Management PolicyBusiness Risks

The Group has identified the following factors as risks that could affect Nippon Paper Group's business performance and financial position:

(1) Major Risks Associated with Management Strategies
1) Delays in Business Structure Transformation and the Creation of New Businesses
In the Paper Business, which is one of the Nippon Paper Group's businesses, a market contraction has been continuing as a trend in response to IoT and digital transformation (DX), as well as the impact of the COVID-19 pandemic. In response, the Group has been shifting its business structure to growing businesses such as the Daily-Life Products Business. While the Group strives to develop new businesses and products, if these efforts do not progress as planned, the Group's business performance, financial position, and other aspects could be affected. The Group's main initiatives are to develop paper products to replace plastics, primarily for containers and packaging; expand the use of woody biomass, including cellulose nanofiber (CNF); and invest in growing businesses, reallocate human resources, and expand overseas business. The Group will implement these initiatives as planned as it strives to improve earnings.
2) Overseas Business
The Nippon Paper Group manufactures and sells pulp and paper and operates forestry plantations and other businesses in North America, South America, Scandinavia, Southeast Asia, Australia, and other overseas locations. In the past few years, the Group has been redoubling its efforts to strengthen the development of its business operations overseas to achieve the Group's growth. Developing business operations overseas entails a number of risks, including changes to laws and regulations by local governments, labor disputes, and the impact of political uncertainty on economic activities. The materialization of such risks may affect the Group's business performance, financial position, and other aspects. For this reason, the Group strives to prevent the materialization of these risks by sharing information with external law firms and dealing with these risks appropriately. In the Australian business, the Group is backing up these operations so that it can capture synergies at the earliest stage with the wide range of businesses it is advancing worldwide, with efforts centered on Orora Limited, which was acquired in FY2021/3.
(2) Risks Associated with the Business Environment and Business Activities
1) Product Demand and Market Conditions
The Nippon Paper Group carries out businesses such as the Paper and Paperboard Business, Daily-Life Products Business, Energy Business, and Wood Products and Construction-Related Business. The Group is exposed to the risk of fluctuations in demand for its products based on factors such as economic conditions and fluctuations in product prices based on factors such as market conditions. Such fluctuations could affect the Group's business performance, financial position, and other aspects.Notably, the Paper Business is experiencing a substantial market contraction as a trend. To address the situation, the Group is working to adjust production output to match market demand by reorganizing its production structure. Concurrently, the Group is implementing measures such as investing in the Daily-Life Products Business, where demand is expected to increase.
2) Raw Material and Fuel Prices
The Nippon Paper Group is engaged in businesses in which it purchases raw materials and fuel such as wood chips, wastepaper, heavy oil, coal, and chemicals, and uses these resources to manufacture and sell products. The Group is thus exposed to the risk of fluctuations in input prices for raw materials and fuel based on domestic and international market conditions. Such fluctuations could affect the Group's business performance, financial position and other aspects. The Group applies risk countermeasures to certain raw materials and fuels, such as establishing and implementing forward contracts for risk hedging purposes.
3) COVID-19
The Nippon Paper Group has set up the COVID-19 Response Office to monitor the Group's condition in relation to COVID-19. The COVID-19 Response Office is also responsible for preparing the Group's guidelines designed to prevent the spread of COVID-19 among employees and ensure business continuity. Based on these guidelines, COVID-19 response measures are implemented in each division. In addition, the Group has put a system in place to form a Response Headquarters whenever needed.
4) Natural Disasters
The occurrence of an earthquake or large-scale natural disaster in the vicinity of the Nippon Paper Group's production and sales bases may impact its production, sales and other business activities. This may lead to opportunity losses due to a production stoppage, additional costs to restore facilities, and/or damage to products, merchandise and materials. Such consequences of natural disasters may affect the business performance, financial position, and other aspects of the Group. In accordance with the Crisis Response Regulations, during emergencies, the Group forms a Crisis Response Headquarters and works to confirm the safety of employees and their families, monitor the status of damage to the Company and its customers, and implement measures to ensure the continuous supply of products to corporate customers. Moreover, the Group has established business continuity management (BCM) to address emergencies. BCM measures include setting up multiple production sites for primary product categories and carrying out drills in preparation for natural disasters.
