Komatsu Ltd

TSE:6301

Earnings Call Analysis

Komatsu Posts Record Q3 Results Amid Challenges

Komatsu's recent earnings report revealed an impressive increase in net sales and operating income amidst currency headwinds. Specifically, net sales rose 5.6% while operating income jumped 15.9%, bolstered by favorable exchange rates and higher selling prices. Reaching record highs, the company's net income soared by 42.4%. Segment performance was mixed, with construction, mining, and utility equipment enjoying a 22.2% profit rise, whereas industrial machinery saw a steep 72.8% profit plunge. For the entire fiscal year, projections remain unchanged, anticipating a decrease in demand of 10% to 15%.

Challenging Global Demand Landscape

The fiscal Q3 2023 earnings call painted a mixed picture for demand across different markets. In major European markets, such as the U.K., Germany, and Italy, construction equipment demand faced a 15% decline compared to last year, attributed to rising interest rates and energy costs. This trend is seen continuing with a full-year demand projection dropping by 10% to 15%. Southeast Asia saw a similar 11% decrease in construction equipment demand due to delayed public works and economic uncertainties, with full-year expectations between a 15% to 20% decrease.

Mining Equipment: A Bright Spot

On the contrary, the mining equipment sector displayed resilience, with a 3% year-on-year increase in demand during Q3. The full-year forecast for mining equipment demand is positive, with a projection of 0% to 10% growth. Sales of mining equipment surged by 20% year-on-year, hitting JPY 448 billion and adjusting for foreign exchange impacts, the growth stands strong at 17%. The sales outlook for the full fiscal year is set to climb by 11% to JPY 1,575.9 billion.

Incremental Growth in Parts Sales

Parts sales, too, are riding a positive wave with fiscal Q3 witnessing a 7% growth year-on-year to JPY 239.4 billion. Taking into account foreign exchange impacts, this growth is closer to 5%. Looking ahead, the company expects a 4% annual increase in parts sales, reaching JPY 916.3 billion by the end of FY 2023.

Electrification and Sustainability Initiatives

Komatsu is actively shaping its future with innovative strategies. Its electrification efforts are underscored by introducing the PC138E-11 electric excavator in 2024, marking the inception of electrified construction equipment in its portfolio. This is part of a broader commitment to market creation and carbon neutrality by 2050. Through the acquisition of American Battery Solutions, Inc., Komatsu aims to integrate superior battery technology for the development of optimized batteries for its equipment, signaling an intrinsic focus on clean energy integration.

Global Expansion and Partnerships

In pursuit of global competitiveness, Komatsu has launched the Reman business for components crucial to hybrid excavators in Japan, with future plans to scale this initiative globally. Furthering its international market presence, Komatsu acquired iVolve Holdings Pty, an Australian firm specializing in fleet management for small to mid-tier miners, unlocking new opportunities for solution delivery worldwide.

Futuristic Collaboration with General Motors

Notably, Komatsu has joined forces with automotive giant General Motors for the joint development of hydrogen fuel cell modules for super heavy-duty mining dump trucks. This collaborative endeavor is scheduled for mid-2020s prototyping, setting the stage for cutting-edge fuel technology in heavy machinery.

Earnings Call Transcript 2024-Q3

[Takeshi Horikoshi, executive]

Hello. This is Takeshi Horikoshi, CFO. Before going into our financial results, we would like to express our deepest sympathies to all those who are affected by the Noto Penisula earthquake on January 1, 2024.

In terms of production, damage to our production basis in the Hokuriku area was minor. And after confirming safety and quality, we have been resuming operations as usual from the beginning of the year after year-end holidays. There have been suppliers that were hit hard, but by making use of inventory and sourcing from alternative channels, production has not been obstructed.

Komatsu has also dispatched maintenance personnel to the effective partner companies to support their restoration. Furthermore, the impact of the earthquake on our consolidated business performance is negligible. For reconstruction assistance, we've donated a total of JPY 600 million as emergency relief funds. JPY 500 million went to Ishikawa Prefecture and JPY 100 million to Toyama Prefecture.

In addition, we're cooperating with our distributors to meet the requests of the disaster-stricken areas by providing water and food supplies, lending, construction equipment and forklifts, et cetera, free of charge and offering maintenance services for machinery.

