Report of Operating Results and Financial Position for the 49th Business Period

Report of Operating Results and Financial Position for the 49th Business Period
(November 1, 2012 – October 31, 2013)

Summary of Operating Results Operating Environment

During the consolidated fiscal year under review, Japan's economy exhibited a modest recovery trend. Correction of the yen's appreciation continued, and stock prices maintained their steady rise against the backdrop of expectations towards the new administration's monetary easing policy and economic measures. Consumer sentiment and the corporate business outlook were more positive as well. Nevertheless, concerns about the risk of an economic downturn, stirred by the slump in Europe and delay in recovery of the overseas economy including China, proved impossible to dispel, and overall conditions remained uncertain.
In the construction-related business that is the Kanamoto Group's main business, the so-called 15-month budget moved forward, and with government construction investment centered on the region devastated by the recent earthquake trending upward, brighter signs of private sector construction investment were evident as well. On the other hand, conditions raised a number of concerns regarding the future progress of these activities, including a conspicuous shortage of skilled construction workers, a sharp rise in labor costs, glitches in project bidding activities and delays in the start of construction.

Amidst such conditions, the Kanamoto Group moved to build an organization that will enable it to respond without pause or delay to the quickening volume and pace of restoration-related works, while undertaking aggressive capital investment, including the establishment of new branches and enhancement of its rental equipment portfolio, and striving to improve profit margins through the efficient utilization of management resources. The Group moved to thoroughly analyze, enhance and improve the efficiency of its present activities and processes as well, while also initiating organizational changes aimed at strengthening earnings.

As a result of these factors, net sales greatly exceeded the Company's initial plan, and consolidated net sales for the fiscal year ended October 2013 rose 28.7% from the prior consolidated fiscal year level to ¥110,831 million. In terms of earnings as well, operating income expanded 77.2% from the prior consolidated fiscal year to ¥11,392 million and consolidated ordinary income increased 86.6% year-on-year to ¥11,073 million. Net income rose 62.5% over the prior consolidated fiscal year to ¥5,809 million.

Fiscal Year ended October 31, 2013 Consolidated Operating Results

Summary of consolidated operating results by business segment

Business related to the Construction Equipment Rental Division

In the construction-related business that is the main business of Kanamoto, restoration-related works in the earthquake-devastated region and decontamination-related works remained steady, as did government construction investment to strengthen infrastructure such as roads, flood control systems, sewerage systems and harbors in regions throughout Japan and works related to countermeasures, maintenance and repairs of deteriorating infrastructure. Likewise, construction equipment rental demand remained brisk on a nationwide scale, supported by a rush in private sector capital investment demand ahead of the consumption tax hike and a recovery trend centered particularly on energy-related construction. To respond accurately to such demands and diversified frontline needs, the Kanamoto Group moved to ensure its organization is capable of meeting these demands to the maximum extent possible through strengthened cooperation among Group firms, aggressive enhancement of the rental equipment portfolio and optimal placement of these assets in the field.
As a result of these actions, net sales by region in the construction-related business expanded substantially in all regions, rising 15.8% in the Hokkaido Region, 32.4% in the Tohoku Region, 43.6% in the Kanto Region, 44.9% in the Kinki & Chubu Region and 5.3% in the Kyushu & Okinawa Region compared with the prior consolidated fiscal year.
Growth in the Kanto Region and Kinki & Chubu Region, which expanded considerably compared with the prior consolidated fiscal year, was influenced significantly by Unite Co., Ltd., which was included in the scope of consolidation beginning in the consolidated fiscal year under review.
Overseas sales of used construction equipment were similarly affected by the improved balance between supply and demand and greater price competitiveness because of the weaker yen, rising 16.0% year-on-year.

As a result of these factors, net sales for Kanamoto's construction-related businesses for the consolidated fiscal year under review increased 29.1% from the prior consolidated fiscal year to ¥102,359 million, and operating income climbed 78.4% year-on-year to ¥10,916 million.

