december 11, 2007 showa denko k.k. · this presentation, containing performance forecast and...

VISIONWe at the Showa Denko Group will provide products and services that are useful and safe and exceed our

customers’ expectations, thereby enhancing the value of the Group, giving satisfaction to our shareholders, and contributing to the sound growth of international society as a responsible corporate citizen.

Unique Chemical Company with Individualized Products;Unique Chemical Company with Individualized Products;Aiming to Fulfill Corporate Social ResponsibilityAiming to Fulfill Corporate Social Responsibility

This presentation, containing performance forecast and business/product development programs, has been prepared based on information available at this moment. The Company cannot guarantee that these programs will be implemented or the performance forecast will be accurate. Please note that actual results may differ materially from the forecast or plans due to a variety of factors, including changes in the market conditions. Development of businesses and products may be delayed or not materialized due to a variety of factors, including market acceptance and the introduction of new products by competitors.

Passion ProjectLaying groundwork for long-term sustainable growth

December 11, 2007

Showa Denko K.K.

Passion ProjectLaying groundwork for long-term sustainable growth

December 11, 2007

Showa Denko K.K.

IndexIndexIndex

PARTPARTⅠⅠ Summary of Second Year AchievementsSummary of Second Year Achievements

Passion Project implementation and results in 2007 41 Exceeding financial goals 52 Continued increases in operating income 63 Continued reductions in interest-bearing debt 74 Progress in business portfolio strategy 85 Major steps taken in 2007 96 Main new products launched in 2007 107 Summary of achievements in 2007 11

PARTPARTⅡⅡ Growth StrategyGrowth Strategy

HD HD industry trends in 2007 13Leading the shift to high-capacity PMR media 14HDD market continues to grow 15SDK share increasing as PMR-shift leader (1) 16SDK share increasing as PMR-shift leader (2) 17SDK is the leader in PMR technology 18Accelerating development for higher capacity 19

Semiconductor-processing materialsBuilding unique business models 20

Creating “new growth driver” businessesCommercial production of ultrabright LED chips 21Ultrabright LED market starting up quickly (1) 22Ultrabright LED market starting up quickly (2) 23Ultrabright LED chip capacity expansion 24Carbon nanofiber VGCFTM 25

PARTPARTⅢⅢ Base Business StrategyBase Business Strategy

Graphite electrodesHigh profit and competitive position 27

Rare earth magnetic alloysIndividualized business model 28Advanced technologies 29

AluminumStructural reform continues 30

Closing RemarksClosing Remarks

Aiming to realize our corporate “image” in 2010 32Reducing greenhouse gas emissions 33

Sales and operating income by segment 34

2

PARTⅠ Summary of Second Year AchievementsPARTPARTⅠⅠ Summary of Second Year AchievementsSummary of Second Year Achievements

3

1. Going to exceed financial goals for the second year of Passion Project

2．Strengthening portfolio through capacity expansion and establishment of new sites

3．Accelerating growth strategy through development of new products/technologies


4

HD: Established PMR-media production setup; Profit increasing in and after 2Q

Substantially increasing ultrabright LED chip production capacity

Operating income: ¥74 billion; Interest-bearing debt at year-end: ¥410 billion


Up in all segmentsUp in all segments¥870 billion¥870 billion¥1,000 billion¥1,000 billionNet salesNet sales

1.7 times1.7 times1.4 times1.4 timesD/E ratioD/E ratio

¥435 billion¥435 billion¥410 billion¥410 billionInterest-bearing debtInterest-bearing debtSubstantially exceeding

goalsSubstantially exceeding

goals

Petrochemicals/Aluminum sales up due to higher feedstock costs, resulting in lower profit ratio

Petrochemicals/Aluminum sales up due to higher feedstock costs, resulting in lower profit ratio

8.4 %8.4 %7.4 %7.4 %Profit ratio (operating income basis)Profit ratio (operating income basis)

Up in Petrochemicals and Inorganics; Aluminum will not reach goal

Up in Petrochemicals and Inorganics; Aluminum will not reach goal¥73 billion¥73 billion¥74 billion¥74 billionOperating incomeOperating income

NoteNoteGoals for 2007Goals for 2007Expected results in 2007

Expected results in 2007

5

Going to exceed all goals, except for profit ratioGoing to exceed all goals, except for profit ratio

2007 forecast was revised on August 7th.

