Bridge Report:（2884）Yoshimura Food Fiscal Year ended February 2022

Representative director and CEO Motohisa Yoshimura	Yoshimura Food Holdings K.K. (2884)

Corporate Information

Stock Information

*The share price is the closing price on April 21. Each value is taken from the brief report on results of the fiscal year ended Feb. 2022.

Earnings Trends

*Unit: Million yen. The estimated values were provided by the company.

This Bridge Report presents Yoshimura Food Holdings K.K.’s earnings results for Fiscal Year ended February 2022 and earnings forecasts.

Table of Contents

Key Points
1.Company Overview
2.Fiscal Year ended February 2022 Earnings Results
3.Fiscal Year ending February 2023 Earnings Estimates
4.Growth Strategies
5.Conclusions
<Reference: Regarding Corporate Governance>

Key Points

• The sales in the term ended February 2022 were 29,283 million yen, nearly unchanged from the previous term. Domestic business sales declined due to the impact of the novel coronavirus crisis. The sales of the overseas business increased due to the loosening of regulations to prevent the novel coronavirus. Operating income rose 25.1% year on year to 655 million yen. In the domestic business, personnel expenses increased due to the hiring of human resources, and profit decreased slightly. On the other hand, the overseas business recovered, and profit increased, mainly in fields with high-profit margins. Ordinary income grew 26.2% year on year to 993 million yen. Foreign exchange gains increased by 184 million yen year on year. EBITDA decreased 1.9% year on year to 1,577 million yen. With respect to the plan, neither sales nor operating income reached the target because the impact of the novel coronavirus crisis lingered longer than expected both in Japan and overseas. Ordinary income and net income exceeded the estimates due to foreign exchange gains and novel coronavirus-related subsidy income.

   

• For the term ending February 2023, sales are expected to increase 4.2% year on year to 30,526 million yen. Assuming that the current conditions will continue in the domestic business, sales are expected to increase with the addition of Junido Co.,Ltd., and the overseas business is expected to recover moderately. Operating income is forecast to increase 22.2% year on year to 800 million yen. The domestic business is projected to increase profit due to price revisions and production efficiency improvement, and the overseas business is expected to grow profit due to sales recovery. However, the estimates do not include the growth through new M&A.

   

• The company has built a unique business model centered on the SME Support Platform in the food industry and is pursuing growth by increasing the number of group companies through M&A and expanding the business of existing group companies. There is no change in the basic strategies or routes. However, the company set up Strategy (1): strengthening M&A, Strategy (2): re-enhancing the business model, Strategy (3): collaborating with business partners and in-house production of missing functions, and Strategy (4): strengthening overseas sales channels to speed up the processes from M&A to PMI and business growth support, execute more M&A, implement growth support, and improve corporate value.

   

• While the impact of the novel coronavirus is weakening, there are still many uncertainties in the company's business environment, such as soaring raw material prices and fluctuations in exchange rates. In addition to price revisions (hikes) and standard revisions (volume changes), we would like to pay attention to how further rationalization of manufacturing and cost reductions will contribute to business performance.

   

• We would like to focus on the progress of the four strategies, Strategy (1): strengthening M&A, Strategy (2): re-enhancing the business model, Strategy (3): collaborating with business partners and in-house production of missing functions, and Strategy (4): strengthening overseas sales channels. In particular, regarding Strategy (3): collaborating with business partners and in-house production of missing functions, making ONESTORY Inc. a subsidiary would contribute to strengthening marketing functions. We can also expect the acquisition of ONESTORY shares to enhance the relationship with Hakuhodo DY Media Partners Inc., which is the transferor of ONESTORY shares and continues to be their shareholder. Moreover, we look forward to the outcomes of the alliance with the Kokubu Group Corp..

