Komatsu Ltd

TSE:6301

Earnings Call Transcript 2022-Q2

[Takeshi Horikoshi, executive]

This is Horikoshi, CFO. I will now explain the summary of the business results for 3 and 6 months of fiscal year 2021. First, I'll explain the highlights of the second quarter of fiscal year 2021 on Page 4. The exchange rate is JPY 110.3 to the dollar, JPY 130.6 to the euro and JPY 17.1 to the renminbi. Yen weakened against the U.S. dollar year-on-year and relative to the same period of the previous year. Although not shown here, the yen also weakened against the Australian dollar, South African rand and Russian ruble.

In the second quarter of fiscal year 2021 consolidated net sales increased year-on-year by 28.9% to JPY 643.1 billion. Operating income increased by 123% to JPY 74.5 billion. The profit ratio was up by 4.9 percentage points to 11.6%. Consolidated net sales increased due to an increase in sales volume, change in foreign exchange rates and improved selling prices. Operating income also increased due to the increase in sales volume. Net income increased by 148.3% to JPY 52.2 billion.

On Page 5, I will explain the sales and profits of each segment. Sales of Construction, Mining and Utility Equipment increased by 31.1% year-on-year to JPY 591 billion, and segment profit increased by 123.9% to JPY 64.9 billion. Sales advanced, mainly supported by increased volume of sales and positive effects of foreign exchange rates and improved selling prices.

Net sales in Retail Finance decreased year-on-year by 1.8% to JPY 16.5 billion, and segment profit increased by 66.1% to JPY 4.6 billion. Revenues decreased due mainly to declined operating leases in North America. Segment profit increased mainly due to improved evaluation of equipment after lease use.

Sales of Industrial Machinery and Others increased year-on-year by 2.3% to JPY 40.8 billion, and segment profit increased by 83.5% to JPY 4.3 billion. Concerning presses and machine tools for the automotive manufacturing industry, both sales and profit advanced, reflecting the completion of reinstalling machinery at overseas customers' plants. With respect to products for the semiconductor manufacturing industry, both sales and profit increased, especially supported by excellent sales of the Excimer laser-related businesses.

Page 6 shows the sales by region for Construction, Mining and Utility Equipment. Sales of Construction, Mining and Utility Equipment increased by 32.5% year-on-year to JPY 588.6 billion. Sales increased in all regions, except China. Sales expanded sharply in Latin America, Asia and CIS. As a result, the ratio of sales in strategic markets increased from 51% previous year to 57% of total sales.

Page 7, I would now like to explain the highlights of the first half FY '21. As for the exchange rate, JPY 110.1 to the U.S. dollar, JPY 131.1 to euro, JPY 17 to yuan or renminbi. Year-on-year basis, the yen became weaker to the dollar, euro and yuan. Though it is not mentioned here, the Japanese yen also became weaker against the Australian dollar, South African rand and the Russian ruble.

Consolidated net sales for the first half was JPY 1,291.4 billion, up 34.8% year-on-year. Operating income was JPY 136.2 billion, up 125.9%. Profit ratio was 10.6%, up 4.3 points. Consolidated net sales grew due to positive impact such as the increased volume, the FX impact as well as the selling price. Operating income also grew due to the increased volume and others. Net income attributable to Komatsu Ltd. was JPY 93.1 billion, up 149.7%. Cash dividends per share is JPY 40, up JPY 9 from the forecast of JPY 31 we made in the beginning of the fiscal year.

On Page 8, I will explain net sales and profit by segment. Revenue for Construction, Mining and Utility Equipment was JPY 1,185.3 billion, up 35.2% year-on-year. Segment profit was JPY 118.6 billion, up 127.2%. We enjoyed the profit due to the positive impacts such as the increased volume, the FX and the selling price. The increased volume resulted in the profit growth.

As for Retail Finance, the net sales was JPY 36.9 billion, up 12.9%. Segment profit was JPY 7.8 billion, up 67.6%. Revenues advanced, supported by the increased new contracts resulting from the expanded sales of the Construction, Mining and Utility Equipment business. Segment profit advanced, reflecting the improved valuation of equipment after lease use and normal adverse effects of an extension of payments, which were implemented and recorded for the corresponding period a year ago under the COVID-19 pandemic.

Industrial Machinery and Others was JPY 81.6 billion, up 25.8% year-on-year. Segment profit was JPY 8.5 billion, up 109.6%. Presses and machine tools and for the automobile manufacturing industry, both sales and profit advanced, reflecting the completion of installing machinery at overseas customers' plants. With respect to new products for the semiconductor manufacturing industry, both sales and profit increased, especially thanks to excellent sales of Excimer laser-related business.

Page 9 shows the status of sales by region in the Construction, Mining and Utility Equipment segment. Sales of Construction, Mining and Utility Equipment increased by 36.7% year-on-year to JPY 1,181.6 billion. In particular, sales in North America, Latin America, Asia and CIS increased significantly, except for China. As a result, the ratio of sales in strategic markets increased to 56% from 52% in the same period last year. Apparently, we are still often viewed as a China-related stock, but the sales ratio of China was 4%, which was lower than sales of Africa.

Page 10 shows the causes of difference in sales and segment profit of the Construction, Mining and Utility Equipment division. Net sales increased by JPY 308.8 billion from the corresponding period a year ago due to the increase in sales volume, foreign exchange rate differences and the positive impact of sales prices. The segment profit increased by JPY 66.4 billion from the corresponding period a year ago, mainly due to an increase in volume. The segment profit ratio increased by 4 percentage points year-on-year to 10%.

Page 11 is about the Retail Finance business. Assets remained about flat from the previous fiscal year-end. New contracts increased due to increased sales of the Construction, Mining and Utility Equipment business. Revenues increased by JPY 4.2 billion, supported by an increase in new contracts. And segment profit increased by JPY 3.1 billion year-on-year, mainly due to the increase in sales and reflecting improved valuation of equipment after lease use and the absence of the negative impact of the payment extensions implemented in the same period of the previous fiscal year in light of COVID-19.

Page 12 shows the sales and segment profit for the Industrial Machinery and Others segment. Sales in the Industrial Machinery and Others segment increased by 25.8% from the corresponding period a year ago to JPY 81.6 billion. Segment profit increased by 109.6% to JPY 8.5 billion, and the segment profit ratio rose by 4.2 percentage points to 10.5%. Sales and profits of presses and machine tools for the automotive industry increased due to the completion of installation work for overseas customers. In the semiconductor industry, sales and profits increased due to strong sales of Excimer laser-related products.

