Risk Factors

（1）Weather, Natural Disaster, Accident and Infectious Disease Risks

Given the nature of the Group’s mainstay beverage packaging operations, the weather conditions may have a significant impact on its business performance. Unpredictable weather conditions, such as a cool summer and an extended rainy season, or natural disasters during the first half of the year, which includes high demand season for drink packaging, would result in decreased demand that would significantly affect the Group’s business performance and finances.

Large-scale natural disasters, such as major earthquakes and typhoons, which cause severe damage to production facilities of the Group would adversely affect its business results and financial conditions as well.

Regarding the COVID-19 pandemic, there still remains a concern about the impact of weaker demand for packaging containers due to sluggish spending in the entertainment, leisure and food service industries as well as in business districts. For addressing the COVID-19 situation, we are taking comprehensive measures for the entire Group, including foreign subsidiaries, by establishing a group-wide COVID-19 crisis management committee consisting of directors and officers of the Company and its group companies, which meets as appropriate, and by sharing information about the current status of infection and governmental measures through the Group’s internal database on a daily basis. To ensure the continuity of the Group’s operations related to food, beverages and household products, which are essential for maintaining social functions, while protecting the health of employees, the committee has been leading the efforts to contain the spread of infection through promoting working from home at the head office and other business offices and implementing preventive measures at production facilities.

We have proactively taken measures to minimize potential damage caused by natural disasters and other disasters and accidents that would threaten our business continuity, by enhancing the resistance of our facilities against disasters, diversifying procurement sources, developing back-up systems at production bases, and maintaining the appropriate inventory levels.

（2）Compliance Risk

With growing emphasis on corporate social responsibility in recent years, all businesses are required to operate in full compliance with the rules and regulations and improve business performance through an efficient and appropriate use of management resources while avoiding management risks.

In light of this situation, we recognize that the enhancement of compliance system is one of the most important management issues, and have been making efforts to achieve this goal across the Group. However, we also admit that it is impossible to completely eliminate the risk of being blamed for failing to fulfill our social responsibility because of insufficient risk control framework. The materialization of such a risk would increase reputational risk and severely damage the credibility or reputation of the Group. We therefore have been enhancing our compliance framework by implementing the following measures:

• Formulate the Toyo Seikan Group Code of Conduct and Guidelines of Behavior as common standards of activities for the Group to comply with and implement, and work on education of its officers and employees for their full understanding.
  ＜Reference＞
  Toyo Seikan Group Code of Conduct and Guidelines of Behavior
• Formulate the Toyo Seikan Group Human Rights Policy, which serves as a guide for the Group to drive its commitment to respecting human rights and to fulfill its responsibility, in accordance with the United Nations Guiding Principles on Business and Human Rights, and share the policy with its officers and employees.
  ＜Reference＞
  Toyo Seikan Group Human Rights Policy
• Establish the Group’s compliance hotlines, an internal reporting system, and disseminate information about the system to its employees with posters and self-check cards.
• Establish the Group Risk and Compliance Committee to lead compliance-related activities across the Group, and conduct education programs for officers and employees under its supervision.
• Conduct the month-long Group Compliance Promotion Campaign in October every year for raising awareness about compliance through educational activities.
• Transmit information to the group members to ensure their understanding by regularly publishing the Compliance News Letter, which contains internal and external information on compliance, and by using emails and internal database.

On top of these measures, we preemptively take action regarding issues related to the antimonopoly act, which would have a particularly significant impact on business continuity of the Group in the event of risk occurring. We regularly examine and check the state of compliance with relevant internal rules and provide employees with educational programs, aiming to achieve a stronger compliance management system to prevent compliance risk.

（3）Business Management Risk

• Fluctuations in economic conditions

  There is concern that the global and domestic economies may contract or stagnate, leading to sluggish consumer spending and currency fluctuations, which could reduce sales and profit of the Group.

• Fluctuations in raw material and energy prices

  Since raw material and energy expenses account for a large portion of the total cost of the Group’s products, fluctuations in raw material and energy prices, including those caused by currency fluctuations, affect its business performance and profitability.

