Komatsu Ltd
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Komatsu Ltd
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Good afternoon. I'm Horikoshi, Chief Financial Officer. Let me brief on the business results of the third quarter FY 2019.
Page 4 shows the highlights of the business results for the third quarter of FY 2019. Exchange rate was JPY 108.6 to $1, JPY 119.7 to EUR 1 and JPY 15.4 to CNY 1. Yen appreciated against all of dollar, euro and renminbi year-on-year. And although they are not listed here, yen appreciated against Australian dollar, South African rand and Russian ruble as well. Consolidated net sales were JPY 613.9 billion, down 12.4% year-on-year. Operating income was JPY 65.8 billion, down 31.1% year-on-year. Profit ratio declined to 10.7%, down 2.9 points. Net sales went down due to volume decline and FX negative impact. Operating income decreased due to volume decline and the geographic competition of sales, among others. Net income attributable to Komatsu Ltd. was JPY 45.2 billion, down 23.1%.
Page 5 shows segment sales and profits. Sales in Construction, Mining & Utility Equipment were JPY 546.4 billion, down 15.3% year-on-year. And its segment profit was JPY 53 billion, down 40.2% year-on-year. Sales declined due to volume decline and a negative FX impact, and profit declined due to volume decline and a change in geographic composition of sales.
Sales in Retail Finance increased to JPY 18.1 billion, up 8.3% year-on-year, and its segment profit increased to JPY 4 billion, up 15.6% year-on-year. Increased assets pushed up sales and profit.
Sales in Industrial Machinery & Others increased to JPY 53.2 billion, up 16.6% year-on-year, and its segment profit increased to JPY 5.5 billion, up 8.3% year-on-year. Expanded sales of machine tools boosted sales and profit.
Page 6 shows sales in Construction, Mining & Utility Equipment by region. Sales in Construction, Mining & Utility Equipment decreased to JPY 545.1 billion, down 14.9% year-on-year. While sales increased in Europe due to sharp decline in Asia, North America and Japan, total sales declined. With substantial decline in strategic markets in Asia, proportion of sales in traditional markets increased from 46% in the corresponding period of the previous year to 50% this year.
From Page 7, highlights of business results for 9 months in FY 2019 are shown. FX rates were JPY 108.9 to $1, JPY 121 to EUR 1 and JPY 15.7 to CNY 1. Yen appreciated against all currencies of dollar, euro and renminbi year-on-year. Although they are not listed here, yen also appreciated against Australian dollar, South African rand and Russian ruble.
Net sales were JPY 1.8274 trillion, down 9.5% year-on-year due to volume decline and the negative impact of FX. Operating income was JPY 207.8 billion, down 29.7% year-on-year due to volume decline and the geographic composition of sales. And profit ratio declined to 11.4%, down 3.3 points. Net income attributable to Komatsu Ltd. was JPY 135.2 billion, down 26.6%.
Page 8 shows segment sales and profits. Sales in Construction, Mining & Utility Equipment were JPY 1.658 trillion, down 10.2% year-on-year. And its segment profit was JPY 182.8 billion, down 32.9% year-on-year. Sales declined due to decreased volume and the negative impact of FX. And profit declined due to volume decline and a change in geographic composition of sales.
Sales in Retail Finance was JPY 52.9 billion, up 14.6% year-on-year, and its segment profit was JPY 10.8 billion, down 16.9% year-on-year. Sales increased due to increased assets, but profit declined due to the absence of reversal of allowance for doubtful accounts in China, which was recorded in the corresponding period of the previous year.
Sales for Industrial Machinery & Others were down 11.0% year-on-year to JPY 127 billion. And its segment profit decreased by 24.0% year-on-year to JPY 9.6 billion. Both sales and segment profit declined due to reduced sales of presses and machine tools for automobile industry as well as decline in sales of Excimer laser-related products for semiconductor market. I will elaborate on positive and negative factors of each segment later.
Page 9 is about sales by region for Construction, Mining & Utility Equipment. Sales of Construction, Mining & Utility Equipment were down 9.9% year-on-year to JPY 1.6544 trillion. While sales increased in Europe and Japan, significant decline was recognized in Asia, China and Africa, and this resulted in the total sales decrease. With the decline in Asia, China and Africa, which are our strategic markets, the ratio of sales in traditional markets increased from 45% to 50% year-on-year.
