Komatsu Ltd

TSE:6301

Earnings Call Transcript 2021-Q3

[Takeshi Horikoshi, executive]

I'm Horikoshi, CFO of Komatsu. First, let me explain about the current status of the impact of COVID.

First, I will explain about the impact on our operations as well the impact on production. We explained that the plans were under normal operation at the result announcement at the end of October. Despite the fact that there are some areas that COVID is spreading again, all our plants are operating normally. In some regions, there are issues about the shortage of containers, and this has some influence on production. However, no impact has been seen to our sales activities and performance.

Next is about the impact on sales and service. Looking at the operation conditions at the sites using our KOMTRAX data, same as-usual conditions have continued in many regions since the second quarter. There are some regions that are under lockdown due to COVID spreading again, but it has not had a major impact on the current operating conditions. On Page 28, there is information about the status of each major market, so I will use this page to explain in more detail.

Page 28. This page shows the trend of the daily average operating average in major markets in KOMTRAX. On the left is a situation in major European countries.

Europe saw a resurgence of COVID cases and went into lockdown, but no major change is seen in operating hours. On the right is the status of other major regions. No major change is seen in Japan, U.S.A. and in Indonesia. In some areas such as India and Peru, operating hours dropped sharply temporarily due to the spread of COVID but has gone back to the normal level and staying at that level now.

Going back to Page 4. As for sales activity, some regions are conducting businesses through teleworking. But in many regions, they are transitioning to regular working or working with some restrictions. Service activities such as parts warehouses and service workshops is, in general, regular working situation.

Next, I would like to give you the results and outlook of demand for fiscal year 2020. On the left is a graph showing the growth rate for the demand for our 7 major products against the previous year and compares that to the projection announced in October and the current results. China saw a 30% increase in the third quarter and went over the October projection. In other regions besides China overall, the results were positive, exceeding the October projection.

Going to the graph on the right-hand side. This is a graph for Traditional Markets and Strategic Markets, excluding China, comparing the projection announced in October and the current results. In Traditional Markets, the minus in Europe and North America shrunk. Japan showed a positive number as it bounced back from the previous year's impact of the consumption tax hike and the impact of typhoons. Overall, Traditional Markets exceeded October projection.

In Strategic Markets, excluding China, markets such as Southeast Asia and India exceeded the October projection. In our announcement in October, we were anticipating that in markets besides China, demand will turn positive year-over-year early into fiscal 2021. Actually, this happened in this quarter. However, we have to take into account the orders that should have shown up in the first quarter and second quarter have been pushed back, so we will take a cautious stance.

This is the overall situation of demand. As for the demand for mining equipment, it has not been affected by COVID. However, as I will explain later, this business is still below last year's level. So total Komatsu sales is still facing a tough situation.

As for the fourth quarter, it is difficult to predict what will happen as COVID has started to spread again in various countries, including Europe and North America, and it is difficult to foresee what will happen. We will continue to observe the demand trend and continue business further engaging in our agile structure.

Going to the business results for the third quarter. On Page 6, I will explain the highlights of the third quarter. The exchange rate was JPY 104.9 to the dollar, JPY 123.4 to euro and JPY 15.7 to renminbi. Compared to the previous year, yen appreciated against the dollar and depreciated against euro and renminbi. Although it is not shown in the slide, yen was weaker against the Australian dollar and stronger against South African rand and the Russian ruble.

Net sales for the third quarter was down 9.5% year-over-year at JPY 555.5 billion. Operating income was down 28.3% at JPY 47.1 billion. Profit ratio went down by 2.2 points to 8.5%. Net sales declined due to volume decrease and the negative impact coming from foreign exchange. As for the operating income, although there were some positive impacts coming from the reduction of fixed costs due to the negative impact of volume decline in foreign exchange, it decreased. Net income went down by 36.6% to JPY 28.6 billion.

On Page 7, I will explain about the segment sales and profit. Net sales for the construction, mining and utility equipment went down by 7.5% year-over-year and was JPY 505.2 billion. Segment profit decreased by 28.8% to JPY 37.7 billion. Sales declined due to the negative impact coming from the exchange rate and the reduced sales of mining equipment and other factors. Although the reduction of fixed cost had effect for the profit, segment profit overall decreased due to the reduced volume and the impact of exchange rates.