  We are working to reduce risks arising from raw material price fluctuations by introducing a system to link selling prices of our products, particularly of metal and plastic products, to raw material prices. However, rises in raw material and energy prices could erode our profitability despite such efforts, depending on the state of their progress.

• Procurement of raw materials

  Raw materials procured by the Group, regardless of whether they are imported or domestically procured, use crude materials produced overseas. If the procurement of raw materials becomes difficult due to deterioration of the international situation or disruptions in international logistics caused by natural disasters or equipment problems in supply chains around the world, the Group's business performance and profitability will be affected. In order to stably provide products and services that are indispensable to people’s daily lives, we constantly strive to ensure stable procurement by collecting a wide range of information on raw material suppliers and promoting purchase from multiple suppliers.

• Intensifying price competition
  

  Price competition is intensifying in the packaging container market, where the Group mainly operates, while more customers are self-manufacturing their containers. This trend could weaken the Group’s price negotiation power and increase downward pressure on product prices.

  We will seek to properly identify changes in needs of consumers and customers, and increase price competitiveness along with differentiation from competitors by providing unique and innovative products and services in various categories that are developed using our proprietary ideas and technologies with all kinds of materials.

• Research and development
  

  While it is essential for the Group to make continuous and effective investment in research-and-development activities, outcomes from such activities are uncertain and higher R&D investment does not necessarily guarantee desired results. In particular, if R&D investment for new products and technologies does not generate sufficient returns, or if the data accumulated in the Group are not effectively utilized in R&D activities for new products and technologies, expected future growth and profitability of the Group could decline.

  In order to meet diversifying market needs, the Group’s research departments, including Corporate R&D, Technical Center of Toyo Seikan Co., Ltd., and R&D Center of Toyo Kohan Co., Ltd., are actively engaged in R&D activities to develop next-generation technologies.

• Investment and lending (Corporate acquisitions / capital participation / capital investment /etc.)
  

  The Group actively seeks opportunities for corporate acquisition and capital participation with an eye on strengthening its operation base and expanding business, while it continues to make active and effective investment in manufacturing, sales and R&D activities to further improve our corporate value. However, results of those activities that do not fully meet expectations may significantly affect the Group’s business performance and profitability.

  We have established the Investment Management Committee to control risks related to investment and loan activities, implementing close examination by clarifying decision-making procedures and criteria, making post-evaluation, and setting criteria for whether to continue or exit the project based on the evaluation results. The committee also conducts regular monitoring on existing projects and, if the evaluated project has not yielded the expected results and is likely to adversely affect the Group’s overall profitability, it will decide to withdraw from the project to reduce the risk of lowering future profitability.

• Customer credit concerns
  

  If a default risk emerges due to concern over the creditworthiness of a customer or business partner, and if the Group is required to post an additional loss or a provision for the potential loss, it may adversely affect the business performance and financial condition of the Group.

  Most customers of the Group pose relatively low credit risk. Meanwhile, for reducing credit risk, we perform transactions with high risk customers by using trading companies or by shortening account receivable collection periods, and conduct an appropriate credit search on a new customer before initiating transactions.

• Recruitment and development of talent
  

  Recruiting and developing talented individuals is essential to the Group’s progress as its continuous growth over the long term highly depends on whether it has excellent leaders. Failing to recruit and develop qualified human resources may unfavorably affect the Group’s future growth.

  To secure talented human resources, major group companies have adopted a group-wide process for periodic recruitment of new college graduates from fiscal 2021 (ended March 2022), switching from the previous system where each group company individually recruited new graduates. Through this new scheme, we aim to obtain competent human resources for the entire Group and foster next leaders by providing career development opportunities from a group-wide perspective. Since fiscal 2017, we have also adopted a core personnel management system to develop the talent of selected candidates for future leaders through training programs and strategic assignment.

  Furthermore, we are working to increase the internal mobility of human resources while promoting collaboration across companies and organizations to prevent organizational inertia and foster an open work environment, thereby aiming to develop a corporate culture and human resources for continuous new value creation.