Turning to Page 13. I will give some explanation about the consolidated balance sheet. Total assets were JPY 3,853.5 billion, an increase of JPY 68.6 billion from the end of the previous fiscal year. Inventories totaled JPY 849.2 billion. Inventory increased by JPY 55.3 billion from the end of the previous fiscal year due to increased demand for Construction, Mining and Utility Equipment. The shareholders' equity ratio increased by 1.3 percentage points from the end of the previous fiscal year to 51.8%. The net debt-to-equity ratio was 0.3x.

This concludes my part. Thank you very much. Morishita will now explain the outlook of fiscal year 2021 business results.

[Masatoshi Morishita, executive]

I am Morishita, General Manager of the Business Coordination Department. I will now explain the outlook of fiscal year 2021 business results and major market conditions.

Page 15 is an outline of projection for fiscal year 2021. From the left is the fiscal year 2020 results. Next to that is the current projection for fiscal year 2021, and then next to that is the projection as of April. Changes shows the increase and decrease between the current projection for fiscal year 2021 and fiscal year 2020 results.

Yen has trended weaker, and demand in North America, Europe and Southeast Asia is expected to exceed the April outlook on the one hand, but the material prices and logistics costs are rising on the other. As a result, we have revised our outlook from April.

First, we have revised the exchange rate for the third quarter and beyond, the U.S. dollar from JPY 105 to JPY 107, euro from JPY 124 to JPY 126 and the Chinese renminbi from JPY 16 to JPY 16.5. We have also revised the rates for other currencies not mentioned here. As a result, the average exchange rate for the fiscal year will be JPY 108.5 to the dollar, JPY 128.6 to the euro and JPY 16.8 to the renminbi.

Next, we have revised the demand outlook for China, North America, Europe and Southeast Asia. We will explain the details later. We will try to absorb the increase in material prices and logistics costs as much as possible by raising prices and improving costs.

With all of that factors in, we project consolidated net sales to increase JPY 214 billion to JPY 2,683 billion, operating income to increase JPY 57 billion to JPY 282 billion and net income to increase JPY 187 billion from April projections. We expect ROE to be 9.6%. We plan to pay a cash dividend of JPY 80 per share, an increase of JPY 18 from the April projection, for a consolidated payout ratio of 40.4%.

On Page 16, I'll explain the projection for sales and profits for each segment. We expect net sales in Construction, Mining and Utility Equipment to increase by 24% to JPY 2,450 billion, segment profit to increase by 73.2% to JPY 249 billion. The segment profit ratio will improve by 2.9 percentage points to 10.2%.

We expect net sales in Retail Finance to increase by 5.4% to JPY 70 billion, and segment profit to increase by 22.9% to JPY 13 billion. Sales in Industrial Machinery and Others are expected to increase by 9.8% to JPY 188 billion, and segment profit is expected to increase by 16.3% to JPY 19 billion. The reasons for the increase in profit in each segment will be explained later.

Page 17 shows the projections of fiscal year 2021 sales by region for Construction, Mining and Utility Equipment. This is for the full year. In fiscal year 2021, we expect sales to increase in all regions, except China, with an increase of JPY 473.7 billion to JPY 2,435 billion. The ratio of sales in strategic markets is expected to increase from 53% last year to 55%, as there will be large sales increases in the strategic markets of Asia, Central and South America and the CIS. As mentioned earlier by Horikoshi, the proportion of China is expected to be only 4% in fiscal year 2021.

On Page 18 are the causes of differences in projected sales and segment profit for fiscal year 2021 in the Construction, Mining and Utility Equipment segment. Sales should expand by JPY 474.1 billion from fiscal year 2020, positively affected by an increase in volume of sales, foreign exchange rates and selling prices. Segment profit should also expand by JPY 105.3 billion from fiscal year 2020, reflecting increased volume of sales. Segment profit ratio will improve to 10.2%, up 2.9 points from fiscal year 2020.

Page 9 (sic) [ 19 ] is the projection for Retail Finance. Assets will decrease from fiscal year 2020 year-end as mainly affected by foreign exchange rates. New contracts will increase from fiscal year 2020, especially in North America and Europe. Segment profit will increase, mainly due to an increase in revenues and reflecting improved evaluation of equipment after lease use and no more adverse effects of an extension of payments, which were implemented and recorded in fiscal year 2020 under the COVID-19 pandemic. ROA is expected to improve to 1.5%.

Page 20 is projection of sales and segment profit in Industrial Machinery and Others. Sales will increase by 9.8% from fiscal year 2020 to JPY 188 billion, and segment profit will increase by 16.3% to JPY 19 billion. We expect sales to increase in presses and machine tools for the automobile manufacturing industry and Excimer laser-related businesses for the semiconductor markets.

I will now explain the status of orders and sales for Industrial Machinery in the reference material on Page 39. Page 39, please. The graph shows the trend of the index for orders and sales. The graph shows the index of average orders in value for 6 months, divided by average sales in value for 6 months and its trend.

Komatsu Industries engages in sales and servicing of presses and sheet-metal machinery. The index had been at a low level due to the impact of investment in large presses running its course. But orders for small to medium-sized presses, sheet-metal machines and the maintenance service work are recovering, and the index is now at 90% level.

Komatsu NTC designs, manufactures and sells machine tools, including transfer machines, machining centers and the crankshaft processing machines. Due to the impact of separation and postponement of capital investment by car and car component manufacturers, the situation has remained severe. However, both orders and sales are on a recovery trend, and the index at the moment is at 100%.

Here, I would like to go back to Page 21. Here, I will explain the actual and projected demand for 7 major products in Construction, Mining and Utility Equipment. The number for the second quarter FY '21 is our latest estimated number. The second quarter demand in units for FY '21 appears to be up 10% year-on-year.

Please look at the yellow box on the right-hand side. Excluding China, the number appears to have grown by 27% year-on-year. It is shown in the white box. China shows a negative number in demand year-on-year, partly due to the slowing down of infrastructure investment. Excluding China, due to the big decline suffered from the COVID-19 pandemic, in most of the regions, we had a big increase in demand year-on-year.

As for the demand outlook for FY '21, it will increase between 0% and 5% year-on-year. We have not changed the April numbers. It is in the yellow box on the left-hand side. But excluding China, we have changed our demand outlook, going up between 15% to 20% year-on-year. In the following pages, I will explain the major market situations.

Here, I would like to explain the demand situations in the Japanese market. The second quarter, on Page 22, it shows further down 4% year-on-year, or up 1% for the total of the first half. Besides the public sector, the private sector business was firm, and the demand was up to the last year's level.

As for the demand outlook for FY '21, we have not changed the number since April. Just like the first half, we believe the demand will move rather firmly, and it will be in the range of 0% to 5% year-on-year. KOMTRAX and average operating hours per month was up 2% in September year-on-year.

