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Business and Other Risks

To achieve the Group philosophy, “Through food, we aim to be a good corporate citizen, connecting and collaborating with people to create smiles in their lives,” the Group is “striving to become a high quality company that provides ‘Healthy Life Through Foods,’” while fulfilling its responsibility as a corporate citizen in all “three responsibilities” (“For our customers,” “For our employees and their families,” and “For society”).
Risks that could influence the Group’s situation including its financial position, operating results and cash flow (hereinafter referred to as “financial position, etc.”) include the following. However, the statements below do not cover all the risks, and the Group may be subject to the impact of any risk in the future that cannot be foreseen or is not perceived as a problem at the present time. Recognizing the possibility of these risks occurring (being actualized), the Group will work to prevent or avoid them. Recognizing the possibility of these risks occurring (being actualized), the Group will work to prevent or avoid them. The Group will also focus on minimizing risks to operations and business risks in the event of actualization of risks.
The forward-looking statements included in this document are judgments made by the Group as of the end of the fiscal year under review.

(ⅰ)Risks related to responsibility for our customers

Key risks related to the activities for sustainable business growth and the continued provision of unique value to society are as follows.

1) Risks related to domestic market trends

Background In the medium and long term, external factors such as economic slowdown and population decline will bring about decline in overall domestic demand.
Customer lifestyles have changed significantly through the COVID-19 pandemic, including changes in working styles and eating habits. In addition, changes in consumption patterns are also emerging as a result of price escalation caused by rising raw material prices and other costs.
Overview and impact of risks Domestic sales account for about 80% of the Group’s total sales, and there is a risk that contraction of the domestic market will impact the Company’s financial position.
Further, while a swift response to customer changes and higher prices will result in new growth opportunities, a delayed response could be detrimental to the value (products and services) the Group provides.
Main countermeasures The Group will pursue new value creation and improvement of productivity, and focus on strengthening ability to address risks and seizing opportunities.
  • Pursuit of value creation in Japan and overseas through identification of the domains in which the Group provides value as four value chains (hereinafter referred to as “VC”): Spice VC, Functional Ingredients VC, Soybean VC and Value-Added Vegetable VC.
  • Reinforcement of earnings strength through improved productivity in existing mature business areas and the focused allocation of management resources to growth business areas in Japan and overseas
  • Sharing of Group management resources, improvement of efficiency and improvement of ability to provide value through the implementation of initiatives to be conducted beyond the boundaries within the Group (hereinafter referred to as “GOT”)
  • Pursuit of the creation of new value through integration of the three dimensions: business development, R&D, and development of human resources

2) Risks related to business expansion

Background Since shifting to a holding company system in 2013, the Group has promoted the expansion of value chains by including Ichibanya Co., Ltd., Gaban Co., Ltd. and U.S.-based Keystone Natural Holdings in the Group in 2015, 2016 and 2022, respectively, among other measures. The Group also established a venture capital fund in 2017 and worked to lay the foundations for new value through investment in enterprises expected to generate business synergy with the Group. As a result, the Group may record goodwill and intangible assets associated with acquisitions.
Overview and impact of risks While the Group is seeking to make its value chain more resilient by acquiring operating companies that possess a high affinity with its growth strategies and unique strengths, there is a risk that the Group will incur impairment losses in relation to goodwill and intangible assets associated with acquisitions if these assets are unable to generate the expected cash flows or create the initially assumed synergies due to nonattainment of the business plan or changes in the market environment.
Main countermeasures
  • Examination of investment plans at the Management committee (including reasonability from a financial perspective as well as profitability and growth potential risk from a business strategy perspective)
  • Ensuring the appropriateness and efficiency of business investments such as M&A and the enhancement of the system of checks in each phase before and after investment through the operation of the Investment Committee (advisory committee to the House Foods Group Management Committee)

