Komatsu Ltd

TSE:6301

Earnings Call Analysis

Record highs met with cautious FY 2024 forecast

The company achieved record financial results for FY 2023 with net sales up 9.1% to JPY 3,865.1 billion and operating income increasing by 23.7% to JPY 607.2 billion. However, for FY 2024, the company projects flat net sales at JPY 3,861 billion and an 8.3% decrease in operating income to JPY 557 billion due to lower demand and higher costs. The net income is expected to drop 11.8% to JPY 347 billion. Despite the challenges, the dividend per share remains at JPY 167, and a share buyback of up to JPY 100 billion or 33 million shares has been approved.

Fiscal Year 2023 Performance

The company has achieved record highs in key financial metrics for fiscal year 2023. Net sales surged by 9.1% to JPY 3,865.1 billion, while operating profits (OP) soared by 23.7% to JPY 607.2 billion. This increased the operating income ratio by 1.9 percentage points to 15.7%. Net income saw a considerable uplift of 20.5%, reaching JPY 393.4 billion. Return on equity (ROE) also improved slightly to 14.4%. A significant factor behind this growth was the depreciation of the yen against the dollar, euro, and Australian dollar, which positively influenced exchange rates and selling prices【4:0†source】.

Segment Analysis

In the construction, mining, and utility equipment segment, sales grew by 9.7% to JPY 3,615.2 billion, and segment profits increased 29.4% to JPY 574 billion, reaching a segment margin of 15.9%. Meanwhile, the retail finance sector saw a 20.9% revenue increase to JPY 103.5 billion, but profits declined by 11.1% to JPY 24.2 billion. Sales in the industrial machinery and others segment rose by 2.5% to JPY 195.6 billion, though segment profits plummeted by 54.5% to JPY 10.3 billion【4:0†source】.

Regional Sales and Demand

Sales in the construction, mining, and utility equipment segment reflected regional disparities. While North America, Latin America, and Oceania experienced growth, the CIS, Asia, and other regions reported declines. This led to a 9.3% overall sales increase in this segment to JPY 3,591.4 billion【4:0†source】.

Factors Influencing Performance

Sales and segment profits were driven by positive exchange rates and improved selling prices. However, these benefits were somewhat offset by decreased sales volumes and higher production and fixed costs. The retail finance and industrial machinery sectors faced challenges due to the absence of prior-year gains and declining semiconductor demand respectively【4:0†source】【4:10†source】.

Outlook for Fiscal Year 2024

The company projects a flat revenue outlook for fiscal year 2024 with anticipated net sales of JPY 3,861 billion, excluding foreign exchange effects. However, operating income is expected to decrease by 8.3% to JPY 557 billion, and net income is anticipated to decline by 11.8% to JPY 347 billion. Despite these expected declines, the company will maintain a dividend of JPY 167 per share. Segment-wise, the construction, mining, and utility equipment segment anticipates a sales decrease of 1.7%, while the industrial machinery segment expects a 17.1% sales increase【4:0†source】【4:2†source】.

Strategic Movements and Innovations

The company made significant strides in its midterm management plan, focusing on innovation, earnings maximization, and corporate resilience. Key initiatives include the introduction of electric models, the acquisition of American Battery Solutions, and advancements in autonomous and remote-controlled machinery. Efforts in carbon neutrality included partnerships for hydrogen fuel cells and the development of hydrogen-powered excavators【4:10†source】.

Market Conditions and Demand Expectations

The demand for construction and mining equipment showed mixed signals across various regions. While the North American market remains strong, other regions like Indonesia are experiencing a downturn due to political and economic factors. Globally, a decline in demand for construction equipment is expected in FY 2024, with an anticipated drop between 5% and 10% year-on-year【4:2†source】【4:14†source】.

Shareholder Returns and Financial Strategy

For FY 2024, the company has approved a share buyback program of up to JPY 100 billion. This decision aligns with their commitment to maintain a consolidated payout ratio of 40% or higher. Despite a projected decrease in profits, the company plans to sustain stable dividends, underpinned by a solid forecast for free cash flow【4:16†source】.

Earnings Call Transcript 2024-Q4

[Takeshi Horikoshi, executive]

This is Horikoshi, CFO of the company. I will go through the highlights of the financial results for fiscal year 2023, which has just ended.

As shown on Page 4, for FY '23, based on the exchange rates of JPY 144.3 to the dollar, JPY 156 to the euro and JPY 94.7 to the Australian dollar, the yen depreciation against all of the 3 currencies over the previous year levels were recorded.

Net sales increased 9.1% year-on-year to JPY 3,865.1 billion and OP increased 23.7% to JPY 607.2 billion with income ratio up 1.9 percentage points to 15.7%. Sales and OP increased due to the positive impact of exchange rates and improved selling prices.

