DOWA : Q&A Session Minutes on Full Year Corporate Strategy Briefing

Q&A Session Minutes on Corporate Strategy Briefing held in May 2023

Time: 10:00 to 11:40, Friday, May 19, 2023

Place: The conference room of head office (Chiyoda-ku, Tokyo) with live internet streaming.

Briefers: SEKIGUCHI Akira, President and Representative Director HOSONO Hiroyuki, Director

OKASHITA Osamu, General Manager of Accounting Dept.

OSHIKA Yoshikazu, Manager of Corporate Strategy Dept.

■Common

1. You have said that capital investment will be carried out as planned. In terms of profits, however, there are gaps between the results and the assumptions of the Midterm Plan. How do you summarize these gaps from the perspective of the relationship between investments and profits?

（President）

The investment plan for FY2023 includes the handling of aging facilities, as well as investments for the improvement of infrastructure in preparation for climate disasters. In the past, we fell behind in business because we did not continually invest. Taking this experience and other factors into account, we believe that it is important to make capital investment according to our plans.

Although profits are forecast to be lower than the Midterm Plan's targets, we are able to secure sufficient cash due in part to the termination of tolling contract for smelting copper concentrates with Onahama Smelting and Refining Co., Ltd. Going forward, in the event of a significant change in cash flows, we may have to drastically review the investment plan. Still, in light of the recent situation, we trust that we will be able to make capital investment without any problems.

1. The Group's overall costs have increased approximately 20.0 billion yen over the recent two years. Reflecting this increase, you have projected that price revisions amounting to 4.0 billion yen will be implemented in FY2023. Is this the maximum

amount or is there more room for additional revisions?

（President）

Over 90% of the 20.0 billion-yen cost increase is attributable to the Nonferrous Metals Business. In the Nonferrous Metals Business, however, with raw material prices and products' sales prices being linked to LME prices according to the global commercial practice, it is very

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difficult for the Company to deviate from the practice and implement price revisions by itself. The planned approximately 4.0 billion-yen price revisions are being implemented to address cost increases that occurred in the Environmental Management & Recycling Business, the Metal Processing Business and the Heat Treatment Business. Therefore, we are already able to respond to cost increases that occurred in sectors other than the Nonferrous Metals Business during the two-year period.

1. Assuming that the market conditions will start to recover in the second half of FY2023, it will be necessary to secure proper inventory levels to ensure that there is no opportunity loss. What are your insights about the probability of risks such as inventory adjustments going forward?

（President）

The Group has been thoroughly controlling inventories at each business sector. Strict inventory management has been implemented within all sectors including the Nonferrous Metals Business, which has a high level of inventory. Take for example, the Business Management Committee that are held every month, we have a scheme for reporting the status of inventories in place regarding key components and raw materials, in addition to the provision of an overview of business by each business sector. Despite the possibility of inventory fluctuations due to a sharp increase or decrease in demand, we have managed to avoid a situation in which we continue to have excessive inventory for a long period of time. So, we have successfully managed the situation to prevent overstock.

■Nonferrous Metals

1. Profitability has been declining in the Zinc Business. In consideration of the improvement of purchase conditions for the zinc concentrates, would one option be to increase production to reduce the impact of rising costs? From the perspective of the overall profitability of the smelting and recycling complex, do you really think that it is essential to decrease production at Akita Zinc? Also, what are your insights about the possibility of the further reduction of production?

（President）

Regarding zinc business, our policy is to facilitate stable production and sales. Meanwhile, demand for galvanized, zinc-plated, steel sheets is expected to be weak in FY2023 based on the automobile production forecast. Therefore, if we continue full production, we will have to rely on exports, the profitability of which is low. To avoid this, we plan to reduce the production of zinc accordingly.

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Another constraint is the difficulty of reducing production significantly because the zinc production facilities were installed based on the assumption of full production. As a general rule, the maximum reduction that we can make in the production of zinc is 10% at the most. In these conditions, we are searching for measures to minimize the negative impact of a range of factors.

