Business risks

Description of risk

Due to global supply chain disruptions caused by the escalating tensions in the Middle East, benchmark prices for petrochemical raw materials such as crude oil and naphtha have risen significantly. Accordingly, concerns have arisen regarding the domestic supply of petrochemical products, and our contract manufacturers are beginning to experience difficulties in procuring raw materials. If this situation prolongs, there is a risk of supply reductions or restrictions, as well as delivery delays, for our main products, including wall coverings, flooring materials, and fabrics. Furthermore, in addition to soaring raw material prices, rising manufacturing and logistics costs have become a serious issue. Since it is difficult to absorb these cost increases and maintain our current service levels through our own efforts alone, we have decided to revise our transaction prices. In the future, if further surges in raw material prices occur, or if demand changes due to price revisions, it may impact the Company’s business performance and financial condition.

Measures against risk

The Company strives to gather information through cooperation with business partners and focuses on identifying potential impacts at an early stage by closely monitoring the international situation. We will make the stable supply of products our top priority and, by leveraging our procurement and inventory capabilities, strive to minimize the impact of supply restrictions and delivery delays on our customers. While we will make our own efforts such as ongoing cost reductions to address rising raw material prices and logistics costs, given the current situation where it is difficult to maintain our current service levels, we have decided to revise transaction prices by approximately 18% to 30% for major products including wall coverings, flooring materials, fabrics, exterior, supplementary materials, and adhesives, effective for orders received on or after July 1, 2026. This measure will allow us to appropriately pass on the increased costs to our prices, thereby ensuring the continuity of our business and a stable supply system. Going forward, we will continue to take prompt and appropriate measures in response to changing circumstances, such as further surges in raw material prices, to minimize the impact on our business operations.

Description of risk

Amid growing interest in the risks of environment and climate change, the Paris Agreement was adopted by the United Nations in 2015, and the Sustainable Development Goals (SDGs) were adopted at the UN Summit held in the same year, which marked progress in the setting of goals targeted at 2030. Furthermore, with the publication of international standards by the International Sustainability Standards Board (ISSB) and the incorporation of the disclosure standards established by the Sustainability Standards Board of Japan (SSBJ) into domestic law, significant progress has been made in standardizing the disclosure of non-financial information, and sustainability has become a prerequisite for investment in capital markets.
Amid these dramatic changes in regulations and market changes related to environment and climate change, the Group recognizes as significant risks not only the risk of not being able to reduce greenhouse gas (“GHG”) emissions from our business activities, but also the tightening of regulations on polyvinyl chloride (PVC), particularly in Europe and the United States, and shifts in customer needs driven by growing environmental awareness.
Specifically, there are concerns that the failure to reduce GHG emissions across the entire supply chain will result in increases in carbon tax burden and purchase costs. Additionally, if we fail to respond in a timely manner to regulations on chemicals such as PVC, or if we do not sufficiently enhance environmentally friendly products, our failure to meet market needs may lead to a decline in social trust and a loss of business opportunities, which could have a material impact on the Group’s operating results, financial condition, etc.

Measures against risk

In response to environment and climate change risks, we have established an Environment/Climate Change Risk Subcommittee under the Risk Management Committee that is chaired by the President & CEO, and are building an organizational management system. Under this Environment/Climate Change Risk Subcommittee, each risk related to climate change is analyzed along the lines of transition risks, such as legal regulations and market, and physical risks, such as acute and chronic risks. The Product Division, Logistics Division, Business Division, and Corporate Division are working closely together to set specific management indicators and monitor and respond to risks.
In addition, in the Sangetsu Group Long-term Vision [DESIGN 2030], the Group sets out the realization of a sustainable society that protects the global environment, and sets FY2029 GHG emission targets for our business activities (Scope 1 & 2) of carbon neutrality (net zero emissions) in the non-consolidated company and a 55% reduction for the entire Group (compared to FY2021). We are striving to reduce GHG emissions through energy conservation activities at production sites with high GHG emissions and the introduction of renewable energy. In terms of products, we are advancing the development of environmentally friendly products and establishing a sales system for them by strengthening cooperation with the Product Division, formulating development plans for environmentally friendly products, and exploring the implementation of an “environmental label” based on our own standards.
Going forward, we will strengthen engagement with suppliers to reduce GHG emissions across the entire supply chain and promote the expansion of sales of environmentally friendly products that meet customer needs in order to respond to environment and climate change risks.

