjustment of industrial machineries, aluminum sales decreased by JPY 10.7 billion year-on-year to JPY 97.5 billion. Aluminum profit decreased JPY 3.2 billion year-on-year to JPY 1.7 billion. With lower shipment volume of high-purity foils for capacitors due to the production adjustments of industrial equipments and capacitors for automobiles, sales and profit of road products decreased. Major reduction of automobiles, mainly in European market led to lower shipment of automotive components. Volume for industrial equipments declined as well. Aluminum specialty component sales and profit decreased. Aluminum can sales were flat year-on-year. Aluminum profit increased with the effect of structural reform in Japan. With lower sales of SHOKO Co. Ltd., sales of others decreased by JPY 11.2 billion year-on-year to JPY 126.2 billion. With higher profit of SHOKO Co. Ltd., profit of others grew JPY 0.1 billion year-on-year to JPY 1.8 billion. Page 7 shows sales and operating income by segment. Blue bars represent 2019 figures. Please turn to Page 8. It shows the operating income breakdown by factor comparing 2018 and '19. Lower graphite electrodes production led to lower volume in Inorganics, pushing down the profit by JPY 46.4 billion. In aluminum, lower volume of components for European automobiles pushed down the profit by JPY 4.3 billion. In Electronics, lower volume of hard disk media pushed down the profit by JPY 4.2 billion. Overall, volume factor was minus JPY 52.5 billion. In Inorganics, graphite electrodes market prices were up and raw material needle coke market prices increased. Net price changes pushed up the profit by JPY 10 billion. In Petrochemicals, weaker supply and demand balance in Asia due to the deterioration of Chinese economy led to the tighter spread, pushing down the profit by JPY 6.3 billion. Overall price change factor was JPY 3.9 billion. Productivity improvement measure were implemented in each segments, such as Aluminum and Chemicals, cost reduction factor pushed up the profit by JPY 6.1 billion. Others were minus JPY 16.7 billion. In Petrochemicals, absence of ethylene plant shutdown maintenance of 2018 improved profit by JPY 6 billion. Lower naphtha price led to the feedstock cost adjustment, JPY 3.5 billion. Net impact was JPY 2.1 billion positive. In graphite electrodes business of Inorganics subsidiary in Sichuan, China, apply the lower of cost to our market method due to the decrease in market prices with feedstock cost adjustment of graphite electrodes, cost increase because of the reduced production and higher headquarters cost and others, Inorganics accounted for minus JPY 7.9 billion of others factor. In Chemicals, changes of allocation method led to higher headquarters cost, pushing up the expenses in electronics research cost of SiC and headquarters cost increased. Please turn to Page 9. As for total assets as of the end of December, inventories increased year-on-year, mainly in Inorganics due to price increase of needle coke's raw materials for graphite electrodes. Notes and accounts receivable decreased by JPY 33.4 billion, mainly by naphtha price decline in Petrochemicals and total assets increased by JPY 1.4 billion to JPY 1.0764 trillion. As for total liabilities, interest-bearing debt increased by JPY 10.6 billion, but notes and accounts payable decreased JPY 21.9 billion due to market price decline of naphtha petrochemicals, raw materials and reduced procurement of needle coke's along with reduced production and the total liability decreased JPY 52.7 billion to JPY 556.9 billion. Total assets increased JPY 54.1 billion year-on-year to JPY 519.4 billion, mainly due to the net income posted. Please turn to Page 10. Interest-bearing debt increased by JPY 10.6 billion to JPY 298.5 billion. Gross debt-to-equity ratio was almost flat at 0.60x and the stockholders' equity ratio improved 4.9 points to 46.4%. Please turn to Page 11. This chart shows consolidated interest-bearing debt and D/E ratio. Both of interest-bearing debt and D/E ratio remained almost unchanged from FY 2018. Please turn to Page 12. Operating cash flow went down by JPY 71.2 billion to JPY 78.6 billion due to decrease in net income and increase in payment of corporate income tax. Investing cash flow was JPY 48.2 billion, with JPY 1.2 billion of less cash outflows due to reduced acquisition of tangible fixed assets and increased sales of investment securities. As a result, free cash flow was down JPY 70 billion year-on-year to JPY 30.4 billion. Financing cash flow was cash outflow of JPY 18.5 billion with JPY 42.5 billion of less cash outflows as financing for dividend payment increased and repayment of interest-bearing debt was especially higher in the previous year. Please turn to Page 13. This chart shows total number of employees. As of the end of December, 239 members were added