Komatsu Ltd . (OTC:KMTUY), a leading Japanese manufacturer of construction and mining equipment, has reported a strong performance in the third quarter with significant increases in net sales and income. Despite minor setbacks from the Noto Peninsula earthquake, the company has shown resilience with operations quickly resuming and a commitment to aiding in reconstruction efforts. While the construction equipment demand has seen a decrease in Southeast Asia, the mining sector continues to bolster Komatsu's financial results, with notable growth in sales and the anticipation of steady demand in North America. The company is also adapting to industry changes with strategic acquisitions and the introduction of electric and battery-powered vehicles.
Key Takeaways
- Net sales rose 5.6% to JPY972 billion, operating income increased 15.9% to JPY156.4 billion, and net income surged 42.4% to JPY98.7 billion year-over-year.
- Sales in construction, mining, and utility equipment segment grew by 6.3%; industrial machinery and others by 7.7%.
- Demand for construction equipment declined in Indonesia, Thailand, and Vietnam, while mining equipment demand increased by 3% year-over-year.
- Komatsu introduced an electric excavator, acquired American Battery Solutions and iVolve Holdings, and signed a joint development agreement with General Motors (NYSE:GM) for hydrogen fuel cell technology.
- The company projects a 10-15% decrease in demand for fiscal '23 but expects selling prices to increase.
- Q3 sales of mining equipment and parts rose by 20% and 7% respectively, with the overall performance exceeding expectations.
- Government coal production targets indicate a slight decrease for the next fiscal year, but commodity prices are trending steadily.
Company Outlook
- Despite a projected decrease in demand for the next fiscal year, Komatsu anticipates a steady rise in selling prices.
- The company plans to enhance profitability through price increases, cost reductions, and growth initiatives.
Bearish Highlights
- Southeast Asian markets showed reduced demand for construction equipment due to delayed public works and economic uncertainties.
- The company forecasts a 10% to 15% year-on-year decrease in demand for fiscal '23.
Bullish Highlights
- Mining equipment demand is robust, with full-year expectations ranging from stable to a 10% increase.
- North American mining business demand is expected to remain steady without significant risks.
- The recovery trend average ratio and rental boosts are expected in April, with strong residential and non-residential sectors.
Misses
- Parts sales in Q3 were slightly lower compared to equipment sales, with a 40% to 60% breakdown.
- Sales in Indonesia and Asia were sluggish in Q3, leading to regional sales variances.
Q&A highlights
- The company addressed concerns about demand trends but remains optimistic about future price increases.
- Komatsu expects minimal impact from steel and freight costs in the fourth quarter.
- Equipment utilization in the field remains high, suggesting potential growth in parts sales despite regional fluctuations.
InvestingPro Insights
Komatsu Ltd. (KMTUY) continues to navigate through market fluctuations with a strategic approach that has yielded a strong financial performance. As investors evaluate the company's prospects, real-time data from InvestingPro provides a clearer picture of its current market standing and potential for growth.
InvestingPro Data highlights Komatsu's robust financial health, with a market capitalization of 26.56 billion USD, reflecting the company's significant presence in the industry. The P/E ratio stands at an attractive 10.55, suggesting that the company's shares may be undervalued relative to its earnings. Furthermore, the revenue growth for the last twelve months as of Q2 2024 is an impressive 19.75%, indicating a solid upward trajectory in the company's earning capacity.
In terms of performance, Komatsu has demonstrated strong returns with a 22.25% increase over the last three months, showcasing investor confidence and market momentum. This aligns with the bullish trends mentioned in the article, particularly in the mining equipment sector, where Komatsu has seen considerable growth.
InvestingPro Tips for Komatsu are particularly relevant for those looking to delve deeper into the company's investment potential. Firstly, Komatsu has raised its dividend for 3 consecutive years, reinforcing its commitment to shareholder returns. Secondly, the stock is currently trading at a low P/E ratio relative to near-term earnings growth, which may appeal to value-oriented investors.
