Business risks

In the domestic market that is the foundation of our business, we do not expect to see significant growth in new construction and renovation in the residential and non-residential sectors in the future due to the declining birthrate and aging population, and we are focusing on our medium-term strategy of expanding our market share and improving income through price increases under the background of reorganizing and improving our various domestic business foundations, while our long-term strategy is to expand our domestic Exterior Business and to profitably expand our Overseas Business. In terms of procurement, we are working to avoid risks by investing management resources into our manufacturing divisions to ensure stable supply from manufacturers and to facilitate product development from a medium- to long-term perspective. In addition, taking into account the long-term development potential of our current businesses, we established a Business Creation Promotion Division in April 2024 to explore and implement business development possibilities for further growth.

We are constantly monitoring the price trends of major raw materials and have transitioned our material procurement to purchasing from multiple locations and adjusting production volumes, but the prices of major raw materials such as PVC, plasticizers, nylon, and polyester have skyrocketed since 2021, and the purchase prices of wallcoverings, flooring material, curtain fabrics, upholstery, adhesives, and sewing costs have increased significantly. Therefore, while closely monitoring the movements of our competitors, in order to maintain a stable supply of products and logistics service levels, as well as the healthy development of the interior industry, we have raised the prices of wallcoverings, flooring material, and fabrics by 13%–18% in September 2021 and 18%–24% in April 2022, and wallcoverings, flooring material and upholstery by 7%–12% in October 2022.
In the future, we will continue to closely monitor not only our suppliers, but also factors resulting from social conditions such as crude oil prices, price fluctuations among raw material manufacturers, and personnel expenses and logistics costs, and will be constantly preparing to gather information in order to make appropriate decisions regarding purchase price negotiations and sales price increases.

In order to ensure the stable procurement of merchandise 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 have established an environment as a backup system that is prepared for emergencies, such as ensuring sufficient inventory of major merchandise and preparing alternative merchandise.
In addition, to ensure a sustainable supply of merchandise from the Company to our customers, we are strengthening system integration at all stages, from receiving products to receiving orders and shipping, as well as regularly reviewing action plans to address risks that may hinder the stable operation of logistics centers, which serve as inventory hubs in each region, and are working to confirm the effectiveness of and improve countermeasures.

We are constantly working to improve our operations by recruiting experienced personnel with specialized knowledge, reviewing and considering the systematization of workflows, and conducting thorough internal supervision from a legal perspective. In April 2024, we established a Construction Unit as a department in charge of design and construction business, and have established a system not only to expand the business but also to thoroughly manage risks related to the construction function of the entire Group.

In order to further strengthen the services of our logistics function and address the concern about anticipated shortages in delivery capacity, we are working to employ drivers in-house and strengthen our alliances with logistics companies, and in September 2022, we acquired Kurosukikaku Corporation, a logistics company with its business area in Kyushu, as a subsidiary. Additionally, in order to shift from a system that relies on manual labor for loading and unloading to a more efficient system, we are considering measures to systematize and save labor, and will implement these measures gradually from fiscal 2024.

We are taking various measures to reduce risks, such as the following.

• We are working to create, protect, and utilize intellectual property by filing applications for and obtaining rights to patents, designs, and trademarks related to our business.
• We constantly monitor the intellectual property information of competitors and share the latest information (patents, designs, trademarks, etc.) within the company.
• We work closely with external experts such as patent attorneys and lawyers and have created a system for immediately taking measures against risks.

We constantly monitor domestic and foreign laws and regulations to ensure that we comply with them. We also consider compliance to be a minimum requirement for a company, and have established a management system and are working to strengthen employee education.

In order to minimize the impact of natural disasters on our business activities, the Group has formulated a Business Continuity Plan (BCP) for times of disaster. In it we have specified the initial response to an emergency, reporting methods, and the establishment and role of a response headquarters, and we have established a system to ensure appropriate action in the event of a disaster and also conduct regular training and equipment inspections. We also review the BCP every year in response to the status of disasters. In addition, to ensure the stable procurement and supply of merchandise, we have established a system that enables product procurement and delivery from alternative locations in the event that a party in the supply chain such as a supplier or one of the Group’s business locations is affected by a disaster.

In response to climate change risks, we have established a Climate Change Risk Subcommittee under the Company-wide Risk Management Committee that is chaired by the President & CEO, and are building an organizational management system. Under this Climate Change Risk Subcommittee, each risk related to climate change is analyzed along the lines of transition risks, such as legal regulations, technology, market and reputation, and physical risks, such as acute and chronic risks. The Space Planning 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], we set out the realization of a sustainable society that protects the global environment, and are striving to reduce GHG emissions that are a cause of climate change risks by setting fiscal 2029 GHG emission targets for our business activities (Scope 1 & 2) of carbon neutrality (net zero emissions) in the nonconsolidated company and a 55% reduction for the entire Group (compared to fiscal 2021).

• We are promoting the migration of servers and network equipment to the cloud 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.
• Any malware that may affect IT systems is immediately detected and isolated by our EDR (Endpoint Detection and Response) system, and we work with the SOC (Security Operation Center) to deal with the issue swiftly.
• We regularly educate employees about information security (the importance of protecting confidential information, including personal information, and managing information) and provide training.
• We have redundancy in place for important system equipment.
• We have taken out cybersecurity insurance.
• We have enacted new personal information protection regulations in line with the enforcement of the revised Act on the Protection of Personal Information.
• We have established a Cyber Security Management Office and are working to build a cybersecurity system for the entire Group.

• 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

• The Group has been 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.
• The Group has established a system for managing businesses after investment.
• If the cost of raw materials etc. rises sharply, we will implement appropriate price increases 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 increases.
• We select the most efficient transportation method and charge appropriate shipping fees to our customers.