• Hostile takeover
  

  Since the Company’s shares are publicly traded, there is a risk of massive share acquisition through trading on the open market, including a tender offer. In the event of a hostile takeover bid that is definitely expected to impair the corporate value of the Group and common interests of its shareholders, it may adversely affect the business performance, finances and management of the Group.

  To continuously enhance the corporate value of the Group and the common interests of its shareholders, we have been implementing the Mid-Term Management Plan and various other measures to strengthen corporate governance. At the same time, we have been disclosing information on such measures in meetings with investors and shareholders to further enhance our corporate value and thereby reduce the risk of hostile takeover.

  We will take appropriate measures against a possible hostile takeover attempt in accordance with the Financial Instruments and Exchange Act, the Companies Act, and other relevant laws and regulations, by requesting the buyer to provide necessary and sufficient information for shareholders to make an appropriate decision on whether or not to accept the proposed large-scale share acquisition, disclosing the opinions of the Board of Directors, and securing the time and information necessary for shareholders to consider the matter.

• Litigation
  

  The Group’s business activities in Japan and abroad carry the risk of being sued. Specifically, we may be obliged to bear an enormous cost to compensate for damage in relation to contractual non-performance, product liability following product defects, liabilities under a labor contract with officers and employees and relevant laws, infringement of third party rights, or other liabilities.

  To reduce the risk, we aim to minimize the potential impact of a lawsuit, if it occurs, on the Group’s business performance and finances by developing a basic form of contract that clarifies liabilities to be borne by the Group and by facilitating cooperation between the relevant business divisions and legal experts, including the internal legal department and external specialists. We have also concluded a comprehensive general liability insurance to cover the entire Group.

(4) Information Security Risk

While the Group implements various measures to protect personal information and other information that it has obtained in the course of business, the risk of information leakage due to unforeseen circumstances cannot be completely eliminated. In the event of such a situation, the credibility or reputation of the Group could be impaired and its business performance and other conditions could be adversely affected.

We have formulated regulations for information management, and periodically conduct education and training programs for officers and employees. With respect to computer systems, various measures are taken to protect information as well. For the purpose of further enhancing our information management framework, we have established the Group Information Management Committee, which supervises information management operations across the Group, and the Information Management Committee, which oversees the Company’s information management.

(5) Financial and Accounting Risk

• Impairment accounting

  If the Group recognizes a significant impairment loss related to its non-current assets due to lower capacity utilization or lower profitability, the potential loss may adversely affect its management, business performance and finances.

• Retirement benefit liability

  Retirement benefit expenses and liabilities related to the Group’s employees are calculated based on actuarial assumptions, such as discount rates, and expected returns on pension assets. The difference between the assumptions and actual results or any change made to the assumptions generally has an impact on the retirement benefit expenses and liabilities incurred in the future. If long-term interest rates become lower than expected, or if the pension assets fail to yield expected returns, the profitability and business performance of the Group may be adversely affected.

• Deferred tax assets

  The Group reports deferred tax assets related to deductible temporary differences. Deferred tax assets are estimated in consideration of its recoverability based on projected future taxable income, etc. However, in the event that the actual taxable income differs from the projected amount and therefore the estimation of deferred tax assets is required to be revised, it may have an impact on the business performance and financial condition of the Group.

• Changes in accounting standards and tax systems

  The Japanese accounting standards have been amended from time to time in order to align with the international standards, and this trend is expected to continue. In addition, discussions are under way toward applying the International Financial Reporting Standards (IFRS) in Japan. Given such circumstances, future changes in accounting standards may have an impact on the Group’s business execution, operating results, and financial condition. Amendments to tax systems and procedures, both domestically and abroad, may similarly affect the Group as well.

  The Company has developed a framework to appropriately respond to changes in accounting standards and secure the validity of the Group’s financial statements and other accounting documentation; it is a member of the Financial Accounting Standards Foundation (FASF) and participates in training and other programs provided by FASF to gather information on a continuous basis, thereby properly understanding the details of changes in accounting standards.

