A N N U A L R E P O R T

Transcription

1 ANNUAL REPORT 2005

2 OUR DRIVING SPIRIT Our Driving Spirit Avoid the pursuit of elusive short-term profits involving undue degrees of risk, instead, focusing exclusively on the true businesses of a trading company, employing Kanematsu s creativity and enthusiasm for taking on challenges Contribute to the further expansion of the global economy, especially in emerging Asian economies, by leveraging decades of experience in cross-border business transactions and the group s infrastructures throughout the world Place priority on our corporate social responsibilities to contribute to global economic and social expansion and the realization of a clean environment CONTENTS Five-Year Summary... 1 Message from the Management... 2 Management s Discussion and Analysis... 4 New Medium-Term Business Plan New KG Strategy of Each Segment for Current Year IT Foodstuffs Iron, Steel & Industrial Plants Life Science & Energy Textiles Financial Section Corporate Directory Forward-Looking Statements Statements contained in this report regarding Kanematsu Corporation s plans, strategies, and expectations for future performance do not constitute statements of historical fact, but fall into the category of forward-looking statements. Such statements are based on current estimates and on forecasts regarding the industrial fields in which the Company operates, as well as on the management s beliefs and assumptions. As such estimates, forecasts, assumptions and so on are subject to a number of uncertainties and unknowable factors, actual results may differ substantially from those projected. Readers are therefore cautioned not to place undue reliance on forward-looking statements. Factors beyond the Company s control and outside its ability to predict, and which could cause results to diverge materially from the Company s projections include, but are not limited to: general economic conditions, currency exchange rates, commodity prices, the impact of unforeseeable technological innovations, changes in customer preference, and the outcome of pending or future litigation.

3 FIVE-YEAR SUMMARY (KANEMATSU CORPORATION AND CONSOLIDATED SUBSIDIARIES) U.S. Dollars Years ended March For the year: Net sales (Total trading transactions) , , , ,477 1,112,920 $8,258,469 Gross trading profit... 68,142 62,208 67,207 73,540 87, ,528 Income (loss) before income taxes and minority interests... 4,836 5,057 4,996 7,211 (6,579) 45,032 Net income... 2,470 3,248 2,234 4,025 17,253 23,000 At year-end: Total shareholders equity... 38,030 23,284 10,763 15,735 14, ,130 Total assets , , , , ,556 4,843,272 Net interest-bearing debt , , , , ,037 2,435,617 Per Share (Yen and U.S. Dollars) Net income Cash dividends... Total shareholders equity Yen amounts have been translated into U.S. dollars, for convenience only, at the rate of =U.S.$1, the exchange rate at March 31, Net Income Net Interest-Bearing Debt and Net D/E Ratio Shareholders Equity and Equity Ratio ( billion) *Tax-effect accounting was adopted beginning FY2000 ( billion) (times) ( billion) (%) FY2000 FY2001 FY2002 FY2003 FY /2001 3/2002 3/2003 3/2004 3/ FY2000 FY2001 FY2002 FY2003 FY Net interest-bearing debt Net D/E ratio Shareholders equity Equity ratio 1

4 MESSAGE FROM THE MANAGEMENT Overview of fiscal 2004 (April 2004 to March 2005) business performance The highlights of fiscal 2004, the first year in New KG200, were as follows: 1. Revenues have turned positive after the slump since our structural reform. Kanematsu Group has returned to an offensive mode, and, as a result, sales have begun to grow again, and both operating income and ordinary income* rose. * Due to reclassification, ordinary income does not appear on the income statements. Tadashi Kurachi Chairman Yoshihiro Miwa President 2. Shareholders equity has increased substantially, and our financial position has been strengthened. First, we would like to thank all our stakeholders for their support and cooperation. As reported in last year s annual report, the Company compiled a new medium-term business plan, New KG200, in February 2004, and launched initiatives in April that year aimed achieving full recovery by transforming itself into a totally new and revamped company. In our new medium-term business plan, New KG200, which started from fiscal 2004, we aim to shift our business and management focus from the cost-reductionoriented defensive mode to the growth-oriented offensive mode, which aims for significant growth in gross trading profit and operating income. For this purpose, we set our priority on reinforcing our marketing power, which will firmly position our company on a growth curve. At the same time, we plan to raise equity and take other actions to build a solid financial position. Moreover, everyone at Kanematsu is determined to bring about group management reforms with the common objective of becoming a speedy and efficient organization that is even more customer-driven. And now, a summary of fiscal The Company saw sales rise 8.4% to billion due to growth in new contracts and other efforts to broaden our customer base. The Iron, Steel & Industrial Plants Division enjoyed strong growth, with Iron & Steel operations benefiting from pipeline sales to the U.S. oil exploration companies, a business priority, and expanding sales by Industrial Plant operations, particularly shipbuilding in Vietnam and electrical power business in Southeast Asian countries. As a result, gross trading profit rose 9.5% to 68.1 billion. Our gross trading profit ratio, which is traditionally high compared with other trading companies, edged up to 7.7%, showing that we have increased sales of highly profitable items. SG&A expenses rose in line with the increase in sales, but we lowered the ratio of SG&A to gross trading profit through continued unstinting efforts to control expenses by streamlining operations. As a result, operating income rose 16.3% from the previous year to 15.7 billion. Non-operating income & loss account deteriorated due to increased long-term borrowings, a heavier interest expense burden due to rising the U.S. interest rates, and underperforming equity method investments at certain poorly performing affiliates. However, ordinary income rose 9.5% to 11.7 billion. Core earnings, the yardstick for underlying profitability at trading companies over time, increased 2