Page 23. And here, I would like to explain the demand in the North American market. The demand in units for the second quarter FY '21 appears to have grown by 16% year-on-year. With the economic activities reviving, the demand for residential and nonresidential constructions, as well as the road and traffic infrastructure, increased in demand. Demand for rental equipment also recovered.

As for the demand outlook for FY '21, we changed the July number. It is now between positive 15% to positive 20%. Though the energy demand is still weak, residential and nonresidential construction, as well as road and traffic infrastructure, are believed to remain firm. KOMTRAX and average operating hours per month was up 4% in September year-on-year.

Operating hours in energy sector still remains to be soft, but it is in the recovery mode. And the demand for rental equipment as well as the construction and residential segments are coming back to the level of pre-COVID-19 pandemic.

Page 24. Here, I would like to explain the demand situations in the European market. It appears the demand in units for the second quarter FY '21 was up 30% year-on-year. On top of the economic activities returning to its normal situations, with state and a seamless policy in place, now the demand in the major markets such as the U.K., France and Germany are now moving rather firmly. Even in Italy, the demand for infrastructure has now recovered.

As for the demand outlook for FY '21, we changed the April number. It now stands at between plus 25% to plus 30%. Following the first half, we believe the second half demand will also move firmly. KOMTRAX and average operating hours per month is now up 3% year-on-year. In almost all the regions in Europe, the demand is coming back to the level of pre-COVID-19 pandemic.

Page 25. Here, I would like to explain the market situations in China. This page shows the demand for hydraulic excavators and excluding mini shovels. For your reference, I have included the demand on the change, including the Chinese manufacturers. The growth rate is the number of foreign manufacturers. It appears that demand in units for the second quarter FY '21 was down 61% year-on-year. The total demand, including Chinese manufacturers, appears to be down 32% year-on-year, minus 30% year-on-year. With the sluggish investment in infrastructure and the reduced number of operating hours due to the environmental regulations, the demand dropped quite dramatically.

As for the demand outlook for FY '21, taking into account the latest situations, we changed our July number. It is now in the range of minus 55% to minus 45%. As for the demand outlook, including the Chinese manufacturers, we changed it to be down 32% year-on-year. KOMTRAX and average operating hours per month was down 18% in September year-on-year. The restrained investment in the construction is still continuing. KOMTRAX and average operating hours per month shows declines for 6 months in a row year-on-year. So we need to keep an eye on the operating hours going forward.

Page 26. Here, I would like to explain the demand situations in the Southeast Asian market. The demand in units in the second quarter FY '21 appears to have grown by 60% year-on-year. The biggest market, Indonesia, appears to have grown 137% year-on-year. Though the pandemic expanded again, they executed the budget for the public investment. The construction sector continued to recover. Also, in agriculture and forestry sectors, demand grew. In the mining equipment business, which the natural resources and price moving at a high level, the demand for coals recovered.

As for the demand outlook for FY '21, we changed the April number. It is now in the range of positive 30% to positive 35%. General -- the construction machine should enjoy continuing demand recovery, particularly in the public investment in Indonesia and the Philippines. For mining equipment business, we believe the demand for coals and nickels will increase. KOMTRAX in Indonesia, average operating hours per month was up 8% in September year-on-year. With the public investment going on, the construction operation became quite firm. And our core China sector is increasing its operating hours, thanks to the rising price of palm oil.

From Page 27, I will explain the demand trend for mining equipment. The demand for mining equipment in the second quarter of fiscal 2021 apparently increased by 48% from the corresponding period a year ago. Demand from iron ore, copper and gold customers remained strong, and demand increased in Oceania, Latin America and the CIS region, et cetera.

In addition, demand for coal recovered due to high coal prices, and demand also increased in Asia. The demand forecast for fiscal year 2021 has been revised from the April forecast and is now expected to be between plus 30% to 40% of the previous year's level. Demand from iron ore, copper and gold customers will continue to be strong, and our view is that demand for coal will also continue to recover.

I'll now explain the status of orders and sales of mining equipment in the appendix on Pages 37 and 38. Page 37 shows the book-to-bill ratio for mining equipment. Komatsu America manufactures and sells super-large dump trucks. In the second half of last year, orders were strong. But in the last few months, orders have decreased. But sales have been steady, and the index is at the 50% level.

The graph in the middle shows Komatsu Germany, which manufactures and sells super-large hydraulic excavators. Orders to copper and coal are strong, and the index is currently around 150%. For Komatsu Limited, orders for Russia and Africa have been strong, and the index has trended above 100%. Orders for 100-ton class dump trucks for Indonesia are also increasing.

On Page 38 is the book-to-bill ratio for KMC mining equipment. In the surface mining business, demand is strong for copper and iron ore, and orders for underground mining are also picking up. The index is trending above 100%.

Now going back to Page 28, I'd like to walk you through mining equipment sales. Sales in Q2 of fiscal year 2021 increased by 42% from the corresponding period a year ago to JPY 254.3 billion. Excluding the impact of foreign exchange rates, sales increased by 36%. Sales increased in Oceania, Latin America, CIS and other regions due to strong demand for iron ore, copper and gold, and sales also increased in Asia due to recovery in demand for coal. The forecast for fiscal 2021 has been revised from the April forecast and is estimated to be JPY 1,032.1 billion, up 31% from the previous year.

Next, on Page 29, I will talk about sales of parts. In Q2 of fiscal 2021, sales increased by 22% year-on-year to JPY 154.9 billion. Excluding the impact of foreign exchange rates, sales increased by 17%. Construction equipment sales increased in all regions, except China, as machine operating hours returned to normal levels in many regions with the resumption of economic activities.

As for mining equipment, sales increased due to strong sales in Oceania, Latin America, CIS and other regions as well as in North America and Asia, where utilization rates are recovering. The sales outlook for fiscal year 2021 has been revised up from our April outlook to JPY 618.3 billion, up by 22% year-over-year.

Next, I'd like to introduce 3 topics, mainly from recent news releases. The first topic is about achieving carbon neutrality by 2050. Looking at the left side of the slide, on September 15, we published our integrated report, Komatsu Report 2021, which sets forth a new long-term vision for our efforts toward carbon neutrality, which is to reduce CO2 emissions to virtually 0 by 2050.

Through optimization of construction through the evolution of Smart Construction as well as further strengthening our circulation-oriented businesses, such as the forestry equipment business, which supports circular forestry of plantation, afforestation and logging and the Reman business, which recycles and reuses components, we will also contribute to the reduction of CO2 emissions in society, thereby realizing the DANTOTSU Value, generating a positive cycle of resolving ESG issues and through the creation of value for customers and improving earnings.

