Among items relating to business and financial information as reported in the NH Foods Ltd. securities report, the major risks identified by management with potentially serious impact on the financial position, operating results and cash flow of the consolidated company are as follows. the management team has identified the following major risks with potentially serious impact on the financial position, business performance, and cash flow status of the consolidated company.
This section includes matters pertaining to the future, but items contained herein represent the judgments of the Group as of the end of the fiscal year under review, unless otherwise indicated.
1. Risk management systems
The risk management systems adopted by the Company are based on the “Risk Management Rules” outlining basic policies and management systems concerning risk management, with the President and Representative Director as the highest management executive. The President and Representative Director has established the “Risk Management Committee” as the consultative organ for issues and measures relating to risk management at the Group. This Committee works to identify and assess various risks, as well as specify priority risks and consider countermeasures. Based on the policies of the Committee, individual business divisions and departments coordinate risk relating to their own particular business domains and functions. Results are reported to the Board of Directors through the Committee. When events occur that may have a significant impact on the Group’s business activities, units for taking countermeasures tailored to the expected severity of the risk are organized, and prompt and appropriate action is undertaken.
Not all of the risks listed below are managed under the above frameworks. Product market risk arising from daily business activities is handled by individual business divisions, and financial risk by the Accounting & Finance Department and related business divisions.
2. Risks in the conduct of business activities
1. Product market risk
Since the Group mainly deals fresh meats and processed meat-related products, and uses fresh meat for both commercially supplied meat and also as raw material for ham, sausages and processed food products, it is exposed to the risk of change in livestock-product market prices. Its livestock breeding operations in Japan and overseas to supply fresh meat as mentioned above are exposed to risks not only from product markets but also from changes in the cost of feeds and of crude oil. Marine and dairy product operations of the Group are also subject to risks including product market and raw-material price fluctuation risk. In addition to the above factors, there is the risk of impact on livestock markets generally, and on the Group’s business performance and financial position, in the event of outbreaks of livestock illnesses (including BSE, avian flu, foot-and-mouth disease, porcine epidemic diarrhea, classical swine fever and African swine fever) and from triggering of safeguard mechanisms (emergency import restrictions).
These price fluctuation risks entail many factors beyond the control of the Group, including demand trends and changes in economic conditions, and always manifest in both positive and negative ways. To minimize the risk of adverse impact exceeding our assumptions, the Group takes take a range of measures including diversification of product and raw-material procurement channels, development of high value-added products and fostering of brands, and customer-oriented market strategy establishment. The Group is committed to securing a stable supply of raw materials ahead of expected changes in product demand, strengthening epidemic control systems within livestock breeding businesses, and maintaining appropriate fresh-meat inventory levels. However, the Group cannot guarantee avoidance of all risks of these kinds.
2. Safety risk
Since the Group mainly deals fresh meat and processed meat-related products, it faces the risk of adverse impact on its business performance and financial position through compromise of product quality and safety due to contamination with foreign substances or improper labelling, which can lead to, among other things, recall or damage compensation expenses, or restrictions on business activity.
To prevent or minimize such risks to the maximum possible extent, the Group has adopted the “More open food manufacturing OPEN Quality” approach, stating policies for “Strict compliance with laws and regulations,” “Quality assurance network,” “Objective assessments,” “Traceability management,” and “Closer links with customers” to meet the expectations and deepen the trust of the customer. In line with this policy, the Group has taken measures to ensure the safety and reliability of raw materials to products, acquiring external accreditation (including ISO and HACCP) and establishing a traceability system for raw materials used in fresh meat, hams, sausages and processed foods. In addition, to ensure product safety, the Group is strengthening its “food defense” strategy, creating rigorous quality assurance systems and further strengthening quality improvement measures. In the unlikely event of issues arising with products supplied by the Group, the Group aims to reduce reputational risk based on a customer-first attitude through prompt disclosure and thorough-going measures to prevent escalation of impact.
