Bridge Report:（4043）Tokuyama First Half of the Fiscal Year March 2020

Hiroshi Yokota The President and Executive Officer	Tokuyama Corporation（4043）

Company Information

Stock Information

*The share price is the closing price on November 5th. The number of shares issued, DPS. EPS and BPS are values for the result of the second quarter of FY 3/20 and ROE is a value for the previous term.

Earnings Trends

*Unit: Yen, one million yen
*The forecast is from the company. Net income is profit attributable to owners of the parent. Hereinafter the same applies.
On Oct. 1, 2017, Tokuyama Corporation changed its trading lot from 1,000 shares to 100 shares, while conducting 1-for-5 reverse split. DPS is total annual dividend taking mergence in consideration. EPS as well as DPS has not been recalculated retroactively.

This report outlines the overview of Tokuyama Corporation for the first half of the Fiscal Year Mar.2020, etc.

Table of Contents

Key Points
1. Company Overview
2. First Half of the Fiscal Year March 2020 Earnings Results
3. Fiscal Year March 2020 Earnings Estimates
4. Topics: Efforts to reduce CO2 emissions, progress of the medium-term management plan, etc.
5. Conclusions
<Reference1: The Medium-Term Management Plan “Cornerstone of the Group’s Revitalization”>
<Reference2: Regarding Corporate Governance>

Key Points

• The sales for the second quarter of the term ending March 2020 were 152.7 billion yen, unchanged from the same period of the previous year. Sales of the company’s main products (chemical products, specialty products, and cement) declined. Operating income fell 14.1% year on year to 14.6 billion yen. Lower costs of raw materials, such as domestically produced naphtha, and increased sales of plastic lens-related materials, dental materials, and electric power contributed to income, but prices of caustic soda exports and petrochemical products sagged, and depreciation, R&D, and advertising expenses increased.

   

• The full-year forecast has been revised downward. The global economy is expected to remain uncertain. The recovery of the semiconductor market is expected to take longer than initial estimates, and sales volumes for semiconductor-related products are forecasted to remain lower than first predicted. Sales are expected to be 322 billion yen, down 0.8% from the previous term. Operating income is forecasted to be 35 billion yen, down 0.7% from the previous term. The assumed foreign exchange rate for the second half is 105 yen/USD (109 yen for the first half) and 40,000 yen/kl for domestically produced naphtha (42,700 yen for the first half). There is no change to the dividend forecast. The full-year dividend is forecasted to be 70.00 yen/share, with a payout ratio of 18.7%.

   

• The semiconductor market is breaking out of its plateau, but how much it recovers is dependent on customers. Full-scale recovery will begin in the next term or later. For raw material and fuel costs, coal price will remain low, but full cost benefits are expected to be seen from the second half.

   

• Unfortunately, the full-year forecast was revised downward, but the company completed its main task of improving the financial structure ahead of schedule. Although sales were sluggish for the company’s main products, this was partly unavoidable due to the external environment. In addition, in the growing business field, dental devices and other products have been performing well, and can be seen as proof that investments are steadily paying off. While it is unlikely that there will be a major improvement in the external environment, we would like to focus on how much sales and profits can grow toward the full-year forecast.

   

1. Company Overview

Tokuyama Corporation is a chemical manufacturer, which produces basic chemicals used for a variety of applications, including soda ash and caustic soda; semiconductor-related products, including polycrystalline silicon; cement, whose production volume is the 4th largest in Japan; materials for eye glasses, generic medicine ingredients, etc. It was founded in 1918. Its major strengths include cutting-edge products created with a wide array of unique technologies and the competitiveness of Tokuyama Factory, which has accumulated and integrated technologies in an advanced manner.

