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Komatsu Ltd
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I am Horikoshi, CFO, I will now give an overview of the business results for the 3 months ended September 30, 2022.
Page 4 shows the highlights of the second quarter of fiscal year '22. Exchange rates were JPY 136.1 to the dollar, JPY 139.3 to the euro, and JPY 93.9 to the Australian dollar. Compared to the same period last year, the yen depreciated against these 3 currencies, and also against the Chinese yuan, the South African rand and the Russian ruble, although not written here.
Consolidated net sales for the first half of fiscal 2022 increased 32.9% year-on-year to JPY 854.9 billion, and operating income rose 58.4% to JPY 118.1 billion. Operating income ratio rose 2.2 percentage points to 13.8%. Consolidated net sales and operating income both increased due to positive impacts of higher volume, foreign exchange rates and selling prices. Net income increased 57.2% to JPY 82.1 billion.
On Page 5, I explained the segment sales and profits. Sales of Construction, Mining & Utility Equipment increased 33.8% year-on-year to JPY 790.9 billion, and segment profit rose 60.4% to JPY 104.2 billion. Increased volume, positive exchange rates and improved selling prices, increased sales and segment profit was up mainly due to higher sales volume. Retail finance revenues increased 30.4% year-on-year to JPY 21.6 billion. Segment profit was up by 54.2% to JPY 7.1 billion. Revenues increased mainly due to positive exchange rates, profits increased due to lower allowance for doubtful accounts.
For Industrial Machinery & Others, sales increased by 20.4% year-on-year to JPY 49.2 billion. Segment profit was up by 69.6% to JPY 7.5 billion. While sales of medium and large-sized prices for the automobile industry declined, sales of the Excimer laser-related businesses were strong. As a result, both sales and segment profit were up.
Page 6 shows sales by region for Construction, Mining & Utility Equipment. Sales increased 34% year-on-year to JPY 788 million. Sales improved in all regions except CIS. Sales expanded sharply in North America, Asia and Latin America. Sales in traditional markets was 43% of total sales, and those of strategic markets, 57%.
Page 7 is an overview of the first half of fiscal year 2022. The exchange rates were JPY 131.6 to the dollar, JPY 138.1 to the euro and JPY 92.9 to the Australian dollar. Compared to a year ago, the yen depreciated against the dollar, euro and the Australian dollar and also Chinese yuan, the South African rand and Russian ruble, although not written here.
Consolidated sales for the first half of fiscal 2022 increased 25.3% to JPY 1,618.7 billion, and operating income increased by 55.3% to JPY 211.6 billion. Operating income ratio was up 2.5 points to 13.1%. Consolidated net sales and operating income both increased mainly due to increased volume and positive exchange rates and improved selling prices.
Net income was up 74.5% to JPY 162.6 billion. Consolidated net sales, operating income and net income all reached record semiannual highs. The dividend forecast is increased by JPY 16 from the JPY 48 for the beginning of the fiscal year to JPY 64 per share.
On Page 8, I explain segment sales and profits. Sales of Construction, Mining & Utility Equipment increased 27.1% to JPY 1,506.2 billion, and segment income increased 58.1% to JPY 187.5 billion. Retail Finance sales increased 12.2% to JPY 41.5 billion and segment profit rose 89.3% to JPY 14.9 billion. Sales of Industrial Machinery & Others increased 2.5% to JPY 83.7 billion and segment profit rose 27.7% to JPY 11 billion. I will explain the causes of differences for each segment later.
Page 9 shows sales by region for Construction, Mining & Utility Equipment. Sales of Construction, Mining & Utility Equipment increased by 27.2% to JPY 1,502.5 billion. Sales increased in all regions except CIS and China, expanding sharply in North America, Asia and Latin America. Sales in traditional markets was 44% of total sales, and those of strategic markets, 56%.
Page 10 shows the causes of difference in sales and segment profit for Construction, Mining & Utility Equipment. Sales increased by JPY 320.8 billion year-on-year, mainly supported by increased volume, positive exchange rates and improved selling prices. Segment profit increased by JPY 68.9 billion year-on-year, thanks to improved selling prices and exchange rates. Segment profit ratio was 12.4%, up 2.4 points year-on-year.
Page 11 explains the situation of Retail Finance. Assets increased by JPY 168.2 billion from the previous fiscal year-end, mainly due to exchange rates. New contracts increased by JPY 106.1 billion year-on-year, supported by increased sales of Construction, Mining & Utility Equipment. Revenues increased by JPY 4.5 billion due to an increase in new contracts and positive exchange rates, which offset the impact of selling post-lease equipment as used equipment in the same period a year ago, and the segment profit increased by JPY 7 billion, mainly due to decreased allowance for doubtful accounts and the positive exchange rates.
Page 12 shows the situation of sales and segment profit for Industrial Machinery & Others. Sales increased by 2.5% year-on-year to JPY 83.7 billion. Segment profit increased by 27.7% to JPY 11 billion. Segment profit ratio rose by 2.6 points to 13.1%. Sales of medium and large-sized prices declined for the automobile industry, resulting in decreases in both sales and profits. Sales of Excimer laser-related business for the semiconductor industry were brisk, resulting in higher sales profits.
On Page 13, I explain the consolidated balance sheet. Total assets increased by JPY 655 billion from the previous fiscal year-end to JPY 5,002.5 billion, mainly due to the effects of exchange rates. Inventories increased by JPY 287 billion from the previous fiscal year-end to JPY 1,275 billion, resulting from an increase in demand for Construction, Mining & Utility Equipment. Shareholders' equity was 51.5%, up 0.1 points. Net DE ratio was 0.33.
This is all from myself. Next, Morishita will explain the outlook of fiscal year 2022 business results.
Yes. I'm Morishita, General Manager of the Business Coordination Department, and I will now explain the outlook for fiscal year 2022 and the main market conditions.
