Komatsu Ltd

TSE:6301

Earnings Call Transcript 2020-Q1

[Takeshi Horikoshi, executive]

Hello. This is Takeshi Horikoshi, CFO. I will explain the business results for the first quarter of fiscal year 2019.

First, on Page 4, I will explain the highlights for the first 3-month period of fiscal year 2019. Foreign exchange rates were JPY 110 to $1, JPY 123.2 to the euro and JPY 16.2 to the renminbi. Compared to the corresponding period a year ago, the yen was weaker against the dollar and stronger against the euro and renminbi. Although, it is not mentioned here, the yen was also stronger against the Australian dollar, South African rand as well as the Russian ruble. Fiscal year 2019 Q1 consolidated net sales declined by 5.6% from the corresponding period a year ago to JPY 609.7 billion. Operating income declined by 22.2% to JPY 74.7 billion. The operating income ratio was 12.3%, down 2.6 points. Net income attributable to Komatsu Ltd. declined by 24.6% to JPY 47.4 billion. Consolidated net sales decreased due to sales volume decline and negative FX impact. Operating income decreased due to sales volume decline and difference in regional mix.

On Page 5, I will elaborate about segment sales and profits. Sales for the Construction, Mining & Utility Equipment segment decreased by 5.5% from the corresponding period a year ago to JPY 561.4 billion, and segment profit declined by 22.2% to JPY 68.6 billion. Sales decreased due to sales volume decline and negative FX impact. Profit decreased due to sales volume decline and change in regional mix. Revenue in Retail Finance expanded by 21.2% from the corresponding period a year ago to JPY 17.2 billion. Segment profit dropped by 38% to JPY 3.4 billion. Revenue was up due to an increase in assets in North America and other regions, but profits were down due to the absence of reversal gains of provisioning related to doubtful accounts in China, which was recorded last fiscal year. Net sales for Industrial Machinery & Others, finally, decreased by 17.5% from the corresponding period a year ago to JPY 34 billion. Segment profit dropped by 81.8% to JPY 500 million. Both sales and segment profit declined due to reduced sales of presses and machine tools to the automobile manufacturing industry as well as a decrease in sales of Excimer laser-related products in the semiconductor market.

Page 6 shows sales by region for the Construction, Mining & Utility Equipment segment. Sales to outside customers decreased by 5.3% from the corresponding period a year ago to JPY 560.5 billion. While sales increased, especially in Europe and Oceania, sales declined sharply in Asia and China. Due to the decline in sales of strategic markets, such as China and Asia, the ratio of sales in traditional markets increased to 48% of total sales from 44%.

Page 7 shows the year-on-year comparison of sales and the profit for the Construction, Mining & Utility Equipment segment. Segment sales were down JPY 32.7 billion year-on-year because the positive effect of price hike was more than offset by the decline in sales volume and the negative effect of FX rates. Segment profit was also down JPY 19.6 billion year-on-year. The positive effect of price hike was canceled out by the volume and the price mix factor as well as higher fixed costs caused by strategic growth investment. Segment profit ratio is down 2.7 points to 12.2%.

Page 8 shows the status of assets and the revenues of the Retail Finance segment. Assets increased by JPY 2 billion from the end of the previous year, mainly due to the increased credit mainly in North America, Europe and Oceania. New contracts declined mainly in China. Revenues increased due to the increased assets, especially in North America. Segment profit declined mainly due to the absence of reversal of allowance for doubtful accounts, which was recorded in China for fiscal year 2018.

Page 9 shows the trends in sales and segment profit of the Industrial Machinery & Others segment. Segment sales declined 17.5% year-on-year to JPY 34 billion, mainly due to the reduced sales of presses and machine tools to the automotive manufacturing industry as well as lower sales of Excimer laser-related products in the semiconductor market. Segment profit was down JPY 2.4 billion to JPY 500 million, while segment profit ratio declined 5.8 points to 1.6%. Let me give you some details with regards to the orders and the sales of the Industrial Machinery & Others segment using the appendix on Page 29. The chart shows the trends in the book-to-bill ratio for Industrial Machinery. The ratio is calculated by dividing the average orders for the past 6 months by the average sales for the past 6 months. Komatsu Industries, a distributor and a service provider of presses and shipment of machines, shows a trend higher than 100%. For the Komatsu NTC, a manufacturer and distributor of machine tools, such as transfer machines, machining centers and crankshaft millers shows the trend falling below 100%. This is due to the reduced orders caused by the delayed investments of the auto industry.

