Business Risks

NIPPON PAPER GROUP (the Group) recognizes that securing human resources is one of the most important issues in its business activities. If the Group does not secure the necessary human resources as planned, the Group's management performance and financial position, etc., may be affected as the decisive implementation of structural reforms and improvement of profitability, which are the basic strategies of the Medium-Term Business Plan 2030, may be hindered.

To address this risk, we are promoting human resource management that links employee growth to Group growth, and are working to secure diverse human resources, improve skills and knowledge, and improve engagement. Specific measures include the introduction of programs to support reskilling and training to support the retention of mid-career hire personnel, as well as selective education aimed at the early selection of candidates for management positions at mills and offices.

We are also working to create an organization that enables diverse human resources to maximize their potential by promoting the development of various systems and work environments that support flexible working styles. In fiscal year 2025, we established the “Wellness Leave” and “Life Support Leave” programs to support employees with issues related to life events. Additionally, we are also improving the work environment via initiatives such as taking measures against heat at our mills.

In addition, the Company regularly conducts employee engagement surveys and shares the results with management and managers. Based on advice from outside consultants, we are also continuously working to promote communication within the workplace, enhance education and training, and improve the working environment.

Additionally, we are also considering automating and reducing labor at operation sites and introducing IoT technology in the logistics field in response to the already apparent decline in the labor force population due to the declining birthrate and aging population.

We will secure appropriate human resources through these initiatives and link employee growth to the sustainable growth of the Group.

We recognize that the reconstruction of Opal, a consolidated subsidiary of the Group in Australia, is an extremely important management issue. As such, we will promote selection and concentration of businesses to achieve profitability at an early date. However, if these initiatives do not progress as planned, they could adversely affect the Group's operating results and financial position.

We will improve profitability by concentrating management resources in the corrugated products business, where demand is expected to grow. In terms of sales, we will leverage Opal's strength in an integrated system from base paper to processing to promote the development and expansion of sales of high value-added and differentiated products. We will also expand sales by providing thorough customer service, such as delivery management, and by steadily capturing the growing demand for paper conversion in Australia. And, to make ourselves more competitive, we will maximize the effects of the new and updated processing machines implemented under the previous medium-term management plan and further increase the productivity of the processing business. At the same time, we will drastically review our organization and personnel structure and improve the efficiency of procurement and logistics. As the Maryvale Mill remains a challenge, we will aim to quickly achieve EBITDA profitability through further optimization of the production system and reduction of fixed costs. We will also proceed with the restructuring of other unprofitable businesses to promptly achieve operating profitability at Opal.

The graphic paper business, one of the Group's core businesses, continues to face a contracting market due to ongoing digitalization and changes in work styles and lifestyles accelerated by the COVID-19 pandemic. Accordingly, we are working to maintain the utilization rate and improve profit margins through resilience by promoting the optimization of the graphic paper business production system, while shifting management resources to the growing daily-life products business. However, if these considerations and initiatives do not progress as planned, it may have an impact on the Group's operating results and financial position.

To strengthen the foundation of the graphic paper business, we have taken measures to improve profitability, such as stabilizing operations and continuously reducing costs. Additionally, we are securing appropriate prices to achieve stable supply when it is difficult to absorb cost increases such as labor costs and logistics costs. We are also working to maintain and increase sales volume by developing and expanding the lineup of environmentally friendly products in cooperation with customers.

We will enhance our competitiveness by promoting the optimization of the graphic paper production system in conjunction with the reduction of greenhouse gas (GHG) emissions. At the same time, we will utilize our existing resources in the graphic paper business, such as human resources, raw material procurement capabilities, pulp, and utilities, to expand our growth fields. These include the forest and wood-related business, daily-life products business, and new biomass materials business.

Through these multiple measures to mitigate risk, we will strive to increase resilience to market changes and secure stable earnings.

