SGH

Risk Management

Business Risks

Of the matters related to the condition of the Group's business and the condition of accounting, the principal risks recognized by management as having the potential to significantly impact the financial position, operating results and cash flows of consolidated companies are as follows.

The Group positions strategic risks as risks that are closely related to its business and have a risk aspect among material issues (materiality) in management that must be addressed over the medium to long term such as strengthening of domestic and overseas transportation network including alliances. We consider and discuss measures for controlling various risks centered on strategic risks through the Group Risk Management Meetings that are the Group's risk management organs, and reflect these in management planning.

The Group recognizes the potential for these risks to occur and has a policy to endeavor to avoid their occurrence and respond in the event of their occurrence, but it believes it is necessary for investment decisions related to the Company's shares to be made after carefully considering the matters described in this section and in other sections.

Furthermore, the following items describe the details determined by the Group as of the filing date of the Annual Securities Report, and do not exhaustively cover all risks related to investment in the Company's shares.

1 Strategic Risks

(1) Climate change adaptation and mitigation

In recent years, serious wind and flood damage as well as forest fires have been occurring frequently throughout Japan due to the effects of climate change, etc, creating a situation in which disaster countermeasures need to be strengthened.

Global warming is progressing rapidly, and according to the World Meteorological Organization, the global average temperature is expected to rise further over the five-year period from 2024 to 2028, making it critical to consider and implement climate change adaption and mitigation measures.

Furthermore, the Japanese government has declared its goal of achieving a carbon neutral, decarbonized society by 2050, and as the transition to a decarbonized society progresses rapidly, efforts to reduce emissions of greenhouse gases in companies are becoming increasingly important. In particular, the transportation sector accounts for approximately 20% of Japan's CO2 emissions, and as a corporate group handling social infrastructure in the form of logistics, it is our responsibility to work toward a decarbonized society, and we need to strengthen our measures even further than before.

For climate change adaptation measures and mitigation measures, please refer to "2. Approach and Initiatives Concerning Sustainability (3) Response to Climate Change ②Strategy" in our securities report for FY 2025/3 (Only in Japanese).

※Annual Securities Report for FY2025/3

(2) Strengthening domestic and overseas transportation network including alliances

In the Delivery Business, the Group maximizes the use of its management resources to obtain logistics outsourcing contracts from companies (from B). For this reason, we outsource about 70% of our transportation services to private homes (to C) and most of our line-haul transportation (long-distance transportation between distribution centers such as between Tokyo and Osaka) to outside contractors. Also, in the Logistics Business and other businesses, some operations are outsourced to outside contractors as in the Delivery Business.

Under such circumstances, we are promoting the "SAGAWA Partner Program" to strengthen communication with our business partners. This initiative includes the development of the SG Partner Mall through a portal site and the establishment of consultation services and notification functions, and the distribution of information through various manual and videos via a portal site.

In addition, we are discussing appropriate outsourcing unit price revisions with business partners through the "meetings to promote appropriate transactions" established in FY2023.

Although the Group endeavors to secure multiple business partners according to the expected volume of transportation and operations, in the event that we are unable to secure sufficient business partners, there is a possibility that labor costs will increase more than expected due to longer working hours of the Group's employees, or that deliveries will be delayed. In addition, the Group's expenses may increase due to rising outsourcing costs caused by labor shortages stemming from the declining birthrate and aging population, responses to the so-called "2024 problem" (overtime work regulations), inflation, and wage increases.

Furthermore, the occurrence of misconduct by the Group's business partners or the inability of business partners to meet the quality of work required by customers could result in a loss of public confidence in the Group. The Group's business, financial position and operating results may be affected if these risks materialize.

(3) Investment in human capital and improvement of employee engagement

In Japan, which has a declining birthrate and aging population, and is in the process of a long-term population decline, competition to recruit and retain human resources is expected to continue to intensify. In order to achieve sustainable growth, we have positioned the creation of a comfortable work environment, improvement of employee engagement, and human resource development as important issues to be addressed.

With respect to the development of a comfortable working environment, we are operating measures to promote the advancement of women, such as the "Women's Career Support Training," with the aim of achieving active participation by diverse human resources. In addition, we have introduced a “Challenge System” that allows talented and capable employees to challenge for early promotion to two grades higher, regardless of age or years of experience, and are working to promote human resources in a flexible manner.