Now I would like to go into fiscal '23 Q3 business results. On Page 4, I will explain the highlights for fiscal '23 Q3 quarterly results. The exchange rates are JPY 149.7 to the dollar, JPY 159.9 to the euro and JPY 96.7 to the Australian dollar. Compared to the same period last year, the yen depreciated against the U.S. dollar, euro and Australian dollar.

Net sales increased 5.6% year-on-year to JPY 972 billion. Operating income increased 15.9% to JPY 156.4 billion. The operating income to net sales ratio rose 1.4 percentage points to 16.1%. Net income increased 42.4% to JPY 98.7 billion.

Net sales and operating income increased due to the improvement of selling prices and the positive impact of FX rates. Net sales, operating income ratio and the net income reached third quarter record highs. In addition, segment profit and operating income reached all-time quarterly record highs.

On Page 5, I'll explain segment sales and profits. Net sales for the construction, mining and utility equipment segment increased by 6.3% from the corresponding period a year ago to JPY 918.2 billion. Segment profit advanced by 22.2% to JPY 149.1 billion. The segment profit ratio improved to 16.2%, up 2.1 points.

Retail finance revenues increased by 23.2% from the corresponding period a year ago to JPY 27.2 billion. Segment profit decreased by 10.6% to JPY 5.7 billion.

Net sales for industrial machinery and others increased 7.7% from the corresponding period a year ago to JPY 46.5 billion, while segment profit declined 72.8% to JPY 1.3 billion. I'll talk about the factors impacting the changes in each segment later.

Page 6 shows sales by region in the construction, mining and utility equipment segment. Sales to outside customers increased 5.1% from the corresponding period a year ago to JPY 904.7 billion. By region, sales increased in North America, Latin America and the Middle East, but decreased in Asia, CIS and Europe.

On Page 7, I will explain the highlights for 9 months. Foreign exchange rates were JPY 143.4 to the dollar. JPY 155.0 to euro and JPY 94.0 to Australian dollar. Yen depreciated against dollar, euro and Australian dollar year-on-year.

Net sales in 3 quarters of 9 months FY 2023 increased by 10.1% year-on-year to JPY 2,795 billion. Operating income increased by 30.8% to JPY 453.4 billion. and operating income ratio was 16.2%, up 2.6 points.

Net income attributable to Komatsu Ltd. increased by 31.2% to JPY 304.3 billion.

Due to improvement in selling prices and the positive impacts by foreign exchange, both sales and profit increased, all net sales, segment profit, operating income, income ratio and net income for 3 quarters of 9 months marked the record highs.

On Page 8, I will explain segment sales and profit. Sales in construction, mining and utility equipment increased by 10.8% year-on-year to JPY 2,625.8 billion, and segment profit increased by 38.9% to JPY 429.9 billion. Sales in retail finance increased by 17.5% year-on-year to JPY 74.7 billion, and segment profit decreased by 12.0% to JPY 18.7 billion.

Sales in industrial machinery and others increased by 3.7% year-on-year to JPY 131.5 billion, and segment profit decreased by 63.7% to JPY 5.7 billion. I will elaborate on causes of difference later.

Page 9 shows the sales by region of construction, mining and utility equipment. Sales increased by 10.3% year-on-year to JPY 2,607.5 billion. By region, sales increased in North America, Latin America and Oceania but decreased in CIS, China, et cetera.

Page 10 shows causes of difference in sales and segment profit in construction, mining and utility equipment. Sales increased by JPY 256.2 billion year-on-year due to the positive effects of foreign exchange rates and improved selling prices. Segment profit increased by JPY 120.3 billion year-on-year, supported by the positive effects of foreign exchange rates and improved selling prices, which more than offset the increased production and fixed cost. Segment profit ratio was 16.4%, up 3.3 points year-on-year.

Page 11 shows retail finance. Assets increased mainly affected by foreign exchange rates and an increase of new contract. New contracts increased year-on-year due to foreign exchange rates and increased sales in the construction equipment business. Revenues increased by JPY 11.1 billion year-on-year due to the positive effects of interest rate hikes and foreign exchange rates. Segment profit decreased by JPY 2.5 billion year-on-year, mainly due to the absence of a gain on reversal of allowance for adoptive accounts recorded in North America for the corresponding period in the previous year.