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Full transcript - Komatsu Ltd (KMTUY) Q3 2024:
Takeshi Horikoshi: Hello. This is Takeshi Horikoshi CFO. Before going into our financial results, we would like to express our deepest sympathies to all those who are affected by the Noto Peninsula earthquake on January 1, 2024. In terms of production, damage to our production bases into Hokuriku area was minor. And after confirming safety and quality, we have been resuming operations as usual from the beginning of the year after year end holidays. There have been some suppliers that were hit hard, but by making use of inventory and sourcing from alternative channels, production has not been obstructed. Komatsu has also dispatched maintenance personnel to the affected partner companies to support their restoration. Furthermore, the impact of the earthquake on our consolidated business performance is negligible. For reconstruction assistance, we have donated a total of JPY600 million as emergency relief funds, JPY500 million went to Ishikawa Prefecture and JPY100 million to Toyama Prefecture. In addition, we are cooperating with our distributors to meet the requests of the disaster stricken areas by providing water and food supplies, blending construction equipment and forklifts, etcetera free of charge, and offering maintenance services for machinery. Now, I would like to go into fiscal ‘23 Q3 business results. On Page 4, I will explain the highlights for fiscal ‘23 Q3 quarterly results. The exchange rates are JPY149.7 to the dollar JPY159.9 to the euro and JPY96.7 to the Australian dollar. Compared to the same period last year, the yen depreciated against the U.S. dollar, euro and Australian dollar. Net sales increased 5.6% year-on-year to JPY972 billion. Operating income increased 15.9% to JPY156.4 billion. The operating income to net sales ratio rose 1.4 percentage points to 16.1%. Net income increased 42.4% to JPY98.7 billion. Net sales and operating income increased due to the improvement of selling prices and the positive impact of FX rates. Net sales operating income ratio and the net income reached third quarter record highs. In addition, segment profit and operating income reached all time quarterly record highs. On Page 5, I will explain segment sales and profits. Net sales for the construction mining and utility equipment segment increased by 6.3% from the corresponding period a year ago to JPY918.2 billion. Segment profit advanced by 22.2% to JPY149.1 billion. The segment profit ratio improved to 16.2% up 2.1 points. Retail finance revenues increased by 23.2% from the corresponding period a year ago to JPY27.2 billion. Segment profit decreased by 10.6% to JPY5.7 billion. Net sales for industrial machinery and others increased 7.7% from the corresponding period a year ago to JPY46.5 billion, while segment profit declined 72.8% to JPY1.3 billion. I’ll talk about the factors impacting the changes in each segment later. Page 6 shows sales by region in the construction and mining and utility equipment segment. Sales to outside customers increased 5.1% from the corresponding period a year ago to JPY904.7 billion. By region, sales increased in North America, Latin America and the Middle East, but decreased in Asia, CIS and Europe. On Page 7, I’ll explain the highlights for 9 months. Foreign exchange rates were JPY143.4 to a dollar, JPY155.0 to euro and JPY94.0 to Australian dollar. Yen depreciated against dollar, euro and Australian dollar year-on-year. Net sales in three quarters of 9 months FY 2023 increased by 10.1% year-on-year to JPY2.795 billion. Operating income increased by 30.8% to JPY453.4 billion and operating income ratio was 16.2% up 2.6 points. Net income attributable to Komatsu Ltd increased by 31.2% to JPY304.3 billion. Due to improvement in selling prices and the positive impact by foreign exchange, both sales and profit increased. All net sales segment profit, operating income, income ratio and net income for three quarters of 9 months mark the record highs. On Page 8, I’ll explain segment sales and profit. Sales in construction, mining and utility equipment increased by 10.8% year-on-year to JPY2.6258 trillion and segment profit increased by 38.9% to JPY429.9 billion. Sales in retail finance increased by 17.5% year-on-year to JPY74.7 billion and segment profit decreased by 12.0% to JPY18.7 billion. Sales in industrial machinery and others increased by 3.7% year-on-year to JPY171.5 billion and segment profit decreased by 63.7% to JPY5.7 billion. I’ll elaborate on causes of difference later. Page 9 shows the sales by region of construction, mining and utility equipment. Sales increased by 10.3% year-on-year to Q3 to JPY2.6075 trillion. By region, sales increased in North America, Latin America and Oceania, but decreased in CIS, China etcetera. Page 10 shows causes of difference in sales and segment profit in construction, mining and utility equipment. Sales increased by JPY256.2 billion year-on-year due to the positive effects of foreign exchange rates and improved selling prices. Segment profit increased by JPY120.3 billion year-on-year supported by the positive effects