3) Risks related to technological innovation

Background In the mature food industry, the Competitive environment is diversified due to entries from other industries and the rise of new technologies, in addition to existing business competition.
Overview and impact of risks While the Group is working to strengthen its R&D functions to help resolve the issues facing customers and society and working to seize growth opportunities by strengthening response to digitalization and globalization, there is a risk that value provided will become obsolete as a result of the declining competitive advantage of the Group if its response to these developments is delayed.
Main countermeasures
  • Setting of key R&D areas and themes as well as the concentrated investment of management resources
  • Awareness-raising and creation of a climate to improve the ability to create and achieve new innovations
  • Enhancement of collaboration among value chains with the aim of creating businesses, in addition to solving technological issues among the Group companies
  • Promotion of co-creation strategies through open innovation
  • Laying of foundations and the creation of new value through more proactive investment in digital technology

4) Risks related to overseas business development

Background The Group is expanding businesses such as curry products, TOFU products and functional drinks in the countries and regions it operates. Food cultures are conservative by nature and detailed prior research and continuous strengthening of the business base are required for these products to penetrate and become firmly established in the food cultures of the countries in which the Group operates.
Moreover, in an everchanging world, emergency preparedness is required.
Overview and impact of risks The Group is working to accelerate business expansion by actively allocating its knowledge and expertise to growth domains. However, business plans may be delayed or impairment losses may be incurred if products and services are less successful than expected in penetrating and becoming firmly established in the food cultures of each market.
There is also a risk of a decline in ability to generate profit or incompetent governance if the Group is too slow in establishing or developing a management base commensurate with business size, if it is too slow to comply with the promulgation or amendment of national laws or if a country risk emerges.
Main countermeasures
  • Forecasting of market potential based on detailed market research into receptivity of food culture and brand recognition
  • Strengthening of the business base by continually developing and securing human resources for managerial posts and gathering information about national laws in collaboration with outside agencies
  • Construction and development of a risk management system according to business size based on cooperation between House Foods Group and its overseas business companies
  • Mitigation of country risk through decentralization of business infrastructure by expanding business into multiple geographical areas

5) Risks related to safety and security of food

Overview and impact of risks The entire Group is focused on maintaining and improving quality to continue supplying customers with worthwhile products and services in a safe and secure manner. However, there is a risk that the occurrence of quality issues in its products and services will harm the health of consumers or give rise to concerns, resulting in damage to the Group’s corporate brand or a loss of its social credibility, and that costs to address such issues will increase.
Main countermeasures
  • Discussion of important quality assurance-related issues and the promotion of continuous groupwide quality assurance activities through the Group Quality Assurance committee and the Group Quality Assurance Executives committee
  • Acquisition of international certifications for quality and food safety management systems, such as ISO 9001 and FSSC 22000, according to the characteristics of each operating companies, and operation in accordance with such standards, with the aim of improving the reliability of product quality and safety
  • Promotion of food safety activities by considering and addressing compliance and customer safety concerns across the Group through quality information risk management activities
  • Promotion of the development of human resources through HACCP study meetings on the subject of safety and security of food and various internal and external activities that are fundamental to quality
  • Fostering of an organizational climate which attaches importance to quality through measures such as a professional award scheme which commends creativity and innovation for safety and security in manufacturing environments
  • Efforts to improve product quality through activities that reflect customer feedback in every process from product design to sales, and ensuring of clear communication of information to customers through product packaging, website and other means

(ⅱ)Risks related to responsibility for our employees and their families

Diversity in terms of gender, nationality and other characteristics and utilization of the diverse experiences and aptitudes of individuals are essential for the medium- to long-term growth of the Group. Key risks in terms of activities for supporting the growth and active participation of employees, to ensure every employee is respected and help employees lead enriched lives through work, are as follows.