Page 12 shows sales and segment profit of industrial machinery and others. Sales increased by 3.7% year-on-year to JPY 131.5 billion. Segment profit decreased by 63.7% to JPY 5.7 billion, and segment profit ratio decreased 8.0 points to 4.3%.

Sales increased mainly due to the increased sales of large presses for automobile manufacturing industry, but profit decreased due to a decline in high margin maintenance revenues for Exmar lasers and others against the backup of declining global demand in semiconductors.

On Page 13, I will explain the consolidated balance sheet. Total assets increased by JPY 493.6 billion year-on-year to JPY 5,369.4 billion, affected by the depreciation of yen. Inventories increased by JPY 232.5 billion due to the depreciation of yen and increased demand for mining equipment and parts.

Shareholders' equity ratio was 52.8%, up by 0 points and net debt-to-equity ratio was 0.30. This concludes my presentation.

[Unknown Executive]

Next, Hishinuma, General Manager of the Business Coordination Department, will explain the business projection for fiscal '23 and demand trends.

[Kiyoshi Hishinuma, executive]

I'm Hishinuma from the Business Coordination Department. I'll now explain the business projection for fiscal '23 and key market trends.

Page 15 shows an outline of the fiscal '23 projection. The annual forecast has not been changed from the October projection. The following pages explain the demand trends and forecast for the 7 major products, which are the assumptions used in the projection.

On Page 16, we will explain the demand trends and outlook for the 7 major products. Fiscal Q3 numbers are preliminary estimates by the company. Demand in the third quarter of fiscal '23 was down by 6% year-on-year. Excluding China, demand appears to have decreased by 3% from the corresponding period a year ago.

Fiscal '23 full year demand is expected to decrease between 10% to 15%. Even when excluding China, demand is expected to decrease between 10% to 15%, which is unchanged from the October projection.

I will address the key markets in the subsequent pages. On Page 17, I will explain demand trends in Japan. In Q3, demand apparently increased by 8% from the corresponding period a year ago.

Demand remained steady in public works and private sector construction. The outlook for fiscal '23 demand is broadly flat year-on-year, which remains unchanged from the April projection.

On Page 18 are the demand trends in North America. Demand in fiscal '23 Q3 appears to have increased by 4% from the corresponding period a year ago. Although there are signs of the rental market coming to a pause, residential construction as a market has bottomed out and the infrastructure and energy-related sectors have remained steady. The demand projection for fiscal '23 is unchanged from the April projection at 0% to minus 5% year-on-year.

On Page 19 are the demand trends for Europe. Demand in Q3 fiscal '23 apparently decreased by 15% from the corresponding period a year ago. Due to higher interest rates and energy prices, construction equipment demand decreased mainly in major markets like the U.K., Germany and Italy. Demand for the full year is expected to decline between minus 10% to minus 15% year-on-year, unchanged from the October projection.

On Page 20 are the demand trends of the Chinese market. This page shows demand trends for hydraulic excavators, excluding many excavators. For reference, demand trends, including Chinese manufacturers are also shown here. The growth rate of demand represents foreign manufacturers.

Fiscal '23 Q3 demand appears to have decreased by 51% from the corresponding period a year ago. Total demand, including Chinese manufacturers appears to have decreased by 34% year-on-year.

Demand continues to decline significantly due to stagnant economic activity caused by the sluggish real estate market conditions, et cetera. The outlook for full year demand is minus 40% to minus 50% year-on-year. And total demand, including Chinese manufacturers is expected to decline by minus 30% to minus 40% year-on-year, unchanged from the October projection.

On Page 21 are the demand trends in Southeast Asia. Demand in fiscal '23 Q3 appears to have decreased by 11% from the corresponding period a year ago. While demand for mining equipment remained steady in Indonesia, demand for construction equipment dropped in Indonesia, Thailand and Vietnam, et cetera, due to delayed execution of public works budgets and uncertainty over the economic outlook.

The demand outlook for the full year is expected to decline between minus 15% to minus 20% year-on-year, which is unchanged from the October projection.

On Page 22, I'll explain the demand dynamics of mining equipment. In the third quarter FY 2023, demand for mining equipment increased by 3% year-on-year.

In FY 2023, full year demand will increase between plus/minus 0% and plus 10%, and it remains unchanged from the projection in April.

I will explain the sales of mining equipment on Page 23. In the third quarter FY 2023, sales increased by 20% year-on-year to JPY 448 billion. Excluding the foreign exchange impact, it was a 17% increase.