Next, looking at the right side of the same slide. As one of our carbon-neutral initiatives, we have completed construction and started production at Komatsu Forest's new Umea plant in Sweden. We have installed solar panels and a geothermal heating system, which has significantly reduced our electricity consumption. The plant is the first of its kind in Komatsu to incorporate new production technologies such as the introduction of an automatic towing assembly line using AGV, automated guided vehicles, which has increased productivity by 30%. This is the first Komatsu plant to become carbon neutral.

Please turn to Page 41. Komatsu introduced the first unmanned dump truck operation system, AHS, autonomous haulage system in Europe for one of Europe's largest copper mines,Aitik, owned by Boliden, a Swedish mining major. 11 units of 930E-5 are expected to operate.

Boliden is a major mining company that focuses on sustainable resource development through exploration, mining, refining and recycling. Two years ago, for the first time in Europe, diesel-electric drive super-large dump trucks were delivered to another Boliden-owned mine. And by building a track record, this has led to the deployment of AHS. The deployment in Europe will be a first for Komatsu. And the planned introduction of the 11 units of AHS super-large dump trucks will include some conventional manned trucks that are already in operation at the Aitik copper mine and will be retrofitted to enable autonomous operations.

Finally, on Page 42. So as we realize the electrification of underground hard rock mining equipment, we have signed a collaboration agreement with Proterra of the United States for the supply of lithium-ion battery systems. We will proceed with the development of electrification of underground hard rock mining equipment, such as battery-load haul dumps, drills and bolters, and finish the development of prototypes from fiscal 2021 and strive to start mass production during fiscal 2022.

This concludes the explanation of the financial results. Thank you.

[Unknown Attendee]

We would now like to answer your questions. First question, Mr. Sano of JPMorgan Securities.

[Tomohiko Sano, analyst]

This is Sano from JPMorgan. First, I'd like to ask you about how to understand the upward revision. Is it correct to understand that you reflected the upturn in the first half to the full year and not really changed the second half projections?

And then based on that, you are projecting lower sales and profit in the second half compared to the first half. What is your view about the outlook of demand in the second half onwards? Are you looking at conditions in the supply chain in Q2 and sensing that things will deteriorate? Can you talk about these points?

[Takeshi Horikoshi, executive]

This is Horikoshi. As for the full year numbers against the actual results in the first half, we have increased the volume outlook for the second half compared to the first half and to the original forecast for the second half. At present, we do not anticipate demand to fall and sales to drop in the second half compared to the first half.

[Tomohiko Sano, analyst]

Mr. Horikoshi, how do you see changes in the supply chain in the last 3 months or in the second half of the year?

[Takeshi Horikoshi, executive]

As for the supply chain, for example, we have included the impact of container ships in the full year projections. So we have included about JPY 8.5 billion of impact in the volume and product mix numbers. So the situation for shipping will continue to be difficult, but we are able to respond by changing routes and utilizing cross-sourcing in the supply chain. And so we don't see this as a major problem.

[Tomohiko Sano, analyst]

I'd like to ask President Ogawa my second question. Please talk about the business environment for mining. I believe your sales in Indonesia are increasing significantly due to the rising prices of resources, especially coal. So what is the likelihood that this will be sustained? And for the mid- to long term, I see a lot of news coming out, such as environmentally, when we unmanned dump truck, DX, do you see changes in the capital investment trends of the resource majors?

[Hiroyuki Ogawa, executive]

Ogawa here. Mining business is doing very well at the moment, and I believe orders are very good in all regions. Mining-related business in Indonesia has a very strong correlation with resource prices, especially coal prices. The current price of coal in Indonesia, which is relatively low-grade coal, bottomed out at around $20 to $25 for 4,200 calories (sic) kilocalories coal in September last year, I believe. As of October, the price has risen to over $140, which is six or sevenfold increase from last year.

The coal business in Indonesia is mainly with contractors and the contractors' willingness to make capital investments or their mindset has changed considerably, and I think it has become very busy there. The vehicle idle rate bottomed out in October last year at around 28%, and it is now around 10%, and sales of parts and services are also very strong. I think the Indonesian government has also revised its coal production volume outlook upward from, I believe, 550 million tons to 600 million tons or 620 million tons to 630 million tons. So I think business will continue to be relatively brisk, unless coal prices fall sharply.

Demand for nickel is also very strong. So we have introduced a new model geared especially for nickel, and we are now focusing our efforts to increase our presence in that area. We have 3 branches in Sulawesi, and we will set up 3 more new locations, something like service support centers to really focus our efforts on nickel. We think there is a great potential there.

As for the resource measures, the other day, we had a meeting with BHP and also Rio Tinto. And we hear that their capital investment will be stable for the next few years, until 2022 or 2023. So I don't think there will be any major changes.

[Unknown Attendee]

Next, we have a question from Mr. Sasaki of Mitsubishi UFJ Morgan Stanley Securities.

[Tsubasa Sasaki, analyst]

Can you hear me?

[Unknown Attendee]

Yes.

[Tsubasa Sasaki, analyst]

The first question is about how you see the supply chain situation, which was also asked by Mr. Sano earlier. Mr. Horikoshi, you said that due to various corporate efforts, you are not experiencing that much impact, except for container ships. But if you look at the current supply chain situation, we see semiconductor supply shortage disruption in the supply chain in Southeast Asia, problems with logistics, containers and supports and the soaring steel prices.

Every one of these could suppress sales or increase costs. So following up on the earlier conversation, could you explain how Komatsu has been coping with these problems? And how is it that these supply chain issues happen to become big problems for you?

[Hiroyuki Ogawa, executive]

First, regarding shipping, it is true that for container ships, there is a severe shortage of space in rising freight rates. However, we are dealing with the container ship situation by switching from container ships to RoRo ships, for example, and also changing shipping routes, as we mentioned earlier, and expanding new routes and also using a logistics platform to visualize the supply chain.

We have introduced a system called Infor Nexus, which allows us to visualize the transportation situation in real time. At the moment, there are problems, especially in North America. But in other areas, we are managing to book the necessary amount of vessels.

I mentioned RoRo vessels. For example, the standard lead time for container ships to North America is less than 40 days, but now that is extended to about 60 days. However, by using RoRo ships, we can have lead time of about 40 days, which is the standard lead time in ordinary times. So using RoRo ships is something we'd like to do, along with other measures.

With semiconductors, we are seeing the impact of such things as the power outage caused by the cold wave in Texas in February, a fire at the Renesas plant in March and, most recently, the lockdown of semiconductor plants in Malaysia. However, we are taking various measures such as securing products on the open market, switching to alternative products, issuing long-term fixed orders, reviewing inventory standards and, in the case of engine controllers, which has become bottleneck in some cases, we are shipping our products engine controller-less and install it later. So we are taking all kinds of measures and somehow managing to continue production.