< Subsidiaries >

The Company's Construction Equipment Rental Division and Daiichi Kikaisangyo Co., Ltd. (a consolidated subsidiary company), Kanki Corporation (a consolidated subsidiary company), Toyo Industry Co., Ltd. (a consolidated subsidiary company) and Kyushu Kensan Co., Ltd. (a consolidated subsidiary company) are engaged in the rental and sale of foundation equipment, construction cranes and equipment and apparatus used for construction. These companies borrow rental equipment assets from the Company as needed in order to meet customer demand. In addition, the Company borrows rental assets from each of these companies as needed to rent to other companies.

Assist Co., Ltd. (a consolidated subsidiary company) is engaged in the rental and sale of furniture, fixtures and safety products. Kanatech Co., Ltd. (a consolidated subsidiary company) designs and sells modular housing units for temporary use. The Company borrows rental assets from each of these companies as needed to rent to other companies. In addition, Kanamoto purchases modular housing units for temporary use from Kanatech as needed.

Unite Co., Ltd. (a consolidated subsidiary) is engaged in the rental and sale of road construction equipment, and manages a road construction business. Unite Co., Ltd. borrows rental equipment assets from the Company as needed in order to meet customer demand. In addition, the Company borrows rental assets from Unite Co., Ltd. as needed to rent to other companies.

Shanghai Jinheyuan Engineering Construction Co., Ltd. (a consolidated subsidiary; Shanghai, China) is engaged in the rental and sale of construction equipment and tools and the import and export of construction materials.

In addition to the above, Kanamoto has four unconsolidated subsidiaries: KG Flowtechno Co., Ltd., KANAMOTO (HK) CO., LTD., Kanamoto & JP Nelson Equipment (S) PTE Ltd. (Singapore) and SJ Rental, Inc. (Territory of Guam, United States). KG Flowtechno Co., Ltd. rents specialized large-scale construction equipment in foreign countries, and is engaged in the technical development, manufacture and sale of ground improvement construction equipment in Japan. KANAMOTO (HK) CO., LTD. borrows rental assets from Kanamoto and is engaged in the rental and sale of construction equipment and tools and the import and export of construction materials. Kanamoto & JP Nelson Equipment (S) PTE Ltd. rents and sells specialized equipment for engineering works in Singapore.

At its Board of Directors meeting held on September 7, 2012, the Company resolved to dissolve and liquidate SJ Rental, Inc., and that company currently is continuing its liquidation procedures.

Other businesses

In the steel products sales the Company is developing in Hokkaido, sales of steel materials for large-scale projects and general steel materials remained steady, and net sales were up 26.8% compared with the prior consolidated fiscal year. In Kanamoto's information and telecommunications-related business, specified worker dispatching also was stable and rose 7.1% year-on-year because of orders received for a major new project.

< Subsidiaries >

The Company's Steel Sales Division sells steel products and other construction-related manufactured products. The Company has no subsidiaries or affiliated companies related to this business. The Information Products Division is engaged in the rental and sale of computers, including workstations and PC servers, as well as computer peripheral equipment. Kanamoto Engineering Co., Ltd. (a consolidated subsidiary) manages specified worker dispatching undertakings to dispatch engineering-related research and development employees to manufacturers and other entities.

Change in number of branches

During the consolidated fiscal year under review, Kanamoto newly opened 5 branches and closed 3 branches.
New branches: Minamisanriku Branch (Motoyoshi-gun, Miyagi Prefecture) Hirono Branch (Futabagun, Fukushima Prefecture) Onagawa Branch (Oshika-gun, Miyagi Prefecture) Minamisoma Branch (Minamisoma, Fukushima Prefecture) Oshamambe Branch (Yamakoshi-gun, Hokkaido Prefecture)
Closed branches: Tobetsu Branch (Ishikari-gun, Hokkaido Prefecture) Hakodate Chuo Branch (Hakodate, Hokkaido Prefecture) Sendai-kita Branch (Kurokawa-gun, Miyagi Prefecture)

Medium to long-term corporate management strategy

Details of Kanamoto's management strategy are provided below.

a) Response to the Great East Japan Earthquake and the crippled Fukushima nuclear power plant