Net sales of retail finance went down by 7.6% to JPY 16.7 billion. Segment profit decreased by 14.6% at JPY 3.4 billion. Both sales and profit declined due to the decrease of new contracts, mainly in the North American market. Net sales of industrial machinery and others went down by 30.4% year-over-year and stood at JPY 37 billion, while segment profit decreased by 12.7% at JPY 4.8 billion. Both sales and profit declined due to the spread of COVID-19. Demand for presses and machine tools in the automobile industry decreased as well, and the installation of machinery was delayed.

Page 8 is sales for construction, mining and utility equipment by region. Sales in this segment went down by 7.5% year-over-year to JPY 504 billion. Sales dropped sharply in North America, Asia, Europe and Latin America. Sales declined in Traditional Markets such as North America and Europe but went up in Strategic Markets such as Oceania, leading to the ratio of Traditional Markets to go down to 47% from the 50% last year.

Page 9 shows the highlights of business results for 9 months. Exchange rates were JPY 106.4 to a dollar, JPY 122.1 to euro and JPY 15.4 to renminbi. Yen appreciated against dollar and renminbi and depreciated against euro year-on-year. And yen appreciated against Australian dollar, South African rand and the Russian ruble, though they are not listed here.

Consolidated net sales declined 17.2% year-on-year to JPY 1,513.3 billion. Operating income dropped 48.3% year-on-year to JPY 107.5 billion. Operating income ratio declined 4.3 points to 7.1%. Consolidated net sales declined affected by adverse impact of foreign exchange rate in addition to the demand drop by the coronavirus pandemic. Operating income decreased also by volume decline and adverse impact of foreign exchange rate. Other income increased JPY 13.7 billion to minus JPY 4.1 billion due to the decrease in interest payment and the gain on foreign exchanges. Net income attributable to Komatsu Ltd. dropped 51.2% to JPY 65.9 billion.

Page 10 shows segment sales and profit. Net sales of construction, mining and utility equipment declined by 16.7% year-on-year to JPY 1,381.7 billion. Segment profit dropped 50.8% to JPY 89.9 billion. Sales were adversely affected by foreign exchange rate and the sales drop, mainly due to the coronavirus pandemic. Profit decreased due to volume decline and adverse impact of foreign exchange rate.

Revenues of retail finance decreased 6.4% year-on-year to JPY 49.5 billion, and segment profit dropped by 25% to JPY 8.1 billion. Revenues decreased in new contracts mainly in North America, and profit decreased due to extension of payments and revaluation of vehicles after lease use in addition to the decreased net sales.

Net sales of industrial machinery and others dropped 19.7% year-on-year to JPY 102 billion, and segment profit decreased by 6.7% to JPY 8.9 billion. Both sales and profit decreased mainly due to declined demand for presses and machine tools in the automobile industry and delayed installation of machinery affected by the coronavirus pandemic.

Page 11 shows sales of construction, mining and utility equipment by region. Sales decreased by 17.3% year-on-year to JPY 1,368.4 billion. Sales dropped sharply in North America, Asia, Europe and Latin America, affected also by the coronavirus pandemic. While sales in Traditional Markets of North America and Europe declined, sales in Strategic Markets in China and Oceania increased, and that resulted in the proportion of Traditional Markets' decrease from 50% to 48% year-on-year.

Page 12 shows causes of difference in sales and profit for construction, mining and utility equipment. Sales decreased by JPY 276.3 billion year-on-year as adversely affected by reduced sales volume and foreign exchange rates. Segment profit dropped by JPY 92.9 billion year-on-year due to advanced impact by reduced sales volume and foreign exchange rates despite the positive impacts by reduced fixed cost. Segment profit ratio was 6.5%, down 4.5 points year-on-year.

Page 13 shows retail finance. Assets decreased mainly affected by foreign exchange rates. New contracts dropped sharply in North America due to reduced sales of construction machinery under the coronavirus pandemic. Revenues decreased mainly due to reduced new contracts, and segment profit decreased mainly due to declined revenues and the revaluation of vehicles after lease use. Affected by the coronavirus pandemic, we received the request from part of clients to extend payment, mainly in the first quarter, and responded after examining the condition, but now the situation settled down.