Page 10 describes causes of changes in sales and segment profit for Construction, Mining & Utility Equipment. As for sales, while selling price increase had a positive effect, sales decreased by JPY 187.8 billion year-on-year due to negative impact from reduced sales volume and foreign exchange rates. Regarding segment profit, we enjoyed selling price increase effect, same as sales, however, it decreased JPY 89.6 billion year-on-year. This was due to reduced sales volume, a change in the geographic composition of sales and increased fixed costs to make strategic investment for growth. Segment profit ratio was down 3.8 points year-on-year to 11.0%.
Page 11 is about Retail Finance. Assets increased from the previous fiscal year-end, mainly in North America and Europe. New contracts declined mainly in North America, China and Oceania due to declined sales of construction equipment. Revenues grew due to increased assets. Segment profit declined, mainly affected by the end of reversal of allowances for doubtful accounts in China, which was recorded in the same period of FY 2018.
Page 12 is about sales and segment profit for Industrial Machinery & Others. Sales declined by 11.0% year-on-year to JPY 127 billion. This was mainly because of reduced sales of presses and machine tools for automobile industry as well as sales decrease of Excimer laser-related products for semiconductor market. Segment profit was down JPY 3 billion year-on-year with JPY 9.6 billion. And segment profit ratio declined by 1.3 points year-on-year to 7.6%.
Now let me explain Page 33 in Appendix for orders received and sales of Industrial Machinery. Page 33 shows changes in book-to-bill ratio for industrial machinery. The graphs indicate the changes in the index obtained by dividing orders in value in the most recent 6 months by 6 months' sales. Komatsu Industries, shown at the top, sales and provide services for stamping presses and sheet metal machinery. The index was slightly lower than 100%, but its order intake environment remained unchanged from the second quarter. Komatsu NTC is engaged in design, manufacturing and sales of machine tools, such as transfer machines, machining centers and crankshaft millers as we are seeing stagnant order intake due to delayed investments in automotive industry. Its index was below 100%.
Please turn to Page 13 for the balance sheet. Total assets grew JPY 91 billion from the previous fiscal year-end to JPY 3.7292 trillion. While we could make progress in collecting account receivables, inventories increased from the end of the previous fiscal year due to increased product inventory, such as mining equipment. Also, as a result of adopting the new accounting standard, right-of-use assets under operating lease increased year-on-year in other assets. Interest-bearing debt rose JPY 117.6 billion year-on-year to JPY 1.0483 trillion. Komatsu Ltd. shareholders' equity ratio was down 1.5 points from the end of the previous fiscal year to 48.4%. Net debt/equity ratio increased by 0.05 points from the previous fiscal year-end to 0.48.
That is all for my explanation.
I am Imayoshi, General Manager of Business Coordination Department. I'll explain the outlook of FY 2019 and major market conditions. Let me explain the outline of projection for FY 2019. Business results up to the third quarter was slightly weaker than our projection as of October in terms of demand and volume, as mentioned. However, as yen depreciated compared with the projection, both of net sales and operating income were mostly within the range of our projection. Latest condition remains unchanged, and we didn't change the full year projection this time.
Page 16 shows the global actual and projected demand for 7 major products. Third quarter FY 2019 is preliminary estimate of the company. Demand presumably in the third quarter went down by 7% year-on-year. While demand remained steady in North America, it declined in other major regions. Since the external environment continues to be uncertain, we will keep close watch on demand trend. Annual demand projection remains unchanged from the announcement in October in the range from minus 8% to minus 3%. From the following page, I will explain the major market conditions.
Page 17 shows demand and projection in Japan market. Demand in the third quarter FY 2019 decreased presumably 20% year-on-year. Demand decreased mainly due to the impact on suppliers caused by Typhoon Hagibis damages and reactionary drop of prebuy demand in the second quarter before consumption tax hike.
On Page 18, I'll explain demand and projection in North America market. In the third quarter of FY 2019, demand in North America presumably increased by 6% year-on-year. Demand in construction equipment for construction and rental were firm despite weak demand in energy-related equipment, and it marks the growth for 11 consecutive quarters. By nation, America is firm, but demand in Canada has been weak with negative growth for 4 consecutive quarters. We have revised upward our projection of the full year demand from 0% to plus 5% as of October to plus 5% to plus 10%.