【1-1 Corporate history】

In 1918, the founder Katsujiro Iwai established “Nippon Soda Industry Co., Ltd.” with the aim of producing soda ash (sodium carbonate), which is a raw material for glass, inside Japan. The company is still the only Japanese manufacturer that keeps manufacturing soda ash.
In 1938, it started producing cement with the wet method from the byproducts in the soda ash manufacturing.
After the Second World War, it grew the inorganic business, and during the rapid economic growth period, it expanded the petrochemical business handling vinyl chloride, polypropylene, etc.
After the two oil shocks, it entered the high added value field, including electronic materials and fine chemicals. In 1984, the company launched the polycrystalline silicon business, which is now ranked in the top 3 in the world. In 1985, it started producing aluminum nitride powder, which is used for cooling down electronic parts, with its original reduction-nitridation method.
Since then, the company has expanded its business domains, including the fields of living and medicine handling materials for eye glasses, dental apparatus, etc., and environment and energy.

The revenue of the polycrystalline silicon business of “Tokuyama Malaysia,” which is a consolidated subsidiary established in Malaysia in 2009, dropped considerably due to the market downturn. Then, significant impairment losses were posted in the term ended Mar. 2015 and the term ended Mar. 2016, and no dividends were paid.
To cope with that situation, the company procured funds by issuing class shares in May 2016, for the purpose of “reconstructing its financial base.”
Under the vision of “new foundation,” the company produced and announced the 5-year Medium-Term Management Plan “Cornerstone of the Group's Revitalization,” and is working on important projects for reforming its corporate culture, redeveloping business strategies, etc. In the term ending Mar. 2018, it paid a dividend for the first time in 4 terms.

【1-2 Corporate ethos, etc.】

Tokuyama Corporation thoroughly revised its “corporate ethos” and “course of action,” which were enacted in 1989, and set the “Tokuyama’s vision” for new foundation, composed of “mission,” “aspirations,” and “values,” when designing the Medium-Term Management Plan “Cornerstone of the Group's Revitalization” in 2016. In order for Tokuyama Corporation, which commemorated the 100th anniversary of establishment in 2018, to build the “Cornerstone of the Group’s Revitalization” and achieve sustainable growth for the coming 100 years, it is necessary to clarify its missions and aims.
Corporate activities, ranging from business strategies, are mostly linked to this vision.

Tokuyama’s vision

【1-3 Business Description】

The business segments are “chemicals,” “specialty products,” “cement,” “life & amenity,” and “others.” (The first four segments are to be reported.)

◎ Chemicals
<Outline and major products>
Tokuyama Corporation handles basic chemicals that are indispensable for a broad range of applications in each industry, such as soda ash, caustic soda, and calcium chloride.
The company also operates business efficiently, for example, by using the chlorine and hydrogen produced during the process of manufacturing caustic soda for producing polycrystalline silicon.
With the goal of “becoming a company that will be chosen by customers forever,” the company strives to offer products and services that satisfy the needs of individual customers in a stable and timely manner.

(Provided by Tokuyama Corporation)

<Basic policy and measures>
By offering basic chemical materials and services that have high quality and cost competitiveness and satisfy the needs of customers, the company aims to contribute to the business growth of each customer and the stable, continuous increase in revenue for its core business.

◎ Specialty products
<Outline and major products>
Tokuyama Corporation handles products in a broad range of fields, including energy, electronics, and the environment. For high-purity polycrystalline silicon used for semiconductors, the company has a remarkable share in the world. In addition, fumed silica, which is produced from byproducts, is used for silicone rubber, copier’s toner, etc. Aluminum nitride, which is excellent in heat release, is used for energy-saving products, such as inverters and LEDs, in addition to semiconductor manufacturing equipment, and high-purity chemicals for the electronic industry are used for producing semiconductors, liquid crystal panels, etc.

(Provided by the company)

<Basic policy and measures>
To expand its business and revenue by supplying products that will be chosen by customers forever and proposing newly developed products.

A wide array of semiconductor-related products that are indispensable for manufacturing semiconductors, such as polycrystalline silicon, for which the company has a 30% global share, and aluminum nitride for dissipating heat, are the cutting-edge materials created by combining a variety of element technologies, which have been developed and accumulated by the company for many years, and all of them are outstandingly competitive in the world.

