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Komatsu Ltd
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This is Hiroyuki Ogawa, CEO of Komatsu.
First of all, I'd like to explain the current status of COVID-19 impact on our operations. First, on Page 4, I'll explain the impact of COVID-19 on our operations. To start, I'll talk about the impact on production. Currently, all plants are operating as usual. There are no problems in this supply chain.
Next, regarding the impact on sales and service activities. Looking at equipment utilization through contracts, many other regions have recovered back to normal year conditions. As for sales activities, although our response varies depending on region due to the situation regarding COVID-19, there are a growing number of business bases that are going back to regular work shifts or working with some limitations. Similarly, with regard to service activities to support customers' machines at parts warehouses and workshops, there are more workplaces that are going back to regular working styles.
Page 5 explains the impact of COVID-19 on our business results. First of all, I'd like to explain the results for the second quarter. Sales of the Construction, Mining & Utility Equipment division were down 19% from the same period last year. China and Oceania, et cetera, turned to positive growth. And in other regions, the magnitude of the negative decline shrank compared to the first quarter. The impact of COVID-19 were hardly seen in China and Oceania. But in other regions, particularly in North America, Europe and Asia, the impact still continues. As for Industrial Machinery & Others, due to the impact of COVID-19 on the automotive industry, we are seeing postponements and reduction of investments in new equipment as well as delays in installation work at overseas customers.
Next, let me touch on the projection FY 2020. This time, we revised the projection, including apparent changes from the projection in July. As for Construction, Mining & Utility Equipment, we had expected the demand to come back gradually to recovery track from the third quarter in traditional markets and from fourth quarter in strategic market, except China. But according to our current projection, in traditional markets, the rate of declines began to slow down year-on-year in the second quarter, remaining on a recovery track while regional differences existed. In strategic market, except China, also, the rate of declines began to slow down dynamically year-on-year in the second quarter, remaining on a recovery track while regional differences existed. Given this, demand is projected at minus 15% to minus 5% year-on-year, showing the improvement from the July projection.
As for Industrial Machinery & Others, challenging condition in the first half will continue for the full year. And based on the latest condition, we revised the projection. Including the coronavirus second spike in Europe, risks of further effects on markets and businesses are not included in the projection.
Page 6 shows the comparison of the current demand projection with those in July for Construction, Mining & Utility Equipment. Chart on the top shows demand for 7 major products. In July, we projected the decline of minus 20% to minus 10% year-on-year, but the current projection is minus 15% to minus 5%.
The graph at the bottom shows the year-on-year growth rate of demand from fiscal 2019 and compares to July projection and the latest projection. As shown in the graph on the left, demand in China increased significantly in the second quarter. In our July projection, we had already expected demand to trend strong but the economic recovery has kept demand even stronger than expected.
The graph on the right shows the areas other than China. The graph on the right compares the July and the current projections for traditional markets in strategic markets, excluding China. As for traditional markets, we revised our projection for demand in North America and Japan. This was mainly due to a recovery trend in demand in construction and housing sectors in North America and continued steady demand in civil engineering and construction from public works projects in Japan.
In strategic markets other than China, we took into account the recovery trend in demand in India and Brazil. If we assume that the recovery will continue at this pace, suggested in the current projection, demand in the region, as a whole, excluding China, will turn positive year-on-year from the first to the second quarter of fiscal 2021 and will gradually recover in an L-shape toward level before the spread of infection. However, COVID is spreading once again, in Europe and other areas, making forecasting difficult. So we will continue our business activities as we prepare to respond to situations quickly.
That's all for my explanation. Next, Mr. Horikoshi will explain the overview of fiscal year 2020 Q2 results.
I'm Takeshi Horikoshi, CFO. I'd like to give you a summary of the business results for the second quarter of fiscal year 2020.
First, on Page 8, I'll give you an overview of the second quarter of fiscal year 2020. Foreign exchange rates are JPY 106.7 to the dollar, JPY 124.2 to the euro and JPY 15.3 to the Chinese renminbi. Compared with the corresponding period a year ago, the yen appreciated against the dollar and the renminbi and depreciated against the euro. Although it's not on the slide, the yen has weakened against the Australian dollar and appreciated against the South African rand and the Russian ruble.
Consolidated net sales for the second quarter of fiscal year 2020 decreased by 17.3% from the corresponding period a year ago to JPY 498.9 billion, and operating income decreased by 50.3% to JPY 33.4 billion. The operating income ratio declined 4.4 points to 6.7%.
Consolidated net sales decreased due to decreased demand in wake of the spread of COVID-19 as well as the negative impact of foreign exchange rates. In addition, operating income decreased due to a decrease in sales volume and negative impact of foreign exchange rates, despite some positive impact from fixed cost reduction. Net income decreased by 50.6% to JPY 21 billion.
On Page 9, I will explain segment sales and profit. In Construction, Mining & Utility Equipment, sales decreased by 18.1% from the corresponding period a year ago to JPY 450.7 billion. Segment profit decreased by 52.5% to JPY 29 billion. Net sales decreased mainly due to a decline in sales resulting from a spread of COVID-19 and the negative impact of foreign exchange rates while profits decreased due to a decline in sales volume and the negative impact of foreign exchange rates, although there was a positive impact from fixed cost reductions.
