Management’s Discussion and Analysis

Scope of Consolidation
Yamato’s consolidated financial statements include 40 consolidated subsidiaries and 2 affiliates
accounted for by the equity method.

Results of Operations
In the fiscal year ended March 31, 2004, the Japanese economy showed some encouraging signs ofrecovery, underpinned by capital expenditures and exports. These gains, however, fell short ofarresting weak consumer spending and other deflationary trends, and the economic environment
remained difficult.
In the domestic transportation industry handling volume increased but average unit prices failedto recover. The business environment remained harsh amid escalating competition amongtransportation companies, including from the package delivery service of Japan Post following its
launch on April 1, 2003.
In these circumstances, the Group restructured its operations into five operating segments—
Delivery, BIZ-Logistics, Home Convenience, e-Business and Financial—to facilitate growth and raise
the Group’s corporate value.
In the core Delivery business, we focused on strengthening marketing power and rebuilding theTakkyubin network to reform the structure of our earnings, in readiness for competition from theprivatized Postal Services Agency (now Japan Post). We switched from a network of delivery bases toa larger network of delivery centers, each staffed by fewer employees. The move brings us closer toour customers and enables us to provide meticulous service that will lead to higher customer
satisfaction, while at the same time raising the awareness among employees of the need to bebusiness oriented. We also consolidated our administrative and service center functions in order toraise the efficiency of back-office operations, while taking measures to make it easier for customers
to use our service, differentiating us from competitors.
As a result of the above and other factors, Yamato Transport recorded consolidated operating
revenues of ¥1,011,344 million (U.S.$9,569.0 million), up ¥39,209 million, or 4.0% from the previous
fiscal year. Operating income fell ¥10,159 million, or 17.9%, to ¥46,659 million (U.S.$441.5 million).
The principal factor affecting operating income was a sharp ¥49,368 million or 5.4%, increase in total
operating costs and expenses to ¥964,685 million, mainly due to capital expenditures related to rebuilding the Takkyubin network as a part of planning for the future and strengthening the Kuroneko
Mail network. The operating income margin declined 1.2 percentage points to 4.6%.

Review by Operating Segment
From the fiscal year under review, Yamato Transport’s business is divided into five operating segments:

Delivery
The Delivery business is mainly focused on small parcel delivery services for consumers and corporateclients and includes the Takkyubin and Kuroneko Mail services. Demand for the Takkyubin service
remained strong. Also contributing to growth was Cool Takkyubin, where volume increased 5.8% to122.6 million units. The Collect Service handling volume increased 9.4% to 63.5 million units.
Consequently, overall delivery volume in the parcel delivery business climbed to 1,011.2 million
parcels, up 2.8% and topping the 1 billion unit mark for the first time. Handling volume in theKuroneko Mail service increased significantly as we revised our rate structure and upgraded service
with the introduction of more packet sizes and worked to expand our corporate client base.

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Annual Report 2004

Total operating revenues, including Rail-Freight Forwarding, Domestic Air Freight and Others, was¥834,495 million (U.S.$7,895.7 million), an increase of ¥34,032 million, or 4.3%. However, operating
income fell ¥10,494 million, or 22.8%, to ¥35,548 million (U.S.$336.3 million) owing to an increase inoperating costs, mainly due to the cost related to consolidating back-office operations and strengthening the organization to rebuild the Takkyubin network.
Takkyubin Revenues and Unit PricesYears ended March 31
Takkyubin revenues(millions of Yen)
Delivery volume(1,000 parcels)
Unit price (Yen)

2000

2001

2002

2003

2004

¥622,666¥658,156¥683,589¥698,499¥ 690,088

836,206¥
744

898,595¥
732

947,895¥
721

983,938¥710

1,011,150¥
682

Unit price for calculation purposes declined in the fiscal years ended March 2003 and 2004 due to the merger of Shikoku
Yamato Transport Co., Ltd. and Kyushu Yamato Transport Co., Ltd.

BIZ-Logistics
The BIZ-Logistics provides inter-company logistics services aimed at the B2B supply chain management
market and includes international marine forwarding, international air-freight forwarding and thetransportation of works of art.
On April 1, 2003, a part of the Logistics business was spun off to Yamato Logistics Corporation. At
the same time, marine forwarding, customs clearance, transportation of works of art and international
moving operations were transferred to Yamato Global Freight Co., Ltd. As a result of this active
reorganization of our domestic and international logistics services, operating revenue rose ¥3,134
million, or 3.6%, to ¥90,236 million (U.S.$853.8 million), with operating income rising sharply by¥390 million, or 14.5%, to ¥3,088 million (U.S.$29.2 million).