(Taken from the reference materials of the company)

In the semiconductor manufacturing field, more miniaturized and three-dimensional semiconductors are being developed rapidly, as the capacity of semiconductors is increasing and their size is shrinking.
The “high-purity polycrystalline silicon for semiconductors” and “high-purity chemicals for the electronic industry” of Tokuyama Corporation are ultrahigh-purity materials for which impurities and residues, which would worsen yield, have been reduced to the maximum degree, and highly evaluated by semiconductor manufacturers, which are developing more miniaturized and three-dimensional products.

In addition, Tokuyama’s heat dissipating materials, which are indispensable for the stable operation of semiconductors, are highly evaluated.
As the power devices for in-vehicle apparatus, industrial equipment, and electric railways are having higher output and smaller size, the demand for heat-dissipating materials is growing rapidly. Tokuyama Corporation supplies heat-dissipating materials with high thermal conductivity and an extremely small amount of impurities developed with its original reduction-nitridation method, such as aluminum nitride powder and ceramics, and boron nitride.
As shown in the above figure, the company plans to create larger business opportunities and meet demand by supplying a wide array of cutting-edge products rather than only specific products, which are used in the process of manufacturing semiconductors from raw materials.

◎ Cement
<Outline and major products>
In 1938, Tokuyama Corporation started this business for the purpose of utilizing the byproducts generated at Tokuyama Factory. The cement and related products, such as cement solidifying agents, produced at Nanyo Plant of Tokuyama Factory are used as ready-mixed concrete and secondary concrete products for constructing structures, ports, bridges, roads, etc. that support housing, buildings, and lifelines for the living of people.
The company receives a large amount of wastes, including waste plastics and ash from the combustion of household garbage, from the inside and outside of the company, and uses them as raw materials and thermal energy for manufacturing cement, contributing to the development of a resources recycling society.

<Basic policy and measures>
The company will develop optimal systems for manufacturing, selling, and distributing products while flexibly responding to the changes in the business environment. It aims to enhance its competitiveness by maximizing the revenue from waste treatment by expanding export and reducing costs.

Tokuyama New Caledonia, which was acquired in Jun. 2013, has recorded substantial positive operating income and cash flow for 4th consecutive year. It also serves as an exporter of clinker (chunks generated during the cement manufacturing process, from which cement is produced through pulverization), contributing to the increase in the revenue of the cement section.

In the mid to long-term, domestic demand will inevitably shrink due to the decline in population. Accordingly, the company will increase sales amounts by securing stable importers, improve the operation rate of cement factories, and accept more wastes, while discussing and proceeding with the operation of overseas pulverization plants following those of Tokuyama New Caledonia.

(Taken from the reference material of the company)

◎ Life & amenity
<Outline and major products>
This segment is constituted by the fine chemical and NF businesses operated by Tokuyama Corporation, and ion exchange membranes, dental materials, clinical testing systems, polyolefin films, resin sashes, etc. developed, manufactured, and sold by group companies.
In the fine chemical business, the company handles mainly materials for eye glasses, generic medicine ingredients and intermediates, which were developed with its organic synthesis technology. In the NF business, the company manufactures and sells films that block water, but allow air and moisture to penetrate.
Its overseas group companies include Shanghai Tokuyama Plastics, which manufactures and sells breathable films for disposable diapers, whose demand is growing rapidly in emerging countries, including China.

(Pharmaceutical products)

(Provided by the company)

<Basic policy and measures>
The company will secure an advantageous position inside and outside Japan, by establishing and fortifying customer-oriented development, manufacturing, and sales systems. It aims to expand its business, to contribute to the improvement of the living and health (quality of life) of people.

In this segment, the company concentrates on the development of photochromic dye materials.

Photochromic dye materials are resin materials that change colors from colorless to gray, brown, etc., when illuminated by sunlight (ultraviolet rays), and return to the colorless state when the illumination stops.
Recently, the usage for sports-wear and driving wear has spread, the awareness of harmful ultraviolet rays has grown, and the cases of eye diseases, such as glaucoma, have increased due to aging population. In these circumstances, the use of photochromic dye materials is increasing.