Description of risk

The Group conducts business mainly in North America, China, Hong Kong, and Southeast Asian countries. If the following events or circumstances were to occur, they may significantly impact the Group’s operating results and financial position.

• The spread of an infectious disease, political instability, uncertainty about economic trends, differences in religion, culture or business practices, war or civil strife, terrorism, restrictions on investment, overseas remittances, imports and exports, etc.
• In accordance with accounting standards for impairment of non-current assets, the future cash flows, etc. of assets are calculated and impairment losses are recognized and measured periodically, resulting in the recording of impairment losses on non-current assets.
• The business of a Group company with a manufacturing division experiences extreme fluctuations in the purchase prices of raw materials and merchandise due to a sharp rise in crude oil or mineral prices, etc.
• A sharp increase in transportation costs from Japan and when overseas Group companies procure merchandise from overseas.
• Reputational risks arise due to prolonged product complaints and quality issues, etc.
• We are unable to secure management personnel of the Company and those in local areas to manage overseas Group companies.

Measures against risk

The Group strives to prevent and minimize overseas business risks by implementing the following measures.

• Proactively creating an environment within the Group that is prepared for emergencies, including by collecting information on issues that could become political or economic obstacles and formulation of a BCP for unforeseen circumstances.
• Established a system for managing businesses after investment.
• If the cost of raw materials etc. rises sharply, we will implement appropriate price revision while assessing the market and competitive situation. We closely monitor not only our suppliers, but also crude oil prices and price fluctuations among raw material manufacturers, and are constantly preparing to gather information in order to make appropriate decisions regarding purchase price negotiations and sales price revisions.
• We select the most efficient transportation method and charge appropriate shipping fees to our customers.
• We are working to establish a system that thoroughly manages quality control in each country and prevents complaints before they arise.
• We are developing young personnel who will take on overseas business in the medium to long term, as well as developing local management personnel who will be responsible for growing business, developing and maintaining organizational structures for transformation, and expanding profitability.

Description of risk

The Group plans, develops, and sells attractive wall coverings, flooring materials, fabrics, and other interior products that are essential elements in living spaces, based on an accurate understanding of customer needs, with the aim of “With all people we collaborate to create peaceful and inspirational spaces.” Except for some products, manufacturing is carried out by external manufacturers of our suppliers, and we receive product supplies from them. However, ensuring product quality is the very “value” that customers require for products, and it forms the foundation for improving reliability as a brand manufacturer, enhancing customer satisfaction, strengthening competitiveness, and increasing corporate value.
In addition, for interior products that will be used over a medium term period, it is also important to ensure quality over a long period of time, including changes over time. If serious quality issues or customer complaints arise due to insufficient testing during product development or deficiencies in the manufacturing process, or if products of a quality that differs from the original design are released to the market, this may impact the Group’s business performance and financial condition due to damage to the brand image and the incurrence of compensation costs.

Measures against risk

We have defined the product design review process as Design Review (DR-A/B/C) and have established and operated a system in which multiple persons in charge verify and check each stage of development. When developing new products, we utilize the “Quality Requirements Confirmation Sheet” that comprehensively lists items to be verified during the quality verification stage. At DR-A, we identify verification items; at DR-B, we confirm quality and functionality, as well as legal requirements; and at DR-C, we report the verification results. We strictly operate the rule that products will not be launched on the market until quality verification is complete. After a product is launched on the market, when quality complaints arise, we hold a countermeasure meeting to analyze and share examples of deficiencies, thereby implementing measures to prevent similar risks from occurring in other products.
We also regularly monitor the occurrence of quality complaints and conduct audits of suppliers’ factories as necessary. Furthermore, for outsourced manufacturing, we clarify quality standards, outsource the manufacture of products in accordance with quality control standards, and to maintain and improve quality, we manage changes in the four elements that occur at the manufacturing site: “Man” “Machine” “Material” “Method,” and have established a system to evaluate the impact of these changes on product quality through prior reporting and implement appropriate measures to prevent quality issues before they occur.