One more thing. One of the strengths of Komatsu is the concept of cross-sourcing. This means that we can supply vehicles or parts from any of our production bases to any of our market. And currently, we have huge spare capacity in China, so we are making use of that to deal with supply chain issues.

[Tsubasa Sasaki, analyst]

By the way, I think the disruption of the supply chain in Southeast Asia has attracted a lot of attention recently. But has that had not much of an impact on you? Also, what is the impact of the power shortage in China on your company?

[Hiroyuki Ogawa, executive]

We have been informed that there are no major supply chain problems in Indonesia at the moment. The biggest impacts is in North America. I think the impact of the North America supply chain situation is big. As for electricity in the Chinese market, it is true that restrictions on electricity are becoming to be imposed, but so far, there has been no major impact on our factories in China. We are employing night shifts. We can shift production front loading and other majors to ensure that production is not interrupted.

[Tsubasa Sasaki, analyst]

Understood. Second question, I'd like to ask about prices. I believe in the new plan you are raising prices by a little over JPY 10 billion. You mentioned earlier about the containership situation, but the price of logistics and steel products has been rising globally, and I want to know. What is the company's policy on passing-through these price increases? And what are the assumptions behind the numbers in the new plan?

[Takeshi Horikoshi, executive]

This is Horikoshi. This time, we assume JPY 24.1 billion impact for the year due to increase in the selling price. The impact of cost of materials, including steel products, is included in the volume and production mix numbers; and it is quite a large amount, JPY 39 billion to be specific. Komatsu's policy has been to pass on the increase in the cost of materials to the selling price. However, that does not mean we immediately raise selling price because the cost of materials increased, but for this matter, this is not the case. Instead, prices will be raised regularly. Unfortunately, in the current fiscal year, the increase in selling prices has not caught up with the profit increase in raw material prices. One of the reasons for this is that a majority of the increase is actually in construction machinery. For mining, especially for the resource majors, contracts are made in such a way that prices rise in line with the market price increases, so the effort of the price hike against this year's steel price rise will show up more next year. So we shall see a greater impact of selling price hikes next year near.

[Unknown Attendee]

Now the next question, [ Mr. Tsuge ] of Nikkei.

[Unknown Attendee]

I'm [ Tsuge ] from Nikkei. Can you hear me? First question, I think the problems over the Evergrande Group in China is leading to further uncertainty in the real estate market. I understand that the percentage of China Evergrande in total sales of your company is very small, but I'd like to know if you are sensing in some way that the situation is deteriorating and that is why you have revised your total demand outlook further. Also, you've been increasing your sales in Southeast Asia. Do you feel the impact of your introducing new mid-priced models in this region?

[Masatoshi Morishita, executive]

This is Morishita. First, our views on China are not particularly shaped by the situation around Evergrande Group. Rather, we are seeing that, from the beginning of this year, we are feeling the weakness of the Chinese market exacerbate month after month. That is especially apparent looking at the number of projects approvals by the government, a statistic that is published each month. So from January to September of this year, the cumulative number is down 40% from a year ago. And in terms of the mandatory value of approved projects, that is also down 15% to 16%. And as we mentioned earlier, we also monitor the utilization rate of our machines and we see very subdued activities. So taking all those market conditions into account, we have lowered our market forecast a step further. In Southeast Asia and elsewhere as well, construction machinery market is very brisk. You mentioned about our new product in Southeast Asia, our CE series. We call it a 2-line strategy. We actually started [ delivery ] of this 20-ton hydraulic excavator just a month or 2 ago. We started in August, so we are still in the early stages of introduction, but at this point, we are getting results that are in line with or slightly stronger than our expectations. In Indonesia and Thailand, we have seen retail sales leading to more units and higher market share. And we are receiving positive news from the local market that new customers who have not had much relationship with Komatsu and its distributors or Komatsu's machines are buying the new CE series. It has only been a month or 2, so it is still too early to tell, but you can understand that things are going well so far.

[Hiroyuki Ogawa, executive]

This is Ogawa. Let me add. As for the CE series of PC 200, we had originally planned to launch in July, but as you know, in July and August, COVID infection spread -- or respread in Southeast Asia, so the launch was delayed. And as Morishita said, full-fledged sales started in September. We see our market share rising substantially in Indonesia, Thailand and the Philippines. In Thailand, our market share in September increased by more than 10 percentage points compared to the previous month. In Indonesia and the Philippines, our market share increased by more than 3 percentage points compared to the previous month, so we are off to a good start. Feedback from customers seem to be very good, so while we will have to wait and see whether this situation will continue, we can say that we are off to a very good start.

[Unknown Attendee]

I fully understood. I have another question, if you could kindly expand on the cross-sourcing situations. You seem to have extra capacity for production in China. The products are -- they are now shipped to other regions. I appreciate if you could be more specific. Many of the products are going to Russia. And what are the new products [ here ]? And where are these products actually being delivered? One, I'd like to know whether or not you have any strong areas from which you may be receiving lots of inquiries.

[Hiroyuki Ogawa, executive]

This is Ogawa. As for cross-sourcing, we have so far positioned the Thailand and India as the cross-sourcing locations. As for the Thailand, the [ mainland ] excavators have been shipped to the neighboring countries of the Thailand as well as the North American, Australian, African and, of course, Indonesian. So this has been the [ international or ] traditional cross-sourcing, the practice. From India, we are supplying excavators to its neighboring countries, and starting from this year, now the India-made products are shipped to the Middle East. We also have a history of cross-sourcing of dump trucks from India to African countries. As for China, since the situation is rather unfavorable now in China -- but the China has a good capacity to producing products. We had not cross-sourced from China in the past, but now we are looking at its possibility. Well, why not leverage China's capacity going forward? We have looked at this possibility and have already decided to ship China-made excavators, say about 500 units per year, [ first ], to Russia. Some excavators from China could be sent to Indonesia. This has been already decided. The idea is why not leverage the extra production capacity we have in China. We should and activated these cross-sourcing opportunities from China to another markets as much as possible. China has its competitiveness in costs. Its raw materials [indiscernible], particularly when it comes to steel, the price, it is cheapest, so if we could use the extra capacity in China, we can actually increase our margin. And there could be other advantages available in China.

[Unknown Attendee]

Next, I would like to have Mr. Isayama from Goldman Sachs Securities.

[Yuichiro Isayama, analyst]

This is Isayama. Can you hear my voice?

[Unknown Attendee]

Yes. Please go ahead.