1. Company Overview

Yoshimura Food Holdings acquires small and medium-sized food products makers, facing various issues such as the difficulty in finding successors, through M&A at the same time as they possess excellent products and technologies. It also facilitates the growth of the entire corporate group by solving problems with their core skill, “a platform for supporting small and medium-sized enterprises (SME Support Platform),” and energizing each group company. Its strengths are the overwhelming advantage toward investment funds and large companies and the high barrier to entry. The company aims to accelerate growth through alliances. As of the end of February 2022, there are 22 major consolidated subsidiaries.

【1-1 Corporate History】

One day, a food company that was facing financial difficulties and could not find a buyer was introduced to Mr. Yoshimura, who was managing the listed companies’ fundraising and M&A in the corporate business division at Daiwa Securities Co. Ltd. and Morgan Stanley Securities Co., Ltd.
Mr. Yoshimura took on this food company and established L Partners Co., Ltd. on his own in March 2008, which was the predecessor of Yoshimura Food Holdings K.K. because he strongly felt that Japan could be more appreciated through its “food” since his MBA days in the USA while working for Daiwa Securities. Through his efforts to revitalize the company using his experience and network, he succeeded in turning a profit.
Many food SMEs started seeking help from Mr. Yoshimura upon learning about his reputation. He thought that it was possible to efficiently achieve results if the companies complemented each other in various functions, such as product development, production, and sales under a holding company system, instead of working on each company individually. Hence, he named the corporate Yoshimura Food Holdings K.K. in August 2009.

Since then, the company has continued acquiring companies facing problems with business succession or failing to handle management on their own. Due to the high reputation of the company for its unique position of not competing with major food companies and investment funds and its policy of not selling the companies it acquired, it received financing from Japan Tobacco Inc. (JT) and expanded its business. In March 2016, it was listed on the Mothers of Tokyo Stock Exchange, and in March 2017, it was listed in the first section of Tokyo Stock Exchange. In April 2022, it was transited to the Prime Market of Tokyo Stock Exchange.
The company is pursuing further growth by acquiring not only Japanese companies, but also overseas companies in Singapore, Malaysia, etc.

【1-2 Target Social Image】

As the social meaning of its existence as an enterprise, the company decided to pursue the mission: “working towards a society where we can enjoy this ‘delicious taste’ forever—achieving affluence that allows consumers to enjoy diverse food cultures,” and set its vision (roles to be fulfilled) and values (values they cherish).

【1-3 Market Environment and the Background of the Company’s Establishment】

As a company aiming for supporting and revitalizing SMEs throughout Japan, Yoshimura Food Holdings explained the conditions of the food SMEs as follows:
(Investment Bridge extracted, summarized, and edited the information from Yoshimura Food Holdings’ annual securities reports and reference material)

(The Conditions of the Food SMEs)
*Japanese cuisine has been highly appreciated worldwide and is attracting attention. Also, on the national level, the food manufacturing industry has been one of the largest industries based on its number of business establishments, number of employees and GDP since the 1990s and it is one of the key industries that Japan is proud of.
*99% of the companies are SMEs where each one of them has strong products and technical skills.
*However, the domestic market scale is shrinking and some of the food SMEs find it hard to survive on their own as the business environment remains stringent due to the falling birthrate and aging population.
*Therefore, many companies give up on continuing their businesses and end up choosing to close down or suspend their business.

(Conditions of the SMEs’ Business Succession)
*The average age of managers is 60.1, and it is expected that around 50% of the managers will reach the average retirement age in the upcoming 10 years as the average retirement age of managers is around 70.
*Meanwhile, 65.1%, nearly two thirds of domestic enterprises are suffering the lack of successors, and the ratio of enterprises that plan to conduct business succession is only 34% in all industries. Namely, the preparations for business succession have not progressed.
*Moreover, in 2020, the number of SMEs that suspended or discontinued business reached 49,698 and have increased rapidly for 13 years in comparison with in 2007 where that number was around 21,000.
(According to SME Agency “White Paper on Small and Medium Enterprises” (2021 Edition), Teikoku , “Analysis of the age of company presidents in Japan (2021),” Teikoku , “Survey of Trends on ‘Companies without a Successor’ in Japan” (2020), SME Agency “Basic Survey on the Actual Situation of SMEs” (Report in FY 2019 [Financial results in FY 2018]）DatabankLtd.DatabankLtd.