However, when events arise that cannot be dealt with such measures, or overarching social problems arise that threaten the safety of food, the Group cannot guarantee complete risk avoidance, given the difficulties of predicting the likelihood, timing and extent of risk materialization.
3. Risk from natural disasters, sudden accidents and social systems, etc.
The Group conducts its business activities in Japan and all over the world. Should the following events occur in these areas, there is a risk of adverse impact on the Group’s business performance and financial position due to suspension of business activities, disruption of logistics networks or other negative impacts. The Group has in place a Business Continuity Plan in readiness for natural disasters and sudden accidents, along with measures such as a disaster prevention manual and arrangements for checking up on the safety of employees, but the Group cannot guarantee complete elimination of adverse impact from such causes.
- Occurrence of major natural disasters such as earthquakes and flooding, and resulting destruction of social infrastructure such as roads, harbors and railways, and paralysis or restriction of supplies of gas, water or electricity
- Environmental pollution including atmospheric, water and soil and other pollution due to unforeseen causes such as sudden accidents
- Social disruption due to influenza and other contagious disease outbreaks
- Unforeseen establishment or abolition of laws or regulations
- Emergence of unforeseen adverse economic or political factors
- Social or economic chaos caused by outbreak of war, conflict or acts of terrorism
(Measures to deal with COVID-19 as of the date of submission of this report, and future impact)
In conducting its business activities, the Group complies with and respects laws, regulations and requirements governing every area of its business activities, so as to meet its social responsibilities as a food manufacturer, while remaining committed to ensuring the safety of its employees. Although there is a risk of temporary negative impact on revenue from the decline in demand for dining out and due to increasing instability in meat-procurement channels, as well as from factors such as the decline in the number of official matches played by professional baseball teams, the Group will strengthen measures to cope with changes in consumption patterns and lifestyle including an increased tendency to eat at home and increased demand for products that can be stocked.
However, if it takes a long time to get over the COVID-19 epidemic and return social and economic activity to normal levels, or in the event of deeper social and economic disruption resulting from the further spread of the infection, there may be adverse impact on the business performance and financial position of the Group from reduced sales and credit concerns at transaction partners.
3. Financial risk
1. Currency risk
The yen conversion amounts relating to expenses and proceeds arising from foreign currency denominated transactions in which the Group engages, as well as its foreign currency denominated credits and debts, are subject to potential impact from changes in exchange rates. These changes will always be positive or negative. To reduce the risk of future cash flow fluctuations in foreign currency denominated transactions due to exchange-rate fluctuations, the Group uses hedge transactions involving derivatives including foreign currency forward exchange contracts, but it can offer no guarantee of complete avoidance of such risks. Likewise, in hedge transactions intended to mitigate such risks, there is the possibility of other kinds of risk arising, such as opportunity loss in the event of exchange-rate fluctuation beyond our assumed parameters.
The Group continually monitors the foreign exchange markets and periodically assesses foreign currency exchange rate risk in accordance with its currency risk management policies for conducting risk-hedging operations relating to these foreign currency denominated transactions. All hedge transactions using derivatives such as forward exchange contracts are conducted in accordance with the currency risk management policies and the internal regulations that specify transaction authority and transaction amount limits.
There is a risk of adverse impact on the Group’s business performance and financial position through other comprehensive income, due to risk of fluctuation in total equity attributable to owners of the parent in the consolidated financial statements through exchange differences on translation of foreign operations. This is a result of translation difference at the time of conversion into yen of financial statements of overseas consolidated subsidiaries compiled using foreign currencies.
2. Interest rate risk
The Group procures most of the funding it needs from external borrowing and other forms of interest-bearing liabilities . As of March 31, 2020, the greater part of approximately ¥176.5 billion in interest-bearing liabilities was fixed-interest, so at the moment the Group expects only negligible direct impact arising from interest rate increases. However, there may be adverse impact on the Group’s business performance and financial position due to increased interest burdens in fund procurement from possible future upward trends in interest rate.