[Yuichiro Isayama, analyst]

If I may, I would like to double check on the numbers. You gave the -- so the questions should go to [ Mr. -- the ] -- Horikoshi, CFO. I am looking at Page 10. There you are talking about volume, and there could be other factors. I would like to know the details of the actual number JPY 58.1 billion for the first half. I wonder if you could give me its details; also, on Page 18, JPY 83.8 billion. So if you could give us some reasons behind these numbers, yes, I would like to again ask this question. And looking at 1 -- well, first Q and second quarter, actually the number seems to be rather the same in this construction and the mining sector. I wonder if you could give me specific reasons why in certain areas the number went up. And in some of the areas, it came down.

[Takeshi Horikoshi, executive]

Okay, thank you for your question. And this time, it is not [ Saito-san ]. This time, it is Isayama-san. In regard to your question on Page 10, the number there, JPY 58.1 billion. Well, as for details, the pure volume increase accounts for JPY 78.1 billion. Materials and price, the so-called cost of goods, is about JPY 4.7 billion loss side. Thirdly, regions. Yes, China came down, while Indonesia, going up. Yes, you are absolutely right there. Also, the breakdowns between products and services, there we had a loss of about JPY 3.5 billion. Fourthly, we are now increasing our inventory in the current year. It was decided as a policy. So we have to deal with the so-called intermediary inventory, annualized inventory. We have to take into account those situations. Also we need to look at Komatsu stand-alone business versus rental business. Komatsu stand-alone business is more profitable. So -- the -- and there putting them together, we had a loss of about JPY 2 billion. As the first point: We were affected by the increased freight of container ship the first half, as much as JPY 4.8 billion. I was explaining this briefly earlier. And others as a temporary cost as much as JPY 5 billion. I just went through the situation in the first half.

And as for the outlook, yes, it is on Page 18. The number here is JPY 83.8 billion. The pure-volume impact is here JPY 113.8 billion. And as I said this earlier briefly, the cost of goods here increased by JPY 39 billion as a loss. The third factor is the regions and products related as much as JPY 4.1 billion on the loss side. The fourth factor is having to do with the unrealized intermediate inventory as a loss and the increase in operation. Here all in all we had a profit of JPY 23.3 billion. As I said earlier, we had a loss from the container side as much as JPY 8.5 billion. And others, putting them together, it is going to become JPY 1.7 billion on the loss side. Well, in terms of geographical factors, China, of course, coming down dramatically, while Indonesia is going up. Another factor is this time we had more growth in products over services. This had an impact on the loss of JPY 4.1 billion for the full year, which I was explaining to you earlier. Did I answer your question?

[Yuichiro Isayama, analyst]

Well, just looking at Q1 and Q2 and -- there is not much difference in your construction and machine business. And that seems to be the case for the second half as well, but the difference can be explained by looking at the regional differences as well as unrealized of the -- becoming realized partially. Is it a fair summary for me to make?

[Takeshi Horikoshi, executive]

Well, may I remind you that there is not much difference between Q1 and Q2. And there is not much difference in terms of the volume, in terms of the cost of goods; and almost no change between Q1 and Q2 in terms of the products and the regions, almost no difference in terms of price. And as for foreign exchanges, well, we had JPY 2 billion in the first quarter and JPY 6 billion in the second quarter. So I will say probably the rental and inventory situations unrealized have given us some big difference.

[Yuichiro Isayama, analyst]

Well understood. My second question is a point raised by President Ogawa saying you have [ a ] little concern about the North American situations. So if I may, I would like to ask about the supply chain situations in mine equipments business. If I remember it correctly, you are making lots of 100-ton-class dump trucks in Ibaraki and other Asian locations. I assume the engine for the dump trucks is provided by the company [indiscernible]. You are importing then from U.S. The 200-ton or 300-ton dump trucks [indiscernible], its engines are supplied by company [indiscernible] or, should I say, former [indiscernible]. As has been pointed out and also the -- raised by the -- many analysts, now there is a tight situation in terms of the [ labor and skills ]. ex-Joy Global is also located in the United States. So I wonder whether or not you are having some sourcing of the capabilities or cross-sourcing. Well, you are having a lot of volumes going up. And it [ should help you to enjoy ] profit, but under those circumstances, particularly tight [ relationship ] particularly in the North American market and -- could be the possible cause behind those tough numbers with supply chain. And also the -- probably the delivery timing is getting extended, if I'm not wrong. So if you can actually expand on those factors, particularly in mining business areas, including the supply chain situations, appreciate that.

[Hiroyuki Ogawa, executive]

Well, earlier, we were talking about engine for 100-ton dump trucks. Of course, it is made in Oyama Plant, so we do not have much disadvantages in terms of the supply chain as you're indicating earlier. And engines or the -- actually made by the [indiscernible] actually being sourced by Cummins. And it has been handled inside North American [indiscernible], so we are not affected by the [ confused ocean ] logistics. So we are not having big supply chain issues in the mine equipment business. I will say the biggest issue is production capacity. In the mining business, the demand is recovering quite quickly, and because of that, the production capacity is not necessarily catching up to the point. I think this has been a problem in this -- or the mining business sector. That said, our plans are planning to replenish human resources and planning to invest into plant facilities. They are making a somewhat aggressive CapEx plan, particularly in the third quarter and in the fourth quarter.

[Yuichiro Isayama, analyst]

How about [ delivery situations ]? If I am not wrong, the lead time is about 6 months -- so I heard. What is the kind of situation? So if I place an order now, I will get the product in the next fiscal year.

[Hiroyuki Ogawa, executive]

Well, we are receiving many orders for large-size dump trucks, particularly in the mining sectors. And unfortunately, our capacity on the -- has been kind of [ fixed ], so the order we are receiving now will be delivered sometime, [ all in ], in the beginning of the next year. It clearly indicates that we are receiving many orders now. Say if it is a 100-ton-class dump truck, usually the lead time here on is going to be around, I will say, 4 months. Say it is now in October. So usually you can expect to receive the product in February. That has been the case, but it is already taken 2 more months before you can get it. So actually we are receiving a lot of strong orders in the background.

[Yuichiro Isayama, analyst]

Sorry to further ask. Then what is the situation when it comes to [ large-size ] vehicles? Say the 200 or the 300 tons class.

[Hiroyuki Ogawa, executive]

For [indiscernible], the lead time is about 5 months. I don't think it has been changed much there.

[Unknown Attendee]

Next, we would like to have Mr. Saito from Nomura Securities.

[Katsushi Saito, analyst]

Yes, this is Saito. May I?

[Unknown Attendee]

Yes. Please go ahead.

