Business Risks

(1) Risks specific to business segments

(i) Colorants and Functional Materials Related Business

For the Group, the synthetic technology of organic pigments is one of its starting points. In addition, dispersal technology cultivated in the manufacturing of inks and coatings has gone far beyond the application of coloring and has expanded into the development of new dispersants to which materials for LCD display color filters and carbon nanotubes are applied.
In the pigment business, there is a risk that demand for pigments for printing inks will contract significantly during the structural downturn of the domestic printing market, and this could result in declines in net sales and profits. Therefore, the Group will enhance its resilience to business risks by expanding pigments into food packaging applications and highly profitable areas with stable demand as well as by improving production aspects.
In the colorants business, there is a risk that demand will decrease due to growing environmental awareness, including the waste plastic problem. However, viewing these changes as an opportunity, the Group will contribute to a sustainable society and reduce business risks through the development of recyclable products and eco-friendly products, such as biodegradable products.

(ii) Polymers and Coatings Related Business

The Group is expanding the polymers and coatings-related business into fields such as packaging materials, automobiles, electronics, energy and medical and healthcare, leveraging its polymer and coating technologies.
Many of the raw materials in this business are petroleum-derived, and their use is restricted by regulations and societal demand in countries for environmental conservation. Therefore, net sales could fluctuate. We will expand the development of and replacement with eco-friendly products that secure the functions of existing products to fulfill our responsibility as a material supplier for end products that are necessary for daily life.
With respect to materials for the electronics market, net sales and profits could fluctuate, depending on whether our products are adopted because the specifications of end products change every year, as is the case with smartphones. We will make efforts to reduce the risk by increasing the probability of adoption and expanding the user companies through the enhancement of our advantages in terms of quality and cost.
With respect to materials for the medical and healthcare market, R&D entails a considerable amount of time and expense, and there is a possibility of a delay, change or cancellation of R&D in the process before launching. In addition, revisions to related laws and regulations following the trends of the pharmaceutical administration and the fluctuation of authorized prices could also impact net sales and profits. We will diversify risks by increasing the development pipeline and expanding the business base into adhesives for healthcare use and peripheral materials of medical devices.

(iii) Packaging Materials Related Business

The Group provides a wide variety of high-performance products in the manufacturing process of packaging materials. In the field of food packaging, where security and safety are required, we are expanding the replacement of inks and adhesives with water-based and non-solvent ones. We are also actively developing biomass products to achieve the sustainable development goals (SDGs).
In the packaging materials-related business, consumer demand for film inks and adhesives may decline due to growing environmental awareness, including the waste plastic problem, which could result in falls in net sales and profits. We will diversify risks by strengthening the development of new products, regarding changes in the market and the environment as an opportunity.

(iv) Printing and Information Related Business

The Group develops a broad range of products, including eco-friendly products and high-performance UV curable inks, and provides solutions in the printing process for customers, taking advantage of its strengths in integrated production from pigments and resins, which are raw materials, to end products.
In the printing and information business, there is risk that net sales and profits will decline faster than expected due to the shrinking of the information-related print market associated with digitalization, and the collection of trade receivables will be affected, depending on the business situation of customers and business partners associated with changes around the printing market. Therefore, we will fully enforce information gathering and credit management to be able to early detect changes in economic conditions and signs of credit insecurity. We will expand adaptation to the market environment by flexibly shifting management resources to growth areas and thoroughly improving business efficiency.

(2) Risks concerning the entire Group

(i) Risks related to overseas operations

The Group conducts production and sales activities both in Japan and overseas and will cultivate overseas operations more deeply in business fields where growth is expected in the future. These overseas operations involve risks as described below.

• Unexpected changes in laws and regulations and changes in tax systems that could have adverse effects
• The adverse effect of inadequate social common capital on the Group's operations
• Unfavorable political factors
• Social turmoil caused by terrorism, war, or infectious disease
• Unexpected rapid changes in the work environment
• Changes in the environment surrounding important business partners overseas and local partners

It is difficult to reasonably predict the probability of the occurrence and impact of these events, and there is a possibility that they will have an adverse effect on the Group's operating results and financial position. However, the Group is working to minimize the risk by taking measures such as the expansion of business development worldwide, the improvement of the balance of business fields, the construction of supply chain management (SCM) that is able to respond flexibly to risks, and the reduction of fixed costs and variable costs including raw material expenses to build an earnings structure that is less vulnerable to economic trends and other risks.