Page 14 shows sales and profit of industrial machinery and others. Sales declined 19.7% year-on-year to JPY 102 billion. Sales of Excimer laser-related products for semiconductor market were firm, but both of sales and profit decreased due to a declined demand for presses and machine tools in the automobile industry as well as delayed installation marginally affected by the coronavirus pandemic. Segment profit declined 6.7% year-on-year to JPY 8.9 billion, and segment profit ratio was 8.8%, up 1.2 points.

Let me explain the orders and sales of industrial machinery shown in the appendix on Page 36. Page 36 shows book-to-bill ratio for industrial machinery. This chart shows the index of orders for the 6 months divided by the sales for the 6 months. Komatsu Industries' sales and provided services of press and sheet metal machinery, subdued or delayed the capital investment and maintenance service works in automobile and the components manufacturers affected by the coronavirus pandemic and delayed installation on the side of the foreign clients due to travel restrictions pushed down the order level, and the ratio stayed below 100%.

Komatsu NTC covers design manufacturing and the sales of machine tools, including transfer machine, machine center and the crankshaft processing machines, negatively affected by the subdued or delayed capital investment and maintenance service works in automobile and components manufacturers, as Komatsu Industries' orders and sales have been sluggish, and the latest ratio was below 100%.

Page 15 shows consolidated balance sheet. Total assets decreased JPY 60.6 billion from the previous year-end to JPY 3,592.9 billion. Inventories increased at the end of June as sales declined more than the production adjustment affected by the coronavirus pandemic, but they decreased following the second quarter. Inventories will be reduced further toward the end of the fiscal year.

Account receivable declined with reduced sales. Interest-bearing debt decreased JPY 95.9 billion from the previous year-end to JPY 916.3 billion. Shareholders' equity ratio increased by 1.6 percentage points to 50.1% from the previous year-end. Net debt-to-equity ratio was 0.39.

This concludes my presentation.

Next, Imayoshi will explain about the outlook of fiscal year 2020 business results.

[Takuya Imayoshi, executive]

This is Imayoshi, General Manager of Business Coordination Department. From this page, I will explain our full year outlook and the situation of the major markets.

Page 17, I will use this page to explain about the outline for the projection of fiscal year 2020. Compared to our projection announced in October, the third quarter results were above or in line with our expectations for both sales and profit due to the fact that demand for construction equipment was strong. Under the circumstances, we will not change our full year outlook.

Although there has not been an impact on the operation yet, there is a risk as COVID is spreading once again. We will carefully watch the operation status of machines and the demand trend of parts and services.

Starting from Page 18, I will explain about the demand for the 7 major products. This slide illustrates the demand trend of the 7 major products, including mining equipment. Figures for fiscal year 2020 third quarter are preliminary numbers using our own data. As the situation of the spreading of COVID differs between China and other markets, from this presentation, we are showing some growth rate numbers of all regions, excluding China.

Demand volume for fiscal year 2020 third quarter is assumed to be 8% above the previous year. In the markets excluding China, this number is plus 5%. For fiscal year 2020 overall, we are reviewing our demand outlook to minus 10% to plus/minus 0% against the previous year. Although there are differences among regions, demand recovery seems to be happening earlier than we had predicted in October. However, there are some regions that are under lockdown due to resurgence of COVID, so we will continue to observe the demand trend carefully.

From the next page, I will explain the situation at major markets. Page 19 is about the demand trend in the Japanese market. It is assumed that the demand in the third quarter went up by 25% year-over-year. Demand was sluggish the same period last year due to the consumption tax hike and the impact of typhoons, leading to the substantial increase for this year. We have revised the outlook for demand for fiscal year 2020 to minus 5% to 0% as steady demand is remaining in the civil engineering sector, and there are signs of recovery in the private sector construction as well. Average operating hours per month for KOMTRAX was plus 6% for December. This was because of the difference of the number of operating days, and last year's snow close did not operate that much because of a warm winter.