The products of Tokuyama Corporation are characterized by “plenty of color variation based on the three primary colors: red, blue, and yellow,” “rapid coloration and de-coloration speeds,” “sufficient coloration performance even at high temperatures in the summer,” “excellent durability,” and “the capability of blocking over 99% of ultraviolet rays.”
The company will advertise these characteristics, aim to expand its share by meticulously meeting customer needs about product specifications and enriching its product lineup, improve visibility, and cultivate new applications of use by utilizing its product features, such as the blocking of ultraviolet rays.

(Taken from the reference material of the company)

◎ Others
This is the segment other than the segments to be reported: “chemicals,” “specialty products,” “cement,” and “life & amenity,” and includes overseas distributors, transportation business, and real estate business.

【1-4 Research and development】

Under the R&D slogan of “creating helpful value for living with chemical technology,” the company engages in R&D with the aim of (1) conducting R&D for customer-oriented business, (2) creating an only-one, No.1 technology by improving unique technologies and fusing them with new technologies, and (3) creating original products while emphasizing customer needs based on its technologies.

Tokuyama Corporation aims to carry out R&D for cutting-edge materials by utilizing its unique technologies for synthesizing inorganic and organic materials, increasing purity, inducing crystallization and deposition, controlling powder, and sintering materials, which have been nurtured by the company as a chemical manufacturer while expecting the aging of society and the drastic growth and diffusion of environmentally friendly and ICT technologies, and by fusing these technologies with new technologies.

As R&D facilities in western and eastern Japan, the company has a “Corporate Development Department (Tsukuba Research Laboratory)” in Tsukuba City, Ibaraki Prefecture, and an “Analytical Science Department (Tokuyama Research Laboratory)” in Shunan City, Yamaguchi Prefecture.
The Corporate Development Department in Tsukuba Research Laboratory is developing cutting-edge technologies from the medium to long-term viewpoint and analysis technologies as basic technologies, conducting R&D in the dental material field, which is characterized by composite materials, and the organic fine chemical field, which is targeted at high value-added products.

The Analytical Science Department (Tokuyama Research Laboratory) located in Tokuyama Factory is a foothold for R&D in the Tokuyama district.
There are some significant merits, such as the synergy of the development group in the Tokuyama district and various R&D teams and the easy exchange of information with the manufacturing section.

【1-5 Competitors】

*Sales and operating income are the estimates for this term. The unit for them is million yen. ROE and ROA are the results for the previous term in units of %.
The market cap, PER (forecast), and PBR (results) are the closing values on November 5. The unit is in millions of yen and the unit is two-fold.

Compared with competitors, sales are small, but it boasts high profitability and asset efficiency with double-digit operating margin and high ROE ranking first, and its shares are evaluated at medium level.

【1-6 Characteristics and strengths】

①Cutting-edge products created with a variety of unique technologies
By fusing new technologies with unique technologies for synthesizing organic and inorganic materials, increasing purity, controlling powder, inducing crystallization and deposition, sintering, electrolysis, refining, reprocessing resources, and so on, which have been accumulated and polished for many years, Tokuyama Corporation has developed cutting-edge products, including inorganic chemicals, cement, silica, silicon, aluminum nitride, high-purity chemicals for semiconductors, lens materials, ion exchange membranes, films, resin, sensor materials, and dental materials.

For example, the company possesses an original reduction-nitridation technology for producing aluminum nitride powder, which is broadly used as a heat-dissipating agent.
Its aluminum nitride powder, which has an extremely low amount of impurities, boasts a 70% global share because of its high competitiveness.
At present, its purity is at the world’s highest level. The company started producing polycrystalline silicon for the purpose of utilizing the hydrogen and chlorine generated at its electrolysis plant, and it is now ranked in the world’s top three. It can be said that its broad, profound technological base helped realize these achievements.

②Competitiveness of Tokuyama Factory, which has integrated and accumulated technologies in an advanced manner
Tokuyama Factory is indispensable for manufacturing products with its unique technologies at low cost and supplying them to customers around the world. It has one of the greatest port infrastructures in Japan and an in-house generation plant, with the following characteristics:
・With the in-house power generation plant, whose output is the 8th largest in Japan, it can use electric power at competitive cost.
・Factories for producing inorganic and organic chemicals, cement, electronic materials, etc. are integrated, so as to utilize raw materials, products, by-products, and wastes mutually.
・The company has achieved zero emissions by using its wastes at a cement kiln (used for sintering cement). It also receives wastes from external enterprises in the Shunan industrial complex, making a social contribution for the environment.

