DyDo Group Holdings

Based on the "Fundamental Policy Regarding the Building of Internal Control Systems", we have established basic matters concerning the risk management system of our group, and are working to ensure efficient and reliable risk management. As a standing committee, the Group Risk Management Committee (the Committee), chaired by the President and Representative Director, meets twice a year, or whenever necessary. The Committee is responsible for risk management policies, evaluation of major risks, approval of countermeasures, verification of the effectiveness of controls, and guidance on corrective measures.

The Committee organizes and evaluates risks by classifying them into "cross-group risks" and "business-specific risks”. Furthermore, we conducted an assessment of medium- to long-term risks associated with demographic changes in FY2023, by using the TCFD framework.

The Committee in FY 2023 identified important risks with high impact and likelihood of occurrence, and discussed procurement of raw materials and materials, and production and logistics systems, both of them have an increasing risk of affecting the current business performance. In addition, based on a medium- to long-term risk analysis of demographic changes by the Group, it was recognized the Group should consider countermeasures for the risks related to the "securing and development of human capital.

The significant risks assessed by the Committee in FY 2023 and the measures are as follows.

(1)Cross-Business Risks

i. Procurement of Raw Materials and Materials

The Group's products use a wide variety of raw materials and materials. Coffee beans, the main raw material for the Domestic Beverage Business, are commodities that are traded on the international market, and their prices are affected not only by commodity prices but also by fluctuations in foreign exchange rates. The same is true for other raw materials and materials, which are also affected by price fluctuations. In combination with the recent rise in energy costs, a sharp rise in the cost of procuring raw materials and materials may have a significant impact on the Group's business performance.

Reducing these risks, the Group has implemented price revisions in stages for some products in the Domestic Beverage Business and Food Business since October 2022. In its International Beverage Business (Turkish Beverage Business), the Group has continued to implement strategic price revisions in Turkey, which is under strong inflation, and is working to improve its profit structure by securing an appropriate marginal profit.

ii. Production and Logistics System

In recent years, the business environment surrounding production and logistics has undergone significant changes. Factors such as labor shortages and stricter compliance have led to a substantial increase in logistics costs and heightened supply risks due to logistical congestion.

The risk of rising logistics costs due to changes in social conditions is expected to continue for the foreseeable future and may have a significant impact on the Group's business performance.

Reducing these risks, in June 2018, the Group established Shibusawa DyDo Group Logistics Co., Ltd. as a joint venture with the Shibusawa Warehouse Co.,Ltd ., one of Japan's leading logistics company. The Group is promoting initiatives such as securing a stable logistics network by strengthening cooperation with the logistics industry and reviewing delivery bases; all in anticipation of the "2024 logistics problem"—labor shortages and other issues arising from the implementation of regulations on truck drivers' overtime work in Japan.

iii. Overseas Situation

In recent years, geopolitical risks and other changes in overseas conditions, such as soaring prices of materials and crude oil due to the situation in Russia and Ukraine, and in Palestine and Israel, as well as sharp fluctuations in foreign exchange rates, have increasingly affected our business activities in Japan.

In addition, overseas business development involves various risks, including differences in laws and regulations and systems, political, economic, and social conditions, culture, religion, and business customs in each country, as well as fluctuations in exchange rates.

In order to mitigate these risks, the Group has established a structure in which the International Business Management Department manages and supervises its overseas subsidiaries, and is reformulating our international business strategies while utilizing the foundation of our existing Turkish and Chinese operations.

iv. Acquisitions and Business/Capital Tie-Ups

To realize the "Group Mission 2030," the Group is constantly considering the possibility of strategic investments, including corporate acquisitions and business and capital tie-ups, as an effective means of accelerating business expansion. However, if we are unable to find effective investment opportunities or if the strategic investments do not yield the initially expected results, there may be a delay in the implementation of our growth strategy, may affect our group's business performance. In addition, when entering a new business domain or market through corporate acquisitions, etc., risks specific to that business or market may be newly added.

Reducing these risks, the Group conducts an annual evaluation of the effectiveness of the Board of Directors. Based on the results, the Group is working to further enhance the effectiveness of the monitoring function of the Board of Directors and to continuously improve corporate governance, which is a mechanism for rapid and decisive decision making.

v. Environmental/Climate Change Issues

The evaluation by stakeholders of a company's approach to climate change and other environmental issues, as well as changes in market values, are having a significant impact on consumers' choice of products and services. In order to curb climate change, laws and regulations such as rationalization of energy use and global warming countermeasures are being strengthened on a global scale.