Retail finance revenues decreased by 3.8% from the corresponding period a year ago to JPY 16.8 billion. Segment profit declined by 18.2% to JPY 2.7 billion. Revenues decreased due to a decline in new contracts, and profits decreased due to a decline in revenues and revaluation of lease-up vehicles.
Sales in the Industrial Machinery & Others segment remained broadly flat from the corresponding period a year ago at JPY 39.9 billion, and segment profit declined by 31.3% to JPY 2.3 billion. Segment profit decreased due to a decrease in sales of process and machine tools for the automotive industry as a result of the spread of COVID-19.
On Page 10 is sales by region for the Construction, Mining & Utility Equipment division. Sales of construction equipment and vehicles declined 19% from the corresponding period a year ago to JPY 444.3 billion. Large decreases were recorded in North America, Asia, Japan and CIS.
Due to a significant decline in North America, a traditional market as well as an increase in the strategic markets of Oceania and China, the percentage of traditional markets declined to 49% from 51% in the same period of the previous fiscal year.
Page 11 shows highlights of the first half FY 2020. As for FX, they were JPY 107.1 to a dollar, JPY 121.4 to euro and JPY 15.2 to renminbi. Yen appreciated to all of U.S. dollar, euro and renminbi year-on-year. And although they are not listed here, yen appreciated against Australian dollar, South African rand and Russian ruble as well.
Consolidated sales in the first half FY 2020 were JPY 957.7 billion, down 21.1% year-on-year. Operating income was down 57.5% year-on-year to JPY 60.3 billion. Operating income ratio was down 5.4 points to 6.3%. Consolidated sales dropped with FX headwind, in addition to the demand decrease affected by the spread of novel coronavirus. Operating income also fell due to volume decline and FX headwind. Other expenses were minus JPY 1.8 billion, up JPY 11.9 billion year-on-year due to a decrease in losses on foreign exchange and interest payment. Net income was down 58.6% to JPY 37.2 billion. Dividend will be JPY 18 per share as announced in July.
Page 12 shows sales and profit by segment. Sales in Construction, Mining & Utility Equipment were down 21.2% year-on-year to JPY 876.5 billion, and the segment profit was down 59.8% to JPY 52.2 billion. Sales decreased due to reduced sales affected by the spread of coronavirus and FX headwind, and the profit decreased due to reduced sales volume and FX headwind.
Revenue in retail finance were down 5.8% year-on-year to JPY 32.7 billion, and its segment profit was down 31.2% to JPY 4.6 billion. Revenue decreased due to a decline in new contracts mainly in North America, and profit decreased due to extension of payments and revaluation of vehicles after lease use, in addition to the decreased revenues.
Sales in Industrial Machinery & Others were down 11.9% year-on-year to JPY 64.9 billion, and its segment profit was up 1.6% to JPY 4.1 billion. Sales decreased due to reduced sales of presses and machine tools to the automobile industry affected by coronavirus. But segment profit increased, supported by steady sales of Excimer laser-related products in the semiconductor market.
Page 13 shows sales in Construction, Mining & Utility Equipment by region. Sales in Construction, Mining & Utility Equipment were down 22.1% year-on-year to JPY 864.3 billion. Sales declined in all regions, except China. Due to spread of COVID-19, the decline was especially large in North America, Asia and Europe. While the traditional markets of North America and Europe declined significantly, the strategic market of China increased. As a result, the share of the traditional market declined year-on-year from 49% to 48%.
Page 14 shows the changes in sales and segment profit in Construction, Mining & Utility Equipment. Sales decreased by JPY 235.1 billion year-on-year due to reduced sales volume and negative impact of foreign exchange rates. Segment profit decreased by JPY 77.6 billion year-on-year due to reduced sales volume and adverse effect of the exchange rate despite a positive factor of reduced fixed costs. The segment profit ratio was down 5.7 points to 6%.
Page 15 shows the status of retail finance. Assets increased, supported by growth in China and other countries while assets declined in North America. New contracts declined significantly in North America due to a decline in sales of construction equipment as a result of the spread of COVID-19 infections. Sales decreased due to a fall in new contracts, and segment income decreased due to decline in sales and revaluation of vehicles after lease use. With the spread of COVID-19, we received requests for payment deferrals from some customers, mainly in the first quarter, and we responded after surveying the situation but this has now calmed down.
Page 16 shows the sales and segment profit of the Industrial Machinery & Others segment. Sales of this segment declined by 11.9% year-on-year to JPY 64.9 billion due to the spread of COVID-19 infections, sales of presses and machine tools for the automobile industry fell whereas sales of Excimer laser-related products for the semiconductor market were firm. Segment profit was JPY 4.1 billion, about flat year-on-year, and the segment profit ratio increased by 0.8 points to 6.3%.
I will explain the consolidated balance sheet on Page 17. Total assets were JPY 3.5944 trillion, down JPY 59.2 billion from the end of the previous fiscal year. Inventories increased at the end of June with COVID-19 impacting sales more than production adjustments but decreased in the second quarter. We plan to further reduce inventories by the end of the fiscal year. Accounts receivable declined due to lower sales. Interest-bearing debt decreased JPY 46.3 billion to JPY 966 billion. Shareholders' equity ratio increased 1 percent points to 49.5%. Net debt equity ratio was 0.41.
