Showa Denko K.K. (SDK) Operating Income Increases 24.6% in First Half 2006.

Tokyo, Japan, Aug 8, 2006 - (JCN Newswire) - Showa Denko  K.K. (SDK; TSE: 4004) announces a 24.6% increase in operating income for the first six months of 2006 (January-June), to JPY 33,784 million, on net sales of JPY 426,993 million, up 9.2%. Ordinary income was up 21.6%, to JPY 28,518 million.

However, due to the fall in gain on the sale of investment securities, the rise in loss on the disposal of fixed assets, and the increase in the income tax, net income decreased 27.8%, to JPY 15,061 million.

During the first half of 2006, the Japanese economy continued to recover due to increased capital spending and personal consumption as well as the expansion of economies in the U.S. and Asia.

In the chemical and nonferrous metals industries, costs of naphtha, aluminum ingot, and other raw materials soared, resulting in a severe environment. Meanwhile, the electronics-parts and materials industry saw a steady improvement.

Under the circumstances, the Showa Denko Group launched its new medium-term consolidated business plan, the Passion Project, aimed at laying the groundwork for long-term, sustainable growth. Under the plan, which started at the beginning of 2006, the Group accelerated the development of new growth businesses while carrying out structural reforms and reducing costs.

The following are summary of results by business segment:

Petrochemicals

Production of ethylene and propylene in the first half of 2006 decreased over the same period of last year due to the maintenance shutdown conducted in every four years. Sales of olefins fell only slightly as the decline in shipment volumes due to the maintenance shutdown was virtually offset by the rise in selling prices, reflecting soaring raw material costs. Sales of organic chemicals were slightly up due to the rise in selling prices, reflecting higher feedstock costs, and higher shipment volumes of acetic acid, which offset the fall in the shipment volumes of vinyl acetate due to the maintenance shutdown. Sales of plastics by Showa Highpolymer Co., Ltd. increased due to an increase in selling prices, reflecting the rise in feedstock costs.

As a result, the Petrochemicals segment's sales rose 1.8%, to JPY 145,245 million, but operating income fell 40.9%, to JPY 6,738 million, due mainly to the decline in production as a result of the maintenance shutdown.

Chemicals

Steady shipments of liquefied ammonia continued, with production volumes remaining at the year-earlier level. Sales of industrial gases, including oxygen and nitrogen, were maintained at the level of the same period last year. Meanwhile, sales of acryolonitrile and ammonia were up due to the rise in selling prices, reflecting higher feedstock costs.

In the specialty chemicals operations, shipment volumes of polychloroprene synthetic rubber, amino acids and Shodex liquid chromatography columns increased. Meanwhile, shipment volumes of feed-additive vitamin C fell slightly. Sales of agrochemicals dropped following the non-consolidation of SDS Biotech K.K. in the first half of 2005.

As a result, the Chemicals segment's sales rose 4.9%, to JPY 38,041 million, but operating income fell 24.1%, to JPY 1,957 million, due to the non-consolidation of SDS Biotech.

Electronics

Production of hard disk (HD) media increased, due partly to the expansion of the total production capacity to 13.75 million disks per month. Sales of HD media increased due partly to the rise in shipment volumes, reflecting the growing demand and start-up of part of our new facilities. Sales of compound semiconductors were maintained at the year-earlier level.

Sales of electronic materials grew due to higher shipment volumes of semiconductor-processing specialty gases, electronic ceramics, and fine carbons, offsetting the slight decline in the sales of rare-earth magnetic alloys resulting from the fall in shipment volumes.

As a result, the Electronics segment's sales increased 25.4%, to JPY 78,602 million, and operating income jumped 104.0%, to JPY 15,848 million.

Inorganics

Production of graphite electrodes increased slightly from the same period of last year. Sales of ceramics were up due to the rise in selling prices of alumina, reflecting higher feedstock cost. Sales of graphite electrodes increased due to continued steady shipments, reflecting growing demand for steel worldwide.

As a result, the Inorganics segment's sales increased 18.0%, to JPY 35,212 million, and operating income jumped 72.3%, to JPY 7,152 million, centering on operating income at U.S. subsidiary Showa Denko Carbon, Inc.

Aluminum

Production of automotive heat exchangers in the first half of 2006 increased in all three regions of Japan, U.S., and Europe. Production of extrusions, rolled products, and Shotic forged products also increased.

