ANNUAL REPORT 2016 For the Year Ended December 31, 2016 Basic Corporate Philosophy Contents The Group operates under the corporate philosophy, “Ties working to expand its operating base, optimize the utiliza- of Reliability,” and the basic policies governing its activities tion of management resources, bolster cost competitive- 01 Basic Corporate Philosophy 11 Capital Investment comprise the principles of ability to create value, fairness, ness, and strengthen technology development capabilities. ecology, and internationalism. The Group’s aim is to be the By achieving sustained earnings growth, the Group seeks to “Global Leader of Carbon Materials” within and outside of fulfi ll the expectations of its shareholders, customers, and 01 Profi le 12 Analysis of Financial Position Japan by supplying high-quality products with a focus on employees as well as those of local communities and all carbon materials. other stakeholders. The Group contributes to the develop- Through these corporate activities, the Group has been ment of society, acting as a responsible corporate citizen. Message from Forecast for the Year Ending 02 13 President December 31, 2017 04 Financial/Non-Financial Highlights 14 Corporate Governance Profi le 06 Five-year Summary 20 Compliance The Tokai Carbon Group commenced operations as a pio- “Fine Carbon” used in variety of fi eld for high technology neer in the carbon industry in Japan in 1918. such as solar cell and semiconductors, the “Industrial fur- It has been our pleasure and honor that we were able nace & related products” which is active in heat treatment 07 Mid-to-long term management strategies 21 Status of Accounting to actively contribute to the development of society through process for ceramics, electrical parts, metal and glass, the carbon-related products and services based on diverse “Friction material” for use in brakes and clutches on engi- 08 Review of Operations 22 Consolidated Financial Statements manufacturing fi elds and technology. neering vehicles, motorcycles and the “Anode material” for The “Carbon Black” as a reinforcing material for rubber secondary lithium-ion batteries. tires, the “Graphite Electrode” as an indispensable material Growing together with these six core divisions, Tokai 11 Research & Development Activities 43 Corporate Data to melt scrap to reproduce steel in electric arc furnace, the carbon continues to spread its wings globally. Industrial Furnaces & Carbon Black Graphite Electrode Fine Carbon Friction Materials Anode Materials Related Products For tire and rubber For steel industry For solar cell and For fi ne ceramic and For motorcycle, For secondary industries semiconductor glass industries construction lithium-ion battery industries machinery, and industry automobiles industries Sales by Area (FY2016) Sales by Segments (FY2016) 4,325 5% Japan Carbon Black Segment 11,932 9,948 7,606 8% Asia 13% Graphite Electrodes 11% 5,243 Europe 6% Fine Carbon 11,029 Net Sales Industrial Furnaces 12% Other area 88,580 37,764 Millions 43,372 Millions and Related Products 12,925 43% of yen million yen of yen Segment 50% 15% Other Operations 24,230 Segment 27% 20,714 Friction Materials 23% Others TOKAI CARBON ANNUAL REPORT 2016 1 year to JPY 1,702 million. The net loss attributable to approach to achieve its mid-term management target owners of the parent company was JPY 7,929 million for FY2018: JPY 110,000 million, operating income of (the net profi t attributable to owners of the parent JPY 9,000 million, ROS (Return on Sales) of 8% or company in the corresponding period of the previous higher, and ROIC (Return on Invested Capital) of 6% fi scal year was JPY 2,484 million). or higher. In addition to the “internal mindset change,” Basic policies related to profi t the company has shifted its attention from structural allocation and dividends for current/ reform to growth strategies in the year 2017 while next term working towards “restoration of technical expertise” To improve the corporate value over medium to long with a focus on the technical headquarters which term, the Company believes that returning profi ts to were newly established in the year 2015 in order to its shareholders is an important management task, link the production know-how across all the divi- and by taking into account the performance and sions. Though the graphite electrode and fi ne carbon outlook of each term, as well as investment plan and divisions, which are facing harsh business condi- cash fl ow conditions, the Company shall strive to pay tions, need to continually restructure the business a stable and continuous dividend with a consolidated to improve their yield ability, the Group also aims to dividend ratio of 30%. actively work towards enhancing the next-generation Hajime Nagasaka The year-end dividend shall be JPY 3 per share, products industry and creating new ventures based President and CEO same as the previous term. Thus, the annual dividend on the understanding that, for