Net income increased 20.5% to JPY 393.4 billion. Net sales, segment profits, operating income, operating margin and net income all reached record highs.

ROE was 14.4%, up 0.4 percentage points from the previous year. Dividend per share for FY '23 is projected at JPY 167, up from JPY 144 announced in October for a consolidated payment ratio of 40.1%.

Page 5 shows sales and profits by segment. In construction, mining and utility equipment, sales increased by 9.7% to JPY 3,615.2 billion. Segment profit increased by 29.4% to JPY 574 billion, and segment margin increased by 2.4 points to 15.9%.

Retail finance revenue increased 20.9% year-on-year to JPY 103.5 billion, and segment profit declined 11.1% to JPY 24.2 billion. Sales of industrial machinery and others increased by 2.5% to JPY 195.6 billion, and segment profit decreased by 54.5% to JPY 10.3 billion. I will discuss detailed factor analysis by segment later in my presentation.

Page 6 shows sales by region for the construction, mining and utility equipment segment. Sales increased 9.3% year-on-year to JPY 3,591.4 billion. By region, sales increased in North America, Latin America and Oceania and decreased in CIS, Asia and other regions.

Page 7 shows causes of difference in sales and segment profit of construction, mining and utility equipment. Sales increased by JPY 318.6 billion year-on-year, mainly by the positive effects of foreign exchange rates and selling prices. Segment profit expanded by JPY 130.4 billion year-on-year, reflecting the positive effects of foreign exchange rates and selling prices, which absorbed the decreased volume of sales and increased production and fixed costs. Segment profit ratio was 15.9%, up by 2.4 points year-on-year.

Page 8 shows retail finance. Assets and the new contracts increased from the previous fiscal year-end and from FY 2022, respectively, mainly due to foreign exchange rates. Revenues increased by JPY 17.9 billion due to the positive effects of interest rate hikes and foreign exchange rates. Segment profit decreased by JPY 3 billion, mainly due to the absence of a gain on reversal of our allowance for doubtful accounts recorded in the previous year.

Page 9 shows segment sales and profits of industrial machinery and others. Sales increased by 2.5% year-on-year to JPY 195.6 billion. Segment profit decreased by 54.5% year-on-year to JPY 10.3 billion, and segment profit ratio decreased by 6.5 points year-on-year to 5.3%.

Sales increased mainly due to the increased sales of large presses for automotive industry, but profit decreased mainly due to the decline in excimer laser maintenance revenues, which have high margins affected by a globally declining demand for semiconductors.

Page 10 shows consolidated balance sheet. Total assets increased by JPY 760.8 billion from the previous fiscal year-end to JPY 5,636.7 billion, partly affected by depreciation of yen. Inventories increased by JPY 211.5 billion, mainly due to the depreciation of yen and increased demand for mining equipment and parts. Komatsu Limited shareholders' equity ratio was 53.8%, up 1.7 points and net debt-to-equity ratio was 0.26.

From Page 11, I will explain the progress made in the midterm management plan. In the current midterm management plan, DANTOTSU Value -- Together, to "The Next" for sustainable growth, which started in FY 2022, we have been acting with 3 major growth strategies of accelerating growth by means of innovation, maximizing earnings power and enhancing corporate resilience and FY 2024 will be the final year [ of actions ].

First, accelerate growth by means of innovation. In small construction business, we advanced our DX partner program with Japanese customers. In overseas, we expanded sales of smart construction 3D machine guidance.

In the mining business, the cumulative number of AHS units installed became 727 units as of the end of March this year. We also started commercial operation of the remote controlled bulldozers.

In response to carbon neutrality, we have introduced 4 electric models for Japanese and European markets. We also acquired American Battery Solutions, a U.S. battery manufacturer with the aim of developing and producing batteries to optimize for construction and mining machineries and accelerating technological development towards carbon neutrality.

In addition, we have begun a proof of concept for hydraulic excavators equipped with hydrogen fuel cells. And for super-large dump trucks, we have signed a joint development agreement with General Motors on hydrogen fuel cells.

Next, for maximizing earning power. In strategic markets, the number of vehicles allocated increased due to expansion of models and region covered by 2-line model strategy. In the aftermarket business, the number of contracts for extended warranties with maintenance contracts, which leverage our strength in in-house component development, production and IoT steadily increased.

For enhanced corporate resilience, in addition to activities aimed at building a supply chain that's resistant to geopolitical risk and fluctuation in production volume through cross-sourcing and multi-sourcing, we introduced enterprise risk management. In addition, we continued to work on reforming the way employees work and improving their skills, such as by conducting global engagement survey, promoting diversity and inclusion and developing AI and DX talents.

