Sanyo Special Steel Co., Ltd.
IR Briefing Regarding the Business Results for the FY2018 1Q andSanyo Special Steel Co., Ltd. (Sanyo) Becoming a Subsidiary ofNippon Steel & Sumitomo Metal Corporation (NSSMC)
Q&A Summary
Date:

September 10, 2018

Speaker:

Representative Director and President;
Shinya Higuchi(Sanyo Becoming a Subsidiary of NSSMC)

Director, Member of the Board and Managing Executive Officer;
Kozo Takahashi(Business Results for the FY2018 1Q)* Please be noted that the actual Q&A session was in Japanese and this English
translation is prepared for reference purpose only.
----------------------------------------------------------------------------------------＜Sanyo Becoming a Subsidiary of NSSMC＞
Q. As the acquisition of OVAKO shares is financed through third party allotment, major stock
dilution will be caused. Did you consider any other options such as combination of capitalincrease and external debt?
A. While even under the current structure, D/E ratio on a consolidated basis after making OVAKO asubsidiary of Sanyo will be 0.5x, if all necessary funds to acquire OVAKO shares are procured
through external debt, it will be 1.2x. Considering that level of D/E ratios of other Japanese special
steel companies are around 0.4x, we thought that we need to keep our D/E ratio at or around 0.5x
and this is why we chose to finance only through third party allotment.

Q. In terms of timeline of realization of synergies, which items are realized at an early stage
and which items take time in your view?
A. Please note that the deliberation of details of synergy can only be made after March 28, 2019, thescheduled date of the acquisition of OVAKO shares, after obtaining approvals from the competition
authorities and shareholders through the extraordinary general shareholders meeting. With that
said, we believe that it is possible to rearrange manufacturing sites sooner for customers whose
approval has been obtained and who has been procuring materials from both Sanyo and OVAKO,for example. On the other hand, if it is necessary to obtain customer's new approval, it will take atleast two years to rearrange the manufacturing sites. With respect to the sharing of operational
know-how, although know-how is in nature considered difficult to share, we believe that some ofsuch know-how can be shared in short time.

Q. Although the business results of OVAKO were not well in the past, you are assuming
OVAKO’s future earnings performance based on this year's year-to-date performance,
which was good. Is this the right presumption? How sustainable do you think are the resultsof this year's year-to-date performance?
A. The performance of OVAKO has been improving even recently because of the effect ofstreamlining the operation and cost reduction initiatives implemented during the previous periods
when OVAKO was being controlled by a fund shareholder, and reduction of interest rates throughrefinancing of borrowings and bonds. We, therefore, believe this improvement is sustainable. Inaddition, as in Japan, there has been increasing demand for special steel in Europe, and webelieve this will also continue to contribute to the improvement of OVAKO's profitability.

Q. Is it possible, for example, for Japanese bearing manufacturers to switch easily to Sanyo(OVAKO) products in Europe in future?
A. Speaking of cutting-edge products, there are differences in usability depending on products. Someproducts and processes may require additional improvement. Although these differences are notclear without examining product details and costs, we consider that it may take long time in somecases to switch products.

Q. It seems that the average unit sales price of OVAKO products is higher than that of Sanyo.
Is it correct to consider that the base margin of OVAKO is superior compared to Sanyo?
A. Currently, Sanyo and OVAKO are competitors, and details including unit sales price will be
examined after March 28, 2019. Having said that, based on our impression through public data, it ispossible that both unit sales price and cost of OVAKO are higher than those of Sanyo. Since
reducing costs makes it possible to increase the margin, we aim to reduce the cost in OVAKO.

Q. Is it possible for OVAKO to reduce its costs with existing equipment?
A. We consider that there could be some improvement on operation that may be realized simply bymodifying existing facilities as necessary.

Q. Regarding fund procurement, although maintaining D/E ratio was mentioned as a reason
for adopting the third party allotment, the entire Japanese special steel industry seems tobe over capital, which is leading to low Price Book-value Ratio (“PBR”). Based on suchcircumstances, shareholders of Sanyo could be expecting Sanyo to operate its businesswith higher leverage. Why did you decide to dilute the shares? It seems that Sanyo’s
financials can be improved if inventory is reduced and the delay in collecting accounts
receivables is improved.
A. As we are adopting the scrap surcharge system, accounts receivables will increase if the prices ofraw materials and fuel increase. With respect to the large amount of inventory, we also recognize
this issue. The reason for increasing amount of inventory is the increase in the raw materials andfuel unit prices, but we believe that it is now improving. Regarding PBR, as you pointed out, itseems to be low in the Japanese special steel industry. We believe there is an investment need toconsider for Mahindra Sanyo Special Steel Pvt. Ltd. in India and for renovation of our factory inHimeji even after the period in 10th Medium-Term Business Plan. In order to retain future financingflexibility, we selected this scheme.

Q. If it is necessary to raise funds in the future, you should first raise the share price byincreasing profits through investment before raising funds. Doing a third party allotment atsuch a low price like in this case makes shareholders feel that they have a loss.
A. There seems to be various views on whether the price of this third party allotment is adequate ornot. We believe that JPY 2,800 is not necessarily low as it is at 19% premium compared to Sanyo’s
share price at the previous date of publication of this transaction on March 15, 2018.
END

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