Risk Management

As the TODA KOGYO Group operates globally, corporate earnings of the Group may deteriorate due to a worsening political or economic situation in Japan or overseas, restrictions on exports, imports or the operation of foreign companies, supply chain disruptions associated with terrorism, war, pandemics or similar developments, or prolonged global trade friction. We have made preparations to deal with changes in the business environment by developing a lean cost structure, and strengthening the earnings structure through measures including the development of multiple production sites and material procurement sources. However, in the event of unpredictable changes to political or economic conditions such as increasingly severe US-China decoupling, the cash flow environment, financial status or operating results of the Group may be seriously impacted.

The Group has defined the Toda Spirits as the starting point for implementing its manufacturing initiatives, and promotes quality assurance activities based on the quality policy of carrying out continuous activities for enhancement to provide quality that achieves customers' trust and satisfaction. We operate quality management systems compliant with ISO 9001 standards at each business site, make improvements to source control and process management through the introduction of IATF 16949-compliant systems for automotive products, work through a Quality Assurance Department that is independent of sales and manufacturing activities to conduct quality audits, and engage in activities including human resource development. However, amid changes to regulations imposed by each country and the rising levels of customers requirements particularly with regard to automotive products, in the event of quality related defects or accidents, the financial status or operating results of the Group could be significantly affected.

The Group purchases raw materials and fuel from multiple external suppliers and has developed production systems on the premise of securing appropriate stockpiles of such items, but some raw materials and other items may depend on limited supplying countries or suppliers for which substitutes are difficult to find. For this reason, there is a risk of supply disruptions affect raw materials and other items due to import/export regulations in various countries, environmental regulations, damages to suppliers and other accidents, the cessation of supply due to poor quality or other reasons, or supply shortages due to higher product demand. In addition, local procurement associated with expanded overseas production could be negatively impacted by various circumstances overseas, and if those effects are prolonged, they could impact production systems and make it impossible to fulfill our responsibility to supply customers. If demand and supply in the market becomes unbalanced, manufacturing costs are expected to increase significantly due to soaring raw material prices and sharply rising energy prices for crude oil, coal and other materials. We have also increased the purchase of raw materials and fuels that are affected by quoted market prices, such as crude oil and coal. In the event that fluctuations to those purchase prices cannot be fully passed on to sales prices or cannot be fully absorbed through cost reduction activities such as Groupwide joint purchasing and sharing including with overseas locations, the financial status or operating results of the Group could be significantly affected.

As a comprehensive iron oxide manufacturer, the Group has enhanced its product development capabilities and supply capacity. In addition, the Group has pursued business diversification beyond iron oxide to develop further. The Group has also continually revised its research and development structure based on analyses of market trends and carried out organizational restructuring to strengthen the selection and concentration of development themes, thereby speeding up business development and enhancing its sales capabilities. However, in the event that demand in the Group's existing product markets deteriorates, or low-cost products or substitutes emerge from a competitor, in the event that the development of new products does not proceed as planned or new products emerge as a result of technological innovation, the competitiveness of the Group may deteriorate, and the financial status or operating results of the Group could be significantly affected.

The Group provides materials and components to customers in the electronic component and automotive markets, and if demand in those markets fluctuates due to changing customer business performance or shifting management strategies, inventory write-downs could occur. In addition, the Group has continually invested in manufacturing equipment to improve quality and productivity while expanding the business, and thus retains fixed assets of considerable value. Fixed assets are periodically examined, and appropriate accounting procedures are implemented when signs of impairment are recognized. However, if the market value of fixed assets decrease significantly, or if business profitability deteriorates, impairment losses could be incurred, and the financial status or operating results of the Group could be significantly affected.

The Group maintains confidential information and other sensitive information related to business partners and the internal workings of the Group through its business and operations, and this information faces the risk of leakage or system shutdowns due to computer viruses, server attacks and other external attacks, as well as from internal negligence. To deal with these threats, the Group has worked to improve information security through technical measures based on management and control utilizing software and hardware technologies, through physical measures based on improved entry/exist control and locking procedures, and through personnel and organizational measures including the review of information security-related regulations, and periodic education and training provided to the employees of the Group and its affiliates. However, in the event that any of the threats described above materialize, the Group's reputation, financial status or operating results could be significantly affected.

The Group conducts business activities with an emphasis on legal compliance, but in the course of doing business there are risks of legal disputes with third parties, including conflicts over intellectual property rights, as well as the risk of complaints and various disputes. We endeavor to prevent disputes and other such issues from materializing by clearly stating contractual terms, engaging in the appropriate management of intellectual property rights, coordinating with experts such as lawyers, and so on. However, due to the nature and results of legal action and other such activities, the Group's reputation, financial status or operating results could be significantly affected.

