Business and other risks
Of the matters related to business conditions, the status of accounting, etc., matters with the potential to have a serious impact on investor decisions include the following. Please note that the following does not represent a comprehensive assessment of all risks related to our Group and that risks other than indicated risks may exist.
- Fluctuations in raw material prices
Group earnings are impacted by fluctuations in market prices for the main raw materials we use (palm oil, coconut oil, cacao beans, milk raw materials, soybeans, and soy meal). To reduce market price fluctuation risks, we engage in initiatives such as conducting hedge transactions and executing futures contracts as well as implementing pricing strategies involving reflecting cost increases in product prices. However, it is difficult to immediately reflect market price fluctuations in product pricing when raw materials market prices increase. Furthermore, a drop in raw material market prices can result in the retention of high-cost inventory due to the balance of sales and production or changes in demand projections, which would force us to adjust sales prices to reflect market conditions. As such, there is the possibility of a negative impact on Group earnings and financial status.
Furthermore, Blommer Chocolate Company, which we acquired in January 2019, conducts hedge transactions to respond to fluctuation risks. However, due to inappropriate hedge accounting, there is a possibility earnings could be negatively impacted by market price valuations at the end of the consolidated accounting year
- Fluctuations in currency market
Our Group is engaged in business on a global scale and overseas net sales accounted for 43% of Group net sales during the current consolidated fiscal year. As such, Group earnings are impacted by fluctuations in currency markets. To reduce this impact, we implement risk hedging measures such as executing forward contracts. However, due to the particularly volatile nature of the Brazilian real, the currency of our subsidiary Harald Indústria e Comércio de Alimentos LTDA in Brazil, it would take time to adjust product prices to reflect prices increases for imported raw materials due to a sudden depreciation of the Brazilian real, which could have a negative impact on Group earnings and financial status.
- Risks inherent to engaging in overseas markets
To promote global growth, our Group has established offices in 20 countries in the world through which we conduct business operations. As such, in the event we are faced with various risks including protective restrictions unique to specific countries, unanticipated legal or regulatory changes, the occurrence of unfavorable tax circumstances for our Group due to complex international tax administration or tax system revisions, or in the event of political or social risks, there is a possibility such circumstances could have a negative impact on Group business, earnings and financial status.
- Capital expenditure recovery risks
In our Group’s Medium-Term Management Plan “Towards a Further Leap 2020”, we outline a growth strategy entailing capital expenditures of 60 to 70 billion yen over a 4-year period. Through this plan, we carefully select investments that exceed our investment standards, which emphasize a focus on capital costs. To ensure a global competitive advantage in our core business, we also continuously engage in corporate buyouts. This consolidated fiscal year, we acquired stock in Blommer Chocolate Company in the U.S.A. and Industrial Food Service Pty. Ltd. in Australia. As a result, our Group now possesses various business-related tangible fixed assets as well as goodwill and other intangible fixed assets incidental to these acquisitions. In particular, goodwill as of the end of the current consolidated accounting year is 54 billion yen, representing 34% of net assets. Changes in economic trends, competitor engagement, or changes in consumer trends, etc. could cause dramatic changes in our operating environment may result in some facilities being idle or in reduced operating rates, resulting in performance at purchased businesses that is below initial targets. This can lead to a reduction in future cash flow projected from retained assets and result in impairment losses due to the application of fixed asset impairment accounting. As a result, there is a risk of an impact on Group earnings and financial status.
- Food safety
While our Group has established a complete system through which we reinforce quality control, in the event of a serious quality problem that exceeds expectations, there is a risk that the Group could incur massive costs as well as serious damage to the reputation of all the Group's products, which would reduce sales and could have a negative impact on Group earnings and financial status.
- Supply chain environmental and social risks
Our Group mainly handles agricultural produce. As such, we work with suppliers and other stakeholders to practice procurement activities respect the environment and human rights. With palm oil in particular, we have drafted our "Responsible Palm Oil Procurement Policy" to promote the prevention and reduction of environmental and human rights risks along the supply chain (farms). However, issues during business operations or along the supply chain such as an environmental issue attributable to farm development or human rights issues such as child labor or forced labor could have a negative impact on Group earnings and financial status.
- Risks related to disasters and accidents
A stoppage of production operations is projected in the event that a major earthquake or other natural disaster, power outage, fire or explosion, infectious disease epidemic, conflicts, terrorism, or violent demonstrations occur in any of the regions in which our production facilities are located. Such conditions could have a negative impact on our Group earnings or financial status.
- Risks related to information systems and information security
Our Group has established an appropriate system management structure and implements appropriate security measures. However damage to our information systems due to power outage, disaster, unexpected cyberattack, unauthorized access, or computer virus infection, or a leak of internal information could have a negative impact on our Group earnings or financial status.
- Risks related to human resource hiring and development
Our Group views the hiring and development of human resources capable of performing on the global stage as a vital issue. We promote diversity and are proactively building an environment that enables the hiring and development of personnel capable of taking on challenges in global markets. However, the inability to conduct the hiring and development of elite human resources in accordance with plans could have a negative impact on our Group earnings or financial status.