Let me explain about the demand trend for the North American market in Page 20. Demand for Q3 is assumed to have gone down by 4% year-over-year. Although the demand in the energy sector and rental is low due to the low crude oil prices, since June, after the economic activity is fully resumed, demand is beginning to recover, mainly in the construction and housing sectors, and the margin of decline has started to shrink.

We have revised our projection for the full year to minus 15% to minus 10%. We assume that demand recovery will continue, but as some states are restricting economic activity due to the resurgence of COVID, we will continue to observe the situation carefully.

Average operating hours per month for KOMTRAX was plus 3% year-over-year in December. Operation in the energy sector and rental is still sluggish, but the operation level has gone back to the pre-COVID levels in other sectors.

Page 21 explains about the demand trend in the European market. We assume that the third quarter demand was down 9% year-over-year. Although customers are refraining from purchasing new equipment as the outlook is unclear, with infrastructure construction resuming, demand has started to recover in countries such as in the U.K., France, Germany and Italy.

We will revise our full year outlook to minus 20% to minus 15% year-over-year. We anticipate that the recovery trend will continue. However, although there is no impact on the business currently, there are countries imposing lockdowns as COVID has started to spread again, so we will cautiously observe the situation going forward. Average operating hours per month for KOMTRAX was plus 4% year-over-year in December.

Page 22 is about the Chinese market. The demand numbers are for the foreign manufacturers. It is assumed that the third quarter demand increased by 30% year-over-year. Thanks to the public investment by the government, demand continues to be strong. For your reference, the total demand for mini shovels in Q3, including Chinese domestic manufacturers, went up by 65% year-over-year. We are revising our outlook for the full year to plus 35% to 45% year-over-year. Average operating hours per month for KOMTRAX was plus 3% year-over-year in December.

Page 23 shows demand dynamics in Southeast Asia. Demand in the third quarter FY 2020 was plus 1%, almost flat year-on-year. In the largest market of Indonesia, demand was minus 15%. With the progress in budget execution of public investment, demand contraction -- in construction sector moderated substantially, and the agricultural sector increased price of palm oil supported demand to recover. In Philippines, demand continued to stay weak, affected by coronavirus pandemic. But in Thailand and Malaysia, demand is picking up.

We revised our projection of FY 2020 demand to minus 30% to minus 20% year-on-year. Demand recovery is expected to continue in Indonesia, Thailand and Malaysia, but we continue to monitor conditions closely as in some regions with the spread of coronavirus pandemic, regulations have been tightened. Monthly average operating hours of KOMTRAX in Indonesia was plus 7% year-on-year in December.

Page 24 shows demand dynamics of mining equipment. In the third quarter FY 2020, global demand declined by 8% year-on-year. Due to sluggish price of crude oil and coal, demand declined mainly in North America and Indonesia. Demand projection for FY 2020 remains unchanged as minus 20% to minus 10% year-on-year. Despite latest trending up price of crude oil and coal, we project that demand in North America and Indonesia will continue to stay weak. In other regions, demand has been firm.

I'd like to explain the orders and sales of mining equipment with the appendix on Page 34 and 35. Page 34 shows book-to-bill ratio for mining equipment. This chart shows index of orders for new equipment in the 6 months divided by sales in 6 months.

Komatsu America manufactures and sells ultra-large dump truck. Demand for copper and iron ores have been firm, and the ratio was over 100%. Komatsu Germany manufactures and sells ultra-large hydraulic excavator. With some fluctuations due to small unit numbers, latest ratio was below 100%. As for Komatsu Ltd., 100-ton class dump truck for Indonesia has been affected by sluggish demand, but due to orders in Russia and Australia, latest ratio was over 100%.

Page 35 shows book-to-bill ratio for KMC mining equipment. Mining equipment demand for surface has been firm for copper, but orders for underground continues to be weak. With sales declines, ratio was below 100%.

Page 25 shows sales of mining equipment. For third quarter FY 2020, sales decreased by 15% year-on-year to JPY 200.1 billion. Excluding the FX impact, they declined 11%. Due to sluggish price of crude oil and coal, sales decreased mainly in North America and Asia.

