JFE : Issues Seventh Medium-term Business Plan to FY2024

May 7, 2021

JFE Holdings, Inc.

JFE Issues Seventh Medium‐term Business Plan to FY2024

Biggest transformation in company's history aimed at achieving global success

JFE announced today that it has issued its seventh medium‐term business plan running from FY2021 through FY2024, signaling the beginning of the most transformative period in the company's history. Through the plan, JFE aims to rise to a new level by taking bold steps to establish a foundation for sustained, long‐term growth. In particular, the plan is designed to enable JFE to overcome rapid and extensive change in social and economic conditions surrounding the company, including a difficult and unprecedented operating environment characterized by intensifying global competition amid the ascendency of China, increasing economic uncertainty and geopolitical risk due to U.S.-China conflict, needs to address climate change, such as carbon neutrality, the emergence of innovative new digital technologies, and the spread of COVID‐19.

I. JFE's mission

The long‐term goal of JFE is to provide products and services that support the development of a prosperous global future, which reflects JFE's corporate vision of contributing to society with the world's most innovative technology.

At the core of JFE's business is steel, a basic material that is indispensable to modern‐day civilization. But the strengths of JFE go beyond that, encompassing an engineering business born out of steel operations that makes life safer and more convenient for society, and also a global trading business that helps to deliver the diverse value of JFE's many operations to all corners of the world. JFE generates value by making maximal use of business resources accumulated over many years, including technology, people, financial and intellectual capital, and networks.

JFE's mission is to be essential to society's sustainable development and to create safe, comfortable lives for people everywhere, and to become a company that is widely recognized throughout the world. Ensuring environmental & social sustainability (helping to solve critical issues) and establishing economic sustainability (stable earnings power) will be crucial to making this happen. This will ensure the resiliency of JFE's operational foundations and allow the company to achieve sustainable growth and increased value over the medium to long term. Through these efforts, JFE employees will develop a stronger sense of mission and responsibility about the company's contributions to sustainable development, motivating them to approach their work with a greater sense of purpose and satisfaction.

1. Medium‐ & long‐term strategies under new plan

1. Achieve environmental & social sustainability

A. JFE Group Environmental Vision for 2050

Having positioned climate change as a top‐priority business issue, we formulated the JFE Group Environmental Vision for 2050 and are now vigorously pursuing efforts to achieve carbon neutrality by 2050.

• Climate change is an extremely important business concern for JFE, based on which the company aims to become carbon neutral by 2050.
• The company will accelerate R&D in new technologies and strive to create super‐innovative technologies.
• JFE also will contribute to the reduction of CO2 emissions in society and use this as a business opportunity to increase corporate value.
• Under the TCFD philosophy, JFE will work systematically to combat climate change

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1. Key environmental initiative
2. • Reduce steel‐business CO2 emissions by 18% vs. FY2013 by the end of FY2024 (adjust FY2030 targets based on progress in technology development under the medium‐term plan)
3. Carbon neutrality by 2050
4. 1. Reduce CO2 emissions at JFE Steel
   2. • Pursue super‐innovative technology for carbon‐recycling blast furnaces and CCU (see Exhibit).
      • Develop hydrogen‐based ironmaking (direct reduction) technology.
      • Leverage top‐in‐class electric arc furnace technology for high‐grade steel manufacturing, high efficiency, etc.
      • Develop transitional technologies for carbon neutrality, including ferro coke, increased use of steel scrap in converters, energy savings and low‐carbon energy transformations.
   3. Expand contributions to CO2 emissions reduction in society
   4. • Engineering business: Expand and develop renewable‐energy power generation and carbon‐recycling technologies.
      • Reduce CO2 emissions by 12 million tons in FY2024 & and 25 million tons in FY2030.
      • Steel business: Develop and market eco‐products and eco‐solutions.
      • Trading business: Increase trading in biomass fuels, steel scrap, etc. and strengthen business in supply chain management (SCM) for eco products.
   5. Accelerate groupwide commercialization of offshore wind‐power business
   6. • Engineering business: Manufacture and market monopile and other seabed‐fixed structures for offshore wind‐power generation.
      • Steel business: Use new continuous casting machine in Kurashiki to produce large heavy plates.
      • Trading business: Carry out SCM for steel materials and processed products.
      • Shipbuilding business:* Manufacture power‐generation floating structures and construct work vessels.
      • Groupwide: Operation and maintenance (O&M) making maximum use of group resources
      • • Japan Marine United Corporation (equity method affiliate)

The task of developing processes to mass produce high‐performance steel with zero CO2 emissions is essential for a sustainable world. Huge R&D and equipment replacement costs will be inevitable as JFE executes strategies targeting carbon neutrality. Society must decide how these costs should be shouldered, including with the support of government and other forms of support. Working toward the lofty goal of carbon neutrality by 2050, JFE aims to establish the necessary decarbonization technologies as soon as possible, ahead of global competitors, with the underlying goal to develop decarbonization infrastructure and achieve equal footing on a global basis.