Description of risk

The Group conducts sales and marketing activities for the mainstay products we handle including wallcoverings and flooring material by distributing sample books which contain samples of merchandise. As our industry is strongly required to maintain a stable supply throughout the validity period of sample books, any interruption in the supply of products, including those caused by production problems, disruptions in raw material procurement or soaring prices due to geopolitical risks, or the bankruptcy or withdrawal of suppliers or processors, as well as other unforeseen factors, may impact the Group’s business performance and financial condition.

Measures against risk

In order to ensure the stable procurement of products from manufacturers, we inspect the manufacturers’ factories and check that their manufacturing processes are appropriate before purchasing, and in the event that procurement becomes difficult, we are developing an environment as a backup system, such as ensuring sufficient inventory of major merchandise and preparing alternative merchandise.
The Group company, CREANATE Inc., is the largest manufacturer of wallpaper in Japan. As we expand the wallcoverings business, we believe that further development will be possible not only through strengthening our competitiveness and securing volume, but also through improving business efficiency by establishing an integrated manufacturing and sales system, and recognize that maintaining stable factory operation and a stable supply of merchandise is an issue that the entire Group must address. With the launch of new plant in Hiroshima Prefecture in October 2025, by establishing a production system with two bases in eastern Japan and one base in western Japan, and introducing state-of-the-art machines with high production efficiency, we are working to build a more resilient supply chain and strengthen our stable supply system.
On the other hand, we recognize the bankruptcy or closure of suppliers and associated processors, changes in the business environment, and understanding the actual state of suppliers’ CSR practices as important ongoing issues. To address these issues, we are striving to strengthen our understanding of the actual situation through CSR surveys and on-site inspections, and to ensure thorough management. We are also focusing our efforts on building a more refined procurement management system, including the further expansion of alternative production systems.

Description of risk

The Group not only sells interior design materials and exterior materials, but also designs and proposes space designs that utilize these materials, and even operates the business of installation work. In the design and installation business, the business activities must be conducted in accordance with various laws and regulations, including the Construction Business Act, and there are risks to business continuity and reputation if we are judged to have committed a violation, and issues that the shortage of specialized human resources for space solutions construction and certified skilled workers for picture mounting is becoming apparent.

Measures against risk

In order to build and expand highly profitable businesses, we are strengthening the construction management system of the entire Group, centered on the “Space Solutions Group,” which is comprehensively responsible for everything from business planning to construction and project management in the field of space creation. Specifically, by obtaining a special construction business license, we will establish a system capable of accepting orders for large-scale construction and all types of construction work. Additionally, by utilizing a new system scheduled to be operational during FY2026, we will strive to ensure thorough profit management and management of legally required documentation for each project. In addition to recruiting and developing specialized human resources and securing certified skilled workers for picture mounting, etc., we have established an effective management system from both legal and operational perspectives, including taking out various liability insurance policies to minimize financial losses in the event of unforeseen circumstances.

Description of risk

The Group operates businesses that involve receiving goods from suppliers, stocking them, and shipping and delivering them. While maintaining a delivery network throughout Japan is one of our strengths in business continuity, we recognize that the “2030 logistics problem,” in which there are concerns that approximately 30 percent of shipments may become undeliverable due to a driver shortage caused by severe decline in birth rates and aging population, is a risk that could make it difficult to maintain the stability of the Company’s delivery system. Furthermore, in addition to the risk of supply disruptions caused by the suspension of operations at transportation companies following serious accidents, it has become essential to respond appropriately to changes in the logistics environment and strengthen operational safety management. This includes the risk of legal violations and penalties resulting from failure to comply with obligations as a specified consignor under the revised “Logistics Efficiency Act,” which enacted in April 2026, as well as the risk that, starting in January 2026, specific transportation consignment has become subject to regulations under the Act on Ensuring Proper Transactions Involving Specified Entrusted Business Operators.