Please turn to Page 10. I will take you through the balance sheet. Total assets increased JPY 53.3 billion from the end of the previous fiscal year to JPY 3.6915 trillion. Accounts receivable decreased year-on-year, despite the progress on credit collection more than offset by reduced sales and increased inventories caused by the reduced distributor stock. Other assets also increased due to an increase in operating lease right-of-use assets caused by the new accounting standards. Interest-bearing debt stood at JPY 1.0043 trillion, an increase of JPY 73.6 billion from the end of the previous year. Shareholders' equity ratio was 48.1%, down 1.8 points from the previous year-end.

[Takuya Imayoshi, executive]

I am Takuya Imayoshi, General Manager of the Business Coordination Department. From here on, I'll talk about the demand and outlook for Construction, Mining & Utility Equipment.

First, on Page 12, I'll explain the actual and projected demand for the 7 major products. Demand trends for the 7 major products and mining equipment are shown here. First, quarterly numbers are our company's estimate. Fiscal year 2019 first quarter demand declined by 7% from the corresponding period a year ago and apparently, recorded a decline for the first time after 11 consecutive quarters. While demand was steady in traditional markets of Japan, North America and Europe, strategic markets, such as China and Southeast Asia, which includes Indonesia, recorded a slowdown in demand.

From the next page onwards, I'll explain the conditions of the major markets. On Page 13, I'll elaborate on the Japanese market. In the first quarter of fiscal year 2019, demand apparently advanced by 15% from the corresponding period a year ago. Demand increased as it recovered from the reactionary drop-off of prebuy demand in anticipation of the new emission-control regulations, which came into force in September 2017.

Page 14 is North America. In fiscal year 2019 Q1, demand in North America increased by 6% from the corresponding period a year ago. Demand for both construction and mining equipment remained steady, resulting in an increase in demand 9 quarters in a row.

Page 15 is demand in the European market. In Q1 fiscal year 2019, demand apparently increased by 2% from the corresponding period a year ago. Demand was steady, especially in major markets, such as Germany, the United Kingdom and France as well as Eastern Europe, resulting in an increase in demand 15 quarters in a row. However, due to a deterioration in macroeconomic indicators and uncertainty around Brexit and other affairs, we'll continue to closely watch changes in demand trends going forward.

Page 16 shows the China market. The demand numbers here represent foreign manufacturers. In the first quarter of fiscal year 2019, demand in China declined by 22% from the corresponding period a year ago. As economic uncertainty strengthened due to the prolonged trade friction between the U.S. and China, demand declined from the corresponding period a year ago. The decline is 3 quarters in a row since the third quarter last fiscal year. The reference chart that includes local manufacturers shows that demand trends in Q1 fiscal 2019 for hydraulic excavators, which includes many excavators, is flat compared to the same time last year. We'll continue to closely watch changes in demand, together with trends such as U.S.-China trade friction.

On Page 17, I'll elaborate on the Southeast Asian market. In Q1 fiscal 2019, demand in Southeast Asia apparently declined by 25% from the corresponding period a year ago. In the largest market of the region, Indonesia, demand for construction equipment declined due to the presidential election. Mining equipment demand decreased as well due to sluggish thermal coal prices. Demand in Thailand and the Philippines were negative as well due to elections.

Page 18 shows actual and projected demand for mining equipment. Fiscal 2019 Q1 mining equipment demand apparently declined by 7% from the corresponding period a year ago, turning negative for the first time in 11 quarters. Although, demand is down in Indonesia due to sluggish thermal coal prices, total demand continues to be firm and is in line with our initial projections.

