Sanyo Special Steel Co., Ltd.
IR Briefing Regarding the Business Results for the FY2020 2Q
Q&A Summary
Date:

Thursday, October 29, 2020

Speaker:

Director, Member of the Board and Managing Executive Officer;
Kozo Takahashi* Please be noted that the actual Q&A session was in Japanese and this English
translation is prepared for reference purpose only.
----------------------------------------------------------------------------------------Q. Could you please give us a detailed explanation about the recording of inventory valuation gain,
and the amount of impact?
A. When inventory unit price exceeds the selling unit price due to sudden decrease in production
volume etc., we need to recognize a loss on valuation of inventories based on accounting rules.
The recorded loss on valuation of inventories will be reversed when the inventory unit price drops
below the selling unit price. When we announced in the previous forecast (7/31), we expected thisreversal period to be in the second half of 2020. However, the recovery in production volume was
earlier than expected, and therefore inventory valuation gain was recorded in the second quarterof 2020. The inventory valuation amount of loss in the first quarter and gain in the second quarterare same, which is 0.8 billion yen.
Q. Could you please tell us any ideas of non-consolidated business forecast for FY2020?
A. For FY2020, we expect positive factors such as a) increase in sales volume, b) decrease in repair
cost, c) decrease in fixed cost, along with cautious factors such as d) lower ratio of highly
profitable alloy steel, e) rise in scrap price, f) delayed impact on manufacturing costs due to costrising in the first half. We believe the sales product mix to deteriorate, due to continuing
destocking of stainless steel, which is quite profitable.
Q. How do you view the financial performance for FY2021?
A. Regarding Sanyo, we expect a positive impact from sales volume increase due to the recovery incustomer demand, and a negative impact due to the completion of unemployment compensation
scheme. Regarding Ovako, we strive to gain operating income that exceeds the amortization ofgoodwill which is 2.6 billion yen. Although it seems to be somewhat a high target from the current
performance, Ovako can have a large positive effect from increasing the quantity due to its highmarginal profit unit price. In addition, we expect that fixed cost will further be reduced by meansof restructuring. Regarding MSSS, we expect to become profitable next year. To conclude, weaim to achieve positive results on consolidated basis and restart paying dividends.

Q. Could you please tell us about the progress of the synergies among Nippon Steel, Ovako andSanyo?
A. Regarding the synergies, it takes some time to switch the manufacturing site because of customer
approval, but sales related synergies in other areas are increasingly accomplished. We will
relentlessly aim to fully realize the synergies by March 2025.
Q. Could you please tell us about domestic demand trends for special steel by each industrial sector?
A. Currently, the demand for automobiles, both for automobile manufacturers and automobile parts
manufacturers are strong. But there is a possibility that inventory may be accumulated and wecontinue to watch the movement of automobile industry closely. Construction machinery has been
in a destocking phase for a long time, but it finally has bottomed out and is expected to recover.
For industrial machinery, capital investment-related items such as machine tools and robots have
not yet recovered. We consider that the reasons are future uncertainty such as the US-China
trade dispute and the US presidential election, hence capital investment decisions are postponed.
Destocking for stainless steel is continuing due to its long supply chain. Tool steel is mostly for
automobiles and the inquiries from customer are increasing.
Q. How do you think the post-corona demand would be?
A. We consider that the demand environment will not completely return to pre-corona level as one ofthe possible scenarios. Even if the demand does not return to the pre-corona level, we have to
become a more profitable company. Therefore, we will continue or endeavor to lower break-evenpoint by reducing fixed costs on consolidated basis.
Q. There are reports that say China plans to phase out conventional gas-burning cars by 2035. Also
there are many reports about carbon neutrality. How will these affect your business?
A. Since we manufacture special steel from scrap, we assume that our CO2 emissions are relatively
low. We are working to save energy and reduce CO2 emissions throughout the supply chain as
we showed in our IR material Page 27 to tackle with the challenge zero activity. Ovako, which islocated in Europe, is well concerned of environmental issues and is working on steel heating
using hydrogen.
Regarding China reports, we do not think that the demand for special steel will be affected bothsignificantly and immediately. We will continue to expand our presence of high-cleanliness steel
since we regard the change to EV and HEV as a positive business opportunity.
Q. Could you please tell us about the mechanism how to calculate exchange rate impact in Ovako?
A. Basically, Ovako makes transactions in euros, but some of Ovako’s subsidiaries are based on
Swedish krona. Hence, foreign exchange effects appear when Ovako makes consolidated
statements in euros. Regarding foreign exchange effects, Ovako record the effects resulting
from operating transactions as operating income and losses, and record the effects resulting fromintra-group loan transactions as non-operating income and losses.

Q. Is there any possibility that the oxygen shortage in India will become a constraint on the production
and sales of MSSS while demand is expected to recover?
A. The oxygen shortage affected the production and sales of MSSS in the July-September 2020. The
newly infections of coronavirus in the state of Maharashtra, where MSSS is located, is declining,
and we think oxygen shortage will be resolved momentarily. The amount of oxygen procured byMSSS has also increased significantly, and we do not think it to be a restraining factor for sales
volume in the second half.
Q. Could you please tell us about the cost outlook for electrodes, in 2nd half of FY2020 and FY2021?
A. We think that the price will not increase in the second half of 2020. In case supply and demand ofelectrodes in 2021 may become tight due to the increase in production volume, it may have animpact on the procurement cost. We would like to continue to increase the usage of inexpensive
Chinese products to offset the possible increase of electrode price.
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