Komatsu Ltd
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Komatsu Ltd
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This is Ogawa, the CEO, speaking.
First of all, from my part, I would like to explain about the impact of COVID-19. When we held our earnings results announcement on May 18, we did not release our forecast for the March 2021 period. Today, we are announcing this forecast based on the available information and predictions, and I will refer to that later.
First and foremost, I would like to offer the condolence to the families who have lost their beloved ones to COVID-19. At the same time, I wish for the swift recovery for the people who are suffering. I also offer my heartfelt gratitude to the medical workers who are working hard to prevent this pandemic.
Then I would like to explain the impact of COVID-19 to our business. First, the impact to our production. At Komatsu, from before, to be able to absorb the fluctuations of demand and the exchange rate, we have a global sourcing system for the equipment and components. Currently, there are no issues related to supply chains. There has been torrential rain in Kyushu in Japan. And in Yamagata, there has been torrential rain in Japan, but there is no issues in the supply chain. Only one site in India is currently suspending production. In the other sites, the operation is being conducted based on the policies of each government and taking measures to prevent the spread of pandemic. For the suppliers who are struggling, we are helping them by buying up their inventory and supporting them to receive employment adjustment subsidies. By doing so, we are supporting this -- their cash flow.
Next is the impact on the sales and support activity. According to the operation situation of each regions of the equipment due to KOMTRAX, it is going back to the last year level. In terms of the sales activity, the sales staff have been working from home, but some workplaces are restarting based on each country's reopening of the economy, or some are working with some restrictions. The service activity, which support the machines or the customers, we are seeing things going back to normal at the parts warehouse and workshops.
In terms of Retail Finance, some of the customers are asking for the extension of the payment. We are looking at the situation and responding accordingly. The cash flow of the group companies, currently, there are no issues.
I will explain the effects of the coronavirus on business results. First, the results for the first quarter. In the construction, mining and utility equipment segment, sales were down 25% year-on-year. Sales declined in all regions, except for China. I'll explain the details later, but our view is that the impact is almost nonexistent in China and Oceania, but it has been impacting other regions, especially North America, Asia and Europe, where sales decreased substantially.
Looking at the sales trend by month during the first quarter, the degree of the decline in sales has gradually improved since the bottom months of April and May.
For Industrial Machinery & Others, although there was no impact on business for the semiconductor industry, for the automobile industry, investment on new equipment was postponed or reduced due to the spread of COVID-19.
Regarding the projection of full year results for fiscal 2020, for Construction, Mining & Utility Equipment, although there are timing differences depending on the region, the projection was created on the basis that traditional markets will gradually recover from the third quarter, and strategic markets other than China will gradually recover from the fourth quarter. However, since it is difficult to read the future, and because there is a risk that the second wave of the coronavirus will come, we will continue business activities, while further improving the way we are organized, so that we can move with agility. For Industrial Machinery & Others, we anticipate that the trends we saw in the first quarter results will continue throughout the rest of the year.
Page 6 compares what happened in light of the Lehman shock and this time around with the spread of COVID-19. The graph on the top shows the demand trends for construction equipment. At the time of the Lehman shock, demand fell by close to 40% from peak, where you have this time around with COVID-19, the demand decrease is expected to stop at close to 30%. Reflecting on recovery of demand during the Lehman crisis, due to the effects of China's economic stimulus measures, demand in strategic markets grew that led to overall recovery, but it took time for the traditional markets to recover.
Under COVID-19 as well, in China, the spread of the virus has already subsided, and demand has recovered in the market. But for other strategic markets, apart from China, there are still regions where infections are spreading, and the demand outlook is uncertain.
On the other hand, looking at the operating hours of KOMTRAX in the middle graph, it took nearly 2 years to return to the operating levels prior to the Lehman shock. But this time, it has already recovered. Based on the above, we anticipate that the time needed for demand to recover will be shorter than that of post Lehman.
The bottom graph shows the year-on-year growth rate of demand from fiscal 2019 onwards. In the left chart, we expect the growth rate of demand in all regions, except for the Chinese market, to bottom out in the first quarter of fiscal 2020 and gradually recover, but continue to be negative on a year-on-year basis. The traditional market should see a recovery from Q3 and the strategic market from Q4. The outlook for fiscal 2021 remains uncertain. But assuming the same pace, demand growth is expected to return to positive year-on-year during fiscal 2021 towards the pre-COVID-19 level, with a gradual L-shaped recovery.
The recent COVID-19 outbreak has revealed a number of challenges. I would like to introduce some of new challenges and initiatives in line with the corona -- with corona, post-corona period to help solve these challenges. First, let's talk about expanding business opportunities. On the equipment side, the need for automation, unmanned and remote control operation will be even greater for social distancing. On the technology front, we expect that the digitalization of customers and the use of digital twins may sharply accelerate on site. Komatsu will respond to this, with even greater speed by providing solutions, such as DX SMARTCONSTRUCTION, and automation in construction equipment as well as new platforms, unmanned dumping and remote control in mining equipment.
Next, I would like to talk about workstyle reforms. As countries apply regulations to individual activities and movements to prevent the spread of the virus, we have been forced to work from home, and our traditional face-to-face sales activities have been limited. We are working on digital marketing to expand contract -- contact with the customers. Since the lifting of the state of emergency, telework is becoming an established part of employees' work. We will introduce this as a regular way of working in the future. In addition to actively introducing ICT tools to make telework more efficient, we're also considering the use of wearable devices for health management of employees.