To ensure that business activities are carried out with an emphasis on legal compliance, the Group has developed appropriate internal regulations and drawn up a compliance code of conduct. We also conduct compliance training for employees, have set up mechanisms including a whistleblowing system, and strive to maintain and improve compliance Groupwide. However, within the Group there is a risk of willful or negligent legal violations, and compliance violations such as improper conduct or harassment. In addition, as the Group conducts business activities globally, the Group's business activities could be adversely impacted due to the revision or abolishment of laws, regulations or other requirements in various countries. The details and results of such developments could significantly affect the Group's reputation, financial status or operating results.

Business activities at the Group's sites could be impeded due to various events including natural disasters such as earthquakes or severe localized rain storms, accidents such as fire, pandemics due to serious infections diseases, or prolonged social infrastructure outages such as electricity or logistics. Although we take various measures such as the formulation of business continuity plans (BCP), periodic inspections of and repairs to equipment, regular disaster readiness drills, the stockpiling of food and the preparation of emergency power supplies, if such a disaster or other incident were to occur, it could interrupt the operations of the Group and result in delayed production and shipping, which in turn could lead to reduced sales and immense costs to repair manufacturing sites or find alternatives, therefore seriously impacting the Group's financial status and operating results.

The Group may implement strategic alliances by acquiring companies or engaging in M&A activities as part of its business strategy to expand existing businesses or make forays into new businesses. When implementing these strategic alliances, the Group engages in thorough research and consideration of market trends and the targeted companies. However, in the event that such activities do not proceed as initially planned, such as when there are significant changes to the market environment following the acquisition or alliance, if it is no longer possible to recover the amount invested or if additional costs are incurred, the Group's financial status or operating results could be significantly affected.

The Group believes it is important to secure human resources that possess management capabilities and expertise, such as management strategy and global management. Through efforts to hire new graduates and experienced personnel year-round, we acquire human resources and pursue their development through enhancements made to tiered training programs. However, if it becomes difficult to secure the talented human resources needed to operate the business and the Group cannot implement the development of human resources as planned due to the declining birthrate, aging population, decline in the working population and other factors intensifying the competition for acquiring human resources, the Group's financial status or operating results could be significantly affected.

The Group has 14 overseas affiliate companies, and the financial statements prepared in the local currency of each region are converted into yen in order to prepare consolidated financial statements. In addition, the majority of exports from Japan are denominated in foreign currencies, and the Group also provides foreign currency-denominated loans, etc. to the overseas affiliate companies. The Group continually monitors exchange rate fluctuations and takes measures such as conducting translations in yen or other stable currencies, and conducting foreign currency-denominated transactions through payments in foreign currency accounts, but in the event that fluctuations in the exchange rate between the yen and other currencies are greater than expected, the Group's financial status or operating results could be significantly affected.

The Group has overseas sites in Asia including China, North America, and Europe. We share overseas safety information and other information with each site on a regular basis, and make every effort to respond to circumstances in a timely and appropriate fashion. However, in the event of conflict or terrorism, a deteriorating political situation, large-scale disaster, pandemic, labor dispute, restrictions on foreign investment or other such developments in the countries where these sites are located, the Group's financial status or operating results could be significantly affected.

In the product manufacturing process, the Group uses chemical substances including raw materials and waste products, as well as fuel and energy sources such as electricity and steam. In addition, the Group uses large amounts of water resources, detoxifies used water through a water treatment process, and releases all of the water into rivers and oceans. For this reason, the Group engages in thorough chemical substance management, energy management and water resource management, and conducts risk assessments in accordance with the relevant laws and regulations. However, in the event that environmental laws or regulations are changed, or a release of chemical substances occurs due to a natural disaster or an accident such as fire, the Group's reputation, financial status or operating results could be significantly affected.

The Group views climate change as a key management issue and we engage in measures to tackle global warming to create a sustainable economic society that enables future generations to live with peace of mind. However, climate change exposes the Group to transition risks (higher tax burden due to carbon pricing, increased capital investment due to the switchover to low-carbon equipment and low-carbon processes) and physical risks (damage to buildings and equipment due to natural disasters, increased investment in coastal sites due to rising sea levels, etc.).
Details regarding climate change risks are included in our securities report for the fiscal year ended March 31, 2023 (90th Fiscal Period) under Part 2: Business Status, 2. Approach to Sustainability and Sustainability Initiatives, (1) Action on Climate Change (Initiatives to Address the TCFD Recommendations) 2) Strategy.

The Group encourages creative activities related to intellectual property, which it sees as an important asset, and implements measures ensuring such assets are appropriately protected and utilized. The Group strives to secure intellectual property rights to the products and technologies that are necessary for business expansion, and conducts sufficient research to ensure that the intellectual property rights of third parties are not infringed upon. However, in the event that it is not possible to secure rights within the expected scope or the Group is sued for infringing upon the intellectual property rights of a third party, the Group's financial status or operating results could be significantly affected.