5) Environment-Related Legal Risk
The Group is subject to the application of environmental laws and regulations in various businesses. Revisions and amendments to such regulations could limit production activities and result in additional costs, affecting the Group's business performance, financial position, and other aspects. In addition, the Group releases CO2 emissions in manufacturing processes and other activities. The introduction of a full-scale carbon pricing scheme could affect the Group's business performance, financial position and other aspects. The Group, while closely monitoring government trends and global conditions, will strive to reduce CO2 emissions by reshaping its energy mix through measures such as fuel conversion to renewable energy and advancing energy-efficient policies.
6) Manufacturing Conditions
The Nippon Paper Group's production activity is based on the estimated demand and production capacity of existing facilities. The Group is exposed to the risk of a reduction in product supply capability due to fires, accidents, or other problems occurring at facilities, or a decline in the capacity utilization rate of production facilities caused by disruptions to the procurement of raw materials and fuel. Such fluctuations in the product supply capability could affect the Group's business performance, financial position, and other aspects. The Group conducts regular inspections, maintenance and repair work and other activities with respect to production facilities to prevent the deterioration of equipment over time. Regarding the procurement of raw materials and fuel, the Group strives to make purchases from multiple suppliers and regions, and make purchases based on long-term contracts, as necessary to ensure stable procurement.
7) Product Liability
The Nippon Paper Group could receive claims for compensation for loss or damage in relation to product liability, but it has not received any significant claims of this sort at present. However, the Nippon Paper Group may be liable for the payment of compensation for loss or damage in the future. While the Group has enrolled in product liability insurance, it may not be enough to cover the amount of compensation for loss or damage for which the Group may be held liable. The Group has established the Nippon Paper Group Product Safety Committee to supervise the product safety risk of Group companies and support efforts to manage and mitigate that risk. Concurrently, Product Safety Committees have been set up at the Group's main manufacturing companies as part of efforts to prevent product safety incidents.
8) Human Resources Recruitment and Labor-Related
The Nippon Paper Group considers its human resources strategy to be a key element of its business activities. The Group recognizes that there is a vital need to recruit and develop optimal human resources to expand its business in the future. The Group's inability to recruit optimal human resources could restrict its business operations, which could in turn affect its business performance, financial position, and other aspects. Additionally, if the Group were found to be out of compliance with various labor-related rules (employment issues, harassment, human rights infringements, etc.), the Group could be subject to lawsuits or experience a loss of public trust. Such events could adversely impact the business performance, financial position, and other aspects of the Group.The Group strives to secure human resources optimally and efficiently through proactive recruitment and development of diverse human resources and the development of workplaces premised on flexible and diverse work styles. From FY2022/3, the Group has introduced annual leave that can be taken in hourly increments, a revised flextime system (abolished core time), and a work-from-home system (permanently put in place). Moreover, the Group works to reduce labor-related risk through appropriate labor management based on laws and regulations and confirms the labor-related regulations of the Group companies.
9) Litigation
The Nippon Paper Group takes the utmost care in compliance management to observe and follow laws and regulations in the course of doing business. However, as it conducts business activities worldwide, the Group is exposed to the risk of litigation or other actions associated with criminal or civil affairs, taxation, antitrust law, product liability law, intellectual property rights, and environmental and labor issues. As a result, such litigation could affect the Group's business performance, financial position, and other aspects. Heightened environmental awareness has made it particularly crucial for the Group to show consideration to local community residents, perform biodiversity surveys and conduct other activities when making use of forestry resources. In addition, ensuring compliance is one of the main principles of the Nippon Paper Group's Action Charter. The Group strives to raise employees' awareness of compliance through awareness-building and training activities for employees.