73.0

57.2

68.7

100.0

79.0

52.1

31.3

19.2

38.5

0

10

20

30

40

50

60

70

80

90

100

110

2001 2002 2003 2004 2005 2006 2007 2008 2010

74.074.0

6

Project PassionProject Passion

73.0

85.0

2007 Goal under Project ¥73 billionExpected results ¥74 billion2007 Goal under Project ¥73 billionExpected results ¥74 billion

Operating income exceeding the goalOperating income exceeding the goal

Down ¥6 billion due to changes

in depreciation

system

Down ¥6 billion due to changes

in depreciation

system

(billion yen)


448.8 400.0

435.0

433.2

527.4

622.4581.1

502.4

1.0

2.2

1.41.61.8

4.5

3.9

2.8

3.2

350

400

450

500

550

600

650

2001 2002 2003 2004 2005 2006 2007 2008 2010

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

interest-bearing debt D/Eratio

(billion yen)（times）


Interest-bearing debt D/E ratio

2007 Goal under Project ¥435 billion 1.6 timesExpected results ¥410 billion 1.4 times

7

Substantially exceeding the goal, reflecting Substantially exceeding the goal, reflecting improved financial strengthimproved financial strength

Project PassionProject Passion

410.0410.0

1.41.4


8

Rare earth magnetic alloysRare earth magnetic alloysHDHDUltrabright LEDsUltrabright LEDs

AlloysAlloysHighHigh--purity foils for capacitorspurity foils for capacitorsHighHigh--performance componentsperformance componentsHeat exchangersHeat exchangersAluminum cansAluminum cans

Aluminum Aluminum and otherand other

CeramicsCeramics

Graphite electrodesGraphite electrodesFine carbonsFine carbonsInorganicsInorganics

Compound Compound semiconductorssemiconductors

SemiconductorSemiconductor--processing processing materialsmaterials

CapacitorsCapacitorsElectronicsElectronics

Base chemicalsBase chemicalsFine chemicalsFine chemicals

AmmoniaAmmoniaLife scienceLife scienceChemicalsChemicals

Specialty polymersSpecialty polymersNew specialty polymersNew specialty polymers

Plastic Plastic productsproducts

OlefinsOlefinsOrganic chemicalsOrganic chemicalsPetroPetro--

chemicalschemicals

Cash cowCash cowGrowth driversGrowth driversNew growth driversNew growth drivers

Base businessesBase businessesGrowth businessesGrowth businesses

Development and commercializationDevelopment and commercializationof new productsof new products Business expansionBusiness expansion Structural reformStructural reform

Strengthening portfolio in line with Passion ProjectStrengthening portfolio in line with Passion Project

- Sold Shares in Heisei Polymer

- Sold the moisture removal sheet business

- Dissolved Showa Aluminum Alloy

- Withdrew from the commodity foils business

- Absorbed Showa Financing

Strengthened Strengthened ““growth drivergrowth driver”” and base businessesand base businessesCapital investments in 2007: Capital investments in 2007: ¥¥80.380.3 billionbillion

9

Focusing on largeFocusing on large--diameter products: One each plant in Japan and U.S.; diameter products: One each plant in Japan and U.S.; Combined capacity increased from 15,000 tons to 25,000 tons/yearCombined capacity increased from 15,000 tons to 25,000 tons/yearGraphite electrodesGraphite electrodes

Expanded capacity for Expanded capacity for LCDLCD--processing abrasivesprocessing abrasivesCeramicsCeramicsStrengthened presence in China (Turning into a consolidated subsStrengthened presence in China (Turning into a consolidated subsidiary idiary and expanding production capacity)and expanding production capacity)Heat exchangers for carsHeat exchangers for cars

