May 12, 2009
Kobelco Construction Machinery’s Financial Results for Fiscal Year 2008 (April 1, 2008 – March 31, 2009)

[General Market Conditions]

The domestic construction machinery market has been weak from the first half of FY2008 in such areas as public works, housing-related construction, private-sector capital investments and used equipment exports. Conditions worsened drastically in the second half of FY2008. Since August 2008, the yen has appreciated rapidly against both the U.S. dollar and Euro, and the export of used equipment became stagnant. At the same time, replacement demand for new machines declined further. In addition, the financial crisis that started in the United States spread to the rest of the world. Sales of both new machines and used equipment decreased drastically.

The overseas construction machinery markets were strong in the first half of FY2008 in newly emerging countries and Asia, but not the United States and Europe. However, in the second half of FY2008, the economic recession due to the financial crisis spread to the entire world, and demand decreased sharply in newly emerging countries, Southeast Asia and China, where demand had been strong.

Against the rapidly changing business environment, the Kobelco Construction Machinery Group implemented urgent measures. In order to reduce the increased inventory and work in process, Kobelco quickly began inventory adjustments from October 2008 and also froze large-scale capital investments. With material prices remaining high, Kobelco tackled cost reductions, improved production efficiency, and raised sales prices. However, such efforts could not fully absorb the drastic changes in the business environment.

On the other hand, Kobelco has steadily taken measures that will serve to build a competitive construction machinery business for the future. The relocation work in Chengdu, Sichuan Province in China, which started in June 2008, is moving forward steadily according to plan. In March 2009, after obtaining the approval of the Hiroshima prefectural assembly, Kobelco signed a formal agreement to purchase 10 hectares of land in the Itsukaichi district in the Hiroshima port area as a future relocation site of its factory. Since large-scale capital investments have been frozen, relocation will not take place for some time. However, the foundation for the global Mother Factory has been laid, aiming to solidify its competitiveness.

In the new product development, Kobelco’s most current models are highly evaluated in markets worldwide. They not only conform to the Tier 3 exhaust emission regulations but also achieve significant reduction in fuel consumption. The low fuel consumption and high performance of Kobelco products are gradually being recognized.

Kobelco has carefully responded to the needs of its customers, remodeling and enhancing the product menu of mainly the small- to medium-sized products. In October 2008, Kobelco’s 7-ton class and 13-ton class ACERA GEOSPEC hydraulic excavators won the 2008 “Good Design Award” presented by the Japan Industrial Design Promotion Organization. The winning machines were praised for their design, featuring low fuel consumption and low noise functions.

Kobelco’s consolidated financial results for fiscal 2008 (April 2008 - March 2009) were as follows:

Financial Results for FY2008

Notes:
Figures in brackets [ ] show the percentage decrease as compared with the previous year.
Figures in parentheses ( ) denote loss.

With regard to consolidated net sales, domestic sales were 103.4 billion yen, an 11.2% decrease over the previous year. Overseas sales were 156.9 billion yen, a 5.1% decrease over the previous year. Overseas sales comprised 60.3% of total consolidated sales, again an increase over the previous year.

FY2008: Review by Geographic Area

Japan

In the domestic market, public works continued to be low. In the second half of FY2008, capital investments in the private sector, which had been relatively strong, decreased and market conditions as a whole worsened dramatically. In addition, affected by the decline of the global market and appreciation of the yen, exports of used equipment slowed down and replacement demand for new machines declined sharply due to the increasing number of companies holding back on new investments.

In this severe business environment, Kobelco, while continuing its efforts to improve prices, made efforts to differentiate its products by launching low-noise models in the market that conform to the exhaust emission regulations and by enhancing the product line-ups for small- to medium-sized machines. Specifically, in addition to the SK30UR and SK75UR, mini excavators from the ultra-short swing radius series, the SK75SR+ hydraulic excavator with short rear swing radius was launched, bolstering the product menu of this class, following the enhancement of the 13-ton class models.

Consequently, although sales volume decreased significantly for FY2008 as a whole, the decline in the second half of FY2008 was smaller than the average decline in the industry, partly owing to the backlog of orders carried forward to the second half.

China

The Chinese market had seen an ever-increasing demand for the past few years. However, the financial crisis that spread to the entire world affected China as well. Demand decreased steeply in the latter half of FY2008. The aggregate demand for FY2008 as a whole increased a little less than 12%. Aggregate demand grew from January 2008 to September 2008 in each month, compared with the same month of the previous year. However, during the last three months, aggregate demand decreased by a little less than 40% over the same quarter of the previous year.

