Financial Section

Report of Operating Results and Financial Position for the 51st Business Period (November 1, 2014 – October 31, 2015)

Matters Concerning the Corporate Group

Summary of consolidated fiscal year operating results

In the consolidated fiscal year under review, Japan’s economy trended toward recovery, fueled by brisk corporate earnings and improvement in incomes and employment thanks to the government’s continued implementation of aggressive economic and fiscal measures. Meanwhile, although there was an uptick in consumer spending, the rebound was sluggish due to a weak outlook, including downside risk reflecting trends in economies overseas.
In the construction industry, within which the Kanamoto Group operates, public works investments remained strong, bolstered by reconstruction and disaster prevention/reduction projects. These projects were spurred in part by a decline in some material prices and the leveling off of rising labor costs. Although private-sector capital investments rebounded owing to improved corporate earnings, trends remained weak due to an uncertain outlook and wary stance by market participants. Amid this environment, earnings at construction companies, which are customers of the Kanamoto Group, substantially improved overall, but this was particularly true for major construction companies.
In this environment, the Kanamoto Group moved forward with key initiatives which were based on various measures in its Medium-term Management Plan (fiscal 2014 to fiscal 2016). In Japan, its main market, the Company expanded branches in areas where it had weak coverage, including the Tokyo metropolitan area, and adequately allocated assets. In addition, the Company actively moved forward with overseas strategies, anticipating changes in the domestic construction market going forward.
Consequently, in the fiscal year ended October 31, 2015 net sales rose 6.2% from the prior consolidated fiscal year level to ¥133,292 million. Meanwhile on the profit front, operating income decreased 1.1% from the prior consolidated fiscal year to ¥16,270 million and consolidated ordinary income increased 0.5% year-on-year to ¥16,164 million. Net income rose 2.8% over the prior consolidated fiscal year to ¥9,557 million.

Consolidated Operating Results

Summary of consolidated operating results by business segment

Business related to the Construction Equipment Rental Division

In the core construction-related business, construction equipment rental demand trended briskly. This partly reflects a pickup in certain redevelopment projects in the Tokyo metropolitan area and private-sector capital investments. Also, demand is brisk for construction equipment rental owing to full-fledged quake-reconstruction projects and decontamination-related work. However, the business environment was weak as there was not construction work in some regions related to the government’s supplementary budget, as was the case in the previous fiscal year.
By region, sales in this business fluctuated as follows: down 9.5% in the Hokkaido Region, up 19.7% in the Tohoku Region, up 4.8% in the Kanto & Shinetsu Region, up 2.0% in the Kansai & Chubu Region, and down 1.5% in the Kyushu & Okinawa Region. The sales growth reflects the quake-restoration demand in the Tohoku region and the substantial redevelopment in the Kanto & Shinetsu Region.
Sales of used construction equipment rose 26.6% versus the previous fiscal year, reflecting the systematic sale of equipment that had been in service for a certain number of years to ensure a reasonable asset composition.
Reflecting these factors, the Kanamoto Group posted net sales in the construction-related businesses of ¥123,572 million, an increase of 6.0% year-on-year, and operating income of ¥15,592 million, a decrease of 2.0%.

< Subsidiaries >

Kanamoto, Daiichi Kikaisangyo Co., Ltd., and Kanki Corporation are engaged in the rental and sales of construction equipment. Assist Co., Ltd. and its affiliate Asahi Rentax Co., Ltd. deal in the rental and sales of furniture, fixtures and safety products. Kanatech Co., Ltd. engages in the design and sales of modular housing units for temporary use. Kyushu Kensan Co., Ltd. deals in rental and sales of construction equipment centered on foundation equipment. Toyo Industry Co., Ltd. handles the rental and sales of equipment related to shield tunneling. Unite Co., Ltd. handles the rental and sales of road construction equipment and the carries out road construction. KG Flowtechno Co., Ltd. engages in the rental, design, manufacturing, and sales of specialty equipment that is used mainly for ground improvement and the construction of underground structures. Eiwashoukai Co., Ltd. handles the rental of general-purpose small construction machinery.
In China, Shanghai Jinheyuan Engineering Construction Co., Ltd., KANAMOTO (HK) CO., LTD., and Shanghai KG Machinery Co., Ltd., a subsidiary of KG Flowtechno Co., Ltd., carry out construction equipment rental and sales. Kanamoto & JP Nelson Equipment (S) PTE. Ltd. (Singapore) also handles construction equipment rental and sales. In addition, in the fiscal year under review, Kanamoto established several sites in Southeast Asia, including PT Kanamoto Indonesia (Indonesia), SIAM KANAMOTO CO., LTD. (Thailand), KANAMOTO FECON HASSYU CONSTRUCTION EQUIPMENT RENTAL JSC (Vietnam), and KNK MACHINERY & EQUIPMENT CORPORATION (the Philippines).
These group companies also lease rental equipment from Kanamoto when necessary. In the same fashion, Kanamoto leases rental equipment from these companies, which it in turns leases to other users in Japan and abroad. Kanamoto purchases modular housing units for temporary use from Kanatech Co., Ltd.