Page 12 shows the progress toward achieving a management target for MTP. In FY 2023, with decline in demand, particularly for construction equipment, we actively work to improve sales price combined with a trend toward a weaker yen and the results of our growth strategy and structural reforms, we achieved record sales and operating profits.

Regarding business targets, the operating income ratio was 15.7%, an improvement of 1.9 percentage points year-on-year. We will continue to improve sales prices and pursue growth strategy.

In terms of efficiency, ROE was 14.1%, exceeding the target of 10%. Regarding the shareholder returns, we will maintain a consolidated payout ratio of 40% or higher.

Regarding ESG, we have been selected by the Dow Jones Sustainability Indices, and we've been rated A by CDP in both climate change and water risk. We also made steady progress in our efforts to reduce CO2 emissions and increase the rate of renewable energy use with a view to achieving our 2030 targets.

In the retail finance business, we have achieved our targets for both ROA and net D/E ratio.

That's all from me.

[Kiyoshi Hishinuma, executive]

Thank you. This is Mr. Hishinuma, General Manager of Business Coordination Department. I will give an overview of our forecast for FY '24 and update on major markets.

Page 14 shows an outline of our forecast for FY '24, First of all, we expect the exchange rates for the U.S. dollar, euro and Australian dollar to be JPY 140, JPY 149 and JPY 90, respectively. Net sales are projected at JPY 3,861 billion, almost at the same level as the last year.

In construction, mining and utility equipment segment, we expect a decrease in volume due to lower demand. But due to improved selling prices, we forecast a year-on-year increase in sales, excluding the impact of FX.

Operating income is expected to decrease by 8.3% to JPY 557 billion. The segment expects a year-on-year decrease in profit. Although the negative impact of lower sales volume, higher material costs and fixed expenses as well as foreign exchange rates will be partially offset by improved selling prices.

Net income is expected to decrease by 11.8% to JPY 347 billion. The Board of Directors today adopted a resolution to buy back shares up to either JPY 100 billion or 33 million shares and retire all of the shares to be repurchased during FY '24.

ROE is projected to be 11.7% taking into account the repurchase and cancellation of shares.

Dividend per share is expected to be JPY 167, the same amount as in the previous year. And the consolidated payout ratio is projected to be 45.5%.

Page 15 shows the forecast of net sales and profit for each segment. For construction, mining and utility equipment, sales are projected to decrease 1.7% to JPY 3,553 billion, and profit is expected to decrease by 6.3% to JPY 538 billion, resulting in a segment margin of 15.1%, down 0.8 points year-on-year.

Retail finance revenue is expected to increase by 2.4% to JPY 106 billion, and the profit is expected to decrease by 9.3% to JPY 22 billion. For industrial machinery and others, sales are expected to increase by 17.1% to JPY 229 billion, and the profit is expected to increase by 172.4% to JPY 28 billion. Details of each sector will be discussed later.

Page 16 is a forecast of sales by region for the construction, mining and utility equipment segment. Overall, segment sales are expected to decrease by 1.2% to JPY 3,548.3 billion. By region, sales are up in North America and Oceania, where sales of mining equipment are expected to increase. While sales are down in Latin America and Asia, where sales of those products are expected to decrease.

Page 17 shows the variance analysis of sales and the profit in the construction, mining and utility equipment segment. Sales are expected to decrease by JPY 62.2 billion due to the negative impact of foreign exchange rates and a decrease in volume despite the positive impact of selling prices.

Segment profit is expected to decrease by JPY 36 billion, although negative impacts of lower volume, higher cost of sales and fixed costs and exchange rates will be partially offset by improved selling prices. Segment profit margin is expected to decline 0.8 percentage points to 15.1%.

Page 18 is the outlook for retail finance. Assets are expected to decrease by JPY 166.2 billion, due to the impact of foreign exchange rates and a decrease in new contracts. New contracts are expected to decrease by JPY 95.6 billion, mainly due to the negative impact of foreign exchange rates.

Segment profit is expected to decrease by JPY 2.2 billion, due to a decrease in resale profit of used equipment after the termination of leases. ROA is expected to decrease 0.1 percentage points year-on-year to 1.9%.

Page 19 shows projection of sales and segment profit in industrial machinery and other segment. Sales will increase by 17.1% year-on-year to JPY 229 billion, expecting the recovery of maintenance sales of excimer laser for semiconductor industry. Segment profit will expand by 172.4% to JPY 28 billion.

From Page 20, I'll explain the actual and projected demand for 7 major products. This slide shows the demand dynamics of 7 major products, including mining equipment. The preliminary figure in our estimate is shown for Q4 FY 2023.

In FY 2023, global demand decreased by 7% year-on-year. In FY 2024, demand will decrease between minus 5% and minus 10%, with demand decreased mainly in construction equipment in each area.