That's all from myself. Next, Mr. Imayoshi will explain the outlook of fiscal year 2020 business results.
This is Takuya Imayoshi, General Manager of the Business Coordination Department. I'd like to give you an outlook of fiscal year 2020 business results as well as conditions of our main markets.
On Page 19, I'd like to give you an overview of the projection for fiscal year 2020. In the table starting from left to right, our results for fiscal year 2019, the latest projection for fiscal year 2020 then next to it is the projection as of July. Year-on-year changes compare the latest forecast for fiscal 2020 and fiscal 2019 results. Compared against the July forecast, the yen is trending on the weaker end. Demand is expected to exceed the assumptions of the July projection and fixed cost reduction is proceeding. Hence, we have revised the projection for this year.
First, for foreign exchange rates, we revised our rates for Q3 and beyond. The U.S. dollar and the Chinese renminbi are unchanged at JPY 105 and JPY 15, respectively, but we have revised the euro from JPY 116 to JPY 124, and we have also revised other currencies, although not mentioned on the slide. As a result, the average exchange rates for the fiscal year are JPY 106.1 to the dollar, JPY 122.7 to the euro and JPY 15.1 to the Chinese renminbi.
Next, we made the revisions to the demand outlook in China, North America, Japan and some other regions. Details will be provided later. Fixed costs are expected to be lower than the July projection due to cost control and other measures, although there was an impact from activity restrictions due to COVID-19. Taking these factors into account, net sales was revised upward by JPY 51 billion to JPY 2.119 trillion. Consolidated operating profit was revised upward by JPY 19 billion to JPY 134 billion, and net profit is expected to be JPY 80 billion. ROE is expected to be 4.5%. Dividends are planned to be JPY 43 per share, maintaining the consolidated dividend payout ratio of 50.8% from the July projection. The payout will be JPY 7 a share higher than what was projected in July.
On Page 20, I'll explain the projection for segment sales and profits. Sales of Construction, Mining & Utility Equipment has been revised upward by JPY 60 billion from the July projection, but will be down 13.9% year-over-year to JPY 1.905 billion. Segment profit has been revised upward by JPY 20 billion, but will be down 48.1% year-over-year to JPY 118 billion. The segment profit ratio is expected to be 6.2%. Compared to the July projection, demand in China, Japan, North America and other markets is expected to exceed our assumptions. And as fixed cost reductions and other factors are anticipated, we have revised the business projection.
In the retail finance segment, revenue was revised downward by JPY 1 billion from the July projection. Revenues are expected to decrease 5.5% year-over-year to JPY 67 billion, and segment profit is expected to be JPY 10 billion down by 21.1% year-over-year. This forecast takes into account the impact of the decline in new contracts.
In the Industrial Machinery & Others segment, sales plus revised downward by JPY 9 billion from the July projection to JPY 172 billion, a decrease of 3.1% year-over-year. And segment profit was revised downward by JPY 2 billion to JPY 12 billion, down 12.4% year-over-year. Sluggish sales to the automotive industry and delayed installation of machinery at overseas customers were factored into this forecast. Causes of differences for each segment will be explained later.
Page 21 shows the projection for sales by region for Construction, Mining & Utility Equipment. For fiscal year 2020, revenues are expected to decline by JPY 315.9 billion to JPY 1.890 billion due to significant declines in North America, Asia and Europe. Compared to the July projection, the outlook for China, Latin America and Oceania has been revised upward.
As the traditional markets of North America and Europe are expected to see large declines whilst the strategic markets of China and Oceania are expected to see increases, the percentage of traditional markets is expected to decline from 50%, in the previous year, to 48%.
Page 22 shows the causes of difference in projected sales and segment profit for Construction, Mining & Utility Equipment. Net sales are expected to decrease by JPY 306.2 billion from the previous year due to a decrease in volume and the negative impact of foreign exchange rates. Segment profits are expected to decrease by JPY 109.3 billion compared to the previous year due to a decrease in volume and negative effects of foreign exchange rates, despite the positive effects of fixed cost reductions.
Page 23 is the outlook for retail finance. Retail finance assets are expected to decrease due to a decrease in new contracts and the impact of foreign exchange rates. New contracts are expected to decrease mainly in North America due to the decline in sales resulting from the spread of COVID-19. Revenues are expected to decrease due to a decrease in new contracts and is expected to be slightly lower than the projections made in July. Segment profit is expected to decrease due to a decline in revenue and the revaluation of vehicles after lease use.
Page 24 shows the sales and segment profit projection for Industrial Machinery & Others. Although sales of press machines and machine tools to the automotive industry are expected to decline due to the impact of the spread of COVID-19, sales of Excimer laser-related products to the semiconductor market are expected to be brisk. Overall, sales are expected to be JPY 172 billion, down by 3.1% year-over-year, and segment profit is expected to reach JPY 12 billion, down by JPY 1.7 billion year-over-year. Sales are expected to decrease against the July projection too, due to the postponement of investments in press machines and machine tools for the automotive industry and delays in installation work at overseas customers.
