(From Annual Report 2024)

President’s Message

Extending our growth trajectory and contributing to a sustainable world and the development of industry

 

 

 

 

 

 

 

Leveraging our strengths to extend our growth path

 

Dividend Policy

With our enhanced financial strength, we declared an annual dividend of ¥100 per share (after the share split) and announced a 100 billion yen’s worth of share buyback.

For the recent 10 years, we increased the dividend by five times. Under our policy of stable dividends, we stated a dividend payout ratio of around 35% as an aim.

Looking back, the payout ratio over the past 10 years was 31%. We will raise the aim to 40% over time. It represents our sincere appreciation to our shareholders for their understanding and support. As a matter of reference, the payout ratio for FY 2023 was 38.5%.

 

Cash Allocation

We have often been asked about the level of cash that the company holds. The cash in hand is intended for large-scale growth initiatives, including merger and acqui- sition, reserves for economic shocks like the pandemic we experienced four years ago and shareholders remu- neration. I believe that we have been a good custodian of the cash, paying attention to our equity spread. We will make good use of the cash for the stated purposes.

 

Future Growth

Going forward, we are striving to extend the growth trajectory that we have shown over years. In this regard, we keep our focus on providing our customers with products which make it attainable for them to do what they pursue.

We tirelessly help solve what our customers need to solve. As changes take place fast and what our customers’ needs constantly evolve, opportunities present themselves for us.

With a strong market-in mindset and aspiration, we work with our customers more closely than ever. We are determined to be a most reliable supplier to all our customers with best-in-class quality, technology and practice, so that our products will be used more and everywhere.

 

Current situation and outlook for each business segment

If I may elaborate on it by laying out our prospects and on-going endeavors in each of our business segments,

 

●Infrastructure Business

We will start up a brand new production facility for PVC and caustic soda in US this fall. We apply our latest advanced technologies to the facility. The PVC capacity addition there is 400,000 ton per year, which matches about 30% of worldwide demand growth per annum. PVC products are environmentally benign, and on top of it, we will do our best reducing the carbon footprint in our manufacturing of the products. We will grow the PVC business as such.

●Electronics Materials Business

The market for semi-conductors will expand at a remarkable rate in three dimensions, i.e., quantitatively, qualitatively and by type. We will stay tuned to capacity increases and product developments. In this regard, we have begun to construct a new facility in Japan for cutting-edge lithographical products. There is an evolving array of new ways of device making, to which we apply our expertise and ingenuity. As an expert and all round player of semiconductor materials, we will be more instrumental to the semiconductor industries. Electrification of cars and others is rapidly expanding, and the so-called green transformation will not be reversed. To this end, we will exploit the periodic table as much as we can for our customers and industries. As a case in point, we plan to bring our magnet customers with genuinely heavy rare earth free magnets with even higher heat resistance this year.

●Functional Materials Business

We are bringing more of new products to various markets and are broadening our capabilities for our customers. To this end, we will push the envelope in silicon chemistry, cellulosics and other synthesis. We add touch points in industries and markets so that our total addressable markets will be greater. We develop our product offerings with this focus and make contributions in such manner that the more of our products are used, the better the industries and human society become.

●The Processing and Specialized Services

With this group of businesses and operations, we enhance the synergy within our group companies.

I may add that we have launched two new business units. The one deploys novel technologies for GaN devices and the other, by the name of μ- Material Machine, offers manufacturing processes, including equipment and materials for various display panels, illumination devices , semiconductor package substrates and so on.

 

Concerning sustainability, we have recently updated our basic sustainability policy. We are determined to do our part as an essential supplier to human life and industries in the world. Let me explain as follows:

 

Carbon-neutral initiatives

In May 2023, we announced a plan to achieve net-zero greenhouse gas (GHG) emissions (Scope 1 and 2), i.e. carbon neutrality, by 2050. The core of this plan is our assiduous efforts to reduce production intensity, increase the capacity to recover the heat emanating from the pro- duction process and improve energy efficiency. Over the past 30 years, we have halved our GHG emissions per production unit compared to the 1990 level. Meanwhile, we are increasing our production capacity and growing our businesses. In the process, the absolute amount of energy consumption increases. Achieving carbon neutrality presents a major challenge to a material manufacturer that relies on raw materials and energy for production.
Nevertheless, we will unceasingly continue our efforts to boost productivity and conserve energy. For example, some of our manufacturing requires combustion or cracking. There are emerging technologies and initiatives that we should consider for possible implementation, and we will put these options into our plans. Recycling plays an essential role and we will continue to promote it jointly with our customers and the industries. For the energy we use (mostly electricity), we are evaluating various sourcing options and discussing them with suppliers. We are assessing technologies that will economically enable us to transition from natural gas to hydrogen to meet our fuel requirements. We are also evaluating solar power generation and carbon capture and storage projects. All of these must be done without sacrificing cost competitiveness. While maintaining cost competitiveness and responding to customers’ requests, we will be innovative and remain open to everything that we can make use of to reach carbon neutrality.