Decided to install modern cracking furnaces at Oita Complex in 2Decided to install modern cracking furnaces at Oita Complex in 2010010OlefinsOlefins

Increased allyl alcohol productionIncreased allyl alcohol production from 50,000 tons to 56,000 tons/yearfrom 50,000 tons to 56,000 tons/yearOrganic chemicalsOrganic chemicals

Second plant in ChinaSecond plant in China completed completed →→ 8,000 tons/year capacity8,000 tons/year capacityRare earth magnetic alloysRare earth magnetic alloys

HDHD

Aluminum cylinders for laser printers: StartAluminum cylinders for laser printers: Start--up of a new plant in Oitaup of a new plant in OitaHighHigh--performance aluminum performance aluminum componentscomponents

HighHigh--purity ammonia capacity expansion in Taiwan; New specialty gas purity ammonia capacity expansion in Taiwan; New specialty gas storage facility in South Koreastorage facility in South Korea

SemiconductorSemiconductor--processing processing materialsmaterials

Commercial production of PMRCommercial production of PMR--mediamedia with worldwith world’’s highest capacitys highest capacity334GB/P (3.5334GB/P (3.5--inch mediainch media))・・160GB/P (2.5160GB/P (2.5--inch mediainch media))80GB/P (1.8980GB/P (1.89--inch mediainch media))

StartStart--up of a new plant in Singapore; Capacity expansion to 22 millionup of a new plant in Singapore; Capacity expansion to 22 milliondisks/month by the end of 2007disks/month by the end of 2007

Major steps and expansionsMajor steps and expansionsBusiness unitsBusiness units


VGCFVGCFTMTM: Production capacity reached 100 tons/year: Production capacity reached 100 tons/yearVGCFVGCFTMTM--SS: Started shipments: Started shipmentsFine carbonsFine carbons

Started shipments of Karenz Started shipments of Karenz MOIMOITMTMEGEG for photofor photo--curing of resinscuring of resinsFine chemicalsFine chemicals

Started shipments of Started shipments of TPNaTPNaTMTM waterwater--soluble stabilized vitamin E soluble stabilized vitamin E Life scienceLife science

Developed phosphorousDeveloped phosphorous--based flamebased flame--retardant and resins for lowretardant and resins for low--odor odor thermalthermal--insulation paintsinsulation paintsSpecialty polymersSpecialty polymers

Established Hybrid PPDEstablished Hybrid PPDTMTM process for nitrideprocess for nitride--based semiconductorsbased semiconductorsGalliumGallium--nitride blue LED chip capacity: 200 million units/monthnitride blue LED chip capacity: 200 million units/monthAlGaInP LED chip capacity: 200 million units/monthAlGaInP LED chip capacity: 200 million units/month

Ultrabright Ultrabright LEDLEDss

Developed new heatDeveloped new heat--resistant transparent sheets and films for displaysresistant transparent sheets and films for displaysOther new businessesOther new businesses

Major steps and expansionsMajor steps and expansionsBusiness unitsBusiness units

10

Creating Creating ““new growth drivernew growth driver”” businessesbusinesses


Results of successful business portfolio strategy

1．Further strengthening of “growth driver”businesses

2．Progress in the development of “new growth driver” businesses

3．Substantial improvement in financial strength

11


PARTPARTⅡⅡ Growth StrategyGrowth Strategy

12

11．．Quick commercialization of PMR media and growingQuick commercialization of PMR media and growingdemand for highdemand for high--capacity mediacapacity media

22. Continued growth of demand for HDDs, centering on. Continued growth of demand for HDDs, centering onconsumer electronics and notebook PC applicationsconsumer electronics and notebook PC applications

33．．Further progress in consolidation of the industryFurther progress in consolidation of the industry

PARTPARTⅡⅡ Growth Strategy: HD Media BusinessGrowth Strategy: HD Media Business

13

Establishment of optimum production setup with technological advantages:

Key to success in media business

Establishment of optimum production setup with Establishment of optimum production setup with technological advantages: technological advantages:

Key to success in media businessKey to success in media business

0

5

1 0

1 5

2 0

2 5

2 0 0 6

1 Q

2 0 0 6

2 Q

2 0 0 6

3 Q

2 0 0 6

4 Q

2 0 0 7

1 Q

2 0 0 7

2 Q

2 0 0 7

3 Q

2 0 0 7

4 Q

L o n g i t u d i n a l

P M R

Breakdown of shipments: Longitudinal vs. PMR(Million disks/month)


14

(Forecast)

PMR media account for 80% of SDKPMR media account for 80% of SDK’’s shipments in 4Q s shipments in 4Q ‘‘0707

80%80%

Completion of the shift

Completion of the shift

Shift to PMR began in full scale

Shift to PMR began in full scale

215 230 244 258 260 262 269

26 28 28 29 30 3177101

131164 200

274

6376

99

123151

179

211

30

238

0

100

200

300

400

500

600

700

800

900

2005 2006 2007 2008 2009 2010 2011

Brisk demand to continueBrisk demand to continue

HDD demand forecast

(Million units)

2005-08Growth rate: 15% per year

SDK leading the market, centering on growing consumer SDK leading the market, centering on growing consumer electronics and notebook PC applicationselectronics and notebook PC applications


15

(Data : TRENDFOCUS)

2008-11Growth rate: 11% per year CE

22%/yearCECE

22%22%/year/year

Notebook PC24%/year

Notebook Notebook PCPC24%24%/year/year

Server3%/yearServerServer

3%3%/year/year

Desktop PC

4%/year

Desktop Desktop PCPC

4%4%/year/year

(2005-11 Average growth rate)

Strengthening presence amid reorganization of the industryStrengthening presence amid reorganization of the industry


16

Total shipments【3Q 2006】

SDKSDK19.4%

KomagKomag1199..33%%

Fuji ElectricFuji Electric1100.7%.7%

HOYAHOYA77..99%%

FujitsuFujitsu3.3.33%%

SeagateSeagate2277..99%%

HGSTHGST111.5%1.5%

SDK 23.4%

Fuji ElectricFuji Electric88..00%%

HOYAHOYA44..44%%

FujitsuFujitsu3.3.44%%

HGSTHGST1155..99%%


KomagKomag1133.1%.1%

(Data : TRENDFOCUS)

【3Q 2007】Total shipments


17

SDKSDK30.6%


Fuji ElectricFuji Electric７７..44%%

HOYAHOYA44..１１%%

FujitsuFujitsu00..88%%


HGSTHGST1414..88%%


Fuji ElectricFuji Electric88..66%%

FujitsuFujitsu88..22%%

HGSTHGST22..77%%


SDKSDK40.8%

(Data : TRENDFOCUS)

Shipments for CE applications【3Q 2006】【3Q 2007】

Shipments for CE applications

Gained the dominant share in the growing CE marketGained the dominant share in the growing CE market

World leader in production of third-generation PMR media【World’s first and largest-capacity media】

1.89-inch： 80 GB/P （Commercial production started in April.）2.5-inch： 160 GB/P （Commercial production started in April.）3.5-inch： 334 GB/P (Commercial production started in June.)


Established the leadership position in development andEstablished the leadership position in development andcommercialization of PMR mediacommercialization of PMR media

18

Optimized setup to increase PMR media productionOptimized setup to increase PMR media productionExpanding total capacity to 22 million disks/monthExpanding total capacity to 22 million disks/month by the end ofby the end of 20072007

→→ Accelerating expansionAccelerating expansion to reach 24 million disks/month by the end of 2008to reach 24 million disks/month by the end of 2008

PMR-related cost increase has passed its peak→ Profit improving since 3Q 2007・”Shift to PMR” completed at all existing production lines ・Increased depreciation expenses due to the installation of new lines are compensated by the

rise in shipment volumes of HD media.・Established a ruthenium recycling system → Improving cost performance


The trend toward higher The trend toward higher capacity is accelerating. capacity is accelerating. (100%/year growth in 2007)(100%/year growth in 2007)

Further improving the PMR Further improving the PMR technology to enhance technology to enhance capacity capacity

