GUNZE LIMITED

The Company has set forth business expansion through new business creation and M&A as part of its growth strategy; however, if the expected synergy effects cannot be created or if it becomes difficult to maintain demand for acquired businesses, this may affect operating results and financial condition. There is also a risk of temporary losses arising from structural reforms of unprofitable businesses and reorganization of business sites. As a countermeasure, a careful investment decision-making process has been established, but this also involves the risk of failing to recover research and development costs when a decision is made that commercialization is difficult.

The Group holds important information, including personal information such as customer information from the Apparel Business's e-commerce sites and membership information from sports clubs and commercial facilities, in electronic data form, creating a risk of information leakage or unauthorized use due to external cyberattacks, virus infections, and similar incidents. Measures such as establishing IT security policies, restricting access, employee training, and confidentiality agreements with outsourcing partners have been implemented, but unforeseen events cannot be completely eliminated. In the event of an information leak, in addition to a decline in social credibility, liability for damages may arise, which could have a significant impact on operating results and financial condition.

Amid intensifying competition for human resources due to the declining domestic working population, employees aged 50 and above account for approximately 50% of the Group's workforce, making continuous human resource acquisition and technology transfer a challenge for business continuity and growth. The Group strives to recruit and develop diverse, highly qualified personnel across development, production, and sales activities, but if it is unable to sufficiently secure and develop human resources, this could have a significant impact on growth potential and future operating results. The Group is working on revitalizing its human resources in parallel with promoting efficiency through technological innovation.

The Group holds ¥68.8 billion in tangible fixed assets and ¥1.3 billion in intangible fixed assets. If a significant deterioration in the business environment causes a decline in profitability or a drop in market prices, impairment of fixed assets recorded from capital investment or goodwill recorded from M&A may become necessary, potentially affecting operating results. For investment decisions, WACC (weighted average cost of capital) is set for each business segment to restrain investment in low-profitability businesses; however, there is a risk that the Group may not be able to fully respond to environmental deterioration at a level not anticipated at the time of the investment decision.

Since much of the Group's raw material and merchandise purchasing from overseas is settled in U.S. dollars, fluctuations in the U.S. dollar exchange rate have a particularly large impact, affecting revenues and expenses from foreign currency-denominated transactions, the yen-converted amounts of receivables and payables, and the yen-converted amounts of financial statements of overseas consolidated subsidiaries. Although hedging is implemented through forward exchange contracts and other means, it is not possible to eliminate all such risk, and exchange rate fluctuations may affect operating results and financial condition.

The Group procures a wide variety of raw materials at market prices, including raw yarn (cotton yarn and synthetic fiber yarn) for the Apparel Business, plastic resin for the Functional Solutions Business, and biodegradable polymer materials for the Medical Business. When raw material prices surge, there is a risk of profitability deterioration due to rising costs. If it becomes difficult to pass these cost increases on to product prices, profitability may decline, potentially having a significant impact on operating results and financial condition.

The Group operates overseas production and sales sites mainly in China and Southeast Asia. If there are significant changes in laws and regulations in the countries where the Group operates, sudden changes in political and economic conditions including the economic security environment, or unpredictable events such as terrorism, war, or disease outbreaks, business continuity may become difficult, potentially having a significant impact on operating results and financial condition. The Group is strengthening governance through close communication with overseas business offices and the establishment of an internal control system, but there are limits to the ability to respond to unforeseen circumstances.

The Group has expressed its support for the TCFD recommendations and is advancing measures to address climate change risk. However, rising operating costs due to the introduction of emissions trading and carbon taxes accompanying the transition to a low-carbon society, as well as increases in raw material prices due to the introduction of bio-based and recycled materials driven by stricter regulations, could have a significant impact on operating results and financial condition. Additionally, as regulations restricting plastic use continue to accelerate, if plastic substitutes become widespread faster than the Group's measures can address, there is a risk of decreased sales and increased inventory.

The Group has production and distribution sites located both domestically and overseas. If production activities are disrupted by large-scale natural disasters such as earthquakes, typhoons, or floods, or by the spread of infectious diseases, there is a possibility of disruption to the supply chain. If economic activity constraints such as requests to refrain from going out or business closure requests occur due to the spread of infectious diseases, there is a risk that multiple businesses could be affected simultaneously, including sluggish store sales in the Apparel Business, decreased tenant sales and rental income due to closures of commercial facilities in the Life Create Business, and decreased revenue due to sports club closures.

The Medical Business is required to strictly comply with laws and regulations such as the Pharmaceuticals and Medical Devices Act and the Clinical Trials Act, and in the event of a legal violation, the Group may be subject to penalties, sanctions, or litigation under such laws. The Group conducts sales activities in accordance with the transparency guidelines of the Japan Federation of Medical Devices Associations and the Fair Competition Code for the Medical Device Industry, and monitors compliance with laws and internal regulations. However, in the event of a violation, loss of social trust and financial damages could affect operating results and financial condition.