In Japan, the natural gas cogeneration system that we operate at one of our manufacturing facilities was awarded the first prize at the 2023 Cogeneration Awards. We participate in a hydroelectric PPA* for local production and local consumption. In the meantime, many of our products contribute to lowering GHG emissions and are helping to increase energy efficiency and lessen environ- mental impacts. The Japanese government has listed 14 areas that will be integral to achieving carbon neutrality and approximately 70% of the sales of our products currently go to these fields. The fields include housing, infrastructure, electric vehicles, digital transformation, and green transformation.
*PPA stands for power purchase agreement, a type of contract under which the consumer purchases electricity from a power producer at a fixed unit price for a certain period of time.

 

Human capital and diversity

To promote and strengthen our people’s professionalism, we invest in our human resources in various ways.
In an effort to promote diversity, we held roundtable discussions between our female outside independent director and audit & supervisory board members and female employees. The objective there is to facilitate the exchange of opinions regarding women’s empowerment and their work. Given the demographic circumstances in Japan, discussions about diversity tend to be quantitative, focusing on the utilization of women as work force. I am actually hopeful that qualitative discussions of diverse ideas will contribute to the raising of our corporate value.

 

Respecting human rights across the entire supply chain

To build responsible supply chains, we make sure our suppliers know about the Shin-Etsu Group Human Rights Policy, our Basic Procurement Policy, and our CSR Procurement Guidelines. In these policies and guidelines, we call on our suppliers to eliminate discrimination,
abide by the labor standards of the International Labor Organization, and not engage in unfair labor practices.

We are also actively taking steps to exclude minerals that have a clear link to conflicts or human rights violations from all the items we procure.

 

Ensuring the safety of workers

The safety of our employees is a No.1 premise of our operation. To achieve zero-accident at our sites, the fundamental thing we do is to eliminate any latent minor mistakes and incidents. To this end, we rigorously enforce the following three key safety guidelines for action: (1) make sure to abide by the rules and operational procedures; (2) cultivate the sensitivity to risks; and (3) eliminate safety risks swiftly.

 

Governance and risk management

The board of directors is at the center of our corporate governance. It consists of nine directors, five of whom are independent outside directors (including one from the United States and one female director). Along with it, we have the audit & supervisory board. This board consists of four members, three of whom are independent (including two female members). They all participate in discussions and provide suggestions and inputs concerning important matters of the company, including shareholder returns, investments, and sustainability. Given the uncertainty in world affairs and the economy, risk management is crucial. We make a point of assessing country risks and other factors in capital investments and raw material procurement. We are strengthening information security and seriously working on countermeasures against cyber-attacks and data leakage.

 

Being a good partner for society

To continue to do what we have been able to do for our customers, our shareholders and our communities, we must continue to grow. We will remain focused on our customers and their needs to be relevant to them, will remain committed to good governance to be relevant to our shareholders and will remain responsible to be relevant to our communities.

I sincerely thank our shareholders for their confidence, our customers for their partnership and our entire Shin-Etsu team for their dedication to our operations.

 

 

Yasuhiko Saitoh
President

Business and Other Risks

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Among the matters relating to the status of business and accounting, etc. described in the Annual Securities Report, the major risks that management recognizes may have a significant impact on the financial position, business results, and cash flow status of the consolidated companies are as follows.
The Group (the Company and its consolidated subsidiaries and affiliates which are accounted for using the equity method, hereinafter referred to as “the Group”) strives to prevent, disperse, and hedge potential risks and thereby mitigates risks. However, there is a possibility that the operating performance of the Group may be impacted significantly should any unforeseeable circumstances arise.

Indicated are principal matters that are considered to likely be risk factors based on the Group’s judgment as of March 31, 2020, and do not cover all risks related to the Group.

1. Risks related to Economic Situation and Market Conditions
The economic situation in the countries and regions where the principal markets of the products handled by the Group are located may significantly impact the operating performance of the Group. Further, some of the main products handled by the Group may be subject to significant price fluctuations due to changes in global supply and demand conditions. The Group hedges potential risks by promoting diversification and globalization of businesses. However, a decrease in demand or an intensified price competition related to a Group’s product may have a significant impact on the operating performance of the Group.

2. Risks related to Foreign Exchange Market Fluctuations
In the fiscal year ended March 31, 2020, overseas sales accounted for 73% of consolidated net sales of the Group. The Company expects the ratio to remain at a high level going forward. Significant exchange rate fluctuations may affect the results when converting overseas group companies’ business results on financial statements into Japanese yen and consequently have a significant impact on the operating performance of the Group. Significant exchange rate fluctuations may similarly affect foreign currency-denominated transactions and there is no guarantee that such risks can be completely avoided, although the Group takes risk-mitigating measures such as making use of foreign exchange contracts.