(Conditions of Business Succession of Food SMEs through Acquisition)
*Although there are increasing needs for business succession from food SMEs, the number of companies and organizations that would acquire them is small.
*The scale of many food SMEs is too small for major companies to acquire, and for investment funds’ whose primary aim is to rapidly grow independent companies and sell them off within a few years, the mature market of food SMEs tends not to be one of their investment targets.
*Under these conditions, there is a tremendous shortage in the bearers of the responsibility of taking on the business of the SMEs.

【1-4 Business Description】

Having Yoshimura Food Holdings as its holding company, the corporate group consists of 22 group companies in February 2022.
Yoshimura Food Holdings aims to support and revitalize SMEs that manufacture and sell food products by creating a corporate group, composed of the food SMEs that are facing problems in securing a successor, through M&A. Yoshimura Food Holdings is responsible for business strategies’ design and implementation, as well as the business management of each company in the group. It also supports and supervises their sales and marketing, production management, procurement and manufacturing, procurement, distribution, product development, quality control, and business management.

①Business Model
The company develops a unique business model in the food industry and is pursuing growth based on two engines.

One of them is the increase in the number of group companies through M&A.
Since its establishment in 2008, the company prevented food SMEs that had business succession and financial problems from shutting down or facing business suspension by acquiring them. Thus, it has managed to solve their problems.
As of February, 2022, the company has 22 group companies. It is recently focusing on adding not only Japanese companies to the group, but also overseas ones.

Target companies are found by mainly M&A mediating companies, local financial institutions such as regional banks, lawyers, and accountants. The company plans to improve its own function for finding target companies from the aspect of costs as well.
The company has used the “indirect approach” to find business opportunities through the introductions from M&A brokerage firms, local financial institutions, such as local banks, lawyers, and accountants, but from now on, the company will enhance the “direct approach,” by producing a list of targets, approaching them to foster relationships, and utilizing the network of KOKUBU GROUP, which is an alliance partner, in order to speed up the business. The company plans to find business opportunities more voluntarily and actively.

The other one is the expansion of business of existing group companies.
Yoshimura Food Holdings supports the expansion of business operations of each company and solves problems by supervising each function of these companies, which have excellent products and technologies but could not achieve growth for reasons such as the lack of sales channels, labor shortage or poor business management, through the “SME Support Platform.”

(Taken from the reference material of the company)

What is the SME Support Platform?
The core of this unique business model is the “SME Support Platform,” a product of the company’s accumulation of know-how and achievements through its specializing in food manufacturing and sales.

As a holding company, Yoshimura Food Holdings is responsible for business strategies’ design and implementation, as well as the business management of each subsidiary in the group. It also aims to strengthen the business foundation of each subsidiary through the company supervisor’s horizontal supervision of its functions (sales and marketing, production management, procurement and distribution, product development, quality control, business management, and securing personnel) in a manner that goes beyond the company barriers and by building organic relations between subsidiary companies.

For example, Company A which has an excellent product but is worried about sales growth can use the sales channels and sales know-how of Company B that has a nationwide sales network. Also, it can achieve a stable financial position by using the creditworthiness of Yoshimura Food Holdings which is listed in the stock market to raise funds.
This cooperation is made to be more effective through appointing the personnel in the group with the highest levels of expertise as supervisors.

Hence, the “SME Support Platform” is a system in which each company’s “strengths” such as strong products and technologies, sales channels, and manufacturing know-how are shared across the group and their “weaknesses” such as a shortage in personnel, funds, or sales channels are supplemented.

“SME Support Platform” functions effectively and produces effects with the current structure, but as subsidiaries will increase further, their know-how will be added as a new strength, and the managerial resources of the corporate group will be accumulated, bringing out a new synergy so that existing subsidiaries will be able to seize opportunities to grow business and acquire the know-how to streamline production processes.
Such scalability of the platform will fortify the business foundation of Yoshimura Food Holdings.