1) Risks related to the securing, cultivation and active participation of diverse human resources

Overview and impact of risks There is a risk that the ability to innovate will be damaged, business opportunities will be lost, and excellent human resources will leave the Group if human resources cannot be appropriately secured, trained and supplied according to the characteristics and growth stage of each Group company or the realization of GOT and global expansion of business domains and if an organizational climate that respects diversity and a challenging spirit cannot be fostered.
Main countermeasures
  • Deployment of human resources to growing business domains and development of human resources for these domains
  • Acquisition of outside human resources with high levels of expertise and new knowledge
  • Support for employees to gain diverse growth experiences through in-house recruitment system and side business system and personnel exchanges inside and outside the Group
  • Understanding of aptitudes through assessment and increased provision of internal and external learning opportunities to increase aptitude and broaden competence
  • Creation of an organizational climate in which diverse human resources can take on challenges for growth, regardless of gender, nationality, career or disability, through measures such as the implementation of a diagnosis of the organizational climate and discussion of the results
  • Development of a safe and secure workplace environment that observes compliance without discrimination and harassment through the understanding and sharing of the Group Philosophy, House Ideals (Spirit), House Foods Group Action Guidelines and other standards

(ⅲ)Risks related to responsibility for society

Key risks related to activities for helping solve various issues facing society through business activities as a corporate member of society are as follows.

1) Risks related to sustainable procurement of raw materials

Overview and impact of risks The Group procures a variety of raw materials including spices from countries around the world, and the sustainable procurement of raw materials is essential for the continuation of business activities.
In the procurement of these raw materials, there is a risk that intensified competition in the procurement of food resources and changes in supply and demand associated with growing international demand, climate change, biodiversity, geopolitical risk, suspended or delayed supply of raw materials due to outbreaks of infection at materials suppliers, and a delay in response to social and environmental issues in each stage of the VC will lead to inadequate procurement, higher costs and loss of social credibility.
Main countermeasures
  • Execution of a variety of measures to strengthen efforts in upstream areas (such as stable procurement through the diversification of production regions, the promotion of efforts to collaborate with procurement places in areas such as technological development and quality improvement, and the strengthened monitoring of suppliers)
  • Development of mechanisms for sustainable procurement (procurement of raw materials that takes social and environmental performance of production areas into consideration (RSPO certification palm oil, FSC certified paper), strengthening of human rights due diligence through the use of a third-party agency (Sedex), switch to procurement methods with less environmental impact)
  • Review of safety stock levels for important raw materials and operation within safety stock levels for other raw materials
  • Reduction of the impact of higher costs by revising the prices of products and services in an appropriate manner

2) Risks related to climate change

Overview and impact of risks Recognizing that climate change is an issue that could have an impact on a global scale and is important for the Group, which has created value chains in Japan and overseas, the Group takes measures against it. There is a risk that incomplete procurement of raw materials, rising costs and the division of business activities, such as a halt in production, will occur due to a rise in temperature, abnormal weather and natural disasters. There is also a risk that higher decarbonization costs, restrictions on business activities and damage to corporate value will occur due to deficiency or delay in response to decarbonization.
Main countermeasures
  • Promotion of climate change initiatives on a global scale and across all value chains, aiming for carbon neutrality by 2050
  • Promotion of investments to reduce environmental burdens by formulating judgment criteria for environmental investments
  • Acceleration of initiatives to reduce Scope 1 and Scope 2 emissions (shift to renewable energy) and action to address Scope 3 emissions
  • Promotion of resource circulation and recycling through initiatives such as the reduction of food waste and process loss (conversion to feedstuff and fertilizer, food banks and disposal control) and development of eco-friendly containers and packages
  • Strengthening of partnerships through the active disclosure of information, including information disclosure in line with TCFD recommendations

3) Risks related to large-scale natural disasters and widespread outbreak of serious diseases

Overview and impact of risks Weather-related factors, such as the occurrence of a large-scale natural disaster, or the widespread outbreak of serious infectious disease could affect the Group’s financial position, etc.
Main countermeasures
  • Construction of a crisis management system including the development of production and supply systems to fulfill our responsibility for supplying products while securing the safety of human lives as the mission of a food company when a large-scale disaster or the widespread outbreak of a serious infectious disease has occurred
  • Formulation of a business continuity plan (BCP) according to the characteristics and size of business and implementation of business continuity management (BCM) through regular trainings and other means at the Group companies in Japan and overseas