With demand and the price of zinc expected to continue to fluctuate daily going forward, we will factor in the forecasts and act flexibly.

1. Regarding the increase in treatment in the PGM Business in conjunction with the upgrade of the electric furnaces, in the past it has often been difficult to see the effects of investments when it comes to the PGM Business. What effect are you

expecting the investment in the recent upgrade to have?

（President）

Regarding the effect of the investment, we plan to ramp up treatment from 1,000 tons per month, which the facility currently operates to achieve, to 1,400 tons per month after the upgrade. We aim to increase future profits to 1.3 to 1.4 times the current level, excluding market price-related conditions.

Incidentally, the PGM Business involves the process of concentrating a few grams of platinum-group metals contained in a piece of spent catalyst using large plant equipment. It is therefore difficult to correctly predict when the input and output will be balanced. We theoretically understand the amount of losses. On the other hand, we are empirically aware that the gap occurs in the output timing depending on the type and the input timing of spent catalyst. Therefore, it is difficult to say clearly how much profit will be generated in FY2023. That said, if we see it through the aggregation of two- to three-year period, the result will converge the difference between the conditions on which the spent catalyst are purchased and the capabilities of operation.

■Electronic Materials

1. What are your expectations regarding the timing of the launch of new products and

the size of the business related to these products?

（Oshika）

Based on three core revenue pillars, specifically LEDs, silver powder and recording materials, which all have different applications and markets, the Electronic Materials Business remained responsive to the changes in market conditions. As the direction in which the Electronic Materials Business is heading, which is to expand into various types of markets,

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has not changed, it is important to facilitate the growth of products that have a strong competitive edge in their respective markets.

Now, we are facing the challenge of establishing a product that can be newly positioned as one of the core pillars in the place of silver powder. We can expect that fuel cell materials will be a core pillar generating significant revenue in the future because its market is expected to expand in new energy-related business areas. In addition, we will work on new applications for the short-wavelength-infrared LEDs that we started to mass-produce and launched in FY2022.

Regarding silver powder, we will work to recover sales by developing new powder, in consideration of the faster-than-expected growth of the solar power panel market, as well as the increase in the penetration rate of next-generation solar panels that offer improved power generation efficiency and higher power output.

In addition to the three core pillars of revenue, fuel cell materials, short-wavelength- infrared LEDs and silver powder, we will facilitate the development of magnetic materials- related technologies. Increasing revenue through these measures is the direction in which the Electronic Materials Business is moving over the medium to long term.

（President）

Regarding the revenue from new products, we think that 1.0 to 2.0 billion yen for each new product will be considered as a target. We had been relying on silver powder as the mainstay product to date. Consequently, we have seen a deterioration of the entire business sector when results related to silver powder were poor. Therefore, we think that it is important to have several kinds of products from which we can earn revenues ranging from 1.0 to 2.0 billion yen.

Also, how soon we can increase the revenues from the individual new products will depend, in our view, on how we can accelerate development and whether the relevant markets start to expand.

■Metal Processing

1. Many of the main measures set out in the Midterm Plan are entering the phase where they will contribute to business in FY2024. How confident are you in those measures?

（President）

For our key measures, we are working on not deviating from the Midterm Plan. We assume that whether or not these measures will contribute to profits depends on to what extent we

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can tap into demand related to automobiles and telecommunications equipment. The market environment has been unfavorable recently. However, if we are swayed by the situation and put off the implementation of the measures, we may miss opportunities when the market starts to rapidly pick up. In addition, regarding new technologies, we need to continue to provide customers with samples that appeal to them. Otherwise, we will face the risk of our products being replaced by the products of competitors.

The Metal Processing Business will move forward with measures steadily and by doing so, it will seek to achieve the profit targets set out in the Midterm Plan.

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