Page 19 shows demand and projection in Europe market. In the third quarter of FY 2019, demand in Europe decreased presumably by 6% year-on-year, while demand remained firm in major markets of Germany and France due to infrastructure-related projects. In the U.K., due to the uncertainty resulting from Brexit, demand has been slowing down. As weak macroeconomic indices continue, we'll continue to monitor demand trend closely.
Page 20 shows China market. Demand shows that foreign makers, in the third quarter of FY 2019, demand in China decreased by 10% year-on-year. And as I referenced, total demand of hydraulic excavators, including mini-shovels, by Chinese makers increased by 17% year-on-year. As for trade friction between U.S. and China, the agreement in the first round was concluded in the middle of January, but uncertain conditions will remain unchanged for some more time. Including the impact by the coronavirus during the sales reason (sic) [ by region ] after Chinese New Year, we will continue to monitor the demand trend closely.
Page 21 shows demand and projection in Southeast Asia market. Demand in Southeast Asia in the third quarter FY 2019 decreased presumably 23% year-on-year. In Indonesia, the largest market of the region, no significant changes have occurred in infrastructure investment, even after the launch of the second Joko administration, and the demand has been sluggish. As for mining equipment, due to weak thermal coal price and future uncertainties, investment appetite by customers was dampened and a substantial decline in demand continues. In major markets of Philippines, Thailand and Malaysia, we have not observed any clear sign of demand recoveries so far. Full year demand projection is revised from minus 20% to minus 15% as of October to minus 25% to minus 20% year-on-year.
Page 22 describes actual and projected demand for mining equipment. In the third quarter, global demand for mining equipment seems to have decreased by 25% year-on-year. Demand in Indonesia remained weak due to sluggish thermal coal price. In Africa, while demand for mining equipment was stable in southern part of Africa, demand was slow in other areas and this led to year-on-year decrease of demand. In CIS, declining demand is indicated due to decreased thermal coal price. Overall demand in other regions has been stable.
Now I'd like to cover Page 31 and 32 in Appendix to explain orders and sales of mining equipment. Page 31 shows changes of book-to-bill ratio for mining equipment. As you saw earlier, the graphs indicate the changes in the index obtained by dividing orders for new equipment in value in the most recent 6 months by 6 months' sales. Komatsu America, at the top, is engaged in sales and manufacturing of super-large dump trucks. Its order intake and sales continue to be strong, and the indices have continuously been over 100% most of the time. Komatsu Germany, in the middle, deals with sales and manufacturing of super-large hydraulic excavators. Its recent index was almost 100%. The indices for Komatsu Ltd., at the bottom, have continued to be below 100% due to weak demand in 100-ton dump trucks for Indonesia.
Page 32 shows changes of book-to-bill ratio for KMC mining equipment. Although its recent index is nearly 100%, orders from coal mining customers in North America are getting weak. We will continue to closely watch the development going forward.
Let me go back to Page 23 for sales of mining equipment. While sales in the third quarter increased year-on-year in Europe, the total sales declined by 15% year-on-year to JPY 235.4 billion due to decline in sales in Asia, Africa and Latin America. Excluding the impact of foreign exchange rates, it was 11% decrease year-on-year.
Page 24 shows sales of parts. Sales in the third quarter was down 9% year-on-year to JPY 141.4 billion. Excluding the impact of foreign exchange rates, it was a decline of 4%. Sales decreased due to weak demand in overhauls, especially for mining equipment parts. Still, overall, sales of parts have continuously been favorable and strong.
Lastly, let me explain Page 34 for promotion of Mining Equipment Platform business. In our new midterm management plan, promotion of Mining Equipment Platform business was identified as one of the management objectives and delivery of 380 AHS dump trucks by the end of FY 2021 was set as KPI. As of the end of December 2019, 218 AHS dump trucks are in operation in 10 mines in 4 countries worldwide. In November 2019, AHS dump trucks started operation in Carajas iron mine in Northern Brazil. 37 AHS dump trucks will be in operation by 2024. Also a new training center opened near the mine. By introducing AHS dump trucks, we will make additional contribution to improvement of safety and productivity as well as optimization of operation for our mining customers.