(Taken from the reference material of the company)

Since it has a natural harbor with a water depth of over 10 m, where large shipping vessels can be docked, it is possible to carry in and out large amounts of raw materials and products.
The highly efficient production and supply systems integrated and accumulated sophisticatedly at Tokuyama Factory boost the competitive advantage of Tokuyama Corporation.

2. First Half of the Fiscal Year March 2020 Earnings Results

(1) Overview of consolidated results

* Unit: million yen. Net income belonging to its parent company. The same applies hereafter.

Sales and profits declined due to the sluggish sales of the company’s main products.
Sales were 152.7 billion yen, unchanged from the same period of the previous year. Sales of chemical products, special products, and cement declined.
Operating income fell 14.1% year on year to 14.6 billion yen. Lower costs of raw materials, such as domestically produced naphtha, and increased sales of plastic lens-related materials, dental materials, and electric power contributed to income, but prices of caustic soda exports and petrochemical products sagged, and depreciation, R&D, and advertising expenses increased.

(2) Trend in each segment

* Unit: 100 million yen. The composition ratio for profit means profit rate. The business categories of several subsidiaries were changed in the first quarter of the term ending March 2020, and those changes are reflected in the above chart.

＊Chemicals
Sales and profits declined.

＊Specialty products
Sales and profits declined.

＊Cement
Sales and profits declined.

＊Life & amenity
Sales increased, and profit decreased.

(3) Financial standing and cash flows

◎Primary balance sheet

*Unit: one million yen. Interest-bearing debts include lease obligations.

Total assets fell 6.4 billion yen year on year to 373.1 billion yen due to a decrease in accounts receivable.
Total liabilities were 202.1 billion yen, down 13.9 billion yen from the end of the previous term, due to a decrease in interest-bearing debts.
Net assets rose 7.4 billion yen year on year to 171 billion yen due to an increase in retained earnings.
As a result, equity ratio rose 2.7 points from the end of the previous term to 42.9%.
DE ratio fell from 0.84 at the end of the previous term to 0.76.
By the end of March 2021, the final year of the medium-term management plan, the company aims to have an “interest-bearing debt of 120 billion yen, an equity capital of 140 billion yen, cash and deposits of 80 billion yen, and a DE ratio of 0.9,” most of which they successfully reached in the first half.

◎ Cash Flow

*Unit: million yen

The surplus of operating CF grew due to a decrease in accounts receivable.
The deficit of investing CF grew due to an increase in purchases of plant, property and equipment. The surplus of free CF increased.
The balance of long-term borrowings decreased, and the deficit of financing CF shrank.
The cash position improved.

3. Fiscal Year March 2020 Earnings Estimates

(1) Full-year earnings estimates

*Unit: million yen
*The forecasts were announced by the company.

The earnings forecast has been revised. Sales and profits are unchanged from the previous term.
The full-year forecast has been revised downward. The global economy is expected to remain uncertain. The recovery of the semiconductor market is expected to take longer than initial estimates.

Sales volumes for semiconductor-related products are forecasted to remain lower than first predicted.
Sales are expected to be 322 billion yen, down 0.8% from the previous term. Operating income is forecasted to be 35 billion yen, down 0.7% from the previous term.
The assumed foreign exchange rate for the second half is 105 yen/USD (109 yen for the first half) and 40,000 yen/kl for domestically produced naphtha (42,700 yen for the first half).
There is no change to the dividend forecast. The full-year dividend is forecasted to be 70.00 yen/share, with a payout ratio of 18.7%.

The semiconductor market is breaking out of its plateau, but how much it recovers is dependent on customers. Full-scale recovery will begin in the next term or later.
For raw material and fuel costs, coal prices remain low, but full cost benefits are expected to be seen from the second half.