B. Solve issues impacting society

1. Safety/health management

We take seriously the fact that we have not been able to achieve our top‐priority goal of zero major accidents. Accordingly, we will further increase efforts to prevent accidents by installing facilities.

1. • Invest around 10 billion yen per year groupwide to address safety issues.
   • Implement multifaceted health/safety management using advanced IT (monitoring, detection, etc.).
2. Facilitate employee participation Workstyle reforms

As business becomes increasingly globalized and complex, it is vital that we attract people who can enhance our competitive advantages and execute our growth strategies. Create workplaces and internal structures to maximize employees potential and enable them to work safely and confidently. We will address the following three points:

• Diversity & inclusion (maximize capabilities of employees with diverse backgrounds)
• Personnel development (improve individual abilities and develop skills for global competence)

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1. • Workstyle reforms (create workplaces where employees can work safely and confidently.
2. Contribute to regional societies through engineering

JFE Engineering helps to build independent, decentralized, recycling‐oriented societies through businesses for renewable‐energy power generation, regional PPS,* utility services such as gas and water supply & sewerage, food recycling, and waste‐power generation.

*Power producers and suppliers engaged in local production of energy for local consumption

1. Respect human rights throughout supply chain

As we believe we must respect human rights not only within our own group, we will conduct human‐ rights due diligence across our entire global supply chain from FY2021 and continue to expand our support in this field.

C. Enhance corporate governance

So far we have formulated a Basic Policy on Corporate Governance, established a directors nomination committee and remuneration committee, introduced stock‐based compensation for directors, revised the structure of our board of directors and audit & supervisory board based on evaluations of effectiveness, and taken other steps to enhance governance. During this medium‐term plan, we will set performance targets for non‐financial metrics related to environmental, etc. issues and consider how to apply these in terms of director compensation and investment decisions. We will further strengthen our groupwide cross‐sectional risk‐management system to appropriately deal with diverse risks in our business environment as well as further strengthen group governance.

2. Establish economic sustainability (stable earnings power)

1. Shift focus of domestic steel business from quantity to quality-Pursue world‐class earnings power
   The steel market in Japan is the most important market for us, but we must assume it will shrink as Japan's population declines. Nevertheless, intensifying price competition for commodity products and the increasing trend of local production of steel for local use suggest that efforts to grow export volumes are not likely to be profitable. Therefore, we must fully shift production in Japan toward profitability based on quality rather than quantity. The new medium‐term plan targets per‐ton profit of steel materials.
2. 1. Achieve world‐class cost and quality competitiveness
   • By successfully completing structural reforms in the steel business and thereby greatly reducing fixed costs and lowering our breakeven points, we will establish a profit base that is resilient to changes in economic conditions, ultimately to achieve world‐class cost competitiveness.
   • We will introduce new technologies through digital transformation (DX) to improve production efficiency and yields and also to greatly increase labor productivity. Large cost reductions (approx. 120 billion yen) will be pursued through investment in equipment modernization and rationalization. We will also strive to ensure competitiveness by improving quality and delivering increased customer satisfaction.
   1. Expand margins and achieve stable profit
   2. • We will enhance our product mix by focusing resources on strategic products. For improved profits, we will increase our mix of highly value‐added products* to an unprecedented 50%, drawing on advanced technologies that underpin our competitive strength.
      • We will ensure that products offering the type of high value that customers seek are suitably recognized in the market, based on which we aim to fully overhaul our sales pricing.

*Products that offer technological advantages, are recognized by customers for their value added, and have greater earnings power than commodity products.

B. Growth strategies

1. Production & sales JV with India's JSW for (gain‐oriented) electromagnetic steel sheets (steel
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business)

To expand earnings, we will further deepen our direct participation in global markets. In India, the demand for (gain‐oriented)l electromagnetic steel sheets used in transformers is expected to grow in parallel with significantly increasing demand for electric power. To leverage our advanced technology, JFE will partner with JSW to study the possible establishment of a joint‐venture company to manufacture and sell (gain‐oriented) electromagnetic steel sheets in India. The feasibility study will finish within fiscal 2021.

