Risk Factors

In relation to matters described in Risk Factors and Financial Condition of the Annual Securities Report, the following items are the major risks that, in management's opinion, may have a significant impact on financial position, operating results, and cash flows of the Group.
Any forward looking information included in this report is based on the best estimates of the Group as of the date of filing of this report.

If rising production costs, such as wage hikes, continue, we may not be able to provide services on an ongoing basis. In addition, the impact of US trade policies, financial market trends, financial systemic risks and other changes in domestic and international circumstances may cause price fluctuations and supply shortages, which may affect the Group's operating results.
To address this risk, we, having declared our commitment to partnership building under the Japanese government initiative, remain dedicated to co-existence and mutual prosperity with our business partners, including implementing price revisions in response to cost increases, and will undertake initiatives that consider the interests of multiple stakeholders, including our business partners.
In addition, to minimize the impact of supply shortages, the Company has appropriately managed its inventory based on supply and demand forecasts, sought new procurement sources, and promoted the reuse of materials.

The customers' expectations toward us are growing ever higher against a background of natural disasters and aging infrastructure. If the Group could not meet such expectations, it may lead to loss of trust of customers and affect the Group's operating results.
The ALSOK Group has responded to these risks by strengthening internal and external infrastructure built up through its Security and Facility Management Services etc., and by expanding and improving new solutions through external alliances that combine various service features, such as services, such as BCP solutions, that provide response to natural disaster risks; comprehensive management services for buildings, facilities, and infrastructure; and on-site response services. In addition, the Group aims to achieve sustainable business growth by enhancing quality and productivity in the Electronic Security Services and the Facility Management Services through improving operational efficiency and enhancement, as well as through the visualization and standardization of operations utilizing AI; and by transitioning to a labor-saving operating model and shifting toward higher value-added services in the Stationed Security Services.

In order for the Group to accurately meet the safety and security needs of its customers and society, it is essential to develop new products and services utilizing drones, AI, and 5G, etc. Under such circumstances, a failure to respond appropriately to such changes in the technological environment could affect the Group's operating results.
Therefore, the Group strives to avoid risks by keeping abreast of the latest technological trends and actively utilizing drones, AI, and 5G, etc. and promoting DX.

The Group has operated a wide variety of businesses, such as the Security Services, Facility Management Services etc., Long-Term Care Services, and Overseas Services. Particularly, under the circumstance of decreasing working-age population, if retaining talent becomes difficult, leading to shortage of staff and managers who operate these businesses, it may affect the Group's operating results.
To address this risk, we have further promoted workstyle reforms and improved employee treatment across the Group, while enhancing employee engagement, by providing systems and environments that enable each employee to reach their full potential. This includes increasing basic salary; hiring diverse human resources; providing diverse workstyle options; providing support for employees to obtain certifications to develop their skills; encouraging employees to take more paid leaves; and introducing the Loan-Based Scholarship Repayment Program for employees who have been with the company for five years or less.
Furthermore, with the aim of revitalizing the organization and developing employees, we make efforts to improve communication within the Group, increase the opportunities for female employees, establish flexible human resource management by multi-tasking and place the right person in the right place.
We also make efforts to improve productivity by streamlining operations and saving labor in the front and back offices. This includes retention of high quality human resources such as introducing a system for retirees with abundant practical experiences to play an active role in the Group even after the retirement, as well as digital transformation and data utilization.

As the Group operates labor-intensive businesses, it considers human rights violations as a major risk. We are also aware that there is an increasing need to take initiatives in reducing human rights risks not only in its own company but also throughout its supply chain.
In order to strengthen its group-wide efforts to respect human rights, the Group formulated the ALSOK Group Human Rights Policy in November 2023 in accordance with the United Nations Guiding Principles on Business and Human Rights, and established the Human Rights Committee in April 2024. Under the responsibility of the officer in charge of General Affairs/Corporate Communication, the Human Rights Committee assesses human rights risks across the departments primarily with the department in charge of sustainability, and discloses a human rights risk map and salient human rights issues. In addition, the Human Rights Committee will develop mitigation and remediation measure to address issues identified, report identified human rights risks to management as appropriate, and manage them in cooperation with the Risk Management Committee.

In recent years, extreme weathers, such as heat waves, heavy rains and droughts, have frequently occurred all over the world. Japan experienced a number of disasters, including torrential rains that were designated as severe disasters, and abnormal weather conditions, such as record-high average temperatures, which had a significant impact not only on the Group but also on corporate activities and the lives of citizens in general.
The Group has responded to such climate change by taking various initiatives and providing products and services from both risk and opportunity perspectives to address issues, such as mitigating and adapting to climate change, conserving water, ocean and forest resources, responding to circulating society, preventing pollution and managing waste and conserving biodiversity, to create more sustainable society. In addition, we are working on CO₂ reductions as a global environmental measure through our initiatives, including installing solar power generating systems at the Group's facilities, switching the lighting of our facilities to LEDs and promoting environmentally friendly vehicles. We also support and participate in JCI Climate Change Initiative, a domestic initiative on climate change. In January 2020, we became a member of Global Environmental Action, an NGO established to contribute to solving global environmental issues and promoting sustainable development. We also support its activities through donations. Furthermore, we endorsed the recommendations of the TCFD and have been disclosing TCFD-based information since October 2022. In May 2023, we joined the GX League and actively engage in initiatives on multiple fronts. We communicate these initiatives through our website and the ALSOK Report (Integrated Report), which is issued annually.