[Katsushi Saito, analyst]

The first point. It has become a kind of global trend to refrain from making investment into fuel coals. With the strong demand, you are not having enough capacity. I would like to inquire here, say, what kind of attitude they are having, particularly among those people who are now mining coals or the fuel coals in Indonesia. Though they will not explore new mines, but -- they have the trucks and equipments, and so they continue to operate more in the existing mines. Is that the case? I'm sure that you are talking to them. What is -- what has been the situations locally there?

[Hiroyuki Ogawa, executive]

In Indonesia, yes, they are not going to deliver new mines. They are going to use excavators they had which were not used for some time. And also they started exploring mines. Actually [indiscernible] book-to-bill, B-to-B, ratio is existing. Well, actually we are selling product, excavators. And also actually they are [ now trying to ] actually replenish the vehicles. Actually, when they are signed, these vehicles were in time -- was rather poor.

[Katsushi Saito, analyst]

According to your integrity report or the commercial report, you are now talking about your efforts to improve the product side and also the process side. This seems to be one of the important messages from the publication. Well, the -- Mr. Ogawa, you do represent the company. And are there any specific messages you would like to share with us?

[Hiroyuki Ogawa, executive]

It was back in 2019 actually. We announced our medium-term business plan by 2030. From products and production, we would like to reduce the CO2 generation by 1/2. Well, this is still a commitment and -- we still have for the entire company, and I'm here to make sure that we'll achieve it. And carbon neutrality and actually aiming at 2050. Actually we have the scope 1, scope 2, scope 3 and category 11 and product specifications. So going through these procedures, we would like to be successful working on the carbon neutrality. When it comes at the product sides particularly, for your information: 90% of the CO2 we generate is coming from our products, so we have to make big efforts on the product side. So here electrification is going to be critical. And we are having a variety of partnership. I will say we are now achieving something concrete. For example, Komatsu is now collaborating with Proterra in kind of the U.S. for electrification of 20-ton-plus excavators. We are making good progress. We have the product finished, and we are planning to have the POC done in around mid-November to December at the customer [ side ]. It is not ready for mass production in terms of its layout, but this is just one example. Even in small classes, we have relationship with Honda Motor Co. And also, in the [ 3-ton ] class, we are planning to launch new vehicle in [ 2020 ]. So we are involved in a variety of initiatives for electrification.

Changing subject a little bit. Earlier, we were talking about our efforts to reduce the ratio of fuel coals. This is one of the exposures we have to further improve, yes. We have to make continuing efforts. The overall ratio of mining within the total revenue -- actually the expected mining revenue in [ 2020 ] is getting close to the level we had back in 2018. The foreign exchange now is also similar to the FX back in 2018. We have analyzed the ratio of mining in the total revenue. Fuel coal was 35% in 2018, and it is expected to be 25% in 2021. The ratio of fuel coal is clearly declining. On the other hand, in the case of iron ore and copper, iron ore has increased by about 3 points, and copper by about 7 points. I think the current situation is that the decrease in thermal coal is being made up for by iron ore, copper and other hard rock minerals. In addition, our original thinking on mining is to focus on hard rock. As for carbon neutrality, as I mentioned earlier, we'll focus on electrification, but at the same time what's important is how we can reduce CO2 emissions generated at our customer sites. It's not just a product. And we'll strive to reduce CO2 by enhancing customer productivity. In order to improve customer productivity, we will continue to develop smart construction, and on the mining side, we will continue to develop the IntelliMine open-technology platform. This will serve to reduce CO2 emissions by increasing the productivity of our customers.

However, the hurdles for electrification are still very high. As you know, our vehicles range from small to large. And in terms of output, we need to be able to handle anything from about 3 kilowatts to about 1,500 kilowatts, so we need to research the best approach to electrification for each model. Various types of power sources can be considered from batteries to hybrid, which is a technology we already have, as well as diesel electric too. Ultimately I think we will settle with fuel cells hydrogen engines, e-fuel or biofuels. However, as I mentioned earlier, because the vehicles come in various sizes, we have to take various approaches. And we can't just decide on one single technology, like batteries, for example, which is what's happening with automobiles. Therefore, we are working with various partners on various technologies as we work on electrification. As I mentioned earlier, we are working on smart construction to increase customer productivity, and we're also developing the open-technology platform IntelliMine to optimize mining. So this is where we would like to start. As I mentioned earlier, the technical hurdles are very high in terms of power output and the operating environment. Unlike a car, our equipment is used in mines or in the mountains, for example. And the operating environment, therefore, is an issue. There's so the issue of weight, and then there's infrastructure issues. There's also the issue of power supply, hydrogen supply and operating hours. For example, our current dump trucks which are used in mines run 24/7. If hydrogen becomes the power source, for example, fuel cells can only operate for 3 to 5 hours long. These types of technological hurdles are still high, so we will continue to promote research and development, and we will also invest in this kind of research and development.

[Unknown Attendee]

The next person is Mr. Tai of Daiwa Securities.

[Hirosuke Tai, analyst]

This is Tai. I have two. The first question is for Mr. Horikoshi. Can you explain the breakdown of fixed costs for the first half and full year? I'd like you to explain the breakdown of fixed costs for the first half and full year. You have structural reform and growth investments. I'm sure some increases are expected too due to the normalization of activities. Can you share with us how you came in for the first half of the year and where you stand in light of the new plan for the full year?

[Takeshi Horikoshi, executive]

Okay, regarding fixed costs, please refer to Page 18. When you look at Page 18, you could see that fixed costs increased by JPY 17.6 billion compared to the previous year. So when you look at what happened in the previous year: In fiscal 2020, fixed costs fell by JPY 20 billion. This was due to COVID-19. Costs fell substantially. And this time around, there was a significant increase in demand comparable to 2018 peak levels, so basically JPY 17.6 billion was a bounce back in fixed costs. As for structural reforms, as we've noted in the past, we'd like to achieve JPY 17 billion in 2022 on a gross basis, and JPY 21 billion in 2024, out of which in fiscal 2021 the gross effect of structural reform measures that have been accounted for is slightly under JPY 10 billion.

[Hirosuke Tai, analyst]

I see. I understand...

[Hiroyuki Ogawa, executive]

Excuse me. This is Ogawa speaking. In fixed costs, costs associated with the mid-term plan are included. In fiscal 2020, as we faced challenges in light of COVID-19, we kept mid-term plan related fixed costs under control. The latest forecast for 2021 includes an increase of about JPY 4 billion in fixed costs associated with the mid-term plan project, compared to fiscal 2020 results.