5 substantially to 12.3 billion. This was the highest level in ten years, and reflects our efforts to steadily build up earnings in our core operations as a trading company. Net income for the period fell 0.8 billion to 2.4 billion, due to a 1.2 billion deterioration in extraordinary gain/loss, mainly due to transfers to the provision for doubtful accounts at affiliates. By segment, the Iron, Steel & Industrial Plants Division increased both revenue and earnings. Iron & Steel sales grew substantially on pipeline transactions for oil exploration in the U.S., and coke transactions in China were also strong. In Industrial Plants, a sales contribution came from contracts for electrical power and shipbuilding businesses in Southeast Asia. Sales of machine tools for capacity increases were also strong. In the Foodstuffs and Life Science & Energy Division, we posted a steady increase in profit. In the IT Division, revenue rose on solid performances in the mobile phone contents business in the U.S., and strong sales in the semiconductor, LCD and electronic components business up to the third quarter. However, earnings overall were down due to decreased profits in the mobile and aerospace businesses. In the mobile business, we made forward investment to increase our trading rights, and failed to generate enough profit to cover expenses. However, we expect to see the benefits of these moves in fiscal In the aerospace business, there was a decline in the number of aircraft we handled, but we expect increased sales in the current year ending March 31, Outlook for fiscal 2005 Despite uncertainties regarding the U.S. and Chinese economies, we expect net sales in the current term to reach billion on a consolidated basis, and ordinary income to total 13.5 billion, as revenues continue to grow from fiscal 2004 and we develop our high valueadded business model. We expect net income to come in at a modest 2.0 billion, reflecting introduction of assetimpairment accounting. Fiscal 2005 will be year two of the new medium-term business plan New KG200. In fiscal 2004, we established our Business Incubation Team (BIT) to foster new businesses and collaboration among our separate divisions, and steadily took measures to position ourselves as an organization for returning to the commercial offensive. In fiscal 2005, we believe we can continue to strengthen our marketing capabilities and get the results we need to generate steady revenues and earnings. We would once more thank our stakeholders for their guidance and support. July, 2005 Tadashi Kurachi Chairman Turning to our financial position, shareholders equity showed steady improvement over the term, rising 14.7 billion from the previous term-end to 38.0 billion, due to conversion of the full sum (totaling 10.0 billion) of convertible bonds issued in June, As a result, the equity ratio (shareholders equity as a percentage of total assets) jumped to 7.3%. Yoshihiro Miwa President We also reduced net interest-bearing debt steadily, by 25.7 billion from the previous term-end to billion. As a result, the net D/E ratio improved strongly from 12.3 to 6.9, indicating that our financial standing has improved. 3

6 MANAGEMENT S DISCUSSION AND ANALYSIS 1. Consolidated Financial Results: Earnings An enhancement of the Company s marketing function is a priority issue under the New KG200 medium-term plan and continuous efforts to expand the customer base have already been originating new businesses. As a result, we realized tangible increases in net sales, gross trading profit, operating and ordinary income respectively. The Iron, Steel & Industrial Plants segment performed especially well, raising sales by 8.4%. Gross trading profit improved by 0.1 percentage points year-on-year, to 7.7%. Thanks to the efficient operations to reduce SG&A expenses, operating income shot up by 16.3% over the previous period, to 15.7 billion. While ordinary income rose 9.5% to 11.7 billion, net income declined to 2.4 billion, due to the extraordinary losses. ( million) FY2004 FY2003 Comparison with FY2003 Percentage Percentage of net sales of net sales Change Change (%) Net sales 886, % 818, % 68, % Gross trading profit 68, % 62, % 5, % Operating income 15, % 13, % 2, % Ordinary income 11, % 10, % 1, % Income before income taxes 4, % 5, % (221) (4.4%) Net income 2, % 3, % (778) (24.0%) (1) Net Sales Net Sales New KG200 to enlarge the operating base have been steadily resulting in higher sales. Especially in the Iron, Steel & Industrial Plant Division, net sales jumped up thanks to favorable market conditions. ( billion) ( million) FY2004 FY2003 Change IT 249, ,923 21,248 Foodstuffs 134, ,432 (4,043) Iron & Steel 118,159 97,997 20,162 Industrial Plants 101,838 79,091 22,747 Iron, Steel & Industrial Plants 219, ,088 42,909 Energy 188, ,170 10,986 Life Science 32,408 28,718 3,690 Life Science & Energy 220, ,888 14,676 Textiles 57,927 64,240 (6,313) Others 5,334 5, Consolidated adjustment (505) (387) (118) Total 886, ,473 68, ( billion) /2002 3/2003 3/2004 3/ Net Sales by Operating Segment IT Foodstuffs Iron, Steel & Life Science Textiles Industrial Plants & Energy and Others FY2002 FY2003 FY2004 4

7 (2) Gross Trading Profit Gross trading profit shows a 5.9 billion increase over the previous period, and the ratio of gross trading profit to sales remains high at the level of 7.7%. ( million) FY2004 FY2003 Change Actual Profit ratio Actual Profit ratio Actual Ratio change IT 23, % 22, % 1,186 (0.3%) Foodstuffs 8, % 8, % (35) 0.1% Iron & Steel 9, % 6, % 3, % Industrial Plants 9, % 7, % 1,696 (0.4%) Iron, Steel & Industrial Plants 18, % 13, % 5, % Energy 6, % 6, % 60 (0.2%) Life Science 2, % 2, % (41) (1.2%) Life Science & Energy 9, % 9, % 19 (0.3%) Textiles 5, % 5, % (291) 0.4% Others 2,649 2,734 (85) Consolidated adjustment (12) 0 (12) Total 68, % 62, % 5, % (1) In the IT segment, sales of the cell phone contents distribution in the U.S., semiconductor, and LCD equipment were strong to absorb sluggish sales in the aerospace business. (2) In the Iron, Steel & Industrial Plants segment, specialty steels and oil well pipes in the U.S., the shipbuilding business in Vietnam, the geothermal power generation business in S.E. Asia, and machine tool transactions contributed to earnings growth. ( billion) Gross Trading Profit by Segment (%) 8 Gross Trading Profit Ratio (FY2004) (Comparison with 7 major trading companies) IT Foodstuffs Iron, Steel & Life Science Textiles Industrial Plants & Energy and Others FY2002 FY2003 FY Kanematsu 7 major trading 7 major trading 7 major trading companies companies companies (average) (highest) (lowest) (3) Selling, General and Administrative Expenses Although SG&A expenses increased year-on-year, the ratio of SG&A expenses to gross trading profit remains in good shape. ( million) FY2004 FY2003 Change Personnel expenses 25,757 24,631 1,126 Non-personnel expenses 26,623 24,023 2,600 Provision to the reserve for doubtful accounts SG&A expenses 52,380 48,654 3,726 Ratio of SG&A expenses to gross trading profit 76.9% 78.2% (1.3%) (%) Ratio of SG&A Expenses to Gross Trading Profit /2000 3/2001 3/2002 3/2003 3/2004 3/2005 5

