New Stage Stage New o., Ltd. Annual Report 2008 For the year ended March 31, 2008 Jump up to the DOWA HOLDINGS C DOWA Dowa HOLDINGS CO., LTD. Annual Report 2008 Profile We, the Dowa Group, are engaged in a wide range of activities to supply materials and provide services that are indispensable for modern lifestyles. Our business segments are Nonferrous Metals, Environmental Management & Recycling, Electronic Materials, Metal Processing and Heat Treatment. We have continuously faced great changes and countless trials since the Dowa Group was established in 1884, but we have overcome all such challenges through adaptation and by maintaining our technological superiority. This business spirit underpins the “Business Structure Reform Plan” we commenced in 2000, and is the driving force behind our “Dismantle and Rebuild” strategy and position as a “Technology-oriented Company.” In October 2006, we converted to a holding company structure to realize greater management speed, autonomy, specialization and agility of business divisions. The resulting structure comprises five operating companies under Dowa Holdings Co., Ltd. This Annual Report details the results obtained and initiatives undertaken in fiscal 2007, the second year of our management plan, Business Structure Reform Plan III. Contents 1 Financial Highlights 25 Board of Directors and Officers 2 Message from the Management 26 Financial Section 4 Feature: Building a Strong Base of 26 Consolidated 11-Year Summary Operations 28 Financial Review 4 Urban Mining 32 Consolidated Balance Sheets 6 Metal Processing Business 34 Consolidated Statements of Income 8 Heat Treatment Business 35 Consolidated Statements of Changes in Equity 10 At a Glance 36 Consolidated Statements of Cash Flows 12 Business Review and Outlook 37 Notes to Consolidated Financial Statements 12 Nonferrous Metals 52 Report of Independent Auditors 14 Environmental Management & Recycling 54 Global Network 16 Electronic Materials 55 Subsidiaries and Affiliates 18 Metal Processing 56 Corporate History 20 Heat Treatment 57 Corporate Data 22 Environmental Preservation Activities 23 Dowa’s Network of Environmental Operations & Recycling 24 Corporate Governance Annual Report 2008 Dowa Holdings Co., Ltd. Financial Highlights Years ended March 31 Thousands of Millions of Yen U.S. Dollars*1 2008 2007 2008 For the Year: Net Sales . ¥475,826 ¥458,701 $4,749,238 Operating Income . 44,319 48,733 442,349 Ordinary Income . 44,888 49,717 448,037 Net Income . 24,520 26,337 244,742 Net Cash Provided by Operating Activities . 40,398 13,700 403,221 At Year-end: Equity . 150,281 141,276 1,499,964 Total Assets . 367,931 352,299 3,672,334 Interest-bearing Debt*2 . 120,953 114,757 1,207,240 Return on Assets (ROA*3) . 12.5% 15.2% 12.5% Capital Expenditures . 26,324 21,821 262,745 R&D Expenses . 7,309 4,384 72,959 Net Sales Operating Income Ordinary Income (Billions of Yen) (Billions of Yen) (Billions of Yen) 500 50 50 400 40 40 300 30 30 200 20 20 100 10 10 0 0 0 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 Net Income Total Assets & ROA*3 Capital Expenditures and R&D Expenses (Billions of Yen) (Billions of Yen) (%) (Billions of Yen) 30 400 20 40 25 300 15 30 20 12.5％ 15 200 10 20 10 100 5 10 5 0 0 0 0 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 *1 The U.S. dollar amounts included herein represent translations, using the approximate exchange rate at March 31, 2008 of ¥100.19=US$1, solely for convenience. 2 Interest-bearing debt at March 31, 2008 does not include lease obligations. 3 ROA is Ordinary Income divided by average of Total Assets. Dowa Holdings Co., Ltd. Annual Report 2008 1 Message from the Management To achieve the goals set out in the medium-term business plan Business Structure Reform Plan III for the three years up to the fiscal year ending March 31, 2009, the Dowa Group is implementing a varied program of measures in line with the plan slogan, “Embrace the challenge of uncharted territory.” Results for Fiscal 2007 Supported by strong business investment and buoyant exports, the Japanese econ- omy initially continued to recover steadily Achieving the Goals of in fiscal 2007, the year ended March 31, Business Structure Reform Plan III 2008. However, there was a downturn in the U.S. economy coupled with the continued appear- ance of negative factors such as yen appreciation and a further surge in oil prices. In the nonferrous metals business, strong demand Kosaka Smelting & Refining Co., Ltd. (construction from China for minerals and the ongoing oligopoly in the started in 2005), an increase in the processing capacity mining sector resulted in a steady tightening of the of our waste treatment facility in the Kanto region of global supply-demand balance for raw materials, leading Japan, an increase in capacity at a metal processing to generally higher prices for gold, silver, copper and plant, and the