Page 15 shows an outline of the projection for fiscal year '22. From the left, we have the actual results for fiscal year '21 under A, and the latest forecast for fiscal '22 under B. And next to that is the projection as of April. The year-on-year comparison shows the change between the latest projection for fiscal '22 and the fiscal '21 results.
In the first half of fiscal '22, despite the impact of supply chain disruptions and increases in material prices and logistics costs, sales and profits both reached record highs due to increased sales of new vehicles and parts services, improved sales prices and a weaker yen. As Mr. Horikoshi explained earlier, although there are concerns about an economic slowdown due to rising interest rates, as demand is strong in Southeast Asia and other regions, and supply shortages caused by supply chain disruptions are expected to improve as well as with sales prices also improving, we have revised the forecast for the year, including revising currency rate assumptions.
Currency rate assumptions were revised for the third quarter onwards. The dollar was revised from JPY 118 to JPY 140, the euro from JPY 129 to JPY 137 and the Australian dollar from JPY 88 to JPY 89. Although not stated here, we have also revised the exchange rates for other currencies. The average exchange rates for the full year are JPY 135.8 to the dollar, JPY 137.5 to the euro and JPY 91 to the Australian dollar. We have revised our business outlook for Europe and Southeast Asia. I'll explain the details later.
Taking these factors into account, consolidated net sales have been revised upward by JPY 460 billion from the April forecast to JPY 3,460 billion. Consolidated operating income has been revised upward by JPY 94 billion to JPY 440 billion. ROE is expected to be 12.4%. The dividend per share is expected to be JPY 128, an increase of JPY 32 from the April forecast for a consolidated payout ratio of 40.6%.
On Page 16, we will explain the sales and profit outlook for each segment. Sales of Construction, Mining & Utility Equipment are expected to increase by 25.2% year-on-year to JPY 3,210 billion. Segment profit is expected to increase by 45.8% to JPY 402 billion. Segment profit margin is expected to increase by 1.7 percentage points to 12.5%.
Retail Finance sales are expected to increase 16.2% year-on-year to JPY 83.5 billion. Segment profit is projected to increase 45.4% to JPY 25 billion. Sales of Industrial Machinery & Others are expected to increase 1.9% year-on-year to JPY 192 billion, with segment profit up 1.8% to JPY 23 billion. Factors behind the increase or decrease in each segment will be explained later.
Page 17 shows the sales projection by region for the Construction, Mining & Utility Equipment segment. In fiscal '22, sales are expected to increase in all regions expect CIS and China, and are projected to increase by JPY 645.7 billion to JPY 3,204.5 billion. Traditional markets and strategic markets are expected to account for 46% and 54%, respectively.
Next, turning to Page 18. This page shows the causes of difference in projected sales and segment profit in the Construction, Mining & Utility segment. Net sales are expected to increase by JPY 645.7 billion from the previous year, mainly due to an increase in volume, exchange rate differences and the positive impact of selling prices. Segment profit is expected to increase by JPY 126.3 billion year-on-year as higher material and logistics costs are expected to be absorbed by improved selling prices, including the positive impact of foreign exchange rates. The segment profit ratio is forecasted to increase by 1.7 percentage points to 12.5%.
Page 19 shows the projection for Retail Finance. Assets are expected to increase mainly due to the impact of foreign exchange rates. New contracts are expected to increase due to the impact of foreign exchange rates and higher sales of Construction, Mining & Utility Equipment. Segment profit is expected to increase due to the increase in net sales, the positive impact of foreign exchange rates and a decrease in allowance for doubtful accounts in addition to the increase in net sales. ROA is expected to improve to 2.4%.
Page 20 shows the projection for sales and segment profit in the Industrial Machinery & Others segment. Sales in the Industrial Machinery & Others segment are expected to increase 1.9% year-on-year to JPY 192 billion. Segment profit is projected to increase 1.8% to JPY 23 billion. While sales and profits for the automotive industry are expected to decline, sales of Excimer laser-related and other products for the semiconductor industry are expected to increase.
I will now explain the status of orders and sales of industrial machinery and the reference material on Page 38. Page 38 shows the index of orders received and sales of industrial machinery. The index is calculated by dividing the amount of orders received in the last 6 months by the amount of sales in the same 6 months.
Komatsu Industries in the top table is engaged in sales and service of presses and sheet metal machines. The index is at the 180% level due to the recent steady accumulation of orders for large presses. Komatsu NTC designs, manufactures and sells machine tools, such as transfer machines, machining centers and crankshaft milling machines. Orders for wire saws for the semiconductor industry and battery manufacturing equipment have been strong with the index currently at the 200% level.
That takes us back to Page 21. This page shows the demand trends and projection for major products. The figures for Q2 fiscal year '22 are our preliminary estimates. Overall demand for the second quarter of fiscal year 2022 is on par with the same period last year. The graph on the right shows that demand in all regions, except China, increased by 3% year-on-year.
In China, demand continues to decline due to sluggish market conditions. In regions, excluding China, demand in Europe, Japan, CIS and other regions declined year-on-year, while demand in main regions, including North America and Southeast Asia remained generally firm. The graph on the left shows demand for fiscal year 2022, which we haven't changed from the April forecast, ranging from 0 to plus 5% in all regions except for China, where demand is expected to remain flat year-on-year. However, we have fine-tuned the production for each region in consideration of the current situation and other factors. I'll explain the situation in major markets on the next and subsequent pages.
First of all, Page 22 shows demand trends in the Japanese market, where demand in Q2 fiscal '22 declined 4% from the same period last year. Although orders for both public and private construction projects were firm, supply could not keep up with demand due to supply chain disruptions, resulting in sluggish demand growth. Our forecast for demand in fiscal '22 is unchanged from our April forecast, ranging from 0 to plus 5% year-on-year.
We expect government and private sector construction investments to trend firmly and also expect supply delays to improve. Average monthly operating ore for contracts were minus 5% year-on-year in September.