Sales from ingot marketing rose, reflecting the trends in the international market. Sales of rolled products rose slightly due to the rise in selling prices, reflecting soaring feedstock costs, and higher shipment volumes of high-purity foils for capacitors. In the extrusions/specialty products business, sales rose due to higher selling prices. Sales of heat exchangers increased slightly in all three regions of Japan, U.S., and Europe. Sales of Shotic forged products increased due to a growing demand for automotive parts applications. Meanwhile, sales of aluminum cans decreased due to lower shipment volumes and selling prices.

As a result, the Aluminum segment--'s sales increased 8.6%, to JPY 129,893 million, but operating income decreased 16.7%, to JPY 3,793 million, due mainly to the fall in operating income from the aluminum can operations, reflecting the soaring aluminum ingot price.

Major steps taken in the first half of 2006

Petrochemicals

- Further diversification of ethylene feedstock and capacity expansion

The Company modified its ethylene plant at the Oita Petrochemical Complex during the maintenance shutdown to increase the use of non-naphtha feedstock. At the same time, the Company modified certain production lines to increase the production capacity by 24,000 tons per year, to 677,000 tons per year. The total modification cost was around JPY 2 billion.

- Expansion of acetic acid/vinyl acetate production capacities

The Company expanded its annual production capacity of acetic acid from 100,000 tons to 130,000 tons, and that of vinyl acetate from 120,000 tons to 175,000 tons.

- Development of new Pichit grade

Showa Denko Plastic Products Co., Ltd., a consolidated subsidiary of SDK, developed a new grade of Pichit moisture removal sheet for perishable foods. The new grade is featured by its good design, and is suitable for use in gifts.

- Decision to make Showa Highpolymer a fully-owned subsidiary

Showa Highpolymer Co., Ltd. (SHP), a key player in SDK's specialty polymers operations, has become a leader in the domestic markets for vinyl ester, biodegradable plastics, and emulsion. It was decided at board meetings of the two companies to make SHP a fully owned subsidiary of SDK through a share exchange arrangement. The share exchange will take effect on September 1, 2006.

- Transfer of shares in Showa Aluminum Powder

The Company transferred the majority of shares in its fully-owned subsidiary Showa Aluminum Powder K.K. to ITOCHU Corporation and ITOCHU CHEMICAL FRONTIER Corporation. SDK now owns 14.9% of Showa Aluminum Powder.

Chemicals

- Launch of "gentle-to-hair" new curling agent

In January, the Company started selling a "gentle-to-hair" new curling agent (trade name: Spiera) that efficiently gives natural curling.

- Launch of new additive in photo-curing resins

In April, the Company started selling a new compound for addition to photo-curing resins. The compound, sold under the trade name of Karenz MT, represents the first commercialization of multifunctional-thiol-based compounds for this application.

- Full-scale participation in bacteria inspection business

In May, Kokusai Eisei Co., Ltd., a consolidated subsidiary of SDK, started a food-related microbe/bacteria inspection business.

Electronics

- World's smallest 0.85-inch HD media adopted in Toshiba's mobile phone

The Group's 0.85-inch HD media - the smallest in the world - has been adopted by Toshiba Corporation in its latest mobile phone "MUSIC-HDD W41T." In June 2005, SDK started commercial production of this type of media, which is the size of a 100-yen coin. Due to high data storage capacity provided by the HD media, the new mobile phone can use KDDI's au LISTEN MOBILE SERVICE: a kind of mobile music transmission service which is expected to become very popular.

- Expansion of HD media production capacity

In April, the Group-->'s HD media production capacity was increased to 13.75 million disks per month to meet brisk demand centering on small-diameter disks for use in mobile music players. The Group will further increase its capacity to 15.75 million disks per month by the end of this year by constructing new lines at its Taiwan subsidiary Showa Denko HD Trace Corporation and increasing productivity at other production sites. The total investment will be around JPY 8 billion.

- Commercial production of 2.5-inch HD media using perpendicular magnetic recording technology

To meet brisk demand for high-capacity HD media for notebook PCs, the Group has started commercial production of media using the innovative perpendicular magnetic recording technology. In the third quarter of this year, the Group will start commercial shipments of 2.5-inch HD media with storage capacity of 100 gigabytes per disk.

