Earth Corporation

Business Risks

Following are the main risks that could impact the Earth Group’s business performance, stock prices, and financial status.
Items related to the future as indicated below are based on the Earth Group’s judgments when the securities report was submitted on March 25, 2024.

(1) Seasonality of performance
The main demand season for insecticides, a core product in the Household Products Business, lasts for about five months, from April to August each year. In typical years, roughly 80% of annual market sales are concentrated here, so sales in the Household Products Business for this period account for a large ratio of the total. Shipments for insecticides begin in March, in preparation for the demand period, and peak around July; after that, and through to December, some business partners return unsold products. For this reason, in terms of the Group’s performance, while earnings are concentrated in the first three quarters (January to September), earnings decline in the fourth quarter (October to December). Given the high seasonality of insecticides, performance may be impacted if market scale shrinks due to weather during the period noted above.



(2) Risks in overseas rollout
The Earth Group has set “strengthening overseas rollout” as a top priority issue, and is actively expanding into Asia, mainly through local subsidiaries in Thailand, Vietnam, Malaysia, Philippines and China. Progress in these plans may be delayed, however, if unexpected conditions arise, for example due to changes in the economic environment, conditions overseas, or regulations put in place by foreign governments. Items at overseas subsidiaries reported in local currencies, including sales, expenses, assets, and liabilities, are converted into yen for consolidated financial statements, but performance may be impacted by substantial fluctuations in post-conversion figures resulting from changes in foreign exchange rates.

(3) Variability of raw material prices
Petrochemical products account for large ratio of raw materials for the products handled by the Earth Group, and performance may be impacted by changes in raw material prices resulting from foreign exchange fluctuations or changes in market conditions. For this reason, the Earth Group mitigates risks from fluctuations in raw material prices through ongoing cost reduction activities.

(4) Availability of raw materials
The main components in insecticides are chemicals called insecticidal substances, which are the core raw materials for many insecticide products. The number of main users of such substances is limited, so annual supply and demand, as well as market prices, tend to be stable. Insecticidal substances can largely be purchased from manufacturers around the world, but in some cases, manufacturers are limited, so performance may be impacted if continued transactions with a given manufacturer become difficult, or if purchase prices fluctuate dramatically.

(5) Impact from M&As
The Earth Group is expanding its business fields and geographical areas through M&As and related initiatives, to achieve continued growth in the future. Performance may be impacted if the expected results are not achieved due to changes in the environment or unexpected events occurring after such transactions.

(6)Securing human capital
Independent human resources with diverse values and expertise are essential for the Earth Group's medium- to long-term growth. However, if the Group is unable to secure human resources with the expertise required for its business activities as planned, or if it is unable to develop and retain them, due to a declining and ageing working population or changes in the employment situation, it may not be able to achieve medium- to long-term growth. In addition, if we are unable to foster a culture that respects diversity of values and improves relationships within the organisation, not only will we lose business opportunities, but we may also experience an outflow of human capital and stagnation in our business activities. Therefore, the Company has set out four human capital materialities and is proceeding with structural reform of its organisation and functions in order to realise 'the development of human capital required by the business and the creation of a system that enables people to play an active role'.

(7) Laws and regulations affecting business
Products handled in the Household Products Business include pharmaceuticals, quasi-drugs, cosmetics, and medical devices, which are regulated by the “Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices” (the Pharmaceutical and Medical Device Act). Products categorized as agricultural chemicals are regulated by the Agricultural Chemicals Regulation Act, and products categorized as fertilizers by the Fertilizer Control Act. In these businesses, we have obtained approvals for the manufacturing and sales of pharmaceuticals, for manufacturing at plants, and for the wholesale sales of pharmaceuticals at branches, and branches also apply for approvals in the sales of agricultural chemicals. We also receive authorizations for the manufacture and sales of each product, and agrochem products are registered. In the General Environment and Sanitation Business, we comply with laws related to securing sanitary environments for buildings in insect and rodent prevention construction and building cleaning, and with the Pharmaceutical and Medical Device Act and the Poisonous and Deleterious Substances Control Act in the handling of pharmaceuticals and deleterious substances. In accordance with these laws, branches obtain appropriate approvals for rodent and insect control in buildings, building cleaning, and the general sales of poisonous and deleterious substances. At present, there are no problems in accommodating these laws and regulations, but the Group’s performance may be impacted if these laws and regulations are amended or strengthened in the future. In the case of the Household Products Business in particular, if the company is subject to penalties involving the revocation of approvals or the suspension of operations, this could hinder the Group’s business rollout, and dramatically impact performance.

(8)Risks related to quality
The Company's products include pharmaceuticals and quasi-drugs, for which high standards of quality control must be ensured. However, in the event of damage to customers due to product defects arising from the manufacturing process or unexpected product accidents, depending on the damage, the Group's brand image and social credibility may be damaged, which may have an impact on performance and other factors. For the Company's manufacturing, the most important social responsibility is to continue to provide high-quality, safe and reliable products and services from the customer's perspective. In order to provide products and services that contribute to safe and comfortable living, we have established basic policies in research and development, quality assurance and communication with customers, and are committed to "improving the implementation rate of regular quality audits at our own factories and those of our contract manufacturers in order to reduce to zero major quality incidents that undermine customer satisfaction and trust", "ensuring compliance with relevant laws and regulations" and "ensuring that our products and services are safe and reliable". We will improve the implementation rate of the annual education and training plan to ensure compliance with relevant laws and regulations and reduce the number of serious accidents that lead to non-compliance to zero.

(9) Impact from natural disasters and infections
The Earth Group has put in place a Business Continuity Management (BCM) structure based on a Business Continuity Plan (BCP) for earthquakes and other natural disasters. In the event of a major disaster, however, performance may be impacted by damage to production facilities or bottlenecks in raw materials procurement and distribution.
Amid the coronavirus pandemic, the Group has implemented a variety of prevention measures, such as encouraging teleworking and the use of staggered working hours, internal and external communications using webinars and other remote technologies, wearing masks, and making disinfectants available in offices. In this way, we continue business operations while ensuring thorough health management for employees. Nevertheless, if the pandemic continues over an extended period, the Group’s business activities and performance may be impacted by infections among employees or business partners, or by disruptions in the supply chain.

(10)Reputation risks
The spread of smartphones and the increase in the number of people using social networking services (SNS) have created an environment in which anyone can send and receive information, regardless of time and location. The dissemination of information via SNSs may include critical evaluations and reputations of companies, and the spread of such information may lead to a decline in brand value and corporate credibility. The Company's use of social networking sites to disseminate various information and brand marketing activities is increasing year by year. If critical evaluations of inappropriate or inadvertent expressions used in those activities, etc. are spread through social networking sites, the Group's brand value and corporate credibility may be significantly reduced.

(11)Risks from climate change
Climate change, the most serious environmental problem worldwide, and its mitigation and adaptation may affect the continuation and expansion of the Company's business in the medium to long term. In addition, climate change may also cause an increase in average temperatures, changes in precipitation patterns and other extreme weather events that could have a drastic impact on the overall value chain of the Company's business. We recognise that addressing climate change is a management issue that will affect our corporate value over the medium to long term. In all our businesses, we will work towards resolving the issues and contribute to the transition to a decarbonised society by 'reducing CO2 emissions' and 'promoting the shift to renewable energy sources for electricity'. The Company also recognises the importance of climate change-related financial disclosure and has expressed its support for the TCFD recommendations and will disclose information in line with the recommendations.

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