(Taken from the reference material of the company)

② Segments
The company has two segments: “manufacturing business segment” and “sales business segment.”

◎ Manufacturing Business Segment
Each company develops and manufactures its original products, domestic enterprises sell products to supermarkets, convenience stores, and drugstores around Japan via mainly wholesalers, and overseas enterprises sell products to hotels, restaurants, supermarkets, etc. in Singapore and Malaysia. As of the end of February 2022, there are 17 group companies as tabulated below.

(Group Companies within the Manufacturing Business Segment)

◎ Sales Business Segment
Its strengths are sales capability and planning skills. Domestic enterprises sell products to mainly industrial catering companies, consumer cooperatives, etc., while overseas enterprises sell products to mainly supermarkets, hotels, restaurants, etc. As of the end of February 2022, group companies are the following three.

(Group Companies within the Sales Business Segment)

◎ Other segments

* ONESTORY Inc. became a subsidiary on April 1, 2022.

【1-5 Characteristics and Strengths】

①The Advantage in Business Succession through Acquisition
There are influential players in the M&A, such as major food companies and investment funds; however, this company has three main points that form strong competitive advantages, which are explained below.

*Ability to Acquire Companies of Various Scales
The company does not aim to sell the companies it acquired. It aims to not only achieve short term business recovery, but also achieve sustainable growth from a medium to long term perspective. Therefore, the company can acquire a variety of SMEs, including those with a small business scale that would take time to achieve growth and those that lack management resources for growth. This point creates a huge difference between the company and other major food companies and investment funds that need the companies they will acquire to be of a certain scale. Moreover, it is not easy for investment funds aiming to generate capital gains from selling companies to gain the trust of owners and managers of food SMEs. Regarding this point, this company operating company groups with the aim of achieving sustainable growth from a medium-term perspective also has a huge advantage.

*Advanced Capability of M&A
Since its establishment, the company has worked on creating many company groups out of food-related SMEs and later has achieved re-growth of these companies. Thus, it has thorough knowledge of the market environment of the food industry, business practices and risks that are peculiar to food SMEs, and strong assessment abilities, which enable the company to choose companies that have strengths from a large number of SMEs.
Also, the company has an extremely high capability of M&A since it has great expertise and accumulated knowledge in due diligence and negotiations.

*Rich and High-Quality M&A Data through its Wide Network
The company can gather plenty of M&A data on the food SMEs since it has a wide network of financial institutions, such as city banks, regional banks, credit associations, securities companies and companies that provide M&A advisory services.
Furthermore, “the company’s specialization in the food industry” and “the reassurance that the company is not aiming to sell” are the two factors allowing the company to access not only to a huge amount of data, but also high-quality data that meets its needs.

②Core Skill: SME Support Platform
The company revitalizes the group companies through the “SME Support Platform” in which each group company’s “strengths” such as strong products and technologies, sales channels, and manufacturing know-how are shared across the group and their “weaknesses” such as a shortage in personnel, funds or sales channels are supplemented. These achievements are highly evaluated.

③Contribution to regional vitalization
The company has actively implemented the business succession, etc. of local food SMEs, including Sakuragao Shuzo K. K. (Iwate Prefecture), Shiroishi Kosan Co., Ltd. (Miyagi Prefecture), and Ohbun Co., Ltd. (Ehime Prefecture), which are subsidiaries.
By utilizing the SME Support Platform, it is possible to distribute attractive products that have been available only in some regions to all around Japan (and overseas) and invest in new equipment by using the funds of the corporate group. Through this, the company contributes to the regrowth of local small and medium-sized food enterprises and the vitalization of local economies.

