Business Risks

Business risks associated with the execution of the Calbee group's strategies, businesses and other activities are described below. The risks are major factors that management recognize as a significant impact on investor decisions. In addition, the risks described below are not exhaustive of all the risks of the Calbee group, and there are other risks that may have an impact on the decisions of investors. The following details and forward-looking statements are based on our judgment as of the end of the fiscal year ended March 2021.

We have built a compliance and risk management system based on the “Basic policy on the development of internal control system”. The Compliance and risk management committee examines and decides solutions, and manages status. If the possibility of a risk increases or occurs, we establish an emergency response committee as needed to reduce the risk. However, if a risk actualizes, it may have an impact on our operating results or financial positions.

1. Product Development

Calbee conducts research and development activities to provide customers with unique, value-added products that maximize the nutritional content and flavor of natural ingredients. Meanwhile, there is considerable change in business environment owing to diversifying customer tastes, growing health awareness, and domestic lower birthrate and aging society. For our business expansion, we need to respond quickly to these changes in the markets and develop high value-added products and health-conscious products. We conduct research and development activities in the areas of new product development, existing product improvement, cost reduction, and basic research in accordance with annual plans.
However, if we are unable to respond appropriately to the needs of our customers and business partners and develop products in a timely manner, which could have an impact on our operating results and financial position.

2. Procurement Risks of Raw Materials and Materials

(1) Risks on Procurement of Potato (unseasonable weather and decreasing number of potato farmers)

Our main products are potato-based snacks made primarily from raw potato, such as Potato Chips and Jagarico. To ensure stable supply of domestic potato in terms of quality, quantity, and prices, we have built a procurement system through contract cultivation and decentralizing production areas. In anticipation of a decrease in domestic potato farmers, we also provide cultivation and harvesting support and labor saving support to farmers. In principle, it is not permitted to import raw potato under the Plant Protection Law in Japan. However, we have developed factory facilities that are capable of handling import raw potato in preparation for a shortage of domestic potato.
However, depending on the crop conditions, we may not be able to secure sufficient quantities of potato, it may result in losing sales opportunities and costs arising from urgent procurement, which could have an impact on our operating results and financial position.

(2) Risks on Procurement of Potato (potato cyst nematodes)

Potato cyst nematodes are a species of nematodes in the soil and are designated as important pests under the Plant Protection Law. It is prohibited to produce seed potato in the field where they occur. To prevent expansion of potato cyst nematodes, we need to convert potato to a more resistant variety. We have established a project to reform the mix of potato variety as raising the percentage of nematodes-resistant varieties to 50% by 2025 and to 100% by 2030, as well as achieving quality on customer satisfaction.
However, there are risks that we cannot develop of new varieties that meet quality conditions such as crop season, acrylamide and color of products in timely manner, or that the spread of new varieties will not progress throughout the production area, and that potato cyst nematodes expansion at a greater-than-expected rate. If these risks were to materialize and we were to delay converting our products to nematodes-resistant varieties, we would not be able to procure seed potatoes, and it may result in decreases in crops of potato and worsened quality of potato based products, which could have an impact on our operating results and financial position.

(3) Procurement Risks on Other Raw Materials and Materials

With regard to imported raw materials from overseas used in our Group products, there is a risk that supply will be stagnated due to natural disasters, pandemics, and other factors. Accordingly, we are working to stabilize procurement by diversifying and diversifying our suppliers and strengthening appropriate inventories.
However, in the event of a prolonged crisis, such as unexpected supply and demand trends, fluctuations in crude oil prices, or the occurrence of political disputes, rising procurement prices due to soaring raw material and material prices or changes in import destinations and import routes could have an impact on the Group's operating results and financial position.

3. Risks on Product Safety

Providing safe and reliable products is our most important social responsibility, and we continue to work tirelessly to build relationships of trust with customers. In the unexpected event has the potential to threaten the health of customers, we give top priority to the safety of customers and respond promptly. Calbee group review the design of standards to avoid product risks, as well as audits the raw materials procurement process and the production process. In addition, we have built a quality assurance system that involves conducting quality inspections to determine whether products are meeting the standards. We also have achieved traceability throughout the supply chain from procurement of raw materials, production, logistics, product distribution, retail stores, and customers. We strive to improve supply chain management in the entire supply chain through listening to our customers' voices and analyzing details to reduce their comments.
However, in the event that quality problems arise and there is doubt about the safety of products, we may have to discontinue the recall or sale of products, which could result in loss of customer confidence and have an impact on our operating results and financial position.
In April 2002, the Swedish government announced the results of a survey to see that the production of a carcinogenic agent (acrylamide) will materialize by baking or frying foods containing a large amount of reduced sugar such as aspartame and fructose and sugar. On the other hand, the Ministry of Health, Labour and Welfare in Japan does not assume that the average amount of consumption will affect people. In our basic research on acrylamide, product development and manufacturing processes, we continue to strive to reduce the content rate of acrylamide in an effort to resolve the concerns of customers.
However, if concerns about acrylamide socially grow and develop into a problem that affects the food industry and harmful reputations, which could have an impact on our operating results and financial position.