mainly through consolidation of subsidiary, including business in overseas Chemicals segment. Total overseas employees increase was 229. In Japan, mainly in Electronics segment, due to consolidation of SHOKO Electronics, LED subsidiary, 108 members were added, and in total employees increased 337 year-on-year to 10,813. Please turn to Page 14. This slide shows CapEx and depreciation by segment. As for CapEx, Inorganics CapEx increased JPY 3.6 billion due to investment to improve product quality in European sites of SHOWA DENKO CARBON Holding. Chemicals CapEx increased JPY 3.4 billion, partly due to acquired ILAG related investment. In the Aluminum segment, building the third production site of Heineken, aluminum can subsidiary in Vietnam investment increased by JPY 2.9 billion, and in total, CapEx increased JPY 8.5 billion to JPY 50.2 billion. Depreciation was down JPY 1.8 billion year-on-year to JPY 37.7 billion as depreciation of a cracker which was newly built in 2010 was completed and the structural reform in aluminum chem business in Japan in the Aluminum segment delivered results. Please turn to Page 15. From here, let me explain the full year forecast for 2020, which was announced yesterday. First, selected data for 2020 forecast is shown here. Exchange rates were JPY 105 to dollar and JPY 115 to euro, they are slightly stronger than the latest FX. In this year, sales of graphite electrodes is expected to be slightly lower, so with JPY 1 appreciation against the U.S. dollar, previously impact was JPY 1 billion, but it was revised down to JPY 0.6 billion this year. And with JPY 1 appreciation against the euro, previously impact was JPY 0.3 billion, but it was revised down to JPY 0.1 billion this year. Naphtha price is assumed as JPY 39,200 per kiloliter, and aluminum RME price is assumed as $1,775 per ton. Interest-bearing debt will be up JPY 1.5 billion compared to the end of December JPY 2019 to JPY 300 billion due to investment increase. Number of employees will be up 271 to 11,084 as of the end of 2020, as the launch of the third plant of our aluminum can in Vietnam is scheduled. Please turn to Page 16. This slide shows 2020 forecast. As CEO, Morikawa explained, we project that this year will be the very tough one. In graphite electrodes business, EBITDA adjustment impact in Europe is bigger than expected, and we project the volume decline with a drastic production cutback and the capacity reduction in Europe. And we are concerned for the serious ramification of China originated coronavirus outbreak on global economy, triggered by drastic slowdown of Chinese economy. Considering those impacts, we made tough first half forecast of all segments, including Petrochemicals, Electronics, Chemicals, Aluminum, among others. Net sales are JPY 810 billion, down JPY 96.5 billion or 10.6% year-on-year. Operating income is JPY 50 billion, down JPY 70.8 billion or 58.6% year-on-year. I will elaborate on net sales and operating income on Page 17 and 18. Order income is JPY 47 billion, down JPY 72.3 billion. As for extraordinary profit and loss, we will implement a structural reform to enhance competitiveness of each business of Showa Denko prior to integration with Hitachi Chemical. Including graphite electrode production capacity optimization in Europe, we post-net extraordinary loss of JPY 22 billion. Net income attributable to owners of the parent will be JPY 15 billion, down JPY 58.1 billion. As shown here, we have a very tough forecast for 2020. But within 2020, graphite electrode inventory adjustment will peak out, and the China originated coronavirus turmoil will settle down. Therefore, business will hit the bottom in the first half of this year, and in 2021, we project a substantial profit growth. Therefore, annual dividend per share will be unchanged at JPY 130 with interim dividend of JPY 60 and year-end dividend of JPY 70. Please turn to Page 17. Let me explain forecast of net sales on Page 17 and operating income on Page 18 with the changes by segment. As for Petrochemical segment, sales will be JPY 233 billion, down JPY 17.7 billion year-on-year, and this operating income will be JPY 12 billion, down JPY 5.2 billion year-on-year. Market prices will be weak due to the economic slowdown in Asia and the spread will be tightened. In particular, in the first half, business will be sluggish due to Chinese New Year impacted by coronavirus outbreak and the shutdown maintenance of our derivative plant. As for Chemicals segment, sales will be JPY 170 billion, up JPY 12.5 billion and operating income will be JPY 15 billion, up JPY 1.3 billion year-on-year. In Electronic Chemicals, despite coronavirus outbreak impact on Chinese market, shipment volumes will be up due to recovery in the semiconductor market and the industrial gases business will continue to be firm. As for Electronics