Shinsho : Business Report (April 1, 2022, to March 31, 2023)

Business Report

April 1, 2022, to March 31, 2023

1. Matters concerning the State of the Corporate Group

1-1 Progress and Outcomes of Business Operations

During the consolidated period under review (April 1, 2022, to March 31, 2023), the global economy slowed somewhat. Negative economic factors included the prolonged conflict in Ukraine, interest rate hikes in Western countries aimed at curbing inflation, and the zero-Covid policy in China. The Japanese economy fared well on the whole. Although manufacturers experienced delays in production because of supply-chain disruption, this was outweighed by the country's transition from pandemic conditions to economic normality.

As for our performance, we ramped up our environmental efforts. We established a basic policy on sustainability, conducted a materiality analysis to identify material issues (the issue that matter the most to our businesses and to our stakeholders), and worked to contribute to the manufacturing of tomorrow and ensure that our business activities are environmentally friendly. Our environmental action and reporting earned us a B score from the CDP (an international non-profit organization that runs an environmental reporting system). We also invested in UMI No. 3 Investment Limited Partnership as part of our efforts to nurture startups and build partnerships in the decarbonization industry and in and other sectors fighting against climate change.

We recognize that the success of our business activities depends on us safeguarding employee wellbeing and providing a healthy, flexible workplace. With that in mind, we took steps to get our organization recognized as an exemplar in employee wellbeing and productivity-by being listed in the large enterprise category of the 2023 Certified Health & Productivity Management Outstanding Organizations Recognition Program.

Our consolidated financial results were as follows: We recorded ¥584,856 million in sales (up 18.3% from the previous year), ¥13,459 million in operating income (up 33.9%), ¥12,668 million in ordinary income (up 30.2%), and ¥9,196 million in net income attributable to shareholders of parent (up 28.9%).

The performance of each business segment was as follows.

(1) Iron & Steel

Sales of steel-plate/sheet and special steel products decreased. Although they sold well thanks to brisk demand from shipbuilders and construction firms, sales to automakers were sluggish because auto production remained slow amid the ongoing semiconductor shortage. However, because of higher sales prices, revenue and profit increased.

Consequently, the Iron & Steel Segment posted sales of ¥238,585 million (up 18.3% from the previous year) and segment income of ¥5,140 million (up 24.4%).

(2) Ferrous Raw Materials

Revenue increased, with a higher volume of sales of the main raw material and cold iron materials to Kobe Steel. Profit increased also, thanks to higher sales prices.

Consequently, the Ferrous Raw Materials Segment saw sales of ¥64,535 million (up 42.6% from the previous year). Segment income amounted to ¥1,498 million (up 108.5%).

(3) Nonferrous Metals

Revenue increased, with strong sales of aluminum sheets/strips and other nonferrous materials to automakers and chipmakers. However, profit decreased because of fewer sales of copper sheets and strips for automotive terminals and of copper tubes for air conditioning units.

Consequently, the Nonferrous Metals Segment posted sales of ¥194,480 million (up 15.4% from the previous year) and segment income of ¥2,675 million (down 11.8%).

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(4) Machinery & Electronics

Revenue and profit increased, with higher sales of construction machinery parts to clients in Japan and overseas, higher sales to Japanese clients of rotating machinery or maintenance services related to such, and strong performance in Japanese subsidiaries.

Consequently, the Machinery & Electronics Segment posted sales of ¥58,143 million (up 4.9% from the previous year) and segment income of ¥2,170 million (up 37.1%).

(5) Welding

Revenue and profit increased, with strong sales to shipbuilders and construction firms in Japan and to shipbuilders overseas, coupled with higher sales prices for welding materials.

Consequently, the Welding Segment posted sales of ¥28,870 million (up 23.8% from the previous year) and segment income of ¥804 million (up 148.0%).

Sales and Income by Segment

	104th term	105th term	Year-on-year change
Segment	Sales	Segment	Sales	Segment	Sales	Segment
	income	income	income
	million yen	million yen	million yen	million yen	%	%
Iron & Steel	201,619	4,132	238,585	5,140	18.3	24.4
Ferrous Raw Materials	45,265	718	64,535	1,498	42.6	108.5
Nonferrous Metals	168,546	3,033	194,480	2,675	15.4	(11.8)
Machinery &	55,430	1,582	58,143	2,170	4.9	37.1
Electronics
Welding	23,327	324	28,870	804	23.8	148.0
Other	439	(65)	538	378	22.6	－
Adjustment	(275)	－	(297)	－	7.8	－
Total	494,351	9,726	584,856	12,668	18.3	30.2

1-2 Capital Expenditure

In the current fiscal year, capital expenditure (including in intangible fixed assets) totaled approximately ¥1.4 billion. A large share of the expenditure was allocated to enhancing the assets of Grand Blanc Processing, L.L.C., and Suzhou Shinko Shoji Material.

