SANGETSU : REPORT 2023 A4-sized

SANGETSU REPORT 2023

SANGETSU Integrated Report

SANGETSU REPORT 2023 Editorial Policy

The SANGETSU REPORT is an integrated report that has been published annually to facilitate Sangetsu stakeholders' understanding of the Sangetsu Group's corporate value and medium-tolong-term growth potential. In the 2023 edition, we worked to enhance information on the current status of our business and ESG activities, centering on the strategy of the Sangetsu Group for further growth under the new Medium-term Business Plan [BX 2025] announced in May 2023. In the editing process, we used the International Integrated Reporting Framework published by the International Integrated Reporting Council (IIRC) as a reference. We sincerely hope that this report will help more people understand the Sangetsu Group.

Overview of Corporate Communication and Positioning of the Integrated Report

Financial Information

Non-financial Information

• Financial results briefings

Stake-	● Meetings with institutional investors			● Facility tours for institutional investors
holder	● IR events for individual investors				● Meetings between institutional investors and outside directors
Dialogue	● General meetings of shareholders			● Company briefings for shareholders
	● Financial summary reports		●SANGETSU REPORT
	● Quarterly reports				● Corporate governance report
			Integrated report combining
Reports	● Securities reports
		financial and	non-financial			● Environmental report
	● Interim reports
			information
WEB	Investor Relations website				Sustainability website
www.sangetsu.co.jp/english/ir/				www.sangetsu.co.jp/english/sustainability/

Gomez IR Site	The 2023 Certified Health & Productivity
2022 Silver	Management Organization Recognition
Prize Awards	Program (large enterprise category)

S&P/JPX Carbon	FTSE Blossom	FTSE Blossom
Efficient Index	Japan Sector	Japan Index
		Relative Index

Morningstar Japan ex-REIT Gender Diversity Tilt Index

THE INCLUSION OF Sangetsu Corporation IN ANY MSCI INDEX, AND THE USE OF MSCI LOGOS, TRADEMARKS, SERVICE MARKS OR INDEX NAMES HEREIN, DO NOT CONSTITUTE A SPONSORSHIP, ENDORSEMENT OR PROMOTION OF San- getsu Corporation BY MSCI OR ANY OF ITS AFFILIATES. THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES AND LOGOS ARE TRADEMARKS OR SERVICE MARKS OF MSCI OR ITS AFFILIATES.

Compliance with the Accounting Standard for Revenue Recognition

Sangetsu has followed the Accounting Standard for Revenue Recognition (ASBJ Statement No. 29 Accounting Standard for Revenue Recognition [March 31, 2020]) since the beginning of the fiscal year ended March 31, 2022. Therefore, data provided for the fiscal year ended March 31, 2022 uses figures after adopting this accounting standard.

Cautionary Statement with Respect to Forward-Looking Statements

All statements, including forward-looking statements, other than historical facts in this report are based on forecasts, expectations, assumptions, plans, understanding, evaluation, and other matters and are prepared using the information available to the Sangetsu Group as of August 31, 2023. To calculate quantitative forecasts, a certain set of assumptions essential in forecasting is also used in addition to facts that have been confirmed and accurately understood in the past.

• Scope of Reporting  Sangetsu Corporation and its Group companies
• Period Covered April 1, 2022 to March 31, 2023

Note: Includes some activities after the reporting period

■ Month of Publication  October 2023

INDEX

More detailed information is available on our website. When using the PDF version, you can move to the

Web corresponding web page when you see the blue and white Web box.

Sangetsu Company Information Homepage https://www.sangetsu.co.jp/english/companyprofile/

01 Index, Editorial Policy

Message from CEO

02 Message from CEO

Story of the Sangetsu Group [Growth Strategy]