3. Risks related to Natural Disasters and Unpredictable Events
The Group strengthens countermeasures to ensure damage from any unforeseen interruption in production activities is kept to a minimum, and this includes regularly conducting inspections and maintenance activities for disaster prevention, and making capital investments to ensure safety. The Group also strives to operate at multiple production sites. However, unpredictable events and natural disasters may cause physical damage to the Group’s production facilities and other properties, or the occurrence of supply chain disruptions, and these may have a significant impact on the operating performance of the Group.

4. Risks related to Laws and Public Regulations
Countries and regions in which the Group conducts its business activities are subject to various laws and regulations, including investment permits, import and export, commercial trade, labor, patent, taxation and foreign exchange. Modifications to such laws and regulations may have a significant impact on the operating performance of the Group.

5. Risks related to Procurement
The Group’s production activities depend on various raw materials and the Group strives to ensure stable procurement of raw materials by avoiding being dependent on specific sources for such. However, a lack of or delay in the supply of raw materials, changes in trade policies in the supplying countries, or a price hike caused by such circumstances, can have a significant impact on the operating performance of the Group.

6. Risks related to Rapid Technological Innovation
Technological advances are remarkable in the electronics market, which is one of the main industries to which the Group distributes its products. As such, the Group makes ongoing efforts to develop cutting-edge materials that can readily respond to technological innovation. However, if the Group faces difficulty in appropriately responding to changes in the industry and related markets, this may have a significant impact on the operating performance of the Group. In addition, the emergence of competitive substitute products may have a similar impact on products for industries other than the above.

7. Risks related to Environmental Issues
As a business entity that handles various chemical substances, the Group complies with various laws and regulations relating to the environment, as well as proactively implementing energy-saving measures to prevent global warming and taking steps to curb the emission of substances that affect the environment by maximizing efficiency. However, if it is technically difficult to respond to environmental regulations or a need arises to newly pursue a major capital investment due to the strengthening of environmental regulations beyond what the Group had assumed, this may have a significant impact on the operating performance of the Group.

8. Risks related to Product Liability
The Group is fully committed to ensuring optimal product quality in accordance with the characteristics of each product. However, should an unforeseeable quality issue arise, such may significantly impact the operating performance of the Group.

9. Impact of the New Coronavirus (COVID-19)
In order to minimize the impact of COVID-19, the Group’s business sites are implementing thorough safety and health measures. However, if the spread of the virus in the future and the policy of curbing economic activity in each country in the aftermath of it significantly reduces demand for the Company’s products and damages the supply chain, including the Company’s business sites, this may significantly impact the operating performance of the Group.

IR Policy

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Shin-Etsu Chemical Co., Ltd. conducts IR activities to provide all stakeholders with a better understanding of the Company’s business and management. The Company listens to the views of shareholders and investors through dialogue and make use of their views to management.

Information Disclosure Policy

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1. Basic Policy
We ensure fair and transparent disclosure to our shareholders and investors in accordance with Financial Instruments and Exchange Act and the Securities Listing Regulations stipulated by the Stock Exchange on which our stocks are listed. This is based on our understanding that timely and accurate disclosure of the Company’s corporate information to the shareholders and investors facilitates the understanding of the Company and brings appropriate evaluation from the market.

2. Information Disclosure Policy
The Company discloses information corresponding to material facts prescribed under the Securities Listing Regulations via the Timely Disclosure Network (TDnet) system of the Tokyo Stock Exchange, the Company’s website, and announcements made at relevant press clubs.
In addition to the aforesaid disclosure, the Company strives to disclose information that is considered to have a substantial impact on the investment decisions of shareholders and investors, and information that is likely to be useful for shareholders and investors to deepen their understanding of the Company via the corporate website in a fair and timely manner.

3. Matters Concerning Operating Performance Forecast
The information disclosed by the Company may contain forward-looking statements. These statements, such as operating performance forecasts, include risks and uncertainties since they are based on management’s judgment and assumptions in light of the information available at the time of disclosure of such information. The reader, therefore, should be aware that actual results may differ from any forecasts expressed due to various factors. Material factors affecting actual results may include overall economic conditions in which the businesses of the Company and its group companies are involved, the relevant market trends and fluctuations in foreign exchange rates. However, factors that may affect operating performance are not limited to those enumerated above.

4. Quiet Period
The Company observes a quiet period from the day following the financial closing date of each quarter until the day of announcement of financial results in order to prevent leakage of financial information and ensure fair disclosure. During this period, the Company refrains from making comments or answering questions regarding its financial results. However, if any event requiring disclosure under the Securities Listing Regulations arises during the quiet period, the Company will disclose information in a prompt and appropriate manner.