ORVIS CORPORATION

As of the end of the current fiscal year, the ratio of interest-bearing debt reliance stood at a high 36.1%, with the Group's fund procurement heavily dependent on borrowings from financial institutions. While relationships with financial institutions are currently favorable, there is no assurance of continued future fund procurement, and changes in interest rates or the operating environment could affect business results and financial condition. Although the majority of borrowings are at fixed interest rates, interest rate risk remains for the portion subject to variable rates.

The purchase price of raw logs, which are the raw material for packaging materials, is affected by the political and economic situation in New Zealand and the global supply-demand balance centered on China. If the purchase price of raw logs and the price of C-fuel oil used for vessels rise, there may be a time lag in passing these costs on to selling prices, or, depending on market conditions, full pass-through may be difficult, which could adversely affect business results. The Group works to mitigate exchange rate fluctuation risk associated with USD-denominated settlements through forward exchange contracts, but complete hedging is not guaranteed.

Payments for raw log imports and C-fuel oil purchases, among others, are settled in US dollars, and a weaker yen increases costs. The Group works to mitigate fluctuation risk through forward exchange contracts, but significant fluctuations in exchange rates could affect business results. Since hedging through forward exchange contracts does not cover the full amount, residual risk exists.

Excluding domestic timber (cedar), all raw logs used as raw materials for packaging materials are imported from New Zealand. While the supply risk from that country is assessed as extremely low due to planned afforestation and political stability, if imports were to become difficult due to unforeseen circumstances, securing alternative procurement sources would be difficult, potentially having a significant impact on production plans and business results. The geographic concentration of procurement sources represents a structural vulnerability to supply disruption risk.

Demand for packaging materials fluctuates in line with trends in the Chinese economy, a major export destination, as well as production and shipment volumes of machine tools, industrial machinery, plant components, and mining/manufacturing products. If the Chinese economy slows or manufacturing production contracts, this could directly affect the Group's sales volume and business results. There is limited scope to adjust sales volume in response to demand fluctuations, creating a risk that deteriorating market conditions could squeeze profitability.

In the packaging materials market, non-wood packaging materials such as steel, paper, and plastic products, as well as wood-based packaging materials made from plywood, Chilean pine, and domestic timber (cedar, pine, etc.), exist as competing products. While the Group believes it has an advantage in supply stability and ease of processing with products made from New Zealand radiata pine and domestic cedar, strengthened price competitiveness or improved quality of competing products could result in loss of market share and affect business results.

Products in the Timber Business are produced solely at the Fukuyama Plant (Hiroshima Prefecture), and if the production line were to suffer significant damage due to a natural disaster such as an earthquake or tsunami, or the spread of an infectious disease, production and shipment of products could be temporarily or long-term suspended. Because production is concentrated at a single site with no alternative production means, the impact on business results could be substantial. The Group has formulated a business continuity plan (BCP) and is working to establish systems to reduce human casualties and enable early resumption of business.

In the event of a large-scale natural disaster such as an earthquake, tsunami, or wind/flood damage, construction work could be interrupted or significantly delayed, properties under construction could be damaged, employees could be affected, and owned assets could be impaired, potentially leading to decreased sales and deteriorating profitability. It is considered difficult to predict the likelihood or timing of such risks materializing, and while the Group is developing response systems through the formulation of a BCP, complete avoidance is not guaranteed.

The main customers of the House & Eco Business are government agencies and private companies, meaning business results are structurally affected by trends in public investment and private capital expenditure. If there are changes in government fiscal policy or private companies curtail capital expenditure, this could affect business results through a decline in order volume. The Group continues to work on acquiring new customers and expanding its customer base.

Chronic labor shortages are a concern in the construction industry, to which the House & Eco Business belongs, and there is a risk that changing values regarding work styles and the declining birthrate combined with an aging population could result in failure to meet necessary staffing plans or greater-than-expected personnel attrition. If labor shortages become severe, this could affect business results through reduced construction capacity or lost order opportunities. The Group strives to secure and develop human resources through active recruitment activities and enhanced training programs.