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Taiheiyo Cement : Summary of Explanation and Q&A on Quarterly Financial Results Briefing Session for the Six Months Ended September 30, 2022

This document is a translated version of the Japanese original. In the event of any discrepancy between this translated document and the Japanese original, the original shall prevail.

Taiheiyo Cement to Focus on Investment in North America and Southeast Asia while Building a Stronger Domestic Business Structure through New Quarry Development, Investment and Alliances with Other Company

The following is a transcript of Taiheiyo Cement Corporation’s financial results briefing for the second quarter of the fiscal year ending March 31, 2023, which was released on November 11, 2022.


Masafumi Fushihara, President and Representative Director, Taiheiyo Cement Corporation Hideaki Asakura, Director and Senior Executive Officer, Taiheiyo Cement Corporation Naoyuki Kira, Executive Officer, General Manager of Sales Department, Cement Business Division, Taiheiyo Cement Corporation

Tsuyoshi Hara, Executive Officer, General Manager of Business Development Department, International Business Division, Taiheiyo Cement Corporation

Masahiro Ban, Executive Officer, General Manager of Accounting & Finance Department, Taiheiyo Cement Corporation

Tomonori Yamamoto, General Manager of Corporate Planning Department, Taiheiyo Cement Corporation


Management Overview and Management Policy

Mr. Masafumi Fushihara : I am Fushihara. Thank you very much for joining us today. Following yesterday’s announcement of our second-quarter results and outlook for the current fiscal year, we will give you more detailed explanations today. First, I am going to give you an overview of our business situation and future management policies, followed by detailed explanations of the financial results from the person in charge.

The first half showed a consolidated operating loss of approximately 300 million yen. We haven’t seen this level of loss for 13 years or so. The primary reason for the slump was that securing the price hikes in the domestic cement business were slightly slower than expected.

The loss was due to the higher price of coal for cement production and the cost of electricity. In short, we were not able to keep up with coal prices rise through increases in cement prices.

Coal prices rose gradually from around September last year and coal, which had always been around $100, went up to about $200/t and showed no sign of coming down. This rise in coal prices is expected to be linked to oil prices. If this situation continued, the cement business would be difficult. Therefore, in October last year, we announced a price increase of 2,000 yen/t cement starting from shipments on January 1st this year and began price negotiations with users.

However, Russia’s invasion of Ukraine in February this year caused the price of coal, which had already risen to $200, to soar to nearly $500. Although slightly lower now, it is still hovering above $400. Since we could not keep up our business with the 2,000 yen price increase, we asked users to accept a further increase of 3,000 yen starting with shipments in October this year. In this way, we have been negotiating prices all through the first half.

For the first 2,000 yen price increase, we aimed to obtain the approval of all users by April 1. Since 80% of our users are ready-mixed concrete companies, it was hard to get their approval without a corresponding rise in ready-mixed concrete cooperative prices. Therefore, it took some time, but negotiations for the 2,000 yen increase were completed by this October.

For the additional 3,000 yen increase, we are working to obtain customer approval as soon as possible. We will negotiate the price to reach an understanding by the end of this year at the earliest, or by the end of March next year at the latest.

Although we are asking for an unprecedented price revision of 5,000 yen/t, users have shown a certain level of understanding. The ready-mixed concrete cooperatives around the country have announced significant increases in their prices. However, the timing of the price increase, such as April next year or the beginning of the new year, does not mesh with our desired timing from October this year and it has been difficult to gain their understanding so far.

It is true that for ready-mixed concrete companies, a 1,000 yen per ton increase in the cement price will have a significant impact on their business, but we are negotiating with the hope they would expedite the price revision.


However, the majority of ready-mixed concrete cooperatives nationwide plan to raise their prices by 3,000 yen or 4,000 yen between the beginning of next year and April. The revision of the ready-mixed concrete price reflects the increase in cement prices, so it is unthinkable that they won’t agree to the increase in cement prices.

Since we are cashing out daily against high coal prices, we are continuing to negotiate and hope to confirm all users’ approval by March next year.

As for coal prices, we have been using Russian coal for nearly 60% of our production needs but, according to government policy, we are required to refrain from purchasing from Russia as much as possible. We will fulfill existing contracts as long as vessels can be arranged. However, we have not yet negotiated next year’s contracts.

Since we are not sure what the situation in Russia will be like in the next fiscal year, we are working very hard to find new coal import sources. We will begin importing coal from Australia, Indonesia, North America and other countries. Since Indonesian coal is nearly half the price of today’s Russian and Australian coal, our focus is on how to use such cheap coal.

There are many reasons why we have not previously imported from these countries, including fineness of the coal and other properties such as susceptibility to stockpile ignition. However, we have no choice other than to source imports through various measures. We have already delivered coal samples to our plants and ran various tests to determine its suitability, and intend to increase the import volume in earnest from now on.

As for Australian coal, Tohoku Electric Power Company negotiates an annual price for power generation coal each year. Latest annual price has been set at $395. Although we may be dealing with a slightly lower grade of coal, Australian coal is a kind of indicator of general coal. We don’t think the price will drop sharply in next fiscal year, so we are working hard to increase the imports from Indonesia and North America.