Next on Page 23 is a look at the North American market. Demand in fiscal year '22 second quarter appears to have increased by 7% year-on-year. Demand for residential, nonresidential infrastructure remained at a high level, and demand for energy rentals increased. The forecast for fiscal year '22 demand is unchanged from the April forecast, ranging from 0% to plus 5% year-on-year. We expect demand to remain at a high level, but we will continue to monitor machine utilization and demand trends closely, given the impact of rising interest rates, such as the declining trend in housing starts.
Monthly average operating hours for contracts increased 5% in September compared to the same month last year. Rental and construction residential segments remained strong, while the energy segment saw an increase in operating hours.
Page 24 shows the situation in the European market, where demand in fiscal year '22 Q2 appears to have decreased by minus 9% year-on-year. Demand declined in key markets such as Germany, the U.K. and France, due in part to supply chain disruptions that prevented supply growth, as well as the impact of high energy prices.
We have changed our demand forecast for fiscal year 2022 from the April forecast, and now expect a 0% year-on-year decline to minus 5% year-over-year. We expect the amount to turn positive in the second half of the year as supply chain problems improve, but we will continue to monitor trends as inflation of fuel prices continue to soar, which could further impact demand.
Regarding the monthly operating hours for contracts, in September, it was down by 8% from the same month in the previous year. There are no substantial reasons why. However, because negative trends are continuing from June, we will continue to closely monitor the situation.
On Page 25, let me update you on China. This page shows the demand trend for hydraulic excavators, excluding mini shovels. The trend, including Chinese local makers is also shown as a reference. The growth rate in demand represents the figures for foreign manufacturers. The demand for hydraulic excavators in Q2 of FY '22 apparently dropped by 33% year-on-year.
Total demand, including Chinese makers, is estimated to have decreased by 31% year-on-year. The market has been sluggish due to the stagnant economy and demand continues to decline.
The outlook for demand in FY '22 is negative 30% to negative 40% on year, and the outlook for total demand, including Chinese manufacturers, is negative 20% to negative 30%, unchanged from the April projection. Although construction investment-related indicators are improving, we have not seen material change on the ground, and we expect the negative trend to continue for the foreseeable future.
In September, the average month of operating hours of contracts decreased by 1% year-on-year. The negative trend has continued since April last year, and the overall utilization rate remains low. However, the rate of decline is moderating.
On Page 26, I'd like to explain the demand trend in Southeast Asia. The demand in Q2 of FY '22 is estimated to have increased by 31% year-on-year. Demand was up in the largest market, Indonesia, as well as in Malaysia and the Philippines. In fact, demand expanded significantly in Indonesia, up by 45% year-on-year. Demand for general construction equipment expanded in the construction sector, owing to progress in public investment budget execution, while demand also grew in the agriculture and forestry sectors.
In mining, demand for coal mining equipment also increased. The demand forecast for FY '22 has been revised from the April projection and is now expected to grow between 20% to 25% year-on-year. With the largest market, Indonesia, remaining strong, we expect general demand to be upbeat.
In September, Contracts monthly average operating hours in Indonesia were up by 7% year-on-year. Operating hours in the construction sector are strong, driven by public investment, while those in the agriculture and forestry sectors are also increasing.
On Page 27, I'll explain the demand trend of mining equipment. The demand for mining equipment in the second quarter of FY '22 apparently increased by 35% year-on-year. Despite the drop in demand in CIS, demand was significantly in Indonesia and other Asian countries, thanks to the high level of coal price. We changed our outlook from April and we now expect the demand for fiscal year 2022 to remain flat over last year. Although demand in CIS is expected to decline, we expect demand to grow mainly in Indonesia and other Asian countries. I'd also like to touch upon the order and sales trend of mining equipment in the appendix section on Pages 36 and 37.
Page 36 is a trend of book-to-bill ratio for the mining equipment. The graph shows the change in the ratio of orders received for new mining equipment for the latest 6 months divided by sales for the same 6-month period.
Komatsu America manufacturers installed super large dump trucks. With orders received for North America and Chile, the BB ratio has remained above 100%. Komatsu Germany manufactures and sells super large hydraulic excavators. The ratio is hovering around the 100% level with orders from North America, Latin America and Oceania. Komatsu Limited mining equipment business is enjoying brisk orders in Asia, driven by the business in Indonesia and the BB ratio is currently above 100%.
Page 37 illustrates the trend of the book-to-bill ratio for mining equipment manufactured by KMC. The overall BB ratio was approximately 80% on the back of progress made in the sales of surface mining equipment.
Now going back to Page 28, I'd like to walk you through the sales trend of mining equipment. Sales for Q2 and fiscal year '22 increased by 37% year-on-year to JPY 349.5 billion and by 13% when excluding the impact of foreign exchange rate. Sales in CIS were down, while revenue was up in Asia, North America and other regions. For FY '22, we revised our forecast from April and now expect sales of JPY 1,361.3 billion, an increase of 26% over the previous year.
Page 29 shows the sales trend of parts. Sales increased by 45% year-on-year to JPY 223.8 billion in the second quarter of FY '22. Excluding the impact of foreign exchange rate, sales would have increased by 20%. Sales of construction equipment grew, except for some regions such as China, as operating hours of machines increased in many regions due to an increase in economic activities. Sales of mining equipment increased in Asia, North America, Latin America, Oceania and other regions. Sales projection for FY '22 was revised up from the April guidance to JPY 846 billion, year-on-year increase of 30%.
From Page 39 and onwards, I would like to share some key topics. In September, Komatsu issued an integrated report. Komatsu Report 2022 - Together, to The Next for Sustainable Growth. The report focuses on Komatsu's growth strategy to create new value for the next 100 years, which is set forth in the 3-year medium-term management plan announced in April. Through [indiscernible] value stipulated in the medium-term management plan, Komatsu will step up to the next stage for the future job site and aim to create new value in order to hand over a sustainable future to the next generation.