further expansion of amount after adding the interim dividend shall be the Company’s business, it is necessary to explore JPY 6 per share. and venture into new business domains in addition to The total dividend for the next term is planned planning growth strategies for existing ventures. Message from President to be JPY 8 per share taking into account the interim As we turn our gaze towards the issues of busi- dividend of JPY 4 per share and the year-end dividend ness administration, we understand that a compli- Successful structural reform and fl y-shift for growth of JPY 4 per share. ance-focused management is the basic requirement. Thus, to fulfi ll this requirement while coping with Issues to be dealt by the Company the business environment of great uncertainty, the Analysis of business performance carbon business, (2) optimizing human resources, Though the Japanese economy is expected to risk-management system needs to be upgraded and Though the world economy saw economic slow- (3) further downsizing and industrial reorganization of recover gradually against the background of the expanded to cover both internal and external group downs in some emerging countries in the current con- the graphite electrodes business, (4) curtailing pro- global economy, we must be aware of the risk factors companies. To achieve sustained growth as a listed solidated fi scal year (January 1, 2016 to December duction capacity and shifting to a production system such as the effects of USA President’s policy admin- enterprise, the Board of Directors shall strive towards 31, 2016), an overall underlying tone of recovery was focusing on high value-added products in China in istration on the global economy, the trend of Chinese bolstering the corporate governance by building a via- seen in Europe and the United States. the carbon black business, (5) reducing inventory by economy, increase in terrorist threats, and the ble management and supervision system. Moreover, Yet, many uncertainties surround the global approximately JPY 8,000 million on a corporate-wide problems arising due to Brexit. As for the industries the Group shall take a straightforward approach to economy, and we must focus on where this recovery basis, and (6) improving internal communication by relevant to the Company, the business environment nurture and strengthen the human resources required is leading us. breaking down walls between divisions. While the is continually becoming more competitive owing to to tackle such varied issues. Under such circumstances, the Group has started Group recognizes that implementing measures as the decline in operating ratio of electric furnace steel the fi rst year of the new three-year medium-term part of our structural reforms involves considerable caused by stacking of steel inventory in China and Management Goals and Objectives management plan T-2018. The key performance tar- pain, the Group has determined that these measures amplifi cation of exports of Chinese products due to The Group considers net sales, ROS (operating gets for the year 2018 being net sales of JPY 110,000 are inevitable for transforming the organization into a excess supply capacity. income/net sales), and ROA (ordinary income/total million, operating income of JPY 9,000 million, ROS strong profi t structure. Even under such diffi cult conditions, the Group assets) to be important performance indicators. Under (Return on Sales) of 8% or higher, and ROIC (Return on As a result of implementing these measures, the worked towards structural reforms consisting of “busi- “T-2018,” a three-year medium-term management Invested Capital) of 6% or higher, the Group has been net sales of the consolidated fi scal year in review ness restructuring” and “internal awareness reforms” plan starting from 2016, the Group will work toward working towards establishing a growth base through decreased 15.5% from the corresponding period of in the current term, which forms the fi rst year of mid- increasing capital effi ciency by regarding ROIC (return structural reforms composed of “business restructur- the previous fi scal year to JPY 88,580 million. However, term 3-year management plan T-2018. As mentioned on invested capital) as the most important perfor- ing” and “organizational transformation by changing the operating income decreased 72.3% from the cor- before, the Group was able to yield results in strength- mance indicator. ROIC is estimated by dividing after- the mindset.” The policies of structural reform in 2016 responding period of the previous fi scal year to JPY ening the management foundation and enhancing the tax operating income by invested capital (working included: (1) reducing production capacity of isotropic 1,131 million. The ordinary income decreased 60.6% capital effi ciency while focusing on business recon- capital + fi xed assets). graphite and narrowing the product line-up in the fi ne from the corresponding period of the previous fi scal struction.