1. Review of the Medium-term Business Plan

1. Toward Future Growth

16 Medium-term Business Plan (2023- 2025) [BX 2025]

Web Medium-term Business Plan

1. Financial Strategies

1. Value Creation Process

1. Story of Value Creation

30			Business Strategy	Web	Businesses and Services
					30	Domestic Interior Segment
					32	Domestic Exterior Segment
					34	Overseas Segment
Story of the Sangetsu Group [ESG]
	36			ESG Management	Web	ESG Management
	38			Materiality	Web	Materiality
	40			Board of Directors/Execution System	Web	Board of Directors
42						Governance
G	Web	(G) Governance
					42  A Conversation between Business Advisor Takashi Nawa and President Shosuke Yasuda
					46	Corporate Governance	Web	Corporate Governance
					51	Compliance	Web	Compliance
					52	Risk Management	Web	Risk Management/BCP
54					Social
	S	Web	(S) Social
					54  Human Rights and Diverse Work Styles	Web	Human Rights and Diverse Work Styles
					56	Value Chain Management	Web	Supply Chain Management
					58	Community Involvement	Web	Community Involvement
60					Environment
		E	Web	(E) Environment

60  Safeguarding the Global Environment

Data Section

1. 10 Year Consolidated Financial Summary

1. Financial Highlights
2. Non-financialHighlights (Non-Consolidated)

68 ESG Data (Non-Consolidated)

Web ESG Data

69 Corporate Profile/Share Information

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01

Develop a Cycle of Value Creation Through Self-Transformation and a Long-term Vision that Understands the Temporal Dimension

Shosuke Yasuda

President and CEO

02

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Message from CEO		Story of the Sangetsu Group	Story of the Sangetsu Group		Data Section
	[Growth Strategy]		[ESG]

Revisiting the New Organizational Structure Implemented in 2014

It has been nine years since I took the reins as President in 2014. We have completed three Medium-term Business Plans since then, which can be summed up in a nutshell as, "the past nine years have been focused on upfront investment aimed at transforming our business and improving profits." In 2014, the Sangetsu Group was widely recognized as a "specialized interior trading company" and our domestic interior business comprised almost the entirety of our sales. This situation instilled in me a strong sense of urgency due to the quantitative limitations of the Japanese construction market. Since we cannot expect this market to grow, for our Group to grow sustainably and remain relevant to society, we had to discover a new model for growth ourselves, and qualitatively enhance our business. To achieve this, we are improving our business foundation, namely our organizational structure and personnel systems, and strengthening functions and services such as products, logistics, construction, and proposals, as well as expanding our business overseas. While these capital injections increased SG&A expenses from fiscal 2014 to fiscal 2018, we saw moderate growth in gross profit and slower growth in profit margins accompanying the investment phase. Against this backdrop, we began to see earnest expansion in gross profits during the final year of the second Medium-term Business Plan as the effects of previous measures took hold. However, performance slumped again in fiscal 2020 due to the impacts of the COVID-19 pandemic.

In May 2020, we set the goal of becoming a Space Creation Company in our Long-term Vision [Design 2030]. And the purpose of our last Medium-term Business Plan [D.C. 2022], from fiscal 2020 to fiscal 2022, was to take the first steps toward achieving this goal. The future goal of becoming a "Space Creation Company" directs the actions of our entire Group, and serves as the basis for discussion on growth between a wide variety of departments. I am proud to see that the trial-and-error we have engaged in since fiscal 2014 has served to clarify the goal we should strive towards.

Under our previous Medium-term Business Plan [D.C. 2022] we strove to expand earnings through qualitative growth of

our core businesses, while working to expand our overseas business and attain profitability in next-generation businesses based on the resources of our core businesses. Moreover, for fiscal 2022, the final year of this Medium-term Business Plan, a third round of sales price revisions helped to improve earnings and led to results that significantly exceeded, not only the targets we put in place when we formulated the plan, but the quantitative targets set forth in our Long-term Vision. Many people have asked me "why the price hikes were successful," but the price hikes were only one result, and what is more important are the background and factors which brought about these results. We also recognize that these factors are themselves are the result of Sangetsu's improved strength and position as a company, brought about by nine years of continually strengthening our functions and services.

On the other hand, while I am pleased to have achieved this kind of performance, I feel that we will face many challenges to further growth from here out. There are many limitations in the external environment surrounding our company. In addition to stagnant sales volume in the interior market, I have concerns about the worsening labor shortage in construction, logistics problems in 2024, and the continuing rise of various costs. Moreover, while I am convinced that our measures to become a Space Creation Company are the appropriate strategy, we need to focus on further enhancing the functions of procure- ment, product appeal, space design, delivery, construction, and branding for our existing domestic interior business, as well as dramatically strengthening our domestic exterior business and overseas business. I also believe that we have not adequately raised awareness among Group employees, and would like each employee to work to realize social value, and be aware of their leading role as a driver of company growth. On top of these measures, I believe it is necessary for our Group to create an entirely new business model to achieve further long-term growth in the absence of market expansion.