Employee engagement is monitored annually through a web-based survey of the Group's employees in Japan. Based on the results of analysis by organization, we formulate and implement improvement measures for each company.

With regard to human resource development, we recognize the urgent need to develop management personnel and personnel capable of proposing solutions, and we continue to implement human resource development programs such as the "Seminar for New GM Qualification Holders" for management candidates and the "Bright Future Vision Committee" for the next generation of personnel.

If these initiatives are not effective, it could lead to a shortage of human capital, which is the foundation of our Long-term Vision and Mid-Term Management Plan, and the Group's business, financial position and operating results may be affected due to missed targets, decreased operating revenues, and increased expenses.

(4) Creation of governance structure that meets global standards, ongoing advancement of compliance

Since the Group is expanding business to overseas countries, we are implementing measures to establish a governance structure that meets global standards and ongoing advancement of compliance.

As for the creation of governance structure that meets global standards, we have expanded the language of our whistleblower application form and established a system to prevent the occurrence of fraud and misconduct. As our response to the ongoing advancement of compliance, we have established an anti-bribery policy and are complying with personal information protection laws in accordance with the laws and regulations of the countries in which we operate.

In the event that laws and regulations are strengthened or new laws and regulations are applied in the future, the Group's business, financial position, and operating results may be affected due to additional costs required to comply with such laws and regulations or being forced to make changes in the Group's business operation methods.

2 Risks Related to Other Businesses

(1) Dependence on the Delivery Business

The Delivery Business is the principal business accounting for approximately 70 percent of the Group's consolidated operating revenues.

Through the promotion of "GOAL" to customers in this business, and in turn the proposal and provision of total logistics services, the Group will aim to boost profitability not only in the Delivery Business, but also in the Logistics Business and others. In addition to providing services with high added value through the promotion of "GOAL" to customers in this business, the Group has endeavored to stabilize profitability since the past fiscal year by conducting individual price negotiations with each customer in order to appropriately reflect rising costs in freight tariffs, including personnel expenses, outsourcing expenses and miscellaneous expenses required for ensuring safety.

The Group's policy is to continually implement these initiatives in the future, but in the event these initiatives do not progress as anticipated due to a decrease in personal consumption or corporate logistics as a result of factors such as an economic recession, this may have an impact on the operating results of the Group.

(2) Rises in fuel prices, etc.

The Group uses transportation equipment including many trucks to conduct business, and the fuel expenses thereof vary according to movements in the price of crude oil and exchange rates.

The Group endeavors to contain the risk of expenses increasing due to fluctuations in the price of crude oil by introducing environmentally friendly vehicles such as trucks powered by natural gas, and has a policy to actively introduce vehicles that save energy or support alternative energy through the introduction of new technologies in the event such vehicles are developed in the future. However, the Group's operating results may be affected if there is a sudden rise in fuel prices, etc., the increase in expenses cannot be passed onto sale prices such as freight tariffs, or demand for the Group's services decreases due to passing on the increase to sale prices.

(3) Intensification of the competitive environment

Competition among the three major companies including our Group is intensifying in the express package delivery services market that is a principal service in the Delivery Business. Furthermore, the Group recognizes that competition with rival companies is also increasing in 3PL in the Logistics Business and forwarding services in the Global Logistics Business.

The Group is committed to enhancing service competitiveness by providing comprehensive logistics solutions based on "GOAL," which integrates multiple services. Through these efforts, we aim to deliver more efficient and value-added logistics proposals to our customers and increase our market share in today's competitive environment. However, in the event the Group's relative advantage declines or there is a decrease in prices due to further intensification of competition in the future, this may have an impact on the Group's business, financial position and operating results.

(4) Transportation trouble

The Delivery Business is centered on transportation of goods owned by customers including corporations and individuals according to the customer's instructions. For this reason, trust in the Group's services may be harmed if it is not possible to deliver on time, damage to the transported goods, or an error in the delivery destination or fluctuations in the volume of transportation in the process of providing services by the Group.