construction of a new heat treatment other major metals. In the metal processing sector, facility. Our investments in the metal processing increasing automotive and construction machinery business were of particular note. We acquired Yamaha demand from Asia supported expansion of exports of Metanix Corporation and Yamaha-Olin Metal Corporation, related components from Japan. In our environmental both of which are based in Iwata, Shizuoka Prefecture— management and recycling business, while expanding the same location as our main manufacturing firm in production of chemical products spurred demand for this sector, Dowa Metal Co., Ltd. The addition of these treatment of industrial wastes that are technically difficult production and sales companies for rolled copper to process, the soil remediation market weakened due products has enabled us to establish a monthly pro- mainly to the impact of the revision of building codes. duction capacity to 5,000 tons. Elsewhere, we set up Compared with the previous year, consolidated net a metal processing plant in Thailand, a country with sales increased by ¥17.1 billion to ¥475.8 billion. Oper- rapid growth in the automotive industry where Japa- ating income was ¥4.4 billion lower at ¥44.3 billion and nese automakers have made significant investments ordinary income declined by ¥4.8 billion to ¥44.8 and are willing to source more components locally. billion. Consolidated net income for fiscal 2007 was This investment provides the Dowa Group with a ¥24.5 billion, a year-on-year decline of ¥1.8 billion. three-pronged supply base in Asia—Japan, China (Shanghai) and Thailand. Anticipated Benefits from Concerted In the heat treatment business, besides the con- Program of Action struction of a new facility in Ota in Gunma Prefecture The Dowa Group has continued to make aggressive (completed in May 2008), we established a new base business investments. of operations in Thailand to provide heat treatment In fiscal 2007, we invested approximately ¥30 services on a subcontract basis, manufacture heat- billion in capital spending projects, including M&As. treatment equipment and provide related maintenance These included completion of a new smelting facility at services. These steps form part of our plan to reinforce 2 Annual Report 2008 Dowa Holdings Co., Ltd. Achieving the Goals of Business Structure Reform Plan III our base of operations for Dowa Group businesses in Japan and overseas. We regard these investments as important measures to generate earnings growth in the Dowa Group going froward. Nearing the Completion of Business Structure Reform Plan III As the final year of our medium-term plan Business Structure Reform Plan III, fiscal 2008 will be the climax By implementing these measures speedily and of three years of reform. We will formulate a new busi- steadily, we will not only ensure that we achieve the ness plan in fiscal 2008 for the next three years. In goals for the final year of Business Structure Reform addition to continuous structural changes effected to Plan III, but also create momentum as we transition date in the nonferrous metals business, we plan to focus into the next medium-term business plan. efforts on fortifying the frameworks of our four other core businesses, environmental management and recycling, electronic materials, metal processing and heat treat- ment, by continuing investments for future growth. One of the slogans of the current medium-term business plan is to transform the Dowa Group into a “technology-oriented company.” We plan to re-emphasize this key aspect of growth in fiscal 2008 with the appointment of a Chief Technology Officer (CTO), who will be responsible for planning and implementing a technology strategy for the Group aimed at boosting our overall technical capabilities. We aim to advance various front-line improvement activities at each plant. Through such reforms, we hope to become an even MASAKI KOHNO more efficient and profitable enterprise. President and Representative Director Dowa Holdings Co., Ltd. Annual Report 2008 3 Feature Attention has increasingly focused in recent years on the concept of “urban mining.” The Dowa Group was an early adopter of this recycling-oriented approach, and has undertaken related initiatives to differentiate its business from that of competitors. This section looks at some developments in the field of “urban mining.” Building a Strong Base of Operations Urban Mining An Uneven Global Distribution of Finite Urban Mining Resources For instance, a post-use mobile phone handset con- Japan faces the major issue of the depletion and tains gold at a ratio of 400ppm on average (that is, 400 uneven distribution of mineral resources across the grams per ton). In contrast, gold-bearing ores typically planet for many of the metals that underpin Japan’s contain only around 20ppm (20 grams per ton) of the industry and production.