Nippon Shikizai,Inc.

The domestic cosmetics market has entered a mature phase, and the competitive environment is becoming increasingly severe due to corporate restructuring through M&A, new entrants from other industries, and the entry of overseas contract manufacturers into the domestic market. If the Group fails to respond appropriately to unforeseen changes in the competitive environment, this may adversely affect its financial position and business results. In the cosmetics contract manufacturing market as well, consolidation among competitors is progressing, further intensifying competitive pressure.

Because the Group's business is conducted in an OEM/ODM format, manufacturing and selling products under the brands of client cosmetics manufacturers, changes in clients' sales measures, sales strategies, and outsourcing policies directly affect business results. As reliance on orders from specific clients increases, there is a risk of being more strongly affected by that client's sales measures. The Group has a structural vulnerability in that its performance is easily influenced by clients' decision-making.

If unexpected defects or recalls occur, large-scale product liability compensation costs may arise, and if these are not covered by insurance, substantial payments may be required, which could also adversely affect product reliability and reputation. In addition, although the Group has established a BCP (Business Continuity Plan) to address the risk of disruption to manufacturing and R&D due to large-scale disasters or accidents, it may not be able to fully respond to events exceeding assumptions. These risks could have a material adverse effect on the Group's financial position and business results.

The Group has two subsidiaries in France and is strengthening its business development in Europe, North America, and Asia. In overseas operations, there are latent risks such as unforeseen economic or political policy changes, political instability, labor issues, outbreak of terrorism or war, and social disruption caused by the spread of infectious diseases. If these risks materialize, they may adversely affect the Group's financial position and business results.

To achieve sustainable growth as an OEM/ODM manufacturer, it is essential to secure and develop capable personnel in the R&D department, as well as to secure a workforce and cultivate skilled workers in the production department. Although the Group is working on establishing an evaluation system that reflects contribution and actively engaging in recruitment and development, the loss of key personnel or difficulty in securing human resources may adversely affect the Group's financial position and business results.

Domestically, the Group is implementing strategic investments to increase production capacity through the expansion of the Tsukuba Plant, and overseas, it is pursuing strategic investments centered on Tepnel S.A.S. (France) and Nippon Shikizai France for overseas expansion. While the Group gathers and examines the necessary information when making investment decisions, if the initially intended results are not achieved due to unforeseen changes in the environment or other factors, this may adversely affect the Group's financial position and business results.

The balance of interest-bearing debt at the end of the consolidated fiscal year under review was ¥9,732 million, and fluctuations in interest rate conditions and financial markets may affect the Group's financial position and business results. In addition, since sales, expenses, assets, and liabilities denominated in foreign currencies are translated into Japanese yen when preparing the consolidated financial statements, even if there is no change in value on a local currency basis, fluctuations in exchange rates may adversely affect the value after translation into Japanese yen.

Soaring prices of raw materials, utility costs, and various expenses caused by global price increases, yen depreciation, supply-demand tightness, and geopolitical issues may adversely affect the Group's financial position and business results. Currently, rising energy prices and global price increases triggered by the prolonged Russian invasion of Ukraine and escalating tensions in the Middle East are affecting business performance. Reduced supply from suppliers and natural disasters can also be factors contributing to price surges.

The pharmaceutical and cosmetics industry to which the Group belongs is subject to domestic laws and regulations such as the Pharmaceuticals and Medical Devices Act, and when the final sales destination is overseas, it is also subject to local regulations. Depending on amendments to these laws and regulations or changes in applicable standards, the Group's financial position and business results may be adversely affected. As the Group expands its business globally, it also faces the risk of increased regulatory compliance costs across multiple jurisdictions.

The Group's main domestic production sites are concentrated at the Zama Plant in Zama City, Kanagawa Prefecture, and the Tsukuba Plant in Tsukuba City, Ibaraki Prefecture. If a large-scale earthquake or flood disaster occurs in the Kanto region or areas north of Kanto, there is a possibility of prolonged difficulty in product supply. In addition, if an epidemic of an infectious disease such as COVID-19 occurs, restrictions on business activities due to hygiene management and infection prevention measures, as well as significant impacts on order levels, may occur. Changes in client cosmetics manufacturers' policies and restrictions on outings or operations may also adversely affect business results.