In order to contain the occurrence of such trouble, the Group has created a database of causes, etc. and continually implements improvement measures such as reduction of mistakes and training of Sales Drivers, but the frequent occurrence of trouble caused by these or an increase in compensation for damages due to such trouble may have an impact on the Group's business, financial position and operating results.

(5) Continuous liquidation of assets in the Real Estate Business

In the Real Estate Business, SG Realty Co., Ltd. plays a central role in the utilization of assets such as management and operation of assets at the Group's business sites, development of large facilities and conversion of existing facilities for different uses. Furthermore, assets are effectively utilized and the financial position is improved by converting the distribution facilities owned and used by the Group and multi-tenant distribution facilities into trust beneficiary interests and selling them, and operating revenues and operating income are recorded as a result.

The Group's policy is to continue to acquire properties expected to be continuously profitable, develop facilities and sell these, but it is possible that the purchase and sale of real estate and trust beneficiary interests in a timely manner at an appropriate price will be difficult due to fluctuations in the purchased price, book price and sale price of a property caused by fluctuations in the real estate market, increases in construction material and personnel expenses, and delays in property development, and such cases may have an impact on the Group's business, financial position and operating results caused by the complexity of accounting.

(6) Serious accidents

The Group is engaged in the land transportation business using public roads centered on the Delivery Business. Recently, there has been growing social pressure on transportation business operators to ensure safe driving as regulations related to safety measures have been continuously strengthened.

The Group is implementing measures with the highest priority on safety, but the occurrence of a serious accident may result in administrative disposition such as suspension of the use of vehicles, forcing the Group to suspend all or part of its business, and lowering social confidence in the Group. Furthermore, if the number of violation points in accidents reported to the Ministry of Land, Infrastructure, Transport and Tourism accumulates, this may lead to difficulty continuing the Group's business due to being subject to suspension of operations or revocation of the Group's business license. Such an event may have an impact on the Group's business, financial position and operating results.

(7) Overseas operations

The Group conducts business in foreign countries centered on Asia. Furthermore, as stated in securities report for FY 2025/3 "1. Management Policy, Management Environment and Issues to Address," the Group intends to further strengthen its global network and international business.

For this reason, the Group's business, financial position and operating results may be affected in the event of a sudden fluctuation in exchange rates or air and ocean transportation freight tariffs due to intensifying trade frictions and conflicts between countries, or the occurrence of risks in regions where the Group's business sites are located, such as deterioration of economic conditions or the business environment, unforeseen changes in laws and regulations, deterioration of political conditions or intensification of terrorist activities, differences in commercial practices or the occurrence of natural disasters or infectious diseases.

(8) M&A, business alliances

The Group considers M&A and business alliances as one of the options for the expansion of business and the enhancement of corporate value. In particular, when implementing these management strategies, the Group conducts ample due diligence on the target companies, and executes the strategies after fully considering the appropriateness of the investment/acquisition amount in the Investment Committee also attended by Outside Directors and Audit & Supervisory Board Members. However, the Group's business, financial position and operating results may be affected due to the occurrence of business problems or the burden of expenses related to the transaction not initially foreseen such as impairment of goodwill or the value of the acquisition of shares due to expected results not being produced as planned at the time of implementation of the M&A or capital alliance.

Furthermore, in particular, in the event it is determined that the results initially planned such as when the alliance was implemented cannot be obtained in a capital and business alliance or a joint venture established through joint investment, the investment may be cancelled or the alliance partner company may be dissolved due to cancellation of the contract. This may have an impact on the Group's business, financial position and operating results.

(9) Business relationships with officers

Eiichi Kuriwada, the Company's Chairperson, and CEO, serves as the Chairman of the SGH Culture and Sports Promotion Foundation and the SGH Foundation, which are auxiliary organizations of the Group. The Group supports the activities of both foundations as part of its sustainability activities, and its policy is to continue to implement activities such as lending artwork at no charge and providing personnel support.

In the current fiscal year, the Group established the SGH Disaster Prevention Support Foundation, a general incorporated foundation, with Eiichi Kuriwada serving as its Chairperson. This foundation aims to address the social challenge of disaster prevention in Japan, a country frequently affected by natural disasters. Its activities include developing and operating logistics infrastructure for disaster relief supplies, providing reconstruction assistance to affected areas, supporting the livelihoods of disaster victims in collaboration with both the public and private sectors, and establishing a system for immediate emergency response. Through these initiatives, the foundation seeks to contribute to the realization of a disaster-resilient and sustainable society.