At this point, I'd like to refer to Pages 27 and 28 in the appendix and explain order and sales trends for new mining equipment. Page 27 shows trends in the book-to-bill ratio for mining equipment. As explained earlier, this is the ratio of average orders for the past 6 months to the average sales for the past 6 months. Komatsu America, a manufacturer and distributor of ultra-large dump trucks, is maintaining a ratio of more than 100%, thanks to the ongoing solid order trends, while Komatsu Germany, a manufacturer distributor of ultra-large hydraulic excavators has been trending below 100% and the Komatsu Ltd. falling below 100% due to the declining demand for 100-ton class dump trucks for the Indonesian market.

Page 28 shows the book-to-bill trend for KMC mining equipment. The ratio in the most recent period is above 100%, with no major change in both orders received and sales.

Going back to Page 19, let me discuss sales trend of mining equipment in the Construction, Mining & Utility Equipment segment. For Q1 FY 2019, sales rose 1% year-on-year to JPY 244.9 billion. Sales declined in areas, such as Indonesia, but sales increased in North America and Oceania. Sales are up 3% year-on-year if we exclude the impact of FX rates.

On Page 20, I will explain about the part sales for the Construction, Mining & Utility Equipment segment. Sales for Q1 FY 2019 was down 1% year-on-year to JPY 152.4 billion. It was almost flat year-on-year. Sales were up 1% without the impact of FX rates. Parts sales for mining equipment was affected by the declining demand for overhaul in Indonesia but remained almost flat year-on-year. Parts sales for construction equipment is slightly up year-on-year, making the overall trend generally firm.

[Unknown Executive]

We'll now move on to Q&A, let me introduce the first person, Mr. Saito from Nomura Securities. Over to you.

[Katsushi Saito, analyst]

This is Saito speaking. Can you hear me?

[Unknown Executive]

Yes, we can. Please, go ahead.

[Katsushi Saito, analyst]

I have 3 questions. The first one is regarding Page 7, the slide about causes of difference in sales and segment profit. I'd like to know the breakdown of the components inside volume product mix, et cetera, and segment profit, such as pure volume difference and regional mix as you refer to.

[Takeshi Horikoshi, executive]

Would you like me to answer your questions one by one?

[Katsushi Saito, analyst]

Yes, please.

[Takeshi Horikoshi, executive]

This is Horikoshi speaking. First of all, for total volume, product mix, et cetera, it's minus JPY 21.9 billion. Pure volume difference is minus JPY 10.9 billion out of this amount. Also, COGS difference had an impact of minus JPY 2.9 billion. Also, like mentioned earlier, the regional mix impact as well as product mix difference as well as other items, such as tariffs, added up to a minus JPY 6 billion impact. Other items include bonuses, which increased as well as other one-off items, which had a minus JPY 2.1 billion impact.

[Katsushi Saito, analyst]

Follow-up question is regarding the COGS difference. Is it related to lower utilization? Or is it due to an increase in COGS for Tier 4 and other models?

[Takeshi Horikoshi, executive]

The COGS increase includes all items, such as higher raw material cost, Tier 4 and model change-related cost increases.

[Katsushi Saito, analyst]

How about any impact from lower utilization?

[Takeshi Horikoshi, executive]

What did you say?

[Katsushi Saito, analyst]

I'm talking about factory utilization. Has any impact from lower factory utilization appeared in volume product mix, et cetera?

[Takeshi Horikoshi, executive]

I don't believe so, hardly. But let me confirm. There was just a little, but it has not been significant.

[Katsushi Saito, analyst]

Related to this, looking at your full year plan on the sales side, minus JPY 27.4 billion is the impact you're expecting on volume, but you recorded for the June quarter minus JPY 30.9 billion already. Should we view this as a challenging start for the year? Or do you think this is tentative? Meaning that in Southeast Asia, there were a series of elections. It was election season. So do you think that this is a one-off and we shouldn't be expecting this to last for the full year?

