Among the matters related to the business and accounting status written in the Securities Report
(only in Japanese), the following may have a significant impact on investor judgment. It should be noted that forward-looking statements in the following text are based on the judgement of the Nippon Sanso Holdings Group (Nippon Sanso Holdings and its consolidated subsidiaries) as of the end of the current fiscal year (March 31, 2023).
(1) Matters related to management strategy and business
(1-1) Global business development
The Nippon Sanso Holdings Group is currently operating business globally in four regions: Japan, the United States, Europe, and Asia and Oceania. The Group’s business operation in these countries may affect the Group’s business activities, business performance and financial position, depending on the market trend, political and economic conditions, customs, religions, terrorism activities, disputes, large-scale disasters, and other factors in these countries and regions. The Company facilitates communication and information sharing with the business companies overseeing each region to achieve speedy decision making.
(1-2) Capital investment
The Nippon Sanso Holdings Group has industrial gas manufacturing bases in the countries where it operates its business and installs air separation units and other facilities at the premises or on the adjacent land of large customers to supply them gases via piping (on-site plant method). Going forward, the Group will continue making investments to acquire business opportunities in both the existing and new business areas. If, however, the operating rate of the Group’s manufacturing facilities falls or all or part of the facilities become redundant due to factors such as the lowering of the operation rate of the Group’s main customers in the iron and steel, chemicals, oil refining, semiconductor, automotive, and other industries following changes in the industrial structure or demand trend or the consolidation, closure, or transfer of their production bases, and if such a situation is not covered by contractual indemnity, the resultant loss on the retirement of facilities may affect the Group’s business performance.
(1-3) Manufacturing costs
Among the manufacturing cost of oxygen, nitrogen, and argon, which are the main products of the Nippon Sanso Holdings Group, electricity cost accounts for a large proportion, and has increased significantly because of the rising crude oil and LNG prices around the world, resulting in a significant increase in the manufacturing cost of core products. Although the Group endeavors to pass through the rising manufacturing cost into sales prices, if the manufacturing cost keeps rising and the cost pass-through cannot keep up with it, it may affect the Group’s business performance and financial position.
Furthermore, the electrical energy market worldwide is heavily influenced by drastic changes in the power supply mix, and it is therefore difficult to predict its impact on the manufacturing cost. This may affect the Group’s business performance and financial position.
(1-4) Supply chain
The Nippon Sanso Holdings Group’s industrial gas products include those that rely on the global supply chain, such as electronic materials gases for semiconductors manufactured by mixing various components, and helium gas, the majority of which is produced in the natural gas fields of North America and the Middle East. These products are exposed to the risk of disruptions to stable supply to customers due to fluctuations in production, the increased geopolitical risk in the country of production, the recent global shortage of containers, or change in marine transport conditions. If such disruptions occur, they may affect the Group’s business activities and business performance.
(1-5) Information security
The Nippon Sanso Holdings Group is in possession of information such as important information about sales and technology, customer information, and personal information of other related parties.
The Group stives to reduce the risk of business information leaks, including important and personal information, through cybersecurity measures and the promotion of crime prevention and anti-theft measures at its business bases. The Group is also strengthening its management system through the organization of rules and standards related to information security, appointment of personnel in charge of and involved in information management, and continuous training for employees.
Furthermore, given the growing importance of countermeasures against cyberattacks, the Group created the Global Information Security Council in October 2021 for the purpose of managing cybersecurity risks.
If, however, information leaks occur due to unforeseen circumstances, they may result in damage to the Group’s corporate value, the loss of social credibility, compensation for customers and other related parties affected by the leak, the lowering of competitiveness in the market, and so on, which may affect the Group’s business performance and financial position.
(1-6) Climate change
There is a growing demand for companies to disclose their efforts to address environmental issues such as global warming and climate change risks. The Nippon Sanso Holdings Group promotes company-wide environmental management and expressed its support for the Task Force on Climate-related Financial Disclosures (TCFD) in November 2019. The Group analyzes climate change-related risks and opportunities, while improving its disclosures based on the TCFD recommendations.
If regulations and systems related to greenhouse gas emissions typified by carbon tax and emissions trading are introduced, the Group’s profits may decrease due to the tax burden of the businesses that have excessive indirect greenhouse gas emissions. In addition, switches to the products that will reduce environmental impacts and changes to the production processes with low environmental impacts in the iron and steel and chemistry sectors may affect the Group’s business performance.
