DyDo Group Holdings

Based on the "Basic Policy for the Development of the Internal Control System," 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 permanent committee, the Group Risk Management Committee, chaired by the President and Representative Director, meets twice a year, or whenever necessary. The Group Risk Management 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.
In response to the recent changes in the external environment, the Group Risk Management Committee in FY2022 organized risk items by classifying them into "strategic risk" and "operational risk". In addition, in order to prevent the occurrence of omissions in the identification and evaluation of risks in each business segment, risk items were added and their names were partially changed, and the evaluation criteria regarding "impact" and "likelihood of occurrence" were also reviewed to lead to more appropriate evaluation.

In FY 2022, the Group Risk Management Committee identified important risks with a high degree of impact and likelihood of occurrence, and discussed "procurement of raw materials and supplies" and "production and logistics systems," which have an increasing risk of impacting the current business performance. Regarding risks related to "Overseas Situation," the committee recognized that each business, not limited to International Beverage Business, should consider it as a risk and consider countermeasures, since the manifestation of geopolitical risks has been affecting the economy and business with increasing frequency in recent years.
Based on the above, the significant risks assessed by the Group Risk Management Committee in FY 2022 and the measures taken to address them are as follows.

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.
In addition, in our International Beverage Business (Turkish Beverage Business), the procurement of some materials is denominated in foreign currencies, and the fluctuation of the Turkish lira exchange rate has a significant impact on the procurement price of such materials. Soaring prices of raw materials and materials may lead to higher production costs, which may have a significant impact on our group's business performance.
Significant increases in the procurement prices of raw materials and materials have put significant pressure on the Group's earnings, and the upward trend in all costs, including raw materials, is expected to continue.
In order to reduce these risks, the Group has implemented price revisions for some products in the Domestic Beverage Business and Food Business since October 2022, and in the International Beverage Business (Turkish Beverage Business), we are working to improve its profit structure by securing appropriate marginal profit margins through such measures as aggressive price revisions on an ongoing basis.
With regard to coffee beans, we are strengthening information gathering through cooperation with domestic roasters and promoting efforts to stabilize procurement prices by diversifying suppliers and changing procurement schemes, as well as developing attractive product lineups that are not solely dependent on coffee.

ii. Production and logistics system

In our core Domestic Beverage Business, we have adopted a fabless system in which production and logistics are outsourced, allowing us to focus our management resources on areas directly related to our customers, such as product planning and development and vending machine operations. By decentralizing and outsourcing the production of products to partner factories throughout Japan, we are able to reduce distribution costs and flexibly respond to production difficulties in some regions due to large-scale natural disasters or droughts, etc.
In recent years, the business environment surrounding production and logistics has undergone significant changes, with a significant rise in logistics costs due to labor shortages and stricter compliance requirements, as well as increased supply risks due to tight logistics.
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.
In order to reduce these risks, the Group established Shibusawa DyDo Group Logistics Co., Ltd. in June 2018 as a joint venture with The Shibusawa Warehouse Co.,Ltd. to secure a stable distribution network by strengthening cooperation with the logistics industry and reviewing delivery bases with an eye on the "2024 logistics problem".

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 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. If it becomes difficult to continue business development or recover investments due to unforeseen problems or inability to cope with these risks, the Group may incur impairment losses or losses on withdrawal from business, which may impede the implementation of mid- to long-term overseas business strategies and significantly affect the Group's business performance.
In order to mitigate these risks, the Group will establish a structure in which the International　 Business Management Department of the holding company will manage and supervise the overseas subsidiaries, and while utilizing the existing foundation of the Turkish and Chinese businesses, the Group will continue reformulating our international business strategies.

iv. Acquisitions and business and capital tie-ups

In order to realize the vision for 2030 as stated in "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, which 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.
When acquiring companies, etc., the Group conducts detailed investigations into the business plans, financial position, contractual relationships and other aspects of the target company and fully examines the risks involved. However, if problems arise that could not be identified in advance or business development does not proceed as planned, there may be a need to write down goodwill and other fixed assets, etc, This could have a significant impact on the Group's operating results.
In order to reduce these risks, the Group conducts an annual evaluation of the effectiveness of the Board of Directors, and based on the results of the evaluation, 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. The Company has been making efforts to continuously improve corporate governance, which is a framework for quick and decisive decision-making.

v. Market competition in the industry

The market environment of the beverage industry in Japan is unlikely to grow significantly in the medium to long term due to the declining birthrate and aging population, which will further develop in the future. The environment surrounding the vending machine market has changed significantly since the spread of COVID-19, with soaring raw material prices and rising distribution costs significantly affecting the profit structure, the attitude of each company in the industry toward vending machines has become polarized, and the trend toward a top-tier oligopoly has become even stronger.
In the distribution market, including convenience stores and mass merchandisers, sales competition among industry companies to secure sales volume continues to be fierce.
If the Group's product, sales, and pricing strategies fail to respond to the speed of such changes in the market environment, the Group's business results may be significantly affected.
In order to mitigate these risks, the Group will strive to provide value to customers through "Offering delicious products for sound mind and body" and optimizing product lineups in accordance with the characteristics of vending machine locations.