[Takeshi Horikoshi, executive]

Especially for the regional mix impact and the fact that it was large in countries like Indonesia as well as India, the Philippines, Thailand as well as even in Australia, there was, in the first quarter, a concentration of elections. And this had an impact on our business. We expect that from Q2, the impact is going to be on the recovery side. To that end, in Q1, the negative impact was fairly large.

[Katsushi Saito, analyst]

Does that mean that profitability is high for these regions considering the fact that it appeared in the regional mix numbers?

[Takeshi Horikoshi, executive]

Especially, Indonesia and China have high profitability, but as sales dropped off, the impact was significant.

[Katsushi Saito, analyst]

My other question is regarding Page 6, sales by region to outside customers. Looking at this page, you talked about China and Asia earlier, but what about Latin America, which also saw a decline in sales and Africa, which had a fairly large drop-off? I'm sure that there may be some fluctuation depending on mining projects, but should we expect the current trends to persist for the year? Or is it a temporary downturn? Can you comment on this?

[Takeshi Horikoshi, executive]

For Latin America or -- rather, especially, Africa, there are differences annually, depending on projects. So I don't think it's the right way to think that the current trends are going to persist. For Latin America, on the other hand, the current trends are likely to continue.

[Katsushi Saito, analyst]

For Latin America, is it copper prices that's having an impact? Because in countries such as Chile, I recall you have various types of service contracts with customers and the equipment sales ratio is relatively lower, and you're doing well on the services side -- I mean, you are doing well in the services side. So can you comment about how you are doing currently?

[Takuya Imayoshi, executive]

This is Imayoshi speaking. Whether it be Latin America or Africa, they are both mining regions. Talking about the mining business overall, there are no major changes. As for Africa, as Mr. Horikoshi mentioned earlier, due to projects, we do see ups and downs and indeed look like the decline is large when you look at our performance on a quarterly basis. However, we have not changed the outlook we set forth in April. The overall trend has not changed.

[Katsushi Saito, analyst]

For Latin America, at the beginning of the year, I think you implied that sales may decrease on a local currency basis. Is this due to special factors? For example, service contracts, switching over the contracts may just impact Komatsu because I recall, CAT is doing relatively better. So are there any special reasons why Komatsu may be impacted negatively, leading to poor performance for just this year?

[Takuya Imayoshi, executive]

No, there are no special factors affecting the parts and services business.

[Unknown Executive]

The next question is from Mr. Isayama from Goldman Sachs.

[Yuichiro Isayama, analyst]

This is Isayama from Goldman Sachs. Can you hear me?

[Unknown Executive]

Yes.

[Yuichiro Isayama, analyst]

My first question is about inventory. Mr. Horikoshi commented that in the beginning, due to controlling inventory towards distributors, inventory increased. So I'd like to ask you how we should view your inventory. The amount of inventory is quite high. And months in hand, looks like it's close to levels that we saw during the bottom of the construction equipment cycle previously. So when you think about your inventory going forward, I don't think you're making distributors carry the inventory, but do you have plans to cut production from the next quarters? Or is it mainly mining-related inventory, and thus, there is no concern due to backlog? Basically, can you give us your view on production and inventory?

[Unknown Executive]

For construction equipment, first of all, turnover, the period is extending. The meaning of what I said regarding controlling distributor inventory is that, up until now, especially in the United States, because demand was strong, we weren't able to completely zero out distributor inventory. Distributors did carry their own inventory. Therefore, Komatsu's consignment inventory was also available. However in Q1, we made efforts to reduce distributor-owned inventory and replaced it with Komatsu consignment inventory. Due to what we did, especially in the U.S., inventory increased. One more thing is regarding the increase of inventory since March. At KMC, backlog is higher in June compared to March. So inventory is rising in preparation for higher sales from the second quarter onwards. These are the reasons why inventory is increasing. At the results briefing in April, we explained that higher working capital led to lower free cash flow, so we'd like to reduce working capital this year. We acknowledge that current inventory levels are relatively high. And of course, you can see our Q1 free cash flow position if you refer to our financial statements. So based off that, moving towards the end of the year, towards March, we do feel the need to adjust utilization at factories so as to reduce inventory. I hope that answers your question.