That is all for my explanation.
Thank you very much. Now we will move to Q&A session. The first question is from Mr. Saito of Nomura Securities.
I'm Saito of Nomura Securities. Do you hear me?
Yes.
First, I'd like to ask you about the impact by typhoon, which made the procurement from suppliers difficult. How much impact did you suffer on sales and profit?
There were almost no impact. There were minor cost of sending staff to support suppliers, but there were no sales decline and the relevant cost increase was negligible level.
Understood. I have 2 more questions. On Page 10, for segment profit. Negative factor of volume, product mix, et cetera, is shown as JPY 88.4 billion for 9 months. Would you show me the impact of volume alone and geographical composition as far as you can?
Yes, volume alone was JPY 54 billion. Cost difference impact was JPY 8.5 billion. Geographical composition and product mix was JPY 16.2 billion. And others, which were one-off factors, was JPY 9.7 billion.
I see. Substantial part is volume impact. But as for the other factors, their progress up to the third quarter seemed to be less than the proportional allocation of the annual projection. Well, is my understanding correct?
Give me a second. Geographical composition and product mix are almost as we projected as geographical composition was slightly worse, and the product mix was slightly better.
Understood.
Annual projection is not shown here. And as of October, we explained annual impact factors. And I said before, the profit projection for the full year remains unchanged. But as of today, volume negative impact will be larger by around JPY 20 billion compared with the projection in October. Almost equivalent positive factor in foreign exchange is expected to balance and we'll be able to cut back additional fixed cost by approximately JPY 5 billion compared with the projection in October.
So do you mean that you have net additional positive factor of JPY 5 billion?
No. Geographical composition will be worse and cost difference will be worsening, too, and they will offset the positive factor of fixed cost.
I see. One more question is on North America. On Page 6, sales in North America is shown as minus 9% in October to December. I understand the FX impact. But excluding the FX impact, it might be minus 5% or so. And this is also affected by the base number of the previous year. While Mr. Imayoshi mentioned on Page 18 that demand is firm, although demand doesn't necessarily move with the sales on a quarterly basis, but would you explain the situation where your sales were declining slightly in local currency, whereas demand was firm?
When you refer to Page 6, decline in North America is shown as JPY 14.5 billion. And excluding the FX impact, it was about JPY 8 billion. And the major cause of JPY 8 billion was mining equipment. As for KMC, the surface mining service business in the previous year was very robust and we see the backlash. And the underground mining equipment in this year was slightly weaker than the previous year. The decline is attributable to these 2 factors and not the construction equipment.
Sorry, let me ask one more question. As for Europe, on Page 19, demand is shown as minus 6%, showing decline from the first half. But sales increased double digit, as shown on Page 6. So finally, would you comment on this point?
There are no specific points to make here. But as Imayoshi mentioned before, U.K. is clearly worsening than before due to Brexit. And Germany and France were firm. I have no special factors to comment.
Next question is from Mr. Isayama of Goldman Sachs.
I'm Isayama of Goldman Sachs. The intention of the first and the second question is the same. Mr. Horikoshi mentioned before that sales volume negative impact will be bigger by JPY 20 billion for the full year compared with the projection.
First, as for sales in construction equipment in the third quarter, which geographical area did you observe the weaker results than your projection? Because in Japan, being hit by typhoon and others, your results were better than the other competitors and industry as a whole. And in China, you fared better than other foreign makers. And I wondered which area was weaker than anticipated. I checked figures and thought North America seemed to be slightly weak. But in construction equipment, where was weaker and where was stronger than projection?
I said before, almost no impact by construction in North America but there was a slight impact. And Asia and Japan affected us more. In Japan, I said that typhoon impact was almost negligible. But as for consumption tax hike, demand surge happened in the second quarter and the reactionary decline was observed. Because of the warm weather in winter, snow plow sales were weaker than expectation. Asia and Japan were weaker than our projection.
Second question is naturally about mining equipment after asking about construction equipment. Mr. Imayoshi said that overhaul was slightly weak. And I have some concern for the sales in parts and services. Historically, even when the market was down, sales in parts and services were rather stable. But compared with the previous year, sales in parts fell rather substantially. Combining KMC and commercial Komatsu, part sales have been slightly above JPY 100 billion for over 1 year. But in the previous quarter, it fared to JPY 98 billion, and it dipped further to JPY 93 billion. Is it simply due to the overhaul business? Or are there any other reasons? So following the previous question, would you comment on the area where there was a gap against your projection in Mining Equipment business?
