We have established a Risk Management Committee for the appropriate and centralized management of risks related to the PILOT Group's businesses and the implementation of countermeasures, starting with priority risks. Through this, we are committed to reducing the risks faced by the Group and minimizing losses when risks do materialize. We assessed risks identified based on various assumptions in terms of the degree of impact if they materialize and the probability of their occurrence. As a result, the following risks were identified by the management as risks which are likely to materially impact the financial position, business performance, and cash flows of the Company and consolidated subsidiaries, among other issues related to the business and accounting conditions described in the annual securities report.
The following contains forward-looking statements based on judgments made by the Group as of the end of the current fiscal year.
1. Risks associated with market changes
The PILOT Group's business performance in the stationery business, its main business, may be adversely affected by a decline in product prices that is greater than expected due to factors such as intensifying competition with other companies in each country or regional market or a sales oligopoly or restructuring by major online sellers and distributors. In addition, if a product or service with remarkable growth potential that would make our products obsolete emerges, an impairment loss on inventories may be posted reflecting a decrease in sales.
At the PILOT Group, we are endeavoring to enhance our corporate value and the power of our brand by developing attractive high value-added products that will please our customers and by developing sales channels. We make ongoing investments in research and development to innovate in the areas of products and services. We are also enhancing our marketing capabilities to accurately identify trends in each market around the world, in our efforts to further improve our competitiveness and stimulate the market. However, the Group's failure to identify or understand market trends may affect the Group's business performance or financial position, for example, it may lead to a decline in net sales or a wasteful investment in research and development.
2. Risks associated with currency fluctuation
The PILOT Group conducts sales activities all around the world, and the ratio of overseas sales is extremely high—around 75%. However, we manufacture products mostly in Japan. In preparing consolidated financial statements, we convert foreign-currency-denominated financial statements of overseas consolidated subsidiaries into yen. Accordingly, exchange rate fluctuations may affect the conversion of the foreign currency-denominated financial statements, and this has the potential to impact the Group's business performance and financial position. Further, the Group bears the risk of forex rate fluctuations because some transactions within and outside the Group are settled in foreign currencies.
The Group hedges forex rate fluctuation risk based on the settlement amount of each company, but if the currency fluctuates more than expected against other currencies, the Group’s business performance and financial position may be affected.
3. Risks associated with investment capital
The PILOT Group may acquire a company, form a joint venture with a third party or implement capital expenditures or other strategic investments for the acquisition of technology, the streamlining of new business development or the enhancement of the competitiveness of its business. In these cases, the Group's business performance may be affected by acquisition or integration expenses that are incurred, a failure to produce synergy, a failure to generate profit or improve costs as expected, the loss of key personnel, or the assumption of debt. Further, when the Group establishes a joint venture or a strategic partnership with a third party, the Group's business performance and financial position may be adversely affected by differences between the Group's and the partner's strategy or culture, conflicts of interest, a failure to produce synergy, additional investments or debt guarantees needed to maintain the joint venture or partnership, an obligation to buy out the equity of the joint venture partner, an obligation to sell the equity the Group holds in the joint venture, an obligation to dissolve the partnership, ineffective business management including cash flow management, a loss of patented technology or expertise, an impairment loss, or reputational damage caused by the joint venture’s actions or business activities.
When an important business decision is made within the PILOT Group, its Board of Directors, Executive Management Committee and other organizations discuss the matter, considering the opinions of Outside Directors and Audit & Supervisory Committee Members, thus incorporating diverse perspectives and specialized knowledge in its decision making. The criteria for business decisions are set based on an economic perspective and strategic business targets and established in accordance with laws and regulations, basic business policy and the Purpose. However, the Group's business performance and financial position may be adversely affected by rapid changes in the business environment or unexpected circumstances.
4. International tax-related risks
The PILOT Group operates globally and conducts intragroup transactions. Therefore, its business operations involve international tax risks such as transfer pricing taxation.
The Group cooperates and shares information with its local staff and experts in international tax affairs to pay taxes properly following the tax laws of each country it operates within in its efforts to reduce these risks. However, the Group's business performance and financial position may be adversely affected by unexpected tax burdens that could arise due to differences between the views of the Group and tax authorities or other reasons.