From next page, I will explain the condition of major markets.

Page 21 shows actual and projected demand in Japan. In FY 2023, demand increased by 3% year-on-year. Demand remained steady in both public works and private sector construction. In FY 2024, demand will remain almost flat year-on-year.

Page 22 shows actual and project demand in North America. In FY 2023, demand increased by 3% year-on-year. Demand remained steady in the rental and energy industry and infrastructure development and residential construction.

In FY 2024, demand will decrease between minus 5% and minus 10% year-on-year. Demand in North America is at a historically high level, and it will be sustained internal. But given negative factors for demand, including strong inflationary pressure and receding prospect for interest rate card observed, we will continue to monitor closely.

Page 23 shows actual and projected demand in Europe. In FY 2023, demand decreased by 10% year-on-year. Demand for construction equipment decreased centering on the U.K., Germany and Italy, the major European markets, which were affected by high interest rates and high energy prices.

In FY 2024, demand will decrease between minus 5% and minus 10%. As we expect, the declining demand will continue with the dampened regional economy and investment appetite affected by the interest rate inflation and sustained high energy prices.

Page 24 shows actual and projected demand in China. This slide shows the demand for hydraulic excavators excluding mini shovels. For reference, demands including Chinese makers are also shown. Demand growth is net of foreign makers.

In FY 2023, demand declined by 42% year-on-year. Total demand, including Chinese makers, decreased by 35% year-on-year. In FY 2024, demand will decline between minus 20% and minus 30% year-on-year, and total demand including Chinese makers will decline between minus 10% and minus 20% year-on-year.

Page 25 shows actual and projected demand in Southeast Asia. In FY 2023, demand declined by 16% year-on-year. Demand for mining equipment in Indonesia remained steady but demand for construction equipment dropped in Indonesia, Thailand and Vietnam and others mainly due to delayed implementation at public works budgets and unclear outlook of economy.

In FY 2024, demand will remain almost flat year-on-year. In the largest market of Indonesia, demand decline year-on-year is expected in mining equipment with expected moderately falling coal prices.

As for construction equipment, demand is expected to recover in the second half of the fiscal year because the new government will be officially established in October after the presidential election and the budget execution of the public works will start following that date.

Page 26 shows the price trends and forecasts for major minerals related to demand and for mining equipment. The price of major minerals have fluctuated recently. But from a long-term perspective, they remain at high levels.

On Page 27, I will explain the trends in demand for mining equipment. Demand for units in 2023 appears to have increased by 1% compared to the previous year. Demand decreased in the CIS region and other region but increased in North America, Central and South America and Oceania resulting in solid demand overall.

Demand outlook for the FY 2024 is expected to be plus or minus 0% to negative 5% compared to previous year. Indonesia is expected to see a decrease but other regions are expected to remain generally strong.

On Page 28, I'll explain mining equipment sales. Sales for FY 2023 increased by 21% year-on-year to JPY 1,717.2 billion. Excluding impact of FX, sales increased by 15%. Sales for FY 2024 is expected to be JPY 1,709.7 billion, the same as the previous year. Excluding the impact of FX, sales would increase.

The Page 29 shows the outlook for the sales of equipment parts and service, et cetera, in the construction, mining and utility equipment segment. In FY 2023, parts sales will increase 11% year-on-year to JPY 975.4 billion with overall market -- aftermarket sales ratio, including services, et cetera, being 50%. Overall, aftermarket sales excluding FX impact increased by 7% year-on-year.

In FY 2024, parts sales are expected to be JPY 966.7 billion, down 1% from previous year. The aftermarket sales ratio, including service, is expected to be 51%, and overall aftermarket sales excluding effect of FX are expected to increase by 3% compared to previous year.

Page 30 is the outlook for capital expenditures, et cetera. On the left-hand side, capital investment, excluding rental assets investment, is expected to remain at the same level as the previous year with continued investment mainly in the production base, sales base and solution business. In the middle, the R&D expense are expected to increase compared to the previous year due to the focused investment in electrification and automation.

Fixed costs on the right includes the effects of structural reforms but are expected to increase compared to previous year due to the effects of inflation on personnel costs and expenses with investment in midterm projects.

From Page 46 onwards, I'll explain some of the main topics. This is Page 46. As a part of our efforts to strengthen our corporate brand, Komatsu has entered into a multiyear sponsorship agreement with British Williams Racing, one of the leading F1 teams. Through this partnership, we aim to create a new value together both inside and outside of circuits and to write history in the new era starting in 2024.