From Page 25, I'll start explaining the demand trends for the 7 major construction equipment products. Demand trends for the 7 major products are shown here, which includes mining equipment. The figures for the second quarter of fiscal 2020 are preliminary figures estimated by the company.
In the second quarter FY 2020, global demand declined 7% year-on-year. Demand in China increased sharply, supported by economic recovery. But in other regions, demand continued to be weaker than the previous year affected by coronavirus. We have revised our projection of full year demand from July, including the apparent changes to minus 15% to minus 5%. Demand growth in China, North America and Japan were included. Along with resumed economic activities, demand will be gradually recovering, but as Europe and other regions continue to observe the spread of coronavirus infections, we continue to monitor demand trend closely.
From next page, I will explain the major market conditions. Page 26 shows demand trend in Japan. In the second quarter FY 2020, demand declined by 13% year-on-year. Demand in civil engineering sector supported by public works has been steady. But due to the preconsumption tax hike demand spike in the previous year and the weakened investment sentiment affected by coronavirus this year, demand decreased year-on-year. We revised to have the demand projection for the full year to minus 10% to minus 5% as our demand in the civil engineering sector, supported by public works, will continue to be firm despite the decline of coronavirus impacts. Contracts monthly average operating hours went down by 1% year-on-year in September. Operation on-site has been normalized.
Page 27 shows demand trend in North America. In the second quarter FY 2020, demand declined by 16% year-on-year. With phased resumption of economic activities, construction has been recovering, but some postponed the purchase of new machines, continuing to use the existing machines. We revised that the projection to minus 20% to minus 15% year-on-year as demand in construction and housing began to recover despite the sluggish energy and rental sector due to weak crude oil prices, and uncertainties due to Presidential election. Contracts monthly average operating hours was down 6% year-on-year in September. Operation is low in energy and rental sectors, but in other sectors, operation came back to the pre-coronavirus period level.
Page 28 shows demand trend in Europe. In the second quarter FY 2020, demand decreased by 24% year-on-year. Machine operation has been recovering with the resumed business activity supported by the eased restrictions by the government. But some projects have been delayed, affected by coronavirus, and future uncertainty dampened the buying appetite and the demand continued to be weak. Full year projection remains unchanged from July, minus 25% to minus 20%. But given the risk of demand worsening further due to the second spike of coronavirus, we will keep close monitoring of market conditions. Contracts monthly average operating hours were up 3% year in September.
Page 29 shows demand trend of foreign makers in China. In the second quarter FY 2020, demand increased by 42% year-on-year, affected by coronavirus, post-Chinese New Year sales season was delayed. And due to the uplift by the infrastructure-related investment, demand spiked in the first quarter. But supported by the sustained economic recovery, strong demand was sustained in the second quarter as well. As a reference, total demand of hydraulic excavators, including mini excavators and Chinese makers, was up 67% year-on-year. We have revised our projection of full year demand to plus 30% to plus 40% year-on-year as demand continued to be firm. Contracts, monthly average operating hours was down 1% year-on-year in September.
Page 30 shows demand trend in Southeast Asia. In the second quarter FY 2020, demand declined 32% year-on-year. In Indonesia, the largest market, demand went down by 50% due to sluggish thermal coal price and the economic activity restrictions due to coronavirus infection.
In Thailand, demand marked plus due to resolved coronavirus impact and the progress in public works. But in Philippines and Malaysia, demand sagged, affected by coronavirus. We project the full year demand will drop by 35% to 30%. With governments easing that restrictions, demand will be recovering gradually from the fourth quarter. But as the thermal coal price will continue to be sluggish, and the government will continue to curb the infrastructure investment in its economic policy, weak demand will continue as a whole. Contracts monthly average operating hours in Indonesia was down 7% year-on-year in September.
Page 31 shows demand trend in mining equipment. In the second quarter FY 2020, demand declined by 27% year-on-year. Demand decreased mainly in North America, Indonesia and CIS due to sluggish prices of crude oil and coal. Demand in FY 2020 will decline by 20% to 10% year-on-year. Demand in North America, Indonesia and CIS were decreased due to sluggish crude and coal prices, but demand in other regions will be firm.
I will now explain the status of orders and sales of mining equipment in reference materials on Pages 41 and 42. Page 41 shows the trend in the index of orders in sales for mining equipment. The graph shows a trend of the index, which is the amount of orders for new vehicles received divided by sales for the previous 6 months, Komatsu America manufacturers and sales, ultra-class dump trucks. Although the current index is above 100% due to steady demand for copper and iron ore mining, there is uncertainty in North America due to the decline in crude oil prices and other factors. And so we will continue to monitor the investment trends of our customers.
Komatsu Germany, in the middle section, manufactures and sells ultra-class hydraulic accelerators. The current index exceeds 100% due to orders for copper and others, but orders for coal are weak and the overall level of orders is low. With regard to Komatsu Limited, at the bottom, demand for 100-ton class dump trucks for Indonesia has been weak. Orders have remained sluggish and the current index is below 100%.
Page 42 shows the trends in orders and sales index for mining equipment made by KMC. Particularly for North American coal customers, orders continue to be sluggish due partly to falling coal prices, but the index was at the 100% level because sales is also declining.