The SGH Culture and Sports Promotion Foundation and the SGH Foundation hold a total of 58,636,362 shares of the Company's common shares (9.16% of the total number of issued shares) as of the end of the current consolidated fiscal year. The articles of incorporation of both foundations stipulate that the exercise of voting rights related to the Company's shares requires the approval of at least two-thirds of the members of their respective Boards of Directors. To ensure the independence of such voting decisions, directors who concurrently serve as officers or employees of the Group do not participate in board resolutions concerning the exercise of voting rights. In addition, the SGH Disaster Prevention Support Foundation is explicitly prohibited by its internal regulations from exercising voting rights. Furthermore, when appointing directors of any of these foundations, council members who concurrently serve as officers or employees of the Group abstain from voting on the appointment of directors who also hold concurrent positions within the Group.

(10) Future Capital Investment

The Group is continuously developing distribution facilities, and began full-scale operations in the year ended March 2021 at X FRONTIER, a large-scale logistics center which was constructed in Koto-ku, Tokyo to achieve efficient operation of line-haul transportation and increase handling capacity. In addition, we intend to continually strengthen our infrastructure in the future such as planning operation of large-scale transfer centers in Kanto and Kansai region in FY2027/3 and in Kyushu region in FY2029/3. However, in the event costs exceed the anticipated level concerning facility construction, or in the event the anticipated effects cannot be obtained after completion, the increase of expenses and occurrence of impairment loss may have an impact on the Group's business, financial position and operating results.

3 Risks Related to Regulations and Compliance

Compliance with a variety of laws and regulations including the following laws and regulations is necessary in the operation of the Group's business. In the event laws and regulations are strengthened or new laws and regulations apply in the future, the necessity for additional expenses to respond to such laws and regulation, or being forced to change the method of operation of the Group's business may have an impact on the Group's business, financial position and operating results.

(1) Permissions material to business

Primarily, permissions such as the following are necessary in the operation of the Group's business. The Group endeavors to ensure compliance with the relevant laws and regulations, etc. pertaining to regulation of these permissions, and no situations impeding the business operations have arisen. However, in the event these permissions are suspended or revoked due to the occurrence of a violation of laws and regulations, or laws and regulations are tightened in the future, this may result in difficulty continuing the Group's business, or have a severe impact on its financial position and operating results.

[Principal Business Permissions]

Business Subject to Permission Law Supervising Agency Details of Permission Expiration Date Grounds for Revocation of Permission Segment
General Motor Truck Transportation Business Motor Truck Transportation Business Act Ministry of Land, Infrastructure, Transport and Tourism Permission None Article 33 of the Act Delivery Business
Logistics Business
First Class Consigned Freight Forwarding Business Consigned Freight Forwarding Business Act Ministry of Land, Infrastructure, Transport and Tourism Registration None Article 16 of the Act Delivery Business
Logistics Business
Second Class Consigned Freight Forwarding Consigned Freight Forwarding Business Act Ministry of Land, Infrastructure, Transport and Tourism Permission None Article 33 of the Act Delivery Business
Logistics Business
Warehousing Business Warehousing Business Act Ministry of Land, Infrastructure, Transport and Tourism Registration None Article 21 of the Act Delivery Business
Logistics Business
Customs Brokerage Customs Brokerage Act Ministry of Finance Permission None Article 11 of the Act Logistics Business
Real Estate Brokerage Real Estate Brokerage Act Ministry of Land, Infrastructure, Transport and Tourism License August 23, 2026 Article 66 of the Act Real Estate Business
Type II Financial Instruments Business Financial Instruments and Exchange Act Financial Services Agency Registration None Article 52 of the Act Real Estate Business
Designated Automobile Maintenance Business Road Transport Vehicle Act Ministry of Land, Infrastructure, Transport and Tourism Designation None Article 93 of the Act Other
Automobile Disassembly and Maintenance Business Road Transport Vehicle Act Ministry of Land, Infrastructure, Transport and Tourism Certification None Article 93 of the Act Other
Worker Dispatching Undertaking Worker Dispatching Act Ministry of Health, Labour and Welfare Permission June 30, 2029 Article 14 of the Act Other

(2) Labor-related laws and regulations

As of March 31, 2025, the Group had 58,217 employees and 46,324 partner employees (average number for the period), and has the obligation to comply with the Article 36 Agreement and secure break times pursuant to the Labor Standards Act for the domestic employees that account for the majority of these. The Group not only complies with these laws and regulations, but also sets forth the promotion of diverse work styles in its Mid-term Management Plan, and actively designs systems aimed at the improvement of the working environment for employees.

