Business Risks

Risks Related to Alcoholic Beverages

Changes in the Japanese Market for Alcoholic Beverages

• Overview of Risks
  In the alcoholic beverages segment, the Oenon Group derives most of its sales in the Japanese market. The domestic market for alcoholic beverages is experiencing a decline in overall demand as the population shrinks, childbirths decline and the population ages. In addition, sales competition is expected to grow more intense. Furthermore, the alcoholic beverages market is highly susceptible to economic trends and changing preferences. Accordingly, the market expected to continue polarizing, with preferences growing increasingly diverse. On the one hand, we are seeing an increase in low-end, price-oriented products. At the same time, we anticipate an increase in demand for higher-priced, value-added and health-oriented products. Delays in responding to this increasingly severe sales competition, price polarization and more diverse preferences could affect the Oenon Group's operating performance and financial position.
• Response Measures
  We are enhancing our competitive capabilities by concentrating the allocation of management resources on our areas of strength and growth fields. We are also enhancing the structure for the development of products that can respond to changes in the market environment. Furthermore, we aim to develop products from a consumer perspective, generating a stream of attractive products.

Regulations Related to the Sale of Alcoholic Beverages

• Overview of Risks
  The World Health Organization (WHO) is considering global regulations related to the sale of alcoholic beverages, reflecting the opinion that inappropriate consumption of alcohol affects health and society. If regulations are strengthened substantially more than anticipated, alcohol consumption could decline, affecting the Oenon Group's operating performance and financial position.
• Response Measures
  As a corporate group that produces and sells alcoholic beverages, the Oenon Group fulfills its social responsibilities by complying with laws and regulations related to the alcoholic beverages business and conducting sales and promotional activities accordingly. We actively promote awareness activities on appropriate consumption of alcohol and strive to eradicate the inappropriate consumption of alcohol.

Risks Related to the Enzymes and Pharmaceuticals Business

Changes in the Market for Dairy Product Enzymes

• Overview of Risks
  A mainstay product in this segment is lactase, which belongs to the market for dairy product enzymes. In this market, we face stiff competition from companies in Japan and abroad, including huge international firms, and technological innovation is progressing rapidly. Delays in the development of new technologies and products or technological innovation from other companies could change the Oenon Group's operating environment substantially and beyond expectations, affecting its operating performance and financial position.
• Response Measures
  The Oenon Group is responding to these changes by promoting research and development on new technologies and products that anticipate future market and technology trends. We are also cultivating positive relations with customers and working to gather information, putting in place structures to respond swiftly to market changes.

Risks Common to Each Business Domain

Business Expansion

• Overview of Risks
  To actively expand its business, the Oenon Group has acquired the shares of companies where it can make effective and efficient use of its management resources and converted these companies to subsidiaries. To further increase the efficiencies of Group management, we have promoted mergers between subsidiaries and otherwise reorganized the Group's structure.
  We have no plans to acquire new subsidiaries for the foreseeable future, and we plan to pursue total cost reductions groupwide by enhancing various functions in our current Group structure. However, based on overall Group policy, for the medium to long term we may consider expanding our business by acquiring subsidiaries. In line with future acquisitions of subsidiaries, changes in the operating environment and other factors could lead to temporary or additional losses. In addition, acquisitions may not deliver the results we anticipate.
• Response Measures
  The Board of Directors will endeavor to make appropriate decisions regarding investment and M&A plans and monitor their progress.

Risks Related to Ingredient Procurement

• Overview of Risks
  Procurement prices on the main ingredients the Oenon Group uses (such as crude alcohol, corn, and fuel oil) are indirectly affected by climate and economic conditions in the countries and regions from which they are procured, with prices changing accordingly. Rapid increases in the prices of these key ingredients could raise production costs, affecting the Oenon Group's operating performance and financial position.
  In addition, the COVID-19 pandemic is expected to cause an increase in global demand for crude alcohol, which is used in brewing and industrial alcohol, pushing up purchase prices and making sourcing itself increasingly problematic. Accordingly, future increases in infection and a prolonged outbreak could affect the Oenon Group's operating performance and financial position.
• Response Measures
  In response to these conditions, we are working to ensure stable procurement by purchasing ingredients from multiple companies and making purchases in a planned manner. Specifically, we are actively gathering information about markets where we source ingredients, reviewing contract periods according to market fluctuations, and endeavoring to diversify procurement sources.

Natural Disasters

• Overview of Risks
  Damage to the Oenon Group's sales or production facilities from large-scale earthquakes, flooding or winds could affect its operating performance and financial position.
• Response Measures
  While placing topmost priority on people's lives we are endeavoring to establish a crisis management system that includes putting in place production and supply systems to fulfill our responsibilities to supply alcoholic beverages, industrial alcohol and other products.