Finally, face-to-face communication with our stakeholders is becoming increasingly difficult, and we are considering online IR events and virtual shareholder meetings. While maintaining physical distance, we will continue to improve the quality of our communication.
That's all for me. Thank you.
Next, Horikoshi will explain about the fiscal year 2020 first quarter outline.
So this is Horikoshi, the CFO. I would like to talk about the first quarter earnings results.
Going to Page 9, this is the fiscal year first quarter outline. In terms of the exchange rate, it is JPY 107.5 to the dollar; EUR 1, JPY 118.6; CNY 1, JPY 15.1. Year-over-year against the dollar, euro and renminbi, the yen has been stronger. It is not written on this presentation, but Australian dollars, South African rand and Russian ruble, the yen has been stronger as well.
The first quarter consolidated net sales year-over-year has gone down by 24.8%, JPY 458.7 billion. The operating income was minus 64.0%, JPY 26.9 billion. The operating profit margin was minus 6.4 point at 5.9%. For the consolidated sales, because of the impact of the COVID-19, the demand has gone down and has been negative impact coming from the exchange rate. The sales has declined accordingly. In terms of the operating income, there has been a decline in volume, and the negative impact from the exchange rate, we have seen a sharp decline in profit. For net profit, it was minus 65.8% at JPY 16.2 billion.
At Page 10, I would like to explain about the sales and profit of each segment. For the Construction, Mining & Utility Equipment business, year-over-year was minus 24.2% at JPY 425.8 billion. The segment profit was minus 66.2% at JPY 23.2 billion. Because of the impact of COVID-19, we have seen a decline in sales and the negative impact of the currency. We have seen decline in sales profit because of the decline in volume. And the minus -- negative impact from the exchange rate, we have seen a decline in profit.
For the Retail Finance, sales was minus 7.9% year-over-year at JPY 15.9 billion. The segment profit was minus 44.3% and stood at JPY 1.8 billion. Mainly in North America, there has been a decline in new contracts, and we've seen a decline in sales. And we have seen a decline in profit because of the extension of the payment and the revaluation of vehicles after lease use.
Finally, sales of Industrial Machinery & Others declined by 26.5% from the corresponding period a year ago to JPY 25 billion, and segment profit increased by 208.1% to JPY 1.7 billion. Sales declined due to reduced sales of presses and machine tools to the automobile industry due to the spread of the coronavirus, while segment profits increased due to steady sales of Excimer laser-related products for the semiconductor market.
Page 11 shows the sales by region in the Construction, Mining & Utility Equipment division. Sales of Construction, Mining & Utility Equipment decreased by 25.1% from the corresponding period a year ago to JPY 420 billion. Sales declined in all regions except for China. We view that the impact of the spread of the coronavirus is almost nonexistent in China and Oceania, but has impacted other regions, particularly in North America, Asia and Europe. While the traditional markets of North America and Europe decreased significantly, the proportion of traditional markets decreased from 48% in the same period of the previous year to 47% due to the increase in China, a strategic market.
Page 12 shows causes of differences in sales and segment profit for Construction, Mining & Utility Equipment. Sales decreased by JPY 135.6 billion from the corresponding period a year ago due to reduced sales volume and the adverse impact of foreign exchange rates. Regarding segment profit, despite positive factors, such as price increase impact and fixed cost reductions due to sales volume decline and negative foreign exchange rate impact, profit decreased by JPY 45.4 billion year-on-year. The segment profit ratio decreased by 6.8 percentage points to 5.4%.
Page 13 shows the status of Retail Finance. Assets increased year-on-year, supported mainly by increases in China, while asset declined in North America. New contracts declined year-on-year due to reduced sales under the coronavirus pandemic. This was especially evident in North America. Revenues decreased year-on-year, especially affected by reduced new contracts and foreign exchange rates. Segment profit also decreased mainly reflecting adverse effects of payment term extension and the revaluation of vehicles after lease.
Page 14 shows Industrial Machinery & Others sales and segment profit. Sales declined by 26.5% year-on-year to JPY 2.5 billion affected by reduced sales of presses and machine tools to the automobile manufacturing industry. Due to the impact of coronavirus, sales of press machines and machine tools for the automotive industry decreased, while the sales of Excimer laser-related products for the semiconductor market were strong. Segment profit improved by JPY 1.1 billion year-on-year to JPY 1.7 billion. Segment profit margin improved by 5.2 percentage points to 6.8%.
On Page 15, I would like to explain the consolidated balance sheet. Total assets increased by JPY 7.1 billion from the end of the previous fiscal year to JPY 3.660.8 trillion. Inventories increased. This was due to production adjustments and a decrease in sales due to pandemic and other factors. On the other hand, accounts receivable decreased due to a decline in sales. Interest-bearing debt increased by JPY 35.4 billion from the end of last fiscal year to JPY 3.0478 trillion. The shareholders' equity ratio was 48.2%, down 0.3 percentage points from the end of the previous fiscal year. The net D/E ratio was 0.45.
That's all.
Next, Imayoshi will explain about the outlook for the fiscal year 2020.
And so I'm Imayoshi from the business coordination department. I would like to talk about the outlook for fiscal year 2020 and the situation of main markets.