vi. Address environmental issues (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, physical risks related to the supply chain, such as the depletion of water resources due to climate change, the impact on coffee and other raw materials, and damage to manufacturing facilities due to large-scale natural disasters, if they materialize, could have a significant impact on our group's business performance.
In order to reduce these risks, the Group has set group-wide CO2 emission reduction targets and aims to be carbon neutral in its vending machine business by 2050, and in its Domestic Beverage Business, the Group has set three environmental targets to contribute to a recycling-oriented society, and is promoting efforts to address environmental issues through its business.
In addition, since climate change risk has the potential to materialize over the medium to long term, we have established the Group Risk Management Committee and the Group Sustainability Committee in order to build a system to assess risk not only in the short term but also in the medium to long term. The Group manages risks by linking the efforts of both committees.

i. Risks associated with hyperinflation in Turkey

The Turkish Beverage Business, which accounts for a large portion of our International Beverage Business, is currently undergoing dramatic changes in the business environment, such as rising inflation in Turkey and soaring prices of imported raw materials due to rapid exchange rate fluctuations. However, our main brand of mineral water, "Saka", continues to grow steadily against the backdrop of health-conscious consumers and is expected to continue to grow in the medium to long term.
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, whose 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 may amount to a large amount and have a significant impact on the Group's operating results.
In addition, the restated value of fixed assets, including trademarks, may have a significant impact on the Group's operating results, as the Company will consider whether impairment is necessary in the same manner as for ordinary fixed assets, and if the restated value exceeds the recoverable amount, the Company will be required to write down the asset to its recoverable amount.
In order to cope with these risks, the Group is strengthening and expanding its management system for earnings management and cash conversion cycle by the Finance Department of the holding company, and at the same time, the local subsidiary in Turkey is striving to reduce risks by securing an appropriate marginal profit margin through continuous price revisions and expanding export transactions from Turkey.

ii. Concentration and dependence on existing vending machine business

Domestic Beverage Business, the core business of our group, has developed along with the history of the expansion of vending machines in Japan. By developing community-based sales activities, we have built one of the industry's leading vending machine networks and a high-quality operation system. In FY 2022, the vending machine channel accounted for approximately 80% of our Domestic Beverage Business sales, which is significantly higher than the industry average.
The vending machine channel is inherently capable of securing stable cash flow through its main product, canned coffee, which has relatively high price and sales stability and high profitability. However, in recent years, the total number of vending machines in the market has been declining, partly due to the shortage of labor to operate vending machines. In addition, the environment surrounding the vending machine market has changed significantly in the wake of the COVID-19, and the trend toward a top-tier oligopoly has become even stronger. If the Group's existing vending machine business fails to adapt to these changes in the environment, it could have a significant impact on the Group's operating results.
Under the materiality of "Create societal value through the vending machine business," the Group aims to establish a sustainable vending machine 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 that "create a sustainable future together with our customers". We will continue to establish a firm advantage in the vending machine market by delivering the value sought by customers through our vending machines, including collaboration with the vending machine installation location.

iii. Entry into Orphan drug Business

The Group has identified the healthcare-related market, including the high-growth life science field, as its next growth area, and in January 2019, the Group established DyDo Pharma, focusing on orphan diseases, which are intractable diseases with fewer than 50,000 patients in Japan. The business model of Orphan drug Business is based on collaboration and alliances with partners in various fields. We will develop and obtain approval through alliances related to drug discovery seeds for the treatment of orphan diseases and licensing-in of development candidates, especially by obtaining exclusive manufacturing and marketing rights in Japan. We utilize external organizations such as Contract Research Organizations (CRO) for clinical development work and Contract Manufacturing Organizations (CMO) for drug manufacturing.
We will in-license, develop, and obtain approval for new drug candidates developed by biotech ventures around the world and expand our business to deliver them to patients as soon as possible. However, during the upfront investment period until our business foundation stabilizes, we will continue to record operating losses and negative cash flow, which may affect our group's business performance. This may affect the business performance of the Group.
Since the development of drugs for orphan diseases involves uncertainties, management decisions regarding investments in development candidates are made after careful consideration of assumptions such as estimates of total R&D expenses to be incurred, timing of product launch, trends in drug prices after product launch, potential number of patients and future average annual growth in the number of patients, etc. However, individual development projects are subject to the possibility of extension or discontinuation of development, failure to obtain drug approval as expected or taking longer than expected to obtain drug approval, and the possibility that the assumed drug price may not be approved.
In order to reduce 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 the Orphan drug Business, we intend to build a business foundation by narrowing down our investment targets to those projects that are already in a reasonable stage of development, and by working on the development of multiple pipelines.
Orphan drug Business is subject to strict regulations under the Pharmaceuticals and Medical Devices Act and other related laws and regulations. In addition to risks related to intellectual property rights and research and development, it is always necessary to be aware of risks such as product liability and side effects.
In order to mitigate these risks, the Group will promote 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. We will also seek cooperation and support from external experts, institutions, and companies to promote our business operations.