5. Risks associated with natural disasters
The Group conducts business in various locations in Japan and overseas, and its production, sales, and distribution of products could be delayed or suspended if production, sales or distribution bases are severely damaged by an unforeseen natural disaster, such as a major earthquake. The Group is addressing these risks by increasing the seismic resistance of its buildings and facilities, stockpiling disaster supplies, and developing a business continuity plan to establish a system for responding to emergencies. The Group is also decentralizing its production facilities. However, the Group's business performance and financial position may be adversely affected by a disaster, depending on the severity of the damage.
6. Risks associated with the procurement of raw materials, etc.
The purchase prices of metals, resins and other major raw materials for the Group’s products are affected by domestic and overseas market conditions and forex rates. Unexpected and unusual fluctuations in these factors may affect the Group’s business performance and financial position. In addition, we depend partly on specific business partners to enable the efficient and consistent procurement of some manufacturing machinery and raw materials. Our production activities may be adversely affected if those suppliers are hampered by the international situation, a large-scale natural disaster affecting the supply chain, an accident, issues regarding compliance with laws and regulations or other events.
The PILOT Group is improving the stability of supply by establishing multiple suppliers for each highly important raw material while continuing to reduce cost by improving production efficiency and taking other measures. We get suppliers' written consent to our procurement policy and through this process work together with them to fulfill our responsibilities to society while regularly checking the situation regarding the stability of raw material procurement with them. However, if the supply chain is enormously damaged by events such as a natural disaster, war or a riot breaking out close to the source of a raw material, our production activities may also be significantly disrupted due to major delays in or the suspension of the supply of raw materials, and the Group's business performance and financial position may be adversely affected.
7. Risks associated with business development
The PILOT Group operates in more than 190 countries and regions, including Japan, the Americas, Europe and Asia. The Group’s business performance and financial position may be adversely affected if business activities are restricted due to unpredictable circumstances, such as changes in the political and economic environment in Japan, the United States, major European countries or China, which together account for most of the Group’s sales, as well as other countries and regions, changes in the unique legal regulations of individual countries, including environmental regulations, social turmoil that occurs due to war, riots, terrorism, etc. and an infectious disease outbreak.
The Group has diversified its sales channels in its efforts to disperse risk and improve the stability of its businesses. We develop measures to address legal, environmental and other regulations promptly by quickly collecting and sharing information. We work together with local staff and other parties to predict risks arising due to politics, conflicts, disasters and other events in overseas countries. When we have confirmed that an emergency such as a war, a riot or terrorism has occurred, or we have determined that the probability of occurrence of such an event is considerably high, we take appropriate, prompt actions to minimize its impact on the management of the Group. However, the sudden occurrence of an event that goes beyond our expectations may interfere with our business activities in the affected area and adversely affect the Group's business performance and financial position.
8. Risks associated with information systems
The Group’s business development depends on the communication network that connects the computer systems in offices and plants. Therefore, we expect that our production and sales activities would be affected significantly if the network breaks down due to an unforeseen disaster or similar event.
The Group has established infrastructure for minimizing security risks which prevents data loss and disruptions using remote data backups and redundant data systems. We have introduced appropriate tools to address cyberattacks which enable us to monitor, detect and respond promptly to attacks. Related rules are updated in accordance with the latest security standards. At the same time, we provide internal training regularly to increase employees' awareness of security. However, if a malicious actor accesses our computer system using unauthorized means resulting in the defacement of websites or theft or destruction of personal information or other important data, or if our information systems are majorly damaged by a ransomware infection or similar attack, the Group's business performance and financial position may be adversely affected, and depending on the timing of the event's occurrence, there may be a delay in the disclosure of financial results and other information.
9. Risks associated with securing human resources and their development and retirement
Japan faces a chronic labor shortage, and the mobility of human resources is expected to continue to increase. However, there is also the issues of longer-term employment and the aging of our employees. Therefore, we assume that we will continue to see a greater-than-expected increase or decrease in the number of employees that we have for the time being. Considering these circumstances comprehensively, we assume that we will continue to face hiring difficulties and an increasing number of employees will leave the company. Based on this assumption, we proactively recruit employees mid-career, an activity with the goal of compensating for a shortage of human resources, in particular generations of employees that we are missing and employees with particular functions, in addition to the hiring new graduates. The PILOT Group regards human resources as the source of our growth. We strive to develop systems which encourage employees to take on challenges and build a comfortable work environment, aiming to steadily secure human resources. We provide our employees with self-directed personal development opportunities and support their development, so that each individual can perform at a higher level and progress on the career path they have envisioned. However, if we fail to secure and develop human resources as planned, the achievement of our business strategy may be hampered, and the Group's business performance and financial position may be adversely affected.