Page 47, Komatsu's unmanned dump truck operation system, AHS for mines, has achieved a cumulative total of over 700, which are large self-driving dump trucks in February 2024. The 700 unit began operation in February 2024 at Glencore's Lomas Bayas copper mine in Chile. This mine is eighth mine in Chile to have Komatsu AHS installed.

Page 48. Komatsu in cooperation with Denyo Corporation has developed a concept generator that uses hydrogen mix combustion engine as a power supply device for electric mini excavators. In the first half of 2024, we plan to conduct a proof of concept at the customer side. When using electric construction equipment, one of the issue is the preparation of our power supply infrastructure as some of these sites are located in areas where power network is not yet in place. Business generator, we aim to realize a power supply solution that meets the environmental needs of our customers.

That's all for my explanation. Now we will take questions from the audience.

[Tsubasa Sasaki, analyst]

This is Sasaki from Morgan Stanley, MUFG Securities. I have 2 questions. One is about your shareholder return policy. You have announced a JPY 100 billion share buyback this time as well as a forecast of negative profit growth. Nevertheless, you are maintaining a dividend of JPY 167 per share, resulting in a payout ratio, I believe, of 45%, which is rather generous. What is the background behind the decision? What kind of internal discussions did you have in announcing this shareholder return? Could you share your thoughts on decision-making process on the shareholder returns?

[Takeshi Horikoshi, executive]

This is Horikoshi, CFO. First of all, regarding dividends, we have always said that we are committed to a payout ratio of at least 40%. Following this commitment, for FY '23, when profit was higher than the forecast announced in October, we decided to raise the payout ratio to 40% or JPY 167. This year, however, we are forecasting a downturn or a decrease in profits.

Even in such case, our basic policy is to maintain the same amount of dividend as much as we can. We would maintain the same amount per share unless it would project the payout ratio too much. That's the basic stance.

On the other hand, as for share buyback. We established our internal criteria for implementation of buyback a long time ago. The criteria would prevent us from using share buyback just for the sake of improving ROE. We are not going to do that.

First, any buyback program shall not lower our credit rating. That's the first criteria. And second, any buyback program shall not lower the equity ratio below a certain level because it is an important source of doing business. Other -- these are the 2 mandatory criteria.

In addition, we have several other items to check such as, first, ROE, whether it's too low or not. Second, cash flow projection, what are we expecting. That's the second point. Third, current net cash, what is the level at the moment in terms of the net cash. That's what we check. That's the third one. And the fourth one is dividend payout projection. Of course, how much is the dividend payout compared with the overall business. And finally, PER. For example, if PER is high or low. If it is low, that means it is a good opportunity for us to buy back shares.

So those are the things that we look at as criteria for implementing a share buyback. We have had this criteria for some time now. Although last year, we had a comprehensive discussion to review some of it as part of the overall capital policy. It was in light of these criteria that we decided to buy back shares this time.

[Tsubasa Sasaki, analyst]

My second question is about concrete details of the FY '24 projection. Slide 14 shows that for FY '24, other operating expenses are negative JPY 28 billion, which I believe is the major factor behind the JPY 30 billion decline in profits. Could you elaborate on this, please?

On the other hand, if we look at Slide #19, industrial machinery profit is significantly increasing by JPY 18 billion, which is probably because of a sharp recovery of Gigaphoton and KELK. But could you explain why this -- there is such a large increase in -- of nearly JPY 20 billion in industrial machinery? Could you please give us some of the details about other operating revenues in industry machinery?

[Kiyoshi Hishinuma, executive]

Thank you for the question. First of all, for segment profit, the line below operating income includes such items as losses on disposal of assets, appraisal losses of nonintangible assets and impairment losses of intangible and fixed assets. And other operating income is usually negative, but last year, we had positive JPY 1.5 billion.

It was because the gain on sale of a subsidiary shares in Peru, that's the reason for the positive number, which is different from usual years. But still, you may be wondering why we have such a large loss of JPY 28 billion this year. We posted a loss of about JPY 20 billion on the sale of reappraisal of Russian fixed assets as we did in FY '22 and '23, which altogether amounted to around JPY 12 billion in impairment losses or mostly inventory write-offs, which is counted against segment profits and losses.

On the other hand, given the situation in Ukraine or Russia at the moment, which is growing tougher recently with time, we have decided to recognize losses on the appraisal of fixed assets this time.

As for the industrial machinery and others segment, projected profits are stronger in FY '24 than in FY '23, as you have correctly pointed out. It's because in FY '23, as you know, the semiconductor industry was at a kind of plateau and the maintenance sales of Gigaphoton declined significantly, resulting in a drop in profit margin.

And KELK on the other hand, has both thermoelectric devices and semiconductor manufacturing equipment-related businesses. The former has a better profit margin but has declined in both sales mix and the profit margin, both lowering profit margin of the whole sector.