Next, I will explain the sales numbers of mining of equipment on Page 32. Sales in the second quarter of fiscal 2020 decreased 24% year-on-year to JPY 179.5 billion due to lower crude oil and coal prices, bringing down sales in North America, Asia and CIS. Excluding the impact of foreign exchange rates, sales declined 23% year-on-year. Fiscal 2020 full year sales are expected to fall 20% year-on-year to JPY 759.9 billion, mainly due to drop in sales in North America, Indonesia and CIS. Excluding the impact of foreign exchange rates and sales decline is expected to be 18% year-on-year. The projection made in July has been revised to reflect the latest developments, including the impact of foreign exchange rates.
On Page 33, I explained the sales situation of parts. Sales in the second quarter of fiscal 2020 decreased 15% year-on-year to JPY 126.7 billion. Excluding the impact of foreign exchange rates, this represents a decrease of 13%. Fiscal 2020 full year sales are expected to decline 14% from the previous year to JPY 506.9 billion. Excluding the impact of foreign exchange rates, the figure is 11%. The projection made in July has been revised to reflect the latest developments, including the impact of foreign exchange rates. Although sales decreased due to this stagnation of economic activities caused by the spread of COVID-19 and the postponement of overhauls caused by the decrease in sales of mining equipment due to the fall in coal oil prices and the curtailment of investment by customers, the average contracts operating hours is returning to last year's level, except in some regions, and demand for parts and services is expected to recover faster than that of the machines.
Next, I will explain about Page 44. On August 21, the Komatsu published the integrated report titled Komatsu Report 2020. With the involvement as the overall theme, this additional features our work on TCFD and SMARTCONSTRUCTION and forestry businesses as value creation stories. Report updated fiscal 2019 results of KPIs that track our contribution to solving ESG issues.
Next is Page 45, a fully owned subsidiary. Komatsu Mining Corp. has begun full-scale construction work to relocate its new headquarters factory in Milwaukee, Wisconsin, U.S.A., utilizing the technology of digital transformation and SMARTCONSTRUCTION. By realizing the digital trend that automizes construction while synchronizing the actual site and the digitally simulated site, KMC contributes to improving the productivity and safety of the site and preventing the spread of COVID-19. The new headquarters factory is scheduled to be completed and relocated in 2022.
Next is Page 46. From November 2020, the target models of SMARTCONSTRUCTION retrofit kit, which provides ICT functions such as 3D machine guidance and payload functions to existing conventional construction machines will be extended to many excavators for the Japanese market. The kit will now be available for mini excavators, less than 6 tons. We will introduce them for rental machines owned by the Komatsu Group in the domestic market from November 2020. By first making them widely available on rental machines, we aim to further expand this in the future. In the past, ICT construction under Ministry of Land, Infrastructure, Transport and Tourism Construction was applied mainly in medium-sized hydraulic excavators. Now that a low-cost retrofit kit will be available for many excavators, it is expected that ICT construction will expand to work in narrow spaces, such as building foundations, road, gutters and pipes.
Finally, Page 47. Komatsu was awarded the Dx Grand Prix 2020 as a leading company in the digital age from among digital transformation brands companies, which were jointly selected by Japan's Ministry of Economy, Trade and Industry and the Tokyo Stock Exchange. This year, 35 companies were selected as DX brands 2020 for having systems to promote digital transformation and achieving outstanding digital utilization. Of the 35, 2 companies were selected for the DX Grand Prix. Also, it was announced yesterday that we were awarded the third Japan Service Awards Prime Minister's award for our SMARTCONSTRUCTION digital business format innovation for all civil engineering and construction services.
That is all from myself. We would now like to move on to Q&A.
The first question is from Mr. Saito of Nomura Securities.
The first question is about the cost of differences in profit. In your first half results,and full year outlook, can you break down the volume product mix, et cetera, item into pure volume manufacturers that may be related to the decline in utilization on a stand-alone basis?
Thank you for your question. This is Horikoshi speaking. First of all, regarding Page 14 and the first half, volume impact was JPY 91.4 billion, out of which pure volume impact was minus JPY 76 billion. Other than that, the impact from COGS was minus JPY 6.1 billion. Also included is minus JPY 3.2 billion, attributed to differences in regional and product mix.
One more factor is JPY 11.4 billion in losses pertaining to the difference in the consolidated, nonconsolidated mix. This is due to the intermediate inventory reduction adjustments that I touched upon before. This has led to a sales decrease at Komatsu Limited on a nonconsolidated basis compared to consolidated sales, resulting in the loss of JPY 11.4 billion.
There is also a JPY 5.3 billion positive factor included in the number. You may recall that last year, we changed the scope of consolidation and announced some losses associated to it. In comparison, this year, we saw some gains come through.
So what I just talked about was about the first half on Page 14.
Can you also give me the rate down for the full year?
Yes, for the full year, we are accounting for minus JPY 131.8 billion volume impact, out of which pure volume is minus JPY 93.8 billion. The COGS difference accounted for is minus JPY 9.9 billion. And the third item accounted for is regional and product mix, which is minus JPY 3.9 billion.
And the impact from consolidation, nonconsolidation mix difference, I referred to earlier is minus JPY 12.1 billion.