In FY 2023, sales are expected to increase by 11% year-on-year to JPY 1,575.9 billion, which remains unchanged from the projection in October. I explain the sales of parts on Page 24.

In the third quarter FY 2023, sales increased by 7% year-on-year to JPY 239.4 billion. Excluding the foreign exchange impact, it was a 5% increase. In FY 2023, sales of parts are expected to increase by 4% year-on-year to JPY 916.3 billion, which remains unchanged from the projection in October.

I have walked you through the forecast. And from Page 35 onwards, let me explain the major topics. Page 35. Page 35, Komatsu introduced 13-ton class PC138E-11 electric excavator with a lithium-ion battery to the domestic market as a rental machine in January 2024.

Komatsu positioned 2023 as the first year to introduce the electrified construction equipment into the market. By responding to the customers' needs through the expanded product lineup in the construction equipment market, market for electrified construction equipment is still nascent. We aim to create the market quickly toward the carbon neutrality in 2050.

Page 36. Komatsu acquired American Battery Solutions, Inc., a battery manufacturer. ABS is a battery manufacturer to develop and produce diverse battery pack, including lithium-ion battery for commercial and industrial vehicles and suppliers to optimize battery system to meet the customers' needs. This acquisition enabled us to combine the battery technology of ABS and expertise and network of Komatsu, which will lead us to develop and produce the optimized battery that is aligned with construction and mining equipment used in the diverse environment and conditions.

Going forward, by using the battery technology of ABS, which was new acquired, we will accelerate the development of battery type electrified vehicles to the carbon neutrality in 2050 and contribute further to create market for electrified construction and mining equipment and to achieve the [indiscernible] society.

Page 37. Komatsu started Reman business of capacitors and inverters key components for hybrid hydraulic excavator components in Japan. Electric system Reman scheme was added to the Reman business of Komatsu for the first time with more reasonable fast repair, we can contribute to reduce the total life cycle cost of hybrid hydraulic excavators and environmental impact through the reduction in waste and CO2 emission.

Looking ahead, we plan to expand the scope of Reman to include the components for hybrid hydraulic excavators outside Japan.

Page 38, Komatsu acquired iVolve Holdings Pty, an Australian provider of fleet management system for small to mid-tier miners contractors and quarries. iVolve has a unique IoT platform for small to mid-tier miners and quarries, and we provide new solutions globally through this system.

Page 39. Komatsu and General Motors Corporation, a leading U.S. automaker have signed a joint development agreement for hydrogen fuel cell module for Komatsu's 930E super heavy-duty dump track, the company's flagship model in mining. 2 companies are planning to test the prototype equipped with HYDROTEC the hydrogen fuel cell LGM in Komatsu test base in Arizona in the middle of 2020s.

This concludes my presentation. We will now move on to Q&A.

[Operator]

The first question is from Mr. Maekawa of Nomura Securities.

[Kentaro Maekawa, analyst]

This is Maekawa from Nomura Securities. I have two questions. First, apologies for going into details. But I'm looking at Page 10 of the presentation materials, I'd like to know whether the impact from mix difference was significant this time or not. If we look at the volume impact alone, I assume that the positive impact was a little greater. Can you give me more flavor on this? So this is my first question.

[Takeshi Horikoshi, executive]

This is Horikoshi. Thank you for your question. The pure volume impact was JPY 15.4 billion. The regional and product mix impact were almost negligible. It was only JPY 200 million. The regional mix impact, especially in the third quarter was negative due to slightly less contribution from Indonesia, but the positive results up until the second quarter went in the opposite way, so the cumulative total is as shown here.

The remaining balance of JPY 5.9 billion is mainly due to expenses related to Russia and due to unrealized losses related to greater-than-expected interim inventory in December. That's all from me.

[Kentaro Maekawa, analyst]

Secondly, about the demand forecast and sales conditions with respect to the North American Mining business, you haven't changed the outlook this time around. Well, when you talked about the market earlier, for the 9 months up until Q3, the North American market looks a little stronger against the full year plan. It appears that the recovery in the residential market and the progress in mining is nice. The demand outlook is currently within range. But looking at your sales trends, are there any notable strengths that you have identified? I'm not just asking about sales volume but also about price increases, et cetera. In any case, could you give us some additional flavor about how the North American Mining business is performing in terms of progress, demand, price increases, et cetera, in relation to business performance.