(2) Trend in each segment

*Unit: 100million yen

(Outlook for each segment)

4. Topics: Efforts to reduce CO2 emissions, progress of the medium-term management plan, etc.

(1) Efforts to reduce CO2 emissions

Tokuyama considers coal-fired power to be its biggest risk, and is committed to reducing and effectively utilizing CO2 emissions.
The company set a target for reducing energy-derived CO2 emissions, and aims to reduce greenhouse gas emissions by 15% (relative to when no measures are taken) by FY2030.

Specifically, efforts include the following:

* Establish an organization to promote the reduction of CO2 emissions (completed).
* Review the system for evaluating investments, and promote investment for reducing CO2 emissions.
* Promote the reduction of CO2 emissions, with a focus on solving the following three issues:
“Develop new technology: Capture and utilize CO2 emissions”
“Introduce renewable energy: biomass mixed-firing, energy mix”
“Optimize energy efficiency at the Tokuyama Factory”

(2) The progress of the medium-term management plan

①Growth Business
<ICT-related products>

Although the business is experiencing a temporary pause in growth, it is certain that demand will grow in the medium to long term. The company aims to differentiate their polycrystalline silicon for semiconductors from other companies' products by further improving quality.
They aim to expand the business for high-purity chemicals for electronic industries (TMAH, IPA) and heat dissipation materials by acquiring a wide range of customers through increased production capacity and an improved supply structure.

<Health care-related products>

Dental devices have been well-received, and its sales in the United States are exceeding the plan. As such, the company aims to increase its market share and expand the business with new products in the North American and European markets.
They also plan to increase their global market share of eyeglass-related materials.

②Improvement of the financial structure
As stated above, the targets for the final year of the medium-term management plan (FY3/21) are “interest-bearing debt of 120 billion yen, an equity capital of 140 billion yen, cash and deposits of 80 billion yen, and a DE ratio of 0.9.” The company achieved most of these targets in this term’s first half.

③Cost reductions for BRIGHT-II
In the first half, the company achieved cost reductions of 2.5 billion yen, significantly higher than that of the previous term’s first half (1.7 billion yen).
Cost reductions are expected to reach 4.9 billion yen for the full year, which means that the company’s medium-term target (FY 3/21) of 4 billion yen would be achieved one year ahead of schedule.

5. Conclusions

Unfortunately, the full-year forecast was revised downward, but the company completed its main task of improving the financial structure ahead of schedule. Although sales were sluggish for the company’s main products, this was partly unavoidable due to the external environment. In addition, in the growing business field, dental devices and other products have been performing well, and can be seen as proof that investments are steadily paying off. While it is unlikely that there will be a major improvement in the external environment, we would like to focus on how much sales and profits can grow toward the full-year forecast.

＜Reference1: the Medium-Term Management Plan “ Cornerstone of the Group’s Revitalization”＞

The company was forced to pass its dividend as it recorded heavy impairment losses in the terms ended Mar. 2015 and Mar. 2016. Needing a new driver for profit growth, the company drew up the 5-year Medium-Term Management Plan entitled “Cornerstone of the Group’s Revitalization” in May 2016 under the vision of “New foundation.”
With this plan, the company is tackling various important issues such as reforming its corporate culture and reconstructing business strategies.

(1) Outline of the Medium-Term Management Plan: “Cornerstone of the Group’s Revitalization”

①Assessment of the present state
◇ The company has its business base in nonorganic and organic chemistry. Having endured the oil crisis of the 1970s, it has since been constantly growing its businesses by expanding into the field of specialty chemicals and overseas expansion.
◇ While the profitability of specialty product business increased during the second half of the 2000s, its general-purpose product business centered on chemicals and cement suffered a profitability decrease due to the shrinking domestic market.
◇ Since its founding, the company has always enjoyed its high-efficiency factories and one of the best in-house power generation capacities in Japan. On the back of these qualities, it has built a business based on chemicals and cement, and also been nurturing new fortes in the field of specialty chemicals such as high-purification, powder control, organic and nonorganic synthesis, crystal precipitation, and sintering.
◇ On the other hand, the company was not able to successfully relay its technological prowess built up through the specialty chemicals business onto business expansion, apart from the polycrystalline silicon for semiconductors. Therefore, there was a blank period in its creation of new businesses.
◇ In 2009, its net interest-bearing debts practically decreased to the no-debt level; however, it swelled rapidly due to the fundraising for its massive investment into its Malaysian business and its financial structure deteriorated drastically, marking a D/E ratio of 4.7 in FY2015.