of foreign exchange rates and improved selling prices, which more than offset the increased production and fixed cost. Segment profit ratio was 16.4% up 3.3 points year-on-year. Page 11 shows retail finance. Assets increased mainly affected by foreign exchange rates and an increase of new contract. New contract increased year-on-year due to foreign exchange rates and increased sales in the construction equipment business. Revenues increased by JPY11.1 billion year-on-year due to the positive effects of interest rate hikes and foreign exchange rates. Segment profit decreased by JPY2.5 billion year-on year mainly due to the absence of a gain on reversal of allowance for doubtful accounts recorded in North America for the corresponding period in the previous year. Page 12 shows sales and segment profit of industrial machinery and others. Sales increased by 3.7% year-on-year to JPY171.5 billion, segment profit decreased by 63.7% to JPY5.7 billion and the segment profit ratio decreased 8.0 points to 4.3%. Sales increased mainly due to the increased sales of large purchase for automobile manufacturing industry, but profit decreased due to a decline in high margin maintenance revenues for excimer lasers and others against that backdrop of declining global demand in semiconductors. On Page 13, I’ll explain the consolidated balance sheets. Total assets increased by JPY493.6 billion year-on-year to JPY5.3694 trillion affected by depreciation of yen. Inventories increased by JPY232.5 billion due to the depreciation of yen and increased demand for mining equipment and parts. Shareholders equity ratio was 52.8% up by zero points and net debt-to-equity ratio was 0.30. This concludes my presentation. Next, Hishinuma, General Manager of the Business Coordination Department will explain the business projection for fiscal ‘23 and demand trends.
Kiyoshi Hishinuma: I am Hishinuma from the Business Coordination Department. I will now explain the business projection for fiscal ‘23 and key market trends. Page 15 shows an outline of the fiscal ‘23 projection. The annual forecast has not been changed from the October projection. The following pages explained the demand trends and forecast for the 7 major products, which are the assumptions used in the projection. On Page 16, we will explain the demand trends and outlook for the 7 major products. Fiscal Q3 numbers are preliminary estimates by the company. Demand in the third quarter of fiscal ‘23 was down by 6% year-on-year. Excluding China, demand appears to have decreased by 3% from the corresponding period a year ago. Fiscal ‘23 full year demand is expected to decrease between 10% to 15%. Even when excluding China, demand is expected to decrease between 10% to 15%, which is unchanged from the October projection. I will address the key markets in the subsequent pages. On Page 17, I will explain demand trends in Japan. In Q3, demand apparently increased by 8% from the corresponding period a year ago. Demand remained steady in public works and private sector construction. The outlook for fiscal ‘23 demand is broadly flat year-on-year, which remains unchanged from the April projection. On Page 18 are the demand trends in North America. Demand in fiscal ‘23 Q3 appears to have increased by 4% from the corresponding period a year ago. Although there are signs of the rental market coming to a pause, residential construction as a market has bottomed out and the infrastructure and energy related sectors have remained steady. The demand projection for fiscal ‘23 is unchanged from the April projection at 0% to minus 5% year-on-year. On Page 19 are the demand trends for Europe. Demand in Q3 fiscal ‘23 apparently decreased by 15% from the corresponding period a year ago. Due to higher interest rates and energy prices, construction equipment demand decreased mainly in major markets like the UK, Germany and Italy. Demand for the full year is expected to decline between minus 10% to minus 15% year-on-year, unchanged from the October projection. On Page 20 are the demand trends of the Chinese market. This page shows demand trends for hydraulic excavators, excluding many excavators. For reference, demand trends, including Chinese manufacturers are also shown here. The growth rate of demand represents foreign manufacturers. Fiscal ‘23 Q3 demand appears to have decreased by 51% from the corresponding period a year ago. Total demand, including Chinese manufacturers appears to have decreased by 34% year-on-year. Demand continues to decline significantly due to stagnant economic activity caused by the sluggish real estate market conditions, etcetera. The outlook for full year demand is minus 40% to minus 50% year-on-year and total demand including Chinese manufacturers is expected to decline by minus 30% to minus 40% year-on-year, unchanged from the October projection. On Page 21 are the demand trends in Southeast Asia. Demand in fiscal ‘23 Q3 appears to have decreased by 11% from the corresponding period a year ago. While demand for mining equipment remained steady in Indonesia, demand for construction equipment dropped in Indonesia, Thailand and Vietnam etcetera due to delayed