[Kiyoshi Hishinuma, executive]

Thank you for your question. This is Hishinuma. Regarding demand in North America, first, we have not changed our forecast in terms of numbers, but as we originally explained segments like infrastructure, energy and rental are brisk while residential was slightly weak back in spring. So this was the basis of this outlook.

Then after post-COVID, demand in the rental segment increased, but when demand picked up, partly due to supply chain problems, the supply situation became tight that led to a significant decline in distributor inventory. As a result, we were striving to replenish distributor inventory. Also, distributors were selling not only rental inventory, but also we're selling inventory outright. So the buildup of inventory was quite considerable. However, in Q2 this year, rental growth slowed down slightly. We presume there was a slight slowdown due to the considerable buildup of same year vintage rental equipment.

As for the third quarter, the rental season is now in a slow season. As the next rental season will start from spring or from April. So the demand-supply balance has eased to some extent. And people are not in a rush due to the circumstances.

Also, interest rates are currently high, but if they are expected to fall in the future, there is no need to rush to replenish rental equipment in the third quarter before the rental season starts in early spring, and that is why rental growth has come to a standstill.

On the other hand, residential and non-residential sales have also been recovering quite a lot. So that is why our view is net-net 0 for the year or minus 5% or less worse comes worse.

In addition, the mining business has been relatively steady and no particular risk factors have come to light at this point in time. As for demand from the mining major companies, there is no mention of any negative impact in their capital investment plans. CapEx has stayed steady this fiscal year and expect steady trends for the next fiscal year as well. And we haven't heard any news of cutting spending.

[Kentaro Maekawa, analyst]

Yes. I'd like to ask you two more questions regarding North America and mining. For North America, I assume that next fiscal year and beyond will also be affected by the recovery in the residential market. So do you need to account for these risks that there may be a drop-off by a certain degree? Although I presume that the inventory buildup process has been completed, I'd like to know if there will be such fluctuations in terms of wholesale. And with such a favorable environment for mining, continuing on into the next fiscal year, I'd like to know your stance on price increases and how they will affect your business performance.

[Takeshi Horikoshi, executive]

This is Horikoshi speaking. Regarding the situation in North America in Q3 overall, construction equipment fell short of initial October projection. On the other hand, mining overachieved. And net-net, sales were about JPY 7 billion short of plan.

In terms of the original equipment and parts, original equipment was minus JPY 16 billion to JPY 17 billion overall due to supply chain issues and parts were plus JPY 10 billion compared to the October projection. As Mr. Hishinuma mentioned earlier, retail demand has performed stronger than the October projection in North America.

On the other hand, regarding wholesale mainly rental cell inventory orders from distributors have decreased whilst retail exceeded expectations.

I said in October that inventory at distributors should be at an appropriate level by the end of this fiscal year. However, because retail was strong and wholesale orders are being held back, inventory has decreased considerably. It's about close to 1,000 units less than expected. So there is a high chance that this reduced rent to sell inventory will be pushed out to next fiscal year or may materialize in Q4. Also, for next fiscal year, demand in North America is not expected to decline as much as anticipated initially.

[Kentaro Maekawa, analyst]

I now have a better understanding of North America. Also, considering the current circumstances of mining demand, can you also comment on prices as much as you can share.

[Unknown Executive]

I mentioned earlier that the mining business exceeded the October forecast. And while the demand in all regions were mostly favorable. The only region where it wasn't was Indonesia. Contractors in Indonesia were holding back orders due to the delays in approvals for coal production applications. However, then after the approvals came through and the government has set forth a production target for next year's coal production of, I believe, 710 million tons compared to 760 million tons this year. And now as the coal production permits have been approved, we expect that Q4 will make up for the dip that we saw in the third quarter.

In terms of overall mining, commodity prices are trending steadily, and coal prices in Indonesia that I was just talking about was approximately $57 to $58 per ton at the end of December. So I don't think we need to worry too much about the next fiscal year.

As for selling prices overall, ever since prices started to rise from the second half of 2021, the sentiment at our marketing department has changed slightly.

Now even if management doesn't ask them to do so, they are working to raise prices. Therefore, I believe that selling prices will increase next fiscal year as well, though perhaps not as much as this fiscal year.