The Group aims to grow sustainably as a “comprehensive biomass company” that makes the most of wood resources. To respond to the decline in demand for graphic products, we have established growth fields, namely the forest and wood-related business and the daily-life products business (the main businesses are the liquid paper container business, household paper and healthcare business, and the chemical business). We are also working to shift management resources to these fields and expand the new biomass materials business. However, if the growth of the forest and wood-related business, daily-life products business, and new biomass materials business does not proceed as planned, it may affect the Group's operating results and financial position.

The Group is promoting the expansion of its forest and wood-related businesses through a green strategy. We will expand our forest management and wood resource distribution business by utilizing world-class breeding, propagation and seedling raising technologies, a strong wood resource supply chain in Japan and overseas, and our own forests of 160,000 hectares in Japan and overseas. In Japan, we will strengthen our supply chain in cooperation with the forestry and lumber industries, expand our handling volume of domestically produced lumber and expand our production system for Elite Tree saplings, and stably supply raw domestically produced lumber materials with a low LCA. Overseas, we will promote the value of forest resources through the advanced use of our proprietary breeding and propagation technologies, and we will increase profits from our overseas afforestation business through the development of superior clones. We will also develop afforestation services and expand the handling volume of wood chips and biomass fuel.

In addition, the Group is promoting sales expansion through new product development, capital investment, collaboration with partners, etc., to strengthen profitability in the daily-life products business. In the liquid paper container business, we will build a system to provide total packaging solutions, develop and launch differentiated containers using Group base paper, and expand our business in the Asia-Oceania region through collaboration with business partners. In the household paper and healthcare business, we will develop high-value-added products that respond to the aging of the population and other changes in the social structure, expand sales in growing markets, and expand exports in collaboration with global partners, all while diversifying and expanding sales channels such as e-commerce. In the chemical business, we will expand earnings from products for growing markets such as automobiles and displays, develop new products and applications, and improve production systems and capabilities to support the growth of each business, all while actively expanding sales in overseas markets.

In addition, the Group will expand its new biomass materials business, which contributes to the building of a decarbonized and recycling-oriented society. We will create wood resources through sustainable forest management and utilize our proprietary technologies and open innovation to develop new biomass materials that have both environmental value and excellent functional characteristics. In addition, we will promote business development by defining our focus business areas as agriculture/forestry/fisheries/food, social infrastructure & environment, lifestyle, and advanced functional materials.

To respond quickly to market needs, including environmental requirements, we must have sufficient technological capabilities, sales strength, and robust networks. We are therefore making proactive investments in growth areas and reallocating personnel to create synergies with existing businesses. At the same time, we are building networks across industry, government, academia, and finance to promote open innovation. By offering the results of that research to the market as products and services, we’re increasing our resilience to changing markets.

Through the expansion of its growing forest and wood-related business, daily-life products business, and new biomass materials business, the Group seeks to make contributions to the building of a sustainable society and pursue sustainable growth for the entire Group by reducing GHG emissions across the entire supply chain, promoting resource circulation and self-sufficiency through recycling, and revitalizing the forestry industry through the utilization of domestic forests.

The Group, whose main business is the energy-intensive pulp and paper business, has positioned a comprehensive response to climate change as an important issue in realizing the corporate group philosophy, and we are actively working to reduce GHG emissions with the aim of achieving carbon neutrality by 2050. If we are slow to respond amid accelerating movement towards decarbonization, including the introduction of an emissions trading system in Japan, we may face regulatory risks such as a strengthening of carbon pricing policies, financial risks due to credit purchase costs and increased investment in reducing GHG emissions, and reputational risks due to a decline in trust from customers and investors. In addition, there are concerns that physical risks such as extreme weather events and the depletion of water resources could cause the Group to suspend operations at its production sites. These could also lead to difficulties in the procurement of wood chips, which are a raw material, and dramatically increase the price of said wood chips, as well as disrupt supply chains. If these climate change risks materialize, it may have a significant impact on the Group's operating results and financial position.