8 (4) Operating Income Gross trading profit well absorbed SG&A expenses so that operating income resulted a strong 16.3% year-on-year gain of 2.2 billion. ( million) FY2004 FY2003 Change Actual Profit ratio Actual Profit ratio Actual Profit ratio IT 3, % 4, % (949) (0.5%) Foodstuffs 1, % 1, % % Iron & Steel 4, % 2, % 2, % Industrial Plants 1, % 1, % % Iron, Steel & Industrial Plants 6, % 3, % 3, % Energy 1, % % % Life Science % % 24 (0.2%) Life Science & Energy 1, % 1, % % Textiles 1, % 1, % (393) (0.4%) Others Consolidated adjustment (7) 10 (17) Total 15, % 13, % 2, % (1) Operating income in the IT segment decreased because of increased marketing expenses in the mobile multimedia business and lower aerospace earnings. (2) In Textiles, operating income decreased due to sluggish domestic sales brought by belated winter and discontinued overseas operations. (5) Non-Operating Income & Loss Interest expenses increased because of the refinancing of (with long-term fixed rates) and rising U.S. interest rates. A decline in earnings at certain affiliated companies decreased gain on equity-method investment. ( million) FY2004 FY2003 Change Dividends received Interest received 1,031 1,772 (741) Interest paid (6,700) (6,706) 6 Financial balance (4,818) (4,228) (590) Gain on equity-method investment 853 1,177 (324) Others (77) 203 (280) Non-operating loss (4,042) (2,848) (1,194) ( billion) Operating Income by Segment IT Foodstuffs Iron, Steel & Life Science Textiles Industrial Plants & Energy and Others FY2002 FY2003 FY Financial Balance Fund Efficiency ( billion) 10 ( billion) 12.5 (%) FY2000 FY2001 FY2002 FY2003 FY FY2000 FY2001 FY2002 FY2003 FY Interest and dividend income Interest expenses Financial balance Ordinary income Fund efficiency *Fund efficiency = ordinary income / (net interest-bearing debt + shareholders equity) *Figures are exclusive of profit from sale of marketable securities 6

9 (6) Ordinary Income Up 9.5% to 11.7 billion Core earnings also improved by 1.5 billion, or 14.7% over the previous period, to 12.3 billion. ( million) FY2004 FY2003 Change Ordinary income 11,720 10,706 1,014 Ordinary income ratio 1.3% 1.3% Core earnings 12,307 10,730 1,577 Core earnings = Operating income + Reserve for doubtful accounts + Financial balance + Dividends received + Gain on equity-method investment ( billion) Core Earnings 11.5 Note: Accounting standards relating to foreign exchange were revised in the term ended March However, figures for prior periods are not retrospectively adjusted FY2000 FY2001 FY2002 FY2003 FY2004 (7) Extraordinary Gain & Loss, and Net Income Extraordinary loss increased 1.2 billion, mainly because of the additional allowance for doubtful receivables from affiliated companies. This caused net income to decline 0.7 billion to 2.4 billion. ( million) FY2004 FY2003 Change Gain on sale of investments, net (264) Loss on revaluation of investments (233) (744) 511 Loss on sale or disposal of property and equipment, net (1,211) (1,842) 631 Provision for allowance for doubtful accounts (2,230) 242 (2,472) Provision for allowance for loss on guarantees (977) (907) (70) Gain on liquidation of subsidiaries 58 (58) Amortization of the unrecognized transition amount arising from adopting the new standard for retirement benefits (1,659) (1,659) 0 Loss on settlement of dispute (2,034) 2,034 Gain on cancellation of lease 2,253 (2,253) Loss on closing business (1,039) (1,741) 702 Other extraordinary gains (losses) 4 4 Extraordinary gain (loss) (6,884) (5,649) (1,235) Income before income taxes 4,836 5,057 (221) Income taxes and minority interests (2,366) (1,809) (557) Net income 2,470 3,248 (778) 2. Consolidated Balance Sheets As a result of the 100% conversion of the unsecured convertible bonds issued in June 2004 for 10 billion, shareholders equity was increased to 38.0 billion up 14.7 billion over the previous fiscal year and the equity ratio also improved sharply, to 7.3%. Net interest-bearing debt at the end of the period was billion, and net debt-equity ratio improved to 6.9%. (1) Interest-bearing debt We were successful in reducing net interest-bearing debt by 25.6 billion from the previous fiscal year, and the liquidity ratio improved to 126.0%. ( million) 3/2005 3/2004 Comparison with 3/2004 Ratio Ratio Change Change (%) Short-term borrowings 99, % 121, % (22,232) Long-term borrowings 211, % 201, % 9,522 Total borrowings 310, % 323, % (12,710) (3.9%) Gross interest-bearing debt 310, ,527 (12,710) (3.9%) Net interest-bearing debt (Note 1) 261, ,246 (25,685) (8.9%) Liquidity ratio (Note 2) 126.0% 110.4% 15.6% Note 1: Net interest-bearing debt = Gross interest-bearing debt Cash and bank deposits Note 2: Liquidity ratio = Current assets / Current liabilities 7