On Page 17, this is the outlook for fiscal year 2020. In terms of the exchange rate, from the second quarter onwards, a dollar will be JPY 105; euro, JPY 116; renminbi will be JPY 15. The full year average exchange rate will be JPY 105.6 to the dollar, JPY 116.7 to the euro and JPY 15 to CNY 1. The consolidated sales, because of the demand decline of the COVID-19, and there has been negative impact of the exchange rate year-over-year, minus 15.4%, JPY 2.68 trillion will be the outlook.
For the operating income, because of the decline in volume and negative impact from the exchange rate, it will be minus 54.1%, JPY 115 billion. The operating profit margin will decline by 4.7 percentage points to 5.6%. The net profit will be JPY 67 billion. ROE will decline by 4.8 points year-over-year at 3.8%. For cash dividends, we are planning to pay JPY 36. The payment ratio will be 50.8%.
Going to Page 18, this will be the sales and profit outlook for each segment. In the Construction, Mining & Utility Equipment segment, sales year-over-year minus 16.6% at JPY 1.845 trillion is the outlook. Segment profit, minus 56.9%, JPY 98 billion. The segment profit ratio will decline by 5.0 points to 5.3%.
For the Retail Finance sales year-over-year, a decline of 4.1% at JPY 68 billion. The segment profit, minus 21.1%. JPY 10 billion will be the outlook.
For the Industrial Machinery & Others, sales year-over-year, plus 1.9%, JPY 181 billion. Segment profit will be plus 2.2% at JPY 14 billion. The cause of difference with the sales and profit for each segment will be explained afterwards.
On Page 19, this is Construction, Mining & Utility Equipment sales outlook by region. For fiscal year 2020, North America, Asia, Europe, Latin America will see a substantial decline, minus JPY 376.9 billion, and JPY 1.829 trillion would be the outlook. For the traditional markets at North America and Europe, we see a sharp decline. Only China in the strategic market will increase, so the ratio of traditional markets will be going down from 50% of last year to 49%.
Going to Page 20. This will be the sales and segment profit -- the causes of difference in sales and profit, Construction, Mining & Utility Equipment sales, there will be some plus impact coming from pricing increase, but the decline of volume and exchange rate have a negative impact. Year-over-year, you'll see a decline by JPY 366.2 billion. For segment profit, there will be some positive impact coming from increase of prices and reduction of fixed costs, but the volume will decrease, and the negative impact of the exchange rate will lead to a decline of JPY 129.3 billion of profit.
Going to Page 21. This is the outlook for the Retail Finance business. The assets of Retail Finance, there will be a decline of new contracts and because of the impact of the exchange rate, this will go down. In terms of new contracts, because of the impact of COVID-19, the sales is going down, and this will have an impact. And mainly in North America, we are forecasting a decline. In terms of earnings, in terms of sales, because of the decline of new contracts, we'll see a decline in sales because of segment profit due to the impact of extension of payments and the revaluation of vehicles after leases. We are forecasting a decline in profit.
Going to Page 22 is the sales and segment profit of the Industrial Machinery & Others. For the Industrial Machinery & Others sales, because of the impact of COVID-19, the forging press and the machine tool sales towards the automobile market is going to go down, but the Excimer laser-related sales is going to be robust for the semiconductor market. Overall, it will be plus 1.9% increase of sales, JPY 181 billion. The segment profit will be plus JPY 200 million year-over-year, standing at JPY 14 billion.
So I would like to skip to Page 41 to explain about the orders and sales situation for the Industrial Machine segment. So this is the BB ratio of the Industrial Machine business. The graph is the average orders value for the 6 months divided by the average factory shipment net value for the 6 months. For the Komatsu Industries, they are selling and servicing the press machinery and sheet metal machines. The automobile makers are reducing CapEx or postponing CapEx due to the impact of COVID-19, so the order is declining. The index is 80% level. The Komatsu NTC assets business design, manufacturing and sales of transfer machines, machining centers and crankshaft processing, this is the same as Komatsu Industries, but there has been an impact from the automobile machines' CapEx extension or reduction. So the order is declining, and the index is at an 80% level.
Going to Page 23, I would like to explain about the demand situation for the 7 major products. For the 7 major products in the mining equipment demand trend is shown here. For the first quarter of fiscal year 2020, it's based on a current projection. For the first quarter of fiscal year 2020, the unit demand is down by 17% year-over-year. Due to the impact of COVID-19, it is different region by region. But excluding China, all of the regions, we are seeing a decline in demand.
For fiscal year 2020, the demand and volume, we assume the most realistic recovery period and level by each region. Overall, we assume that the demand is going down by 10% to 20% year-over-year. The economic activity is restarting, and the demand is gradually going to recover. That is our assumption. But there are some regions that are still seeing a spread of COVID-19. We'll be observing the demand trend carefully.
So from the next page onwards, I would like to talk about the situation of each major markets. On Page 24, I'll explain the demand trends in the Japanese market. In Q1 fiscal 2020, demand apparently declined by 4% from the corresponding period a year ago. Due to the spread of COVID-19, investment sentiment cooled down, particularly in the private sector, resulting in a year-on-year decrease. The outlook for fiscal 2020 is that, while construction investment by the government will remain firm, investment by the private sector is on the decline due to the economic downturn, and overall demand will remain sluggish. For the year, we expect demand to decline between 15% to 20% compared to the previous year. The average operating hours per month of KOMTRAX was up 3% in June compared to the same month of the previous year. Job site operations are at normal levels.
