SGH

Risk Management

1.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 tosignificantlyimpact the financial position, operating resultsand cash flows of consolidated companies are as follows. The Group recognizes the potential for these risks to occur and has apolicy to endeavor to avoid their occurrence and respond in the event of their occurrence, but it believesit is necessary for investment decisions related to the Company's shares to be made after carefully considering the matters described in this sectionand in other sections.

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

1 Risks related to business

(1)Dependence on the Delivery Business

The Delivery Business is the principal business accounting for approximately 80 percent of the Group's consolidated operating revenues.

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 priceof 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 apolicy 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 resultsmay 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

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

The Group intends to provide logistics solutions that are efficient for customers and offer high added value to increase share under such competitive conditions by providing composite services based on GOAL. 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 positionand 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 due to damage to the transported goods, 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.

(6)Occurrence of misconduct, etc

The Group has a network of business sites covering all of Japan, and also operates businesses in countries overseas centered on Asia, and it delegates actual business operations to the personnel engaged in business in each company and location within the Group. Furthermore, there are also cases in which services are provided using external vendors when they cannot be handled within the Group. For this reason, the possibility of embezzlement of funds received through cash-on-delivery services or the improper recording of sales cannot be ruled out.

The Group is endeavoring to ensure such misconduct does not occur by providing regulations and manuals required for business operations and establishing a system for discouraging such action through internal audits and checks when selecting business partners. However, in the event misconduct, etc. occurs or is discovered in the future, or the amount thereof is large, this may lower social confidence in the Group and have an impact on the Group's business, financial position and operating results.

(7)Serious accidents

The Group is engaged in the land transportation business using public roads centered on the Delivery Business. Recently, there has been growing demand for social responsibility for transportation business operators to drive safely as regulations on safe driving have been strengthened through the "Act to Partially Amend the Railway Business Act, etc. to Improve Transportation Safety" (the so-called "Transportation Safety Omnibus Act").

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.

(8)Utilization of business partners

The Group's Delivery Business fully utilizes the Group's management resources to obtain entrustment of logistics services from companies (from B). For this reason, the majority of transportation services to individuals' homes (to C) and a large portion of line-haul transportation (long-haul transportation between logistics sites such as between Tokyo and Osaka) are entrusted to external business operators. The Group endeavors to secure multiple business partners according to the anticipated transportation volume, but cases where adequate business partners cannot be secured may result in greater labor expenses than anticipated due to the Group's drivers' working hours being longer, or the occurrence of delays in delivery. Furthermore, the Group's expenses may increase in the future in the event outsourcing expenses rise due to a shortage of drivers. In addition, the occurrence of a scandal in a business partner of the Group or the transportation quality of a business partner not meeting a customer's requirements may lead to a decline in social confidence in the Group. The manifestation of such risks may have an impact on the Group's business, financial position and operating results.

(9)Overseas operations

The Group conducts business in foreign countries centered on Asia. Furthermore, as stated in "1. Management Policy, Management Environment and Issues to Address," the Group intends to further strengthen its global network and strengthen 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 marine transportation freight tariffs, or the occurrence of geopolitical 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.

(10)Training and securing of human resources

Securing drivers and other personnel engaged in operational work is essential to the Group's businesses, and it is necessary to hire and train human resources with the qualities required by the Group. In particular, demand for logistics services has increased and the services required by customers have become more sophisticated due to the recent expansion of the e-commerce market, and competition to secure drivers is increasing within the industry.

The Group's policy is to endeavor to secure adequate human resources in terms of both quality and quantity by providing a variety of work styles and creating a remuneration system commensurate with the operations performed, in addition to conducting regular training after hiring. However, the Group's business, financial position and operating results may be affected due to a decrease in operating revenues or an increase in expenses in the event such initiatives are not effective.

(11)M&A, business alliances

The Group actively utilizes M&A and business alliances 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 operating results and also lead to revision of its published Medium-term Management Plan.

(12)Capital and business alliance with Hitachi Transport System, Ltd.

The Company and Sagawa Express Co., Ltd. have concluded a capital and business alliance agreement with Hitachi Transport System, Ltd. effective as of March 30, 2016 for the purpose of creating a robust business foundation and becoming more competitive within the logistics industry. However, if appropriate measures are not taken to leverage their respective strengths, the expected benefits of the capital and business alliance agreement may not be able to be obtained. Furthermore, Hitachi Transport System, Ltd. may face financial or other business problems, or change the strategy concerning the capital and business alliance as a result of restructuring of the industry.