10 Long- and Short-Term Borrowings ( billion) (%) /2001 3/2002 3/2003 3/2004 3/ Long-Term Borrowings Short-Term Borrowings Ratio of Long-Term Borrowings Liquidity Ratio ( billion) (%) /2001 3/2002 3/2003 3/2004 3/2005 Current assets Current liabilities Liquidity ratio Net Interest-Bearing Debt and Net Debt Equity Ratio ( billion) (Times) /2001 3/2002 3/2003 3/2004 3/2005 Net Interest-Bearing Debt Net Debt-Equity Ratio (2) Shareholders Equity As a result of 100% conversion of the recent issue of unsecured convertible bonds for 10 billion, shareholders equity was built up to 38.0 billion. Thanks to the increased shareholders equity and the reduced net interest-bearing debt, the equity ratio and the debt-equity ratio improved sharply. ( million) Comparison with 3/2004 3/2005 3/2004 Change Change (%) Common stock 27,502 22,448 5, % Capital surplus 26,038 21,035 5, % Retained earnings 5,392 3,505 1, % Land revaluation reserves Unrealized loss on available-for-sale securities 1,694 (1,025) 2,719 Foreign exchange translation (Note) (21,505) (21,591) 86 Treasury stock (1,149) (1,146) (3) Total shareholders equity 38,030 23,284 14, % Equity ratio (%) Net D/E ratio Note: Exchange rate : /US$ at March 31, /US$ at March 31, 2005 (3) Assets by Account Title ( million) Comparison with 3/2004 3/2005 3/2004 Change Change (%) Cash and bank deposits 49,256 36,281 12, % Accounts and notes receivable 148, ,096 (1,545) (1.0%) Inventories* 71,172 67,849 3, % Investments (Note) 71,670 78,362 (6,692) (8.5%) Loans (Note) 30,624 30,644 (20) (0.1%) Tangible fixed assets* 69,395 71,565 (2,170) (3.0%) Deferred tax assets 26,356 27,339 (983) (3.6%) Others 83,916 76,801 7, % Reserve for doubtful accounts (30,821) (30,946) 125 Total assets 520, ,991 12, % Note: Investments = Marketable securities + Investment securities Loans = Short-term loans receivables + Long-term loans receivables * Real estate holdings 11.0 billion held for sale included in inventories 50.3 billion in tangible fixed assets where 15.5 billion is for rent and 34.8 billion is for operational use. 8

11 Total Assets and Ratio of Ordinary Income to Total Assets Investments and Loans ( billion) (%) ( billion) /2001 3/2002 3/2003 3/2004 3/ /2001 3/2002 3/2003 3/2004 3/2005 Total assets as of the end of fiscal year Ratio of ordinary income to total assets 3. Consolidated Cash Flows FY2004 FY2003 Change Operating income + Depreciation and amortization 18,884 16,650 2,234 Decrease (increase) in trade notes receivable, inventories and trade notes payable (3,459) 9,747 (13,206) Income on (payment of) interest, dividends and income taxes (5,302) (7,129) 1,827 Cash flows from operating activities 10,123 19,268 (9,145) Cash flows from investing activities 5,383 6,615 (1,232) Total free cash flow 15,506 25,883 (10,377) Cash flows from financing activities (2,913) (24,823) 21,910 ( million) 9

12 NEW MEDIUM-TERM BUSINESS PLAN NEW KG200 New KG200 New Medium-Term Business Plan ➀Reinforced Marketing Power Establishing profitable business base by increasing value-added transactions Strengthening ability to earn a sufficient level of profit ➁Establish a Sound Financial Position Continuous effort to reduce interest-bearing debt Increase of shareholders equity by 100% Improvement of asset quality ➂Conduct Group-wide Management Reforms Customer-oriented efficient operations through fast decision-making Management renovation including structural reform (1) The Kanematsu Business Model Features of the New Kanematsu Return to the Basic Principle of a Trading Company, i.e., Focusing Exclusively on Business that Creates Value. Focus Strategy Focusing on four core business segments with the potential for value-added services Liquidating unprofitable businesses Low-Cost Operations Low administrative expense ratio Low financial cost to sales ratio High Profitability High operating income margin High pretax income ratio Rigorous Risk Management Avoid high-risk financial business (including proprietary trading) Avoid investments and loans that merely chase high returns Business Model Pursuing Higher Profitability Markets and Products Niche Markets Top Market share Geographic Regions Focus on Key Areas Asia North America Business Style Structuring and Proposals (A solution provider) Functions Hybrid Trading Company 10