On Page 25, I'll explain the demand trends in the North American market. Fiscal 2020 Q1 demand apparently decreased by 29% from the corresponding period a year ago. In addition to the drop-off in demand in energy field due to the impact of lower crude oil prices, the impact from the spread of COVID-19 was extremely large, and demand in the rental segment and others declined significantly. The projection for fiscal 2020 is minus 20% to minus 25% compared to fiscal 2019. Demand is expected to gradually recover from the third quarter due to the resumption of economic activities and the effects of economic stimulus measures, but uncertainty regarding the presidential election remains. The average operating hours per month of KOMTRAX continue to decrease by double digits up until May. But in June, it was down by 1% compared to the same month of the previous year.
On Page 26, I'll explain the demand trends in the European market. In fiscal 2020 Q1, demand apparently decreased by 36% from the corresponding period a year ago. Due to the spread of COVID-19, demand was significantly down due to factors such as stay-at-home restrictions that started from the beginning of March in major markets, such as Germany, France, the U.K. and Italy. The projection for fiscal 2020 is minus 20% to minus 25% compared to fiscal 2019. Due to the relaxation of restrictions by governments in various countries, machine utilization has recovered, with the resumption of corporate activities, but demand is expected to decline substantially year-on-year due to delays in projects impacted by COVID-19 and holdbacks on purchases due to uncertainty about the future. The average operating hours per month of KOMTRAX in June was back up to previous year's same month levels, recording an increase of 4%.
Page 27 is the Chinese market. The demand numbers are those of foreign manufacturers. Fiscal 2020 Q1 demand was apparently up by 45% from the corresponding period a year ago. Due to the spread of COVID-19, the post-Chinese New Year sales season was delayed into the first quarter. And in addition, purchases in anticipation of infrastructure investments and new projects significantly boost the demand. For your reference, total demand, including local makers for hydraulic excavators and mini-excavators, increased by 69% year-on-year. The projection for fiscal 2020 is an increase of 10% to 20% compared to the previous fiscal year, as demand is expected to remain firm due to economic support measures, such as infrastructure investment and others. The average monthly operating hours per month of KOMTRAX was plus 2% in June compared to the same month of the previous year, showing positive growth for the third consecutive month.
On Page 28, I'll explain the trends in demand in the Southeast Asian market. In fiscal 2020 Q1, demand declined by 39% from the corresponding period a year ago apparently. In Indonesia, which is the largest market, demand decreased by 68%. In addition to sluggish thermal coal prices and uncertainty about the future, leading to continued restraint of investment by customers, the spread of COVID-19 had an impact.
In Thailand, demand was positive as the impact of COVID-19 had subsided and public investment progressed. But in the Philippines and Malaysia, demand dropped significantly due to the coronavirus.
The outlook for fiscal 2020 is minus 30% to minus 35% compared to the previous year. In Indonesia, it is expected that demand will gradually recover from the fourth quarter due to the relaxation of activity restrictions by the government. But as it is expected that thermal coal prices will continue to be sluggish and government economic measures are expected to curve investment in the infrastructure, we expect that the overall weak situation will persist. The average operating hours per month of KOMTRAX in Indonesia was minus 20% in May and plus 22% in June compared to the same month of the previous year. Numbers have fluctuated due to the difference in the timing of Ramadan.
On Page 29, I'll explain the trends in demand for mining equipment. In fiscal 2020 Q1, demand for mining equipment declined by 29% from the corresponding period a year ago. Demand decreased mainly in North America, Indonesia and CIS due to sluggish prices of crude oil and coal. Demand in fiscal 2020 is expected to decline in North America, Indonesia and CIS due to sluggish crude oil and coal prices, while other regions are expected to remain firm. We expect demand for equipment to decline by 10% to 20% year-on-year.
Now taking this moment, I'll explain the status of orders and sales of mining equipment with reference materials on Pages 39 and 40. This page shows the book-to-bill ratio for mining equipment. The graph shows the amount of orders received for the past 6 months divided by the sales for the past 6 months. Komatsu America manufacturers and sales ultra-large dump trucks, orders and sales have been strong for some time, but the decline in oil prices and other factors have increased uncertainty in North America and other parts of the world, and that we have continued to see orders and sales fall below 100% in the past quarter. We will continue to closely monitor our customers' investment trends.
Komatsu Germany manufacturers and sales ultra-large hydraulic excavators, although the current index is about 100%, sales to coal customers were weak and orders levels were low. As for the index for Komatsu parent, demand for 100-ton class dump trucks to Indonesian countries to be weak. That index has been above 100% since March, but orders have remained at a low level.
This page shows the book-to-bill ratio for KMC mining equipment. The index has fallen to the 30% level as the current order situation continues to be weak, particularly for North American coal customers due to the decline in coal prices.
On Page 30, we discuss mining equipment sales. Sales for the first quarter of fiscal 2020 decreased 3 point -- 31% to JPY 169.6 billion, as sales declined in North America, Asia and the CIS due to low oil and coal prices. Excluding the impact of foreign exchange rates, net sales decreased 27% from the same period last year. In fiscal year 2020, sales were expected to be JPY 749.1 billion, down 22% from the same period last year, mainly due to the lower sales in North America, Indonesia and the CIS. Excluding impact of foreign exchange rates, sales are down 18% from the previous year.