1. 1. Expand solution business (steel business)
      In the steel business, we will build a platform to provide technologies, operations and research knowhow for manufacturing highly value‐added products and reducing environmental impact. By developing a solutions‐based business model, we aim to triple earnings in this field in fiscal 2024 compared to fiscal 2020.
   2. Expand sales revenue to 1‐trillion‐yen level in FY2030 (engineering business)
      In view of the increasing importance of the environmental, recycling and renewable‐energy fields, we aim to expand our engineering business as a growth sector by helping to solve pressing issues in global society. The goal is to double current sales revenue to the 1‐trillion‐yen level by fiscal 2030 through expansion of operational businesses and also M&As and business alliances.
   3. Expand SCM for overseas processing of electromagnetic steel sheets (trading business)
      In the trading business, we intend to create the world's No. 1 global distribution and processing system by making full use of the global network. This will include leveraging synergies with the steel business to expand SCM for the overseas processing of high‐function electromagnetic steel sheets, which is one of our strengths.
2. Significantly enhance competitiveness through DX
3. 1. Advance productivity through innovation
      The intangible assets we have amassed over many years, including vast stores of data and knowhow, are key sources of our steel business's competitive advantage. We intend to use such assets to innovatively optimize all operations for enhanced productivity. This will include deploying leading‐edge digital technologies such as cyber‐physical systems (CPS)* in all steel‐manufacturing processes and building a platform that does not require specialized knowledge to analyze plant‐operation data.
      *Systems that generate value by collecting huge amounts of sensor‐based data about physical equipment and products, analyzing it in cyberspace, and feeding the results back into the physical environment in real time.
   2. Transform existing businesses
      We will enhance products and services and strengthen relationships with customers. The strategies are to improve supply chain efficiency among group companies, digitize accumulated plant‐operation data, etc., and utilize digital‐twin technology optimized in virtual spaces for everything from design to operations.
   3. Create new businesses
      We will create new business models by expanding our solutions businesses that provide operational technologies and knowhow, and by developing new value, markets and customers in fields such as disaster‐resilience and environmental‐protection through digital services.

Our expanding deployment of DX will require us to address cybersecurity risks. To prevent cyberattacks and the unauthorized use of our systems as well as to protect our information assets and ensure we conduct business in a safe manner, we will strengthen our security measures and governance led by our JFE Security Integration and Response Team (JFE‐SIRT).

D. Balance financial soundness with effective investment based on a "select and concentrate" approach

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In the steel business, from the beginning of our business integration we were among the first to reduce fixed costs by consolidating and shutting down production facilities. In March 2020 we fixed plans for structural reforms to reduce our annual crude steel production capacity in Japan by approximately 4 million tons. This is expected to have the effect of reducing annual costs by approximately 60 billion yen in fiscal 2024 and lowering needs for renewal investment by approximately 200 billion yen over 10 years. Under the plan, investments to maintain functions will be carefully selected from the perspectives of effectiveness and necessity. The emphasis will be shifted to investments for improved profitability, cutting‐edge facilities, green transformation (GX) and DX.

Furthermore, we will reduce our assets by 200 billion yen, particularly those assets and businesses that contribute little to earnings or are tied to unprofitable businesses, to strengthen our investment effectiveness and financial stability. Also, to reduce the volatility of earnings that are susceptible to changes in economic conditions, we will establish a more stable profit base by expanding our solutions business for steel and operational business for engineering projects.

Investment and asset‐downsizing plans (consolidated basis, 4‐year horizon)

			Seventh medium‐term	Notes
			business plan
		Equipment	About 1,200 billion yen
Consolidated		Investment
	Business
Investment		About 250 billion yen
	Investment
		Total	About 1,450 billion yen	Steel business: 1,080 billion yen
		Steel business maintenance: About 30%
				Steel business: 160 billion yen
(Of above)		GX Investment	About 340 billion yen	Engineering business: 130 billion yen
			Trading business: 50 billion yen
		DX Investment	About 120 billion yen
Asset Downsizing			About 200 billion yen
Non‐consolidated Crude Steel	About 26 million tons
Production (FY2024)
Steel Business Cost Reduction	120 billion yen

We are also working with Kawasaki city and other government authorities to consider how to repurpose various sites in the Keihin District of our East Japan Works after our restructuring. We are looking at options for land sales, leasing and business uses to maximize economic efficiency and land‐use conversion in ways that contribute to sustainable development in local communities. Large‐scale land‐repurposing initiatives will begin in the Minamiwatarida area and after we disclose our development plans for the Ogishima area in FY2023, we will strive to see some properties put to new use by FY2030.

Performance & profitability targets and dividend policy

We have set the following performance and profitability targets for the plan's final year in FY2024: ROE of 10%, consolidated business profit of 320 billion yen and profit attributable to owners of the parent of 220 billion yen. We will execute a range of measures to ensure achievement of these goals. Regarding returns to shareholders, our policy is to aim for a dividend payout ratio of around 30%.

		7th Medium‐term Plan targets	FY2020 actual
	Consolidated business profit	320 billion yen	‐12.9 billion yen
	Profit attributable to owners of	220 billion yen	‐21.8 billion yen
	the parent
Consolidated
ROE	10%	‐1.3%
	Debt/EBITDA ratio	About 3x	8.1x
	D/E ratio1	About 70%	93%
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