【1-6 Dividend Policy and Shareholders’ Benefit System】

(Dividend Policy)
Although payout to shareholders is one of the important business challenges, it is thought that allocating the cash to investment in the facilities to actively expand the business and to strengthen the business foundation by expanding the platform is what would lead to the highest payout to the shareholders because the company is considered to be within the growth process.
Therefore, the company has not provided dividend payout to its shareholders since its establishment and as of the time being, it plans to continue on using the cash to invest in business expansion and as necessary operating capital for the existing companies. The company is planning to look into providing dividend payouts to its shareholders while considering the operating performance and financial conditions for each business year.

(Shareholders’ Benefit System)
The company offers special benefits to the shareholders mentioned below according to the number of shares they hold.

【1-7 ESG Management】

The company is working on its ESG management based on the goal mentioned above, “working towards a society where we can enjoy this ‘delicious taste’ forever—achieving affluence that allows consumers to enjoy diverse food cultures.”

The company recognizes that taking over companies that have no successors and revitalizing it as their group companies is ESG management itself.
Also, the company believes that contributing to local communities and providing value to consumers by promoting ESG management, as well as increasing the number of good companies that sympathize with the group and want to participate, and the companies and consumers that sympathize with the group and support them as shareholders, will lead to the realization of sustainable growth.

(Taken from the reference material of the company)

2. Fiscal Year ended February 2022 Earnings Results

【2-1 Consolidated results】

*Unit: Million yen. Net income is the net profit attributable to shareholders of the parent company. EBITDA is calculated by adding amortization (depreciation, goodwill), Covid-19-related subsidy income and acquisition costs associated with M&A to operating income.

Sales were unchanged year on year but profit increased due to the recovery in overseas business.
In the term ended February 2022, sales were unchanged year on year, but profit increased thanks to the recovery of overseas business. Sales were 29,283 million yen. Sales decreased in the domestic business due to the impact of the novel coronavirus. Overseas business sales grew thanks to deregulation of Covid-19. Operating income increased 25.1% year on year to 655 million yen. Domestic business slightly declined due to an increase in labor costs resulting from personnel hiring, but overseas business recovered, mainly in high-margin fields, and profit increased. Ordinary income increased 26.2% year on year to 993 million yen. The foreign exchange gains increased 184 million yen from the previous fiscal year. EBITDA decreased 1.9% year on year to 1,577 million yen.
Sales and operating income did not reach the plan due to the longer-than-expected impact of Covid-19, both in Japan and overseas. Ordinary profit and net income exceeded the plan due to foreign exchange gains and Covid 19-related subsidy income.

【2-2 Results of each segment】

*Unit: Million yen. The composition ratio of operating income means the ratio of operating income to sales.

*Manufacturing business segment
Sales and profit increased.
Domestic manufacturing subsidiaries' sales decreased, and their profit increased as there was a recoil from the special demand in the first quarter due to people spending more time at home and sales for retail stores such as food supermarkets and drug stores slowing down in the prolonging novel coronavirus situation, as well as the improvement of production efficiency and the reduction of costs mainly for distribution.
Regarding overseas manufacturing subsidiaries, sales to retail stores such as supermarkets were favorable due to the easing of novel coronavirus restrictions on socio-economic activities, and sales to hotels and restaurants also have recovered gradually. Thus, sales and profit increased.

*Sales business segment
Sales and profit decreased.
Sales of domestic sales subsidiaries, mainly for industrial catering, decreased, while sales to co-ops increased. Hence, earnings were about the same as those in the previous year.
Sales and profit of overseas sales subsidiaries declined due to a decrease in export sales to countries other than Singapore and a rise in some raw material prices.

【2-3 Financial conditions and cash flow】

◎Main balance sheet

*Unit: Million yen

While cash and deposits, notes and accounts receivable, and inventories decreased, property, plant and equipment increased due to the acquisition of shares of Sharikat, a real estate holding company in Singapore, and total assets increased 590 million yen from the end of the previous term to 23.7 billion yen.
Total liabilities decreased 0.4 billion yen to 15.4billion yen due to a decrease in interest-bearing debt.
Net assets increased 0.99 billion yen to 8.3 billion yen due to an increase in retained earnings and foreign currency exchange adjustments.
The equity ratio increased by 3.0 points from the previous fiscal year to 26.6%.