On Page 31, we will discuss parts sales trend. For the first quarter of fiscal 2020, sales decreased 25% from year ago to JPY 114.8 billion. Excluding the impact of foreign exchange, the decline was 21%. For fiscal year 2020, sales are expected to be JPY 498.5 billion, down 15% from the previous year. Excluding the impact of foreign exchange, sales are expected to decrease by 11%. The decline in sales is due to sluggish economic activity caused by the spread of COVID-19 and the postponement of overhauls as a result of lower mining equipment sales, and customer investment restrained due to falling coal and oil prices. However, average operating hours of KOMTRAX are returning to last year's level, except in some areas, and we expect demand for parts and services to recover faster than -- for the demand in main units.
On Page 32, we will explain the status of capital expenditures and other items. CapEx, excluding investment in rental assets, will decrease from FY '19 due to temporary freezing or delay of new investments under the COVID-19 pandemic. R&D expenses will sustain the level on par with FY '19, as we will carry out priority investments in growth areas. Fixed costs will decrease from FY '19 mainly due to reduced projects and operational expenses resulting from the COVID-19 restrictions, despite continued investments in growth areas.
Let me take you through major activities on Page 42 onwards. On July 16, Komatsu issued its first green bond. Under our medium-term management plan, we have set the following ESG management targets. By 2030, we will reduce CO2 emissions by 50% from the 2010 level and use 50% renewable energy. We are committed to reducing environmental impact and providing high-quality, high-efficient products, service and solutions to address climate change in consideration of safety. With the issuance of the green bond, we will further accelerate these efforts to realize decarbonized society.
Next, on Page 43, today, we have published a news release on our automotive -- autonomous haulage system. As of June 30, 2020, we have a total 251 AHS dump trucks in 24/7 operation in 11 mines in 4 countries. We have handled a cumulative total 3 billion tons of excavated earth.
Finally, Page 44, on July 15, we issued a news release. Komatsu is going to construct a new seal ring factory in Himi Plant 2 as one of the initiatives to structure -- of structure reforms designed to reinforce the business foundation, which is a key activity of midterm business plan. For the new plant, we will realize Komatsu Group's synergies, such as the introduction of high-precision, high-efficiency equipment jointly developed with Komatsu NTC and automatic inspection based on AI technology to reduce labor and improve productivity. And we will work on environmental issues by introducing airtight buildings and renewable energy facilities.
That's all for today. Thank you.
So we'd like to start the Q&A session from this point. First, we have Mr. Saito from Nomura Securities.
This is Saito from Nomura Securities speaking. So my first question is about the difference in profit, and the second is about the coal situation in North America. In terms of the difference of profit, in terms of the volume difference, whether it be the actual results or in terms of the outlook, I think they have pure volume difference and other factors that is negative. Could you give me the breakdown of these?
This is Horikoshi speaking. First, for the April to June quarter, if you look at the volume and product mix, it is minus JPY 51.6 billion. In terms of the pure volume difference, that will be minus JPY 41.2 billion. In terms of the cost difference, it would be minus JPY 4 billion. And the third factor would be the region and product mix difference that will be minus JPY 1.9 billion. And fourth factor, so this is a difference between the parent and consolidated mix difference. This actually happened in the fourth quarter of last fiscal year. The -- more than the drop of the sales of the consolidated, the sales of the parent is larger because to reduce the intermediate stock on the parent side, the production is reduced. So if we look at the fact, the parent has a higher profitability. But if you saw the drop in the parent side, that has a higher impact on the profitability. So that has a minus JPY 5.5 billion impact from that. And the plus JPY 1 billion, that will be other various elements. So that is the year-over-year breakdown for the April to June quarter.
Going to Page 20 of the presentation, for this fiscal year's outlook and comparing that for the result of fiscal year 2019, the full year difference was JPY 138.8 billion, and go to the breakdown of this. Again, the pure volume difference would be minus JPY 104.6 billion. The cost difference will be minus JPY 7.2 billion. That's the second point. The difference in region and product mix would be minus JPY 2 billion, and the difference in the consolidated and parent composition is minus JPY 8.9 billion.
And there is another major element here. So in the intermediate stock of unrealized gains, the decline in the realized profit in this element, so it's very difficult to explain. So that difference is minus JPY 12.5 billion, and others would be JPY 3.6 billion. So that will be the breakdown. Does that answer your question?
Yes. So in terms of the profit difference, I would like to talk about the cost difference in the first quarter. So in terms of the positive impact, it was JPY 7.6 billion. The full year, it's JPY 12.4 billion. So meaning that in the main 3 quarters, it would be a JPY 4.8 billion difference. So if you look at the overall fixed cost, you have JPY 500 billion. So you have bought KMC. The coal business is tough there. So in the following third quarter, the reduction of the cost, it seems not that large. So what is your take on this currently?
So as a company overall, including the newly consolidated entities in the first quarter, not only the construction equipment, the total is JPY 8 billion. And full year, it will be about JPY 12.5 billion or JPY 12.6 billion cost reduction. It means that from the second quarter onwards, we will be only reducing JPY 4.6 billion. I think that's what you're referring to. But if you look at the breakdown in the midterm management plan, we have decided that in the key initiative areas, and for the full year, we will be increasing spending a little under JPY 2 billion year-over-year.
For the remaining areas, we're going to reduce cost. More specifically, and for the first quarter, because the COVID-19 has spread very rapidly, we have frozen all the new projects. But that said, from the second quarter onwards, we have discussed that we will have to -- even under the situation, we have to steadily go forward with development project. So that is the reason why we came up with this outlook.