We include this in our New Medium-term Business Plan [BX 2025].

In recognition of these issues, our New Medium-term Business Plan [BX 2025] (BX: Business Transformation) positions the three years from fiscal 2023 to fiscal 2025, as "three years

SANGETSU REPORT 2023

03

Message from CEO

to prepare for the next leap forward." As we transition to a Space Creation Company with strong profitability and growth potential by strengthening and expanding solutions that enhance the value of "space creation," we will also consider expanding our business to achieve further long-term growth.

Next, let's look at the five basic measures laid out in our New Medium-term Business Plan.

1. Support Utilization of Human Capital, Expansion, and Enhancement
   Out of our five basic measures, we place the great- est emphasis on human capital. Highly capable people are indispensable to achieving the Business Transfor- mation (BX) that we included in the name of our New Medium-term Business Plan. There are two types of "professional capabilities" we need: external expertise such as spatial design, proposal, logistics, IT, and legal capabilities that should be actively incorporated into our organization; and capabilities that our group has built up through long experience concerning our industry, dis- tribution channels, and product expertise. We believe that both are essential to becoming a Space Creation

Company. We want to develop new capabilities and corporate culture within the company by supporting the advancement and utilization of existing and external human capital, in order to drastically change our business.

1. Accumulation, analysis, and utilization of digital capital
   Our Group handles an enormous number of products from wall coverings to flooring material, and our value chain is extremely long. Up until now, the vast amount of product data held by each player in the value chain was not always centrally managed. We will strive to make transactions and logistics more efficient, by digitizing the wide variety of information related to our business, and understanding which products are being used at which properties. We will also provide higher added value by using digital technology to support product selection by end users.
2. Enhancing our Ability to Provide Solutions

We will enhance our ability to provide necessary solutions as a Space Creation Company. Specifically, we will

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SANGETSU REPORT 2023

Message from CEO	Story of the Sangetsu Group	Story of the Sangetsu Group		Data Section
[Growth Strategy]		[ESG]

increase the value we provide to the market by further developing and intensifying the enhancement measures we have pursued to date. This includes: increasing our spatial design and spatial proposal capabilities by hiring more expert personnel; expanding, optimizing, and strengthening the branding for the products we handle; maintaining and enhancing our procurement systems; expanding logistics systems for inventory, delivery, and distribution; and improving our installation resources- which include interior construction capabilities, overall construction capabilities, and construction management capabilities.

4) Exterior Business and Overseas Business

Our exterior business is an important function for building the business model for our Space Creation Division, and the ability to make proposals that include both interior and exterior spaces is one of the unique strengths of our company. Going forward, in addition to such unified proposals, we will expand our exterior business out of the Chubu region of Japan, and attempt to enhance our product appeal through efforts that include the development of original products. Meanwhile, our overseas business has continued to be in the red, and while we were busy resolving the issues facing our overseas local subsidiaries in each region, the impacts of the COVID-19 pandemic cast a further shadow on performance. Now that we are emerging from the effects of the pandemic, in addition to the recovery brought about through normalization of the market, we will take concrete measures to achieve further growth in each market as a Space Creation Company.

5) Improve social value

On the environmental front, we are working to help bring about a decarbonized society, and have set long term targets of achieving carbon neutrality for Sangetsu Corporation alone by fiscal 2029, and reducing greenhouse gas (GHG) emissions on a consolidated basis by 55% (compared to fiscal 2021). By fiscal 2025, the final year of the New Medium-term Business Plan, we aim to reduce GHG emissions for Sangetsu Corporation alone by 60% (compared to fiscal 2018) and 28% on a consolidated basis (compared to fiscal 2021). We will also

set specific KPIs for tackling social issues, and focus on achieving value for society.

Capital Policy and Improving Capital Efficiency

Regarding shareholder returns, we intend to aim for a stable increase in dividends. In the past, we carried out large-scale stock buybacks, but since many individual shareholders have expressed the desire to have dividends returned to sharehold- ers, we intend to proceed in accordance with this policy at this time. Specifically, we have set a minimum annual dividend of 130 yen per share during the period of our New Medium-term Business Plan, and aim to steadily increase dividends. Howev- er, we will take a flexible approach to share buybacks based on consideration of market conditions and the situation concerning our share price.

