Business and Other Risks

The following section describes primary risks in terms of those that our management has recognized as potentially affecting the Morinaga Milk Group’s operating results and financial position. Forward-looking statements contained herein are based on conclusions reached by the Group as of the filing date of the Securities Report.

(as of June 30, 2023)

(1) Dairy and Milk Industry

When engaging in business transactions involving raw milk used as a raw material for dairy products manufactured by the Morinaga Milk Group, subsidies are paid to producers under the system for subsidizing producers of milk for manufacturing use, pursuant to the Livestock Stabilization Act. Accordingly, the Group’s operating results and financial position could be affected by possible future changes in subsidy levels upon substantial modification or abolishment of the Livestock Stabilization Act.
Moreover, whereas a tariff system protects the domestic agricultural industry with respect to dairy products produced by the Group, its operating results and financial position could be affected if the government were to substantially overhaul said system.
The Group accordingly strives to achieve solutions in a manner that involves coordinating efforts with relevant ministries and agencies, as well as other relevant organizations, in order to facilitate timely and appropriate action in addressing issues and other matters pertaining to the dairy and milk industry. We also visit dairy farmers and dairy farming organizations on a daily basis and engage in activities to promote dairy production, such that involve providing them with information on techniques for managing the health of dairy cattle as well as raw milk supply and demand.

(2) Risk Involving Procurement of Raw Materials

The primary raw materials used by the Group are subject to factors that may affect pricing, such that include changes in the balance of supply and demand domestically and overseas, modifications to tariff systems, raw materials markets and currency exchange rates. Accordingly, raw material procurement and production costs could be affected by price changes due to such factors.
To provide for the possibility of substantial changes in the supply-demand balance, the Group closely monitors trends in the raw materials market and has otherwise established the Morinaga Milk Group Procurement Policy, under which it places top priority on safety and reliability with respect to taking various measures, such that include purchasing from multiple regions and suppliers as well as providing allowances for substitute raw materials.

(3) Safety of Food Products

Although the Group takes an approach to manufacturing that involves making every effort to ensure the safety and quality of food products, its operating results and financial position could be affected should an unforeseen product-related contingency arise that would result in a large-scale product recall and product liability claims.
As such, the Group remains committed to ensuring product safety and quality, and has accordingly established a Quality Policy premised on the concept of ensuring quality throughout the supply chain extending beyond manufacturing sites.

(4) Effects of Foreign Exchange Rates

Given that the Group procures some of its raw materials and other items from overseas, such purchase prices are subject to effects of market price and exchange rate fluctuations. As such, the Group’s operating results and financial position could be affected by factors resulting in such higher costs as a depreciating yen and surging market prices.
The Group accordingly strives to curtail foreign exchange risk by arranging foreign exchange contracts and settling payments in foreign currencies, while gathering intelligence from financial institutions and other such entities.

(5) Effects of Weather

Net sales of the Group’s respective business segments are subject to the effects of weather. The Group’s operating results and financial position could be especially affected by decreases in sales of ice cream, beverages and other similar products in the event of unseasonably low summer temperatures.
As such, the Group flexibly addresses effects of weather by striving to optimize its overall operations, which involves facilitating close coordination among each of its divisions engaged in everything from production to sales, and making adjustments to production in a timely manner in accordance with developments in sales.

(6) Effects of Natural Disaster, Catastrophe, Epidemic and Other Such Events

The Group’s operating results and financial position could be affected under scenarios that include potential long-term work stoppage, suspension of product supply amid disruption of logistics channels, and changes in markets and lifestyles, should a sudden and substantial disaster strike. Such potential scenarios include natural disasters such as earthquakes and storms, incidents and accidents such as fire and terrorism, and proliferation of infectious disease affecting the Group’s business sites.
The Group accordingly maintains business continuity plans and other such guidelines and places top priority on protecting the lives of its employees and their families, as well as those of its customers, clients, community members and affiliates. The Group also strives to build frameworks that appropriately facilitate efforts to supply products and promptly restore business activities.

(7) Divulgence of Information

The Group has drawn up and accordingly implements information security countermeasures for preventing unauthorized access to its information systems, and for protecting and managing the personal information and trade secrets held by the respective Group companies. Nevertheless, the Group’s operating results and financial position could be affected if, for example, it were to encounter deteriorating public confidence amid a scenario wherein information had been inadvertently divulged due to unforeseen circumstances.
The Group has accordingly established an Information Security Subcommittee under its Internal Control System Committee in order to take various actions that include enhancing measures to guard against unauthorized access and efforts to address vulnerabilities, properly managing technological data, and reviewing security rules. The subcommittee also takes steps to heighten knowledge and awareness involving information security in part through employee education, and training on addressing targeted e-mail cyberattacks.

(8) Information Systems

The Group maintains regulations, enhances its support systems and implements security measures with respect to its use of information systems throughout its businesses overall in carrying out tasks that include accepting product orders, placing raw material orders, furnishing instructions on product manufacturing, and undertaking accounting. Nevertheless, we are exposed to risks particularly in terms of stoppage or loss of systems due to contingencies that include disaster, power outage, computer virus, and unauthorized system access. As such, the Group’s operating results and financial position could be affected if, for example, it were to become involved with a stagnating business and the resulting deteriorating public confidence.
The Group accordingly maintains business continuity plans and other such guidance, backs up important data, and addresses system vulnerabilities. It also works to ensure system security by educating its employees about such risk.

(9) Intellectual Property

The Group utilizes various forms of intellectual property throughout its business activities, including intellectual property owned by the Group and that legally subject to user licensing of a third party. As such, the Group’s operating results and financial position could be affected as the result of a third party unexpectedly filing a lawsuit against the Group for having violated intellectual property rights.
The Group accordingly takes action that involves showing deference toward intellectual property rights, filing and maintaining intellectual property applications that enable it to appropriately perform business activities, and consistently maintaining divisions dedicated to such matters ensure that the Group is not violating rights of third parties.

(10) Environmental Impact

Amid intensifying global environmental concerns as represented by climate change, the Group’s operating results and financial position could be affected if it became subject to regulations or hearsay regarding the use of fossil-fuel energy or plastics, water risks, and other issues that could call for review of its product strategy, capital investment, or responses to surging energy and raw materials procurement costs. For this reason, the Group is taking action using information it collects through various stakeholders.
The Group has identified “Resources and the Environment” as one of the material issues in its Sustainability Medium- to Long-Term Plan 2030, and appropriately sets and manages goals based on the ISO 14001 standard for environmental management systems, as stipulated in the Morinaga Milk Group Environmental Policy.
The Group’s initiatives for climate change are reviewed periodically by the Climate Change Measures Subcommittee and the Sustainability Committee. For details, please refer to “Initiatives Related to TCFD” on the Company’s website.

URL to Initiatives Related to TCFD
https://www.morinagamilk.co.jp/english/sustainability/resources_and_the_environment/tcfd/

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