◎Cash flows

*Unit: Million yen

Positive range of operating CF and free CF narrowed.
Cash position decreased.

【2-4　Topics】

(1) Acquiring SHARIKAT NATIONAL FOOD PTE. LTD. (Singapore) as a subsidiary
In December 2021, YOSHIMURA FOOD HOLDINGS ASIA PTE. LTD. (YOSHIMURA FOOD ASIA), which oversees overseas business, acquired the shares of SHARIKAT NATIONAL FOOD PTE. LTD. (Sharikat), a company that owns a food factory and a low-temperature food warehouse in Singapore, and made it a subsidiary to integrate the bases of three Singapore subsidiaries and expand the business.

(Outline of Sharikat)
Established in April 2009.
Sharikat owns a food factory and a low-temperature food warehouse in Singapore and operates a real estate leasing business. The real estate is rented to Sharikat's group companies and third parties. YOSHIMURA FOOD ASIA and its Singapore subsidiary SIN HIN also rent part of it.
SHARIKAT NATIONAL PTE. LTD., the parent company of Sharikat, which owns multiple real estate properties in Singapore and operates a real estate management business, has decided to reorganize the group. Thus, YOSHIMURA FOOD ASIA took over Sharikat's shares.

(Purpose of Making it a Subsidiary)
After making it a subsidiary, JSTT and PACIFIC SORBY will relocate their head offices and factories to Sharikat's properties, and the four companies, including YOSHIMURA FOOD ASIA and SIN HIN will be integrated into one base. As a result, the following synergistic effects can be realized within the group, and Sharikat will continue to rent properties to third parties other than the Yoshimura Food Holdings Group and earn rent income, so sales and profit can be expected to increase.

Singapore Food Agency has licenses and various regulations for real estate regarding food processing and food warehouses in Singapore. Moreover, the supply of low-temperature food warehouses is tight due to increased demand for frozen foods. Thus, rents are on the rise.
By acquiring the real estate through the acquisition of Sharikat's shares, it will be possible to curb future increases in rents and maintain a medium- to long-term advantage in terms of costs.
By making Sharikat a subsidiary, the company aims to improve business performance and create synergies between groups to achieve the early listing of YOSHIMURA FOOD ASIA on the Stock Exchange of Singapore.

(2) Acquiring ONESTORY Co., Ltd. as a subsidiary
On April 1, 2022, the company acquired 70% of the shares of ONESTORY Inc., a wholly owned subsidiary of Hakuhodo DY Media Partners Inc., making it a consolidated subsidiary.

(Outline of ONESTORY Inc.)
Established in April 2016.
With "further exploring the hidden joys in Japan" as its concept, the company's strength is rediscovering and restructuring the food and culture hidden in the local area and planning and producing them as premium content.
DINING OUT (https://www.onestory-media.jp/diningout/), a premium outdoor restaurant that opens only for a few days somewhere in Japan and is planned and operated by ONESTORY, has been held 19 times (18 times in Japan and one time overseas) since 2012. It has introduced the ingredients grown in the area and the richness of the area.
ONESTORY is creating places that give participants new ways of enjoying various parts of Japan and help the locals rediscover the area's attractions as the famous chefs invited to each event infuse new sensations into the ingredients grown in the area through special dishes and unique productions.
In addition, ONESTORY takes time to cover various parts of Japan besides the DINING OUT venue and disseminate the area's charm through ONESTORY MEDIA (https://www.onestory-media.jp/).
ONESTORY provides marketing solutions to local governments and advertiser companies based on its unique planning know-how cultivated through these businesses and its network of top chefs and celebrities who are globally active. In addition to advertising production, product development, brand development support, and space production, ONESTORY develops businesses that include regional revitalization support that discovers the region's charm and revalues ​​it.