So my second question is related to coal. Specifically in the United States, there is a very strong headwind against coal business. If you look at your fixed assets, I think you have a huge allocation to coal. So for the midterm, and you have the presidential election, I don't know what type of policy the U.S. is going to take, but what is your idea about this?
This is Imayoshi speaking. Saito-san, you're talking about our initiatives, not the outlook, right?
Yes, yes. I would like to ask about your initiatives. What are you going to do under the situation? You talked about the North American coal business is very tough. So what things are you going to do? That is what I want to hear.
When we bought global, at that point, we have already been saying that the North American coal business is not going to grow, so we're looking at the situation very carefully. But currently, because of the price of coal going down, the demand orders for equipment, as you've seen, the B2B ratio is -- has been worsening. But if you look at KMC, rather than selling new equipment, it's very low, rather. They have a high proportion in service and parts. So I think you have to serve that business. But that said, because of decline of price in coal, I think that part is struggling as well. However, I'd like to continue to answer the request from the customers and continue, for instance, offering overhaul business. So no change in the policy.
Next is from Goldman Sachs Securities, Isayama-san.
So Isayama from Goldman Sachs. So my first question is about the mining business. So Mr. Imayoshi, you have explained that because the impact of the lockdown is seen, but it's going to recover. But in terms of the outlook for the mining parts and service business, it is a low level not seen in recent years. But if you look at utilization rate or how many machines are actually idle, could you give you some color on this? So you're talking about the review of the overhaul on the customer side. It's a short-term percent. It's going to come back, but I am a bit surprised how low this level of business is.
So in terms of the idle ratio or in terms to utilization ratio, what is your outlook for this? So you're saying that maybe we will recover faster than the new equipment business. [ Messe ] has talked about that. So will it be the fourth quarter? Or is it going to be in 2021? So in the recovery for the parts and service overhaul, which is going to happen? So if you're giving you some figure, explain about the situation, I would like to listen to your story.
This is Imayoshi speaking. In terms of the utilization situation, so Indonesia is a typical example we always give. So there's still a lot of cars, machines that are idle. So currently, 20% of the machines are not operating. So the customers are not using all machines in their operation. So as a result, the parts specifically for the overhaul sales is not generated.
For the customer side, they are trying to hold down the CapEx and investment. I think this situation will continue. About the global situation, currently, because of COVID-19, things are a bit weak. But as we have shown in the numbers for the parts sales for the full year, it will be a better level than the first quarter results.
So on this point, if you look at the installed base, if you look at the time stamp of 10 years, you're talking of 14,000, 15,000, so the actual operation, maybe 17,000, 18,000 of machines are operating in the market. I think you have explained that point. So there's a lot of view being made for overhaul. For instance, is there some bottle-up, pent-up demand, so next year or the year after that, the parts sales will be higher than previously? Are there any signs pointing to that or because this review has been so tough in terms of recoveries, it's not going to be one spike, it's just going to be a gradual recovery?
Well, I have always been explaining that in the past, but the impact of Indonesia is substantial in this business. If you look at the graph in terms of demand volume, you can see that the equipment in itself has seen some extreme fluctuations. Depending on the price of coal, the -- how you spend for overhaul, where, basically, they tend to show very extreme fluctuations. So 2015, 2016, it has dipped and has suddenly spiked from 2017, '18, '19 in terms of overhaul. And now it has completely stopped. So it's very difficult to say what's going to happen going forward. However, the output itself has not gone down, so we are not worried at all. However, in terms of what will be pace of this recovery, I think we'll -- this market has -- sees also very extreme fluctuations. It's very difficult to foresee. But of course, we think, gradually, things will start to recover.
My second question is about Mr. Horikoshi and Mr. Imayoshi's comments that caught my attention regarding postponement of payments and revaluation of vehicles after lease in the Retail Finance business. Because it is sales finance, you start to get concerned about whether you are going to take additional provisioning going forward. So in your results and outlook, how large of an impact did and will these 2 factors have? Can you share with us how much you are assuming?
This is Horikoshi. The impact is not so big in Q1, especially when COVID-19 was spreading. Many customers asked us for their payments to be rescheduled. Of course, we check the customer's past repayment history. In the case of U.S., for example, we granted a 2-month grace period for interest payments. The impact of these factors in Q1 was about JPY 400 million and is likely to be around JPY 700 million to JPY 800 million for the year.
Regarding operating rates, as far as I look at KOMTRAX data, apparently, recent demand has not collapsed, so I presume that, although you granted some postponement of payments, I guess, it's not something that's going to develop into bad loans and that you have to provision against it. Is it fair to say that we are not in that kind of situation?
Currently, we are not in that kind of situation. For example, in March, there were a lot of customers in China to which we granted a grace period, but most of these customers have already paid us as scheduled than after. Of course, demand increased in China, so you may say that the situation is different. But so far, in other regions, such as the U.S. where our account receivables are large, delinquency rates have not gone up in a material way that may cause concern.
However, on the other hand, as I talked about earlier, for vehicle assets that have ended its lease, resale losses and valuation losses were recognized. Due to COVID-19, secondhand vehicle prices have declined somewhat, which resulted in losses for the first quarter.
The next person is Mr. Ibara from Morgan Stanley Securities.
This is Ibara from Morgan Stanley. Can you hear me?
Yes.