10. Risks associated with product quality control and product liability
As part of activities to practice its Corporate Philosophy, the PILOT Group has established its Quality Policy to improve the quality of all of its activities from product planning to after-sales services. In addition, we have set our own quality control standards for the planning and production of products. Through these activities, we endeavor to maintain and improve the quality of our products and reduce the risk of quality-related problems and product defects after their launch. However, risks related to product quality and safety persist in the manufacturing industry. Further, while we appropriately manufacture and sell products based on the laws and regulations of the countries and regions where they are sold, we might not be able to respond to sudden changes in the environment or legislation, which could increase the risk of product liability issues. This may affect the Group's reputation and cause it to incur expenses arising from product recalls, after-sales services, etc. At the same time, the Group’s existing products and services may fail to keep customers satisfied, resulting in a decline in demand or competitiveness, or become obsolete, which in turn may affect the Group’s business performance and financial position.
11. Risks associated with intellectual property (IP) protection and litigation
The PILOT Group has acquired many intellectual property (IP) rights as a result of product development and holds IP as an important management resource. There are also cases where we license IP rights to other companies. We do our best to maintain and protect these IP rights. We have established a flow in which we research IP exhaustively and give approval when planning a product or creating sales promotional or other items, as part of our efforts to reduce the possibility of any problems related to IP rights. Regarding the infringement of our IP by other companies, the Group's employees monitor the market to quickly detect these problems, and the Intellectual Property Department plays the leading role in the implementation of appropriate measures to minimize any loss. However, the Group's business performance and financial position may be adversely affected if the Group files a lawsuit in response to the unauthorized use of its IP by another company, or if the Group is sued by a competitor for infringing on their IP rights.
12. Risks associated with environmental regulations
Both domestically and overseas, the PILOT Group is subject to environmental laws and regulations, including those related to energy, greenhouse gases, air, water and soil pollution, hazardous chemical substances, products, batteries, the recycling of containers and packaging materials and waste. If, to address global warming and curb climate change, it is necessary to significantly reduce energy consumption on a global scale and implement other measures, the tightening of these regulations may result in new tax burdens and an increase in expenses related to changing the materials, fuels, and equipment used in our business activities, etc. Also, if consumers become more environmentally conscious and our products no longer match their purchasing preferences, sales could diverge from the Group’s forecasts, in turn affecting sales and profit plans.
The PILOT Group engages in various activities based on the PILOT Group Environmental Policy, including its compliance with laws and regulations, the development of environmentally friendly products and the reduction of environmental impact. Regarding our conformity to the gradually increasing number of environmental laws and regulations in Japan and other countries and the growing expenses associated with them, we work together with local staff, suppliers and other parties in each region to collect information and more quickly implement countermeasures. Regarding environmentally friendly products, we will continue to work to understand the needs in each market and consumer needs correctly and develop products which will help solve environmental issues. However, the Group's business performance and financial position may be adversely affected if large amounts of expenses are necessarily incurred to respond to the tightening of regulations.
13. Risks associated with compliance
As it operates businesses in many areas of Japan and overseas, the PILOT Group is subject to many different laws and regulations. To ensure its corporate activities conform to laws and regulations and are based on social ethics, the Group has established a compliance system and endeavors to adhere to this system. We have established various rules including the Basic Compliance Regulations based on the Basic Internal Control Principles. To push forward with activities that comply with laws and regulations, we strive to ensure compliance with laws through regular employee training and awareness-raising activities. However, if laws are violated, conduct is inappropriate, or there is a failure to act in the future in Japan or other countries, the Group's financial results and financial position may be adversely affected, and there is the possibility that the brand image may be damaged.
14. Risks associated with fixed assets
The Group has adopted the Accounting Standard for Impairment of Fixed Assets. If the profitability of fixed assets declines due to a significant deterioration in the business environment, etc., we may need to recognize impairment losses, which may affect the business performance and financial position of the Group.