Page 40, please. Commodity exhibited at the International Construction Equipment Trade Fair, bauma 2022, held in Munich, Germany for 7 days from October 24 to 30. In response to the growing awareness of climate change around the world, Komatsu has pledged to achieve carbon neutrality by 2050 with the aim of realizing a sustainable society. At bauma 2022, Komatsu introduced latest products, services and solutions, including construction and mining equipment that levers the technology and expertise we have cultivated over many years. Komatsu has continued to work with customers to create new value and accelerate the realization of safe, productive, smart and clean workplaces of the future.
Please turn to Page 41. Komatsu has issued sustainability-linked bonds. This is a very first foreign currency-denominated sustainability-linked bond issued by a Japanese company. The terms and conditions of sustainability-linked bonds changed subject to the achievement of KPIs, predetermined by the issuer. The KPIs we have set, a reduction target of CO2 emission from production and CO2 emission from product use.
In our medium-term management plan, we have set a goal of creating customer value through our growth strategy, which creates a virtuous cycle of profit growth in solving ESG issues. With the issuance of the sustainability-linked bond, we intend to accelerate our sustainability management, aimed at achieving sustainable growth.
This will conclude my presentation. Thank you very much for your attention. We'd now like to answer your questions.
First question. Mr. Sasaki of Mitsubishi UFJ Morgan Stanley Securities.
Thank you for taking time today. I am Sasaki from Mitsubishi UFJ Morgan Stanley Securities. I'd like to ask you 2 questions one-by-one, if that is okay. The first is about the numbers we always ask about. In the section of the cause of differences for Construction, Mining & Utility Equipment, please explain the breakdown of the first half results and the new plan. I want to know the ups and downs of actual volume, cost and ocean freight.
Horikoshi speaking. First of all, regarding the first half of the fiscal year, volume and product mix is a loss of JPY 25.8 billion. Fuel volume difference is positive JPY 26.1 billion. Then there is a loss of JPY 59.8 billion due to cost increase.
The third factor is the regional composition, i.e., increase in Indonesia. Also, the increase in the ratio of parts and services in the product mix, which together accounts for a gain of JPY 13.5 billion. The increase in the price of container ships from the previous year was JPY 9.4 billion. The remainder is a gain of JPY 3.8 billion, which is mainly due to an increase in allocation due to higher inventory. That is all for the first half.
For the full year, please refer to Page 18. This is a loss of JPY 78.5 billion due to volume and product mix. Do you hear me?
Yes, please.
Pure volume difference is the positive JPY 38.6 billion. The second factor is the increase in cost of sales, which is JPY 103 billion. Then there is the geographic sales composition and product mix, which together account for JPY 10.1 billion gain. The annual forecast includes a negative JPY 15.1 billion due to the year-on-year increase in container shipping costs.
Fifth, there is a loss of JPY 9.1 billion from other items. This is the breakdown. In this sense, compared to the initial plan, there was the exchange rate impact for parts and materials, steel was negative; container shipping, slightly positive; volume and product mix, positive; price increase has progressed also positive, resulting in a large upward revision. Is that about right? You were asking about the first half? Sorry, I can't hear you. The upward revision is due in part to the exchange rate, but compared to the initial forecast, still significantly negative. Containers, slightly positive; exchange rate sightly positive; volume and product mix, significantly positive; and price increases, pretty big positive. And overall, it is a major upward revision. Is that right? Yes, that's right. Thank you.
Second question is about the price. I think that while steel prices are rising more than expected, you are also making steady progress raising your prices. Please explain how the price increase is progressing compared to the initial plan. I assume that if the economy were to worsen in inflation to subside, you would expect the prices to fall. What would be your pricing strategy in such a case? Tell us your thinking going forward?
About the prices, we said the price differential is JPY 115.3 billion annually. Compared to the level announced in April, we were able to increase by about JPY 40 billion. First, the increase in cost of sales. Raw material prices have risen sharply, especially since the second quarter. Compared to the level announced in April, this has had a negative impact of about JPY 56 billion. The way it affects the PL is that at the point we buy the materials, the higher cost is reflected on the PL. So market price increase are reflected immediately.
On the other hand, the increase in the selling price tends to appear slightly later because there is a time lag of about 4 months from the time an order is received to the time the product is sold. Now the cost of goods sold has recently been calming down. So the increase in selling prices will gradually have more of an effect going forward. As for now, the increase in cost is more or less offset by the increase in selling price for the year. But going forward, we'd like to further increase the selling price.
The next question is from Mr. Sano of JPMorgan Securities.
I have 2 questions. First, regarding your view of the mining equipment market, I understand that you have raised your previous forecast for demand from flat to minus 10% to flat. Please explain the backdrop for your positive view here. Furthermore, I'd like to know whether this positive move is sustainable and looking at orders coming in. Will it continue to increase over the initial forecast? If you can update us on this, including recent communication with major mining companies, that would be appreciated.
Yes, Morishita here. Regarding our view of demand for mining equipment. First of all, I just mentioned earlier that the first half of this year, the actual result was positive 30%, which is a very strong figure. We believe that this was boosted by demand for coal in Asia, particularly in Indonesia. In the second half of the year, CIS is going to be a key factor. We talk about sales in monetary terms, but demand in a number of vehicles. So you may feel a bit of a gap here. In any case, I believe we have to expect that CIS sales will fall drastically in the second half.
Taking into account the positive factors in Asia and the negative factors in CIS, we expect sales to be at the level equivalent to the previous year. As for the next fiscal year and beyond, we are still in the process of formulating our forecast for fiscal year 2023. But we do not think there will be any major negative factors. As for the current situation, material prices with ups and downs have remained at a fairly high level. And we have heard from customers that they are going to steadily and strongly continue investment. Therefore, we do not currently see a large negative impact in fiscal year 2023 compared to fiscal year 2022. That is all.