(ii) Risks related to system failure, information leak, loss and damage

In developing its business, the Group, including its domestic and overseas bases, is connected to the systems of business partners, etc. through networks and therefore holds confidential information, including sensitive and personal information of the Group and its business partners. The risk of an information leak, or loss or damage due to computer viruses and security violations via the Internet, in addition to the suspension of operations due to system failure, is rising. The Group is working to maintain the stable operation of systems on a daily basis, in addition to taking measures to ensure backups for critical systems in principle, and is seeking to mitigate risks by establishing the Information Security Office, strengthening its information management, and providing employee training. On February 18, 2023, an accident occurred in which the Group’s primary mission-critical systems, including the sales management system and production management system, ceased operating due to a malfunction of the server equipment used by the Group. However, the cause of the malfunction was not a cyberattack, and there was no possibility of a customer information leak. In addition to implementing technical responses and measures against the malfunction of server equipment, the Group is working to prevent a reoccurrence by reconstructing system BCP measures, assuming various risks and reviewing contingency plans to minimize damage.
If a system failure, information leak, loss or damage due to unforeseen circumstances, including the cases above, occurs, it could lead to the suspension of business activities, loss of social trust, a breach of a non-disclosure agreement, or a decline in competitiveness due to an outflow or loss of expertise of the Group, and this could impact the business performance of the Group.

(iii) Risks related to quality and product liability

The Group is strengthening its quality assurance system, but there is a possibility that accidents or claims caused by the quality of products will impact the business performance of the Group. In addition, there is no guarantee that compensation for damage paid by the Company will be fully covered by product liability insurance. The Group will strive to reduce risks by continuing to make efforts to comply with laws and regulations for quality and safety and to increase customer satisfaction and gaining the customers' confidence by improving the performance of products and continuously developing products that will contribute to the security and safety of customers.

(iv) Risks related to natural disasters and epidemics

At the Group, the procurement of raw materials and production activities were disrupted by the spread and prolongation of the COVID-19 pandemic and disruption associated with China’s COVID-19 policy. If demand for the Group's products declines further or if the Group faces negative developments, such as difficulty procuring raw materials on a scale larger than expected, the shutdown of business locations, the inability of employees to come to work and the stagnation of logistics functions due to the situation of the COVID-19 pandemic, it could have an additional impact on the Group's operating results and financial position. The Group is implementing the following measures after updating and disseminating an employee handbook of COVID-19 measures for the safety of stakeholders and business continuity.

• Temperature checks, wearing a mask, hand washing and sterilization
• Staggered commuting, working from home and a web meeting system
• Prompt situation reporting to managers and departments that address the COVID-19 pandemic and attendance restrictions according to the infection status and symptoms in cases where an employee and their family members may be infected.
• Workplace vaccination for COVID-19

Recently, risks related to natural disasters, such as large-scale earthquakes, heavy rain and the pandemic, have been increasing in Japan and overseas. A greater-than-expected expansion or prolongation of damage could harm assets, including buildings and production facilities, and result in limits on the use of electricity and water, difficulty with the sourcing of raw materials, stalled distribution, and even the inability of employees to come to work. These factors could lead to a reduction in supply capacity and have enormous adverse effects on the Group's operating results and financial position. Assuming these inevitable business interruption risks, the Group is working to develop a business continuity system by assembling emergency response manuals and regularly providing practical training.

(v) Risks related to the sourcing of raw materials

Since the main raw materials for products that the Group manufactures are petrochemical products, the purchase prices and sourcing of petrochemical products are affected by factors such as changes in the oil and naphtha markets, natural disasters, accidents and policies. Particularly in the consolidated fiscal year under review, risks were evident in areas such as difficulty in procurement, rising prices and the delayed delivery of numerous raw materials due to logistics disruptions triggered by Russia's invasion of Ukraine, a sharp rise in energy costs such as LNG, oil, coal and electricity and decreased supply capacity following disruptions associated with China’s COVID-19 policy. Rises in purchase prices could result in falls in net sales and profits of the Group, because it will take time to convert consumer goods that use the Group's products to sales prices, given their market prices and supply responsibility. There is also a possibility that the risk of difficult procurement of raw materials will result in compensation for damages due to an inability to supply products to customers and will have adverse effects on the operating results and financial position of the Group, depending on the amount of compensation for damages. To avoid this risk, the Group is expanding purchases at an appropriate price by reflecting multifaceted perspectives such as the market environment and the accuracy of demand forecasts in its raw material procurement based on the purchasing strategies tailored to the characteristics of each manufacturer, and is proceeding with the procurement of raw materials for stable product supply by securing stock. The Group is also striving to mitigate and curb the impact on its business performance by promptly responding to various risks through the prompt collection of information that may affect the Group, while constantly striving to develop new suppliers and strengthen its relationships with them.

(vi) Risks related to exchange rate fluctuations

The Group operates business overseas, and the financial statement items for overseas consolidated subsidiaries are converted to the yen to prepare consolidated financial statements, which may impact the Group's operating results and financial position due to dramatic fluctuations in exchange rates. The same could apply to foreign currency transactions, such as imports and exports. Therefore, the Group is taking steps to reduce FOREX fluctuation risks, including exchange forward contracts and the balancing of foreign currency receivables and payables.