Infectious Diseases

• Overview of Risks
  Expansion of the COVID-19 pandemic could result in people refraining from going out, requests that restaurants shorten operating hours or suspend operations, or state of emergency declarations, substantially affecting business activities. In particular, an infection among our employees or the emergence of an infection cluster at our offices could require us to suspend business operations for an extended period, affecting our operating performance and financial position.
• Response Measures
  The Oenon Group takes appropriate and required measures, adhering to the instructions of national and local government bodies and industry organizations. Specifically, we thoroughly employ basic measures to prevent infection, including gargling, hand-washing, the use of hand sanitizer, ventilation, and mask-wearing. We also have measures in place to encourage working from home, working staggered hours and holding meetings online.

Information Management

• Overview of Risks
  The Oenon Group possesses important management-related information, as well as a variety of confidential information related to individuals. However, information could be lost or leak outside the company in the event of a power outage, disaster or computer virus that exceeds our scope of expectations, affecting the Oenon Group's operating performance and financial position.
• Response Measures
  A system center within the Company's Corporate Planning Department takes the lead in putting information security systems in place for the entire Group. In addition, we provide thorough employee education and training and implement software- and hardware-based security measures.

Recruitment and Cultivation of Human Resources

• Overview of Risks
  Addressing the labor shortage stemming from Japan's changing demographics is a major issue in determining sustainable growth in the future. Recruiting appropriate personnel on an ongoing basis may become difficult as social conditions and the employment environment change. This situation could hinder the advancement of the Group's growth strategies in existing businesses, affecting the Oenon Group's operating performance and financial position.
• Response Measures
  We believe it will be essential for our personnel to have varied perspectives based on diverse values, in order to ensure sustainable growth throughout the Oenon Group and enhance corporate value over the medium to long term. We encourage diversity among the Oenon Group's executives and employees and strive to create a working environment that fosters characteristic qualities and individuality. Specifically, we have launched a project that focuses on the promotion of women's participation and advancement in the workplace. Taking on board the opinions obtained through this project, we are promoting women in a planned and ongoing manner. We provide an environment aimed at making full use of the individual characteristics and skills of our female employees. We provide an environment that enables women to continue working with peace of mind even while raising children or providing nursing care, as well as supporting career advancement. We offer hourly annual paid leave and allow employees to take second or side jobs in our effort to promote a work-life balance. We also conduct LGBT awareness activities as part of our effort to create a society in which all people feel comfortable being themselves, by respecting each person's sexual orientation and gender identity.

Food Safety and Security

• Overview of Risks
  Unforeseen quality or product labeling issues could affect the Oenon Group's operating performance and financial position. In addition, we face the risk that defects in Oenon Group products might lead to product recalls or compensation for damages. The materialization of such risks and the inability to cover losses via insurance could hinder our business activities and affect the Oenon Group's operating performance and financial position.
• Response Measures
  We are reinforcing our groupwide quality assurance structure. These efforts center on Group production department meetings and Oenon's Quality Assurance & Management Department. Important matters are deliberated by the CSR and Compliance Committee, which is chaired by the president and CEO, and countermeasures are formulated. We are also working to enhance our quality assurance and have obtained certification under ISO 9001 (an international standard for quality management systems) and FSSC 22000 (an international standards for food safety management systems). In addition, we are reinforcing initiatives with respect to our record-keeping obligations under the Liquor Tax Act and other legislation and ensuring our conformance with labeling requirements.

Compliance

• Overview of Risks
  In its business activities, the Oenon Group is subject to a variety of laws and regulations, such as the Liquor Tax Act, the Food Sanitation Act, the Act on Pharmaceuticals and Medical Devices, and the Act against Unjustifiable Premiums and Misleading Representations. Falling afoul of these laws and regulations or behaving contrary to social demands could result in legal punishments, having suits brought against us or being subject to social sanctions, causing customers to lose trust in us.
• Response Measures
  The Oenon Group recognizes that compliance is a major pillar supporting its corporate value and is an essential facet of management itself. We conduct training to ensure thorough compliance among our employees, striving to prevent the manifestation of compliance-related risks.

Intellectual Property

• Overview of Risks
  The Oenon Group recognizes the importance of intellectual property and has systems in place to protect it. However, the Oenon Group's intellectual property could suffer infringement or be leaked to a third party. Our intellectual property could also cause intellectual property conflicts with third parties. Such occurrences could affect the Oenon Group's operating performance and financial position.
• Response Measures
  We have established a department dedicated to the management of intellectual party. We make certain to obtain and protect this property and strive to research other companies' intellectual property.

