Risks with the potential to affect the Group's operating results and financial condition include, but are not limited to, the following major risks. These risks contain future factors, which are envisioned as of the end of this fiscal year.
1. Market-Related Risks
The Group's business centers on fresh meats and fresh meats-related processed products. As such, in addition to selling fresh meats, the Group uses fresh meats as raw materials for hams and sausages, processed foods, and other applications. As a consequence, the Group's operating results and financial condition are vulnerable to fluctuations in market prices for livestock. Moreover, the Group's livestock breeding business, which supplies these fresh meats, is by nature affected not only by fluctuations in product prices but also by swings in feed prices. The Group also manufactures marine and dairy products, and is thus vulnerable to market conditions and fluctuations in the prices of raw materials used in these businesses.
To counter market-related risks, the Group works to diversify its product procurement channels; make use of commodity futures contracts; develop value-added products; and establish distinctive marketing strategies. The Group also strives to ensure the stable procurement of raw materials in anticipation of product demand and to maintain appropriate inventories of fresh meats. Such measures do not, however, guarantee protection against the impact of these risks.
The Group's operating results and financial condition may also be significantly affected by outbreaks of disease - such as BSE, avian influenza, and foot-and-mouth disease - as well as by the imposition of safeguard tariffs, that is, emergency restrictions on imports.
2. Safety-Related Risks
Based on its Open Quality concept, which emphasizes earning the trust of customers and responding to their expectations concerning the safety of its products, the Group has established five fundamental quality improvement policies: Strict compliance with laws and regulations; Creation of a quality and safety assurance network; Objective analysis of product safety; Product traceability; and Closer ties with customers. In line with these policies, the Group has built a rigorous quality control system for which it has obtained recognized third-party certification (i.e., ISO and HACCP), and a traceability system for the raw materials used in its fresh meats and its processed food products, which include hams and sausages, thereby ensuring the safety and security of its products right from the procurement of raw materials. Should a quality issue arise, the Group will respond in a manner that reflects its priority on customer safety through the prompt disclosure of information and the implementation of swift, decisive measures to prevent escalation.
However, in the event of a quality issue that falls outside the scope of these initiatives or has a major impact on society because, for example, it threatens food safety, the impact thereof has the potential to affect the Group's operating results and financial condition.
3. Risks Related to the Procurement of Materials
The Group strives to increase production efficiency and reduce inventory losses and distribution costs. However, should the Group be unsuccessful in offsetting increases in costs related to the procurement of materials and fuel or to distribution - attributable to such factors as high crude oil prices - or in passing those costs onto customers by raising product prices, the resulting increase in costs has the potential to affect the Group's operating results and financial condition.
4. Foreign Exchange Risks
The translation into yen of costs, income, and trade receivables and payables associated with transactions undertaken by the Group denominated in other currencies may be affected by fluctuations in currency rates.
To minimize exchange risks, the Group utilizes hedging instruments, including forward foreign exchange contracts, currency swap contracts, currency option contracts and cross-currency swap contracts. Such measures do not, however, guarantee protection against the impact of these risks.
Moreover, the use of hedging instruments to minimize foreign exchange risk may expose the Group to the risk of opportunity loss in the event foreign exchange market fluctuations exceed management's estimates.
There is also a risk that translation losses-that is, losses arising from the translation of the foreign currency-denominated financial statements of overseas consolidated subsidiaries into yen-may accumulate in the foreign currency translation adjustments, triggering fluctuations in shareholders' equity in the consolidated financial statements. Such fluctuations have the potential to affect the Group's operating results and financial condition.
To hedge risks associated with transactions in foreign currencies, the Group continually monitors currency markets in accordance with its exchange risk management policies and periodically assesses its exposure to foreign exchange risk. All forward foreign exchange contracts, currency swap contracts, and currency option contracts are carried out based on these policies and on internal regulations governing transactional authority and transaction amount limits.