Imayoshi speaking. As I explained on Page 24, there were 2 factors. One is mining, as mentioned. Parts and service mining was weaker than our projection. And in Indonesia, demand for overhaul continue to be weak or almost nonexistent. And it was weaker than our projection of weakness.
I wonder if there is any difference this time compared with the experience of the previous weak market. Is it simply because the business scale expansion, which shows are deep -- deeper than before? Or did KMC make parts and service business more volatile when the market weakens? Would you give us some colors on this?
Presumably, I think Indonesia is the biggest factor. In the previous year, new equipment sales were firm, and there was some demand for overhaul as well. But this year, new equipment sales are sluggish and customers are cutting back overhauls.
Do you think that other businesses, including KMC, are stable and the present level of parts and services sales will be sustained?
As I said before, in the third quarter, KMC's parts and services were slightly weak, but we'll continue to monitor closely.
Third question is on inventory. In the first half results meeting, you said that it was going well. When I refer to the cash flow statement, inventory seems to be declining. But in yen terms, the decline was not substantial. So would you update on the inventory, maybe as a qualitative comment, including those in North America and mining equipment? And would you comment on the needs to reduce production as well? This is my last question.
When you turn to Page 13 for balance sheet, inventories are up from the end of the previous fiscal year by JPY 62.4 billion. Excluding the FX impact, that increase is even bigger, JPY 86.8 billion. From the end of the previous fiscal year, the increase is mainly due to mining equipment. Inventories in construction machinery does not increase much from the end of the previous fiscal year. In this year, at the end of June, at the end of the first quarter, I said that we would like to reduce inventories. As of the end of December, excluding FX impact, decline from the end of September was only JPY 4 billion or JPY 5 billion. Toward the end of the fiscal year, inventories will be reduced rather drastically.
As for production, because most of the preworks are already complete, adjustment will not be so easy. It appears to be in line with our projection. Inventory, we did down and the sales will be falling if things go as we project. However, in China, this year's operational days after the Chinese New Year should be longer by 12 days than the previous year under the normal condition. We made the projection based on that. But now, due to the spread in coronavirus, it was ordered to extend holidays, the Chinese New Year holidays by 10 days. And with the absence of the benefit of longer operational days, our result might be short of projection. And we are concerned for the rise of inventories relating to this.
Mr. Horikoshi, I have one more question on mining equipment. I remember that there was some cancellation by customers, which led to some excess products. But production adjustment was almost complete, mainly in Ibaraki. Can I deem that there wouldn't be any more production adjustment? Is my understanding correct? I would like to have a confirmation.
Demand is dipping down, and we have monthly sales and production meeting and we are renewing rolling plan of production adjustment monthly. Not only at the end of March, it is possible to adjust production with the prospect of April to June, if in need. At this moment, we cannot deny the possibility of further production reduction.
Next question is from Mr. Sano of JPMorgan Securities.
First, I would like to ask about the profitability of mining business. Considering decline in Indonesia in the parts business, profitability would be declining year-on-year. I'd like to have you comment on this. That's my first question.
Profitability in Mining is declining. Mining business includes Indonesia where our business is contracting and where the profitability is high. So it is certain that mining profitability is declining.
Understood. Second question is about order ratio in Indonesia and BB ratio seems to be picking up slightly. Is there any sign of recovery in Indonesia from the third to the fourth quarter or further down the road?
The latest accurate order rate data is not available yet. But compared with the end of the second quarter, order rate is picking up. Presumably, customers are suspending old equipment and using new one to avoid overburden and to save cost.
Don't you see any sign of improvement as of today under such environment?
No, we don't see it. BB ratio seems to be picking up. But it is drawing closer to 100% gradually and I cannot see this sign of improvement. In the summer, coal price has been low, and the customer is keeping -- trying to save cash.
Finally, let me ask on China. Compared to the demand, your sales based on the local currency seems to be -- are growing more strongly. And at the end of the second quarter, President said that the latest results showed some recovery. Would you share with us as your current initiatives, competitive environment, including pricing, and other dynamics in the third quarter?