4. Risks on Stagnation in Domestic Product Supply

In recent years, there are concerns about shortage of transportation vehicles by a decline in the working population due to the lower birthrate and aging population, and an increase the number of deliveries with expansion of e-commerce, and the long working hours unique to the logistics industry. In order to secure a transport and delivery vehicles stably, we have taken various measures to improve the working environment, such as reducing drivers’ waiting times, reducing the frequency of deliveries, consolidating delivery destinations and promoting pallet transportation. In addition, we have introduced some measures for the diversification of transportation such as the use of rail transportation.
However, there is no assurance of securing transportation vehicles at appropriate costs in the future, if it may result in stagnate our product supply or delivery costs increase, which could have an impact on our operating results and financial position.

5. Risks on Fluctuations in Foreign Currency Exchange Rates

Our raw material procurement and sales of products include transactions denominated in foreign currencies. We forward foreign exchange contracts for part of the transactions with aiming risk hedge of changes in foreign currencies. However, sudden market fluctuations or exchange rate fluctuations that exceed our forecasts could have an impact on our operating results and financial position.
We translate the operating results of overseas subsidiaries and equity-method affiliates that are in local currencies to Japanese yen for preparing consolidated financial statements. As a result, fluctuations in the value after conversion into yen could have an impact on our operating results and financial position.

6. Risks on Changes in the Political and Economic Conditions of Overseas Businesses

As a pillar of our business growth, we operate in a variety of countries and regions. There is the possibility that problems may occur in the countries or regions in which we have established operations due to changes in laws and regulations, political, economic and social confusion caused by terrorism, conflict, or other factors, or cultural and customary differences. The materialization of such country risks could have an impact on our operating results and financial position.

7. Relationship with Major Shareholders

As of March 31, 2021, PepsiCo, Inc. (hereinafter "PepsiCo") held 20.01% (after dilution) through FRITO-LAY GLOBAL INVESTMENTS B V. (hereinafter "FLGI"), a PepsiCo's 100% subsidiary, and Calbee, Inc. (hereinafter “the Company”) are an equity-method affiliate of PepsiCo. FLGI, which directly owns the shares of the Company, is a wholly owned PepsiCo subsidiary, so PepsiCo effectively makes all decisions regarding the exercise of common share voting rights. PepsiCo is one of the world’s largest food and beverage makers and is listed on the New York Stock Exchange. In addition, PepsiCo operates globally in the same snack food field as the Company via group companies, primarily its subsidiary Frito-Lay North America, Inc. On June 24, 2009, the Company and PepsiCo concluded a strategic alliance agreement, based on the understanding that combining management capabilities to generate synergies was necessary to deliver sustained growth for both companies. In order to reinforce the partnership with PepsiCo, the Company allocated new shares to PepsiCo’s wholly owned subsidiary FLGI via a private placement and, at the same time, acquired all the shares of PepsiCo’s subsidiary Japan Frito-Lay Ltd. Under the strategic partnership, PepsiCo has agreed not to operate a snack food business in the Japanese market and therefore does not compete with the Company in Japan. In addition, because no restrictions have been placed on overseas business development, the Company believes there are no limits on its management decisions or business development under the agreement. The Company intends to maintain this strategic partnership and work toward boosting corporate value.
However, in the future it may no longer be possible to generate synergies from the partnership in the event that PepsiCo makes changes to its management policy and business strategy. In addition, the PepsiCo Group could become a competitor in the Japanese market in the event that the partnership is dissolved for any reason. Any of these developments could have an impact on Calbee’s operating results and financial position.

8. Risks on Securing Human Resources

For the Group's sustainable business growth, it is important to have human resources with the ability of autonomous execution for innovation and challenges. To secure and develop human resources who can promote the group management, we introduce systems that enable diverse work styles and develop human resources who can promote Digital Transformation. In addition, to realize new value creation, we aim to be an organization that enables all employees to be active makes while leveraging its diverse values and expertise.
However, changes in the employment situation and the decline in the working population due to Japan's lower birthrate and aging population may make it difficult to secure the talented personnel needed for business activities. In addition, a delay in the speed of human resource development may make it difficult to sufficiently secure and develop human resources who develop the group management or needed for business activities. Any of these cases could have an impact on our operating results and financial position.