The sales volume of the Kobelco Construction Machinery Group during the three months from October to December also decreased over the same quarter of the previous year although the decline was small. The sales volume for FY2008 as a whole increased over the previous year, owing to the buoyant business in the early and middle periods of the year, and to Kobelco’s close location near areas under reconstruction from the Great Sichuan Earthquake.

The Chinese Government was one of the first countries to hammer out its economic recovery plan in November 2008 with public works amounting to 4 trillion RMB. It also enhanced the liquidity of funds by swiftly implementing a monetary-easing policy. It is hoped that these measures will gradually take effect in the next fiscal year and construction demand will move toward a soft landing without declining any further.

The relocation work of the Chengdu Plant is moving forward steadily following a ground-breaking ceremony for a new facility in June 2008. The Chinese market has already grown into the world’s biggest construction machinery market. From a medium- to long-term perspective, demand is expected to continue expanding. Kobelco is taking all possible forward-looking measures in order to prepare for the future.

Overseas (excluding China)

In the overseas business, based on its global alliance with CNH Global N.V., Kobelco made efforts in 1) enhancing business by focusing on the APAC area, which is Kobelco’s main territory, and 2) further reinforcing joint ventures with CNH in the United States and Europe.

Regarding the APAC area, business in Southeast Asia, which had been growing steadily, was affected by the global financial crisis. Although there was demand, finance was not available. Business talks were therefore not concluded and sales decreased rapidly. Demand related to the development of alternative energies also suffered due to the sharp drop in the price of crude oil.

Thai Kobelco Construction Machinery Co., Ltd.’s second plant in Thailand, for the integrated production of hydraulic excavators, was to commence full-scale production from the second half of FY2008 after start-up operations. However, under the current business conditions, the start of full-scale operation had to be postponed until the market shows signs of recovery.

The U.S. market, which is covered by CNH, continued to be sluggish from the beginning of FY2008. On the other hand, the European market was buoyant until the first half of FY2008, but shrank rapidly in all areas in the second half of FY2008. Throughout Europe, conditions became severe due not only to the financial crisis but also to the seriously stagnant real economy.

The markets in emerging nations, such as Russia and countries in the Middle East, which had experienced relatively steady growth, also shrank rapidly, affected by the sharp drop in the price of crude oil and by the financial crisis.

Key Issues in the Future and Outlook for Fiscal 2009

In FY2009, it is hoped that the economic and monetary measures taken in countries around the world will start to take effect. However, a quick recovery cannot be expected. As a result, demand for construction machinery is anticipated to remain low.

In the Chinese market, public works amounting to 4 trillion RMB is gradually showing its effect. The possibility that the market will decline drastically decreased, and the market is expected to remain steady. However, since the operating rate of machines remains relatively low, it is still necessary to pay close attention to the changes in the situation for some time. China is an important market where continuous growth can be expected, while demand is decreasing sharply in other markets worldwide. The importance of the Chinese market is becoming increasingly significant. Demand in Southeast Asia and India is currently low. However, once the impact of the credit contraction due to the financial crisis lessens, demand is anticipated to recover in line with their relatively strong GDP. Kobelco therefore anticipates that the Asian market as a whole will grow steadily.

In the North American market, it is highly likely that recovery in housing investment will be pushed back to next year, and the market is expected to remain sluggish. With regard to the European market, financing and the real economy have declined more than in the United States. Thus, recovery is expected to take some time. The markets in the newly emerging nations, such as BRICs, are expected to continue growing because demand is expected to increase in the medium and long term owing to improvements in the infrastructure and resource development. However, the global demand for construction machinery in FY2009 is expected to remain at a low level.

Under these circumstances where demand has declined globally, Kobelco will return to the basics of the manufacturing business, strengthening its manufacturing capabilities. In addition to quality improvement, Kobelco will make steady efforts in cost reduction through activities to increase productivity 30%, as well as through cost reduction (value engineering) activities that are being executed in cooperation with suppliers. In Japan, Kobelco will work on benefitting from the integration of its domestic marketing subsidiaries into two units. Overseas, Kobelco plans to rebuild growth markets -- particularly China, other Asian countries, and newly emerging nations -- from a global perspective.

The Kobelco Construction Machinery Group’s previous Medium-Term Management Plan (FY2006 – FY2008) ended in March 2009. Under normal circumstances, a new Medium-Term Management Plan was to have begun in FY2009. However, Kobelco has decided to concentrate on responding to the financial and economic crisis first. Kobelco plans to undertake the next Medium-Term Management Plan when the medium- and long-term prospects of the global market become clear.

Forecast for FY2009

Notes:
Figures in brackets [ ] show the percentage of decrease compared with the previous year.
The currency exchange rate assumption set for FY2009: US$1 = 90 yen; 1 Euro = 122 yen

*The above forecast is based on information available as of the date of this announcement. The actual results may significantly differ according to various future factors.