Inorganics

- Development of world's largest sintered compacts of CBN

The Company has developed the world's largest sintered compacts of cubic boron nitride to be used mainly for cutting automotive parts. Commercial shipments started in April.

- Increased production of large-diameter graphite electrodes

The Company decided to increase its production of 30-inch- and 32-inch-diameter graphite electrodes to meet growing demand from electric arc furnace steelmakers. The 32-inch type is the largest size on the world market. The Company started construction of a new graphitizing furnace, which is scheduled for start-up in the second half of 2007.

- Joint F/S for alumina project in Indonesia

In April, the Company reached agreement with PT. ANTAM Tbk of Indonesia, Straits Trading Amalgamated Resources Private Limited of Singapore, and Marubeni Corporation of Japan on implementation of a joint feasibility study for a chemical-grade alumina plant in Indonesia.

- Opening of a ceramic abrasives plant in China

In June, the Company held an opening ceremony for Lianyungang Zhaoling Abrasives Co., Ltd., a ceramic abrasives joint venture with Mitsubishi Corporation . After establishment in December 2003 in Lianyungang, Jiangsu Province, China, the joint venture built a plant at the site and made trial runs. SDK has the largest share in the abrasives market in Asia, and is one of the leading abrasive manufacturers in the world. With the start-up of the joint venture, SDK has established an efficient production system together with its existing facility in Shiojiri, Nagano Prefecture, Japan.

Aluminum

- Expanding production of aluminum cylinders for laser printers

The Company decided to build a new aluminum cylinders plant at Oita Complex to meet growing demand for use in office color laser printers. The Company will also upgrade existing plants to expand the production. Total investment will be around JPY 2 billion.

- Dissolution of Showa Aluminium Fabrication

In March, the Company decided to dissolve Showa Aluminium Fabrication, a consolidated subsidiary engaged in the production of aluminum baseball bats.

- Expansion of high-purity aluminum foils production capacity

The Group decided to increase its production capacity of high-purity aluminum foils for electrolytic capacitors used in cars and digital equipment, from 1,500 tons per month to 1,800 tons per month. The Group will invest around JPY 1.2 billion, starting up the new facility in 2008.

- Consolidation of aluminum alloys business

The Company reached agreement with Sumitomo Corporation on the consolidation of the aluminum alloys operations. The consolidation was realized in July with the transfer of the aluminum alloys business of Showa Aluminum Alloy K.K., a consolidated subsidiary of SDK, to Summit Showa Aluminum Ltd. (former name: Summit Aluminum Ltd.), a consolidated subsidiary of Sumitomo. At the same time, SDK subscribed for new shares in Summit Showa Aluminum issued "for allotment to third party."

Projections for 2006 (full-year)

1) Overall projections

As to the Japanese economy in the second half of 2006, gradual recovery will continue owing to steady private sector demand, centering on capital investment and personal consumption amid the continuation of high-level corporate earnings. However, as the prices of oil, aluminum ingots and other raw materials are expected to remain high, the business environment is forecast to remain severe.

Under the circumstances, the Showa Denko Group will aim to lay the groundwork for long-term, sustainable growth based on the Passion Project and pursue thorough cost reductions, thereby striving to improve competitiveness and earning power. The Showa Denko Group's performance forecast for 2006 (full-year) is as follows.

The Showa Denko Group's performance forecast for 2006 (full-year):

                                                    (Unit: millions of yen)
            Forecast term     Results term   Difference   Rate of
                  ending 12/31/06   ended 12/31/05                 change

Net sales              900,000           811,899        88,101       10.9%
Operating income       67,500            57,191        10,309       18.0%
Ordinary income        56,000            46,960         9,040       19.3%
Net income             26,500            15,647        10,853       69.4%

Net sales, operating income and ordinary income will increase over the previous year to JPY 900,000 million, JPY 67,500 million, and JPY 56,000 million, respectively. Net income will increase about JPY 10,900 million, to JPY 26,500 million. The above forecast is based on the assumption that the exchange rate of the yen will be JPY 110 to the U.S. dollar and the naphtha price will be JPY 48,000/KL.