Another reason is the Komatsu NTC's automotive battery manufacturing equipment incurred some test and research expenses, which was not negligible. These are the factors behind the decline in margin for FY '23. For FY '24, however, the semiconductor industry is expected to have stronger performance, as you're all aware, and we expect a large increase in maintenance sales and recovery in profit margin at the Gigaphoton. That's why we expect a higher profit margin.

[Unknown Attendee]

This is Kitaura from Bloomberg. I also have 2 points. Could you give us some additional information on the mining equipment business where FY '24 projection is flat or a slight increase, excluding FX. Could you give us a breakdown for North America, Indonesia and Latin America? How are these trends differentiated? How do you -- your order books look like at the moment? And if there is any difference by the type of mineral, what are you seeing at the moment? I understand that, for example, the LME has restricted trading of Russian metals, which is affecting price trends at the moment.

[Takeshi Horikoshi, executive]

Thank you for the question. This is Horikoshi speaking. Please look at Page 16 first. If you look at the sales trends by region on Page 16, you will see that there are very uneven trends by region, which may appear inconsistent with the trends in market demands. That's what you may be thinking. For FY '24, as Mr. Hishinuma mentioned earlier, we believe that the orders for mining will be firm with the exception of Indonesia.

On Page 16, there is a JPY 144 billion impact of foreign exchange rates, which is a factor pushing down sales and profits. But on the other hand, sales prices are expected to increase and contribute JPY 100 billion next year, meaning the net effect appears to be explainable by the volume trend.

As you can see, North America is up significantly, most of which is attributable to mining, whereas Latin America is down due to mining also. The reason for this is simply a matter of deal-making. It just so happens that in FY '24, there are more deals recognized or booked in North America and less in Latin America. Such differences, however, are canceled out in a mid- to long-term basis.

For other regions, as I mentioned earlier in the discussion of demand for construction machinery, we are looking at negative growth almost in all regions, except for North America, and any difference here is largely due to mining business.

In North America, we plan to increase the inventory of rent to sell in the next fiscal year, more than in this year partly due to some delay we had this year. There is a positive growth for construction machinery as well.

[Unknown Attendee]

If you look at Indonesia alone, the mining sector is a little weak. But you mentioned earlier that there was a slight recovery in the construction machinery sector after the election. But if we look at the net effect, do you still expect a negative trend at this point?

[Kiyoshi Hishinuma, executive]

This is Hishinuma speaking. Thank you for the question. As for Indonesia, we are still seeing a negative trend on a net basis. As I mentioned earlier, construction equipment due to the presidential election, we had a modest forecast for Q4 FY '23. Although the new administration will be in place, we may have to wait until around October to see a pickup in trend from the current low level.

If you look at the demand for nickel, which is more important for construction equipment or than for mining equipment, the demand is slightly weak. This is another reason why we expect a modest trend in Indonesian construction equipment.

As for mining, as I mentioned earlier, given our repeated comments about our equipment demand being related to 4,200 kilocalorie coal price, the price was around $53 per tonne in April, and it's not that low. In view of the idle equipment ratio, it's kept low at around 5% or so at the moment. However, looking ahead, there is a possibility that the local prices may weaken slightly. So that's the outlook for being negative.

[Unknown Attendee]

My second point is about the mining equipment business and how you think about profit margin, which may not be all clear, but given the ongoing yen's depreciation trend, which should be positive to your profit margin. If the conventional profit margin is about 20%, which I believe is the case, has there been any major changes recently including the impact of FX trend?

[Takeshi Horikoshi, executive]

Well, I'd like to answer. The biggest factor when it comes to foreign exchange's trend is in which currency products are sold. In that sense, mining products are mostly sold in the U.S. dollar, meaning that there is a major impact at the moment. However, the profit margin itself has improved considerably beyond the impact of FX rates. In particular, KMC's operating income has improved greatly, especially in the underground mining business driven by structural reform efforts. So the overall profit margin is favorable.

[Kentaro Maekawa, analyst]

This is Maekawa from Nomura Securities. I have 2 questions. First is about the variance in segment profit, there was a factor called volume and product mix on Page 7 and 17, respectively, which show results for FY '23 and the forecast for FY '24. It appears that the volume impact is larger than the revenue impact. For FY '23, the results may have been affected by Russia as you mentioned earlier. But for FY '24, what kind of impact do you expect? Is there any inventory fluctuation or other factors included?

[Takeshi Horikoshi, executive]

I'd like to answer. First of all, on Page 7, the difference between FY '22 and '23, the volume and product mix factor is negative JPY 20 billion, of which the volume factor accounts for negative JPY 1.2 billion. Since this factor affected sales only by JPY 3.3 billion, it affected profit only by JPY 1.2 billion. More important factor is regional mix and the product mix, which totaled a loss of JPY 14.9 billion.