(1-7) Laws and regulations
The Nippon Sanso Holdings Group is conducting its business in Japan, the United States, Europe, and Asia and Oceania. Any unexpected legislative changes, enactment of laws or regulations, or administrative guidance in any of the countries in which the Group operates its business may affect the Group’s business performance due to the cost to accommodate such changes and so on.
The Group also conducts environmentally friendly business activities in Japan and overseas. Any tightening of regulations due to revisions of environment-related laws and regulations may affect the Group’s business performance due to the increased cost to accommodate such regulatory tightening. In addition, the Group exports products and services that are subject to laws and regulations that govern exports in each country. Any tightening of export regulations in each country due to changes in international conditions may reduce the export of our products and services to certain countries or companies. In this case, the fall in exports may affect the Group’s business performance. Furthermore, a specific country or company from which the Group imports products may be subjected to sanctions by the laws of each country due to changes in the international situation. In this case, the Group will not be able to import the relevant product, which may affect the Group’s business performance.
Moreover, in executing its business in Japan and overseas, the Nippon Sanso Holdings Group is exposed to the risk of being investigated by regulatory bodies in charge of not only laws and regulations governing the industrial gas business but also laws and regulations relating to competition laws, environmental protection, export regulations, and so on. If an adverse decision is made against the Group following an investigation, such as an order to pay a fine or fines, an order to suspend business, revocation of permits, or other punitive measures, it may have a significant impact on the Group’s business development, business performance, financial position, and creditability.
(1-8) Securing human resources
The Nippon Sanso Holdings Group is currently operating business globally in four regions: Japan, the United States, Europe, and Asia and Oceania. Operating businesses in each region requires a stable procurement of workforce and achieving the Group’s business goals requires talented people in each business function such as production, engineering, marketing, sales, logistics, and management, as well as overall business management. In addition, the Group needs to secure personnel with the qualifications and skills required by the relevant legislations when conducting business operations. Furthermore, promoting overall Group management and strategic measures and facilitating initiatives to enhance the Group’s total power require personnel who can work well globally. If the Group cannot secure such personnel according to its plan due to changes in the employment conditions and the supply-demand situation of labor, it may affect the Group’s business activities and business performance.
(1-9) Technological development
The Nippon Sanso Holdings Group actively conducts technological development activities to further expand its business. However, there are risks associated with the development of new products and technologies. For instance, if it takes time to commercialize or put into operation a new product or technology, the conditions of the relevant markets may change significantly, resulting in a missed opportunity. Furthermore, new technologies or products or alternative products developed by other companies could reduce the competitiveness of the Group’s products. In industry-academic-government collaborations or joint development projects with other companies, the Group may not be able to achieve the intended results if cooperation with its partners does not progress well.
(2) Matters related to technology and security
The Nippon Sanso Holdings Group defines risks associated with security, the environment, quality, product safety, and intellectual properties as technology risk, and confirms the countermeasures taken by its Group companies and determines the approach to these risks as the shareholding company at the Global Strategy Review Committee, which meets once a year. Furthermore, the Technology Risk Liaison Committee comprising the persons responsible for security, the environment, quality assurance, and intellectual properties in the Company and its Group companies meets twice a year to work on the matters decided by the Global Strategy Review Committee to reduce technology risk.
The Nippon Sanso Holdings Group is engaged in the manufacturing and selling of high-pressure gases. In addition to the danger of high pressurization and cryogenic temperatures, these high-pressure gases include toxic and flammable gases used for products related to liquid crystal, semiconductor, and other products. Regarding the manufacturing and supply of these products, the Group provides education programs for employees who handle such products, with some programs tailored to the employees’ job levels and some offered based on applications from employees. In particular, as an initiative to foster a safety culture, the Technical Academy offers danger simulation seminars, with a focus on providing education that aims to eradicate not only equipment accidents but also occupational accidents. Special efforts are currently being made to expand education programs for experienced employees who face a greater risk of occupational accidents that result in absence from work and for local subsidiaries in the Asia and Oceania region, taking all possible measures to ensure security. In the event any leakage, fire, explosion, or other accident causes significant damage to humans or facilities, it may affect the Group’s business operation, business performance, and financial position due to the subsequent suspension of operation or other reasons.
The Nippon Sanso Holdings Group conducts its business in accordance with environmental regulations governing air pollution, water contamination, waste management, and other matters in the countries where the Group operates its business. If the Group fails to comply with the current or future environmental regulations or if any contamination for which the Group is responsible is discovered, the Group may incur a fine or expenses including the removal cost of the contaminating substance or compensation or may need to make investments to modify facilities and equipment. Furthermore, any future tightening of environmental laws and regulations may result in additional costs for the necessary actions to be taken.