[Yuichiro Isayama, analyst]

Yes. Here's my second question. What about the regions you didn't touch upon so far? For example, what about production and inventory in China? We already know, sales trends are sluggish in China, but we also know that your company has been disciplined since last year already. My sense is that other companies will probably have to adjust production and inventory. But for your company and your operations in China, will you need to take measures to adjust production and inventory in the second half? Please share your view.

[Takeshi Horikoshi, executive]

Regarding China, since last fiscal year, sales already wasn't great, so we took measures to adjust production. So the situation we're having in China is not necessarily the situation we're having in North America.

[Yuichiro Isayama, analyst]

Finally, the person before me asked about volume product mix, et cetera. I'd like to confirm about some things while referring to Pages 20 and 21 that Imayoshi-san explained. Looking at the mining equipment business, it seems that sales is increasing on a local currency basis. But due to a variety of factors, such as tariffs, volume, product mix, et cetera, is down. Indonesia is your most profitable region due to coal mining. So with this region performing negatively, I guess it makes overall sales come down, even if ex Indonesia sales is flat. Am I being too extreme? Or is it a right view? Can you confirm this?

[Takeshi Horikoshi, executive]

If you divide the businesses into mining equipment and construction equipment, mining equipment is actually increasing. I mentioned in my analysis that regional mix had a negative impact. And to your point, it's due to Indonesia, especially the impact from thermal coal. Sales dropped off due to lower prices and it turned out to have a significant impact.

[Yuichiro Isayama, analyst]

I just wanted to confirm one thing. I presume that for Indonesia, HD785 have a large impact on sales. I believe they offer high added value due to a high in-house production rate, resulting in high margin. And you also have high market share. Parts and services, overhaul, you benefit from all of these things, and you also even have pricing power. So it's not just new equipment, but also parts and services that makes Indonesia, by far, the most profitable region. Is this view correct?

[Takeshi Horikoshi, executive]

Well, I'm not going to talk about the profitability of certain products. But HD785 is a large contributor to sales in Indonesia, that's a fact. Because HD785 is a dump truck, spare part sales are not as large as other types of models.

[Unknown Executive]

Let me introduce the next person. Mr. Kuroda from Crédit Suisse. Over to you.

[Shinji Kuroda, analyst]

Can you hear me?

[Unknown Executive]

Yes, we can.

[Shinji Kuroda, analyst]

I wasn't on the call from the beginning, so this may have been mentioned already. My question is, how did Q1 results come in against your internal plan?

[Takeshi Horikoshi, executive]

Against plan? Sales came in slightly below our plan. Profits were broadly in line with our expectations.

[Shinji Kuroda, analyst]

All right. Next, I'd like to ask the same question for the mining business, excluding Indonesia and the parts business.

[Takeshi Horikoshi, executive]

For mining, as mentioned earlier, it was in line with expectations. Only 3 months have passed so far, but the outlook set forth at the beginning of the year was minus 10% to 20%, and the demand was minus 7% for the June quarter. So we are not seeing any big changes. The slowdown in Indonesia is also in line with expectations. For parts, once again, only 3 months have passed, but like we explained earlier, it continues to be brisk.

[Shinji Kuroda, analyst]

All right. So you're in line. Lastly, under your cause analysis, I'd like to ask about your view on fixed cost. Actually, I was expecting that you were going to say that Q1 performance was below your plan, so I was thinking about asking whether you had plans to cut fixed costs going into the second half of the year? So minus JPY 2.2 billion for fixed cost, I think it's JPY 12.3 billion for the year, plan-wise, but can you give us your view on fixed cost as we move towards the end of the year?

[Takeshi Horikoshi, executive]

For fixed cost, we have already started to manage fixed cost below our plan in Q1. Although, I'm not going to mention the numbers, we've already cut costs significantly. For the year, in April, we talked about our spending plans over the medium-term plan. However, we're intending on making adjustments accordingly, depending on our business performance.

[Unknown Executive]

The next person is Mr. Tai from Daiwa Securities.

