Among matters relating to the status of business and financial condition, etc. described in the Annual Securities Report, the following are considered to have the potential to significantly affect investors’ decisions. Forward-looking statements contained herein are based on the judgment of Daio Paper Corporation (the “Company”) as of the date of submission of the Annual Securities Report. The Company’s risk management system is described in “Part IV: Information on the Reporting Company, 4. Corporate Governance, (1) Overview of Corporate Governance.”

1. Impacts of Changes in Demand and Market Conditions

The Group operates in the Paper and Paperboard Business, the Home and Personal Care Business, and other businesses. A significant decline in demand for, or a substantial deterioration in the market conditions of, main products such as paper and paperboard products and household paper products may result in decreases in sales volume and revenue, thereby affecting the Group’s financial position and operating results.
In the Paper and Paperboard Business, we review and improve our production system, including flexible switching of product types at our core Mishima and Kani Plants and production subsidiaries, in response to changes in demand and market conditions.
In the Home and Personal Care Business, we maintain a broad product lineup ranging from hygiene papers to absorbent products and implement cross-category sales strategies to minimize the impact of demand fluctuations or market downturns in specific product categories. Through providing products that enhance customers’ quality of life, we are establishing a resilient sales approach less susceptible to market volatility.

2. Impacts of Changes in Raw Material and Fuel Prices and Foreign Exchange Rates

The Group procures raw materials and fuels such as woodchips, recovered paper, chemicals, heavy oil, and coal both domestically and internationally. Changes in the prices of these raw materials and fuels, as well as fluctuations in foreign exchange rates for transactions denominated in foreign currencies, may affect the Group’s financial position and operating results.
Although the impact of the current tensions in the Middle East on fiscal 2025 is expected to be limited, sustained high raw material prices and increased transportation costs may have a greater impact going forward.
Foreign exchange fluctuations may also affect export sales and overseas business activities. To mitigate these risks, the Group utilizes forward exchange contracts for certain transactions. Furthermore, recognizing the importance of strengthening procurement systems and diversifying suppliers, the Group promotes “SDGs Procurement,” working closely with business partners to ensure fair transactions, enhance quality and technological capabilities, and secure stable supply through the formulation of business continuity plans (BCPs).

3. Impacts of Overseas Business Expansion

As part of its growth strategy, the Group is expanding its overseas operations, mainly in China, South Korea, Southeast Asia, and Brazil, led by the Home and Personal Care Overseas Division. Such overseas expansion may be exposed to risks including fluctuations in foreign exchange rates, regulatory changes by local governments, deterioration of diplomatic relations or public sentiment, political instability, and changes in the economic environment.
In addition, geopolitical risks such as tensions in the Middle East may lead to supply disruptions or increases in raw material and fuel prices, which could affect the Group’s financial position and operating results.
To mitigate these risks, the Group shares the latest information collected by its subsidiaries and relevant departments and responds appropriately.

4. Impacts of Natural Disasters and Infectious Diseases

Natural disasters such as earthquakes and typhoons in regions where the Group or its suppliers operate may cause damage to facilities, suspension or delay of operations, disruptions in logistics, and supply chain interruptions, as well as infrastructure outages and labor shortages. These factors may lead to loss of assets, supply shortages, and recovery costs, thereby affecting the Group’s financial position and operating results.
The spread of infectious diseases may also result in reduced demand due to economic downturns, constraints on plant operations, difficulty in securing personnel, logistics disruptions, and increases in raw material prices.
To address these risks, the Group is strengthening its group-wide business continuity management (BCM) framework, including identifying critical operations, formulating and reviewing BCPs, and conducting regular drills to enhance effectiveness.

5. Impacts of Legal Regulations and Litigation

(1) Risks Related to Legal Regulations
The Group operates under various laws and regulations in Japan and overseas, including environmental regulations, intellectual property laws, product quality and safety standards, labeling regulations, competition laws, and labor laws.
The Group promotes compliance by disseminating and providing training on the “Daio Group Code of Conduct” across all group companies, including overseas subsidiaries. However, failure to comply with such regulations or failure to appropriately respond to changes in laws and regulations may affect the Group’s business continuity, financial position, and operating results.
The Group endeavors to prevent the materialization of such risks by identifying and evaluating risks and implementing appropriate countermeasures based on their significance.
(2) Risks Related to Litigation
The Group may be subject to various legal proceedings related to its business activities, including product liability, intellectual property rights, and contractual matters. The outcomes of such proceedings may affect the Group’s financial position and operating results. The Group has established a system to respond promptly in cooperation with law firms and to disclose necessary information appropriately in accordance with laws and regulations, thereby maintaining its reputation.

6. Information Security Risks

The Group recognizes cyberattacks and information leakage as significant risks. To address these risks, we implement measures such as firewalls, advanced antivirus software utilizing AI and machine learning, monitoring of unauthorized access, email filtering, application of security patches, and regular security assessments. We also conduct system recovery drills based on recovery plans.
To prevent information leakage, we strengthen security through the use of advanced protection measures and cloud services. In addition, we provide ongoing employee education, including simulated targeted email attack training, and enforce internal regulations such as the “IT Security Management Rules,” including restrictions on external device usage.
With respect to the use of AI, we restrict usage to approved tools configured not to learn or externally disclose input information and prohibit the input of personal or confidential information. We have established internal rules for the appropriate use of AI and ensure their thorough dissemination across the Group.

7. Risks Related to Human Resources

Securing and developing human resources is a critical management issue for achieving sustainable growth and enhancing corporate value over the medium to long term. However, due to population decline, aging demographics, and intensifying competition for talent, the Group may face difficulties in securing the necessary human resources, particularly those with specialized expertise and advanced skills.
To address this, the Group enhances recruitment activities and utilizes diverse hiring channels. In addition, as required skills evolve with changes in the business environment, insufficient development or allocation of existing employees may affect business operations and competitiveness.
Furthermore, failure to appropriately respond to rising labor costs and diverse expectations regarding working styles and treatment may result in difficulties in retaining personnel. Accordingly, the Group promotes work-style reforms and reviews compensation systems to create a rewarding work environment.

8. Impacts of Interest Rate Fluctuations

Although the Group is working to reduce interest-bearing debt, a significant rise in interest rates may affect its financial position and operating results. To mitigate this risk, the Group mainly procures funds through fixed-rate long-term borrowings.

9. Impacts of Financial Covenants

Certain loan agreements entered into by the Group include financial covenants based on indicators such as net assets in the consolidated balance sheet and ordinary profit/loss in the consolidated statement of income. If these covenants are breached, the Group may be required to repay borrowings, which may affect its financial position and operating results.

10. Impacts of Price Fluctuations of Investment Securities

Available-for-sale securities with market value are measured at fair value based on market prices at the fiscal year-end. Changes in stock prices may affect the Group’s financial position and operating results. The Group is reducing cross-shareholdings to mitigate such risks.

11. Impacts of Impairment of Non-current Assets

The Group holds non-current assets such as property, plant and equipment and goodwill, to which impairment accounting is applied. If profitability declines due to a significant deterioration in the business environment or if market values fall substantially, impairment losses may arise, which may affect the Group’s financial position and operating results.

12. Climate Change Risks

For details regarding risks and responses related to climate change, please refer to “2. Sustainability Initiatives, (2) Response to Climate Change” in the Annual Securities Report.