NIPPON FILCON CO., LTD.

With domestic sales accounting for a high proportion of total sales, the contraction of the domestic market due to population decline continues. In the Industrial Functional Filter & Conveyor Business, demand for paper both domestically and overseas has not recovered, while in the Environment & Water Treatment Business, the discontinuation of school and private pool usage is accelerating. As countermeasures, the Group is promoting share gains through the introduction of value-added products and capturing school pool demand triggered by the withdrawal of its largest competitor.

The Group conducts transactions in multiple currencies for product sales, raw material procurement, and other activities, and fluctuations in exchange rates may affect its financial position and business results. During the fiscal year under review, the continued yen depreciation had a favorable impact on earnings; however, the Group is focusing on cost reductions in preparation for a future yen appreciation phase. In importing overseas materials, the Group considers forward foreign exchange contracts and enters into agreements that incorporate exchange rate fluctuations.

Global inflation has led to rising resource and energy costs, and as an equipment-intensive industry, the Group continues to face increases in the purchase prices and maintenance costs of production equipment. Price revisions have not been completed across all businesses and products, resulting in an impact on earnings. The Group is working to secure early inventory through building trusted relationships with raw material manufacturers, and to realize appropriate sales prices through dialogue with customers.

With production and sales sites deployed domestically and overseas, the occurrence of large-scale natural disasters such as earthquakes and floods, or fire and explosion accidents at plants, could affect business results and financial condition in addition to damaging social credibility. As countermeasures, the Group conducts regular workplace patrols, has formulated a BCP, and conducts annual disaster prevention drills, while continuing to update aging facilities. In the Papermaking Products field, the Group is also making capital investments to increase production capacity in Thailand, where disaster risk is relatively low.

The Group is promoting active capital investment and M&A, but if expected cash flows are not obtained due to changes in market conditions or technology not anticipated at the time of the investment decision, impairment of fixed assets or goodwill may occur, affecting business results and financial condition. Amid recent inflation and yen depreciation, the depreciation burden has increased, and in some cases replacing aging equipment cannot be expected to generate significant revenue increases; accordingly, the Group has adopted a policy of more careful assessment of investment effectiveness. A comparison of IRR and WACC is used as an important criterion in determining whether to proceed with an investment.

Due to the declining birthrate, aging population, and changing values regarding work styles, the aging of employees, turnover, and difficulty in new hiring are progressing, which could lead to stagnation in business activities. In particular, a shortage of information security personnel and DX-promoting personnel has been recognized as an issue. As countermeasures, the Group is working on shifting to year-round and mid-career hiring, strengthening communication to prevent turnover among young employees, mid-career hiring and recurrent education of specialized personnel, and utilization of senior employees.

The Group is subject to environmental laws and regulations concerning the discharge of waste and hazardous substances, and if legal or social responsibility arises in connection with past, present, or future business activities regarding the environment, it could affect business results and financial condition. The Group strives for legal compliance through ISO14001 certification and the establishment of internal monitoring and inspection systems, and is also working on energy and power conservation through an energy conservation committee.

Due to increased harassment risk and opportunities for misconduct accompanying changes in values, the occurrence of a serious compliance violation could damage social credibility and affect business results. The Group has established a Compliance Promotion Committee and continues to conduct rank-based training and e-learning aimed at implementing the "Nihon Filcon Group Code of Conduct"; during the fiscal year under review, the Group conducted management training with a particular focus on harassment prevention. Going forward, the Group is considering enhancing its internal reporting system and establishing digital consultation channels.

The Group operates information systems for order receipt, production, sales, human resources, and accounting, and if a cyberattack, unauthorized access, computer virus infection, or similar incident causes leakage of confidential information or a shutdown of information systems, it could affect business results and financial condition. The Group regularly conducts training on countermeasures against targeted attack emails, and is working on studying the migration of firewall functions to the cloud, clarifying standards for cloud use of core systems, understanding countermeasures across the major supply chain, and reviewing its backup systems.

The Group conducts production and sales activities in Asia, Oceania, North America, Europe, and other regions, and local legal regulations, political instability, and changes in the business environment could affect business results and financial condition. The Group is also working on surveys to identify child labor and excessive working hours risks, and analyzing differences between local accounting standards and international accounting standards. Strengthening governance within the Group is being considered as a priority issue in the next medium-term management plan.