[Hirosuke Tai, analyst]

This is Tai from Daiwa. I apologize if this already came up. But regarding the decrease of profits in your Industrial Machinery business, was this in line? Also, regarding Gigaphoton, I recall it was said before at a business briefing that profitability was higher than 20% for this business. This makes me wonder if all of the businesses, excluding Gigaphoton, were all loss-making. Can you comment on this?

[Takeshi Horikoshi, executive]

This is Horikoshi speaking. First, sales came down from JPY 41.2 billion last year to JPY 34 billion this year. By company, Komatsu Industries and NTC went down in line with our expectations. As for Gigaphoton on the other hand, it was due to excess memory inventory that led to memory prices significantly coming down. This is what we've been hearing. Consequently, customer factory utilization has been coming down, and memory producer capital investments have been delayed. So the decline has been greater than expected. Regarding the segment profit ratio, compared to 7.4% last year, it is down to 1.6% this year, so you may think that this is substantially lower, but most of it comes from sales volume difference. Fixed cost can't come down that easily. So it's the sales volume decline leading to a gross margin decrease that hit us.

[Hirosuke Tai, analyst]

So did Gigaphoton's profitability also fall? Did it fall to the teens? Or is it even less at single digit?

[Takeshi Horikoshi, executive]

No. It's not that bad. However -- but due to the sales volume difference, operating income has decreased.

[Hirosuke Tai, analyst]

I see. Then in terms of progress towards the annual profit target of JPY 21 billion, was the progress of those businesses other than Gigaphoton, in line with the plan for the first 3 months?

[Takeshi Horikoshi, executive]

Yes. That is the case. But let me add some more comments. NTC expects a decline in the sales of machine tools, such as molding machines for batteries and wire saws to Chinese customers. So there may be some gap compared with original expectation at the beginning of the year. Gigaphoton is also suffering in semiconductor. So there may be some gap here as well. Overall, Komatsu NTC should be in line with the plan.

[Hirosuke Tai, analyst]

I see. It's clear now. I suppose that the P&L gap is not going to be so significant, because the lead time is long.

[Takeshi Horikoshi, executive]

Yes. And also the sales to China is not so large.

[Tomohiko Sano, analyst]

This is Sano from JPMorgan. Earlier, first of all, you said that Q1 sales was slightly lower than the internal target. I believe that underperformance was caused mainly by Industrial Machinery or Gigaphoton and also the U.S. business. Were there any business which overperformed? Or were there any business which overperformed -- or underperformed?

[Unknown Executive]

First of all, we did not have any major underperformance. Sales were only slightly below the plan or almost in line with the plan. Although, it is true that industrial machinery is slightly below the plan for reasons I just mentioned. If I can elaborate on construction equipment. Due to the declining volume in China and Indonesia, some gap was caused, but it was almost offset by the gain from foreign exchange rate translation, and overall sales were almost in line with the plan. As for profits, as explained earlier, we are controlling fixed costs more tightly compared with the plan, and there were some unexpected profits as well not included in the plan. So profits were slightly higher compared with the plan.

[Tomohiko Sano, analyst]

Understood. My second question is about the U.S. This time, the demand in the United States, U.S. market was up about 6%, while the company's sales grew only 2% on the Japanese yen basis and probably also on the local currency basis. What was the growth rates of other companies, such as CAT and Hitachi Construction Machinery? Compared with them, the company seems to have grown very little. What's the difference in terms of product mix or internal infrastructure or product offering? Are there any differences or disadvantages compared with the competitors?

[Takuya Imayoshi, executive]

I don't have any particular comment. But as explained, North America consists of the U.S. and Canada. In our sales mix, mining accounts for a large volume in North America, that's why demand and the sales do not always go up and down together. In addition, construction machinery demand also include demand for rental fleet owned by distributors called DORF. So please understand that our sales and the market demand do not necessarily move together. That's not our expectation. Our perception is that our sales trend during Q1 was as strong as expected. There was no particular concern compared with other companies.

[Takeshi Horikoshi, executive]

This is Horikoshi speaking. As mentioned earlier, we are already carrying out inventory adjustment at distributors, which did constitute a negative factor for the consolidated performance of Komatsu.