[Hirosuke Tai, analyst]

I understand. One more thing I'd like to ask you, Mr. Ogawa, is about the 4-cylinder CE series, the civil engineering model. Given that the market share increased by about 3 points in Indonesia and Thailand, within 2 to 3 months since its launch, do you feel that you are off to a good start? I'm not saying that the product originally had excess specifications, but I was wondering if you felt that there were quite a lot of customers who were looking for a product with reduced specs. Or is it a case that, when you launch new products, it's quite natural that they go through a sales spike in the beginning? If it's the former reply, the opportunity should not be limited to Southeast Asia, but there may be potential needs in Japan, U.S. as well as Europe too. Do you think it may be better to adopt the strategy of providing high-end customers with solutions and low-end customers with slightly lower specs? You just started selling the product, so it might be a bit too early to tell, but if you can share with us how you analyze the situation, that would be great.

[Hiroyuki Ogawa, executive]

As I mentioned earlier, we started full-scale implementation in September, so it's only been a month, but it was positive month-over-month. Normally when a new model is released, the market share does go up, so I think we have to watch carefully how [ it ] will develop in the future, but as Mr. Morishita mentioned earlier, we are now able to have relationships with customers with whom we did not have one before. So there is no doubt that our coverage of such customers is increasing. If we can make inroads into these customers, the middle-end customers, that is, I think we can increase our market share. Also you mentioned that specs have been downsized, but the fittings actually have not changed significantly from the conventional models, so the quality and performance are not significantly inferior to the conventional models. But the engine has been downsized a bit to optimize the specifications for civil engineering. However, there is no such thing as taking out the air conditioner or making the operator seat uncomfortable. So I think it would be better if you understand that the specifications were optimized rather than reduced.

Also you mentioned that this type of equipment might be accepted in Japan, U.S. and Europe, but from our point of view, we believe that the [ access ] of competition is completely different in Japan, U.S. and Europe; as well as in traditional versus strategic markets. I think that, the [ access ] of competition in Japan, U.S. and Europe, it's all about environmental aspects, safety as well as ICT, whilst the competitive [ access ] of strategic markets is about fuel efficiency, robustness and cost. So if we were to sell something like the CE series in Japan, U.S. and Europe, it might do well for a while, but we're not expecting massive sales. Also, for Japan, U.S. and Europe, we have already adopted a 2-line strategy which includes ICT construction machinery and conventional machinery. Therefore, we have already been adopting a 2-line strategy in Japan, the U.S. as well as Europe.

[Unknown Attendee]

We're very sorry, but our time is running out, so the next person will be the last question. So Mr. Miyagi from Mizuho Securities, I'll hand over to you.

[Hirokazu Miyagi, analyst]

This is Miyagi from Mizuho Securities. I have 2 short questions. First, regarding the impact of foreign exchange rates, can you once again confirm the sensitivity mainly from the U.S. dollar perspective? And also, in the foreign exchange rate part of the causes of difference waterfall chart, is there some carryover impact? So can you give more explanation around FX impact?

[Takeshi Horikoshi, executive]

Yes, sure. This is Mr. Horikoshi speaking. In terms of sensitivity against the dollar, with a JPY 1 move against the dollar, the impact on sales is about JPY 11 billion, and JPY 3.6 billion for profits. As you just said, because of intermediate inventory, the impact is not direct, but we account for a certain degree of turnover and our assumptions lead to the JPY 3.6 billion number. I hope that answers your question.

[Hirokazu Miyagi, analyst]

So you're saying that it would be larger if it were based on theoretical calculations, but you're talking about JPY 3.6 billion after factoring in the effects of the carryover.

[Takeshi Horikoshi, executive]

That's correct, yes.

[Hirokazu Miyagi, analyst]

I understand. My other question is about how we should look at mining demand. As you mentioned earlier, the forecast has come back to almost the same level as the previous peak in 2018, so I'd like to know what you think about the future trends from here. You mentioned earlier that investment by mining majors are expected to stay stable in 2022 and 2023, but in the past few years, including other customers, you've also indicated the level of demand that should be expected based on the renewal cycle and other factors. Can you give us an update on these numbers? And although this year we'll be going back up to previous peak levels, can you share your thoughts about beyond this year?

[Masatoshi Morishita, executive]

Yes. This is Morishita speaking. Indeed we have revised up the demand and sales outlook, and we expect to come back to the level of fiscal year 2018. It is still difficult to say what will happen in the next fiscal year and beyond. We don't have anything definitive to say, but as Mr. Ogawa mentioned earlier, for the mining majors, we have been hearing that CapEx is likely to continue to be stable. As for the rest of the world, especially Asia, I think it will depend on various factors such as what will happen to the supply and demand of coal. We have already learned from past experience that there is even more volatility in the mining industry, so I can only say for now that we'll be watching the situation carefully.

[Hiroyuki Ogawa, executive]

This is Ogawa speaking. I think it's necessary to look at each region and each commodity carefully. For example, when you look at our sales, I think one of our strengths is that we have balanced sales. For example, in Latin America, copper accounts for about 80% of our sales. In Oceania, iron ore accounts for about 1/2 of sales, at 50%; and coking coal 30%. In the CIS region, gold accounts for about 60%. And EMEA, Asia, 80% or 75% is thermal coal. So I think that we will have to carefully monitor the characteristics of sales in each region and make various moves depending on the price fluctuations of each commodity. In the past, we have been communicating that about 5,000 units is the average level of demand, but looking at the current situation, I think that 4,000 to 4,500 units should be the average. When I said 5,000 units last time, I was taking the average over the past 10 years, including the number of units during the mining bubble from 2011 to 2013, I believe. And I think now the normalized level is about 4,000 to 4,500 units.

[Hirokazu Miyagi, analyst]

And I'm sorry, but I wasn't able to keep up with you when you were talking about Latin America accounting for 80% of copper sales...

[Hiroyuki Ogawa, executive]

In Latin America, for our sales. Out of our sales in Latin America, copper accounts for 80% of total sales. For Oceania, iron ore accounts for about half of sales.

[Hirokazu Miyagi, analyst]

And you were saying coking coal accounts for 30%.

[Hiroyuki Ogawa, executive]

Yes. And Asia, about 75% to 80% is thermal coal. And in CIS, 60% is gold. So basically, in the future, as I mentioned earlier, thermal coal will probably continue to decline rapidly, but on the other hand, copper and other metals are likely to increase. And nickel will probably increase as well. And because of EVs and its rise, we also expect opportunities where we will not only make up for the decline in commodities but we'll be able to grow higher. In any case, I think it all depends on the price trends of commodities.

[Unknown Attendee]

We have received some other questions, but as we reached the scheduled time, we would like to conclude the Q&A session. This concludes today's financial results briefing.

Thank you very much for joining today.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]