Megmilk Snow Brand Co., Ltd.

Supply and demand for raw milk, the key raw material, repeatedly swings between oversupply and tightness. In periods of oversupply, increased dairy product inventories intensify sales competition and weaken the production base, while in periods of tightness, reduced production volumes lead to lost sales opportunities and lower production efficiency. Fluctuations in international market conditions directly affect procurement costs for dairy products and feed materials, and increased manufacturer contributions under the compound feed price stabilization system could put pressure on business performance. As countermeasures, the Group is working on restructuring its business portfolio, diversifying its revenue base, and continuously improving its product mix.

If a quality issue occurs, product recalls, plant shutdowns, and product liability (PL) burdens under the Food Sanitation Act and other laws may arise, leading to deteriorated business performance and damage to social credibility. Widespread rumors regarding contamination with substances affecting health or livestock infectious diseases, both domestically and overseas, could also negatively impact sales. As countermeasures, the Group promotes the operation of its proprietary quality assurance system "MSQS" and the acquisition of certification under internationally recognized GFSI-approved food safety schemes.

If it is discovered after acceptance that dairy cows were infected with a legally designated livestock infectious disease, the raw milk and products in question must be disposed of, and if the disposal volume is large, it could adversely affect business performance. Reputational damage from an outbreak of infectious disease could also reduce consumption of products using domestic raw milk, and culling of dairy cows could reduce raw milk production volume and feed sales. As countermeasures, the Group has established a system for rapid information gathering and appropriate response in cooperation with government authorities and producer organizations, based on its "Livestock Infectious Disease Response Guidelines."

The Group is subject to a wide range of laws and regulations, including the Food Sanitation Act, the Ministerial Ordinance on Milk and Milk Products, the Food Labeling Act, and the Feed Safety Act. If manufacturing process problems or labeling deficiencies result in regulatory violations, disposal and recall costs and a decline in social credibility could adversely affect business performance. If legal amendments render existing ingredient standards or manufacturing methods no longer permissible, additional costs would be incurred to comply with new standards. The Group addresses this through thorough legal compliance and manufacturing/quality control based on the Group Code of Conduct and related regulations.

With the enforcement of laws related to work-style reform, restrictions on truck drivers' working hours are making it increasingly difficult to secure long-distance transport capacity, an impact known as the "2024 problem." Rising freight rates and vehicle allocation constraints are increasing logistics outsourcing costs, and delivery delays or stockouts could result in lost sales opportunities. As countermeasures, the Group is working to build a sustainable logistics system through the promotion of palletized transport, modal shift, and relay transport, review of delivery routes, extension of expiration dates, and review of delivery conditions.

The markets targeted by the Group are trending toward contraction due to population decline from the declining birthrate and aging population, as well as reduced consumer spending willingness amid sharp price increases. Meanwhile, oligopolization and consolidation in the distribution industry heighten the risk that changes in policy by specific customers could directly affect business performance, and consolidation among major manufacturers in the dairy and food industries, as well as new entrants from other industries, could intensify competition. As countermeasures, the Group is strengthening its revenue base by enhancing development of high value-added products, expanding its functional foods business through mail-order channels, and accelerating borderless expansion of its overseas cheese business.

Changes in domestic and international political and economic conditions and rising international tensions could cause logistics disruptions, constraints on raw material procurement, higher procurement and energy costs, and exchange rate fluctuations, which could affect business operations, performance, and financial condition. Restrictions on overseas business activities, transactions, and personnel movement could also necessitate revisions to business plans and create operational constraints. As countermeasures, the Group utilizes its BCP and crisis management systems to continuously gather information and monitor developments, and considers response policies for procurement and logistics in coordination among relevant departments.

Since some raw materials and products are procured from overseas, a weaker yen raises procurement costs and adversely affects business performance, while a stronger yen has a favorable effect, creating a structural exposure. Changes in financial market conditions and higher fundraising costs due to deteriorating performance also pose financial risks. As countermeasures, the Group works to reduce the impact of exchange rate fluctuations through forward exchange contracts and foreign currency settlements, and to secure sufficient liquidity through commitment line agreements and overdraft agreements.

Information systems are used across the entire business, including raw material ordering, product manufacturing, order receipt, and accounting processes. If a power outage, disaster, computer virus infection, unauthorized access, or similar event causes an information system outage or loss, leakage, or falsification of internal information, business operations could be temporarily suspended and social credibility damaged, adversely affecting business performance. Leakage of personal information also poses a risk of reduced social credibility. As countermeasures, the Group formulates BCPs, implements appropriate security measures, and conducts employee training based on the "Group Information Security Basic Policy."

If production business sites are forced to suspend operations for an extended period due to earthquakes, fires, or wind and flood damage, the entire supply chain could be seriously affected, potentially resulting in significant losses to management and business activities. The spread of infectious disease within business sites could also hinder staffing and potentially lead to site closures or business downsizing. As countermeasures, the Group works to ensure business continuity through the development of BCPs and continuous training, as well as by disseminating thorough hygiene management practices at the first signs of an infectious disease outbreak.