13 (2) Goals Key Goals: Numerical Targets for the Plan s Final Year (Fiscal 2006: April/2006 March/2007) Consolidated Pretax Income before Extraordinary Items: 20 billion, Consolidated Net Income: 10 billion Net Interest-bearing Debt: 250 billion Net DER: 6 times Return on Capital (Consolidated Pretax Income before Extraordinary Items) on Invested Capital: > = 6% Earnings for first business year The target for consolidated ordinary income for the first business year was 13.5 billion, and the actual result was 11.7 billion. Net income was 2.4 billion, compared to the targeted 4.0 billion. At billion, net interest-bearing debt was well below the target of 280 billion. With a CB of 10 billion converted to capital, shareholders equity stood at 38 billion, while the net debt-equity ratio of 6.9 was significantly below the target of 11.0 and close to the target for the final year of the plan. Numerical Goals ➀Earnings ( million) New Medium-Term Business Plan New KG200 FY2004 FY2005 FY2006 (Actual) (Forecast) (Forecast) Net Sales 886, ,000 1,000,000 Gross Trading Profit 68,142 74,500 80,000 Ratio 7.7% 8.0% 8.0% Operating Income 15,762 21,000 24,500 Ratio 1.8% 2.2% 2.5% Pretax Income before Extraordinary Items 11,720 16,000 20,000 Ratio 1.3% 1.7% 2.0% Net income 2,470 6,000 10,000 ➁Balance Sheets ( million) New Medium-Term Business Plan New KG200 FY2004 FY2005 FY2006 (Actual) (Forecast) (Forecast) Total Assets 520, , ,000 Net Interest-bearing Debt 261, , ,000 Shareholders Equity 38,030 32,000 42,500 Shareholders Equity Ratio 7.3% 6.4% 8.5% Net DER Return on Net Debt (*1) 3.9% 5.4% 6.8% ROE 8.1% 17.1% 26.8% Interest-bearing Debt Repayment Period (*2) (*1) Return on Net Debt = Pretax Income before Extraordinary Items / (Net Interest-bearing Debt + Shareholders Equity) (*2) Interest-bearing Debt Repayment Period = Net Interest-bearing Debt / Operating Income before Depreciation and Amortization 11

14 Highlights of the New Kanematsu Structural Reform Plan (May 1999 March 2001) A two-year Turnaround Program 1) Courageous shift to the focus strategy 2) Rigorous downsizing and cost-cutting efforts 3) Capital reduction, private placement and debt forgiveness 4) Substantial reduction in interest-bearing debt and improved financial position a Meeting our three year targets in only two years Previous Medium-Term Business Plan (April 2001 March 2004) A three-year Revival Program Establishing a Solid Foundation for Group Management 1) Growth opportunities demonstrated by sound corporate system and flourishing business development 2) Substantial reductions in interest-bearing debt and interest expenses 3) Immediate exit from accumulated deficit status 4) Contribution to the Japanese economy New Medium-Term Business Plan New KG200 (April 2004 March 2007) Completing the Recovery The Final Stage of Kanematsu s Revival Program Kanematsu aims to achieve a full recovery in business performance through structural reform, leading to the creation of an almost completely new company. From Turnaround to Complete Revival Developing growth seeds planted during the previous New Medium-Term Business Plan (IT: FPD Project, etc.) Reaping the benefits of businesses that have sprung from these seeds Prospective Business Developing growth seeds planted during the previous Structural Reform Plan New Business Dramatic reduction in unprofitable businesses and establishment of an organization with strong cost management skills Strengthening the group s management base Existing Business Structural Reform Plan (May 1999 Mar. 2001) Previous Medium-Term Business Plan (Apr Mar. 2004) New Medium-Term Business Plan NewKG200 (Apr Mar. 2007) 12

15 Consolidated Business Performance (FY1999 ~ FY2004) ( million) Medium-Term Business Plan Structural Reform Plan Previous Medium-Term Business Plan New KG200 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 (Actual) (Actual) (Actual) (Actual) (Actual) (Actual) Net Sales 1,407,921 1,112, , , , ,877 Gross Trading Profit 92,299 87,996 73,540 67,207 62,208 68,142 (Gross Trading Profit Ratio) (6.56%) (7.91%) (8.15%) (8.01%) (7.60%) (7.68%) Operating Income 14,507 21,608 15,779 15,716 13,554 15,762 (Operating Income to Net Sales Ratio) (1.03%) (1.94%) (1.75%) (1.87%) (1.66%) (1.78%) Consolidated Pretax Income before Extraordinary Items 2,560 11,368 11,735 12,073 10,706 11,720 (Income to Net Sales Ratio) (0.18%) (1.02%) (1.30%) (1.44%) (1.31%) (1.32%) Net Income (loss) (12,446) (*3) 17,253 4,025 2,234 3,248 2,470 (Net Income (loss) to Net Sales Ratio) (-0.88%) (1.55%) (0.45%) (0.27%) (0.40%) (0.28%) Total Assets 884, , , , , ,119 Shareholders Equity 11,542 14,387 15,735 10,763 23,284 38,030 (Shareholders Equity ratio) (1.30%) (1.86%) (2.60%) (2.04%) (4.58%) (7.31%) Net Interest-bearing Debt (*1) 543, , , , , ,561 Net DER (*2) Consolidated Subsidiaries Notes: 1. Net Interest-bearing Debt = Interest-bearing Debt Cash and Bank Deposits 2. Net DER = Net Interest-bearing Debt / Shareholders Equity 3. Switch to Deferred Tax Accounting 13