[Operator]

The next question is from Mr. Sano of JPMorgan Securities.

[Tomohiko Sano, analyst]

I'm Sano from JPMorgan. Can you hear me?

[Unknown Executive]

Yes, please go ahead.

[Tomohiko Sano, analyst]

My first question is to Mr. Horikoshi, regarding overall performance. First, can you give me more flavor on the positives and negatives in Q3? And operating income is about 83% against the full year plan now. So are you accounting for any risks in terms of demand, price or a region? Or since it was Q3, did you decide not to make any revisions accounting for the possibility to beat your guidance in Q4?

[Takeshi Horikoshi, executive]

Thank you for your question. This is Horikoshi. On a cumulative Q3 basis, compared to the October projection, the construction, mining and utility equipment segment sales exceeded by JPY 70 billion. Profit also exceeded by JPY 19.5 billion.

Regarding sales, the FX impact was JPY 74.5 billion. The sales volume impact was minus JPY 7 billion, and the sales price increase was larger than expected, which had an impact of plus JPY 2.5 billion. All in all, this led to sales exceeding by JPY 70 billion against October projection.

In terms of profit, the currency rate was originally assumed to be JPY 135 against the dollar. But since the FX is where it is now, the impact on profit has been JPY 13.5 billion higher.

On the other hand, regarding sales volume, I mentioned earlier that the impact on sales was minus JPY 7 billion. But in terms of profit, it was minus JPY 2.5 billion.

The other factor is regional product mix. Product mix had the greatest impact. Like I said earlier, original equipment declined, parts increased and was net negative. And construction equipment, mainly in North America declined, but mining overall was positive. So product and regional mix combined had a plus JPY 3 billion impact.

Also for selling price, as I mentioned earlier, the impact was JPY 2.5 billion, and the cost of sales was also better than expected at about plus JPY 2 billion. In addition, fixed costs were about JPY 1 billion less than planned. So the total impact on profit was about JPY 19.5 billion.

As for the full year, if you take out the FX impact from the JPY 19.5 billion, we are exceeding by JPY 6 billion, but this amount is likely to decrease a little in Q4. And ultimately, we expect to be in line more or less against October projection.

One reason why we think so is gross margins. There may be additional scrapping of parts. And since sales of parts were too good in the third quarter, sales of original equipment is expected to catch up in North America, as I mentioned earlier, and the sales of parts will probably not be so good in comparison. Due to this mix change, we are expecting a negative impact and selling prices are expected to be better than Q3 and that the degree of overachieving will be more than twice as much. As for cost of sales, steel prices have increased in the fourth quarter. The increase will have an impact. And since ships cannot go through the Suez Canal but will be going through via Cape Town, an increase in freight is expected. Also, fixed costs may be pushed out to the end of the fiscal year. So as I mentioned earlier, although the results exceeded by JPY 6 billion. Q4 may come in line or below expectations. And yes, obviously, there will be an impact from FX. That's all for me.

[Tomohiko Sano, analyst]

I understand. The second question is about your thoughts about next fiscal year. The market is quite concerned about demand trends that you've shared with us. Looking at Page 31 and what Komatsu can do on its part, when you look at the sales composition of the construction, mining and utility equipment segment, contribution from the parts business, which is 49% of sales probably contributes more to profits. And the same thing can be said for mining. There is talk that your profits may decline, but looking out into next fiscal year, I'd like to know what Komatsu will do about Reman or whether it's possible to raise selling prices of parts, and to what extent there will be positive factors?

I think you mentioned before that free cash flow is more likely to be generated when demand falls. So I'm not sure if it will be aggressive M&A or shareholder returns, but I'd like to know if we can expect any of those things for the next fiscal year. Can you give us more flavor on what Komatsu can do for the next fiscal year?

[Unknown Executive]

As it is still third quarter, I wouldn't comment much on the next fiscal year, but we are not so pessimistic though demand might be worsening.

As mentioned before, since the second half of 2021 with the acceleration of inflation, the operational segment has been changing. And we expect that the selling price will be steadily up. Looking at the recent orders of mining, we are not that pessimistic.

In the case of Indonesia, one of our key areas, the national budget for capital relocation in the next year will be 1.5x of that of this year.