My first question is about the analysis of cause of differences, namely selling price impact. In Q1, it was plus JPY 1.3 billion. However, some of your competitors are saying that pricing in China has become increasingly challenging. So is it the case that China has a negative impact, whilst other measures are enabling selling price to be positive? Can you give me some flavor on this together with overall pricing trends in China? Also for the full year, you were expecting JPY 10.2 billion. Relative to Q1 results, you were expecting a further improvement. So can you comment on this part as well? That's my first question.
This is Horikoshi speaking. Comment for Q1 selling price difference is basically in line with what you said, Mr. Ibara. Parts are growing steadily as anticipated. But for equipment, mining equipment prices are increasing steadily. However, for construction equipment, we are seeing some declines in China. So from a selling price difference perspective, construction equipment has a slightly negative impact. For the full year, under our current plan, we won't be able to reach our initial expectations. However, to your point, we do expect that we can reach around JPY 10 billion.
The second question is for Mr. Ogawa, if possible. I believe that you have contact with your major mining customers. When comparing now with April, are there any changes in the investment sentiment by the mining majors? Can you give us a feel of what's happening? Also earlier, you talked about automation and other opportunities as a way of averting the 3 Cs: closed spaces; crowded places; and close contact. What kind of time line are you considering about this? For mines, for example, do you think such opportunities will arise from the second half of the year? Or do you think it's going to be next year when this happens? I also think that such opportunities will emerge, but I was wondering about when you think such opportunities will materialize. Can you share with us your thoughts?
This is Ogawa. First, for the majors, their investment plans compared to April hasn't changed greatly and continues to be firm. That's what I'm hearing. So we are not concerned with the majors that much. But as we have mentioned earlier, as well as what we said in April, coal is a concern. Impact from Russia, Indonesia is likely to be substantial this fiscal year. As for the outlook for 2020, demand that we've talked about in April has not changed.
Regarding opportunities, for AHS, we are currently increasing units quite steadily. At the end of last fiscal year, we had 221 units in the global market, and now we have 251. We think we can expect 100 units more during this fiscal year. In the integrated report, we raised as a KPI that we'd like to reach 380 units by fiscal 2021. If things go well, we may be able to overachieve this target. Moreover, for remote control AHS dump trucks and remotely controlled boring, as well as development of a new [ ME ] platform for mining is being considered comprehensively. Time line-wise, please think that it will take about 2 years.
Excuse me for going into detail, but you said at the end of last fiscal year, you had 221 units. But for the 100 unit increase, is this an increase against the June numbers of 251 and that you think you can grow it to 350? Or are you comparing against 221 units, which is likely to increase to 320?
We are expecting 100 unit increase for fiscal 2020 as a whole. We already did 30, and we will do 70 more.
All right, which means you are likely to reach about 320 units by the end of this fiscal year, and that's why you have gained visibility of reaching 380 units in 2021 and believe it may be possible to overachieve.
We have already received orders for 100 units, so we may be able to finish higher even for this fiscal year.
The next person is Mr. Sano from JPMorgan.
I'm Sano from JPMorgan. My first question is about China. Your demand growth compared to other foreign companies seems to be slightly lower from a sales standpoint. Can you comment about the current competitive landscape? Also Mr. Imayoshi said that you anticipate firm trends from Q2 and beyond. Can you talk about the external environment that is going to drive these trends as well as your projections going forward together with your strategies? This will be my first question.
This is Imayoshi. For Q1 in China, because there was a delay in the Chinese New Year, growth was quite good, as we've explained. From Q2 onwards, we expect moderate but firm growth. With economic stimulus in place, we are monitoring the effects that they have. Permits for large-scale projects is expected to be fairly firm in the first half of the year.
As for the competitive environment, the proportion of local manufacturers are gradually rising. We believe that competition is about what happens between the firm manufacturers. But by implementing measures that we have discussed in the past, such as extended warranty schemes, finance or replacing distributors, we have started to see results appear gradually, and our stance is to continue these efforts.
My second question is for Mr. Ogawa, if possible. Often in mining, there is talk about headwinds around coal. But recently, you have been working on a hybrid vehicle comprised of fuel cells and storage batteries for Anglo American. I surmise that you will be doing more on the electric vehicles front in the future. Can you talk about the current status of what you are working on and also about whether you are able to have an advantage in hybrid electric vehicles, including platforms going forward? Can you share with us your perspective and strategy?
We are currently debating internally about our electrification strategy. However, electrification comes in various forms. You have battery-based full electrification than hybrid, which is what we already have. Then you have diesel electric that is already applied to large electric dump trucks. It's like -- it sounds e-power. There is also the trolley-type electrification and, to your point, battery-type fuel cells. By product, what we are doing internally is we're having discussions around which electrification technology is the most appropriate.
In the Anglo American project, we talked about the use of fuel cells as well. We are currently talking about the time line in our discussions. Due to the strict environmental management required today, electrification is a key. So going forward, it will be very difficult to cope with the environmental issues, so electrification is very important. In the beginning of this year, we have introduced a small-sized electric excavator. We want to try a larger product of 20 tons or more going forward. And in terms of the mining, our mining business is trying to focus on the underground hard rock, electrical or hybrid products as well. This is another focus area at the moment.
We are trying to decide whether we should go for a battery engine, fuel cell engine or even hydrogen engine in the future. That is what we are discussing at the moment. As for the Anglo project, they desire to carry out everything within the mine. They are interested in using electricity from solar energy, for example, decompose water into hydrogen and operate their dump trucks with hydrogen engines. That's what they are interested, and we are making steady progress in this project.