Our owned capital came to 95.7 billion yen in fiscal 2022, but we have set a target between 95 and 105 billion yen by the end of fiscal 2025. To improve capital efficiency, we aim to achieve a cash conversion cycle of 65 days with a ROE of 14.0% and ROIC or 14.0% in fiscal 2025. Basically, we want to continue being a company with a high capital efficiency ratio, without significantly increasing our own capital. We plan to make growth investments of 20 to 25 billion yen during our New Medium -term Business Plan, but expect our largest investment in growth during this period to be in human resources, and anticipate aggressive expenditures with an eye to increasing our future corporate value.

A Sound Governance Structure that Incorporates External Perspectives

We are working to reinforce our corporate governance through transparent, speedy, and efficient management. Four of the seven members of the Board of Directors who are also Audit and Supervisory Committee Members (a majority), are outside directors who use their respective expertise to help improve the effectiveness of the Board of Directors. Our external directors not only share information openly at board meetings, but conduct on-site audits of work sites inside and outside of Japan to get a better idea of the state of operations, and offer their candid opinions. Furthermore, starting from April 2023, we have invited Kyoto University of Advanced Science (KUAS)

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Message from CEO

Business School professor Mr. Takashi Nawa to act as a management advisor. He has already provided a great deal of objective and broad-ranging advice concerning the management of our Group, and we have asked him to attend meetings of the Board of Directors with a thorough understanding of our Group's business and operations.

In this way, we hope to maintain a sound system of governance that keeps us from falling into complacency, by developing and strengthening systems for incorporating a variety of external perspectives.

Clarifying our Vision for Becoming a Space Creation Company and Beyond

As I have already mentioned, I am convinced that our plan to transition to a Space Creation Business is extremely appropriate for the long-term growth of the Sangetsu Group. In response to a questionnaire targeting Sangetsu Group managerial personnel, almost 100% of respondents said that the space creation business model was effective in carrying out their work. However, I believe that it is necessary to further accelerate our efforts related to various products, fields, and regions if we want to generate further results.

With this in mind, in May 2023, we re-clarified the idea of a Space Creation Company that we envisioned three years back as part of our [DESIGN 2030]. Specifically, we see it as "a company that delivers high value in relation to space creation worldwide through its ability to provide solutions that organically integrate 'four key functions' using design and creativity based on human and digital capital." Our growth strategy for attaining this corporate vision incorporates five elements: "Maintaining and improving earnings from primary products and businesses with large, stable market share," "strength- ening mid-size products with room to expand market share," "developing new products," "strengthening our exterior seg- ment," and "expanding earnings from our overseas business." In addition, we reviewed the economic and social values that the Sangetsu Group hopes to provide through achieving our long-term vision, and set upward-revised quantitative targets for economic value of 250 billion yen in net sales and 27 billion yen in operating income in fiscal 2029.

The "Space Creation Company" that the Sangetsu Group aims to become, is one that strengthens its ability to deliver various solutions for providing better spaces. In a sense, this is

a policy rooted in the "spatial dimension." However, to create spaces that are truly valuable, we need to make proposals that consider not just the physical space itself, but take the "tempo- ral dimension" into account by thinking about how the people who use it will spend time there and what kind of value they will gain from their time there. We believe that thinking about the people who spend time in the spaces we create will lead us to provide more meaningful value over the long term. Our hope is that considerations and proposals that take this kind of temporal dimension into account will serve as the foundation for future business beyond space creation. Space creation proposals are not simply about offering well-designed spaces. They require thinking about how people will use and spend time in the completed space, and make a proposal that allows them to relax, enjoy, and optimally utilize the space once completed.

Therefore, we see the operation and utilization of spaces as major issues, and believe that the diverse and wide-ranging ideas gained there, the possibilities explored, and the adaptability this know-how provides, will form a firm foundation for our space operation business. Our Group defines "space op- eration" as the operation of a space from a long-term point of view, and aims to explore the possibilities of a space subscription business model.