Secondly, I'd like to ask President Ogawa about the forecast of 30% growth in parts sales this fiscal year, which I think is partly due to the exchange rate. I have also read the integrated report, and I'd like to know the medium-term outlook in the area of digital marketing. This is about online sales of parts, the introduction of PIM and the next-generation contracts, but I believe that you are taking various measures to increase the sales of parts even more than the launch of new vehicles. Could you tell us about your strategy in this area?
Yes, the sales of parts have consistently been rising and the operating hours of equipment, especially for mining has been increasing. In Indonesia, in particular, we have been looking closely at the ratio of idle equipment. And at this point, the ratio is about 2% to 3%. In the past, it was as high as 30% at the worst point. So the high operating hours of equipment is leading to the rise of sales of parts.
As for what you mentioned, business models based on the next-generation contracts data, or PIM, we will increase our efforts in these areas for the future. As can be seen in the KPIs that we put out in the integrated report, we are now aiming to increase parts sales 15% by 2024 and making various plans for that. Of course, we'd like to consider M&As and other opportunities as well.
Next question, Mr. Suge from Nikkei, please.
Suge from Nikkei. I'd like to ask you 2 questions. Please answer one at a time. First, I think you have lowered the demand for gas for Europe by 5% this time. You said that you see no clear causes, but contracts operating hours have been declining a little. What do you think is the reason for this? Are customers taking a wait-and-see attitude due to the supply chain issues? Or are there other problems like Ukraine, monetary typing or any other psychological factors?
Morishita speaking. For Europe, it is difficult to find anything positive in the various economic indicators. As for the demand for construction equipment, we often hear from our customers that they are extremely busy right now and that their workloads are already filled until the end of next fiscal year. This is the case in major markets of Germany and France. However, demand is declining every month year-on-year. It is very difficult to see how much the supply chain problem has affected the situation.
In fact, the order backlog has been gradually decreasing, whereas new orders from retail customers to distributors are also gradually decreasing. However, the reason for this decline may be because customers have to wait for a long time for the delivery of their equipment, so is it because of some sentiment that customers feel they don't need to rush to place orders? That is very difficult to decipher.
As I mentioned earlier, we expect demand to be slightly lower than originally planned. We will gather more information on the current interest rate situation, energy prices on the situation in Ukraine in the next month or two, and then we will reflect this information in our plans for the next fiscal year. That is all.
Let me confirm. The backlog of orders is still quite high. And in that sense, you think that there will not be a significant decline in sales in Europe during the current fiscal year?
Yes, it is as you say. As for our sales, the backlog of orders is gradually decreasing, but we do not expect sales to drop rapidly this fiscal year. What I mentioned earlier is the market situation, and I think we have a rough idea of our sales for this year.
One more, please. I want to also hear about North America. You say sales is stronger than demand forecast, I have heard that your distributors' inventories are low, and I was wondering if their inventory levels, especially in Europe and the United States, are gradually normalizing. What are your views on this, including your company's order backlog?
Yes, this is Morishita. As I explained at the beginning of the year, there is a divergence between the market view and our sales figures. The biggest reason for this is the supply chain, whose effect is still continuing even in the current full year forecast for fiscal year 2022. For example, I said earlier that we have not changed our view of the market in North America, which is 0% to 5%. On the other hand, the increase in our sales has been quite large.
Excluding Foreign exchange impact, we are up about 23% for the year in real terms. If the market itself were to grow by only 5%, the gap would be 18%. The gap would include, for example, price increases. In North America, this will probably account for 5% to 6%. Another 10% or so is due to the fact that our wholesale sales are larger than the retail sales, which is recorded as commodity sales. This is about 1,800 or 2,000 units. With these developments, we expect that the distributors' inventories will settle down to an appropriate level in spring of the next fiscal year.
The same is true for Europe. I mentioned earlier, 0% to minus 5%. But in terms of our own sales, it is 20% or about 12% in real terms, excluding exchange rate impact. Again, this is partly due to price increases, inventory replenishment in Europe and an increase in the volume of some products due to a rise in market share. Does it answer your question?
I understand very well.
Next question. Mr. Maekawa from Nomura Securities.
Maekawa from Nomura Securities. I have 2 questions. First, another confirmation of your market view, if I may. It seems that in both Europe and North America, price hikes are prevailing and economic situation is getting tougher, but there still seems to be a difference between Europe and North America. North America seems more resilient. I'd like to know where this difference is coming from.
This is Ogawa. In North America, as you all know, employment is very strong, and housing demand is also declining due to rising interest rates. But I believe that demand will remain strong over the medium to long term. In addition, as the trend towards nationalism is expected to continue, strengthening the manufacturing base, semiconductors, carbon neutral, et cetera are becoming key themes.
In addition, the modernization of infrastructure with their $1 trillion investment plans in place, we are not that concerned about the North American market. Of course, housing may decline, but our view is that infrastructure and energy are performing well enough to cover this decline. In particular, the energy market has shifted from the focus on decarbonization to the stable supply of energy, partly due to the situation in Ukraine. And we expect the energy market to remain relatively strong in the next fiscal year. So I don't think there will be such a big decline in North America.
As for Europe, as Mr. Morishita explained earlier, whether the decline in demand is happening because of production and supply shortages, or whether we have already reached a turning point is yet to be validated. I personally attended a meeting with European distributors the other day, and their view was that the actual end users, especially those in road construction industries, still have a large backlog of orders for next year's work. So the business environment itself is not that bad. Of course, when you look at economic indicators, nothing looks good. So I think we need to take a closer look at Europe. And as Mr. Morishita mentioned earlier, retail orders are also showing some signs of slowing down.
So whether people are trying to wait and see or if retail orders have slowed down just because the backlog is high, we will need to take a close look to see whether retail orders where they are headed as they are slowing down slightly. So as you have rightly pointed out, the situation is quite different between North America and Europe.