execution of public works budgets and uncertainty over the economic outlook. The demand outlook for the full year is expected to decline between minus 15% to minus 20% year-on-year, which is unchanged from the October projection. On Page 22, I’ll explain the demand dynamics of mining equipment. In the third quarter FY 2023, demand for mining equipment increased by 3% year-over-year. In FY 2023 full year demand will increase between plus minus 0% and plus 10% and it remains unchanged from the projection in April. I’ll explain the sales of mining equipment on Page 23. In the third quarter FY 2023, sales increased by 20% year-on-year to $448 billion. Excluding the foreign exchange impact, it was 17% increase. In FY 2023, sales are expected to increase by 11% year-on-year to JPY1.5759 trillion, which remains unchanged from the projection in October. I will explain the sales of parts on Page 24. In the third quarter FY 2023, sales increased by 7% year-on-year to $239.4 billion. Excluding the foreign exchange impact, it was 5% increase. In FY 2023, sales of parts are expected to increase by 4% year-on-year to JPY916.3 billion, which remains unchanged from the projection in October. I have walked you through the forecast and from Page 35 onwards, let me explain the major topics. Page 35, Komatsu introduced a 13-ton class PC138E-11 electric excavator with a lithium-ion battery to the domestic market and the rental machine in January 2024. Komatsu positioned the 2023 as a first year to introduce the electrified construction equipment into the market. By responding to the customer’s news through the expanded product line up in the construction equipment market, where a market for electrified construction equipment is still nascent, we aim to create the market quickly toward the carbon neutrality in 2050. Page 36, Komatsu acquired American Battery Solutions, Inc. a battery manufacturer. ABS is our battery manufacturer to develop and produce diverse battery pack, including lithium-ion battery for commercial and industrial vehicles and supplies optimized battery system to meet the customer’s needs. This acquisition enabled us to combine the battery technology of ABS and expertise and network of Komatsu, which will lead us to develop and produce the optimized battery that is aligned with construction and mining equipment used in the diverse environment and conditions. Going forward by using the battery technology of ABS which was newly acquired, we will accelerate the development of battery type electrified vehicles toward the carbon neutrality in 2050 and contribute further to create market for electrified construction and mining equipment and to achieve decarbonization society. Page 37, Komatsu started Reman business of capacitors and inverters, key components for hybrid hydraulic excavator components in Japan. Electric system Reman scheme was added to the Reman business of Komatsu for the first time. With more reasonable parts repair, we can contribute to reduce the total lifecycle cost of hybrid hydraulic excavators and environmental impact through the reduction in waste and CO2 emission. Looking ahead, we plan to expand the scope of Reman to include the components for hybrid hydraulic excavators outside Japan. Page 38, Komatsu acquired iVolve Holdings Pty, an Australian provider of fleet management system for small to mid-tier miners, contractors and quarries. iVolve has a unique IoT platform for small to mid-tier miners and quarries. And we have provide a new solutions globally through this system. Page 39, Komatsu and General Motors Corporation, a leading U.S. automaker have signed a joint development agreement for a hydrogen fuel cell module for Komatsu 930E super heavy duty dump truck that company is a flagship model in mining. Two companies are planning to test a prototype equipped with a HYDROTEC, the hydrogen fuel cell LGN in Komatsu test base in Arizona in the middle of 2020s. This concludes my presentation. We will now move on to Q&A.
Operator: The first question is from Mr. Maekawa of Nomura Securities. Please go ahead.
Kentaro Maekawa: This is Maekawa from the Nomura Securities. Thank you very much for your explanation. I have two questions. First, apologies for going into details. But I’m looking at Page 10 of the presentation materials. I like to know whether the impact from mix difference was significant this time or not. If we look at the volume impact alone, I assume that the positive impact was a little greater. Can you give me more flavor on this? So this is my first question.
Takeshi Horikoshi: This is Horikoshi. Thank you for your question. The pure volume impact was JPY15.4 billion. The regional and product mix impact were almost negligible. It was only JPY200 million. The regional mix impact, especially in the third quarter was negative due to slightly less contribution from Indonesia. But the positive results up until the second quarter went in the opposite way. So the cumulative total is as shown here. The remaining balance of JPY5.9 billion is mainly due to expenses related to Russia, and due to unrealized losses related to greater than expected interim inventory in December.
