We are striving to enhance our corporate value
by leveraging the capabilities the Shin-Etsu Group has built up to now.
I would like to express my deepest gratitude to our customers, as well as to our shareholders, suppliers and the local communities hosting us for your support and cooperation.
The fiscal year 2019 posed a severe challenge with the global economic slowdown. Despite this, the Shin-Etsu Group achieved record high earnings thanks to its unremitting management efforts.
Shintech, a core of the Group’s PVC business, completed the work to build an ethylene plant in February 2020, and it has now started operations. This has further reinforced Shintech’s fully integrated production plant that starts from raw materials. As the world’s largest merchant supplier of PVC, we will further enhance our foundation for achieving greater stability in supplying our products to customers in coming years.
Shintech started operations in October 1974 in Freeport, Texas. Since then, it has steadily captured the global PVC demand, and grown through repeated large-scale expansions to the facilities located there. Following the completion of a series of expansions in Freeport in 1997, the company recognized the need for a new production base and decided to act accordingly. The decision was to disperse the manufacturing bases so that we can reliably fulfill our supply responsibility to customers even in the event of natural disasters or other unavoidable circumstances. As the first phase toward this goal, Shintech started PVC production in Addis, Louisiana in December 2000. Following this, the company worked on plans for an integrated production project starting from raw materials, with the aim of achieving further growth. Vast stretches of land were required to achieve this project, and after surveying several possible locations in the U.S., Shintech found an industrial site in Plaquemine, Louisiana that was ideal for both railway and waterway transport. In July 2008, at this location, Shintech started integrated production from chlorine, one of the main raw materials for PVC. The site in Plaquemine underwent two large-scale expansions after this, and Shintech’s production capacity has now reached as much as three million tons annually. This February, Shintech started in Plaquemine the production of ethylene, which is another major raw material used for PVC. Thus this step has marked the completion of Shintech’s plans for achieving a fully integrated production system starting from raw materials. Of course, Shintech’s journey does not end here. The company is currently proceeding with subsequent major expansions to achieve further development, which it seeks to finish by the end of 2020.
Currently, the global economy is severely impacted by the spread of Covid-19. The economic impact of the pandemic may well have surpassed the global financial crisis in 2008, and it is said that we are facing the challenging crisis. Looking at the company’s history, one can see that we have applied our management capabilities to overcome many crises in the past and have ultimately succeeded in achieving further growth. These achievements have only been possible through the strengths that we have cultivated in the following areas within the Shin-Etsu Group:
・Avoiding over-reliance on a single product or customer; instead, focusing our efforts to strengthen our core businesses in PVC, semiconductor silicon and silicones, as well as all of our other businesses.
・Building solid financial foundations so that we can make timely and appropriate capital expenditures and R&D investments with our own funds.
・Continuously pursuing technological innovation and improving productivity so as to develop a strong, resilient company that can overcome depressions.
・Ensuring that management and employees work together towards the shared goal of sustainable growth.
As we look ahead, we will continuously strive to enhance our corporate value. More than ever, we sincerely request your understanding and support.
With utmost priority on safety and quality,
high rates of operation maintained and record-high income levels achieved.
Determined to build a stronger and more resilient company
and provide better value to our customers.
As I prepare this year’s message to you, the world is confronting one of the greatest health threats of a generation, one that profoundly impacts the global economy and the livelihood of all of us. My thoughts go to individuals and communities deeply hit by the COVID-19 pandemic.
I must say how proud I am of our 23,000 employees around the world. They have been doing excellent jobs to keep our work place safe and our facilities running, and serve our customers during this extraordinary time. I am grateful to see them working hard with a strong sense of purpose. Their attention, focus and teamwork are unrivalled. We as a company certainly place our utmost priority on their health and safety. I also would like to express my sincere appreciation to our executive team for the exceptional leadership they have been exhibiting.