Cool Takkyubin Delivery Volume

Collect Service Delivery Volume(1,000 parcels)(1,000 parcels)

150,000

80,000120,000
60,00090,00040,00060,00020,00030,000000

01020304

000

01020304

YAMATO TRANSPORT CO., LTD.

Annual Report 2004

23

Home Convenience
Home Convenience services include moving services and lifestyle support services, such as home
services intimately connected with the needs of local markets, in addition to merchandise marketing.
In the fiscal year ended March 31, 2004, the moving service operations of each base wereseparated and merged with Yamato Home Service Co., Ltd., Yamato Transport’s home service
subsidiary, which was renamed Yamato Home Convenience Co., Ltd. and started actively marketingthese services. Despite this, operating revenues, including moving services and merchandise
marketing, declined ¥1,031 million, or 2.4%, to ¥42,611 million (U.S.$403.2 million). Operating
income fell ¥1,498 million to ¥10 million (U.S.$0.1 million).

e-Business
The e-Business segment includes information services targeted at the business market, including ASP
services and the development of information systems.
A new data center, designed to provide safe, reliable and competitively priced services, wascompleted in Koto-ku, Tokyo in April 2003, helping us actively promote our e-Business. As a result,operating revenues increased ¥1,354 million, or 6.9%, to ¥21,082 million (U.S.$199.5 million).
Operating income rose ¥703 million, or 40.3%, to ¥2,447 million (U.S.$23.2 million).

Financial
The Financial segment includes financial services targeted at business customers and consumers, suchas settlement and collection.
In the fiscal year ended March 31, 2004, Financial services were actively promoted throughcampaigns and other initiatives to increase delivery volumes for our core Collect Service. As a result of
these and other factors, operating revenues, including collection service fees and leasing income,increased ¥1,720 million, or 8.1%, to ¥22,920 million (U.S.$216.9 million) and operating income rose¥548 million, or 9.5%, to ¥6,346 million (U.S.$60.0 million).

Financial Review
Operating costs
In the fiscal year ended March 31, 2004, Yamato Transport recorded consolidated operating costs andexpenses of ¥964,685 million (U.S.$9,127.5 million), up ¥49,368 million, or 5.4% from the previous
fiscal year. Significant components of the increased operating costs are as follows:
Breakdown of operating costs
Years ended March 31

24

YAMATO TRANSPORT CO., LTD.

Personnel expenses
Subcontracting expenses
Vehicle expenses
Other expenses
Elimination of internal procurement costs¥ 503,828
318,80918,442
198,925(124,687)

Millions of Yen
Increase/decrease¥ 526,882¥23,054311,349(7,460)23,346
4,904
217,143
18,218(114,035)
10,652

Total¥ 915,317¥ 964,685

Annual Report 2004

2003

2004

¥49,368

Personnel expenses increased ¥23,054 million, an increase largely attributed to reallocation ofemployees as a result of consolidation of back-office operations in support of restructuring theTakkyubin network and an increase in the ranks of delivery personnel. The number of employees increased by 19,026 to 131,974. The number of full-time employees went up by 1,540 to 69,398 andthe number of part-time employees rose by 17,486 to 62,576. As a result, the share of part-time
employees in Yamato Transport’s workforce increased 7.5 percentage points to 47.4%. Provision for
retirement benefits decreased ¥14,609 million to ¥18,424 million due to exemption from future
pension obligation of the governmental program.
Subcontracting expenses declined by ¥7,460 million, due to a ¥17,820 million decline incommission expenses following the merger of Shikoku Yamato Transport Co., Ltd. and Kyushu
Yamato Transport Co., Ltd., which reduced delivery expenses.
Vehicle expenses rose ¥4,904 million as our vehicle maintenance facilities were spun off to a subsidiary.

Other Income and Expenses
Other income—net increased ¥6,389 million to ¥40,634 million (U.S.$384.5 million).
The principal component of other income was a ¥40,470 million gain on decrease of pension
obligation with transfer to cash balance plan. Loss on devaluation of land (¥8,697 million in the fiscal
year ended March 31, 2003) and unrealized loss on devaluation of investment securities (¥2,002
million in the fiscal year ended March 31, 2003), which significantly affected income in the previous
fiscal year, narrowed in the fiscal year ended March 31, 2004.