Industrial Accidents

• Overview of Risks
  In the event of a major industrial accident at a Oenon Group factory, the Group may become liable for the payment of compensation or other expenses related to such accident. Furthermore, the Group may be affected by opportunity losses or the payment of restitution due to the suspension of production activities, as well as a loss in social confidence. Such factors could affect the Oenon Group's operating performance and financial position.
• Response Measures
  We are reinforcing our administrative structure by establishing a department dedicated to production strategy. We are putting in place pre-emptive measures, such as enhancing facilities.

Environmental Issues

• Overview of Risks
  Stakeholder evaluations and the market's sense of values toward a company's stance on climate change and other environmental issues is changing. These factors are becoming an important determinant of consumers' product and service choices, and to suppress climate change, laws and regulations are being strengthened to rationalize the use of energy on a global scale and introduce measures to prevent global warming. Furthermore, awareness is rapidly growing that plastics in the seas and oceans is a shared global problem. This issue is prompting a rethink about the use of containers and packaging, and is having a major impact on the beverage industry. The additional costs of responding to increasingly stringent regulation and addressing issues related to containers and packaging could affect the Oenon Group's operating performance and financial position. The Oenon Group's operating performance and financial position could also be affected by the manifestation of physical risks in the supply chain, such as the depletion of water resources due to climate change, the impact on raw materials and damage to manufacturing equipment from large-scale natural disasters.
• Response Measures
  The CSR and Compliance Committee, which is chaired by the president and CEO, is organizing the issues we should address to realize the SDGs. The committee is also promoting efforts to resolve these issues on a groupwide basis.

Exchange Rate Fluctuations

• Overview of Risks
  Some of the products and ingredients the Oenon Group imports are priced in foreign currencies. Exchange rate fluctuations that exceed the Group's short-, medium- and long-term forecasts could have a negative impact on the Oenon Group's operating performance and financial position.
• Response Measures
  The Oenon Group endeavors to limit the risk of foreign exchange fluctuations by engaging in hedging transactions, such as foreign exchange forward contracts.

Fundraising

• Overview of Risks
  Due to financial market trends at the time of fundraising, interest rate fluctuations could exceed the Group's short-, medium- or long-term fluctuations, affecting the Oenon Group's operating performance and financial position. As part of its loans payable, the Group has syndicated loan agreements in place with its financial institutions. If we were to fall into conflict with the financial covenants of these agreements, we could be asked to prepay loans payable, which could affect the Group's financial condition.
• Response Measures
  The Oenon Group engages in interest rate swaps as necessary to limit its risk of interest rate fluctuations. In addition, the Group is currently reducing its loans payable significantly, greatly reducing its exposure to interest rate volatility.

Inventory Valuation

• Overview of Risks
  The Oenon Group has applied the Accounting Standards for Measurement of Inventories to fiscal years beginning on or after April 1, 2008. Under this standard, inventories held for sale in the ordinary course of business are carried at acquisition cost on the balance sheet. However, if the net selling value falls below the acquisition cost at the end of the period, inventories are carried at the net selling value on the balance sheet, which is regarded as a decreased profitability of assets. Differences between the acquisition cost and the net selling value are treated as an expense for the period under review. Accordingly, if the purchase price on ingredients held in the Oenon Group's inventories increases, if production-related fixed costs rise, if production volumes decrease or if product sales prices decline, causing the net selling value to fall below the acquisition cost and the Company to determine that profitability is decreased, the carrying cost of these inventories could be reduced, affecting the Oenon Group's operating performance and financial position.
• Response Measures
  Doing our best to limit the potential for substantial new decreases in book value, we value and inspect inventories each fiscal year, doing so continuously, conservatively and thoroughly. We also post impairment losses when necessary.

Impairment Losses on Property, Plant and Equipment

• Overview of Risks
  The Oenon Group owns a variety of property, plant and equipment, which are used in its businesses. The Group has applied the Accounting Standards for Impairment Losses on Property, Plant and Equipment since fiscal 2006. However, further decreases in the market value of idle property, plant and equipment or a substantial worsening of the operating environment may create the need for additional impairment losses, which could affect the Oenon Group's operating performance and financial position.
• Response Measures
  To reduce the risk of additional impairment losses, the Oenon Group inspects assets for signs of impairment each fiscal year, on an ongoing basis.

Retirement Benefit Obligations

• Overview of Risks
  Some of the Oenon Group's retirement benefit obligations and retirement benefit expenses are based on actuarial calculations that use certain assumptions such as the discount rate, retirement rate and rate of salary increase, as well as the expected rate of return on pension assets. The emergence of such factors as deterioration in the investment yield on pension assets or a decrease in the discount rate could affect the Oenon Group's operating performance and financial position.
• Response Measures
  To address the risk of fluctuations in profits and losses associated with the occurrence of such actuarial gains and losses, we strive to obtain information on the investment of pension assets as appropriate, and to allocate investments from a perspective of safety. In addition, the Company has a retirement benefit plan that combines defined benefit and defined contribution plans.