That was very clear. When it comes to energy, the situation between North America and Europe is quite different. Europe may be the final place of demand. But in terms of the market, including construction and mining equipment, the drivers are quite different between North America and Europe, are they not?
That is correct.
Okay. I understand. My second question may be related to what you just said. But when you look at mining equipment, it's true that market fluctuates quite substantially. But on the other hand, the production volume of mines does not move that much. And in the current environment surrounding energy, mining equipment itself is relatively resilient to the recession than before. Is that the way we should look at it? Or can we say that there is a more persistent demand or support for mining equipment even during recessions? It may be too early to draw any conclusions, but I would appreciate any implications you can give me at this point.
Yes. This is Morishita. That's the way we look at it as well. Often people talk about 2011 and 2012 when the market was very heated and we were in the so-called super cycle. Back then, mining companies were pretty aggressive. However, many of the mining companies were financially hurt because of this phase. So I think this became a lesson for the mining companies that rather than being reactive to ups and downs in commodity prices, you should have a long-term view instead. So I think that's the reason why the Mining Equipment business is becoming increasingly stable as a result and moderate. This is one of the reasons why the business environment for fiscal 2022 is not so bad for us.
Business is very strong, including Indonesia. And although this may be a temporary factor, it is especially true for coal. Trends have been changing in the past 2 years. Not sure if it's the right way to say it, but the coal industry in North America is making a revival. But this is a situation we are currently facing. Therefore, for fiscal year '23 and beyond, our current view is that similar trends to fiscal year '22 may continue.
The next question is from Mr. Ibara from Morgan Stanley MUFG Securities.
This is Ibara from Morgan Stanley. Well, one thing I would like to ask you is about currency rates. If there's no change, that's fine. But if you did any reviews and any revisions, I would like to know about the sensitivity. With the U.S. dollar assumption at JPY 140 this time, I think on top of mining equipment, parts and components are also dollar-denominated. And I also think you mentioned earlier that it takes 4 months from manufacturing to shipment. If the current exchange rates of JPY 140 to the dollar continues, will there be benefits from the exchange rate that will be carried over into the next fiscal year, because I recall that you have explained so in the past. So if it's possible, I would like to know if you have any implications as to how much the advantage of the JPY 140 exchange rate will continue to hold up next year.
This is Horikoshi speaking. First of all, the U.S. dollar sensitivity is expanding because of the increase in volume. With a JPY 1 move against the dollar, sales will be impacted by JPY 13.5 billion and operating income by JPY 4.6 billion. This is the level for this year.
As for the euro, a 1-year move will have a JPY 2.8 billion impact on sales and a JPY 500 million impact on profit. For the Australian dollar, which has the next largest impact, has an impact of JPY 3 billion on sales and JPY 300 million on profit with a JPY 1 move. And what I meant about the 4-month comment was not the lead time from manufacturing to sales, but that it would take about 4 months from the point of order when prices increases and to when sales are accounted for and actually recognized, which is different compared to COGS, because COGS are recognized right away on the P&L. And the difference is recognized right away as well.
So that was what I meant. And regarding the question about what if JPY 140 continues next fiscal year, although we don't have any numbers available right now as we are yet to formulate the plan, but if we apply the current sensitivity to the increase in the volume of goods, we can expect to see an impact of that amount approximately. So for example, if the volume we are projecting for the second half continues next year, we can calculate that compared to the previous levels of JPY 110 to the dollar, we will be able to add about JPY 70 billion to our profit.
Yes. Thank you very much. And my apologies about the misunderstanding regarding the fourth month comment. Also, this is a basic question, but how much higher was the second quarter operating income of JPY 118 billion compared to the original plan? And apologies if I have calculated this incorrectly, but when I look at the first half and the second half, considering the volume of goods, I have a feeling that the profit margin could be a little higher. But looking at the explanation you gave earlier, I see that other areas were negative in the second half, and volume product mix is a little negative. I feel that the second half of the year is likely to be a little bit more profitable, but how should we think about this?
First of all, I think you are asking how the current progress is in terms of profit compared to the figures announced in April. When we made the announcements in April, we were looking at the first quarter as a large quarter with a decline in the second and third quarters and an increase in the fourth quarter. But in reality, in the first quarter, due to the Shanghai lockdown and supply chain problems, we missed about JPY 60 billion in sales in the first quarter alone. In the second quarter, sales loss was about JPY 20 billion. But we have been able to catch up in sales thereafter. Therefore, looking at the first half of the fiscal year, we have not yet completely caught up to the level of the April announcement.
In the second half of the year, the supply chain issues have been approved to some extent. So we expect that we will be able to catch up going forward. And also, as you say, if we look at the profit margin for the first and second half of the year and the exchange rate for the first half of the year and the second half of the year, at JPY 140, it would be reasonable to expect a little more profit in the second half of the year if we look at it as it is. But fixed costs, in particular, are expected to increase in the second half compared to the first half of the year. We also expect that the reduction of inventory will not be as much as originally planned. Therefore, projections are a little bit less then the profits that can be derived by just applying the foreign exchange rates for the second half of the year.
I just wanted to ask one more point. At the beginning of the fiscal year, I remember that you had assumed that the second half would be a little more difficult because of the decrease in Russia, which is different from previous years. But now that you have revised the forecast for Q3 and Q4, Q4 is typically higher in the past, but what is your view for this year when you account for Russia, as well as fixed costs?
We expect an increase as time passes, meaning as we progress from Q3 to Q4 which is the same as usual.
How about profits? Can you repeat that? You said sales will increase as time progresses. But for profits, will it decrease because of fixed cost in the second half or fourth quarter? Or are profit is going to be higher in the fourth quarter than in the third quarter?
Well, it depends on the inventory situation and the way fixed costs are incurred. But we are not expecting Q4 to be better than Q3 in an extreme way.
The next question is from Mr. Ouchi from SMBC Nikko Securities.