In forecast for second half, we have only included certain import volume of lower price coal . If the volume increases, variable costs may be slightly lower than expected.

The price of electricity has also risen steeply. As we do not generate all our own electricity we are inevitably having to pay more for that purchased from power companies and it is important for us to find ways to cover the increase.

On October 24, a waste heat power generation facility at the Saitama Plant started operation. Therefore, we expect to see the benefit of reduced purchased electricity in the future. So, the second half depends on two things – the increase in cement prices as soon as possible and the reduction of variable costs.

As for our overseas business, operating income of the first half deteriorated by about 4.6 billion yen from the same period last year. The primary reason was the simultaneous need for repairs at


three plants in the United States. It would have been nice if the repairs could have been implemented with a little more balance but, partly due to the convenience of contractors, the work was concentrated in the first half this year. Compared to the first half of last year, there were more than 30 more days of plant shutdowns, which resulted in greater haulage distances from distant plants and the usage of imported cement with a lower profit margin. As a result, profitability was slightly lower in the first half of this year.

There was also a strike by the ready-mixed concrete workers’ union in Washington State. As a result of the interruption of ready-mixed concrete shipments until the strike was settled, our U.S. business struggled a little in the first half.

However, the newly acquired Redding cement plant has been making a decent contribution, and another plant is under review by the local authority corresponding to Japanese Fair Trade Commission. Once we get the permit, the two new plants will be in full operation, which would be a very exciting situation for the future.

With regard to our China business, we have decided to suspend operations of our cement plant in Dalian. Since it became clear that the land lease could not be renewed, we must cease the business there after more than 30 years of operation.

We have already sold our subsidiary in Qinhuangdao to a local company the year before last and our subsidiary in Jiangnan is facing difficulty getting a new permit for mining. However, we have some long-standing customers in Hong Kong and we have many other relationships there, so we need to continue to think strategically about how we will interact with China.

In the future, we will concentrate our management resources on Southeast Asia, which is expected to grow. Last year, we secured a 15 percent stake in a subsidiary of an Indonesian state-owned company. Also, in August, the Philippines plant held the groundbreaking ceremony for a new production line after the old one was dismantled and cleared. The new line will be completed in two years. As for the plant in Vietnam, we will continue to invest in waste heat power generation and environmental projects focusing on recycling in order to make the plant contribute to the formation of a recycling-oriented society in the country.

For our domestic business, we will first work on the development of quarries. Actually, we have been developing quarries in sequence for a long time and, probably by the end of this year, we will be able to start developing a new quarry at the Oita Plant.

Also, we will jointly develop the Myojo Cement quarry with Denka Company Limited. (hereunder, Denka) , with whom we are entering into a business alliance. We have been able to strengthen our relationship with Denka in various ways during the business transfer and hope to begin construction there in the next year or so. Once it is done, we will be able to secure limestone reserves in the quarries of each plant for the next 100 years or so, ensuring a very stable raw material supply for the future.


As I have just informed you, Denka has transferred its cement business to us, and we have agreed to sell it under our brand name from shipments starting April next year. For the next two years or so, Denka will run its own plant and produce cement, and we will receive and sell it under the Taiheiyo Cement brand.

The reason for this two-year time frame is that there are more than 200,000 tons of various wastes generated from Denka’s plants. After Denka’s cessation of cement production these wastes will basically be received and processed by Myojo Cement.

In preparation for this, we must make various capital investments in Myojo Cement and develop a system for two years. After the investments completed, instead of Denka we will supply users from our group’s plants with over 1 million tons of cement.

We undertook OEM from Hitachi Cement three years ago. This time, we will produce and sell Denka’s portion as well.

We are now serving as a recipient for companies that will discontinue cement production. We have a very good balance of plants in Japan, with cement plants in each region from Hokkaido to Kyushu and on both the Pacific and Sea of Japan sides. It is probably for this reason that we are an obvious partner for business alliances.

Since we were the first company to build a cement plant in Japan 141 years ago, we can say that the history of the cement industry in Japan is equal to the history of Taiheiyo Cement. Over the course of 141 years, cement production in Japan grew from 0 to 100 million tons. As a cement company with such a history, we believe we have an obligation to supply cement for the domestic market and operate under such a corporate mission.

Therefore, since we have such obligation of supply, we may start to discuss what we can do if we are approached from other companies in the future. Most recently, the two companies I just mentioned told us they hoped to work with Taiheiyo Cement.

We are also committed to carbon neutrality and towards achieving this goal, we will complete the development of technology by 2030 and implement the technology and equipment in each plant and other facilities by 2050. We made this declaration, and are now steadily investing in facilities and engaged in R&D to achieve carbon neutrality.

As part of our efforts we are working on the development of new calciner to efficiently capture CO2. We have begun construction of a demonstration plant in Sanyo-Onoda City and, next year, we will use the plant to develop more specific technologies, which will then be used to create facilities that can be installed in each plant. If the equipment is too large, there will be no place to install it in the current plants. So, we are developing compact facilities which can be retrofitted to kilns to recover 100% of CO2 from the exhaust gas.


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