In this way, the Group is continuously working to improve its labor environment. However, if misconduct in labor management were to occur during the Group's business operations, it may not only lower the Group's social credibility but also have an impact on the Group's business, financial position and operating results.

4 Risks Related to Information Security and Systems

(1) Information leaks

The Group acquires much personal information including not only information on officers and employees, but also information on senders and recipients and information on the personnel responsible in client companies in the course of business operations. Furthermore, there are cases in which the Group holds business secrets of client companies in its services aimed at corporate clients. To protect these secrets, in addition to password management and access restrictions related to data, and ensuring the management of locks related to hard copies for the protection of such confidential information, the Group endeavors to ensure the strict management of information such as continuously raising employees' awareness through information security training. Furthermore, in addition to strengthening information security measures such as taking steps to address access to and from the Internet in case of external cyber attacks from outside, —including ransomware attacks, which have seen a recent global surge—the Group is engaged in enhancing information security measures such as establishing SGH-CSIRT (SG Holdings Computer Security Incident Response Team) as a dedicated organization for responding to cyber attacks within the Group and joining the Nippon CSIRT Association. However, leakage or loss of information due to system trouble, unauthorized access, an intentional act or negligence on the part of a Group employee, unauthorized access due to an event such as a cyber attack, or a computer virus, etc. infection or the like may lead to lowering social confidence in the Group, and the occurrence of additional expenses required for claims for compensation for damages and information security measures may have an impact on the Group's business, financial position and operating results.

(2) System trouble

Within the Group's businesses, the utilization of IT is essential particularly in the Delivery Business and the Logistics Business from the perspective of real-time management of transportation status, inventory management in warehousing operations. Furthermore, there is a high reliance on systems in accounting due to the centralized management of a large volume of transactions using systems. SG Systems Co., Ltd. is a Group subsidiary which performs system development, maintenance and operation, and develops and provides logistics systems inside and outside the Group.

Although no problems have arisen at present and appropriate development is being conducted to avoid risk, in the event of system trouble (caused by the discovery of a severe bug, hacking unauthorized access due to an event such as a cyber attack, or a computer virus infection, or the like) or trouble at a system recipient, hacking or a virus infection, or trouble at a system provider, there is a possibility of suspension of the Group's business operations and the incurrence of a large amount of expenses due to responses to system problems or claims for compensation for damages from the Company's customers, and this may have an impact on the Group's business, financial position and operating results as a result.

5 Risks Related to Litigation, Other Legal Procedures and Disasters, etc.

(1) Litigation and other legal procedures

In the event of unforeseen trouble or problems in the Group's business operations, the Group may be subject to claims for compensation for damages or filing of litigation arising from these regardless of whether the Group is at fault. In such an event, social confidence in the Group may be lowered depending on the content of the litigation, the status of the claim for compensation for damages and the results thereof, and this may have an impact on the Group's business, financial position and operating results.

(2) Occurrence of natural disasters

The Group's core business is the Delivery Business using vehicles and large-scale logistics centers, and this business and other businesses are based on the assumption of operation of business using equipment requiring power supply such as computer systems performing information management, automatic package sorters, and frozen and refrigerated warehouses. Furthermore, in addition to motor vehicles, the Group conducts business utilizing a variety of infrastructure such as railways, aircraft and ships.

For this reason, the occurrence of a natural disaster causing transportation routes to be cut, certain equipment being damaged or the stoppage of operation of equipment due to the stoppage of power supply as a result of a power outage may have an impact on the Group's business, financial position and operating results. Furthermore, in the event of the spread of an infectious disease, blockage or quantitative restriction of transportation, or economic stagnation may have an impact on the Group's business, financial position and operating results.

Risk Management

Risk Management/BCP/Information Security