Measures against risk

By internalizing logistics functions in a wide area within the Group, we aim to strengthen sustainable logistics functions, including reducing environmental impact, and to build and advance a delivery system that is more responsive to individual regions and a more effective and efficient logistics system that includes procurement logistics. Following the acquisition of Cloth Kikaku, Corporation in September 2022 (converted to a stock corporation in April 2023), we acquired SDS Corporation, a logistics company, as a group company in April 2025. As a countermeasure to the 2030 logistics problem, we are strengthening the securing of alternative options in the event of unforeseen circumstances, as well as the maintenance and operation of backup systems to prevent disruptions in the supply of products.
Furthermore, in response to the revised “Logistics Efficiency Act,” we are proceeding with the appointment of a chief logistics officer, a requirement for specified consignors, and the formulation of medium- to long-term plans. In practical terms, we are not only promoting labor-saving and systematization of cargo handling operations such as loading and unloading through the introduction of cargo handling equipment, but also enhancing compliance with decision criteria such as reducing waiting time for cargo and handling times and improving load ratios. We will strive to achieve both thorough compliance, including responses to the Act on Ensuring Proper Transactions Involving Specified Entrusted Business Operators, and efficient operations. Furthermore, even in high-risk environments such as nighttime deliveries, we thoroughly enforce safety management across both our company and our partner companies, and we are continuously working to strengthen operational safety management to prevent serious accidents.

Description of risk

We recognize that securing diverse and capable human resources who can execute the management strategy is essential for the Group to achieve sustainable growth and enhance corporate value over the medium to long term. However, due to the declining labor force population and the increasing fluidity of the labor market in Japan, competition for the acquisition of human resources beyond industry and type of business is intensifying. If we are unable to recruit and develop the human resources the Group needs as planned, or if existing excellent human resources leave the companies, there are risks that the execution of business plans will be delayed, which may impact the Group’s operating results and financial position.

Measures against risk

In order to realize and accelerate “Transformation, Challenge and the Driving of Innovation,” set forth in the “Medium-term Business Plan 2029,” the Group is implementing human resource measures linked to our management strategy, and are working to strengthen the human resource foundation.
We are working to strengthen both “human resources” and “organization,” and have positioned four initiatives as priority measures: Strengthen the human resource foundation to support sustainable growth, Strengthen human resources to lead business strategies, Deepen DE&I, and Improve well-being.
As for specific initiatives related to “human resources,” we are working to steadily develop and secure human resources by expanding education and training systems and enhancing the effectiveness of HR system. We are also developing management personnel and global human resources and recruiting highly specialized human resources as priority areas. Meanwhile, in terms of “organization,” we are working to turn diversity into the power of co-creation by promoting the women’s active participation, fostering a culture of co-parenting, and supporting the active participation of people with disabilities. We are also expanding diverse work styles, promoting autonomous career design, and promoting health management to create a work environment where diverse human resources can maximize their potential and continue to take on new challenges with peace of mind.
In addition, we are striving to maximize performance through promoting detailed human resource management and optimal staffing by the assignment of HR personnel to each organization, which has been ongoing since FY2023, and improving organizational issues utilizing engagement surveys. At the same time, we are working on risk management by confirming the progress of recruitment plans, the results of engagement surveys, trends in employee turnover rates, and the progress of various human capital KPIs, including the ratio of female managers in line positions.

Description of risk

The Group provides credit to business counterparties and if a counterparty’s financial condition deteriorates due to changes in social and economic conditions or unforeseen circumstances, making it difficult to collect receivables, the Group may incur losses due to bad debts, which may impact the Group’s business performance. We are taking the following measures against these risks, strengthening our credit management system to prevent losses due to uncollectible receivables, and striving to avoid losses due to bad debts.

Measures against risk

• Appropriate implementation of credit management regulations
• Annual update of credit limits based on the credit standing of counterparties
• Regular checking of the business conditions of important counterparties and their financial statements
• Review of business terms with a view to future developments with counterparties
• Timely monitoring of debt collection status
• Review of the turnover period of accounts receivable
• Setting of allowance for doubtful accounts in our accounting for counterparties with credit concerns
• Strengthening management of counterparties with credit concerns and providing sales support
• Implementing credit protection measures such as collateral, guarantees, and trade credit insurance according to the credit status of counterparties

Description of risk

The Group’s facilities related to merchandise development, manufacturing, procurement, logistics, sales, and services are spread throughout Japan and overseas (North America, China, Hong Kong, and Southeast Asian countries). In addition to infrastructure outages and damage to buildings and facilities caused by natural disasters such as earthquakes, floods, storms and heavy snow, any functional failure of information systems or damage to data could lead to operational shutdowns or delays in logistics and service provisions. This may impact the Group’s operating results and financial condition.