The Group appropriately assesses the financial impact of these risks and makes highly transparent disclosures based on the framework recommended by the TCFD (Task Force on Climate-related Financial Disclosures). To reduce transition risks, we have set a target of reducing GHG emissions (total of Scope 1 and 2) by 54% compared to fiscal year 2013 by fiscal year 2030. We are promoting energy conservation measures by introducing high-efficiency equipment and optimizing manufacturing processes, as well as by switching to renewable and waste energy. In addition, to further reduce GHG emissions, we will install a new high-efficiency black liquor recovery boiler at the Ishinomaki Mill during fiscal year 2028, and will also stop the operation of one existing coal boiler. This will further accelerate the reduction of GHG emissions.

We must formulate and implement a transition plan from a medium- to long-term perspective to address the risks of climate change. Based on a transition plan that assumes the development trends and the timing of the social implementation of next-generation fuel technologies such as hydrogen and ammonia, the Group has newly established a medium-term target of reducing GHG emissions (the total of Scope 1 and 2) by 60% by 2035 and 65% by 2040 compared to fiscal year 2013 levels, and is steadily implementing measures to reduce GHG emissions.

In addition, the Group is strengthening collaboration on logistics GHG emissions with stakeholders, including not only business partners but also companies in the same and different industries. We are working to reduce emissions across the entire supply chain through collaborative efforts such as round-trip transportation, modal shifts, and a shortening of transportation distances. Furthermore, we are actively engaged in initiatives such as forest absorption through appropriate forest management and carbon recycling, promoting the reduction of GHG emissions in a multifaceted manner and strengthening our efforts to achieve carbon neutrality by 2050.

In response to the emissions trading system that will be introduced in full from fiscal year 2026, we will accelerate the reduction of fossil fuel consumption, including coal. At the same time, we will develop a carbon management system that will include monitoring of the carbon credit market and procurement systems, and appropriately respond to the system to manage and reduce financial impact risks.

Addressing climate change issues goes beyond risk management and leads to the creation of new business opportunities. Through investments in reducing GHG emissions, the Group can create biomass materials with low GHG emissions and high environmental value. The Group aims to simultaneously achieve both corporate growth and the creation of a sustainable society by further strengthening cooperation with a wide range of stakeholders and introducing a variety of biomass materials ahead of the market for green products. 

The Group procures raw materials and fuels such as chips, used paper, heavy oil, coal and chemicals, and manufactures and sells products. Raw material prices are significantly influenced by domestic and international market conditions. Furthermore, increasing decarbonization and a decline in graphic paper production may lead to instability in procurement and price fluctuations due to business downsizing or withdrawal by raw material suppliers. These factors may affect our operating results and financial position, etc. In addition, the shortage of logistics workers (cargo handling workers, port workers, and transportation capacity), delays in transportation networks in the global supply chain due to increased geopolitical tensions, and rising transportation costs caused by rising raw material and fuel prices mainly due to decarbonization policies in response to climate change are expected to persist, which may further affect our operating results and financial position.

As a major measure, we have taken steps such as setting and operating reserve purchases to hedge risks for some raw materials and fuels. Specifically for wood chips used in paper manufacturing, we own 160,000 hectares of forest resources globally. We are also working to secure raw materials and stabilize purchase prices by strengthening trust-based relationships with domestic and international chip suppliers built on long-term transaction histories, and by developing and adopting low-cost resources from nearby locations. We are also advancing efforts to optimize financial conditions by enhancing appropriate inventory management. This includes sourcing from multiple regions and sources, including overseas; switching to alternative products; expanding flexibility and procurement networks through strengthened intra-group collaboration; and reviewing inventory levels. After taking these measures, we will pass on the increase in transportation costs that cannot be absorbed to our customers at an appropriate level. 