Net Income
Income before income taxes and minority interests declined ¥3,770 million, or 4.1%, to ¥87,293
million (U.S.$825.9 million). Income taxes declined ¥5,023 million to ¥37,515 million (U.S.$355.0million). The result was a net ¥1,281 million, or 2.6%, increase in net income to ¥49,783 million(U.S.$471.0 million). Return on equity declined 0.9 of a percentage point to 11.7%.
As a result of these factors, diluted net income per share amounted to ¥105.20 (U.S.$1.00), anincrease of ¥3.57, or 3.5%. As a part of the program to strengthen group management, profit sharing
with shareholders will be linked to consolidated profit. Furthermore, the payout ratio target has been
set at a minimum of 30% of the consolidated net income. In line with this policy, the annual dividend
was raised by ¥3 per common share to ¥18.00 (U.S.$0.17).

Cash Flows(Operating Activities)
Net cash provided by operating activities totaled ¥41,064 million (U.S.$388.5 million), a decrease of ¥44,971 million from the previous fiscal year. The principal uses of cash in operating
activities were capital expenditures for reengineering the Takkyubin network and an increase innotes and accounts receivable.

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25

(Investing Activities)
Net cash used in investing activities was ¥40,684 million (U.S.$384.9 million), an increase of ¥1,309
million. The principal use of cash in investing activities was an increase of ¥14,007 million for thepurchase of property, plant and equipment. This included continuing introduction of low-emission
vehicles, and the purchase of a complete set of receipt-filing-system equipment for the reengineeringof the Takkyubin network. Purchases of marketable and investment securities declined ¥10,734
million from the previous fiscal year.

(Financing Activities)
Net cash used in financing activities totaled ¥16,440 million (U.S.$155.6 million), a decrease of¥57,155 million, from the previous fiscal year. The principal uses of cash were ¥9,984 million for thebuyback of 7.7 million shares (based on a resolution approved by shareholders) and cash dividend
payments of ¥7,427 million.
As a result of these actions, cash and cash equivalents at the end of the fiscal year totaled¥117,031 million (U.S.$1,107.3 million), down ¥15,362 million from the end of the previous fiscal year.

Financial Position
Total current assets as of March 31, 2004 were ¥251,261 million (U.S.$2,377.3 million), an increase of¥3,153 million, or 1.3%, mainly because of a ¥10,188 million, or 12.0%, increase in notes andaccounts receivable.
Net property, plant and equipment increased ¥8,201 million, or 2.6%, to ¥326,995 million(U.S.$3,093.9 million), reflecting continuing investment in the Delivery service and other facilities.
There was a net ¥8,498 million increase in buildings and structures, including a ¥3,872 million
investment in a new YSD data center and a ¥6,693 million increase in vehicles and transport
equipment. In the fiscal year ended March 31, 2004, the Group purchased 6,979 vehicles, including
replacements. The Group’s network as of March 31, 2004 was as follows:
Network
Years ended March 31
Vehicles (unit)
Delivery channels
Sub-agents

2003

2004

37,741
3,583
317,595

41,5638,267
306,986

Investments and Other Assets declined ¥14,439 million or 16.2%, to ¥74,536 million (U.S.$705.2million). Investment securities declined ¥1,735 million, reflecting the streamlining of the portfolio.
Deferred tax assets fell ¥13,302 million as temporary differences upon transfer to a new retirement
benefit system were amortized.
As a result of the foregoing, total assets declined ¥3,085 million, or 0.5%, from the end of theprevious fiscal year, to ¥652,792 million (U.S.$6,176.5 million).
Total current liabilities as of March 31, 2004 were ¥176,458 million (U.S.$1,669.6 million), an
increase of ¥5,864 million, or 3.4%, from the previous fiscal year-end. The current portion ofcorporate bonds was ¥17,000 million.

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YAMATO TRANSPORT CO., LTD.

Annual Report 2004

Total long-term liabilities fell ¥46,073 million, or 58.7%, to ¥32,455 million (U.S.$307.1 million).
The principal factors contributing to the decline were a switch to DA accounting and the introductionof a CMS system to reduce interest-bearing debt, in addition to the establishment of a credit facility
to strengthen the Group’s financial position. Corporate bonds coming due this year totaled ¥17,000
million and were therefore reclassified as current assets. Liabilities for employees’ retirement benefits
declined ¥29,479 million as a portion of reserve for employees’ retirement benefit was liquidated
following the transfer to a new employee retirement benefit system.
Total shareholders’ equity rose ¥37,409 million, or 9.2%, to ¥443,715 million (U.S.$4,198.3 million). The principal factors were the addition of ¥43,394 million in retained earnings from the postingof net income. Another factor was the rebound in stock prices that led to a ¥3,935 million increase inunrealized gain on available-for-sale securities. Continuing purchases of treasury stock led to anincrease of ¥9,791 million in treasury stock. Shareholders’ equity per share rose ¥96.76, or 11.1%, to¥971.84 (U.S.$9.20). The shareholders’ equity ratio rose 6.1 percentage points to 68.0%.

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Annual Report 200427