In addition, direct risks related to the supply chain, such as the water source depletion due to climate change, the impact on coffee and other raw materials, and damage to manufacturing facilities due to large-scale natural disasters could have a significant impact on our group's business performance.

Mitigating these risks, the Group continuously assesses the actual situation and examines countermeasures based on the TCFD framework. Since climate change risk has the potential to materialize over the medium to long term, the Group manages climate change risk by linking both the "Group Risk Management Committee" and the "Group Sustainability Committee”.

(2)Business-Specific Risks

i. Risks associated with hyperinflation in Turkey

The Turkish Beverage Business, which accounts for a large portion of our International Beverage Business, is expected to continue to grow in the medium to long term. In particular, our main brand of mineral water, "Saka", continues to grow steadily against the backdrop of health-conscious consumers.

On the other hand, since the cumulative inflation rate in Turkey over a three-year period showed that it exceeded 100%, the Group has determined that its subsidiary in Turkey, functional currency is the Turkish lira, is operating in a super-inflationary economy. Therefore, the Group has made accounting adjustments to the financial statements of the Turkish subsidiary effective FY2022 according to the requirements set forth in IAS 29, "Financial Reporting in Hyperinflationary Economies". If inflation in Turkey becomes more severe in the future, the accounting adjustments could be significant and have a material impact on our Group's results.

In addition, the restated value of non-current assets, including trademark right, may have a significant impact on the Group's operating results. This is because, as with ordinary non-current assets, the Company is required to consider whether impairment is necessary, and if the restated amount exceeds the recoverable amount, required to write down the asset to its recoverable amount.

Coping with these risks, the Group is strengthening and expanding its management system for earnings management and cash conversion cycle by the Finance Department. Besides that, the local subsidiary in Turkey is striving to reduce risks by securing an appropriate marginal profit through continuous price revisions and expanding export transactions from Turkey.

ii. Dependence on Vending Machine Business

There is a possibility of a significant impact on our group's operating results if our vending machine business, our core business, is unable to adapt to the changing environment. The channel has traditionally been able to secure stable cash flow with canned coffee, which has relatively high price, sales stability and high profitability, as its main product. However, in recent years, the vending machine market has been shrinking due to a shortage of labor to operate them, and the soaring costs of raw materials and materials have reduced profitability.

Under the materiality of "Create societal value through the vending machine business", the Group aims to establish the business model that can flexibly respond to changes in the market.

To cope with future labor shortages, we are working on the further evolution of smart operations using the latest technology and developing "LOVE the EARTH Vendors", carbon-neutral vending machines, "creating a sustainable future together with our customers". We will continue to establish a firm advantage in the market by delivering the value sought by customers through our vending machines, including collaboration with the installation location.

iii. Entry into Orphan Drug Business

In January 2019, the Group established DyDo Pharma, Inc. to focus on healthcare-related markets, including the high-growth life science field, as its next growth area, with a particular focus on orphan diseases, or intractable diseases with fewer than 50,000 patients in Japan. Subsequently, in December 2023, DyDo Pharma, Inc. filed an application for approval of its first therapeutic drug, and has made steady progress.

However, since the development of orphan disease drugs is subject to uncertainties, there is a possibility, development will be extended or discontinued, regulatory approval will not be granted according to expectations, regulatory approval will take longer than expected, or the drug price may be lower than expected. In addition, during the period of upfront investment until the business foundation is stabilized, the Group may incur continuous operating losses and have negative cash flow, which may affect the Group's results.

Reducing these risks, the Group has appointed an independent outside director with extensive knowledge and experience in the pharmaceutical industry to strengthen monitoring of DyDo Pharma's business plans based on individual development projects. In addition to this, the Group promotes its business operations with expert personnel with long experience in the pharmaceutical industry, including business development, new drug development, regulatory affairs, medical affairs, and post-approval systems, as well as with the cooperation and support of external experts, institutions, and companies.

The Group believes demographic changes will have an increasing impact on business, particularly in the domestic market, the population continues to decline, birthrates are declining, and the population is aging. Beginning FY 2023, the Company has applied a scenario analysis framework to conduct an assessment of medium- to long-term risks that should be watched closely within the entire supply chain.

The Group believes demographic changes will have an increasing impact on business, particularly in the domestic market, where the population continues to decline, birthrates are declining, and the population is aging. From FY 2023, we have applied a scenario analysis framework to conduct an assessment of medium- to long-term risks that should be watched closely within the entire supply chain.

Addressing these risks, the Group is stepping up its investment in human capital and improve productivity. We will continue to monitor risks on an ongoing basis and consider countermeasures to reduce risks from a medium- to long-term perspective.