Page 26 shows sales of parts. For the third quarter FY 2020, sales of parts decreased 12% year-on-year to JPY 124.1 billion. Excluding the foreign exchange impact, sales declined 9%. As for construction machineries, with the resumed economic activities, operating hours have been coming back to normal level in many regions, and the parts sales have been recovering. But mining equipment sales went down with sales declines in mining equipment affected by coal and crude oil price falls and clients' overhaul being put off due to investment control.

Finally, from Page 37, let me share with you our major activities. Firstly, ESG efforts of Komatsu. Komatsu was continuously selected as a component of the Dow Jones Sustainability World Index. Komatsu has been identified as Climate & Water "A" List company by CDP.

Page 38. Komatsu has signed a collaboration agreement with Proterra Inc. of the United States to receive the supply of Proterra's lithium-ion battery system to electrify small and the medium-size hydraulic excavators. Proof-of-concept test will start in 2021, and we aim to enter commercial production in 2023 to '24.

Finally, Page 39. Komatsu will celebrate its 100th anniversary in May 2021. The 100th anniversary website has been preopened in Komatsu website. We will deepen communication with stakeholders in FY 2021, the 100th anniversary.

That concludes my presentation.

[Operator]

From Nomura Securities, Mr. Saito, please.

[Katsushi Saito, analyst]

So this is Saito of Nomura Securities. So I'm looking at Page 12, and this is a question to Mr. Horikoshi. The difference in volume and product mix and others, would you please break it out between the pure volume mix and the product mix? So if you have the data, can you give me the data only for the third quarter? I think it's about JPY 20 billion or JPY 19.7 billion for the third quarter for the volume and product mix. Can you break this out?

[Takeshi Horikoshi, executive]

So for the third quarter alone, that means that 2019 result was JPY 53 billion, and 2021 outlook is JPY 37.7 billion. So out of which, the volume -- the pure volume mix difference is minus JPY 10.5 billion. And the cost difference is minus JPY 3.2 billion. For the product or market mix difference, minus JPY 0.5 billion. And others, that will be the year-over-year difference of the realized portion of the unrealized inventory gains, that would be minus JPY 2.8 billion.

[Katsushi Saito, analyst]

So in terms of the difference between consolidated parents, well, in the third quarter, it's marginal. It's only JPY 0.2 billion for the third quarter. How about the remainder?

[Takeshi Horikoshi, executive]

That will be others. That will be up JPY 3 billion. It's about JPY 2 billion, about JPY 2.5 billion, that is. So on the second half plan, if you look at the second half plan, the unrealized gains will be larger. The difference between the consolidated parent, well, because -- that is because you have reduced the operating ratio of the parent side, this is why this number came up. So if the situation is the same, if the same thing doesn't happen the next year, negative here would turn positive, well, let's look at the intermediate inventory. It's JPY 300 billion. If it increases, it will translate to a loss. If it goes down, then it translates to a gain.

Maybe you didn't ask about this specifically. In terms of the inventory assets, if you look at our balance sheet, so it has been decreasing in line what we have announced as a target for the end of March. So towards the end of March, we'll be reducing the same amount as we have in the third quarter.

So for the fourth quarter, the unrealized gains on inventory will come up. But last year, fiscal year 2019, the fourth quarter, we reduced inventory a lot. Compared to that, so realization of the unrealized gains of inventory assets will not be the same level.

So the first half was a negative JPY 10 billion for the consolidating parent mix. If next year things go back to normal, then it will go back to normal.

[Katsushi Saito, analyst]

Understood. Yes. My second question is I'm looking at Page 31. That is the quarterly sales by region. So year-over-year, it is true that it has gone down. But compared to the first quarter and the second quarter, it has gone up, specifically for the JPY 504 billion within this. For the regions that I'm going to mention is it for the mining? Or is it for the construction equipment? Well, can you give me a rough idea whether from Horikoshi-San or Imayoshi-San? Well, we have seen -- I see the recovery in Africa, Oceania, Asia, CIS, Latin America, North America.

Mr. Imayoshi said that the construction equipment was better than expected, but markets like Oceania and Africa, maybe it's not coal, but there's a lot of mining. So against the previous year and the quarter, the level has recovered. So I want to have some more qualitative information about these markets. So if it's mining, what type of demand is good? What -- where is the construction equipment demand is coming back? Can you give me some color?