Kentaro Maekawa: That’s all for me. Thank you. Secondly, about the demand forecast, and sales conditions with respect to the North American mining business. You haven’t changed the outlook this time around. Well, when you talked about the market earlier, for the 9 months, up until Q3, the North American market looks a little stronger against the full year plan. It appears that the recovery in the residential market and the progress in mining is nice. The demand outlook is currently within range. But looking at your sales trends, are there any notable strengths that you have identified? I’m not just asking about sales volume, but also about price increases, etcetera. In any case, could you give us some additional flavor about how the North American mining business is performing in terms of progress, demand, price increases etcetera, in relation to business performance?
Kiyoshi Hishinuma: Thank you for your question. This is Hishinuma. Regarding demand in North America, first, we have not changed our forecast in terms of numbers. But as we originally explained, segments like Infrastructure, Energy and Rental are brisk, while Residential was slightly weak back in spring. So this was the basis of this outlook. Then after post-COVID, demand in the Rental segment increased, but when demand picked up partly due to supply chain problems, the supply situation became tight. That led to a significant decline in distributor inventory. As a result, we were striving to replenish distributor inventory. Also distributors were selling not only rental inventory, but also were selling inventory outright. So, the buildup of inventory was quite considerable. However, in Q2 this year, rental growth slowed down slightly. We presume there was a slight slowdown due to the considerable buildup of same year vintage rental equipment. As for the third quarter, the rental season is now in a slow season as the next rental season will start from spring or from April. So the demand supply balance has eased to some extent. And people are not in a rush due to be circumstances. Also, interest rates are currently high. But if they are expected to fall in the future, there is no need to rush to replenish rental equipment of a third quarter before the rental season starts in early spring. And that is why rental growth has come to a standstill. On the other hand, residential and non-residential sales have also been recovering quite a lot. So that is why our view is net-net zero for the year or minus 5% or less, worse comes first. In addition, the mining business has been relatively steady and no particular risk factors have come to light at this point in time. As for demand from the mining major companies, there is no mention of any negative impact in their capital investment plans. CapEx has stayed steady this fiscal year, and expects steady trends for the next fiscal year as well. And we haven’t heard any news of cutting funding.
Kentaro Maekawa: Yes, thank you very much. I like to ask you two more questions regarding North America and mining. For North America, I assume that next fiscal year and beyond will also be affected by the recovery in the residential market. So do you need to account for these risks that there may be a drop off by a certain degree. Although I presume that the inventory buildup process has been completed, I like to know if there will be such fluctuations in terms of wholesale and with such a favorable environment for mining continuing on into next fiscal year. I’d like to know your stance on price increases and how they will affect your business performance. Thank you.
Takeshi Horikoshi: This is Horikoshi speaking. Regarding the situation in North America in Q3 overall, construction equipment fell short of initial October projection. On the other hand, mining over achieved and net-net sales were about JPY7 billion short of plan. In terms of the original equipment and parts, original equipment was minus JPY16 billion to JPY17 billion overall, due to supply chain issues and parts were plus JPY10 billion compared to the October projection. As Mr. Hishinuma mentioned earlier, retail demand has performed stronger than the October projection in North America. On the other hand, regarding wholesale mainly rent-to-sell inventory orders from distributors have decreased whilst retail exceeded expectations. I said in October that inventory at distributors should be at an appropriate level by the end of this fiscal year. However, because retail was strong and wholesale orders are being held back, inventory has decreased considerably. It’s about close to 1,000 units less than expected. So there is a high chance that this reduced rent-to-sell inventory will be pushed out to next fiscal year, or may materialize in Q4. Also for next fiscal year, demand in North America is not expected to decline as much as anticipated initially. That’s all for me.
Kentaro Maekawa: Thank you very much. I now have a better understanding of North America. Also considering the current circumstances of mining demand, can you also comment on prices as much as you can share?
Takeshi Horikoshi: I mentioned earlier that the mining of this has exceeded the October forecast and while the demand all regions were mostly favorable. The only region where it wasn’t was Indonesia. Contractors in Indonesia were holding back orders due to the delays and approvals for coal production applications. However, then after the approvals came through, and the government had set forth a production target for next year’s coal production of I believe 710 million tons a compared to 760 million tons this year. And now as the coal production permits have been approved, we expect that Q4 will make up for the dip that we saw in the third quarter. In terms of overall mining, commodity prices are trending steadily. And coal prices in Indonesia that I was just talking about, was approximately $57 to $58 per ton at the end of December. So I don’t think we need to worry too much about the next fiscal year. As for selling prices overall, ever since prices started to rise from the second half of 2021, the sentiment at our marketing department has changed slightly. Now, even if management doesn’t ask them to do so, they are working to raise prices. Therefore, I believe that selling prices will increase next fiscal year as well, though perhaps not as much as this fiscal year.