(2-3) Quality and product safety
The Nippon Sanso Holdings Group engages in the business of manufacturing and selling high-pressure gases and related equipment. The Group appropriately manages risks related to these products by implementing quality controls that meet the requirements of laws and regulations and the requirements of the Group’s customers and by performing safety inspections before the launch of these products. In the unlikely event that a product is defective, is of poor quality, or malfunctions, it may affect the Group’s business performance and financial position due to a decline in customer trust and the burden of compensation for damages.
(2-4) Intellectual properties
The Nippon Sanso Holdings Group positions intellectual properties as a management resource that increases its competitiveness as a company and promotes the acquisition and protection of necessary intellectual property rights. There is, however, a possibility that a third party may violate the Group’s intellectual property rights and illegally use them. In the areas where the Group conducts its business, the Group constantly investigates and monitors the intellectual property rights of third parties to prevent infringement of their intellectual property rights. There have been extremely few instances when the Group was sued for the violation of intellectual property rights of third parties in the past because of the measures the Group has taken such as developing alternative technologies or finding technological workarounds to not use the intellectual property rights of third parties and obtaining the license to use such intellectual property rights from the relevant third parties. If, however, a lawsuit is filed against the Group, it may affect the Group’s business performance.
(3) Matters related to finance
(3-1) Foreign exchange rate fluctuations
The Nippon Sanso Holdings Group procures raw materials from overseas and exports products related to special gases and equipment. Since there are transactions that are denominated in foreign currencies in connection with such transactions, the Group endeavors to avoid foreign exchange fluctuation risks through forward exchange contracts and other measures. However, if the Group cannot respond to sudden foreign exchange fluctuations, it may affect its business performance. Furthermore, the foreign currency-denominated financial statements of consolidated subsidiaries overseas are converted into yen in the process of preparing consolidated financial statements. Any significant fluctuation in foreign exchange rates that are beyond expectations may therefore affect the Group’s business performance and financial position.
(3-2) Interest rate fluctuations
The Nippon Sanso Holdings Group makes capital investments and executes M&As based on its business strategies, and raises the funds needed for these activities mainly through borrowings from financial institutions and the issuance of corporate bonds. While the Group’s borrowings are mainly on fixed interest rates, the Group raised the funds for the acquisition of the European business of US Praxair, Inc., which was executed during the fiscal year ended March 31, 2019, largely through variable interest rate borrowings and hybrid financing whose interest rate would change from a fixed rate to a variable rate after a given number of years. Accordingly, future interest rate fluctuations may affect the Group’s business performance and financial position.
(3-3) Capital relationship with Mitsubishi Chemical Group Corporation
Mitsubishi Chemical Group Corporation (MCG) owns 50.59 percent of the total number of outstanding shares issued by the Company. MCG agreed to maintain its shareholding ratio in the Company in the letter of understanding, which was signed on May 13, 2014 for the purpose of further enhancing the capital and business alliance and improving the Company’s corporate value. The Group therefore understands that MCG presently does not intend to change its shareholding ratio.
However, any change in the capital relationship with the MCG group may have a significant impact on the Nippon Sanso Holdings Group’s business operation, business performance, and financial position.
(3-4) Goodwill and intangible assets
The Nippon Sanso Holdings Group posts goodwill and intangible assets (hereinafter, “Goodwill, etc.”) on its consolidated statement of financial position following the acquisition of companies. The Group may post new Goodwill, etc. when it acquires companies in the future. The Group conducts impairment tests each period to evaluate the goodwill and intangible assets whose useful life is indeterminable. If the growth rate of a target business significantly declines due to a considerable deterioration in the economy or if the discount rate used to calculate fair value and use value after the deduction of disposal costs rises significantly due to the rise in market interest rates and so on, the recoverable amount decreases significantly and an impairment loss occurs, which may affect the Group’s business performance and financial position.
Large-scale natural disasters, infectious diseases, and others
The occurrence of a large-scale natural disaster may severely damage the Nippon Sanso Holding Group’s business bases. If a large-scale manufacturing base is affected by a large-scale natural disaster, significant declines in the labor force and production capacity and huge restoration costs will become unavoidable and may affect the Group’s business performance. Furthermore, the occurrence of an unexpected situation or compound disasters or the spread of an infectious disease may impact the Group’s business activities and business performance. To prepare for such emergencies, the Group routinely organizes an information gathering system to speedily collect necessary information in the aftermath of a disaster for the implementation of a business continuity plan (BCP), conducts activities to protect the lives and safety of its officers and employees, and promotes the initiatives needed to continue and promptly recover its core businesses.