3. Share price risk
To maintain and strengthen business relationships, the Group holds marketable equity financial assets, and recognizes them as financial assets measured at fair value through other comprehensive income. There is a risk of these share prices falling due to fluctuation in market prices. As of March 31, 2020, the carrying amount of such holdings totaled approximately ¥20.7 billion, mostly representing unrealized gains. Depending on future share price trends, there is a risk of adverse impact on the Group’s business performance and financial position through other comprehensive income.
In the event of degradation of the value of plan assets of the Group due to a decline in stock markets, it may be necessary to increase retirement benefit expenses or accumulate further plan assets.
4. Risk of impairment loss on non-current assets
In the event of a fall in the value of non-current assets held by the Group due to erosion of profitability or changes in economic conditions or other factors, impairment losses are recorded as needed. As of March 31, 2020, the total carrying amount of items such as property, plant and equipment, right-of-use assets, intangible assets and goodwill, investment property included in other non-current assets, and equity method goodwill included in investments accounted for using the equity method, totaled approximately ¥337.4 billion. Given this, there is a possibility of adverse impact on the Group’s business performance and financial position through the booking of amounts recorded as impairment losses under other expenses and share of loss in investments accounted for using the equity method.
4. Other risks
1. Leakage of information risk
The Group has established regulations for safeguarding personal information and governing insider trading. The Group requires officers and employees of the Group to protect and manage personal information and important information of the Group, and ensures strict information management through compliance training and employee education by grade. At the same time, measures are taken to safeguard security systems and ensure disaster readiness.
However, the Group may face the risk of adverse impact on business performance and financial position due to natural disasters of severity exceeding foreseen parameters, protracted power outages, major hardware or software defects, leakage, modification or loss of information as a result of infection by computer virus or unauthorized computer access, etc., or protracted information system shutdowns or disruptions.
2. Compliance risk
Committed to being a transparent corporate group of integrity, the Group works continuously to thoroughly instill compliance awareness. In these measures, the Compliance Committee, chaired by an officer appointed by the President and Representative Director of the Company, oversees the Group as a whole . The Company’s Compliance Department carries out continuous measures to raise compliance awareness among all officers and employees in the Group and ensures that a system is in place to respond promptly in the case of identification of risk.
However, in the event of a compliance-related problem including legal or regulatory violations by any officer or employee, the business performance and financial position of the Group could suffer adverse impact caused by a tarnishing of the Group brands following imposition of legal, regulatory or other sanctions by public authorities.
3. Risk Associated with Environmental Issues
The Company has established the Sustainability Committee, comprising officers appointed by the Company’s President and Representative Director and external experts, to comprehensively examine sustainability initiatives and to act as an organ for reporting and making proposals to the Board of Directors. To address environmental problems, the Company has set “preserving the environment” as one of its Five CSR Material Issues and is working to reduce environmental impact by setting numerical targets for environmental performance in areas such as CO2 emission and water usage volumes so as to promote corporate activities in harmony with environmental imperatives, helping ensure attainment of a sustainable society. The Company has taken measures to acquire external accreditation for environmental performance (ISO 14001) and arrange suitability appraisals by external organizations, and undertakes internal environmental audits through the Sustainability Department.
In particular, risks related to climate change and water resources are recognized as important risks since the Group is involved in livestock breeding and food manufacturing. In addition to measures to reduce CO2 emissions, such as conversion to LED lighting and hybrid vehicles, the Group is considering water risk investigations, appraisals and measures.
However, there is a risk of adverse impact on the Group’s business performance and financial position in the event of the destabilization of production livestock breeding businesses due to drought, torrential rain or other exceptional weather conditions, stagnation of production/manufacturing activities due to deteriorating water quality or drought, environmental pollution due to accidents or errors as well as associated costs of restoration to original condition and damage compensation liability, or a major increase in environmental investment due to amendments of related laws and regulations.
In June 2020, the Company approved the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) and became a member of the TCFD Consortium. Looking ahead, the Company will analyze the impact of climate change on our businesses, identify risks and opportunities, take appropriate measures and make specific disclosures as it work to build a sustainable society.