Private investment will be JPY 930 billion, 2.4x of this year according to the government forecast. And the impact by the election, which will be on the fourth quarter, wouldn't be material. So overall, our view is not so pessimistic.

As for the things Komatsu can do, we continue what we have been doing steadily, including the increase in selling prices, increase in the paid guarantee of parts to stabilize the profit.

[Operator]

I'll take the next question. Mr. Motoki of Nikkei, please.

[Unknown Analyst]

Hello. I'm Motoki of Nikkei. Do you hear me is?

[Unknown Executive]

Yes, please.

[Unknown Analyst]

I have two questions. income ratio in 3 quarters was 16%, showing the high profitability. I'd like to know the strategy to increase the profitability further going forward toward the next fiscal year.

[Unknown Executive]

As I answered before, it is increasing the selling prices, cutting costs and promoting the growth strategy in the mid-term plan steadily to reap the fruits.

[Unknown Analyst]

I see. You said that selling price improved more than you expected in the third quarter. Can you specify the region? In the previous results meetings,, you said that in the area where Caterpillar increased the price, it was easier to follow the suit. Does it continue? Or was there any other case where you raised price independently?

[Unknown Executive]

In the third quarter, price increase was more prominent in parts rather than the equipment. As President Ogawa also mentioned before, price increase in parts were strong in the third quarter.

By region, in America, Latin America and strong demand areas such as Middle East and Africa, the ratio of price increase was higher.

[Unknown Analyst]

As for the equipment, is the price increase mostly scheduled?

[Unknown Executive]

I talked in a relative manner. So selling price of equipment also increased steadily.

[Operator]

I'll take the next question. Mr. Ibara of Morgan Stanley MUFG Securities, please.

[Yoshinao Ibara, analyst]

This is Ibara of Morgan Stanley. Do you hear me?

[Unknown Executive]

Yes.

[Yoshinao Ibara, analyst]

I'd like to confirm the comment of Mr. Horikoshi to confirm that I understand correctly. As for North America market, you have been saying up to October as follows, inventory buildup will be over this year. So we believe the demand is flat next year, users may be down. It was the color I perceived. But today, you said that retail will be strong due to residential demand and others, and the retail demand may not be down next year. And restocking in this year is slightly delayed, and it might be continuing in the next fiscal year as well, so the likelihood of your shipment downturn is now receding from that in October. Can I take a comment as such?

[Takeshi Horikoshi, executive]

Correct. I cannot comment clearly on the next year. But as mentioned before, the retail was stronger than the projection in October and the wholesales especially went to sales of dealers were affected by the buying or order restraint, but because of the account closing timing in December, dealers inventory is lower by about 900 units than our estimate. So we need to monitor closely whether that will recover in the fourth quarter or in the next fiscal year. In any case, I said that the timing of inventory adjustment at dealers will be delayed than our expectation.

[Yoshinao Ibara, analyst]

As for the retail demand strength, which was stronger than the projection in October, and as a speaker mentioned that the recovery trend of residential and that the next boost in rental will be in April. He said the residential, non-residential and mining were also strong. Rental was not negative, right? Can we expect the recovery in April? Could you share with us any color on the breakdown, if any?

[Kiyoshi Hishinuma, executive]

This is Hishinuma. As for the residential, at the beginning of the year, housing starts were weak. But now residential investment is coming back, and we think it has already bottomed out. Nonresidential is also robust.

Rental has a seasonality. Q3 is not the strong period in rental, but there are businesses wholesale business for dealers and now the dealers are not rushing to refill the stock. So the sales are not picking up. Therefore, as mentioned before, toward the rental demand season in April onwards, depending on whether they restock by March or later, there might be time lag.

[Yoshinao Ibara, analyst]

Retail is more than expected strength is coming mainly from the residential, right?

[Kiyoshi Hishinuma, executive]

As for the recent trend, yes, that's right.

[Yoshinao Ibara, analyst]

When say the rental is that for rental companies? Yes, for the third party.

[Kiyoshi Hishinuma, executive]

Right.

[Yoshinao Ibara, analyst]

Second question is about the selling price in the fourth quarter. Mr. Horikoshi, you mentioned that fourth quarter will be double the third quarter, what do you mean by that?

[Takeshi Horikoshi, executive]

In the third quarter, pricing was JPY 32.7 billion, which was higher than expectation by JPY 2.5 billion. So originally, it was expected to be JPY 30 billion in the fourth quarter against the expected JPY 28 billion, and with a doubled upside, pricing will be plus JPY 33 billion year-on-year in the fourth quarter.