FY2019 was another successful year for our company. We managed to maintain the record level of earnings. When you look around, you will notice that not recording an earnings decrease was in itself a very rare feat in the chemical and material industries in 2019. We retained the levels of return on invested capital and of return on equity, which were 19.4% and 12.3%, respectively. Since March 2010, the cumulative growth in earnings was \230.2 billion on an after-tax basis, which is equal to a compound annual growth rate of 14.1%. This result and the preceding accumulative achievements allow us to tackle the very difficult ongoing challenges from a position of strength. In FY 2019, we completed our capital plans in the amount of \265.0 billion. We are executing capital projects in the amount of \240.0 billion for FY 2020 to advance our capabilities and position. We are doing so in a prioritized and disciplined manner. We have been managing basic business requirements and addressing various issues while keeping our objective intact. The objective remains to build a stronger and more resilient company with our dedicated people, so that we can serve our customers better, innovate well and reward our shareholders.
In the PVC/chlor-alkali business segment, we first of all report to you that the ethylene plant commenced its operation at our Shintech Inc.’s facilities in the US. The greater integration will enhance our long-term competitiveness. At the same site, Shintech is constructing a new integrated chlor-vinyl plant as planned. Meanwhile, we have begun evaluating its second phase. In the silicones business, the planned expansion of production capacity for silicone monomers and final products at our major sites is continuing. With the capital projects, we strengthen the supply capabilities and product lineups for customers worldwide. Turning to the specialty chemicals business, while we expand our cellulose business in pharmaceutical and industrial fields, we will increase our presence in food application markets. We are adding more products to the pheromone offerings to facilitate agricultural yield increase in an environmentally sustainable manner. Our work of differentiating the polyvinyl alcohol product lines will continue.
Although semiconductor device industries are experiencing some short-term fluctuations, we are certain of the growth of the industries on a long run. We will employ every effective means to assure our customers of the supply of high-quality and advanced silicon wafers. We serve the same industries with our photoresists, photomask blanks and some other products. We are close to being a one-stop shop of high-end materials for semiconductor device industries and will extend the path forward. As the use of rare earth magnets continues to rise and evolve, we are elevating the integration and capabilities of supply. We are adding new products which meet 5G requirements to our encapsulant and substrate product lines. We will continue to serve optical fiber markets as the only merchant supplier and we will swiftly meet the growing demand for high purity synthetic quartz substrates in all sizes.
We have been running all the plants as hard as we can. We do so with our strong commitment to safety and quality. We have 23,000 highly motivated people working day in day out to deliver our commitments. Our success comes from the energy and passion of all those team members. By enhancing the employee experience, we foster a culture where everyone is respected and valued, and has an equal opportunity to contribute. We invest in our employees through managerial interactions, various training programs and career development opportunities.
Our research and development activities are on the rise. We invested \48.5 billion or 3.1% of the yearly sales in the FY2019. Roughly one thousand new products were introduced and 1,892 patents were granted. More than thirty percent of our revenue comes from patent-advantaged product sales. In 2019 we launched several new products, which include quartz cloth, thermoset ultra-low dielectric resin, gallium nitride related products and materials for micro LEDs.
Our technical and engineering expertise is the backbone of our operation. Coupled with our employees’ commitment to safety and quality, it enables us to deliver quality products consistently in a timely manner. Our entire team is customer centric and our customers find it easy to work with us. We continue to deploy our ingenuity and enabling technologies to serve our customers’ needs and help solve their issues.
Our product portfolio and developmental direction are in line with SDGs. We believe that our product offerings facilitate the achievement of SDGs, and SDGs will in turn facilitate our business. For the parallel pursuit of sustainable development of human society, improvement of its quality, and greater lessening of the burden on the environment, we believe that it is essential to maximize efficiency. Connectivity, resource efficiency, productivity advancement, smart infrastructure, and health enhancement are the key themes that we are working on. In this endeavor, we commit ourselves to applying and improving what we have and produce and innovating further throughout our operation. It is our daily mission to provide materials of value of which users will say that it is owing to those products that human life has been enhanced and problems markets and customers experienced have been solved.
We pay great attention to shareholders return. In this regard, we declared an annual dividend of \220 per share, which is the highest mark in the company’s dividend history.
In order for this great company to continue to do what it has been able to do for our customers, our shareholders and the communities we are in, the company will have to grow. We are working on various initiatives to broaden our business portfolio and expand our footprints. We will remain focused on our customers and their needs to be relevant to them, will remain committed to governance to be relevant to our shareholders and will remain responsible to be relevant to our communities.
I sincerely thank our shareholders for your confidence, our customers for their partnership and our entire Shin-Etsu team for their dedication to our operations.
Business and Other Risks
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.
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
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.