1-3 Ongoing Challenges

To achieve growth in this business climate, we have a medium-term plan for 2021-2023 (year ended March 2022 to year ending March 2024) in which we will strengthen existing businesses, forge new businesses, invest toward business growth, strengthen governance, and actively integrate sustainability into our businesses. Our key tasks are as follows:

(1) Strengthening profitability

During the period under review, we took action to strengthen profitability and adapt to external challenges such as volatile exchange rates and increases in freight charges and other costs.

Alongside this, we worked to drive our global business growth. We strengthened the functions of three overseas hubs (USA, Thailand, China), founded a joint venture in India that sells parts to construction firms, and founded a Vietnamese subsidiary that cuts and processes aluminum sheets.

(2) Investing efficiently

We continued allocating capital expenditures to operating companies that engage in global agendas such as the shift to electric vehicles and the demand for greater environmental responsibility. With such expenditures, our US subsidiaries Grand Blanc Processing, L.L.C., and

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Aiken Wire Processing, L.L.C., (secondary processors of special steel) introduced wire drawing machines, and our Chinese subsidiary Suzhou Shinko Shoji Material (a processor of aluminum rolling materials) introduced a large production line for leveling and shearing.

1. Strengthening our trading function Growing SDG-linked businesses
   SDG-linked businesses are on the rise. We will invest in businesses that help build a circular economy (such as businesses that offer a stable supply of biomass fuels, market cold-formed iron globally, or recycle non-ferrous scrap) and in products that will help achieve carbon neutrality (such as compressors and equipment for LNG carriers).
   Strengthening entrepreneurship
   As part of our efforts to nurture startups and build partnerships, we invested in UMI No. 3 Investment Limited Partnership, a fund of Universal Materials Incubator. In this way, we are looking to unlock synergies and also drive entrepreneurship in the decarbonization industry.
2. Bolstering the Business Foundation Tightening Corporate Governance
   The listing requirements for this market include tight corporate governance. Accordingly, we have committed to complying with all principles in Japan's Corporate Governance Code, including robust evaluations of board effectiveness.
   We have also taken action to improve our ESG performance. For example, we have established the Sustainability Committee, which advises the Board of Directors on sustainability matters. For environmental governance, we have also adopted the recommendations of the Task Force on Climate-Related Financial Disclosures. For social governance, we took actions to earn a listing in the 2023 Certified Health & Productivity Management Outstanding Organizations Recognition Program.
   To improve stakeholder engagement, we released our first integrated report on October 2022. We will continue efforts to make it easier for people to understand the actions we are taking.
   Embracing diversity
   We hire and promote diverse talent on the principle that job security and equal employment opportunities should be available to all, regardless of race, nationality, creed, gender, or disability. Amid the growing societal expectations for empowering women in the workplace, as illustrated by the enforcement of the Act on Promotion of Women's Participation and Advancement in the Workplace, we provide our workforce training opportunities designed to empower all employees. In our effort to provide a workplace culture that respects the inherent worth and dignity of every person, we are building a talent management system that accommodates diverse working practices and that rewards employees fairly, reflecting their contribution to the company.
   Our new diversity project team, launched this year, will use employee feedback to identify sustainability issues and advise the management on future actions and a timetable for addressing the concerns. We also use an internal newsletter to keep employees informed about the project team's activities. We will continue to introduce new organizational and workplace improvements to promote sustainability, guided by feedback from our employees.
   Building Risk Management Infrastructure
   We prepare actions plans for risk management. We also have the Risk Management Committee, which monitors risks and advises the Management Committee on how to respond to priority issues.
   We have established the Business & Risk Management Department to coordinate all risk management operations throughout the organization. To bolster risk management throughout our corporate group, we assist our subsidiaries and affiliates in managing risk and we monitor health and safety in our manufacturing companies.
   Digital Transformation
   We have committed to a digital transformation, the ultimate goal of which is to improve the value of our organization. Our digital transformation strategy involves engaging in three tasks concurrently: cultivating DX talent, shifting to more productive working practices, and customer- centric value creation.

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Under the leadership of the Corporate Planning Department's DX team, the business divisions select DX supervisors to coordinate horizontal DX action across the segments.

For cultivating DX talent, our business units and corporate divisions will work to cultivate talent who can design workflows and apply digital tools with an eye on the organization as a whole. They will also provide training opportunities to improve all employees' digital literacy.

To shift to more productive working practices, we will use digital technology to improve the efficiency of our workflows and communications so that our organization can devote more energy to sales and marketing-the business end of our operations.