Regarding the demand in China, the situation seems to be getting better, including for domestic manufacturers than our estimation in October. Our measures are unchanged as we have explained so far. First measure is introduction of new 20-ton hydraulic excavators to new strategic markets in January 2019. We focused on fuel efficiency and robustness for them and a new extended warranty program introduced as well. Second measure is so-called assurance program 5, introduction of a new standard extended warranty program to cover 3 years or 6,000 hours. Since July, application of this program has expanded to all 20-ton equipment in addition to new products. Third measure is the strategic interest rate program for Retail Finance. That is to strategically lower the interest rate to promote sales. We started this program in May 2019. Fourth measure is Rental business started in Komatsu China. This is mainly for 20- to 30-ton hydraulic excavators. With such rental business at Komatsu China, we can establish recycling business as conducted in Japan with high-quality used equipment to compete against domestic equipment in China. These are the measures we are taking.
Next, Mr. Mizuno from UBS.
I am Mizuno from UBS. My first question is about Southeast Asia. I'd like to know the actual results in the third quarter and your outlook for the region. As for the actual results in the third quarter, I understand the sales in Asia decreased by half year-on-year as the sales decrease is larger than the decline of demand in the same period shown in the slide. I appreciate if you elaborate more on the background. Also, when do you expect to see recovery in Southeast Asia?
I am Imayoshi. Southeast Asia business is engaged in both mining and construction equipment. What I explained on Page 21 was the total number of units in demand. So it does not match the sales value in terms of 2 points. First, volume of mining equipment is significantly more than construction equipment and its sales account for a substantial part of sales, including its parts. This makes the discrepancy with sales. However, as I explained, customers are postponing their investment in mining equipment in a wait-and-see attitude and sales of parts are declining as well, including the overhaul.
In other countries than Indonesia, as I mentioned earlier a little, in major countries such as the Philippines, Thailand and Malaysia, we had expected demand recovery, but no signs of recovery have been seen yet. We will closely watch the situation, and it is difficult to say now that when we expect the demand recovery.
Okay. Let me ask my usual question. Can I assume there is no particular change in competitive environment?
We suppose there is no change.
Okay. My next question is about your thinking on profit on cost-based on your view on profit level. Regarding negative factors for the change of segment profit of Construction, Mining & Utility Equipment, I'd like to ask about fixed costs and cost variance. Profit decline was substantially reduced from that of the first half. They should take any new measures for it to address severer-than-expected business environment such as postponing to generate costs.
Fixed cost for 9 months increased JPY 6.4 billion year-on-year, as described on Page 10. If you look at the third quarter only, fixed costs decreased year-on-year. What we did was, considering the tough business environment, we are substantially saving on fixed costs. At the beginning of this fiscal year, in April, we estimated fixed cost would increase about JPY 12 billion, but we decided to contain them considerably. Currently, we exceeded the fixed cost by JPY 6.4 billion year-on-year, but we are trying to make the overrun smaller in the fourth quarter. I'd like you to understand that we are trying to improve production-related costs as well.
Okay. And do you continue your investment for growth?
The year-on-year increase of fixed cost is JPY 6.4 billion, but most part of them is used for new projects. Regular fixed costs are equivalent to the previous fiscal year. In the fourth quarter, the cost for projects of midterm management plan will increase so we will save on regular fixed cost further.
Next is Mr. Ibara, Morgan Stanley MUFG.
I am Ibara. On Page 27, comparing the second and the third quarter, segment profit decline is larger than that of sales and profit ratio is lower as a result. Earlier, in Mr. Saito's question, you already explained about year-on-year changes. But can you explain this profit decline from the second quarter to the third quarter?
Well, the second quarter profit was JPY 61.1 billion. And in the third quarter, it was JPY 53 billion. The factors for this difference of JPY 8 billion are worsened price and cost.
I noticed sales did not decline much, but segment profit did. For the fourth quarter, assuming you expect profit ratio will recover with increased shipment due to seasonality, can I assume price and costs were incidentally unfavorable in the third quarter, and they will recover in the fourth quarter?