[Tomohiko Sano, analyst]

Understood. My last and third question is about Europe. During Q1, Europe must have recorded a double-digit growth, even on a local currency basis. The Q1 result was only 2%, but full year forecast is 5% to 10%. I know that I shouldn't compare Q1 to Q1, but is the full year demand outlook generally in line with your expectation? Are there any comments on any geographies?

[Takeshi Horikoshi, executive]

In April, we said that full year outlook is 5% to 10%, but the actual result for Q1 was just 2%. On the bottom-right corner of the slide, you can see our outlook by region, major markets, such as the U.K., France and Germany account for 60%. But the rest is East, West and North Europe, which can be volatile, making it more difficult to forecast. But so far, we have not changed our outlook. Having said that, also, as mentioned, the macroeconomic indicators are rather weak with the imminent Brexit deadline approaching and the German auto demand weakening, among other negative factors. So we need to stay cautious. However, demand for infrastructure investment, which is a driver of our construction equipment demand, remains intact. That's the assumption we are maintaining.

[Hikaru Mizuno, analyst]

This is Mizuno from UBS Securities. I have 2 questions. First, on Southeast Asia. In the presentation, you said that the impact of elections in the Philippines and Indonesia were material. What is the situation in the second quarter so far? Do you see any sign of recovery? I'm asking because the BB ratio on Page 27 is looking down. If you look at the chart at the bottom of the page for Komatsu, although, it is up in -- up only to June, the downward-looking curve is slightly concerning. I want to ask about the most recent trend observed internally, whether it is already looking up or not?

[Takuya Imayoshi, executive]

This is Imayoshi speaking. Our comment earlier on Southeast Asia was mainly concerning construction equipment. As you may be aware, this year, there are elections, not only in Indonesia but also in Thailand and the Philippines. And election tends to delay the execution of infrastructure projects. That's the reason for a slower start than expected. In terms of signs of recovery, since the elections are just over, we have yet to see recovery, and we have to monitor closely how each country is executing their infrastructure policies. On the other hand, the BB ratio trend shown here is for mining equipment of 100 ton or more, for which the demand in Indonesia has dropped anyways due to reasons unrelated to the election.

[Hikaru Mizuno, analyst]

Well, I do not remember exactly what the comment was 3 months ago. Correct me if I'm wrong. Did the company originally expect a recovery in the latter half of Q2? Could you just confirm this point?

[Takuya Imayoshi, executive]

Yes, that's the comment, I believe, we had made in April. We said that the Q1 results may be weaker due to the elections.

[Hikaru Mizuno, analyst]

Understood. I also want to get a clarification on 2 points on variance analysis. One is about the COGS difference, and also, the other is about the selling price difference. The Q1 selling price effect was positive JPY 4.2 billion compared to JPY 20.4 billion for the full year for Construction, Mining & Utility Equipment, meaning slightly slower progress for Q1 compared with the full year target. I know that Q1 saw a lower demand compared with the plan. But did that force you to slow down the pace of price hike? Could you comment on that?

[Unknown Executive]

As for COGS difference, Q1 was minus JPY 2.9 billion compared with minus JPY 4.2 billion for the full year, according to the explanation 3 months ago. Given the fact that sales are slower, couldn't you slow down the spending as well? Could you comment on this as well?

[Takeshi Horikoshi, executive]

This is Horikoshi speaking. As for selling price difference, it was almost in line with our expectation. It is true that full year estimate is JPY 20 billion, which divided by 4 is JPY 5 billion. And JPY 4.2 billion is slightly lower than JPY 5 billion. We believe, however, that it is within the margin of error. As for COGS difference, you are pointing out that the amount for Q1 is rather high compared with the full year target. On this one, we are not planning to revise the full year target either. Please consider this also as being within the margin of error.