• Fluctuation in the value of assets

  Falls in the value of assets the Group holds, such as land and marketable securities, may adversely affect its business performance and financial condition.

  The Company engages in so-called strategic-shareholding, including cross-shareholding, for maintaining and strengthening relationships with various business partners to allow the Group to grow and improve its corporate value. The appropriateness of the strategic-shareholding is examined by the Board of Directors and other management bodies, which verify whether the benefit and risk from the holding are reasonable for the capital cost. If the Board and the relevant bodies conclude, as a result of the examination, that there is little significance in holding certain shares, we will consider the unwinding of the holdings. As for shareholdings whose benefit cannot be readily evaluated quantitatively, qualitative factors such as the purpose of holding are also taken into account.

（6）Manufacturing and Quality Risk

Although the Group follows strict quality control standards in manufacturing and selling diversified products, there is still no guarantee that all products are completely free of defects or that no quality claims or product liability claims are brought against the Group. Unexpected massive claims for quality or product liability may cause the Group to incur significant expenses or may damage its credibility or reputation.

The Company has established the Quality Administration Department, which supervises quality control departments across the Group, in order to implement social responsibility as a corporate group that provides safe and reliable products, systems and services and earns the trust of customers and society.

（7）Environmental Risk

The Group’s efforts to reduce environmental impacts of its manufacturing activities may increase its production cost, while its business activities may cause unexpected environmental problems. As a result, the Group may incur significant expenses, or its credibility or reputation may be impaired.

As the problem of marine plastic litter has recently drawn global attention, public opinion is increasingly calling for the reduction of plastic products. Since the Group manufactures plastic packaging containers, which account for a fourth of its total sales on a consolidated basis, the future development of the situation related to plastic waste issues could have an impact on its sales activities and, in turn, adversely affect its business performance and financial condition.

We have been making efforts to decrease the occurrence of unexpected environmental problems by regularly identifying and reviewing risks and opportunities related to environmental issues. In July 2021, we expressed our support for the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) to advance our study into the impact of climate-related risks and opportunities on our business operations, and disclosed information based on the recommendations in May 2022. The disclosed information is available on our website through the following link.

In 2019, we formulated the Eco Action Plan 2030, a set of environmental targets toward 2030, to implement group-wide activities to reduce environmental impact over the mid- to long-term. In May 2021, we raised several targets in the Eco Action Plan 2030, setting a new long-term goal toward carbon neutrality, in order to advance our ongoing efforts. Furthermore, in November 2021, we revised several major targets of the Eco Action Plan 2030 with an aim to obtain approval from the Science Based Targets initiative (SBTi)* on the revised targets as aligned to the SBTi’s new criteria reflecting its commitment to keeping global temperature increase to 1.5°C. In the plastic-free challenge, we are working on reducing weight of plastic packaging containers and switching to alternative materials following the Japanese government’s Plastic Resource Recycling Strategy.

• The SBTi is an international initiative that examines the greenhouse gas reduction targets set by individual companies and approves them as consistent with scientific evidence through its target validation process.

（8）Country Risk

As the Group operates globally in Asia, Europe, North America and other regions, the business performance and other conditions of the Group may be affected by weak corporate governance structures of overseas group companies as well as the occurrence of terrorism, deterioration of political situations, economic and currency fluctuations, and unexpected changes in laws and regulations in foreign countries and regions. (As of March 31, 2022, 33 of its 71 consolidated subsidiaries, or 50 of all 96 group companies including non-consolidated subsidiaries, affiliates and subsidiaries of affiliates, run their businesses outside Japan.)

In case of an emergency in overseas regions where group companies operate, we decide how to respond to the situation based on the Group Crisis Management Rules for Overseas Operations. In expanding business abroad, we determine whether or not to proceed a new overseas project based on the assessment of the country risk conducted during both the decision-making and implementation stages of the project.

The situation in Ukraine may indirectly affect the Group’s procurement of raw materials, as described in the previous section iii) Procurement of raw materials, 3) Business management risk. However, we expect that it will have little direct impact on the Group's business performance.