As I said earlier, according to the current full year outlook, there are negative impact from sales volume decrease, and positive impact from foreign exchange rates are expected to be around JPY 20 billion each from the outlook in October as well as additional reduction of fixed costs by about JPY 5 billion, which will cover a decrease of JPY 5 billion from deteriorating geographic composition of sales and costs. So we expect the situation will be better in the fourth quarter than the third quarter.
So without changing the full year projection, just slight ups and downs are expected in each quarter. Am I correct?
Yes, that is correct.
Okay. Earlier, you used the word temporary for costs. In the third quarter results, are there any tentative cost items?
No major ones are included.
Okay. My second question is about KMC already discussed earlier. Can I assume it was not included in your outlook in October but it turned out to be worse than your expectation? Regarding Indonesia, it is easy to understand that you had expected poor results, and the results were even worse. As Mr. Imayoshi mentioned earlier that you would watch the development more carefully going forward, I'd like to know if these issues became visible in the third quarter or you had already been aware of this issue. Can you share your view on that?
We do not expect the performance of KMC will be worse than our expectation in April or October.
Then although you mentioned both KMC and Indonesia earlier, can I assume Indonesia has a larger impact in terms of value?
I am Imayoshi. We do not have precise breakdown for the 2. But for the 3 months of the third quarter, performance result of KMC was worse than expected. On the other hand, what I explained at the book-to-bill ratio was that its order intake situation is slightly unfavorable.
I see. My last question is about the novel coronavirus infected pneumonia. I'm afraid what you can say now is limited as their operations have not resumed yet, but I'd like to know about your current plan for resuming operations. And I think it's less likely, but if manufacturing in China continues to be difficult, is it possible to affect operations in other regions or such a situation can be fully supported by other locations? Can you share your current situation and measures you are taking as much as you can disclose?
As explained earlier, following the instruction by the Chinese authority, we extended the holidays until February 9, despite the Chinese New Year was originally scheduled to end on January 30. To be honest, we have no idea how this is going to affect our operations. Did I answer your question?
Am I correct in understanding that product shipped from your manufacturing sites in China to other overseas locations?
The number of product shipped from China to, for instance, the U.S. is very small in the first place. This is why we explained we did not have to suffer the impact from the tariff hike imposed on Chinese products by the U.S., so we do not estimate significant impact on operations in other countries due to the measure this time.
We are running out of time. So I'd like to take the last question. Next is Mr. Sasaki from Mitsubishi UFJ Morgan Stanley.
I am Sasaki from Mitsubishi UFJ. My first question is about your thought on the fourth quarter. In the earlier question, you said you would adjust inventory and reduce fixed costs. In the fourth quarter, are there any specific regions or products you're expecting recovery from the third quarter?
I am Imayoshi. As I explained at the beginning, in the third quarter, there were some regions in which demand or sales were worse than expected. However, I said, as of the end of January, there is no change in the situation, and we do not expect changes in February and March, although nobody knows what is going to happen for sure. As Mr. Horikoshi explained, in the fourth quarter, the situation will continue to be worse than our original expectation in terms of volume, but that will be offset by the effect of exchange rates. We do not have any thoughts specifically about regions.
Am I correct if I understand that external environment will not change significantly, foreign exchanges rate and fixed costs will positively affect earnings and the financial results of Q4 will recover from Q3?
Your understanding is correct.
Lastly, let me ask a simple question about your subsidiary, Gigaphoton. According to the financial results announcement by semiconductor equipment manufacturers in Japan and the U.S., they expect their market will make substantial recovery in 2020. Do you expect a significant change in the market for Gigaphoton, especially in the outlook for 2020? Do you see any signs of recovery? I appreciate if you can share your thought on it.
I'm afraid I cannot see clearly about what is going to happen in 2020. But as you know, Gigaphoton makes semiconductor light source for semiconductor equipment. It is true that the demand for the semiconductor equipment is growing recently. On the other hand, many of our customers are memory makers. And as the price of memory is declining, in a sense, the demand for Gigaphoton will depend on the memory price. For this fiscal year, memory price has not risen as expected and customer investment in semiconductor equipment is not growing. Therefore, our outlook is weaker than the initial estimate for now.
Can I assume you are seeing some signs of recovery for memory?
I cannot definitely say so.
We have received some more questions, but let me close the Q&A session here.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]