Kentaro Maekawa: Thank you very much for the details.
Takeshi Horikoshi: Thank you very much.
Operator: The next question is from Tomohiko Sano of JPMorgan Securities.
Tomohiko Sano: Thank you very much. I’m Sano from JPMorgan. Can you hear me?
Takeshi Horikoshi: Yes, please go ahead.
Tomohiko Sano: Thank you. My first question is to Mr. Horikoshi. Regarding overall performance, first, can you give me more flavor on the positives and negatives in Q3? And operating income is about 83% against a full year plan now. So are you accounting for any risks in terms of demand, price or region? Or since it was Q3? Did you decide not to make any revisions, accounting for the possibility to beat your guidance in Q4?
Takeshi Horikoshi: Thank you for your question. This is Horikoshi. On a cumulative Q3 basis, compared to the October projection, the construction, mining and utility equipment segment sales exceeded by JPY70 billion. Profit also exceeded by JPY19.5 billion. Regarding sales, the FX impact was JPY74.5 billion. The sales volume impact was minus JPY7 billion and the sales price increase was larger than expected, which had an impact of plus JPY2.5 billion. All in all, this led to sales exceeding by JPY70 billion against October projection. In terms of profit, the currency rate was originally assumed to be JPY135 against the dollar. But since then effects is where it is now. The impact on profit has been JPY13.5 billion higher. On the other hand, regarding sales volume I mentioned earlier that the impact on sales was minus JPY7 billion. But in terms of profit, it was minus JPY2.5 billion. The other factor is regional product mix. Product mix had the greatest impact. Like I said earlier, original equipment declined or its increased and was negative and construction equipment mainly in North America declined, but mining overall was positive. So, product and regional mix combined had a plus JPY3 billion impact. Also for a selling price, as I mentioned earlier, the impact was JPY2.5 billion and the cost of sales was also better than expected at about plus JPY2 billion. In addition, fixed costs were about JPY1 billion less than planned, so the total impact on profit was about JPY19.5 billion. As for the full year if you take out the FX impact from the JPY19.5 billion, we are exceeding by JPY6 billion. But this amount is likely to decrease a little in Q4, and ultimately, we expect to be in line more or less against October projection. One reason why we think so is gross margins. There may be additional scrapping of parts. And since sales of parts were too good in the third quarter, sales of original equipment is expected to catch up in North America, as I mentioned earlier. And the sales of parts will probably not be so good in comparison. Due to this mix change, we are expecting a negative impact and selling prices are expected to be better than Q3, and that the degree of overachieving will be more than twice as much. As for cost of sales, steel prices have increased in the fourth quarter. The increase will have an impact. And since ships cannot go through the Suez Canal, but will be going through via Cape Town, an increase in freight is expected. Also fixed costs may be pushed out to the end of the fiscal year. So, as I mentioned earlier, although the Q3 results exceeded by JPY6 billion, Q4 may come in line or below expectations. And yes, obviously, there will be an impact from FX. That’s all for me.
Tomohiko Sano: Thank you. I understand. The second question is about your thoughts about next fiscal year. The market is quite concerned about demand trends that you have shared with us. Looking at Page 31 and what Komatsu can do on its part, when you look at the sales composition of the construction, mining and utility equipment segment, contribution from the parts business, which is 49% of sales, probably contributes more to profits. And the same thing can be said for mining. There is talk that your profits may decline, but looking out into next fiscal year, I like to know what Komatsu will do about demand or whether it’s possible to raise selling prices of parts and to what extent there will be positive factors. I think you mentioned before that free cash flow was more likely to be generated when demand falls, so I am not sure if it will be aggressive M&A or shareholder returns, but I would like to know if we can expect any of those things for the next fiscal year. Can you give us more flavor on what Komatsu can do for the next fiscal year?
Takeshi Horikoshi: Yes, it is still third quarter, I wouldn’t comment much on the next fiscal year. But we are not so pessimistic, though demand might be worsening. As mentioned before, since the second half of 2021, with the acceleration of inflation, the operational sentiment has been changing. And we expect that the selling price would be steadily up. Looking at the recent orders of mining, we are not thus pessimistic. In the case of Indonesia, one of our key areas, the national budget for capital relocation in the next year will be 1.5x of that of this year. Private investment will be JPY930 billion, 2.4x of this year, according to the government forecast. And the impact by the election, which will be on the fourth quarter wouldn’t be material. So, overall, our view is not so pessimistic. As for the things Komatsu can do, we continue what we have been doing steadily including the increase in selling prices, increase in the pay to guarantee at parts, to stabilize the profit.