9. Risks on Information Systems

Calbee group strives to protect information systems and telecommunications lines needed for the group business. In the event of security-related problems in the operation of information systems, we have established an incident response system centered on CSIRT (Computer Security Incident Response Team). To prevent the loss, misuse, and falsification of confidential information, we have implemented appropriate security measures for information management including information systems.
However, in the event of power outages, disasters, defects in software and equipment, computer virus infections, loss of information and falsification of data, leakage of personal information and company confidential information due to unauthorized access, or the shutdown or temporary disruption of information systems could have an impact on the our operating results, financial position and social credibility.

10. Compliance Risks

Calbee group is subject to a range of legal regulations, including the Food Sanitation Act, Act against Unjustifiable Premiums and Misleading Representations, Measurement Act, Unfair Competition Prevention Act, Plant Protection Act, and Consumer Product Safety Act in Japan. In addition, the group companies overseas are subject to the laws and regulations of each country in which we operate our business. Based on Calbee Group's fundamental policy, we have established Calbee Group Code of Conduct on social values, ethics, laws, and social responsibilities. We have also formulated Calbee Group Guidelines of Conduct as material actions. Through corporate training systems and awareness-raising activities in Japan and each country where we operate businesses, we strive to ensure compliance with ethics, social norms, laws, and internal rules and to reduce the likelihood of violations of laws and social norms.
However, violations of laws and social regulations due to changes and unexpected introduction may result in punishment or cancellation of authorization by law, the filing of lawsuits, and the loss of trust from customers and other stakeholders. Any of these cases could have an impact on our operating results and financial position.

11. Risk on Natural Disasters such as Earthquakes, Typhoons, Heavy Rains, or Pandemics

Calbee group has diversified its production bases and suppliers of raw materials, in order to reduce the risk of natural disasters such as earthquakes, typhoons and heavy rains. In the event of a disaster at production bases or suppliers of raw materials, we work to resume our supply chain as soon as possible, determining priority of products based on the BCP (Business Continuity Plan).
However, if the disruption of supply chain continue for a protracted period, we may not able to supply products to our distributors, we may need a large amount of expense for facility renovation, or consumer sentiment may decline. Any of these cases could have an impact on our operating results and financial position.
In particular, we recognize that the pandemic of the new coronaviral infectious disease (a major global epidemic) is one of the important risks in the ongoing form at present. In January last year, we launched the new Corona Virus Response Headquarters, which conducts operations under a thorough hygiene management system while taking into account trends in the government and local governments.
These measures include banning the principle of traveling abroad, preventing unnecessary and sudden domestic trips, halting events that will be brought to plant visits and many clients, and adopting the principle of working at home in the head office and tele-workable departments (roughly a thirty-percent of employees).
In addition, although the Group strives to reduce the impact of its business by securing procurement of key raw materials, implementing flexible product policies and maintaining its supply structure, it has been significantly affected by the slump in the tourism business due to the curbing of human resource distribution in Japan and the decrease in inbound tourism.
In addition, if a pandemic were to continue for a prolonged period, resulting in a sharp rise in raw material prices, difficulty in securing raw materials, stagnant consumption or a decrease in inbound tourists, etc., the Group's operating results and financial position could be affected.

12. Risks on Climate Change

Following the adoption of the Paris Agreement at the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) and its ratification by countries, efforts to reduce greenhouse gases caused of climate change and global warming are advancing on a global scale. Our medium-term target is to reduce greenhouse gas emissions by 30% by 2030 compared to levels in 2018. For the target, we work on further energy conservation and the utilization of renewable energy.
However, depending on the progress of efforts to reduce greenhouse gases, the introduction of a carbon tax could have an impact on our business activities. In addition, consumers' purchasing behavior may change, the quality of potato may have damages, the damage to manufacturing facilities, suspend operation and disrupted supply chain caused by typhoons and heavy rains may increase. Any of these cases could have an impact on our operating results and financial position.
In February 2020, we endorsed the recommendations of the Climate-related Financial Disclosure Task Force (TCFD) established by the Financial Stability Board. We will proactively analyze and respond to the risks and opportunities of climate change on our business, and disclose information in our annual securities reports, integrated reports, and on our website.