This is Ouchi. I understand that it is difficult to forecast. But regarding the difference in consolidated and nonconsolidated results, I remember you said at the beginning of the fiscal year that the full year forecast was plus JPY 17 billion for the full year. But I understand that the reduction of inventory is quite difficult. So can you confirm where the projection is right now and if you have made any revisions?
The consolidated nonconsolidated difference for the first half had an impact of minus JPY 7.7 billion. The full year figure is expected to be about the same.
So is it safe to say that about JPY 24 billion, JPY 25 billion is a factor in the downward revision? What are you referring to? I think you had a fairly positive outlook for this area in the initial beginning of the year plan. It was positive.
Yes, that's correct.
Okay. I understand. The second point is that free cash flow was quite negative in the first half because of the supply chain difficulties. But you mentioned that the supply chain situation is easing. So what are your free cash flow expectations for the full year? And I would also like to ask you about something that the previous management had said in the past, which is about considering share buyback options. If the PER becomes below 10x based on the company's plan, the past management were saying they will proactively think about share buybacks. The stock price is now at around 10x PER based on the company's plan. So I wanted to confirm your thoughts on this, once again, as cash flow is expected to improve and also considering where stock prices are right now. That's my second question.
Free cash flow for the first half from April to September was negative JPY 59.8 billion. During the first half, inventory buildup was very significant, and this was the reason for a negative impact of approximately JPY 170 billion on the cash flow. The impact was quite significant, and our free cash flow was positive JPY 88.1 billion in the first half of last year. It was negative JPY 59.8 billion in the first half of this year, resulting in a negative free cash flow.
And back in April, I made a comment that we hope to generate free cash flow of about JPY 220 billion for the full year. However, as I mentioned earlier, sales are expected to increase sequentially, particularly moving into Q3 and Q4. So accounts receivables are expected to increase significantly, especially towards the end of the year.
In projecting the free cash flow for the full year, we are looking at a free cash flow of approximately JPY 130 billion. As we have explained on previous occasions, when sales are increasing, the subsequent rise in working capital is usually quite large for Komatsu, and the increase in working capital has a negative implication on the cash flow. The impact is actually significant. And in the upcycle of the economy, free cash flow is not good. Conversely, when sales are declining, free cash flow will start to improve with some time lag. I think this is still the case today.
As for how we think about share buyback, I honestly don't know much about how the past management had communicated our policy. Having said that, our PER at the end of September was indeed around 11x. The basic idea of share buybacks is that we consider that option in a very flexible manner, and that has not changed. At the same time, it is absolutely paramount, for example, that the company's credit rating is not downgraded as a result of the share buyback. Also, we must have sufficient capital to execute share repurchase. And in that context, certain level of net DE ratio should be fulfilled before considering the option.
Then we are also monitoring the level of ROE. For instance, our ROE at the end of September was already over 12%, and we are also expecting to achieve over 12% for the full year. I believe this 12% is a good figure, well above the target of 10%. We also need to take into account of the stock price level. I have explained first market conditions. When looking at the financial markets, I am inclined to believe that the short-term economic outlook is reflected in the equity market. In such a market environment, I wonder how effective our share buyback program can be. So that is our view on share buybacks.
I should also note that we plan to pay an annual dividend of JPY 128 per share. The total dividend payment would amount to roughly JPY 120 billion. This is an unprecedented level, and the highest dividend paid in the past was about JPY 110 per share. The dividend scheduled for this year is considerably higher than that level. And considering the current situation comprehensively, we did not reach a conclusion to buy back our own shares at this point in time. I hope this answers your question.
We'd like to move on to the next question. Mr. Isayama from Goldman Sachs.
This is Isayama from Goldman. Can you hear me?
Yes, go ahead.
I want to go back to the earlier question on the costs, if I may. Full year figure was the first. But after Q1, I remember Mr. Horikoshi's comment that the total of the cost variance in containers cost will be about JPY 40 billion higher than the initial plan. If we add the cost increase in the updated container cost, the total would be about JPY 120 billion, which is a little higher than what we had expected. If you look closely, does this figure reflect cost improvement that is better than expected because the volume trend is good? Or is it not the case?
Also, if I'm not mistaken, Mr. Ogawa, President and CEO, mentioned at the beginning of the year that he'd like to better use supply chain in China and take other measures to deal with the situation. Is it fair to say that we can expect improvement in the second half and beyond? What I am trying to find out is when things will turn positive next year, I want to understand the measures you are taking, how effective those measures are to offset the negatives, what's working well and what's not and so on. I would especially appreciate an update on this cost variance.
The cost increase in the first half compared to the previous year was JPY 59.8 billion. In the second half of the year, the increase in cost is projected at JPY 43.2 billion. On a year-on-year basis, we are expecting a slight improvement in the second half. In total, the spiking cost will be JPY 103 billion compared to the previous year. As for the containers, as you know, the supply situation has slightly eased. We were projecting negative JPY 9.4 billion impact year-on-year for the first half and JPY 5.7 billion for the second half. So we do anticipate some improvement.
And after seeing the cost rise rapidly from the second quarter of FY '21, we had anticipated at the beginning of that year that coming into FY 2022, the cost inflation should stabilize to a certain extent. However, against our expectation, we detected signs of rapid rise in costs, particularly from Q2, and that is the reason for how we stand today. However, we expect the situation to moderate slightly from the third quarter onwards. Were you also asking about model changes and cost reduction?
Yes.
We have not received any updates on cost reduction measures, such as those in China. So I'm not sure how much progress has been made.
I have heard that Japanese steel is the most expensive in the world today. I'd like to know if your company is actually making efforts to reduce the cost of steel.
Yes. We have been quite active in crowd sourcing, especially as we have some excess capacity in our Chinese plants. The export from there to Indonesia for margin enhancement as a group, and such measures will always be considered. Our current numbers reflect such initiatives.