2) Net sales by business segment

                                                   (Unit: millions of yen)
           Forecast term      Results term  Difference    Rate of
                 ending 12/31/06    ended 12/31/05                 change

Petrochemicals        325,000           301,189        23,811        7.9%
Chemicals              80,000            74,001         5,999        8.1%
Electronics           165,000           133,902 31,098       23,2%
Inorganic Materials    70,000            61,882         8,118       13.1%
Aluminum              260,000           240,924        19,076        7.9%
Total                 900,000           811,899        88,101       10.9%

Financial Conditions

1. Assets, liabilities and total equity at June 30, 2006

As we continued our efforts to reduce assets, including the sale of investment securities, total assets decreased JPY 5,377 million, to JPY 980,856 million. Interest-bearing debt further decreased JPY 21,099 million, to JPY 427,731 million. As a result, total liabilities fell JPY 336 million, to JPY 730,108 million.

Total equity increased JPY 44,010 million, to JPY 250,748 million. Notwithstanding the payment of dividends for the previous fiscal year and the fall in the land revaluation reserve as a result of revised tax allocation, total equity increased due to a rise in net income for the first half 2006 and the fact that we started including minority interests and deferred hedge gains (losses) in the category of total equity as from the settlement of accounts for the first half of 2006.

2. Cash flows in first half of 2006

Net cash provided by operating activities decreased JPY 4,506 million from the same period of last year, to JPY 32,217 million, due to a rise in working capital, reflecting higher raw material costs, and increased payments of pension premiums. Net cash used in investing activities increased JPY 4,039 million, to JPY 17,299 million, due to increases in capital expenditures.

Thus, the free cash flow decreased JPY 8,545 million, to JPY 14,918 million. Net cash used in financing activities increased JPY 151 million, to JPY 23,660 million, due to reductions in interest-bearing debt. As a result, cash and cash equivalents at June 30, 2006 decreased JPY 8,724 million, to JPY 28,509 million, after changes due to the increase in the number of consolidated subsidiaries.

3. Projections for 2006 (full-year) For the full-year of 2006, cash flows from operating activities will increase. In the category of cash flows from investing activities, meanwhile, payments will increase substantially due to the rise in capital investments, centering on the Electronics segment. Thus, free cash flow for the year will end up in net payments of JPY 2,500 million, representing a decrease of around JPY 62,400 million, from last year's net proceeds of JPY 59,979 million. Interest-bearing debt at the end of the year will be JPY 445,000 million, down JPY 3,800 million from the end of last year.

4. Trends in cash flow indexes

                            2003    1H2004 2004   1H2005    2005    1H2006

Equity ratio               17.7%     18.7%   18.8%    21.3%   21.0%     20.7%
Equity ratio on
market value basis         29.2%     33.1%   32.0%    32.3%   53.3%     59.3%
Debt maturity (years)       8.3        --     8.4       --     5.8        --
Interest coverage ratio     6.0       3.9     5.9      8.2     8.9       8.8

[Notes]

Equity ratio: Equity / Total assets

Equity ratio on a market value basis: Total market value of listed shares / Total assets

Debt maturity (years): Interest-bearing debt / Cash flows from operating activities

Interest coverage ratio: Cash flows from operating activities / Interest payment

- Each index is calculated by relevant formulas with financial figures quoted from the consolidated balance sheet.

- As from the first half of 2006, equity is calculated by deducting minority interests from total equity.

- Market capitalization is calculated by multiplying the closing share price at the term-end by the number of shares issued, after deducting treasury stock.

- As to the cash flows, the amount of "cash flows from operating activities" in the consolidated cash flow statement is used. "Interest-bearing debt" refers to loans payable and bonds out of all liabilities listed in the consolidated balance sheet.

- As to the interest payment, the amount of "interest expense" in the consolidated cash flow statement is used.

About Showa Denko K.K.

Showa Denko K.K. ('SDK') (TSE: 4004; US: SHWDF) is a major manufacturer and marketer of chemical products serving a wide range of fields ranging from heavy industry to the electronic and computer industries. SDK makes petrochemicals (ethylene, propylene), aluminum products (ingots, rods) electronic equipment (hard disks for computers), and inorganic materials (ceramics, carbons). The company has overseas operations and a joint venture with Netherlands-based Montell and Nippon Petrochemicals to make and market polypropylenes. In March 2001, SDK merged with Showa Denko Aluminum Corporation to strengthen the high-value-added fabricated aluminum products operations, and is today developing next-generation optical communications-use wafers. For more information, please visit www.sdk.co.jp.

Source: Showa Denko K.K.

Contact:

Showa Denko K.K.
Nobuhiro Kato
[e-mail]
[phone]

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