The reason for this is in terms of regional mix, contribution of Indonesia, where profit margin is relatively high, has declined, affecting the overall margin. And the product mix was also negative, significantly for the equipment sales. Well, we sold more low-margin products in FY '23. That still is the case for FY '24.

Just for your information, the impact of these 2 factors resulted in a loss of JPY 14.9 billion. The remaining JPY 3.9 billion is unrealized profit on inventories and one more factor, which is related to intergroup transactions. The exports from Japan, which is high in profitability, has decreased considerably this time, especially due to the ongoing trend of inventory reduction.

Therefore, an increase in unrealized profits on inventories and a decrease in exports from Japan, which is referred to as intergroup transaction mix are the major factors. In addition, there was a loss of JPY 3.9 billion due to some small allowances for the accounts booked by some local entities during FY '23.

The forecast for FY '24 on Page 17, also show a large impact of the volume and sales mix factors. Again, out of the sales volume impact of JPY 53.3 billion, the corresponding difference in gross profit is JPY 19.3 billion. In addition, we have the regional mix and the product mix factors totaling JPY 18 billion, which is rather significant.

The regional mix factor is negative due to the same reason for FY '23 when the contribution of Indonesia declined. The product mix factor is mainly due to mining product mix. There is a large variation of profit margin among mining products. And next year, we expect to sell more low profitability products causing losses of JPY 18 billion in total. The remaining JPY 4.2 billion is explained by the acquisition of American Battery Solutions last year. This company requires massive R&D expenses as a matter of fact, and it generates limited profits on its own. Because of the conclusion or inclusion of this company, overall mix has deteriorated. I hope this answered your question.

[Kentaro Maekawa, analyst]

The second point is about share buyback. Once again, earlier, you took us through the internal criteria for executing buyback. Among them, one of the most impactful was free cash flow, I believe, as the company experiences a reduction in working capital going forward. There is less pressure to increase sales volume so quickly at the moment, meaning stable and solid free cash flow to be realized this year once again, which is a similar situation as last year when you decided to buy back your shares.

In that sense, although you may make a decision on a case-by-case basis, I wonder if you can say that there is a certain degree of continuity in the outlook for your decision-making. I would appreciate it if you could elaborate on this.

[Takeshi Horikoshi, executive]

Free cash flows in FY 2023 were JPY 230 billion. In April last year, I said that it will be JPY 350 billion, much larger number, but the actual free cash flow was JPY 230 billion, down by JPY 120 billion. As a reason for one, we spent for the acquisition of ABS, American Battery Solutions and iVolve. And more than anything, working capital did not decrease as expected. As a result, free cash flow turned to JPY 230 billion this year.

As I have been saying before, due to the structure of Komatsu, when sales increase, working capital tends to increase and it wouldn't generate much free cash flow. That worked in the fiscal year 2023. And free cash flow resulted in JPY 230 billion. Next year, as the sales will be flat and the reduction of inventory for which we are working hard would deliver results, we expect free cash flow will be around JPY 370 billion. So when the sales are flat year-on-year and working capital doesn't increase much, we would generate free cash flow as such.

[Kentaro Maekawa, analyst]

Is it correct to understand that in this fiscal year, you would have a considerable leeway with the cash allocation, including that for shares buyback?

[Takeshi Horikoshi, executive]

We make an investment plan considering the possible M&A in the future. But the free cash flow number I mentioned does not include those unexpected factors, including M&A.

I will take the next question. Mr. Isayama of Goldman Sachs, please.

[Yuichiro Isayama, analyst]

I'm Isayama of Goldman Sachs. First, I'd like to ask about the construction in North America. Mr. Hishinuma mentioned that demand in January to March was flat year-on-year in North America. Excuse me for referring to a Japanese peer, but they said the demand for hydraulic excavator was minus 10%. And last night, an American peer said especially about the Europe, the momentum in the North America is slowing down as well. So please let us know your perspective of wholesalers, retailers and the industry trend in January to March period in North America. And do you expect that demand in FY 2024 will decrease between minus 5% and minus 10%, while a Japanese peer expect the demand will be down by 3%. So please explain your current construction business in North America and your view for the industry.

[Kiyoshi Hishinuma, executive]

This is Hishinuma. When I discuss Q4 of FY 2023 alone, well, our view is almost 0 or flat year-on-year. However, the situation varies by segment. For example, rental has been firm. But in Q3, it started to weaken slightly and that weakness continued in Q4. Energy was not very strong either.

On the other hand, residential investment has not been very strong in the first half. It was negative year-on-year in Q1, but it has been recovering gradually. The latest housing starts may not be very firm. But in January to March period, it was positive year-on-year. The total figure of each company might have been slightly different like plus or minus by 1% or 2%. Going forward, I think that trend will continue in each area.