segment, sales will be JPY 112 billion, up JPY 15.6 billion year-on-year; and its operating income will be JPY 12 billion, up JPY 7.1 billion year-on-year. Regarding hard disk business, in the first half, shipment in hard disk drive market will be slow, heavily affected by the slowdown of Chinese economy. But in the second half, volume of hard disk media for data centers will increase, which resulted in increased both in sales and profit. Concerning SiC epitaxial wafer business, in addition to the shipment growth for railways, in the second half, export will be increasing and volume will be up. As for Inorganics segment, sales will be JPY 128 billion down JPY 102.1 billion and operating income will be JPY 14 billion down JPY 75.3 billion. Graphite electrode business is affected by slow steel production, mainly in Europe, but we will hit the profit bottom in the first half and tend to go back to the recovery track. We will promote the production cutback in the first half and try to optimize our inventory level on the side of customers. Due to this, sales volume decline and feedstock adjustment impact, the first half will be a very challenging period. In the second half, shipment volume will turn to increase and feedstock adjustment will be improving and the profit will be up compared to the first half. Both of graphite electrode and needle cokes market price will drop, and it will be about 3x and 4x of that of 2017, respectively. Putting feedstock adjustment impact aside, spread has been sustained wide. As for ceramics business, both of its sales and profit were increased, supported by the recovery of abrasives. Sales of Aluminum segment will be JPY 96 billion, down JPY 1.5 billion year-on-year; and operating income will be JPY 4 billion, up JPY 2.3 billion year-on-year. As for road products, moderate shipment recovery of high-purity foils for capacitors is expected when the production adjustment of industrial equipment is over. Automotive capacitors will take some more time. As for aluminum specialty components, our recovery for automotive applications is not likely due to impact by coronavirus outbreak, but incremental volume growth for industrial equipment is expected. As for aluminum cans, sales will be down due to production capacity optimization in Japan. But due to the launch of the third production site in Vietnam sales will be up. However, due to volume decline in Japan, both of sales and profit will go down. Please turn to Page 19. This slide shows our results of 2019 and the '20 forecast of sales and operating income by segment by chart. Page 20 shows cash flows forecast. Operating cash flow will be down JPY 23.6 billion due to net income decline year-on-year. In investing cash flow, cash outflow of JPY 1.8 billion will be increased. As a result, free cash flow will be down JPY 25.4 billion to JPY 5 billion. In financing cash flow, cash outflow of JPY 7.5 billion will be increasing to the outflow of JPY 26 billion. Please turn to Page 21. CapEx will be up JPY 8.8 billion year-on-year to JPY 59.1 billion. In Chemicals segment, capacity expansion of Electronic Chemicals and delivering network expansion are planned. And in Electronics segment, CapEx will be up due to investment to improve hard disks. Whereas Inorganics segment, investment to improve graphite electrode quality in Europe will peak out. And in Aluminum segment, investment to set up the new third production facility for aluminum can in Vietnam will be peaking out. Depreciation will be up JPY 2.7 billion year-on-year to JPY 40.3 billion. It will be down in aluminum segment by JPY 0.2 billion but in other 5 segments, it will be slightly increasing. Page 22 shows quarterly operating income in 2018 and '19 for the whole company, and from Page 23 to 25 quarterly operating income by segment are shown. Page 26 and onwards shows topics by segment for your reference. Finally, as CEO, Morikawa explained, due to China originated coronavirus outbreak, Chinese economy will significantly slow down, and that would directly impact the automotive and the display industries, among others, and we are to prepare the worst scenario in 2020. Under such serious environment, prior to the integration with Hitachi Chemical, we'll broadly implement business structure reform ahead of schedule and make utmost effort to beat targets and dividend per share will be sustained at a high level. Graphite electrode business will steadily improve when we clear the feedstock adjustment, among others. And even under such environment, 4 segments, including Chemicals, Electronics and Aluminum, we achieved annualized profit growth year-on-year. We are confident to achieve the substantial profit growth next year after tiding over the one-off factors of this year. That concludes my presentation, thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]