(ⅳ)Other common risks

1) Risk related to laws and regulations and soft law

Overview and impact of risks The Group is subject to a number of laws and regulations, including the Food Sanitation Act, the Product Liability Act, the Act against Unjustifiable Premiums and Misleading Representations, and local laws and regulations overseas.
The Group conducts business activities in Japan and overseas in compliance with the laws and regulations of each country but new laws and regulations are being enacted in line with changes in society and the environment and increasingly diverse values.
If the Group fails to obtain information about existing laws and regulations or the enactment or amendment of new laws and regulations in a timely manner, if it fails to properly adapt its businesses practices to the content of such laws and regulations, or if it fails to conduct business activities in line with moral values and ethical values that show respect for diverse values, the Group’s business activities may be restricted and there is a risk of other consequences such as a loss of favor among customers, increased costs if it is sanctioned or subject to restrictions on its business activities for violation of the law or anti-social behavior, and damage to its corporate value due to a loss of social credibility.
Main countermeasures
  • Compliance with laws, regulations and international rules in the countries of each officer and employee and the maintenance and promotion of friendly relationships by respecting human rights and local cultures, traditions and customs based on the House Way, which contains values common to the Group, as well as the House Foods Group CSR Policy and the House Foods Group Action Guidelines, which outline the code of conduct for the Group.
  • Implementation of monitoring and review of the status of efforts for important CSR-related subjects for the entire Group through the Group CSR Committee, which consists of directors, etc. in House Foods Group
  • With respect to compliance, which is regarded as an important CSR issue, progress on the resolution of issues at each company through establishment of the Compliance Promotion Committee
  • Development and publication of the House Foods Group General Compliance Helpline to discover and solve compliance issues at an early stage
  • Gathering of information about new laws and amendments through the division responsible for each type of law or the Legal Division and adaptation of business practices accordingly

2) Risk related to exchange fluctuations

Overview and impact of risks In the case of raw materials that the Group procures from overseas, there is the possibility that procurement costs will rise due to the impact of exchange rate fluctuations. With respect to the Group’s foreign- currency-denominated receivables and payables, a foreign exchange gain or loss may occur due to the impact of exchange rate fluctuations. The Group’s overseas sales account for around 20% of its total sales, but the Group is working to accelerate the expansion of the International Food Business and its materiality is expected to increase in the future. The Group converts financial statements prepared in the local currency of each area of operations into yen to prepare its consolidated financial statements and is affected by currency fluctuations.
Main countermeasures
  • (Raw materials procured from overseas)
  • Mitigation of exchange rate risk through the build-up of inventories of imported raw materials in Japan, within reason
  • (Foreign-currency-denominated receivables and payables)
  • Use of hedging instruments such as forward exchange contracts and cross currency swaps to hedge against exchange rate risk

3) Risks related to information security

Overview and impact of risks The Group (including overseas bases) uses mainly IT systems to manage data about development, production, logistics, sales, labor and other aspects, and the personal information of many customers obtained mainly through mail-order marketing.
There is also the potential for system failures, unauthorized disclosure, or falsification of data as a result of unexpected cyber attacks. Meanwhile, the diversification of workstyles might result in employees taking information outside the Group or handling it inappropriately, leading to information leaks. Such events could affect the Group’s financial position, etc. and public trust in the Group.
Main countermeasures
  • Strengthening of organizational structures including overseas bases for comprehensively managing information security, and enforcement of applicable rules, including the laws and regulations unique to each country
  • Implementation of system security measures using software and equipment as well as employee trainings and exercises
  • Verification of the current status of diversification in work styles, including working at home and on-line meetings, through periodical internal surveys
  • Identification of information held which needs protecting, and establishment and thoroughgoing implementation of appropriate measures to prevent information leaks