For customer-centric value creation, we will develop a mechanism through which divisions will share their sales information (information on customers, leads, marketing activities) with each other instead of keeping it to themselves as they have done until now, as such cross-organizational communication will strengthen marketing.

Keeping capital costs in check

We have for years used ROE as a KPI of financial performance. In the period under review, our ROE was 13.6%. As well as monitoring ROE, we keep capital costs in check by ensuring loan repayments and reducing the shares we hold under cross-shareholding arrangements.

1-4 Assets and Income

(1) Assets and Income of the Corporate Group

			102nd term	103rd term	104th term	105th term
	Segment		(FY2022)
		(FY2019)	(FY2020)	(FY2021)
			(period under review)
	Sales	(millions of yen)	936,031	784,160	494,351	584,856
	Ordinary income	(millions of yen)	3,943	4,067	9,726	12,668
	Net income attributable to	(millions of yen)	1,629	2,198	7,136	9,196
	shareholders of parent
	Earnings per share	(yen)	184.03	248.24	805.91	1,042.65
	Total assets	(millions of yen)	284,477	286,233	364,029	395,092
	Total equity	(millions of yen)	54,571	57,185	63,753	73,896
(2) Assets and Income of Shinsho Corporation
			102nd term	103rd term	104th term	105th term
	Segment		(FY2022)
		(FY2019)	(FY2020)	(FY2021)
			(period under review)
	Sales	(millions of yen)	760,698	646,529	345,607	415,342
	Ordinary income	(millions of yen)	4,372	4,044	6,382	8,634
	Net income attributable to	(millions of yen)	2,318	2,313	4,928	6,643
	shareholders of parent
	Earnings per share	(yen)	261.78	261.23	556.56	752.94
	Total assets	(millions of yen)	205,784	215,371	267,265	277,341
	Total equity	(millions of yen)	38,355	42,176	45,552	50,495

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1-5 Parent Company and Significant Consolidated Subsidiaries

(1) Significant Consolidated Subsidiaries

		Investment
Company name	Paid-in capital	ratio%	Main Business Lines
		%
Shinsho Steel Products Corporation	310 million JPY	100	Trading of construction materials and special
steel products
MORIMOTO KOSAN Co., Ltd.	30 million JPY	100	Trading of steel products; cutting, processing,
and trading of steel-plate and sheet materials
Shinsho Non-Ferrous Metals Corp.	90 million JPY	100	Cutting, processing, and trading of aluminum
and copper products
Shinsho Metals Corporation	30 million JPY	100	Trading of raw nonferrous metals and processed
products
			Import, export, and trading (in Japan) of
Matsubo Corporation	465 million JPY	100	industrial machinery and plants; contracted
			installation of machinery
SC Welding Corporation	44 million JPY	100	Trading of welding materials, welding
equipment, and welding robot systems
Shinsho Business Support Co., Ltd.	10 million JPY	100	Contracted personnel operations; temporary
staffing
			Import, export, and trading of products related
Shinsho American Corp.	19 million USD	100	to iron & steel, ferrous raw materials,
nonferrous metals, machinery, and information
			industry
Grand Blanc Processing, L.L.C.	18 million USD	70*	Secondary processing of special steel wire
products
Aiken Wire Processing, L.L.C.	2.617 million	100*	Wire drawings for special steel wire rod
USD
Shinsho Mexico S.A. de C.V.	1.5 million	100*	Import, export, and trading of iron & steel
USD	products
			Import, export, and trading of products related
Shinsho Europe GmbH	1 million EUR	100	to iron & steel, nonferrous metals, machinery,
			information industry, and welding
Kobelco Trading Australia Pty. Ltd.	1.7 million	100	Investment in mineral rights
AUD
			Import, export, and trading of products related
Kobelco Trading (Shanghai) Co., Ltd.	13 million USD	100	to iron & steel, ferrous raw materials,
nonferrous metals, machinery, information
			industry, and welding
Suzhou Shinko-Shoji Material Co., Ltd.	8.82 million	100	Slitting, shirring, processing, and trading of
USD	aluminum rolling materials
			Precision-processing of products for liquid
Kobelco Precision Parts (Suzhou) Co., Ltd.	450 million JPY	80	crystal displays and semiconductor equipment;
			bonding-processing of target materials
Kobelco Precision Parts (Yangzhou) Co.,			Processing and trading of semiconductor
400 million JPY	100	equipment, flat-panel display equipment, and
Ltd.
		other products
Shinsho Osaka Seiko (Nantong) Corp.	5 million USD	55	Manufacture, processing, and trading of
automotive parts
	0.2 million		Import, export, and trading of products related
Shanghai Shinsho Trading Co., Ltd.	100	to iron & steel, nonferrous metals, machinery,
USD
		information industry, and welding

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