And as a fifth factor, which I also touched upon when we announced the July projection, is that there are JPY 13 billion of losses accounted for. The difference is related to the adjustment of unrealized inventory profits. When intermediate inventory decreases, profits increase in general. However, compared to last year's realized profits, this year's profits are expected to be lower.
So there are 2 differences we are accounting for making this a bit complicated. But in any case, this adds up to the KRW 13 billion loss. There's also a JPY 900 million positive impact.
For the unrealized profit, are you seeing that it wasn't a large item in the first half?
Yes, that is correct.
Got it. The second question is about fixed cost reduction. It seems that you are accounting for more compared to your previous projection. What kind of measures are you going to implement?
Also, in the integrated report, you can see that ever since you acquired Joy Global or the current JMC, fixed costs have been on the rise. You spoke about how coal in North America has been tough, but can you give us more details around the fixed cost reduction of JPY 24.1 billion. Are you going to do something like structural reform? I'd like to ask Mr. Ogawa about your thoughts behind this.
This is Ogawa speaking. For fiscal 2020, we are expecting a JPY 25.2 billion fixed cost reduction. This will be realized mainly through activity restrictions amid COVID-19 and freezing new investments. Some impact from personnel optimization is already accounted for, too. But the main components are what I talked about earlier.
Also, we've been working on making our business process leaner and streamlining through IoT utilization. And we have been making some IT investments in the past several years for this purpose. So I believe that we have been seeing some positive impact from this initiative. However, once we shift to normal operations from operations under COVID-19, we do expect a certain degree of fixed costs to increase.
Regarding your question on structural reform, we said before that we will carry out our drastic structural reform efforts. It is comprised mainly of 3 components. First is personnel optimization. This will include measures such as keeping hiring down and in some overseas entities, we have already started to rightsize our workforce.
The second component is fixed cost related, namely structural reform at KMC. Specifically, we plan to integrate operations at KMC and KAC, which is the entity in charge of U.S. operations in order to drive synergies. We also plan to conduct a product portfolio review for the underground business.
Thirdly, we will review our global production capacity. For example, we will look at our global capacity for casting or capacity in China. In any case, we will look at where global capacity stands, and there are some factories we are thinking about already. But in any case, we will conduct a review. And by reviewing the current organization as well as the capacity we have in place, the plan is to cut fixed costs from when operations normalize by JPY 17 billion by 2022 and JPY 21 billion by 2024. This is end of my remark.
I am so sorry, I wasn't able to catch the numbers you just mentioned. Can you run through the numbers you mentioned in the end of your remarks one more time?
JPY 17 billion by 2022. This is from when we move out of COVID-19 and shift to normal operations. So by 2022, our plan is to cut JPY 17 billion worth of fixed cost and and JPY 21 billion by 2024. So this is a plan we have formulated and plan to execute. That will be the end of my remarks.
So the JPY 17 billion cut you mentioned is separate from the JPY 24.1 billion cut you were planning for fiscal 2020. Just to confirm, your point is that once things normalize, cost increases are anticipated in some areas. But apart from that, you're planning for a JPY 17 billion cut. And by 2024, you'd like to reach JPY 21 billion, which includes the JPY 17 billion, right?
Yes, that is correct.
All right. Were you thinking about this prior to COVID-19? For example, KMC was doing well until last year. And from this year, there is a situation around North America in coal. Were you thinking about doing this from before, but have decided to go ahead with your plans now, and you're sharing the details with us now as things have started to settle down?
As I said in Q1, due to the M&As we have conducted in the past several years at Komatsu, it's true that we have become quite fixed cost heavy. So we are aware that we need to do something about it. And when wake of COVID-19, we have decided to engage in cost reduction efforts once again.
The next question is from Mr. Sano of JPMorgan Securities.
This is Sano of JPMorgan Securities. My first question is about production trends. Compared to your July projection, you were saying that the pickup that was anticipated in the second half for traditional and strategic markets is happening earlier than anticipated. You also mentioned that production is back to normal operations amid COVID-19. For markets such as China, Japan and North America, for which you revised your outlook heading into Q3 and Q4 from Q2, is production likely to increase? Can you give us more flavor on this?
For the second quarter, utilization adjustments were made at some factories so as to reduce inventories. However, as we expect more volume heading into Q3 and 4, factories that we're seeing decline trends in overtime have now shifted to increases in over time.
My second question is about Page 45, regarding your strategy for Milwaukee. I'd like Mr. Ogawa to take this question. You were saying that the factory is expected to be completed in 2022 but how much better do you think productivity and safety is because you are doing the project and are adopting a digital twin compared to a general construction project. Are there any examples that you can share with us so that we can get a better understanding of the potential growth rates?
I'm not sure whether that -- what I'm going to say applies to the new factory we are building in Milwaukee, but generally speaking, results have shown that SMARTCONSTRUCTION reduces our customers' construction period and productivity improves by 30%. For example, in Germany, we have been running test cases since last year, but lead time has been going down by 30%. So we think that an impact of this degree can be expected from the Milwaukee factory as well. The Ministry of Land Infrastructure and Transport's i-Construction initiative has also been saying that the productivity gains through i-Construction are about 30%, which probably is the same as our track record.
Next Question is from Mr. Isayama of Goldman Sachs.
