Morozoff Limited

Population decline due to the falling birthrate and aging population, closures of department stores in regional and suburban areas, and changes in gift-giving customs are expected to shrink the gift market for Valentine's Day, mid-year (Chugen), and year-end (Seibo) gifts. The Company is highly dependent on department stores and mass merchandisers as its main sales channels, and rapid changes in the market environment could affect business results and financial condition. As a countermeasure, the Company has positioned "baked confectionery" (yakigashi) at the center of its growth strategy, promoting the capture of everyday demand for "casual gifts" (temiyage) and "self-reward" purchases.

Agricultural raw materials such as cacao, dairy products, and nuts are subject to purchase price volatility due to fluctuations in harvest volumes caused by adverse weather and natural disasters, as well as supply-demand conditions. For imported raw materials, purchase prices of containers and packaging materials may also fluctuate due to exchange rate movements and crude oil price changes. The Company addresses these risks by securing stable supply sources, diversifying procurement sources, and negotiating prices in advance; however, sudden price surges or procurement failures could affect business results and financial condition.

If climate change caused by global warming results in poor harvests in production areas of main raw materials (cacao, dairy products, nuts), this is expected to lead to higher raw material procurement costs and lost sales opportunities due to insufficient supply volumes. Furthermore, if natural disasters associated with climate change exceed expected levels, this could disrupt production, logistics, and sales systems. The Company is working to reduce CO2 emissions through energy conservation and use of renewable energy, as well as to reduce food waste, while continuously assessing impacts and developing response systems.

Issues undermining food safety and security, such as mislabeling of food and false expiration date labeling, have occurred across the industry, and a large-scale product recall or product liability claim could have a material impact on business results and financial condition. The Company has established a company-wide quality assurance system incorporating HACCP and various quality-related manuals as a preventive system, and addresses risk through a traceability system, response manuals for when problems occur, and product liability insurance coverage. However, risk remains if problems beyond expectations occur in raw materials or manufacturing processes.

The Company is subject to a wide range of legal regulations, including the Food Sanitation Act, Food Labeling Act, Product Liability Act, Act against Unjustifiable Premiums and Misleading Representations, and environmental recycling-related laws. Failure to comply with these regulations could result in restrictions on business activities, increased costs, and brand damage. Revocation of licenses or business suspension orders would affect business results and financial condition. Each relevant department works in coordination with the legal department to ensure compliance with all legal regulations through the development of various internal rules.

The Company is actively making capital investments in factories and manufacturing machinery, as well as in new store openings and renovations, in support of its baked confectionery expansion strategy. If profitability declines due to changes in the business environment and the recovery of invested amounts becomes unlikely, impairment losses may need to be recognized. Although the Company carefully examines cash flows and investment profitability when making investment decisions, unexpected changes in the environment could affect business results and financial condition.

Large-scale investments in factories aimed at expanding production capacity to realize the baked confectionery expansion strategy are having a significant impact on investing cash flow. If unexpected changes in market conditions or a decline in demand cause investment returns to fall short of expectations, or if further increases in construction costs prolong the investment payback period, this could affect business results and cash flow.

There is a risk that targeted attack emails or unauthorized access to information systems using technology beyond expectations, as well as computer virus infections, could cause information system failures or the external leakage of internal information. Should such an event occur, it could disrupt business activities such as production and sales, and affect business results and financial condition. The Company has implemented thorough measures against virus infection and hacking, but risk remains as technology continues to advance.

Labor shortages have become apparent against the backdrop of population decline caused by the falling birthrate and aging population, and continued shortages of mid-level managerial staff and difficulty in hiring at production and sales sites could disrupt business activities. Recognizing that "people" are the foundation of sustainable growth, the Company is advancing human resources system reforms and promoting human capital management aimed at maximizing overall organizational performance; however, addressing the structural labor shortage remains an ongoing challenge.

In its overseas business operations, unforeseen events such as changes in local political and economic factors, unexpected amendments or abolishment of laws and regulations, natural disasters such as earthquakes, or sharp exchange rate fluctuations could affect business results and financial condition. The Company strives to gather information early in each country, appropriately and promptly review its strategies as needed, and build a system capable of providing appropriate guidance locally.