16 STRATEGY OF EACH SEGMENT FOR CURRENT YEAR IT In addition to the expanding semiconductor market supported by a robust digital home electronics market, the Company will focus its resources onto the automotive electronics market and opto-electronics fields where tangible market growth is expected. In the automotive electronics field, we anticipate strong demand for ICs for vehicle communications, car navigation, and audio-related devices. In the optoelectronics field, with the Company s micro-lenses for cell phones as a core product, such products as units used in rear-projection TV are expected to become a new source of revenues (1) Main Business Consolidated Business Main Products Department in charge Major Consolidated Subsidiary Net Sales (Forecast) Semiconductor, semiconductor/led Devices Company Electronic Parts and manufacturing equipment, Semiconductor Dept. Components optical/communications, Industrial Electronics 142 billion electronic components/ Dept. Mobile Multimedia mechanized parts Mobile communications terminals/mobile phones IT Administration Office Kanematsu Communications Ltd billion Aerospace Aircraft/aircraft parts Aerospace Dept. Kanematsu Aerospace Corp. 10 billion Memorex Telex Japan Ltd. 6.5 billion System Solutions Computers/network systems IT Administration Office Kanematsu Electronics Ltd. Nippon Office Systems Ltd. ( 79 billion) Total 265 billion Note: Names in italics indicate companies that contributed to the consolidated ordinary income on the equity-method basis: and the amount in parentheses shows the total of net sales of those companies. (2) Business Forecast FY2005 ( million) FY2005 FY2004 (Forecast) (Result) Change Net Sales 265, ,171 15,829 Gross Trading Profit 28,500 23,859 4,641 Ratio 10.8% 9.6% 1.2% Operating Income 5,000 3,613 1,387 Ratio 1.9% 1.5% 0.4% (3) Actions and Outlook for FY2005 (compared with FY2004 result) Electronic Parts and Components Business (sales down 1.9 billion, gross trading profit up 1.2 billion) In the semiconductor business, the Company anticipates earnings growth in semiconductor products for special applications such as automotive communication devices and amusement machines. Sales of sound-source ICs for cell phones are expected to maintain the same level as in the previous term. In semiconductor and LCD manufacturing equipment, a slowdown in the industry hit sales; however, the outlook is for a mid-year recovery. Utilizing a business alliance with a fab-less manufacturer, the Company succeeded in developing manufacturing equipment for plasma CVDs. Sales of the product will start in this fiscal year. Growth in sales and income is expected in the electronic and mechanical components business, such as exporting OEM parts for four- and two-wheel vehicles, and printers. Through an alliance with a leading optical lens manufacturer, Kanematsu obtained exclusive sales rights for micro-lenses. Strong growth is anticipated for cell phones with cameras in Korea, Taiwan, Europe, and North America. We also anticipate an expansion of demand for lenses for the units of rear projection TVs. Mobile Multimedia Business (sales up 7.7 billion, gross trading profit up 0.6 billion) We will focus on expanding the customer base in response to the introduction of number portability which allows customers to maintain the same phone number when they change services to other providers. New sales collaboration with a rental video chain started in the previous year. Efforts are focused on increasing market share to be a countable agent for the carriers, such as NTT Docomo and AU. We established a strong position as a contents distributor in the U.S. market, where dynamic expansion is expected. 14

17 Aerospace Business (sales up 3.4 billion, gross trading profit up 0.5 billion) There are scheduled deliveries for airplanes based on a long-term contract with the public sector. The rotatable parts business will show steady growth in the U.S. and U.K. As Japanese sales agent for Lockheed Martin Corporation of the U.S. we are focusing on sales of next-generation broadcasting satellite, equipment and materials for ground control facilities. System Solutions Business (sales up 6.5 billion, gross trading profit up 2.3 billion) Starting in the current fiscal year, Memorex Telex Japan, Ltd. will operate as Kanematsu s 100% subsidiary in the System Solution business, primarily as a supplier of storage solutions. Foodstuffs We will continue to be pro-active to the client s taste and demand. We provide safe, traceable, and high quality foodstuffs through the exclusive network we created with suppliers and processors. We integrated the feedstuff sales subsidiary as a division company to optimize efficiency and enterprise value. (1) Main Business Consolidated Business Main Products Department in charge Major Consolidated Subsidiary Net Sales (Forecast) Foods Canned/frozen/dried fruits, coffee, Produce Dept. I Kanematsu Food Corp. 18 billion cocoa, sugar, sesame, peanuts, various beans, wines Produce Dept. II Nippon Liquor Ltd. ( 3 billion) Meat and Marine Meat & Marine Products Kanematsu Food Corp. All meat, seafood Products Dept. Nippon Shokuhin Co., Ltd. 57 billion Feed and Dairy Feed, fertilizer, soybeans, barley, Agri Company, Kanematsu Food Corp. Products/Grains wheat, rice, processed foods, pet foods Grain Dept. Kanematsu Agri-Tech Corp. 65 billion Note: Names in italics indicate companies that contributed to the consolidated ordinary income on the equity-method basis: and the amount in parentheses shows the total of net sales of those companies. Total 140 billion (2) Business Forecast for the FY2005 ( million) FY2005 FY2004 (Forecast) (Result) Change Net Sales 140, ,389 5,611 Gross Trading Profit 9,000 8, Ratio 6.4% 6.4% Operating Income 2,500 1, Ratio 1.8% 1.3% 0.5% (3) Actions and Outlook for FY2005 (compared with FY2004 result) Food Business (sales flat, gross trading profit flat) We established a new processing plant for vegetables and fruit in China. It has started full-scale operations. We utilize contracted farming to ensure traceability and quality control in order to differentiate products. Rapid sales growth has been achieved in Japan, U.S., and Europe. 15 An aloe for yogurt s ingredient, we set up a plant in Thailand to enhance both product quality and volume of supply. Our goal in this business is to achieve growth in sales by stabilizing supply sources. To maintain and expand our market share in coffee, we have an alliance with a leading grower of Blue Mountain Coffee, which is an established brand in Japan. In the challenging wine business, we strengthened our subsidiary, Nippon Liquor Ltd., by entering into an alliance with Mercian Corporation, the industry s largest company. This move was targeted at enhancing our specialty in the market for middle- and high-grade wines. Meat and Marine Products Business (sales up 5.6 billion, gross trading profit up 0.2 billion) In the livestock business, we have expanded sales of marbled Australian beef raised on carefully regulated grain feed. We believe that we could continue to differentiate our products even after the import of U.S. beef resumes.