Divisional Sales (Consolidated)

■ Divisional Sales and Sales Ratio (Consolidated)

　 (Millions of yen; % change from prior year)

Other Businesses

In Other Businesses, net sales increased 8.2% from the prior consolidated fiscal year to ¥9,719 million, while operating income also increased 39.4% year-on-year to ¥301 million, reflecting steady sales at businesses related to the Steel Sales Division and the Information Products Division.

< Subsidiaries >

This segment mainly consists of the business related to the Steel Sales Division, and business related to the Information Products Division and Other Businesses.
In the business related to the Steel Sales Division, Kanamoto sells construction materials, including steel products. In addition, in the business related to the Information Products Division and Other Businesses, the Company handles the rental and sales of computers and peripherals, including workstations and servers. Note that Kanamoto sold all of its shares in Kanamoto Engineering Co., Ltd. on October 1, 2015.

Change in number of branches

During the consolidated fiscal year under review, Kanamoto newly opened 8 branches and closed 1 branch.
New branches: Sendai-Kita Branch (Kurokawa-gun, Miyagi Prefecture), Hitachi Branch (Hitachi, Ibaraki Prefecture), Tohoku Machinery Maintenance Center (Miyagino-ku, Sendai), Hokkaido Region National Sales Division (Chuo-ku, Sapporo), Biratori Machinery Center (Saru-gun, Hokkaido), Tsuruga Branch (Tsuruga, Fukui Prefecture), Tokyo Small Machinery Center and Misato Branch (Misato, Saitama Prefecture)
Closed branches: Oda Branch (Nyu-gun, Fukui Prefecture)

Medium- to Long-term Corporate Management Strategy

The Company’s medium-term corporate management strategy is included in BULL 53, the medium-term corporate management plan. In accordance with this plan, Kanamoto plans to aggressively expand its operations base in the Kanto & Shinetsu region, the home to major projects such as infrastructure development and redevelopment projects related to the Tokyo 2020 Summer Olympic/Paralympic Games, and also aims to build a structure that will enable the Company to bolster earnings in the Tokyo metropolitan area, in line with medium- to long-term demand forecasts. In addition, as a long-term growth engine, Kanamoto aims to strategically move forward with the development of an overseas base for operations, mainly in the ASEAN nations, where strong underlying demand is a potential long-term growth engine.
Meanwhile, to enhance risk resilience to adapt to changes in the business environment, Kanamoto aims to build a management system that will facilitate sustainable growth in the long term by improving its earnings management and strengthening its corporate governance system.

Outlook for the Next Fiscal Year (Fiscal year ending October 2016)

In the fiscal year ending October 2016, Kanamoto anticipates firm construction demand in the Tohoku and Tokyo metropolitan areas, including quake-restoration demand in three prefectures hardest hit in Tohoku, the start of large-scale redevelopment projects in the Tokyo metropolitan area, and acceleration of Olympic-related construction and infrastructure refurbishment However, public works in some regions are likely to be weak, as they were in the previous fiscal year. In light of this, the business environment is expected to remain harsh.
The Kanamoto Group aims to continue to assist in the quick restoration of disaster-stricken areas as it moves forward. Concurrently, as the first step of the new Medium-term Management Plan, the Company plans to accelerate branch openings in the metropolitan areas of Kanto and Kansai, and other uncharted areas, and ultimately build a base for operations to achieve the goals in the final year of the Medium-term Management Plan two years from now. In addition, to continue building corporate value the Company plans to concentrate management resources in construction-related fields in which it can leverage the Group’s comprehensive capabilities. The Company aims to build a structure to facilitate the fortification of its financial position and earnings strength.
That said, regarding overseas business expansion, the Company aims to aggressively move forward by developing partnerships with strong local companies, mainly in Asia where there is future growth potential.
In light of the aforementioned measures, the Kanamoto Group aims for net sales of ¥133,900 million, a growth of 0.5% year-on-year, operating income of ¥16,340 million, an increase of 0.4%, ordinary income of ¥16,270 million, a rise of 0.7%, and profit attributable to owners of parent of ¥10,230 million, an improvement of 7.0%.

Projected Operating Results for the Fiscal Year Ending October 31, 2016