(vii) Risks related to general legal restrictions

The Group's operations in Japan and overseas are subject to general legal restrictions on business activities. To comply with general legal restrictions, the Group has established and operates special committees such as the ESG Promotion Committee, Compliance Committee and Risk Management Committee under the Sustainability Committee to examine and identify legal regulations related to the Group's business activities and develop necessary measures, including the verification and review of operating processes in each activity field of manufacturing, sales and R&D, the creation of internal rules, and education for those involved to ensure legitimate and appropriate business activities. In addition, the Group is striving to develop and operate an internal control system for proper financial reporting.
However, there is no guarantee that litigation or other legal procedures that could have a material impact on the Group's operations, such as environmental issues, human rights issues, product liability, and patent infringement, will not arising in relation to its domestic and overseas operations. Litigation and other legal procedures could have an immense impact on the Group's operating results and financial position as the case may be, depending on the amounts claimed in litigation, along with other factors.

(viii) Risks of environmental burdens

The Group's principal business is the manufacture of chemicals, and the raw materials and products associated with this business include a number of chemical materials. The Group is actively leading efforts to reduce its environmental footprint by checking the degree of impact that these chemical materials have on the environment. The Group will promote awareness of the SDGs by establishing the Sustainability Committee and will work to reduce its environmental footprint at its own facilities and throughout the supply chain. The Group is conducting activities in compliance with a variety of environmental laws and regulations in Japan and overseas for waste, discharged water, noise, vibration, soil contamination and CO2 emissions generated in the manufacturing process. Recently, laws and regulations related to chemical materials and the environment have tended to be strengthened, and standards for chemical materials are being tightened to improve the environment in Japan and overseas. This could generate costs for capital investment and management. In addition, given that society is now also demanding deplasticization and carbon neutrality, it is necessary to select and procure more environmentally friendly raw materials, reduce energy use (save energy) in manufacturing processes, and expand the Group’s contribution to the environment. This could give rise to additional costs and the need to improve production processes and change business forms and could therefore have adverse effects on the Group's operating results and financial position. However, there is also a possibility that the Group will achieve a competitive advantage if social confidence in the Group increases in the long term as a result of appropriately addressing these risks and actively disclosing information. In its long-term management plan, the Group is working on a range of measures, such as the reduction of energy use and CO2 emissions by reviewing the manufacturing processes, the stronger management and systematization of chemical materials, the development of VOC-free products, and the reduction of waste through recycling and reuse, including the recycling of chemicals.

(ix) Risks related to climate change

The Group recognizes that acute or chronic climate change caused by global warming attributable to increasing global greenhouse gas emissions, in addition to the policies and measures taken by national and local governments in response to such changes, will have a profound impact on the market environment, raw material procurement, customer and consumer preferences, and other areas, and could significantly affect the continuity of business, performance and the execution of the strategies of the Group.
More specifically, climate change may expose the Group to the actualization of a variety of potential risks that are intricately linked to other risk areas, such as increased difficulty in procuring fossil- and biomass-based raw materials, financial burdens from carbon taxes and emissions trading, a decline in certain markets due to the transition to a decarbonized and recycling-based society, and the loss of assets and business opportunities due to weather disasters, and these risks could force the Group to change its policies and strategies
To ensure an appropriate response to the possibility of climate change and to reflect this in its management and business plans, the Group is promoting company-wide response activities in accordance with the TCFD (Climate-related Financial Disclosure Task Force) recommendations and is pursuing a number of initiatives, such as establishing and operating a governance system in response to climate change centered on the Sustainability Committee and ESG Promotion Subcommittee, identifying and analyzing risks and opportunities that may arise from climate change, formulating measures and making proposals to management and business entities, raising awareness and sharing information with Group employees, and disclosing appropriate information to investors and other external stakeholders.

(x) Risks related to common debt collection

The Group delivers its products to numerous customers in a range of industries in Japan and overseas and depending on the customers' financial situation may be unable to collect trade receivables and other claims, including loans to customers associated with transactions. The Group has already posted an expected non-recoverable amount as an allowance for receivables it currently holds. However, if a greater-than-expected non-recoverable amount has occurred, it could adversely affect the Group's operating results and financial position. Therefore, the Group will make efforts to strengthen credit management by regularly reviewing the credit risk of customers and implementing measures to protect receivables tailored to the risk by adding qualitative information from sales sites, as well as using credit information and others as a reference.

(xi) Risks related to impairment of non-current assets

The Group owns a large amount of non-current assets, including manufacturing equipment. For important capital investments, the Investment and Loan Management Committee reviews in advance the business strategy, market trends, technologies, productivity, investment amounts and the appropriateness of investment plans, and the Group Management Committee and the Board of Directors then deliberate on them. In addition, if signs of impairment are seen in any business, the Group takes immediate action to improve profitability and reduce risks.
However, if the Group is unable to recoup its investment due to the impact of COVID-19 or other changes in economic conditions, it may record an impairment loss, and this could affect the Group's business results and financial position.