18 As to pork, the safeguards have put in place for four successive terms have made our business difficult, however, we have established channels to sell black Canadian hogs and other high-quality pork to be able to supply profitable value-added products. In marine products, sales of octopus and shrimp are expected to recover sharply as prohibition of fishing imposed last year just lifted. Feed and Dairy Products/Grains Business (sales flat, gross trading profit up 0.2 billion) The mixed feedstuffs business of Kanematsu Agri-Tech, a consolidated subsidiary, has been integrated into Kanematsu to operate as a division company. This has enabled us to build an integrated system, from procurement to processing, to achieve efficient cost management. In the trading of hay and raw ingredients for feed, strong sales are expected due to the Company s expanded cooperation with large farms. We anticipate higher revenue and income in soybean food products, as demand for organic soybeans in the current health conscious market continues to be strong. To improve profit margins in our grains business, we will continue cost-cutting efforts in operations with government agencies. In addition, expanded retail networks as a franchisee of high-end bakery chains to which we supply wheat flour and related products will contribute to higher earnings. Iron, Steel & Industrial Plants <Iron & Steel> Iron and steel-related businesses continue to be profitable despite a slowdown of the market from the previous term. The Company will focus its activities on the sale of steel materials to the Middle East and special steel pipes for oil exploration equipment in the U.S. The Company will diversify supply sources to meet an increased demand for galvanized iron products. In the Casting and forging products-related business, we are expecting large volumes of orders from the U.S. automotive industry. <Plants> We pursue projects which will create new markets and value such as the Ship Building Project in Vietnam targeting the Japanese medium-sized bulk cargo vessel market where shipbuilders are focusing on large container vessels. We are focusing efforts on the projects for geothermal electric power generation and plants in Southeast Asia and China, where we have excellent experiences. In the machinery and tool business, to strengthen our customer service functions we are in the process of setting up a maintenance center. (1) Main Business Major Consolidated Business Main Products Department in charge Consolidated Net Sales Subsidiary (Forecast) Steel Trading and Stainless steel, Iron & Steel Foreign Steel Materials surface-treated steel plates, Trade Dept. seamless piping, coking coal SSOT 69 billion Iron & Steel Automotive Precision forged products, Materials Automobile parts Automotive Materials Dept. 11 billion Domestic Iron and Steel products Iron & Steel Administration Kanematsu Steel Dept. Trading Corp. 40 billion Plants and Various plants, automobiles, Projects & Plant Machinery Transportation maritime equipment, Dept. Transportation Machinery Equipment ODA projects Dept. 43 billion Plants Telecommunications Cable/Electric projects, optical fiber, electric Cable & Power Power Projects power projects Projects Dept. 5 billion Machine Tools and Machine tools, industrial Machinery & Plant Kanematsu KGK Industrial Machinery machinery Administration Office Corp. 52 billion 16 Total 220 billion

19 (2) Business Forecast for the FY2005 ( million) FY2005 FY2004 Iron & Steel (Forecast) (Result) Change Net Sales 120, ,159 1,849 Gross Trading Profit 8,300 9,619 (1,319) Ratio 6.9% 8.1% (1.2%) Operating Income 4,000 4,930 (930) Ratio 3.3% 4.2% (0.9%) ( million) FY2005 FY2004 Plants (Forecast) (Result) Change Net Sales 100, ,838 (1,838) Gross Trading Profit 9,200 9, Ratio 9.2% 8.9% 0.3% Operating Income 1,800 1, Ratio 1.8% 1.5% 0.3% (3) Actions and Outlook for FY2005 (compared with FY2004 result) <Iron & Steel> Steel Trading and Steel Materials Business (sales up 0.8 billion, gross trading profit down 1.0 billion) Trading of special steels in the U.S., which yielded a high level of earnings last year, is to be slower due to the price increase in the market. The sale of special steel materials to oil exploration in the U.S. will continue to be lucrative. The Company expects to maintain a high level of earnings going forward. The Company will diversify supply sources to meet an increased demand for galvanized iron products. We started to supply steel materials for the shipyard in Vietnam where our Plants division originated a shipbuilding project. With the rise of the Chinese economy causing inflated prices of natural resources, we have reopened mine in India to meet increasing demand for iron in China. First commercial shipping will start in the middle of this fiscal year. Automotive Materials Business (sales up 1.4 billion, gross trading profit flat) European and the U.S. automotive industries maintain strong demand for galvanized steel sheets. Casting and forging products, we are expecting a large volume of orders from the U.S. automotive industry. Domestic Iron and Steel Business (sales down 0.4 billion, gross trading profit down 0.3 billion) Striving for higher efficiency and profit margin. <Plants> Plants and Transportation Equipment Business (sales flat, gross trading profit flat) In Southeast Asia, Iran and China, where we are in a strong position, we will focus on getting permits for mandates in industrial plants, water works, environment facilities, transportation and harbor facilities. In the previous term, a new shipbuilding project in Vietnam successfully delivered a first vessel to Japanese owner. We expects this strong demand to continue to lead to a steady stream of contracts this fiscal year. Cable/Electric Power Projects Business (sales flat, gross trading profit flat) Demand is high in the Philippines and Indonesia, where several orders have been received. We are also making efforts in new areas of the environmental business. This includes originating projects in the fields of biomass electric power generation and clean development mechanisms (CDM). Part of this strategy is to gain emission rights. Steady gains in securing income are being made in our cable projects business through activities such as fiberoptic and light communications components and building broadband and mobile phone networks in Southeast Asia. Machine Tools and Industrial Machinery Business (sales flat, gross trading profit up 0.2 billion) Sales are expected to be flat in machine tool markets, where a slowdown has taken place. The Company has responded to these conditions by securing an adequate market share. We have established a new maintenance company to expand business in the after-market segment. 17