[Takeshi Horikoshi, executive]

So for the third quarter situation, so if you look at the year-over-year situation, so looking at Page 11, so JPY 286.6 billion. Well, maybe Page 8 will be better for me because I'm looking at October to December situation. So it's going -- went down by JPY 41 billion, if you look at Page 8. But the actual impact, well, you have to look at the foreign exchange impact as well. So the actual decline was JPY 26.9 billion, out of which most of it is coming from the mining business.

For the construction equipment, it is about the same as last year. So in terms of the mining business, the markets that went down most is not North America, Latin America and Asia as well. So for the third quarter, compared to what we announced in the October projection, the third quarter situation was the same as the projection of October for mining. For the full year outlook, you can see that in the appendix, in terms of October, I think it's the same level.

The over achievement in the third quarter was mostly in the construction equipment business, and this will continue into the fourth quarter.

[Katsushi Saito, analyst]

So the construction equipment, can you give me some color by region? You have talked about overall demand, but can you give me some color about the regional situation?

[Takeshi Horikoshi, executive]

So this is the by-market situation for the construction equipment. Well, North America under achieved the most because -- JPY 10 billion worth of underachievement. Well, the North America, if you look at Page 8, the underachievement or the decline is JPY 20.3 billion is large, and this is not in line with the demand at all. The reason is that half of this is coming from the mining sector, and the remaining half is about JPY 10 billion. But this is because we have reduced the inventory at the distributors.

Last year, I have been saying that up into the second quarter, we have reduced inventory to the distributors in North America until the second quarter. And this third quarter, that didn't change that much. But this year, the third quarter, we have reduced inventory a lot. That is the reason why we saw the impact. And the wholesale business has declined because of this. That is why the demand trend and the sales trend does not match. But if you exclude this factor, basically, it's in line.

[Katsushi Saito, analyst]

So this -- the reduction of the distributors' inventory at North America is more or less done?

[Takeshi Horikoshi, executive]

Well, for inventory, the less the better, so we will continue this activity.

[Operator]

Next is from Mitsubishi UFJ Morgan Stanley Securities. Mr. Sasaki, please.

[Tsubasa Sasaki, analyst]

So this is Sasaki speaking. I have 2 questions. First is about the mining equipment. So you have not changed your projection. If you look at the sales, it is about -- JPY 200 billion has recovered. So quarter-over-quarter, it has recovered about 10%. So I would like to know the situation by minerals, by region. Specifically -- so specifically for minerals, coal and noncoal minerals, can you divide that? So can you explain why the mining equipment recovered in the third quarter? So Indonesia and KMC, I think the business is struggling. Can you give you some more color about this?

[Takuya Imayoshi, executive]

So if you turn to Page 24, if you look at -- I explained about the demand, if you look at on the quarterly situation, the first quarter was minus 3%. The third quarter was minus 8%. So in terms of the volume of mining equipment, it's smaller. So it's a bit lumpy, but the negative range is declining.

So if you look at the orange color portion, Asia and Indonesia is included here. In Indonesia, things are unchanged. The demand is very, very slow. This is issue about the coal prices, and the market continues to be very, very stagnant. But by minerals, what's growing is iron, copper and gold, specifically markets like Australia, Russia, Latin America. These are the markets where the resource majors have a position. So these minerals and markets are recovering.

[Tsubasa Sasaki, analyst]

So if you can, can you give me the ratio of how much machines are idle in Indonesia?

[Takuya Imayoshi, executive]

In the second quarter, I said that at the end of September, it was minus 26%, and it was increasing. But at the end of December, it is minus 20%. So we are seeing a slight recovery. There is issue between Australia and China, and China is imposing a restriction of the import, and meaning that Indonesia is exporting more to China, and the coal production is increasing because of this.

[Tsubasa Sasaki, analyst]

So for the parts for the mining equipment, it tends to be struggling because overhaul of Indonesia and KMC is impacting this business?

[Unknown Executive]

Yes. That's the correct understanding. Specifically in Indonesia, the overhaul business -- because the CapEx appetite of the customers is not high, they're very, very cautious about that.

[Tsubasa Sasaki, analyst]

My second question, changing track, is about how I should think about the profitability of your business.