[Yoshinao Ibara, analyst]

When you say double in the fourth quarter? What do you mean by that?

[Takeshi Horikoshi, executive]

I meant that the gap from the projection in October will be double.

[Yoshinao Ibara, analyst]

I see.

[Takeshi Horikoshi, executive]

Compared to October projection, selling prices was higher by JPY 2.5 billion. In 4Q, it will be higher by almost JPY 6 billion than the October projection. And compared to the previous year, in Q3, selling prices were up by JPY 32.7 billion. And in Q4, it will be up by about JPY 33 billion year-on-year.

[Yoshinao Ibara, analyst]

I see that in total for the full year compared to the October projection prices will be up by JPY 6 billion, right?

[Takeshi Horikoshi, executive]

In total, it will be about JPY 8 billion.

[Yoshinao Ibara, analyst]

JPY 6 billion in the fourth quarter, is that for 3 months?

[Takeshi Horikoshi, executive]

Yes. Then for the full year is the upside, JPY 8.5 billion. I said JPY 8.1 billion. Compared to the October projection, we will see that upside.

[Yoshinao Ibara, analyst]

You commented on the steel cost and the freight cost vis-a-vis the forecast. You may not be able to specify the impact, but can you give us some colors like low [indiscernible] level or any?

[Unknown Executive]

Steel cost impact in the fourth quarter may be less than JPY 1 billion, and it will be higher in the next fiscal year.

[Yoshinao Ibara, analyst]

How about the ocean freight?

[Unknown Executive]

It's smaller.

[Yoshinao Ibara, analyst]

Then when they are combined, it's not much less than JPY 1 billion, right? Are you talking about the next fiscal year?

[Unknown Executive]

No, for the fourth quarter. For the fourth quarter, it is less than that.

[Operator]

We are running out of time. So I'd like to take the last question. Mr. Tai of Daiwa Securities, please.

[Hirosuke Tai, analyst]

This is Tai. I have one question. On Page 24 of sales of parts. In Q3, sales of parts were better than those of equipment, relatively speaking, but we will see the parts alone, part sales fell slightly in Q3, you will still depreciate it. So was there any change in the momentum or trend?

Pricing impact was about JPY 100 billion for 9 months up to Q3. Can you give us the rough breakdown? How much was from parts? Would you give us any hints?

[Unknown Executive]

Breakdown between parts and equipment, it is about 30-70. Sorry -- no, almost 50-50 or 40-60, 44 parts, and 64 equipment, including both the mining and construction equipment.

[Hirosuke Tai, analyst]

I see. Then reference speaking parts JPY 40 billion and equipment for JPY 60 billion, right?

[Unknown Executive]

Yes, sound close.

[Hirosuke Tai, analyst]

Incidentally, talking about the next year from April, Mr. Ogawa said that post price increase will be important in other, how is it going to change next year?

[Unknown Executive]

At this point, I don't know.

[Hirosuke Tai, analyst]

You don't know. I see. Should I assume that the parts will be bigger than the equipment? Is it likely to happen?

[Unknown Executive]

No idea.

[Hirosuke Tai, analyst]

It depends on demand as well. Right.

[Unknown Executive]

I'm not sure.

[Hirosuke Tai, analyst]

I see. Can you comment on Q3?

[Kiyoshi Hishinuma, executive]

This is Hishinuma. There were differences in sales by region in Q3. Indonesia and Asia were more or less sluggish.

[Hirosuke Tai, analyst]

I see. Then excluding them, can we expect the incremental trend from Q1 to Q2?

[Kiyoshi Hishinuma, executive]

Are you asking about Q4 and next year?

[Hirosuke Tai, analyst]

Well, I'm not asking about numbers, but equipment sales might be up and down by region, but the utilization of the equipment in the field is high. So parts will continue to grow and price should be and can be raised. I conceived such story. Does my story sound right? It's my last question.

[Kiyoshi Hishinuma, executive]

Yes, your thought is right. But due to economic conditions and utilization, part sales may fall in some areas.

[Operator]

Thank you very much. With this, we'd like to close the business results meeting for the third quarter FY 2023 of Komatsu Ltd. Thank you very much for your participation today.