Tomohiko Sano: Understood. That’s all from me. Thank you.
Operator: I will take the next question. Mr. Motoaki of Nikkei, please.
Unidentified Analyst: Hello, I am Motoaki of Nikkei. Do you hear me?
Takeshi Horikoshi: Yes. Please.
Unidentified Analyst: I have two questions. Income ratio in three quarters was 16%, showing the high profitability. I would like to know the strategy to increase the profitability further going forward towards the next fiscal year.
Takeshi Horikoshi: As I answered before, it is increasing the selling prices cutting cost and promoting the growth strategy in the mid-term plans steadily to reap the fruits.
Unidentified Analyst: I see. You said that selling price improved more than you expected in the third quarter.
Takeshi Horikoshi: Can you specify the region?
Unidentified Analyst: In the previous results meetings, you said that in the area we had increase of price, it was easier to follow the suit [ph]. Does it continue, or was there any other case where you raised price independently?
Takeshi Horikoshi: In the third quarter, price increase was more prominent in parts rather than the equipment. As President, Ogawa also mentioned before, price increase in parts was strong in the third quarter. By region, the America, Latin America and strong demand areas such as Middle East and Africa, the ratio of price increase was higher.
Unidentified Analyst: As for the equipment, is the price increase mostly settled?
Takeshi Horikoshi: I told you in a relative manner. So, selling price of equipment also increased steadily.
Unidentified Analyst: Understood. Thank you.
Operator: Thank you. I will take the next question. Mr. Ibara of Morgan Stanley MUFG Securities, please.
Yoshinao Ibara: This is Ibara of Morgan Stanley. Do you hear me?
Takeshi Horikoshi: Yes.
Yoshinao Ibara: I would like to confirm the comment of Mr. Horikoshi to confirm that I understand correctly. As for North America market, you have been saying up to October as follows. Inventory built up, it will be over this year. So, even if the demand is flat next year, your sales may be down, it was a color I perceived. But today, you said that retail will be strong due to residential demand and others and the retail demand may not be down next year. And restocking in this year is slightly delayed, and it might be continuing in the next fiscal year as well. So, the likelihood of your shipment downturn is now receding from that in October. Can I take your comment as such?
Takeshi Horikoshi: Correct. I cannot comment clearly on the next year. But as mentioned before, the retail was stronger than the projection in October and wholesales especially meant to sales of dealers were affected by the buying or order restraint, partly because of the account closing timing in December. Dealer’s inventory is lower by about 900 units than our estimate. So, we need to monitor closely whether that will recover in the fourth quarter or in the next fiscal year. In case, I said that the timing of inventory adjustment at dealers will be delayed than our expectation.
Yoshinao Ibara: Thank you. As for the retail’s demand strengths, which was stronger than the projection in October, another speaker mentioned that the recovery trend average ratio and that the next boost in rental will be in April. He said that the residential, non-residential and mining were also strong. Winter was not negative, right? Can we expect the recovery in April? Could you share with us any colors of the breakdown if any?
Kiyoshi Hishinuma: This is Hishinuma. As for the residential, at the beginning of the year, housing starts were weak, but now residential investment is coming back and we think it has already bottomed out. Non-residential is also robust. Rental has a seasonality, Q3 is not the strong period in rental. But our business is wholesale business for dealers. And now the dealers are not rushing to refuel the stock, so the sales are not picking up. Therefore, as mentioned before, towards the rental demand season in April onward, depending on whether they are restocked by March or later, there might be time lag.
Yoshinao Ibara: Retailers more than expected strength is coming mainly from the residential, right?
Kiyoshi Hishinuma: As for the recent trend, yes, that’s right.
Yoshinao Ibara: Thank you. When – say, the rental is dead for rental companies.
Kiyoshi Hishinuma: Yes, for the third-party.
Yoshinao Ibara: Right. Thank you. Second question is about the selling price in the fourth quarter. Mr. Horikoshi, you mentioned that fourth quarter will be double the third quarter. What do you mean by that?