I am Isayama of Goldman Sachs. I'd like to ask you about the mining equipment margin. I would appreciate if you give me some hints or anything about the full year plan or the first half results? The best margin in the past was over 20%, and the low side was about 16% or 17%. Even considering the fixed cost as mentioned and the sluggish shipment due to sluggish coal price, I assume 10% was still sustained. But I dare to ask this question because I haven't asked about that for a while. That's my first question.
Indeed, it has been a while. In the past, yes, margin was over 20%. And you said the current margin should be over 10%. And and yes, of course, it's over 10%. And you suggested the low side, and the current margin is slightly below that. Does that answer your question?
May I have the follow-up question for confirmation. What is different between now and then as KMC?
Before acquisition, margin at KMC was single digit. And the conventional Komatsu was in the middle of 10%.
And can I take that you came back to the level of margin now?
Especially in this year, KMC's op margin dipped as coal price in North America fell sharply, and that pushed down the profitability of mining.
On the other hand, in mining business, profitability in Indonesia is originally high. But currently, it is almost at the bottom. So that is another reason for the weakness.
Let me ask another follow-up question to the first question. You described the annual coal sales proportion. I'd like to know the present sales percentage of coal? I'm referring to Page 32. The percentage of Asia, North America, Europe and CIS is very small in this quarterly chart. My ballpark estimate of the sales percentage of coal in mining sales is about 30% or slightly below. Am I close? Or is it still high? This is my last question.
May I make a comment from the overall perspective. Industry year's forecast, thermal coal sales are 7% of the consolidated total sales.
Is it out of the total sales?
Yes. And out of the mining equipment, thermal coal sales are about 20% and the coking coal sales are 4% of total sales and 11% of mining.
And my second question is about KMC. And this is also for confirmation. There was a comment about the synergy effect at the time of acquisition. Previously, there was a question about the fixed cost. And I guess, it was about the total fixed cost. Could you comment on the fixed cost for the KMC or mining considering the coal condition in North America?
Are you asking about the KMC's proportion out of the total fixed cost?
Yes. President Ogawa mentioned that JPY 17 billion by 2022 and JPY 21 billion by 2024. I assume that mining proportion out of those will be large. And also, there was a comment on the synergy in mining business. So I thought the structure reform in mining would have the big implications.
Ogawa speaking. What is inferential is operational integration of KAC and KMC in North America. Another key point is a review of product portfolio of underground mining. It includes a business review and its impact will be substantial.
Next question is from Mr. Ouchi of SMBC Nikko Securities.
Ouchi speaking. Firstly, you did not show the plan for the second quarter, but did you achieve the target? And what were the factors behind the achievement?
And when I compare the first and the second quarter, volume increased, but it seemed profit didn't grow as much. Would you comment on the second quarter with a quarter-on-quarter profit change? This is my first question.
Horikoshi speaking. Both of sales and profit in the second quarter were above the forecast announced in July. Profit was above by over JPY 10 billion and sales were by above by about JPY 20 billion.
Do you have any figures for the quarter-on-quarter profit change, don't you?
I don't have them now.
I see. Secondly, I'd like to understand the gap between demand and sales by region. In the new plant, sales in Latin America are revised up by JPY 14 billion and over JPY 20 billion in Oceania. But in mining, only JPY 10 billion was revised up. So I assume presumably, nonmining would be strong. And I'd like to have your comment on those more in detail.
On the other hand, market demands in North America and Japan were revised upward but your sales forecast are almost flat compared to the July forecast. So would you comment on factors behind? This is my second question.
Imayoshi speaking. We do not disclose mining regional breakdown, and I cannot comment specifically in detail.
In Mining, Oceania and Latin America are growing. But construction machinery is growing as well. And as foreign exchange also affect us, not everything is coming from the volume impact.
As for construction machinery demand, demand was revised up. As mentioned, China impact is substantial. And in addition to Japan and North America, full year demand in other regions, including Latin America and India, will be stronger than our initial projection.
As for Japan, demand will be picking up. But as you know, rental market has a big presence in Japan, and that would not affect our new machine sales directory. Did I cover most points?
How about North America? In North America, is that similar?
Mining proportion is very high. New machines in construction does not have major impacts. But I think they are growing somewhat.
Next question is from Mr. Minamihata of Nikkei.
I'm Minamihata of Nikkei. I have one question about Indonesia. I think you said that you cannot expect much from a stimulus package for infrastructure. I'd like to have your prospects for construction machinery demand recovery in Indonesia, specifically.
Are you asking about construction machinery?
Yes.
In Indonesia, mining proportion is high, but talking about the construction machinery, it was severely affected by coronavirus, as mentioned. And operational ratio had fell temporarily and infection continues to spread, but we expect to see recovery in the fourth quarter.
On the other hand, government's budget allocation for infrastructure investment will not be prioritized, and we'll continue to monitor the situation cautiously.
For the mining, is it all up to market conditions?
In mining, although production is continuing at a certain level, our sales have been impacted quite severely. Two things. One, customers have been completely holding back renewal investment in new equipment and they have been putting off overhauls of parts. We just suspend operation of old equipment and make do with the new ones they have. So it is a quite tough situation for us. As I said, production is continuing. So it should come back at some point.
