KOATSU GAS KOGYO CO., LTD.

Major industries such as steel, automobiles, chemicals, and semiconductors, which account for the majority of domestic demand sources, are proceeding with business consolidation and overseas expansion in anticipation of limits to domestic market growth potential, creating a risk that market competition will intensify due to significant slowdown in domestic demand. If the Group is unable to maintain competitive advantages over competitors in terms of products, services, and pricing, this may affect operating results and financial condition. The Group seeks to differentiate itself through active business investment, strengthening of sales, logistics, and technological capabilities, thorough quality control, and the creation of high-value-added businesses.

The purchase price of naphtha, a raw material for petroleum-based gases and chemical products, is linked to fluctuations in crude oil prices and may fluctuate significantly due to geopolitical risks and changes in output from producing countries. In addition, procurement costs for some imported industrial gases have risen due to tight international supply-demand conditions, and rising raw material costs may have a material impact on operating results and financial condition. Details of the Group's countermeasures against price fluctuation risk have not been disclosed.

The Group is exposed to exchange rate fluctuation risk due to foreign currency-denominated transactions in trade and the expansion of overseas business. Although forward exchange contracts are used for settlement, complete risk avoidance is difficult, and for overseas businesses, fluctuations in shareholders' equity through the foreign currency translation adjustment account and changes in the yen-equivalent amount of period profit or loss may occur. These fluctuations may affect operating results and financial condition.

The Group depends on multiple suppliers outside the Group for the procurement of raw materials, and there is a risk that tightness or shortages in the raw materials market may arise due to geopolitical factors and stricter environmental regulations in producing countries for imported raw materials, or due to consolidation, business withdrawal, unforeseen accidents, or disasters among suppliers for domestic raw materials. This could result in production delays or increased costs, which may affect operating results and financial condition. The Group seeks to maintain a stable supply relationship through the conclusion of basic transaction agreements, but it is difficult to completely eliminate this risk.

Although product supply is mainly conducted through the Group's internal logistics organization, logistics costs may rise sharply due to soaring fuel costs from rising crude oil prices and increased labor costs resulting from driver shortages caused by changes in the labor market. Although the Group continues to promote improvements in delivery efficiency, a sharp rise in costs may affect operating results and financial condition.

The Group manufactures and distributes flammable gases such as dissolved acetylene and LP gas, as well as oxidizing gases such as oxygen gas, and therefore carries a potential risk of fire or explosion accidents due to leakage. Although measures such as thorough safety operation training, maintenance and management of safety equipment in the manufacturing process, and thorough safe driving practices in the distribution process have been implemented, if an accident occurs due to unforeseen causes such as external factors, it may have a material impact on operating results and financial condition.

If natural disasters such as earthquakes, heavy rain, or heavy snow, or a pandemic of infectious diseases such as novel viruses occur domestically or overseas, the Group may suffer material damage due to prolonged suspension of business activities. Although the Group has formulated a BCP and dispersed manufacturing sites nationwide to respond to such events, it is extremely difficult to completely avoid damage, and a significant decline in production capacity or utilization rate may affect operating results and financial condition.

The Group holds important business information, personal information, and confidential information of business partners, and there is a risk of unauthorized diversion to third parties due to theft, loss, or other causes. Although measures based on the Basic Policy on Information Security have been implemented, if cyberattacks or incidents beyond expectations occur, or if intentional unauthorized use results in the destruction, falsification, leakage, or system suspension of important data, this may affect operating results and financial condition.

Due to the intensification of recruitment competition resulting from the declining birthrate and aging population, if there is a significant decline in new hiring and employee retention, maintaining the organizational structure may become difficult, creating a risk of disruption to business continuity. The Group positions securing capable human resources as one of its most important issues, and seeks to improve employee retention and morale through personnel system reforms that emphasize ability, but structural changes in the labor market may make this response difficult.

The Group has adopted a contract-based defined benefit pension plan, and calculates retirement benefit expenses and obligations based on actuarial assumptions such as the discount rate and mortality rate. If the investment environment deteriorates due to drastic changes in the economic environment or if the assumptions change, this may affect operating results and financial condition through increased retirement benefit expenses and expanded obligations. The Group periodically reviews asset management based on future projections of retirement benefit obligations.