Regarding the logistics problem, we are working to comply with laws and regulations and curb cost increases at Group-wide meetings for product sales and raw material and fuel procurement. Working collaboratively with suppliers, we are implementing measures such as requesting planned delivery times, modifying transportation systems, improving load factors, and establishing new inventory bases near consumption areas. To reduce loading/unloading times, each factory has introduced truck reception reservation systems to shorten waiting times. Furthermore, we are realizing joint transport with other companies to reduce GHG emissions while also promoting logistics DX initiatives to address labor shortages.

A large-scale natural disaster, such as an earthquake, typhoon, flood, or wildfire, or, a drought or heat wave, in an area where the Group's production and sales bases are located could have a significant impact on business continuity. There is a possibility that there will be an outage of production activities, an increase in expenses for the restoration of facilities, or damage to products or raw materials, which may affect the Group's operating results and financial position. While we maintain insurance coverage for losses arising from natural disasters, such coverage may not be sufficient to fully cover all potential losses or liability claims that may be asserted against the Company.

Therefore, in case of emergency, we will promptly set up a Crisis Management HQ in accordance with the Crisis Management Regulations, to confirm the safety of employees and their families, to ascertain the status of damage, and to implement measures for continuing supply. In addition, we have strengthened our business continuity management (BCM) to respond to emergencies. We are investigating establishing supply systems between several plants, and we regularly conduct evacuation drills and safety confirmation drills based on disaster scenarios.

Through these initiatives, we are flexibly responding to unexpected situations, and building and maintaining a system to ensure the safety of our employees and business continuity. We will continue to respond to changing social conditions by continuously reviewing and strengthening risk countermeasures.

The Group manages its business by using various systems in the processes of purchasing raw materials, receiving orders, production, and shipment. In the event of unauthorized access or information leakage due to cyberattacks from outside, the Group may lose social trust, suspend its business activities, or incur increased expenses for the restoration of facilities, which may have an adverse impact on its operating results and financial position, etc.

To this end, the Group strengthens and rigorously implements security measures for its information systems and is introducing defense systems that are in line with the times. We have taken sufficient information security measures even in the rapidly spreading telecommuting environment, and have strengthened our management system by increasing employee literacy through regular information security education and by establishing communication channels in the event of a security incident. In addition, we conduct regular internal operation verifications and vulnerability diagnoses by external specialists to detect and correct system vulnerabilities in an effort to prevent security incidents.

The Group conducts its business activities based on planned production that takes into account market demand and the capacity of existing facilities. However, if the operating rate of production facilities declines due to equipment breakdowns, fires, or equipment accidents caused by natural disasters, the supply capacity of products may be insufficient, which could affect the Group's operating results and financial position. In addition, these sort of equipment breakdowns or accidents can lead to workplace accidents involving employees or to adverse effects on the surrounding environment. In response to these risks, we conduct regular facility inspections and maintenance, implement construction for vulnerable areas, including aging countermeasure work for systematic upgrades, are considering building supply systems at multiple plants, and optimize inventories.

The Group could receive claims for compensation for loss or damage in relation to product liability, but we have not received any significant claims of this sort at present. However, the Group may be liable for the payment of compensation for loss or damage in the future. While we have 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 NIPPON PAPER GROUP Product Risk Committee to supervise the product safety risk of its group companies and support efforts to manage and mitigate that risk. Concurrently, Product Risk Committees have been set up at the Group's main manufacturing companies as part of efforts to prevent product safety incidents by promoting the development of product safety risk management regulations.

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 incurred to implement countermeasures, etc., affecting the Group's business performance, financial position, and other aspects.

In addition, there is a risk of business suspension or loss of trust if we are given administrative guidance in the event of exceeding legal limits or affecting the surrounding environment of factories and business sites.

In addition to regularly monitoring the status of environment-related laws and regulations, we collect various information from outside the company, monitor daily operations, and appropriately maintain and manage facilities to address these risks. This allows us to comply with environmental laws and regulations and to establish a system to minimize the negative impact on the environment surrounding our mills and offices.