The current level of demand for mining equipment is quite low, and I don't think this will continue forever. However, the price of coal is still depressed, so it will be difficult to predict from when we will see a recovery.
As for Indonesia, demand for mining equipment fluctuate considerably, depending on the price of coal. Indonesia can only produce low quality coal. So unless the price of low quality coal rises, users will not be more motivated to buy new equipments. Especially now, the idle rate of 90-ton class dump trucks is increasing rapidly, and it has risen to 26% in September. The previous bottom, I believe, was in 2015. And at that time, the idle rate was about 20%. So the rate is higher now. And I think the situation continues to be very severe.
As I said last time, there was considerable amount of machinery renewals in the latter half of 2016 and then 2017 and 2018. So I don't think customers are looking to buy new equipment now. Customers are idling all the equipment about to require overhaul and operating just the new equipment. So the situation is very tough for remanufacturing and parts as well. In any case, unless coal prices rise, mine demand in Indonesia will not pick up.
For general construction machinery, due to PSBB, large-scale source of restrictions, much of infrastructure construction work have been suspended with economic activity essentially at a standstill. So it is a very difficult situation. At present, we expect a recovery in the fourth quarter or later, and we expect the pace to be very slow.
Next, Mr. Ibara from Morgan Stanley MUFG Securities.
My name is Ibara. First, about mining equipment. The figure on Page 32 shows that sales of mining equipment in the first 2 quarters were JPY 41.6 billion and JPY 40.1 billion, so JPY 81.7 billion in the first half. And then you project JPY 214.7 billion for the full year. So if you do the subtraction, it means about JPY 133 billion for the second half or about JPY 65 billion per quarter, which seems rather high. Is it correct to understand that this reflects that you are expecting large shipments of equipment for copper and iron ore in Oceania and Latin America as you explained earlier?
And sorry to ask this every time, but President Ogawa, as you are engaged in various business negotiations with mining customers, compared with 3 months ago, do you get the sense that Indonesia is worsening further, but you are seeing business negotiations returning in Oceania and Latin America, like you mentioned earlier. If you see any changes in trends by customer, mineral or a region, could you please explain that?
As for the sales, the result of the subtraction is correct. Sales of equipment are expected to be substantially higher in the second half. You can see this on Page 31, demand is expected to decrease by 28% in the first half of the fiscal year, but it is expected to be between minus 10% and minus 20% for the full year. This is always quite a bit of fluctuation by quarter. But this year, we expect first half low and second half high for business negotiation activity and correspondingly, our sales. We are monitoring specific businesses negotiations as well as backlog of orders. So although not 100% certain, we expect second half to be higher.
As you mentioned, we do see demand arising in things like copper and gold in regions other than Indonesia. I believe it was last month that I had a meeting with the CEOs of Vale and BHP. They were very positive in particular, the CEO of Vale said, that the production of iron ore was very low in the first half of the year due to COVID-19 and that they would have to make up for it in the second half. So iron ore, copper and gold in the CIS, they are going to be quite strong.
BHP had a similar attitude and said that they will continue to invest. So I am not too worried about these major players. I will meet with Anglo top management in December. Rio Tinto, not yet planned because their CEO is changing. But I will meet with Anglo in December, and I believe they will strike a similar tone.
If that is the case, maybe with Indonesia in very difficult condition, it may be that shipments happened to occur at the same time, but you are projecting sales of over JPY 130 billion in the second half. If we continue to see movement in iron ore, gold and copper, as you are seeing now in the second half of next year, do you anticipate that kind of shipment volume for equipment to continue? Or is there not enough visibility at this time?
I am not sure. But at the moment, we are not hearing about major companies holding down their investments toward next year.
Second question, with regard to the construction equipment on the next page, operating hours are picking up. And so you expect that parts for construction machinery will improve in the second half of the fiscal year. Of the breakdown of differences in volume and product mix that Mr. Saito asked about earlier, the region and product mix were negative in the first half and negative for the full year by JPY 3.9 billion. So I think the region and product mix have continued to be negative for a while. You mentioned earlier that mining has a higher profit margin, and that is returning. Although, of course, Indonesia is still in a difficult situation. In this regard, I think it is about time that the regional and product mix becomes positive.
Looking at this from the outside, this item includes many things like products and regions, but is slated to be minus JPY 700 million in the second half. Is there a possibility that this will turn positive in the fourth quarter? Can you share your views on this?
This is Horikoshi. First of all, I think the regional composition impact will gradually improve in the second half. The regional composition is impacted greatly when Indonesia slumps. So that is why we have had negative figures for a long time. But at this point in time, we think the figure will be slightly positive in the second half of the year.
As for the product mix, what is important is the parts. For now, we think this will be negative for the rest of the year. And I don't know what it will be next year. Sorry for that.
At least the regional composition is moving toward becoming positive. And if the parts gets better, the overall figure will turn positive. Is that how I should see it?
The factories that have been largest impact on the product mix figures are the ratio of parts in equipment at Komatsu conventional and the ratio of services and equipment at KMC. At KMC, the fall in equipment was bigger than that of services, and that led to the negative figure in product mix.
Thank you. We have received more questions. But since it is time, I would like to end the question-and-answer session.
This concludes the business results conference. Ladies and gentlemen, thank you for joining us today.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]