The Kanamoto Group has declared a full response in support of restoration and recovery work by every member of the Kanamoto Group as its most important activity. This effort includes ground improvement works, an activity in which Kanamoto particularly excels, establishing an organization to respond to the crippled Fukushima nuclear power plant, and support for decontamination operations. The Kanamoto Group will continue working zealously to achieve the quick restoration and recovery of the stricken areas.

b) Expand and enlarge Kanamoto's domestic base of operations

Beyond the Tokyo metropolitan area, which was selected for the 2020 Olympics and remains the region where much of Japan's public and private sector demand is concentrated, the Kanamoto Group is actively pursuing branch development, including M&A, in areas west of the Kanto Region, where the Company's presence until now has been limited. Moreover, Group firms are also working to expand operations through cooperation centered on Kanamoto's Regional Special Procurement Sales Division.

c) Undertake overseas deployment

In addition to operations in mainland China, Hong Kong and Singapore where it has established overseas affiliates, the Company will pursue development in ASEAN countries that are exhibiting remarkable growth.
Because the sales of high-quality used construction equipment implemented by Kanamoto each year enhance the Company's reputation, and contribute substantially to business development in other countries, Kanamoto also will continue to offer high-quality used construction equipment for sale.

d) Take steps to improve operating activities

Kanamoto regards adept construction equipment management, together with improved operating efficiency, to be the foundation of the Group's earnings. Consequently we are taking steps to maximize earnings during the life of rental equipment and boost operating margins. These include launching operating improvement measures, thoroughly analyzing and enhancing current operational processes, strengthening loss controls and sharpening the Group's competitive capabilities.

Outlook for the next fiscal year (Business Period ending October 2014)

Turning to the outlook for the next fiscal year, in addition to full-scale restoration works in the earthquake-devastated areas, nationwide disaster prevention and disaster mitigation countermeasures are on the drawing boards based on the slogan "nation-toughening." The re-building of Japan's industrial infrastructure has been raised as a growth strategy as well, and the government is undertaking a variety of projects that will include the construction of ring roads in Japan's major metropolitan areas, improvement of logistics networks and the extension of Shinkansen lines. Moreover, with the decisions to hold the 2020 Olympics in Tokyo and open a linear Shinkansen line in 2027, incidental demand related to these projects is anticipated as well. Finally, because private sector construction demand centered on energy-related needs is likewise growing, Kanamoto believes construction equipment rental demand will be vigorous not only in the disaster-stricken Tohoku Region but on a nationwide scale. Nevertheless, the business climate will continue to discourage an optimistic view because of multiple concerns, ranging from tender glitches and irregularities originating in the shortages of materials, equipment and manpower for works ordered at such an accelerated pace, to the growing competition among firms triggered by the changing balance of supply and demand, including excess inventories of rental equipment, that will result from these projects.

The Kanamoto Group continues to declare a full response in support of restoration and recovery work by every member of the Kanamoto Group to be its most important activity, and will ensure earnings and fulfill its corporate responsibilities in the areas in question. Furthermore, we will simultaneously continue to lay the foundation stones for our domestic operations by mainly bolstering activities in the Tokyo metropolitan area, while pursuing the creation of bases overseas.
Although Kanamoto will continue to restrict sales of used construction equipment, which it partially postponed in order to provide equipment for earthquake disaster reconstruction, for equipment that has been used for a certain number of years the Company's policy will be to proceed with sales on a timely basis, while closely observing the overseas market and the exchange rate trend.
Furthermore, to establish an operations management organization that will generate earnings efficiently, Kanamoto will continue to focus on lowering cost and managing its assets efficiently, while working to further strengthen the regional sales organization that has achieved excellent results so far. The Company will strive as well to further secure earnings from every aspect, including the creation and management of rental demand in sectors unrelated to construction.
Presently the percentage of total earnings accounted for by overseas businesses is not significant. As Kanamoto seeks to deepen its presence in each region mainly through equipment rentals, however, including overseas development of geoengineering-related firms and development into new areas, mainly in Southeast Asian nations, the Company will seek to expand the contents of such operations while continuing to give sufficient attention to the country risks and business risks.

Fiscal year ending October 2014 Projected Operating Results (November 1, 2013-October 31, 2014)