[Unknown Executive]

The third quarter profitability, if you look at the construction equipment, is 7.5%. Have recovered to about 7.5%.

[Tsubasa Sasaki, analyst]

So if you compare the mining equipment, the construction equipment, I would like to hear about the breakdown between these 2. I assume that the mining equipment have a double-digit margin, meaning that the construction equipment should be about 5%. And on top of that, the construction equipment margins has been recovering at the major markets. But compared to the previous level, maybe it has not recovered to that level. You talked about the inventory. So the 7.5% margin, what is the breakdown of that? And I assume that the construction equipment margin is still low. Could you explain about the reason behind this?

[Takeshi Horikoshi, executive]

This is Horikoshi speaking. So the margin of the mining business is higher than the construction equipment. And I think I have been explaining about this every quarter. So the margin is high for the mining equipment, and the margin is lower for the construction equipment. And the numbers you just mentioned is close to the situation.

The reason why the construction equipment has a lower margin is that -- the major reason is that -- well, this is true for the mining business as well. But for the construction equipment, markets like Indonesia and Russia, these markets have a high level of gross profit. So if Indonesia is at the bottom, meaning that the margin will go down.

[Tsubasa Sasaki, analyst]

So the reason for the low margin of construction machinery even with some recovery will be, first, inventory is controlled and utilization is low. And as you mentioned, the volume in strategic markets such as Indonesia has not yet fully recovered. And due to the regional mix, margin of construction machinery remains still low. Is my understanding correct?

[Takeshi Horikoshi, executive]

Yes. I talked about the current American dealers. In the case of construction machinery, compared to October, sales have been trending up, and its recovery is faster than mining equipment. But in mining, margin is low, recovery is lower compared to the construction machinery, and that is one of the reasons why overall margin doesn't recover drastically.

[Operator]

Next question is from Mr. Minamihata of Nikkei.

[Ryuta Minamihata]

Minamihata of Nikkei speaking. My first question is about China. You said that demand for the full year is up 40%, and it is up 30% only in the third quarter. But your sales is, in the third quarter, up 1% or so. How do you view the situation? And compared to the strong recovery of demand, when I look at the KOMTRAX, although it is in the positive range, but it doesn't show the equally strong operation as a demand. How should I see the gap? This is my first question.

[Unknown Executive]

In China, as we mentioned, demand only in the foreign makers market was up 30%, and our sales didn't grow as much as shown in the regional data. When you see the year-on-year comparison in the third quarter of the previous year, we had aggressive sales promotion, and this year reactive downturn from the previous year's massive effort was observed.

As for the machinery operation, although there are some fluctuations, in this third quarter, it was positive. Given the increase in population, we understand that the positive figure indicates that construction workload is increasing. Does that answer your question?

[Ryuta Minamihata]

As the demand recovery is so rapid in China, some have concerns for the development after Chinese New Year. What's your take?

[Unknown Executive]

For the sales we achieved so far, we understand that they are backed by the real demand, and the machines are operational. But looking at the launch of projects and the machinery sales industry, which grew too sharp, we think that we need to monitor the situation closely, especially after Chinese New Year.

[Ryuta Minamihata]

Understood. Secondly, according to the monthly report for December, operational hours were positive in all 5 disclosed areas. In Indonesia, it was positive after 6 months, and in North America, it was after 1 year. Latest hydraulic excavators showed a sign of recovery. And how long does it take to see the full-fledged recovery after the recovery in operating hours, though there will be regional differences?

[Unknown Executive]

Sometimes I receive such questions, and it is hard to answer. As we mentioned, latest figure is positive. Given different regional factors, we need to monitor closely. Since the construction works are going, sooner or later, we will see demand grows. As explained in the overview, partly due to the coronavirus pandemic, demand dipped.

As explained at the beginning, because of the weakness in the first and the second quarter, third quarter was, in a way, supported by so-called pent-up demand. I think we need to have more in-depth analysis.

[Operator]

Next question is from Mr. Ouchi of SMBC Nikko Securities.