Also taking the lead in the Also taking the lead in the development of discrete development of discrete media, a nextmedia, a next--generation generation technologytechnology

19

2004 2005 2006 2007(Estimated by SDK)

2008 2009 2010

Recording density(Gbpsi)

PMR mediaPMR media

Longitudinal Longitudinal recording recording

mediamedia

10

100

1000

2011 2012

Discrete media

New applications for three major productsNH3: Nitride-film forming; Cl2: Etching; N2O: Oxide-film forming

→ Expanding business in Asia as “strategic products”

Developing new high-performance gasesHigh-purity etching gases（C4F6、HBr）Next-generation CVD film-forming materials

PARTPARTⅡⅡ Growth Strategy: SemiconductorGrowth Strategy: Semiconductor--Processing Materials BusinessProcessing Materials Business

Semiconductor Semiconductor processingprocessing

LCD processingLCD processing

LEDLED processingprocessing

N2ON2O

SF6SF6 NF3NF3C2F6C2F6C4F6C4F6 ・・・・・・

HBrHBrPETaPETa

C4F8C4F8C3F8C3F8

BCl3BCl3

Solar cell processingSolar cell processing

CF4CF4

Cl2Cl2

NH3NH3

20

NH3 capacity expansion in TaiwanNH3 capacity expansion in Taiwan

Starting up as a “new growth driver” business

PARTPARTⅡⅡ Growth Strategy: LED BusinessGrowth Strategy: LED Business

21

Substantially expanding production capacity to meet growing demand for TV/PC LCD backlighting applications

Ultrabright AlInGaP LED chipsCapacity to be expanded to 200 million units/month by the end of 2008Highest quality and best cost performance

based on proprietary technology

Gallium-nitride-based blue LED chipsCapacity to be expanded to 200 million

units/month by the middle of 2008Completed a four-inch line

based on proprietary Hybrid PPD technology


22

0

1000

2000

3000

4000

5000

6000

7000

2006 2007 2008 2009 2010

Demand is expected to grow more than 16%/year on the average for use in displays, automotive parts and illumination.

(¥100 million)

Forecast of world’s ultrabright LED package market

(Estimate by SDK)


23

Backlighting for large displaysBacklighting for large displaysBacklighting for large displays

Road lampRoad lampRoad lamp

New applications

Automotive partsAutomotive Automotive partsparts

Substantially expanding ultrabright LED chip production capacity


0

50

100

150

200

250

300

350

400

450

End of 2006 End of 2007 End of 2008

AlGaInP

GaN

Creating a new large-scale “growth driver” business

(Million units/month)

24

Sales target in 2008: ¥15 billionSales target in 2008: Sales target in 2008: ¥¥15 billion15 billion

SDK’s ultrabright LED chip production capacity

Growing demand for lithium-ion battery (LIB) application→ Capacity expanded to 100 tons/year

LIB market will continue its high growth.New demand for use in anode

PARTPARTⅡⅡ Growth Strategy: Carbon Nanofiber BusinessGrowth Strategy: Carbon Nanofiber Business

25

Volume production technology and cost advantages

Sales target in Sales target in 20102010: : ¥¥15 billion15 billion

Accelerating development of composites with resins, metals and ceramics


26


Completed capacity expansion for 30- and 32-inch electrodes15,000 t/y → 25,000 t/y

Growing demand for use in large electric steelmaking furnacesThe largest share (40%) in the world market

Electric steel production Electric steel production expected to grow furtherexpected to grow further

Stable high profitStable high profit

27

Large-diameter electrode (30” or more) market forecast(t)(SDK ‘s estimate)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2004 2005 2006 2007 2008 2009 2010

U.S.

EuropeAsia

AsiaGrowth rate: 55%/y

E. & U.S.Growth rate: 5%/y

Supplying large-diameter electrodes from Japan and U.S.

（Raw materials）

（Customers）

Magnet Production

SDK’s businessSeparation,

Ores purification & smelting

Casting of alloysCasting of alloysCasting of alloys

（Approx. 80% of ores located in China）

Operation sites in China to secure raw materials

Demand for rare earth magnets rapidly growing for

use in automotive parts; especially in Hybrid cars

(motors, generators, electric power steering devices, etc.)


