MITSUBISHI PENCIL COMPANY,LIMITED

Overseas markets accounted for 57.2% of net sales in the fiscal year under review, and the majority of transactions are settled in foreign currencies, exposing the Company to persistent foreign exchange fluctuation risk. Imported materials such as resin and sheet materials are also settled in foreign currencies, which affects the cost side as well. Although hedging measures such as forward foreign exchange contracts have been implemented, complete risk avoidance is not guaranteed.

Resin, a key raw material, is strongly affected by crude oil prices, while metal and sheet materials are affected by the supply-demand balance, which is influenced by resource and environmental policies. In addition to the difficulty of stable procurement due to unforeseen economic and political circumstances, if the surge in crude oil prices and logistics costs becomes prolonged, it could directly affect gross profit and operating profit. At present, the surge in crude oil prices and logistics costs continues, and this risk is becoming increasingly manifest.

In the core writing instruments market, amid diversifying consumer needs and shortening product cycles, a rapid digital shift could significantly change the demand structure for writing instruments. Failure to provide attractive products and services that meet market needs in a timely manner would affect future business growth and profitability. Continuous provision of high value-added products and services is positioned as the key to growth.

The Group conducts sales operations in the United States, Asia, Europe, the Middle East, and Oceania, and manufacturing operations in Asia and Europe, exposing it to risks such as political and economic changes, major tax system revisions, outbreaks of terrorism or war, and social disruption caused by infectious diseases in each country. Although the Group strives to respond through advance investigation and early detection, it may be difficult to respond to unforeseeable and abrupt changes. If such events occur, they could affect the Group's operating results and financial position.

The Group has business sites domestically in Tokyo (head office) and Kanagawa, Gunma, Yamagata, and Tochigi (production and research sites), and overseas in China, Vietnam, Germany, and India (production sites). If a large-scale natural disaster such as an earthquake, flood, typhoon, or tsunami, or a pandemic occurs in these regions, it could lead to paralysis of head office functions or the suspension of production and research activities. Since the sites are dispersed both domestically and overseas, there is also a risk that multiple sites could be affected simultaneously.

The Group faces risks such as information leakage or system failures caused by power outages, disasters, software defects, or cyberattacks, and the loss, falsification, or misuse of important information could disrupt business activities. Although appropriate security measures have been implemented, complete defense against increasingly sophisticated and diversified cyberattacks is difficult. If a system failure occurs, it could affect the Group's operating results and financial position.

The Group holds fixed assets, including production facilities for writing instruments and goodwill, and if profitability deteriorates due to a sharp decline in sales or other factors, it may be necessary to write down the value to the recoverable amount and recognize an impairment loss. In addition, for securities other than shares without a market price, if stock prices decline significantly, impairment treatment will be performed. Such impairment treatment could affect the Group's operating results and financial position.

Based on the 'Accounting Standard for Measurement of Inventories,' the Group evaluates the profitability of inventories held for sale at the end of the period, and if profitability is determined to have declined, a valuation loss is recognized. If the profitability of inventories declines due to sudden changes in market conditions or shifts in consumer needs, the recognition of valuation losses could affect the Group's operating results and financial position. This risk increases as the pace of change in the demand structure of the writing instruments market accelerates.

The Group is subject to various laws and regulations relating to safety, the environment, chemical substances, and business activities both domestically and internationally, and future major changes in laws or regulatory tightening could restrict business activities or increase costs. If the Group's response to sustainability-related environmental and social laws, regulations, and societal demands is insufficient, there is also a risk of business stagnation or suspension, the incurrence of significant countermeasure costs, or a decline in social reputation. Although the Group strives to ensure legal compliance, responding to changes in the regulatory environment remains a management challenge.

The active participation of diverse talent is considered essential for sustainable growth, but amid significant changes in the labor market environment, the Group may find it difficult to recruit, develop, and retain appropriate personnel. Although the Group strives to create a work environment that maximizes the capabilities of each employee, if securing talent becomes difficult, it could affect business operations and growth. This is set against a backdrop of a declining working-age population due to the falling birthrate and aging population, and intensifying competition for talent in the global market.