Next question is from [ Mr. Minamihata ] of Nikkei Shimbun.
This is [ Minamihata ]. At the beginning of the presentation, President Ogawa showed us a comparison between the ongoing crisis and the GFC, global financial crisis. I have some basic questions about that. Profit margin today has fallen to the similar levels as GFC, I suppose, as of the April, June quarter. Since the GFC, however, the company must have enhanced its product portfolio, and the market structure must have changed significantly. Why then has the profit fallen so much?
The question is about the comparison with the GFC. First of all, the impact of corona pandemic is as severe as GFC. That's how we see it. As you can see in the middle, however, customers and utilization is steady -- steadily recovering. Whereas at the time of GFC, it took as much as 2 years for the demand to recover. We don't believe it will take so long this time. Having said that, we should not forget about the fact that the global demand was already looking downward from 2019. So based on those factors, we tried to project how the business is recovering going forward in response to the COVID-19 impact. That is what is represented on the chart. The lower panel shows how our current expectations go. Most likely, we will only have an L-shaped recovery, not a V-shaped recovery.
As for profit margin, it's been declining at the moment, if you compare with the GFC. This is due to the increased fixed costs over the last 10 years. A major increase is seen in development where the headcount increased by about 1,000 people since 2009, which is equivalent to nearly JPY 30 billion in fixed cost. We have made various efforts to curtail it. However, there was further increase in fixed costs due to additional resources gained through acquisitions. So oil sales declined, fixed cost put additional burden. That's why, as Mr. Horikoshi mentioned earlier, we will try to reduce fixed costs throughout the year and simultaneously implement dramatic structural reforms for the first time in 10 years.
Understood. I have one more question, which is different from the first one. As someone asked earlier, while brand-new unit sales are under pressure, the company can focus on parts and services to earn extra revenues, which should be an ideal way to handle the situation. In reality, however, there is a weakness here in the parts business as well. According to the company's total demand forecast, the traditional market should see a recovery from Q3 and the strategic market from Q4. If you look only at the parts business, when do you expect a recovery for mining and construction equipment, respectively? That's my second question.
As you can correctly pointed out, average operating hours of KOMTRAX are returning to normal in most of the regions. However, the demand for brand-new units remains unclear, and the momentum of customer investment remains low. This is true, we believe, for both construction and mining equipment.
As for parts and services, customers' mindset is to push out as -- for as long as possible, we believe. At the same time, operating hours are returning to normal for sure. So we believe that the demand for parts and services will come back sooner or later. Earlier, we talked about the recovery from Q3 and Q4, parts recovery should come sometime earlier than for unit sales recovery. That's the assumption factored into the latest guidance. I hope you will understand.
Next question is from Mr. Tai of Daiwa Securities.
This is Tai from Daiwa Securities. My first question is related to a minor detail. The first quarter segment operating margin was 5.8%, and full year forecast was also the same -- about the same at 5.9%. As sales per quarter should increase towards the end of the year, with additional contribution from parts sales as well as just mentioned, why doesn't the company expect operating margin to stay at the same level? So could you share a detailed breakdown with some Q-o-Q or semiannual figures? That's my first question.
This is Horikoshi speaking. As mentioned by Mr. Saito at the beginning, we had a substantial fixed costs incurred during the first quarter of about JPY 8 billion in total for the company. That's expected to go down during the second half of the year. That's one factor.
And another factor is foreign exchange rates. Q2 onwards, our assumption is JPY 105 to the U.S. dollar, JPY 116 to the euro and JPY 15 to the Chinese renminbi, if I remember correctly. So there is an impact of foreign exchange rates as well. These are the main factors.
Does the JPY 8 billion fixed cost during the first quarter include the impact of restricted sales activities during the period, which is a common factor among other companies, I suppose? As sales activities return to normal, there will be more fixed cost incurred. Is that also included in this assumption?
Yes, that's one factor, as well. Another factor is that we had to freeze all new projects during the first quarter, which we won't do as strictly as in Q1 during Q2 onwards. That's another reason why fixed cost reduction decreases for Q2 onwards compared to Q1.
I see. Last year, if I remember correctly, during the third quarter or the latter half of the year, the company revised down the impairment of Cabtec and the inventory write-off of subsidiaries, which were special factors in the background information. Do you expect similar adjustments this year?
There are some adjustments included in this year's forecast in areas outside of segment profits.
Understood. There is one more question, which is also a minor detail. You said that the traditional market should see a recovery from Q3 and the strategic market from Q4 using the diagrams in the lower right corner of Slide 6. So what exactly did you mean when you said expecting a recovery? Did you mean a reduction in year-on-year decline? If that's the case, it should start from Q2 according to the material. Or did you mean a year-on-year increase in sales? Well, if that's the case, it should start only from next year according to the handout. What exactly did you mean by recovery from Q3 and Q4? What message are you trying to convey? Or what's going to happen from Q3 and Q4? So please elaborate on those points.
This is Imayoshi. The chart on Page 6 shows quarterly trends in year-on-year growth in demand. As you pointed out, throughout this year, the year-on-year trend is expected to remain negative. Our comment on recovery from Q3 for traditional market and Q4 for the strategic market is based on a general impression about how the pandemic will come to an end and the economic activities will be resumed. That's the overall impression. Quantitatively, the year-on-year decline is the largest for Q1. And as shown by the chart, it will become much smaller from Q3 for the traditional market.
With this, we would like to conclude the briefing. Thank you for your attendance today.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]