20 Life Science & Energy <Energy> Oil tank operations generate a stable stream of profit as we could transfer higher crude oil prices to the consumer. Downstream operations such as running self-service gas stations, and LPG bulk sales business will contribute to earnings this year. We are promoting ESCOs (energy conservation support businesses), an activity begun in the first half of fiscal We will continue to pursue commercialization of services in this field. <Life Science> Collaborating with Kanematsu Chemicals Corp. in our functional chemicals business, we are concentrating on developing new products and materials in the environment field. In such existing products as fertilizers and battery materials, we expect to expand our market share and customer base. In our health care business, taking advantage of the market s trend toward expansion of health consciousness, we are enhancing supplement business. New nutritional supplements, such as Alpha-Lipoic Acid and Creatine are introduced to Japanese fine supplement manufacturers. (1) Main Business Energy Major Consolidated Business Main Products Department in charge Subsidiary Petroleum Products Crude oil, petroleum Kanematsu Petroleum and Gas Energy Dept. products, LPG Corp. Consolidated Net Sales (Forecast) 190 billion Functional Chemicals Battery materials, fertilizer Kanematsu Chemicals materials, adhesive Functional Chemicals Dept. Corp. materials, solvents 28 billion Functional food materials, Kanematsu Wellness Life Science Healthcare Stolle Milk, nutritional Corp. 5 billion supplements Life Science Dept. Pharmaceuticals, Pharmaceuticals pharmaceutical 2 billion intermediates Total 225 billion (2) Business Forecast FY2005 ( million) FY2005 (Forecast) FY2004 (Result) Change Net Sales 190, ,156 1,844 Gross Trading Profit 7,200 6, Energy Ratio 3.8% 3.6% 0.2% Operating Income 1,300 1, Ratio 0.7% 0.6% 0.1% Net Sales 35,000 32,408 2,592 Gross Trading Profit 2,800 2, Life Science Ratio 8.0% 7.6% 0.4% Operating Income Ratio 2.6% 2.2% 0.4% 18

21 (3) Actions and Outlook for FY2005 (compared with FY2004 result) <Energy> Petroleum Products and Gas Business (sales up 1.8 billion, gross trading profit up 0.4 billion) Kanematsu operates about 150 gas stations either directly or indirectly. More self-service oriented locations will be opened mainly in Kyushu, and the Nagoya regions where Kanematsu established a strong operational base. Centered on strengthening our trading business in key Asian markets where demand is expanding, such as China, Vietnam and the Philippines. In the LPG business, Kanematsu will specialize in industrial LPG with powerful distribution systems. We have been promoting ESCOs (energy conservation support businesses), since previous fiscal year. To execute efficient marketing activities, we utilize nationwide sales channels of Kanematsu Petroleum Corp. The goal for the current fiscal year is to turn this activity into a full-fledged business. <Life Science> Functional Chemicals Business (sales up 0.5 billion, gross trading profit up 0.1 billion) We strengthen a collaboration with Kanematsu Chemicals, a consolidated subsidiary, to develop new products and materials in the environment field. Healthcare Business (sales up 1.2 billion, gross trading profit up 0.1 billion) Lacsel Force is a lactobacillus product, which is being marketed in collaboration with our Food department as a material for mixed feed for pigs and cattle. The sales performance is excellent, and we intend to expand sales overseas. Orders are increasing rapidly for Alpha-lipoic acid, Creatine and similar functional food ingredients, and growth in sales is expected. Kappa branded sports supplements will also contribute to expanded sales. Pharmaceuticals Business (sales up 0.8 billion, gross trading profit up 0.1 billion) We are targeting areas such as the Middle East and Asia for bulk exports of pharmaceuticals. Collaboration with pharmaceutical companies to develop new reaction intermediates is underway. Importing low-priced generic drugs produced in China, India, and Eastern Europe will contribute to earnings. 19

22 Textiles The keys to success are originality and fashion. Kanematsu s business model is that it covers all the way from procurement of raw materials and yarn (materials) to supply of fabric and products. We are moving ahead in conducting a value chain of operations from production management through logistics both in Japan and overseas. The Company will aggressively pursue the introduction of new brands and the development of its own brand through in-house planning and production. Business strategies Market strategy Stress SPA and retail in Japan; overseas, prioritize Europe/North America and China Merchandise strategy A focus on developing the Company s own merchandise, brands, and fashions (1) Main Business Consolidated Business Main Products Major Consolidated Subsidiary Net Sales (Forecast) Kanematsu Textile Corp. Cotton/knit cut-and-sew clothing, dresses, Kanematsu (Shanghai) Co., Ltd. Products casual shirts, sports clothes, sports shoes, denim items Manufacturing strategy Reinforce manufacturing functions as a fabless manufacturer, enhance skills in materials, planning and proposals, build distribution functions Kanematsu Italia S.p.A. KG Garment Supply Co., Ltd. U Textiles Co., Ltd. Kanematsu Textile USA Inc. 40 billion All types of woven items, knitting yarn, Kanematsu Textile Corp. Materials cotton/synthetic woven goods/ Kanematsu Taiwan Corp. 20 billion functional materials for non-apparel uses Kanematsu Textile (HK) Total 60 billion (2) Business Forecast for the FY2005 ( million) FY2005 FY2004 (Forecast) (Result) Change Net Sales 60,000 57,927 2,073 Gross Trading Profit 5,500 5, Ratio 9.2% 8.7% 0.5% Operating Income 1,500 1, Ratio 2.5% 2.1% 0.4% (3) Actions and Outlook for March 2005 Fiscal Year <Products Business> Kanematsu will introduce merchandise under leading overseas brands, including Lotto Sport Italia, which is popular in the soccer, futsal, and tennis community, Lowe Alpine (Italy) and ASOLO (Italy) for outdoor wear; J4D (Jifordi) for jeans and clothing with a rugged outdoors image; and overseas brands such as Daypack of America, and JanSport. We also will continue to grow the Company s own businesses, promoting new product proposals and marketing such goods as knits and cottons, ladies denim products and men s casual wear. <Materials Business> Kanematsu will draw on its expertise in the export of printed knits to the U.S. and textiles to Europe, both of which have value added by design and planning. This business will also concentrate on exports of textiles from joint ventures in Malaysia and Indonesia to Europe, other regions of Asia and the Middle East. To create new sources of demand, original products are developed using yarn made from Meryl, the nylon material brand of Italy s Nylstar, Europe s largest manufacturer of nylon. We strengthen our line of functional fabrics through an additional tie-up, in the materials field, with IBQ, a leading Spanish maker. 20