Assessing its present state like this, and with the shrinking of domestic general-purpose product market for its traditional businesses and slowdown of growth rate of its electronic materials business forecast, the company believes it is essential to create a new driver for profit growth by overcoming the points listed below.
“Overconfidence and dependence on Tokuyama Factory”
“Inward and passive posture spread among employees”
“Corporate governance”
“Uncertainty surrounding the strategic direction of the Group and each department”

②Management policies
With the “Tokuyama’s vision” below, the company will place changing its business culture and a fundamental overhaul of business operations as its core business strategies, and aim to achieve these by FY 2025.

(Tokuyama’s vision)

(Medium to Long Term Business Strategies)

(Restructuring business strategies)

(Drivers for growing businesses)
In the growing businesses, the company endeavors to utilize its unique technologies nurtured in the cutting-edge areas to develop products to respond to the society’s needs.
ICT and healthcare are the prospective fields.
In the ICT field, the company will expand the production line of aluminum nitride for heat-dissipating materials, put boron nitride production into operation, and increase production of polycrystalline silicon.
In the healthcare field, the dental equipment and diagnostic medicines will occupy the company’s core business, while seeking further growths and not ruling out the possible M&A.

(Cross-departmental cost reduction activities)
The company will perform non-conventional, cross-departmental approaches and strategic capital investments to reduce the costs of principal items such as raw material and fuel, repair costs and logistics costs.
The company aims to reduce company-wide cost by 4 billion yen by 2020.

(Research & development)
To achieve the expansion of existing businesses and expand into the new business fields to utilize its unique technologies, the company will change its R&D structure so it is more in line with the general customer needs.
Also, it will embrace a more outward-looking R&D, involving a higher ratio of R&D personnel from operations department and group companies rather than from within.
(Capital investment plan and setting strategic investments)
The company plans to spend a cumulative total of 96 billion yen on capital investments from 2016 to 2020 (5 years). Of the total, 26% will be earmarked for new business extensions such as responding to demands for refinement of polycrystalline silicon and enhancing the heat-dissipating materials, to lay down a stronger foothold.
At the same time, the 20 billion yen strategic investment will be set aside to expand the growth businesses and strengthen the competitiveness of traditional businesses, with the breakdown of 65% towards the traditional businesses and 35% for the growing businesses.

③Key challenges and countermeasures
The company identifies the following 4 key challenges and the measures.

④Targets for Final Business Year (FY2020)

*ROA = operating income ÷ total assets

<Reference2: Regarding Corporate Governance>

◎ Organization type and the composition of directors and auditors

◎ Corporate Governance Report
Last update date: Jun. 24, 2019

<Basic approach>
Under “Tokuyama’s Vision” set in 2016, our company defined the mission of the Tokuyama Group as “Centered on the field of chemistry, the Tokuyama Group will continue to create value that enhances people’s lives.” With the chemical technology that has been nurtured by the Tokuyama Group, we will create new value and keep offering it, to contribute to the happiness of people and the growth of society. We can create new value and keep offering it, only when we have trust and cooperation from stakeholders, including shareholders, customers, business partners, employees, and local communities, and this will lead to sustainable growth and the mid/long-term improvement in corporate value. To do so, it is necessary to constantly enrich corporate governance, which is an important managerial issue. This is our basic policy.
As a basic policy, the company follows the corporate governance code, respects the rights and equality of shareholders, cooperates with stakeholders in an appropriate manner, discloses information properly, secures transparency, ensures the independence of the board of directors, upgrades the supervisory function, streamlines the decision making process, clarifies responsibilities, conducts constructive dialogue with shareholders, and so on.

<Reasons for Non-compliance with the Principles of the Corporate Governance Code >

<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>