10) Information Systems
The Nippon Paper Group strengthens and rigorously implements security measures for its information systems. The Group also implements extensive information security measures to address the work-from-home environment, which has been rapidly adopted across society. If there are any problems such as information leakages due to unauthorized access to computers and/or data breaches due to criminal acts, the Nippon Paper Group may be held liable for the payment of compensation for loss or damage and experience a loss of public trust in the Group. Such events could affect the business performance, financial position, and other aspects of the Group. The Group provides employee training on information security in step with current conditions. The Group has set forth rules concerning the handling of personal information, and made those rules known to its executives, employees, and business partners as part of its efforts to strengthen its management structure.
11) Foreign Exchange
The Nippon Paper Group is exposed to the risk of foreign exchange fluctuations associated with import, export and other transactions. In terms of the balance of imports and exports, the Group's imports of raw materials and fuel, such as wood chips, heavy oil, coal, and chemicals, exceed its exports of products and other items. For this reason, the predominant foreign exchange impact is that the depreciation of the yen against the U.S. dollar will have a negative impact on business performance. The Group hedges against this risk through forward contracts and other means in order to mitigate the impact of foreign exchange rate fluctuations on its business performance.
12) M&As and Business Alliances
The Nippon Paper Group may conduct activities such as M&As and business alliances with the aim of realizing sustainable growth by creating new business opportunities. In the process, the Group conducts a thorough examination of business strategies and synergistic effects before it decides to engage in such activities, and it works to maximize its results after it concludes such agreements. However, changes in the operating environment and other factors may prevent the Group from achieving the results it had initially anticipated. In these circumstances, the business performance, financial position, and other aspects of the Group could be affected.
(3) Financial and Accounting Risks
1) Share Prices
The Nippon Paper Group holds marketable shares primarily in business partners and affiliated companies. Therefore, the Group is exposed to the risk of share price fluctuations that could affect its business performance, financial position, and other aspects. With this in mind, the Group conducts regular monitoring of the shares it holds, so that it can detect whether the shares could have a significant impact on its financial position.
2) Interest Rates
The Nippon Paper Group is exposed to the risk of interest rate fluctuations with respect to interest-bearing debt and other items. Such fluctuations could affect the business performance, financial position, and other aspects of the Group. The Company maintains the ratio of fixed interest rate loans to long-term debt above a certain level. Also, the Company mitigates the risk of interest rate fluctuations through the use of financial instruments such as interest rate swaps, in addition to spreading out repayment periods and diversifying financing methods, among other measures.
3) Credit Risk
The Nippon Paper Group takes care to limit its credit risk through measures such as continuously evaluating the financial and related information of its business partners in accordance with credit management rules and establishing credit limits accordingly, but any event that disrupts the collection of receivables, such as a deterioration in the financial condition or bankruptcy of customers, could affect the business performance, financial position, and other aspects of the Group.
4) Impairment of Fixed Assets
The Nippon Paper Group owns fixed assets such as production facilities and land. Changes in the operating environment and other factors that result in a significant decline in future cash flow generated through these assets may lead to an incurrence of an impairment loss and affect the business performance, financial position, and other aspects of the Group.
5) Retirement Benefit Obligation
The Nippon Paper Group's retirement benefit expenses and obligation are calculated based on actuarial assumptions such as the rate of return and the discount rate on pension assets. However, any circumstances requiring a change in the actuarial assumptions or an impairment to pension assets resulting from stagnation of the stock market and other factors may affect the business performance, financial position, and other aspects of the Group.
6) Reversal of Deferred Tax Assets
The Nippon Paper Group records deferred tax assets after it judges the recoverability of deductible temporary differences and operating loss carryforwards based on an estimation of future taxable income. However, changes in the operating environment and other factors that lead to a decline in taxable income, or changes in the tax regulations and other factors that lead to a revision in recoverability, may cause a reversal of deferred tax assets. Such a reversal could affect the business performance, financial position, and other aspects of the Group.