TOYO DRILUBE CO.,LTD.

The automotive-related industry accounts for approximately 55.2% of net sales, so fluctuations in production trends and the number (amount) of coating processing applications per vehicle in that industry directly affect business performance. If a global slowdown in automobile production or a decline in production by domestic manufacturers occurs, this could have a significant impact on the Group's financial position and operating results. This represents a structural risk of high dependence on a specific industry, with limited diversification being an ongoing issue.

The automotive-related equipment industry and the electrical/electronic components industry, which are major customers, are subject to intense price competition, and for products with long life cycles, selling prices may be reduced irregularly. The Company addresses this through cost reductions from rationalization and automation of production/processing lines, as well as through developing new customers and launching new products; however, if price reductions exceed cost reductions or if such measures are delayed, this could affect the Group's financial position and operating results.

The major raw materials used in Drilube Products (Solid Lubricant Coating Materials), such as molybdenum disulfide, fluororesin, graphite, and organic solvents (petrochemical-related products), are subject to market conditions. If a surge in purchase prices cannot be absorbed through internal efforts, or if it is difficult to pass on the increase to product prices, this could have a significant impact on the Group's financial position and operating results through a decrease in gross profit.

Although the Company engages in quality control under ISO9001 certification, the occurrence of product defects or nonconformities cannot be completely ruled out, and there remains the possibility of unforeseen defects in new products. If a defect is found and causes significant disruption to a customer's production activities, this could lead to a loss of social credibility and liability for damages, thereby affecting the Group's financial position and operating results. The Company also implements quality and delivery date confirmation management for coating processing steps that utilize certain outsourced partners.

The automotive-related equipment industry and the electrical/electronic components industry, which are the Company's major customers, are experiencing remarkable technological innovation, resulting in routine requests for new product development. Although the Company is strengthening its response capabilities by increasing research staff and enhancing research facilities, if it becomes persistently difficult to respond to development requests, the Group's products could be replaced by competitors' products, affecting the Group's financial position and operating results.

There is a trend of new enactment and tightening of environmental regulations both in Japan and overseas, such as the addition of organofluorine compounds like PFOA (perfluorooctanoic acid) to the list of substances subject to elimination under the Stockholm Convention (COP) following a POPRC recommendation. New costs may arise from the development of substitute products and alternative technologies to comply with such regulations, and if this burden becomes substantial, it could affect the Group's financial position and operating results.

Some of the Drilube Products exported to affiliated companies are subject to export controls under the Foreign Exchange and Foreign Trade Act and other laws, requiring the permission of the Minister of Economy, Trade and Industry depending on the export destination, use, and end-user requirements. If domestic and overseas legal regulations are tightened or changed in the future, new costs may arise, and if this burden becomes substantial, it could affect the Group's financial position and operating results.

The Group operates affiliated companies and subsidiaries in China (Guangdong Province and Jiangsu Province), Thailand, and Vietnam, and there are inherent economic instability factors including a slowdown in the Chinese economy and other national economic uncertainties. If unexpected changes in local laws and regulations, unfavorable political or economic factors, or a loss of local asset value due to exchange rate fluctuations occur, this could affect the Company's financial position and operating results.

If the Kanagawa Technology Development Center, the Company's main production site for Drilube Products, becomes unable to produce due to a natural disaster or accident, there is a risk that production will stall across all production sites, as other business divisions cannot compensate for this. Coating Processing Service is conducted at a total of 13 sites, including three domestic sites, domestic subsidiaries, and overseas affiliated companies, and for processing requiring special equipment, production would be interrupted for the recovery period even if only one site is affected. Although the Company has prepared through BCP formulation, seismic reinforcement, and fire drills, disruptions to business continuity due to a resurgence of infectious diseases such as COVID-19 could also have a significant impact on business performance.

To respond to customer industries undergoing significant technological innovation, securing and developing excellent engineers and R&D personnel is essential. Despite efforts to raise the Company's profile and through education and training, if the Company is unable to sufficiently secure and develop the necessary personnel, this could affect business performance. As the scope of required talent expands due to the globalization of business, diversification of operations, and refinement of accounting standards, the Company recognizes the risk that a shortage of human resources could affect future business development.