To All Our Stakeholders

During the nine years I have been involved in the management of the Sangetsu Group, I have always striven to be open and honest in my speech and conduct both inside and outside the company. And going forward, I plan to disclose the issues facing our Group, and my own opinions about them, as openly and honestly as possible. As a business manager, I always try to consider various opportunities and risks to the business with an appreciation for the temporal dimension. I'm always thinking about how we should see our balance sheets three to ten years from now, how we should view our business in terms of time, how we should manage our business from a long- term point of view, and how our company should behave as a member of society. I believe that taking the temporal dimension into account, rather than just handling the present moment, will make our measures more sustainable.

I also believe that it is important to our shareholders and other stakeholders, that we manage the company with the goal of attaining long-term growth. In such uncertain times, a

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SANGETSU REPORT 2023

Message from CEO	Story of the Sangetsu Group	Story of the Sangetsu Group		Data Section
[Growth Strategy]		[ESG]

company cannot expect to automatically grow without taking any steps to achieve growth. It is impossible for a company to achieve long-term sustainable growth in a stagnant market, unless the company itself changes the stage on which it operates and continues to take on new challenges.

Moreover, before we can become a company that creates social value, we need to be a company that generates solid earnings and creates economic value. Thankfully, the enhancements to our business that we have enacted over the past nine years are making us into a company that can generate stable cash flows. As we aim for further growth, we again need to make upfront investments that will help us to become a Space

Creation Company, and then a Space Operation Company after that. We will generate economic value as a dynamic company that can achieve long-term growth, and become a company that can deliver greater social value. If through this we can increase the value of the Sangetsu Group in the eyes of society, it will draw employees, customers, and others to our company, and be a motive force making further growth possible. Mean- while, our Group will provide greater social value and become a company which plays an important role in society.

I hope you will look forward to seeing the Sangetsu Group strive to set up a cycle of value creation grounded in a long- term perspective.

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07

Story of the Sangetsu Group [Growth Strategy]

Review of Medium-term Business Plan

In the nine years since our Group adopted the new organizational structure in 2014, we have worked to transform our business in line with three medium-term business plans. Two of these medium-term business plans, "Next Stage Plan G" from 2014 through 2016, and "PLG 2019" from 2017 through 2019, laid the foundation for our business and strengthened its functions. Then [D.C. 2022], covering the three years from 2020 through 2022, improved profitability based on the results generated through previous measures. As a result, consolidated operating income increased significantly, growing from 8.03 billion yen in fiscal 2014 to 20.28 billion yen in fiscal 2022.

				Investment Phase
Next Stage Plan G (2014-2016)				PLG 2019
Basic initiatives			Results			Basic initiatives

1. Establish a sound corporate structure that allows employees to actively participate in management

1. Organizational review
2. Reforms to personnel system
3. Review and clarification of organizational management rules
4. Restructuring of IT systems and improvement of management accounting systems

1. Restructure our business strategy

1. Expansion of existing business
2. Promotion of growth strategy

1. Strengthen stakeholder value

Operating		Passing on our corporate
4
Income
(billions of		philosophy, principles, and vision
yen)

100 since our founding

5 Quantitative achievements

Introduced product division system; established logistics centers, offices, showrooms, and other facilities; revised and enhanced organizational systems and rules

Considered restructuring mission-critical systems (implemented Oct. 2018)

Introduced new personnel compensation system

Strengthened product development, alliance with suppliers, organizational structure, construction work, branding, and other areas Established a subsidiary

in China and acquired U.S. company Koroseal

Enhanced shareholder return strategy

Social contribution activities based on employee initiative

Formulated brand concept, "Joy of Design"

Opened Interior Design Archive

Achieved record high profits one year ahead of schedule in fiscal 2015

CCC improvements

1 Business strategy for growth

1. Strengthen the Value Chain Function and Expand the fields of Business
2. Expansion of geographical development in overseas markets, expansion of products, enhancement of functions
3. Global operations between local locations
4. Strengthen consolidated management system
5. Restructure business

1. Enhance Human Resources

1. Cultivate professionals
2. Fully commit to merit-based approach
3. Promote diversity
4. Reform working styles
5. Promote health management

1. Bolster profit management system
2. ESG and CSR policies

50

5 Quantitative achievements

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SANGETSU REPORT 2023