If a massive disaster occurs and the Group's employees or facilities are suffered from the disaster, it may affect the business operations. Therefore, in preparation for the occurrence of a large-scale disaster, the ALSOK Group has taken measures utilizing know-how accumulated through experience. These include developing response manuals aligned with the Business Continuity Plan and the Disaster Countermeasure Regulations, stockpiling emergency supplies, establishing a flexible nationwide response system, and conducting periodic education and training programs.
Also, if a massive disaster and the prolonged power outage associated with the disaster disrupt the Group's network, it may affect the Group's ability to provide services continuously. To address this risk, the Group locates two data centers each in Eastern Japan and Western Japan as a backup for critical systems, which enables to mutually monitor the systems to prepare for massive disasters.
In addition, a large-scale disaster could impede the procurement of materials necessary for business operations, which could affect the provision of services. As the Company is responsible for the majority of material procurement within the Group, it has established material warehouses in two locations, one in eastern Japan and one in western Japan, to ensure continued supply in the event of a large-scale disaster.
If an employee assigned to guard critical facilities becomes infected or when an outbreak occurs at one of the long-term care facilities operated by the Group, it may affect the Company's ability to provide services continuously. To address this risk, the Group has developed a contingency plan as a measure to prevent the spread of infection.

In some cases, the Group outsources development of new products, services and enterprise system to external vendors. If the development work of the Company or the vendor is delayed and the product, service or system is not released as planned, it may affect the Group's operating results or business plan. To address this risk, the Group closely works with the vendor to monitor the progress, and if necessary, takes appropriate measures immediately to prevent the delay. Also, we have an option to conduct system migration in phases by function in order to mitigate the risk. We have appropriate internal controls in place for acceptance tests and system repair/improvement. Moreover, by strengthening the recruitment and development of human resources with advanced expertise such as project management skills, the progress and quality of the vendor will be appropriately managed.
If a system trouble occurs after the implementation during the development of the enterprise system used by the Company, it may affect the Group's operating results or internal controls. To prepare for such system trouble, the Group has established a system with an external vendor to deal with such trouble and appropriate internal controls.
In addition, if a network failure, communication line outage, or system trouble occurs in the operation of a system or enterprise system related to products and services, it may affect the Group's ability to provide the services. To address this risk, the Group has a backup system in place, including multiplex network equipment at each location and multiple backup servers at remote locations. The Group also conducts drills for system failures to ensure stable system operations. We also conduct planned equipment upgrades to prepare for potential communication line outages.

The Group handles personal information and confidential information. If any malicious attack to the information assets by third parties or any accidental or intentional leakage of the assets by the Group's employees or vendors occurs, it may lead to disruption to the Group's business continuity, deterioration of the Group's social credibility and brand image, the payment of damages and legal punishment, which may affect the Group's operating results.
To address this risk, the Group has established the Basic Policy for Information Security as a cornerstone to ensure information security, which is applied to all employees including officers and all information assets held. Based on the Information Asset Management Rule, a company-wide management system for information assets has been established and promoted, and drills have been conducted to prepare for incidents related to information assets. Furthermore, if a critical incident occurs, the Group sets up the ALSOK-CSIRT (Computer Security Incident Response Team), which is a framework to respond to the incident and develop and execute the preventative measures.

In providing products and services, the Group shares common corporate brand among multiple companies. Under the circumstance, if any incident or scandal occurs at the Group or its subsidiaries and associates, not only may the Company be suspended from bidding, but it may also damage the brand image and affect the operating results.
For the purpose of enhancing group governance, the Company has established a specialized department to provide strict supervision and oversight of subsidiaries and associates. The department reports to the Company on performance of duties and critical information related to risk of loss of subsidiaries and associates on a timely basis. The Company sends directors or the Audit and Supervisory Board members to the subsidiaries and associates.
Based on the Internal Audit Regulation, the Inspection Department is working to ensure compliance of the Group by managing overall business activities of subsidiaries and associates, as well as by providing supervision, advice and recommendation for operational systems and business process improvements.
The information on the Company's internal control system and audit by the Audit and Supervisory Board and internal audit is described in IV. Information on Reporting Company, 4. Corporate governance in the Annual Securities Report.

In providing the customers with security services, etc., the Group is subject to various regulatory requirements, including major ones described below.
If any of these regulatory requirements is amended or abolished, or any new requirement is established, it may affect the Group's operating results.
To address this risk, each department of the Company as well as subsidiaries and associates confirms whether there is any amendment to or abolishment of regulatory requirements or newly established requirement and takes appropriate actions. Such risk information is reported to the Company's Legal Office on a regular basis. Going forward, we will pay close attention to the regulatory developments and take appropriate actions in order to avoid the impact of such changes on our operating results.

At times, the Group acquires companies as part of its investments for growth aimed at maximizing group value. Under the circumstance, if the operating results of the acquired company deviate from the business plan at the time of acquisition or if the organizational restructuring, such as merger, is carried out, it may give rise to impairment losses of intangible assets, such as goodwill and customer-related assets, and other property, plant and equipment, affecting the Group's operating results.
To address this risk, the Company has established a system to monitor the performance of the acquired company and report to the Board of Directors on a regular basis. If the business plan at the time of acquisition deviates from the actual results, related departments immediately develop and take appropriate measures.

The ALSOK Group is developing international businesses mainly in Southeast Asia. If a country risk emerges due to geopolitical development and disputes, prices and tariffs, financial market conditions, culture and legal systems, or the massive disasters occur in the countries in which it operates, the Group's operating results may be affected.
To address this risk, the Company has established a department dedicated to overseas businesses, which receives reports on important local information from overseas subsidiaries and representative offices in a timely manner and responds to the risks. In addition, the Company holds regular meetings attended by the directors of the Company and presidents of overseas subsidiaries to provide strict guidance and supervision. Furthermore, in the event that the Group's employees or offices are exposed to the threat of terrorism, the Company will set up a 24-hour task force team to respond to the situation.