KPP GROUP HOLDINGS CO., LTD.

The Group promotes M&A investments both domestically and overseas as part of its inorganic strategy, and goodwill of ¥14,917 million was recorded as of the end of the current consolidated fiscal year. If it is determined that the expected synergy effects cannot be achieved due to changes in the business environment or other factors, an impairment loss may occur, which could materially affect the financial position and operating results. As a response, the Group deliberates on profitability and strategic significance at the time of investment decisions, and continuously monitors post-investment performance and signs of goodwill impairment.

The Oji Holdings and Nippon Paper groups together account for 26.8% of total purchase amount as major suppliers, and if a significant disruption to product supply occurs due to natural disasters or other causes, it could affect business operations, financial position, and operating results. In overseas business as well, dependence on a small number of suppliers is high, and the risk of reduced purchasing negotiation power is also recognized. As a response, the Group is diversifying its procurement sources by developing new suppliers domestically and overseas, and is increasing the proportion of business outside paper and paperboard through business portfolio reform.

Core business operations depend on information systems, and system outages caused by configuration errors during system changes, equipment failures, disasters, cyberattacks, or other causes could lead to delays or stoppages in business processing. Prolonged outages could reduce customer service capability and cause lost business opportunities, potentially affecting business performance and social credibility. As a response, the Group is thoroughly conducting prior verification in development and test environments, regularly updating equipment and maintaining maintenance contracts, establishing backup systems for critical data, and formulating system recovery plans premised on the possibility of cyberattacks.

There is a risk of information leakage or system failure due to unauthorized access, virus infection, targeted attacks, and other causes. In particular, ransomware attacks that render systems unusable could halt business operations and damage or leak important information, potentially having a material impact on business continuity. Inadequate internal rules and inappropriate employee responses are also contributing factors to security risk. As a response, in addition to technical measures such as endpoint protection, access control, and log monitoring, the Group has established information security management regulations, continues to conduct targeted phishing email training, and is expanding education across the entire Group, including affiliated companies.

The purchase prices of paper, paperboard, and other major products handled by the Group are affected by global supply and demand trends for pulp, wood chips, waste paper, crude oil, and other materials, and a significant rise in prices would increase procurement costs. Since waste paper and pulp are globally traded commodities, it is difficult to completely avoid risk in the event of a sharp price decline over a short period, which could affect financial position and operating results. As a response, the Group conducts ongoing price negotiations with customers, diversifies sales channels and suppliers, and determines sales prices at the time of purchase contracts and reduces inventory.

The Group conducts business worldwide with Kokusai Pulp & Paper, Antalis, and Spicers as regional holding companies, and when the yen appreciates, the yen-converted amount of profit and loss denominated in local currencies decreases, negatively impacting consolidated net income. In addition, price competitiveness in cross-border transactions involving paper, paperboard, waste paper, and other products is also affected by exchange rate fluctuations. As a response, the Group strives to minimize the impact of exchange rate fluctuations by utilizing foreign exchange forward contracts and other means.

The Group procures working capital and other funds through borrowings from financial institutions, corporate bonds, and commercial paper, with a balance of ¥96,741 million at the end of the current consolidated fiscal year. If interest rates rise beyond expectations, an increase in financial expenses could affect financial position and operating results. As a response, the Group seeks to mitigate interest rate fluctuation risk by procuring funds through long-term borrowings (fixed rate) and corporate bonds, and by utilizing interest rate swaps and other instruments.

The Group holds shares in companies with which it has close business relationships, such as suppliers and customers, and if share prices fluctuate due to stock market trends or changes in the business performance of these companies, it could affect financial position and operating results. The policy on cross-shareholdings is disclosed in the Corporate Governance Report, and the Group is working to reduce risk through appropriate divestment as needed.

The Group has adopted defined benefit pension plans and lump-sum retirement benefit plans. If a decline in the discount rate, deterioration in investment returns, a fall in the market value of stock trusts, or the amortization of significant actuarial differences occurs, it could increase retirement benefit expenses and expand retirement benefit obligations, thereby affecting financial position and operating results. Under the UK defined benefit pension plan, there is also a risk that the amortization period for differences may shorten due to a reduction in the average remaining service period. As a response, the Group regularly reviews pension assets, increases the proportion of highly safe assets, and continues to consider risk mitigation measures such as the UK pension buy-in implemented in FY2024 (ended March 2024).

The Group obtains the licenses and permits necessary for its business activities and conducts business in accordance with prescribed business processes; however, if a failure in business processes results in the loss of such licenses or permits, it could affect financial position, operating results, and the supply chain. As a response, the Group identifies and eliminates risks that could impede business activities and conducts audits that contribute to the reliable execution of business processes.