5. Interest Rate Risks
The Group raises the bulk of the funds it requires through loans from third parties and other forms of interest-bearing debt.
Most of the Group's interest-bearing debt-¥110.9 billion as of March 31, 2018-is fixed-rate. Accordingly, the Group believes that for the foreseeable future the direct impact of interest rate increases will be negligible. Nonetheless, if interest rates were to rise, the resulting increase in the Group's interest burden has the potential to affect the Group's operating results and financial condition.
6. Share Price Risks
As the securities held by the Group are mainly shares of trading partners, there is a risk of falling stock prices based on fluctuations in market prices. As of the end of March 2018, the overall status is unrealized, but future share price trends may affect the business results and financial position of the Group.
Nonetheless, if interest rates were to rise, the resulting increase in the Group's interest burden has the potential to affect the Group's operating results and financial condition.
7. Risk of Impairment Loss on Fixed Assets
Should the value of fixed assets owned by the Group decrease, necessitating the application of impairment accounting, resulting losses have the potential to affect the Group's operating results and financial condition.
8. Risks Associated with Natural Calamities, Unforeseen Accidents, and Social Upheaval
The Group has operations in Japan and several other countries. The geographical locations of these operations involve certain risks. Any of the following occurrences has the potential to affect the Group's operating results and financial condition:
- Earthquake, flood, or other major natural calamity and the potential impact thereof on the infrastructure, i.e., damage to roads, harbors, and rail lines and the interruption of gas, water, and electric power supplies
- Environmental contamination (pollution of the atmosphere, water, or soil) resulting from an unforeseen accident or chance occurrence
- Social unrest caused by the spread of an infectious disease, such as influenza
- Unforeseen establishment of adverse, or the repealing of favorable, laws or regulations
- Unforeseen adverse economic or social event
- War, conflict, terrorist attack, or other such event
9. Risk of Information Leakage
In line with internal regulations for safeguarding personal information and governing insider trading, the Group rigorously protects and manages both the personal information it possesses and critical corporate information through such measures as compliance training and hierarchical employee education. The Group has also formulated measures to ensure the security of its information systems and to respond to the impact of major disasters. Nonetheless, information may be leaked, falsified, or lost, in the event of a natural calamity that exceeds assumptions, an extended interruption of power supplies, damage to hardware and/or software, a computer virus, or unauthorized access of the Group's computer networks; a protracted breakdown of the Group's information systems may also occur. Any of these occurrences has the potential to affect the Group's operating results and financial condition.
10. Compliance Risks
The Group strives to maintain a corporate culture that emphasizes transparency and sound business practices and works continuously to reinforce and embed awareness of compliance. The Group has established a risk management structure that ensures its ability to respond swiftly to recognized risks. The Risk Management Committee, which is chaired by the president and representative director of the parent company, is responsible for ensuring compliance Groupwide, while the Compliance Department is charged with deploying ongoing measures aimed at enhancing understanding among employees and management, as well as with compliance risk mitigation.
However, should an instance of noncompliance, such as the failure of an employee or member of management to comply with a relevant law or regulation, arise, it would have the potential to affect the Group's operating results and financial condition.
11. Risks Associated with Environmental Issues
In line with its Environmental Policies, the Group is committed to conducting its business in a manner that incorporates consideration for the environment, thereby contributing to the realization of a sustainable society. The Group has obtained certification under ISO 14001 and is working to earn certification from other key external organizations. The Group's management practices, which include environmental audits implemented by the Sustainability Department also reflect its commitment to being an environment- friendly organization. The Group also endeavors to ensure the appropriateness and transparency of its environmental and other CSR initiatives. Nonetheless, in the event of an accident, negligence, or other problem resulting in environmental contamination, the Group may be obliged to pay for remediation and/or damages. In the event existing laws and regulations are revised, the Group may be obliged to significantly increase environment-related investment. Either of these occurrences has the potential to affect the Group's operating results and financial condition.