Investor relationsManagement policyBusiness risks

1. Risk related to natural disasters, accidents, viruses, and other events

The TOCALO Group has a Risk Management Manual outlining countermeasures and procedures for limiting the impact and reestablishing operations as quickly as possible in the event of a natural disaster, accident, or other impact event, and we are establishing a business continuity framework that includes appropriate measures such as confirming the safety of employees. However, unforeseen circumstances including a natural event such as a typhoon, heavy rain, earthquake, tsunami, or volcanic activity, as well as an accident, fire, terrorism, labor strike, or civil unrest have the potential to halt our production activities, damage equipment, or restrict our water or power supplies. Such an event could also cause similar hindrances to the production activities of our business partners, and a prolonged impact could affect the business performance of the Group.

The Group is continuing to carry out full-scale measures to minimize the impact of the coronavirus pandemic on our businesses, including implementing infection prevention measures at all work sites and increasing liquidity at hand. Despite these efforts, if the pandemic continues to spread, the Group’s financial conditions and earnings performance could be impacted if a high number of orders are postponed or cancelled, if any prolonged suspensions of production occur due to a high number of Group employees contracting the virus, or if there is a prolonged disruption or fragmentation of the supply chain due to impacts on the production or delivery operations of our suppliers or subcontractors.

2. Risk of demand fluctuations in industries related to semiconductor or FPDs

The Group’s non-consolidated sales in the semiconductor and flat panel display (FPD) sectors of the core thermal spray business have been increasing substantially since the fiscal year ended in March 2001 and in the fiscal year ended in March 2023, the ratio to total consolidated sales was 48.3%.

The Group’s earnings could therefore be impacted by decreasing demand in markets related to semiconductors, FPDs, or related devices or by intensifying price competition in these markets particularly among companies overseas, which could lead to requests from equipment makers or others to reduce order volumes or unit prices. Group earnings could also be significantly impacted if semiconductor or FPD manufacturing equipment were to adopt processes that did not require thermal spraying.

The Group is countering these scenarios with measures to minimize the potential impact of changes in the order trends from semiconductor manufacturers by developing maintenance demand the device components it supplies, thermal spraying technology for components that do not currently use the technology, and coating applications for next-generation devices.

3. Risks of customers applying in-house surface modification technology and shifting factories overseas

TOCALO specializes in thermal spraying technology, but materials makers and metal spraying companies^* also have thermal spraying technology, and major machinery manufacturers conduct their own thermal spraying in some of their manufacturing processes. Major machinery manufacturers and others outsource the thermal spraying processes to our Company as well as others if the process volume is beyond their capacity, if their spraying equipment is unable to perform the required process, or if they do not possess thermal spraying equipment. Group earnings could be impacted if major machinery manufacturers either increase the percentage of or completely convert to in-house thermal spraying processes.

In addition, the Group takes steps to develop business by maintaining close ties to customers, which include receiving customer products for surface coat processing and locating Group processing plants near major customers. Group earnings could be impacted if such a major customer were to relocate their operations, particularly overseas.

• Metal spray companies provide thermal spraying of zinc, aluminum, and zinc-aluminum alloys as anticorrosive coatings for buildings and other structures.

4. Risk of dependence on a specific business partner (Tokyo Electron Group)

The TOCALO Group relies heavily on sales to the Tokyo Electron Group, resulting in a high ratio to total consolidated sales (33.1% in the fiscal year ended March 2023). Our Group earnings could be impacted by the trends in the Tokyo Electron Group’s production of semiconductor and FPD devices and orders to our Group.

5. Product liability risk

The Group supplies customers in various industries, provides thermal spraying and other surface modification processing, and delivers products following quality control systems tailored to each product type. We do our utmost to prevent product defects by maintaining a robust quality assurance system with trained personnel while also integrating new quality control techniques to strengthen the quality assurance system.

To be fully prepared for the unlikely event that we were to receive a product liability claim based on a quality defect, the Group maintains product liability insurance to cover the financial costs that might be incurred.

However, Group earnings could be impacted if the details of the quality claim or the scale of the defects were to adversely affect the Group’s reputation as a manufacturer.

6. Intellectual property risk

The Group has created numerous new technologies and techniques while developing new coatings, and we accordingly apply for intellectual property patents and implement measures to protect those rights and use them as management resources. However, risk of intellectual property right infringement exists due to the possibilities of insufficient ability to protect the rights or to protect against imitation of the rights in certain geographic regions. Conversely, the Group’s financial standing and earnings could be impacted if the Group were to unknowingly infringe on a pre-existing intellectual property patent held by a third party leading to a claim for damages.

7. Data security risk

The Group possess a large volume of critical technical information, such as parts drawings, related to semiconductors, FPDs, and other devices that has been entrusted to us by customers. The Group protects this information by applying information security rules and regulations as well as by strengthening information security rules in line with the advancement of information technology and changes in the social landscape, investing in information protection technology, maintaining an internal information management system, and training our employees in information security. Despite these efforts, the Group’s financial standing and earnings could be impacted if an unauthorized access led to a major systems disruption, or if an information leak caused by unforeseen circumstances is discovered, requiring a large cost to rectify or resulting in a loss of customer trust.

8. International business risk

The TOCALO Group is expanding its overseas business in the United States as well as in China, Taiwan, and throughout Asia. The Group’s financial standing and earnings could be impacted from the exposure to each country’s culture, religion, trade practices, condition of social capital, and other factors; a deterioration in the local economic, political, or security conditions; or wide fluctuations in currency exchange rates.

Group earnings could also be indirectly impacted by the status of our customers as some of our main customers are also expanding their businesses internationally and could likewise encounter severe limitations on their activities due to changes in the international political situation, import or export restrictions including punitive tariffs, or unilateral changes to regulations, such as concerning product sales licenses.

9. Climate risk

Doing our part to address climate change is a priority management issue that is part of our vision of “contributing to a bright future for people and nature.” In April 2022, we established the Sustainability Committee to oversee all of our activities related to sustainability, including the reduction of greenhouse gas emissions. Chaired by the representative director, the committee is charged with formulating policies and plans, tracking the progress of initiatives, and monitoring the overall status of risk management. In the fiscal year under review, the committee identified the Company’s risks and opportunities related to climate change, organized the related countermeasures, and estimated the potential financial impact.

We view the efforts by society to address the increasing environmental issues caused by climate change as providing opportunities to raise income and profit by addressing the needs of customers adapting to climate change and by capturing new customers. We are focusing on developing coatings that can contribute to solutions as well as coating process that are environmentally friendly.

(Excerpt from the Securities Report for the fiscal year ended March 2023)