(Purpose of Making it a Subsidiary)
Yoshimura Food Holdings was fascinated by ONESTORY's unique marketing and brand development know-how related to food, its driving force and execution capabilities to develop business while involving related regions with companies and local governments, and the planning and development capabilities that constantly create new businesses and sales channels related to food while utilizing its unique know-how. Thus, the company decided to acquire its shares.
The company will further develop the business conducted by ONESTORY by utilizing the network of Yoshimura Food Holdings and its partner Kokubu Group. Moreover, by utilizing the strengths of ONESTORY, such as its unique know-how and its network of top chefs, Yoshimura Food Holdings will enhance its SME Support Platform’s sales and marketing areas, improve the products and corporate brand power of all group companies through collaboration, and raise the level of marketing power.
In addition, by combining the management support know-how and regional network capabilities cultivated by the Yoshimura Food Holdings Group, the company will work to rediscover new attractions hidden in various parts of Japan and create new business opportunities there.

Yoshimura Food Holdings will acquire 70% of the issued shares of ONESTORY, but Hakuhodo DY Media Partners will continue to hold 30%. By promoting collaboration with Hakuhodo DY Media Partners, which has a strong relationship with media content holders, the company will work to improve the business performance of Yoshimura Food Holdings and ONESTORY.

3. Fiscal Year ending February 2023 Earnings Estimates

【3-1 Full-year earnings forecasts】

*Unit: Million yen. Net profit is net income attributable to shareholders of the parent company. EBITDA is calculated by adding amortization (depreciation, goodwill) and acquisition costs associated with M&A to operating income.

Sales and operating income increase.
Sales are projected to increase 4.2% year on year to 30,526 million yen.
The domestic business is expected to maintain the status quo, and with the new addition of Junido, sales are expected to increase, while the overseas business is expected to recover moderately. Operating income is expected to increase 27.5% year on year to 835 million yen.
The domestic business is expected to see an increase due to price revisions and production efficiency improvements, while the overseas business is expected to see an increase due to a recovery in sales. The forecast does not include growth through new M&A.

【3-2 Impact of Soaring Raw Material Prices and Foreign Exchange】

Food ingredient prices are soaring worldwide due to global supply chain disruptions, unseasonable weather, and rising energy costs. Prices of raw materials and packaging materials purchased by the company group and distribution costs are also rising. Price revisions (hikes), standard revisions (volume changes), and further manufacturing rationalization and cost reduction are being implemented to respond to these increases to maintain and improve the profit margin.

In addition, the exchange rate has fluctuated significantly, and the company's valuation of loans to its Singapore subsidiary may fluctuate, resulting in foreign exchange gains or losses. To continue the business in Singapore, the company plans to avoid hedging through foreign exchange contracts.

4. Growth Strategies

The company has built a unique business model centered on the SME Support Platform in the food industry and is pursuing growth by increasing the number of group companies through M&A and expanding the business of existing group companies.

There is no change in the basic strategies and routes. However, the company set up Strategy (1): strengthening M&A, Strategy (2): re-enhancing the business model, Strategy (3): collaborating with business partners and in-house production of missing functions, and Strategy (4): strengthening overseas sales channels, to speed up the processes from M&A to the PMI and business growth support, execute more M&A, implement growth support, and improve corporate value.

（Taken from the reference material of the company）

By organically linking each strategy, the company aims to realize its vision and achieve its mission.

（Taken from the reference material of the company）

【4-1 Strategy 1: Strengthening M&A】

The company will aggressively promote M&A through the three strategies: the business unit strategy, the community-based product and niche market strategy, and the platform strengthening strategy to effectively demonstrate synergistic effects and improve profitability.

Business unit strategy
The company will conduct M&A with companies with a certain degree of business scale and market share and will be a new pillar (core) of the business.
After that, the company will implement roll-up mergers (M&A) of companies in the same field to improve efficiency.
The company will also achieve synergies within the units and improve profitability.

Community-based product and niche market strategy
The company will conduct M&A of companies with a high market share, product strength, and high-profit margins in niche markets.
It will utilize the platform to grow profits by increasing sales.