18%

37%11%

34%

Automotive parts

Audio & communication equipment VCM for HDD

MRI

（Various applications）

28

( Nd, Dy, Tb )


Demand for high-performance rare earth magnets is growing, centering on such automotive parts applications as motors and electric power steering devices.SDK’s total rare earth magnetic alloy production capacity: 8,000 tons/year (Chichibu Plant in Japan and two plants in China: Baotou and Ganzhou)

SDK provides high-quality rare earth magnetic alloys based on its proprietary quick-cooling technology.

Ganzhou Plant Ganzhou Plant

Baotou PlantBaotou Plant

29

Aiming to substantially expand sales Aiming to substantially expand sales volume and increase total production volume and increase total production capacity to 10,000 tons/year by 2010capacity to 10,000 tons/year by 2010

【2007 overview】Results improving because of progress in

structural reform; Will not reach goals for2007 under the Passion Project owing to the negative factors below:（Negative factors） - Soaring aluminum ingot prices

（Considerably affecting the aluminum cans business）

- Low profitability in the heat exchangers business

（Steps taken） - Expansion of high-added-value product lines- Price increases- Cost reductions

【Steps to be taken in 2008】Up profitability of heat exchangers －Raise productivity of new models; Expansion in China & Europe

Expansion of high-value businesses －Aluminum cylinders for laser printers: Strengthen position furtherHigh-purity aluminum foils: Use new furnace to increase competitivenessShotic: Develop new applications for medium-sized forgings

Full use of new casting furnace in Oyama－Reduce costs, improve quality and reduce environmental loadPromotion of price increases

30

Closing RemarksClosing Remarks

31

32

Fulfilling social responsibilityFulfilling social responsibility

Overwhelming Overwhelming superiority in cost superiority in cost

performanceperformance

Products with Products with unrivalled qualityunrivalled quality

Win-win relationship with customers

Individualized Individualized products & products &

servicesservices

Fusion

Creative business Creative business modelsmodels

Materials

Technologies Know-how

2000

2200

2400

2600

2800

3000

1990 (Base year) 2009 2010 2012

Target

（ｋｔ‐CO2)

Will achieve greenhouse gas emission reduction goals in and after 2009, in line with the Kyoto Protocol

Forecast of SDK Group’s CO2 emissions

33

The performance forecast and plans are based on the information available and risk factors recognized on the date of announcement. Please note that actual results may differ materially from the forecast or plans owing to a variety of factors, including changes in the market conditions and exchange rates.

ReferenceReference

34

* Performance forecast for 2007 was revised on August 7, 2007.** The Passion Project was announced on November 29, 2005.*** Total operating income for 2008 after the planned changes in depreciation systems will be ¥79.0 billion. (Unit: billion yen)

68.7

(3.9)

6.5

16.1

28.6

5.1

16.4

O.I.

914.5

260.1

74.3

165.5

79.2

335.4

Sales

2006Actual results

62.0

(5.0)

11.0

11.0

24.0

6.0

15.0

O.I.

800.0

245.0

67.0

161.0

74.0

253.0

Sales

2006Passion plan**

85.0940.0

74.01,000.0

73.0870.0

57.2811.9Total

(7.0)(5.5)(6.0)(5.7)HQ costs

17.0268.0

9.5260.0

14.0250.0

8.3240.9Aluminum

and other

12.070.0

19.580.0

11.068.0

8.361.9

Inorganics

37.0241.0

25.0200.0

30.0200.0

19.7133.9

Electronics

8.084.0

6.580.0

7.078.0

4.774.0

Chemicals

18.0277.0

19.0380.0

17.0274.0

21.8301.2Petro-

chemicals

O.I.SalesO.I.SalesO.I.SalesO.I.Sales

2008Passion plan**

2007Forecast

2007Passion plan**

2005Actual results

***

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december 11, 2007 showa denko k.k. · this presentation, containing performance forecast and...

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