The capital and business alliance with Hitachi Transport System, Ltd. may have an impact on the Group's business, financial position and operating results as a result of these factors.

(13)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 CSR activities, and its policy is to continue to implement activities such as lending artwork at no charge and providing personnel support.

The two foundations hold a total of 29,318,181 of the Company's common shares (9.16% of the total number of issued shares) as of the end of the fiscal year under review. The articles of incorporation state that approval of no less than two thirds of the administration board is required when the foundations exercise voting rights pertaining to the Company's shares. In order to ensure the independence of voting by the two foundations, the Group has determined that administration officers who concurrently serve as officers or employees of the Group will not participate in votes by the administration board. Furthermore, when electing administration officers of the two foundations, councilors who concurrently serve as officers or employees of the Group do not participate in council resolutions on the election of administration officers who concurrently serve as officers or employees of the Group.

(14)Medium-term Management Plan

As stated in "1. Management Policy, Management Environment and Issues to Address," the Group has established the New Medium-term Management Plan "Second Stage 2021" and published consolidated results forecasts for the fiscal year ending March 31, 2021 based on its management strategy on the Company's website. However, the Medium-term Management Plan is based on a variety of assumptions including the expansion of customer demand such as the expansion of e-commerce, the average unit price and number of packages delivered in the express package delivery business, and personnel and outsourcing expenses, and in the event the assumptions are not fulfilled, the targets in the plan may not be able to be achieved, and this may have an impact on the Group's business, financial position and operating results as a result.

(15)Future Capital Investment

The Group is continuously developing distribution facilities, and recently constructed the X FRONTIER large-scale logistics center in Koto-ku, Tokyo to achieve efficient operation of line-haul transportation and increase handling capacity, and will gradually bring it online toward the second half of the year ending March 2021. In the event costs exceed the anticipated level concerning facility construction in the future, including the new construction of the X FRONTIER, 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. See "4. Contracts, etc. Material to Management" and "III. Condition of Equipment 3. Plans for New Installation, Retirement, etc. of Equipment" for details.

2 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 sever 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, 2021 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, 2024 Article 14 of the Act Other

(2)Labor-related laws and regulations

As of March 31, 2020, the Group had 51,363 employees and 43,928 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 Medium-term Management Plan, and actively designs systems aimed at the improvement of the working environment for employees.

Furthermore, laws related to work style reforms are being enacted to correct long working hours and ensure the same wage for the same labor, and the necessity for additional expenses to respond to such laws and regulations, 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.

(3)Environmental regulations

The cargo trucks (diesel trucks) used by the Group are subject to the "Act on Special Measures for Reducing the Total Amount of Nitrous Oxides and Particulate Matter Emitted from Motor Vehicles in Specified Regions" (Motor Vehicle NOx and PM Act) and environmental ordinances enforced by the national government and local governments. The Group uses vehicles that meet the regulations, and no particular problems have arisen at present, but in the event legal amendments such as strengthening or expanding the scope of regulation are made in the future and it is necessary to take action such as installing additional dust collection devices on existing vehicles, the occurrence of additional expenses may have an impact on the Group's business, financial position and operating results.

3 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. 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 cyber attacks from outside, 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 or a computer virus, etc. 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. 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 or a virus infection, or trouble at a system recipient, 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.

4 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.

The Company's consolidated subsidiary Expolanka USA LLC was subject to filing of litigation demanding compensation for damages by a rival company in New Jersey, USA in relation to the hiring of a former employee of the rival company by Expolanka USA, but the litigation was settled with the Plaintiff in mediation on September 26, 2019.

As a result, the risk related to this litigation included in "(14) Litigation and Other Legal Procedures" in the Annual Securities Report for the previous fiscal year has ceased to exist.

(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.

Although the spread of COVID-19 has impacted the Group such as economic stagnation, reduction of air transportation space and changes in the content of packages handled, the Group is endeavoring to strengthen transportation capacity according to changes in conditions, replace means of transportation and control costs. Prolongation or changes in this impact may have an impact on the Group's business, financial position and operating results.

2.Risk Management

Risk Management/BCP・Information Security