Platform strengthening strategy
The company will conduct M&A of companies that will improve the SME Support Platform.
In particular, it will strengthen product development, marketing, and EC sales fields.

（Taken from the reference material of the company）

Although the number of M&A deals introduced and executed temporarily dropped due to the impact of the novel coronavirus, it has been on a recovery trend recently. In the future, the company will further expand earnings by accelerating M&A.

【4-2 Strategy 2: Re-enhancing the Business Model】

By hiring specialized human resources, the company aims to improve business performance by improving management support and support for each function.
In management support, the company will hire human resources with abundant management experience and appoint them as presidents of group companies.
In addition, the company will hire excellent young human resources and help them gain management experience in group companies to enhance management innovation.
In support for each function, it will provide support utilizing the SME Support Platform. It will also recruit specialized personnel in each function to strengthen the platform.

（Taken from the reference material of the company）

【4-3 Strategy 3: Collaborating with Business Partners and In-house Production of Missing Functions】

The company aims for further growth by forming alliances and conducting M&A with the most suitable partners for each value chain.

（Taken from the reference material of the company）

Cooperation with KOKUBU GROUP CORP.
The status of collaboration with the Kokubu Group Corp., which has about 35,000 customers, approximately 10,000 trading manufacturers, 54 group companies, almost 600,000 items in the product lineup, and know-how cultivated through over 300 years of business, is as follows.

【4-4 Strategy 4: Strengthening Overseas Sales Channels】

As one of the functions of the SME Support Platform, the company will strengthen sales of domestic group company products through the Singapore subsidiary.

To that end, it will expand its sales channels to Southeast Asia and China, centering on Singapore. It is also necessary to hire human resources who can communicate in English.
In addition, the company will continue to study conducting M&A of companies that will lead to the group's growth as needed, mainly in Southeast Asia.
It will also aspire for growth by utilizing the resources of the company and partner companies such as Kokubu.
The company has set up its own sales booth at Jurong Point, the largest shopping mall in western Singapore, to improve Japanese group companies' product sales.

5. Conclusions

While the impact of the new coronavirus is weakening, there are still many uncertain factors in the company's business environment, such as soaring raw material prices and exchange rate fluctuations. It will be interesting to see how further manufacturing rationalization and cost reductions, in addition to price revisions (price increases) and standardization revisions (content volume changes), will contribute to earnings.
In the medium term, we will focus on the progress of four strategies: "Strategy 1: Strengthening M&A," "Strategy 2: Re-enhancing the business model," "Strategy 3: Collaborating with business partners and in-house production of missing functions," and "Strategy 4: Strengthening overseas sales channels.
In particular, regarding "Strategy 3: Collaborating with business partners and in-house production of missing functions," we expect the conversion of ONESTORY Inc. into a subsidiary to strengthen the marketing function and strengthen the relationship with Hakuhodo DY Media Partners Inc. The acquisition of ONESTORY is also expected to strengthen the relationship with Hakuhodo DY Media Partners, Inc. We look forward to the results of the alliance with Kokubu as well.

<Reference : Regarding Corporate Governance>

◎Organization type, and the composition of directors and auditors

◎Corporate Governance Report
The latest update: December 29, 2021

<Basic Policy>
Our company believes that our sustainable growth and creation of mid/long-term corporate value can be achieved especially through the trusting relationships and cooperation with our stakeholders, including shareholders, clients, business partners, employees, and local communities.
Accordingly, we consider that the most important mission in management is to keep tightening corporate governance as a base for securing the soundness, transparency, and efficiency of business administration. We will strive to secure the transparency and fairness of our company and timely disclose information to all stakeholders by streamlining the decision-making process, improving the supervisory function for business execution, strengthening the function to oversee directors, and developing an internal control system.

<Reason for not implementing the principles of the Corporate Governance Code (excerpt)>

<Disclosure based on the principles of the Corporate Governance Code (excerpt)>