[Hirosuke Tai, analyst]

This is Tai from Daiwa Securities. Sorry, this is my second round. I'd like to ask this question, which is not directly related to financial results, since the next time I get to see Mr. Horikoshi and Mr. Imayoshi will be 2 or 3 months away. Ever since Ogawa-san took office, has there been any changes in the way people work in the company or types of meetings you're having, frequencies of meetings and so forth? Has there been any changes? It's been only 3 months since the new year started under the new leadership. But are there any changes in day-to-day business or operation? Could you comment on this?

[Takuya Imayoshi, executive]

This is Imayoshi speaking. Despite the change of President, there is no change in the way we operate or we work. Our governance structure is well thought through. There's no need to change it. Furthermore, a new medium-term plan was announced by the new leadership. So we are all concentrating on the execution of the plan at the moment.

[Hirosuke Tai, analyst]

Well, I remember that Mr. Ogawa said in a small meeting of sell side after substantial fixed cost reduction and under the leadership of Mr. Ohashi, the company is getting ready because it is getting profitable, and it is getting ready to take aggressive actions, he said. I was hoping to hear something along these lines, but I suppose that there is no major change worth mentioning at the moment.

[Takuya Imayoshi, executive]

Well, 3 months ago, when we explained the concept of strategic investment as part of the medium-term plan, we mentioned it, we are shifting towards investment. And in fact, we are injecting money in new areas, while verifying the return on investment in each area. This is something that we are doing day to day.

[Yuichiro Isayama, analyst]

This is Isayama from Goldman Sachs. This is my second round as well. My question is similar to Tai-san's. At the beginning of July, Mr. Ogawa made a comment, I think, on Bloomberg, on the contribution of coals. Could you give us some color around this topic? Has there been any change from the explanation given in the past in earnings meetings? It seems that the company is becoming negative towards coal. What happened to the previous plans on Joy and HD785 nonconsolidated investment plan and the production plan? Has there been any change in the stance towards the coal? That's my question. Could you comment on this, please?

[Takuya Imayoshi, executive]

This is Imayoshi speaking. There is no particular change. Mr. Ogawa just explained our prevailing thinking. We are making those comments from time to time because there is a public debate ongoing on the viability of coal. That's the background. Within the medium-term plan, the company intends to reduce coal exposure. That is one of the objectives of Joy acquisition. Expansion of underground hard rock is one of the major themes to date we are working on. That's the reason behind the comment. For conventional coal, despite the headwind, we will continue to provide safe and productive equipment to customers. That is our responsibility, and we will not change this.

[Yuichiro Isayama, analyst]

Maybe the article exaggerated what the company stated, but let me finish my question with some numbers. In the past, the company quoted something like 40% to 50% being the exposure of brand-new mining equipment. But if you include parts and services, what is the contribution of coal-related mining equipment in the entire sales? Is it 50% or higher? That's my last question.

[Takeshi Horikoshi, executive]

We have been saying that the contribution for the entire construction and the mining equipment is slightly less than 20%. Does that include parts and services? Yes, it does.

[Katsushi Saito, analyst]

This is Saito from Nomura Securities. I just want to ask one more question. As for the mining equipment, you said that the Q1 result was plus 3% on a local currency basis. You may not show the breakdown anymore, but at the beginning of the year, you said that for the entire mining equipment business, it is projected at minus 2% for full year and 5% for former Komatsu due to the impact of Indonesia, meaning 4% or so for KMC, I suppose, if I calculate correctly. Now the Q1 result was plus 3%. Does that mean that KMC was a major positive surprise? That's what I suppose. Could you give us the breakdown between former KMC and the former Komatsu, which are combined into one unit starting this quarter?

[Takeshi Horikoshi, executive]

Sorry, but we no longer track those figures separately and for parts either. However, in terms of KMC's progress versus plan, they are in line with the plan, both in terms of sales and the profit.

[Katsushi Saito, analyst]

Wasn't the Q1 result considerably higher compared with the annual plan?

[Takeshi Horikoshi, executive]

No. That's not the case. The equipment business had a considerably higher sales, and the parts business was slightly negative, so that in total, the performance was just in line with the plan. Profits were also in line with the plan that we had shared with you in the past.

This is the end of the Q&A session. Thank you very much.