Measures against risk

In order to minimize the impact of natural disasters, etc. on our business activities, the Group has formulated a Business Continuity Plan (BCP) for times of disaster. The Plan prioritizes ensuring safety of all Group employees and conducting thorough and prompt safety confirmation in the event of an emergency, and clearly outlines initial response procedures in emergencies, reporting methods, and the establishment and roles of the response headquarters. In addition, we enhance the effectiveness of the Plan through regular drills and equipment inspections, and we review the Plan annually based on the latest disaster risk assessments. Furthermore, in addition to establishing a backup system for information systems, we have established a system that enables product procurement and delivery from alternative locations in the event that our suppliers or the Group’s business locations are affected by a disaster, in order to maintain the stable procurement and supply of merchandise.

Description of risk

The Group makes significant investments in order to appropriately manage the various confidential information, including personal information, collected through its business activities. In addition, we take maximum precautions to prevent system problems or external leaks of information when operating, introducing, or updating such systems. However, there is a risk of damage from external computer viruses or hacking, the breakdown of computers or network equipment, system failures due to software defects, business suspension due to partial damage to systems caused by a disaster, and incidents such as information leaks to outside parties, and the occurrence of such unexpected problems could damage the trust from society and result in significant expenses, which may impact the Group’s business performance and financial condition.

Measures against risk

The Company appointed an executive officer in charge of cybersecurity and established a Cybersecurity Management Office. The officer in charge of cybersecurity leads the Cybersecurity Committee, which includes the President & CEO and responsible persons from each department. The committee identifies information security issues every six months and discusses countermeasures.
In addition, we have established a CSIRT (Computer Security Incident Response Team) to manage incidents across the entire Group and are working to increase the number of employees with security certifications.
As specific measures against risk, we are implementing the following initiatives.

• We are promoting the migration of servers and network equipment to the cloud environment or data centers and the use of such where appropriate.
• As measures against unauthorized external access and malware, we have introduced the use of intrusion detection and monitoring services and security software. We are also continuously working to enhance the authentication strength.
• We have established a system for immediate response to unauthorized access by malware, etc. that could affect IT systems, and we also have developed a framework that enables us to respond swiftly in cooperation with the SOC (Security Operations Center).
• We regularly conduct employee education and training about information security (the importance of protecting confidential information, including personal information, and managing information). By combining new employee orientation with ongoing practical training programs, we strive to enhance the security capabilities of the entire organization.
• We have redundancy in place for important system equipment.
• We have taken out cybersecurity insurance.
• We have enacted personal information protection regulations in accordance with the revised Act on the Protection of Personal Information.

Description of risk

In the course of conducting its business activities, the Group is subject to a wide range of legal regulations covering areas such as product liability, intellectual property, the environment, and labor. Therefore, if there are unexpected amendments to laws and regulations, this may impose constraints on our business operations and impact the Group’s operating results.
Furthermore, regarding intellectual property, we strive to develop products with excellent design and functionality under the brand statement of “Joy of Design.” However, we cannot completely eliminate the risk that other companies may manufacture similar products. Furthermore, if a third party alleges infringement of intellectual property rights and files a lawsuit, the Group may incur losses such as litigation expenses and losses such as compensation for damages, which could impact its operating results and financial condition.

Measures against risk

The Group is taking the following various measures to reduce these risks.

• We also consider compliance to be a minimum requirement for business activities, and maintain a system that allows us to monitor domestic and international laws and regulations at all times and respond promptly to legal requirements. At the same time, we strive to ensure that compliance awareness is thoroughly instilled in the entire Group through the establishment of management systems and the strengthening of employee education.
• We are working to create, protect, and utilize intellectual property by actively filing applications for and obtaining rights to patents, designs, and trademarks related to our business. In addition, we constantly monitor the competitors’ intellectual property information, share the latest updates internally, and conduct thorough preliminary research and verification prior to the launch of new products.
• We have established a close cooperation system with external experts such as patent attorneys and lawyers and we have prepared to immediately take measures upon the occurrence of any risks.