Related laws and regulations are constantly changing in a wide range of fields, including Paper and Paperboard Business, Daily-Life Products Business, and Energy Business businesses, as well as Wood Products and Construction Related Business that our group deploys, and new compliance-related issues are emerging. In particular, the risks of non-compliance are becoming increasingly complex due to changes in social conditions, such as digitization, globalization, and the growing interest in environmental protection and respect for human rights.

As a countermeasure, the Group provides compliance training that is updated to reflect changes in the social environment and conducts compliance awareness surveys to further strengthen employees' compliance mindset. In addition, we have established the "Nippon Paper Group Helpline, which enables employees to report concerns and seek advice outside the normal chain of command regarding conduct that may violate laws, social norms, corporate ethics, the Code of Conduct, the Code of Ethics, or the internal rules of Group companies. We investigate all suspected compliance violations and, depending on the nature and significance of each case, implement corrective actions and measures to prevent recurrence, including internal disciplinary actions, warnings and guidance, and employee education to reinforce awareness.

Because the Group conducts business activities with cooperation of our business partners and various subcontractors for operations that are difficult to execute on our own, we emphasize fair and sound business practices in our relationships with our business partners and subcontractors. While we seek fair trade practices that reflect changes in social values as well as compliance with the Antimonopoly Act and the Act on Proper Trade with Small and Medium Subcontractors, if there is a violation, it is expected to be a major risk in management, such as litigation and the loss of social trust.

In order to respond to these requirements, we comply with desirable business practices between commissioning business operators and small and medium-sized entrusted business operators based on the "Declaration on Building Partnerships", and are actively working to rectify business practices that hinder the establishment of partnerships with business partners. In addition, based on the "Guidelines on Price Negotiations to Appropriately Pass Through Labor Costs" published in November 2023, we are proceeding with risk assessment and implementation of countermeasures on a Group-wide basis.

Through these initiatives, we aim to respond flexibly to changes in social conditions and minimize the risk of non-compliance.

The Group is committed to operating all facilities with safety as its highest priority. However, workplace accidents remain a significant risk that could impair employees' health or, in the worst case, result in loss of life. Depending on the nature of the incident, there is a possibility that we will lose valuable human resources, or that we may have to shut down production facilities to ensure safety and take measures to prevent a recurrence. There is also a risk that we will lose credibility as a company, as we may be held accountable for our management responsibilities. As a countermeasure to these risks, we operate our own occupational safety and health management system to prevent workplace accidents. Under this system, each facility incorporates specific, ongoing, and voluntary initiatives into its safety and health plans, with the aim of preventing accidents, promoting employee health, and improving workplace safety and health standards, including the creation of a comfortable working environment. We also conduct regular inspections and maintenance of production facilities and we implement aging countermeasure works, including scheduled renewal of vulnerable areas.

We share these efforts with all Group companies and promote the prevention of workplace accidents to ensure a safe working environment for the entire Group.

With the spread of social media and other media, the risk of the Group being criticized or slandered on the Internet has also increased. This may cause serious reputation risks such as damage to corporate brand, suspension of transactions, and turnover of personnel, which may affect the Group's operating results and financial position.

To address these risks, the Group regularly monitors and collects information about itself on the Internet, including via social media, and has established a system that enables it to respond quickly and appropriately in the event of an unforeseen situation.

The 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.

The 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.

The 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 result of deterioration in the financial condition or bankruptcy of customers, could affect the business performance, financial position, and other aspects of the Group.

The 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.

The 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. With this in mind, the Group has diversified its pension plan assets into multiple asset classes and management styles with different risk and return characteristics based on the advice of external consultants. By regularly conducting an analysis of the risk and return of the entire pension plan assets, the Group conducts an evaluation of the effectiveness of the diversification effect.

The 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.