Takeshi Horikoshi: In the third quarter, pricing was JPY32.7 billion, which was higher than expectation by JPY2.5 billion. So originally, it was expected to be JPY30 billion in the fourth quarter against the expected JPY28 billion. And we said doubled upside pricing will be plus JPY33 billion year-over-year in the fourth quarter.
Yoshinao Ibara: When you say double in the fourth quarter, what do you mean by that?
Takeshi Horikoshi: I meant that the gap from the projection in October will be double.
Yoshinao Ibara: I see.
Takeshi Horikoshi: Compared to October projection, Q3 selling prices was higher by JPY2.5 billion in 4Q, it to be higher by almost JPY6 billion than the October projection. And compared to the previous year, in Q3 selling prices were up by JPY32.7 billion and in Q4, it will be up by about JPY33 billion year-over-year.
Yoshinao Ibara: I see. Then in total for the full year compared to the October projection prices will be up by JPY6 billion, right?
Takeshi Horikoshi: In total, it will be about JPY8 billion.
Yoshinao Ibara: JPY6 billion in the fourth quarter, is that for three months?
Takeshi Horikoshi: Yes.
Yoshinao Ibara: Then for the full year, is the upside JPY8.5 billion?
Takeshi Horikoshi: I said JPY8.1 billion, compared to the October projection we received that upside.
Yoshinao Ibara: You commented on the steel costs and the freight costs vis-à-vis the forecast. You may not be able to specify the impact, but can you give us some colors like low [indiscernible] level or any?
Takeshi Horikoshi: Steel cost impact in the first quarter will be less than JPY1 billion and it will be higher in the next fiscal year.
Yoshinao Ibara: How about the ocean freight?
Takeshi Horikoshi: It’s smaller.
Yoshinao Ibara: Then when they are combined, it’s not much less than JPY1 billion, right?
Takeshi Horikoshi: Are you talking about the next fiscal year?
Yoshinao Ibara: No, for the fourth quarter.
Takeshi Horikoshi: For the four quarter, it is less than that.
Yoshinao Ibara: I see. Thank you.
Operator: Thank you. We are running out of time, so I would like to take the last question. Mr. Tai of Daiwa Securities, please.
Hirosuke Tai: This is Tai. I have one question. On Page 24 of sales of parts, in Q3, sales of parts were better than those of equipment, where to be speaking? But we don’t see the parts alone parts sales failed slightly in Q3, yen will still depreciate it. So, was there any change in the momentum of trend?
Takeshi Horikoshi: Pricing impact was about JPY100 million for nine months up to Q3.
Hirosuke Tai: Can you give us that rough breakdown, how much was from parts? Would you give us any hints?
Takeshi Horikoshi: Breakdown between parts and equipment, it is about 30-70, sorry, no, almost 50-50 or 40-60, 40 for parts and 60 for equipment, including both of mining and construction equipment.
Hirosuke Tai: I see. Then roughly speaking, parts JPY40 billion and equipment JPY60 billion, right?
Takeshi Horikoshi: Yes. Sound close.
Hirosuke Tai: Incidentally, talking about the next year from April, Mr. Ogawa said that the parts price increase will be important in this year. How is it going to change next year?
Takeshi Horikoshi: At this point, I don’t know.
Hirosuke Tai: You don’t know, I see. Should I assume that the parts will be bigger than the equipment, is it likely to happen?
Takeshi Horikoshi: No idea. It depends on demand as well.
Hirosuke Tai: Right.
Takeshi Horikoshi: I am not sure.
Hirosuke Tai: I see. Can you comment on Q3?
Kiyoshi Hishinuma: This is Hishinuma. There were differences in sales by region. In Q3, Indonesia and Asia were more or less sluggish.
Hirosuke Tai: I see. Then excluding them, can we expect the incremental turned from Q1 to Q2?
Kiyoshi Hishinuma: Are you asking about Q4 and the next year?
Hirosuke Tai: Well, I am not asking about numbers, but equipment sales might be up and down by region. But the utilization of the equipment in the field is high, so parts will continue to grow, and price should be and can be raised. I conceived such story. Does my story sound right? It’s my last question.
Kiyoshi Hishinuma: Yes, your thought is right. But due to economic conditions and utilization, part sales may fall in some areas.
Hirosuke Tai: I see. That’s all. Thank you.
Operator: Thank you very much. With this, we would like to close the business results meeting for the third quarter FY 2023 of Komatsu Limited. Thank you very much for your participation today.
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