[Taku Ouchi, analyst]

Ouchi speaking. Net sales of construction machinery in the third quarter were JPY 504 billion. I understand the sales of construction machinery were above projection. Would you give us any colors? How much better were they compared with the in-house projection? Full year projection remains unchanged. But if the tariff recovery in construction, which happened already, is sustained in the fourth quarter, are the fourth quarter sales going to be higher? Would you give a comment on this?

[Takeshi Horikoshi, executive]

Horikoshi speaking. In the third quarter, sales were above projection by almost JPY 20 billion, and most of it was in general construction machinery. As for the fourth quarter projection, compared with the projection made in October, sales will be higher. But as for mining equipment, as demand mix remains unchanged, sales will be almost -- mostly in line. However, orders are slightly better, and they may be above projection.

[Taku Ouchi, analyst]

Understood. Your projection profit also remains unchanged. It means that there will be no major quarter-on-quarter increase in fixed cost. Is that right?

[Takeshi Horikoshi, executive]

In October, we said the annual fixed cost was JPY 24.1 billion. In the first half, it was JPY 15.4 billion, and the second half fixed cost was shown as about JPY 9 billion. 3 quarters cost was JPY 20.1 billion, down by JPY 5 billion year-on-year. Fixed cost has been declining steadily in line, and it will continue to decline in the fourth quarter as well.

[Operator]

Next question is from Mr. Mizuno of UBS Securities.

[Hikaru Mizuno, analyst]

Mizuno of UBS Securities speaking. My first question is about mining equipment. I'd like to know the growth by mineral, either sales or orders. On Page 25, sales are down 15% in the third quarter and, excluding the foreign exchange, a little over 10%. You don't disclose orders, but mining equipment companies such as Epiroc and Sandvik grew 10% to 20% year-on-year. They are skewed to hard rock gold and copper.

In Komatsu, coal decreased substantially, as shown in the chart of North America and Asia. But can you say that in other minerals, for example, copper and gold, are growing, say, around 10% to 20%? And would you give us the update of the coal mix out of the total, if any change is expected?

[Unknown Executive]

Because of the quarterly fluctuation, we seldom talk about the sales by mineral. But your understanding is generally right. Coal has been sluggish, while iron, copper and gold are firm, but the mix doesn't change notably. As mentioned in the first half results meeting, coal is about 11%, including coking coal. Copper is robust 9%. Does that answer your question?

[Hikaru Mizuno, analyst]

Yes. Just for confirmation. Currently, Indonesia's coal export seems picking up temporary for China. I'd like to have your view for the long term. Don't you see any change in coal mining in other areas, except North America?

[Unknown Executive]

As for Indonesia's coal, majority of Asia in chart is Indonesia. Current sales are small compared with the past. But the production volume is on the rise, and historically, it didn't fall. Therefore, replacement demand will emerge soon, and parts demand for overhaul will emerge as well. But latest clients' investment appetites are still weak even with temporary price increase.

[Hikaru Mizuno, analyst]

Understood. Another question is about the profit of Komatsu as a whole. Year-on-year gross margin falls deeply, and personally, I expect you to perform better. Volumes started to recover, but weak mining equipment and regional mix might give some impact. On the other hand, you said that fixed cost reduction has been mostly in line with the plan. Is there any change in the mindset in the company with renewed sense of crisis to accelerate the pace of improving profitability? Or in other words, with the increase in volume, profit and profitability will naturally improve, but I'd like to know whether you try to do something additionally. Would you comment on whether there is a change in mindset in the company?

[Unknown Executive]

As I said at the first half results meeting, marginal profit and gross margin has been sustained. Then as I mentioned, if sales improved, that should lead to better profit. Or you indicated that we should do some additionally as current profit is low. In the first half results meeting, President Ogawa said that as a part of a structural reform, we will carry out 3 key measures: personnel optimization, review of manufacturing capacity and the structural reform of KMC fixed cost is heavy. And we cut back fixed cost of JPY 17 billion by FY 2020 and JPY 21 billion by FY 2024. Just recently, we announced the closure of Bluefield underground mining plant of KMC as a part of the effort.

Focusing on the aforementioned 3 pillars, we executed structural reform steadily.

[Operator]

We received more questions, but as we have run out of the scheduled time, I'd like to close the Q&A session.

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