This is Ogawa speaking. I would like to make some additional comments. Japanese steel products are not the most expensive in the world. In the past, Japan used to offer the cheapest price for steel, but now a Japanese steel has risen considerably and lost a lot of its price competitiveness. And now the cheapest is Chinese steel. We expect the cost of raw materials to fall slightly from Q3 and the steel price is also projected to decline moderately. However, even when price comes down, Chinese steel products would be still cheaper. Therefore, we have made a major change in our direction since last year to cross-source our machine to other markets by utilizing the surplus production capacity in China.
We are now planning to crowd source approximately 3,500 units from China this year to Indonesia, Latin America and some parts of the United States, and this should prove to be effective in improving costs. And in the medium-term management plan, we aim to achieve cost improvement of JPY 50 billion over the 3 years from 2022 to '24, and we expect contribution from the crowd sourcing effort as part of cost improvement plan. However, Komatsu's basic concept is that cost improvement always comes with model changes. What I mean is that we will use the gain from cost improvement as a financial resource to enhance the product quality and competitiveness through the model changes. In that sense, the benefit of cost improvement will not be too visible on the P&L statement. That is how we have worked with cost improvement. And I hope that you will interpret it that way.
Excuse me, this is Horikoshi. And I'd like to correct my previous comment. Earlier, I said difference between consolidated and nonconsolidated, it was negative JPY 7 billion in the first half, but it's actually positive JPY 7 billion. The magnitude of the impact is similar for the full year as well.
Thank you for the clarification. And may I add another comment regarding the impact of price hike and increasing cost?
Mr. Horikoshi mentioned earlier, we should be able to cover for the surge in cost by raising the selling prices for the full year of FY '22. In our plan, we project the pace of the price hike to exceed the increase in cost from around the third quarter. In other words, price hike will be greater than the cost inflation. As I mentioned earlier, the cost increase will hit the P&L immediately, but the sales price increase will kick in as we take on new orders, which means that there will be some time lag.
However, I want to reiterate that the planned costs for the hike in selling prices to catch up with the cost increase in the third quarter.
Thank you for the additional color. Is it fair to assume that next year, the cost will come down? Can we expect that next year, half of the JPY 100 billion to roughly JPY 50 billion will be a positive impact stemming from cost to presale profit?
Well, steel price are going to be the most important factor. Of course, not just steel price, but also nonferrous metal prices. But I'd say that the profit swing will be subject to the commodity prices. And depending on the resource prices, the cost variance could potentially improve. Recently, logistics costs have been improving quite substantially. So I have a feeling that next fiscal year, it would be better than the current year.
That's very clear.
If I may, let me also add some comments. According to the analysis on the implication of ForEx fluctuation and cost variance, the cost variance includes the increase in cost due to the exchange rate, or in other words, the depreciation of the yen. In fact, the effect of weaker yen has some great impact on the foreign exchange variance and cost variance, respectively. So for instance, if the yen appreciates in the future, the cost will decrease, and this will be analyzed as part of the cost variance and mitigates the ForEx variance. I just wanted to mention that, that is also factored in our analysis.
That's very clear. My second question is very simple. When talking with the client for the order placement of mining equipment, are you already discussing about businesses for the middle of next year? In short, with the current backlog, do you have sales visibility for the whole of next fiscal year? Mr. Morishita comments seem to be quite positive for next year as well. And I thought it may be coming from the general confidence that sales for the next fiscal year is solid to some extent. I would appreciate it if you could simply tell us how much visibility you have for next fiscal year with the current order backlog.
I'm Morishita, I will take that question. As you can imagine, we don't have visibility leading all the way up to the end of next fiscal year. I think I made a comment about 3 months ago that we had a rough idea of how the business would stand for this year. We moved forward 3 months since then, so we are already receiving some orders through the fiscal '23 business. Of course, there are some differences depending on the product and the models, but we are not yet in a situation where we can be fully confident about the visibility for fiscal year 2023.
Thank you for the questions. I am truly sorry, but time is running out. So we'd like to take the last question. Mr. Miyagi from Mizuho Securities.
And my question is on the mining equipment. I would like to know if you can tell me the breakdown of sales or orders or some development data for the first half by different types of minerals.
Sure. And the breakdown will be based on the full year sales projection for FY '22, which we have updated in October. And as a percentage of the total mining, the thermal coal is 27%, and coking coal is 10%. So the total for the 2 different types of coal is 37%. For the other key minerals, copper accounts for 26%, and this remains pretty much unchanged from the original annual plan. What else do we have? Well, gold is 7%, and 12% is for iron ore, and the rest will be a combination of various minerals. And that will be the composition of sales by minerals.
How does that compare to last fiscal year just for coal?
The actual from fiscal 2021, thermal coal was 24%. So this year, it is up by 3 percentage points from 24%. Coking coal remains unchanged. So total coal exposure of 34% last year is going up to 37% this year. For the other minerals, there are no material changes.
Also of the total benefit of increasing the selling price, what is the contribution stemming from the mining business for this fiscal year? Do you have any data that you can share?
I'm sorry, what impact did you say? Can you repeat your question, please?
The impact of the price hike. For example, what is contribution to the JPY 115.3 billion from the mining business for the full year?
Yes, one moment, please. In terms of the breakdown of the JPY 115 billion, the contribution from the construction equipment business accounts for slightly over half or around JPY 67 billion or so, and the rest is mining. And please be noted that this will be the combination of the machine and the parts sales.
I see. Is it fair to say that there will be some time lag in realizing the benefit of the price hike given the differences such as longer lead time for the mining business? In that sense, would I be right in saying that the benefit of the price hike will be felt more evidently for the mining business next fiscal year?
Yes, in that context, with the price hike for the current business, the benefit for the mining equipment will be longer tail compared to the construction equipment.
Thank you. We have received other questions, but we have reached the end of the scheduled time. So we will now conclude the Q&A session and today's financial results briefing. Thank you very much for your participation today.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]