On the other hand, due to the sustained inflation and expected interest rate cut in FY 2024, dealers postponed their replenishment of rental equipment. And now as we see the prospect of interest rate cut being pushed back by another 6 months or more, so mindset seems to be slightly weakened. However, the overall situation of backlog on the side of retail customers remains unchanged and the demand for equipment will continue to exist. But as mentioned before, we see that investment mindset might be slightly weakened.

[Yuichiro Isayama, analyst]

I think you commented in the Q3 meeting that there are some gaps between wholesalers and retailers on dealer side. So would you additionally share with us the current comments of dealers?

[Kiyoshi Hishinuma, executive]

According to dealers, their customers continue to hold order backlog and dealers continue to restock their new equipment inventory. And they are ready to sell if the demand comes back. And supply chain also recovered, so if there is an additional order, we are ready to supply as well. But talking about the rental restocking, as mentioned before, expect rental replenishment in the second half onwards due to the high rental season in spring onward.

But actually partly due to the prospect of sustained high interest rate, the timing of replenishment slightly delayed in the second half. They refrained from making orders. In FY 2024, they're definitely replenishing stock as the inventory is insured, but we need to be watchful for its timing.

I'll take the next question. Mr. Sano of JPMorgan Securities, please.

[Tomohiko Sano, analyst]

I'm Sano of JPMorgan Securities. I have 2 questions. First, I'd like to ask about a view for the Indonesian market in FY 2024. I think you talked about your prospect of construction equipment 3 months ago saying that after the presidential election, we expect to see the project-related budget also for the relocation of the capital.

On the other hand, due to the weakening Chinese market, I think Chinese makers seem to be more focused on Indonesia market. So including this competitive environment, please let us know how you view the Indonesia in this fiscal year, including demand in market share?

[Kiyoshi Hishinuma, executive]

Regarding Indonesia, as I mentioned briefly before, demand for construction equipment in FY 2023 was firm. But due to the presidential election, we expected a drop in Q4. And as the new government will start in October, overall FY 2024 will be slightly weak. Because of expansion of Chinese makers, competitive environment is tough but we continue to address as before.

[Hiroyuki Ogawa, executive]

This is Ogawa. Let me add a comment about Indonesia. Talking about the seasonality, Q4 is a sales season in Indonesia. But unfortunately, in FY 2023, demand fell considerably as mentioned in that quarter. In FY 2024, first half will be weak as the new government will start in October and the budget execution will be after that point. So in our demand plan, we expect the low first half and high second half.

As for mining equipment, in other areas except Indonesia, demand will be almost flat year-on-year. And in Indonesia, it will be lower than the previous year. Partly, it will be affected by the coal price. Current price is about $56 or 4,200 kilocalorie. Going forward, due to the build-up high-level coal inventory in China, we see the risk of summer coal price falling further, and the risk is included in our plan.

As for the permit for the coal production, it is slightly delayed though it seems to be progressed gradually. And this is also one of the major impacts. So coal price determines the mining demand in Indonesia, and we need to monitor this closely.

Due to the very weak price of coal in the last few years, replacement during the idle time to the new equipment is progressing, and we need to be watchful for that development as well. But as Hishinuma mentioned before, operational level of equipment is very good. So we do not have to worry about aftersales market.

[Tomohiko Sano, analyst]

Second question is about selling prices. Plus factor by selling prices in FY 2024 plan is shown as JPY 105.1 billion. And would you comment on this in terms of area and the key driver?

[Kiyoshi Hishinuma, executive]

When I simply compare this with sales, it is close to 3%. And compared to the competitor Caterpillar, whose number was 3.6% in Q1, you are getting closer to the peer.

[Tomohiko Sano, analyst]

Let us know your thoughts on the difference from the 3 months ago, competitive environment. And after sales market, whether your share there is larger?

[Takeshi Horikoshi, executive]

I'm Horikoshi, I said that in FY 2023, selling price increase was JPY 133.1 billion, and this is 3.8% of sales. It is based on the calculation of selling prices increase compared to the sales before price increase. Then when it comes to FY '24, selling prices increase impact is expected to be JPY 105.1 billion. And compared to the sales before price increase, it will be 3.1% of sales.

When I compare last year and this year, partly due to the improvement in supply chain, selling price increase ratio is down. You refer to the example of Caterpillar. Their selling price increase was over 10% before, but we assume that it is coming down to around 4%.

For the next fiscal year, the price increase ratio of construction equipment will be lower than this year. We raised price last year but the price increase ratio of equipment will be down. And relatively speaking, parts price will not be so much lower than the previous year. The price increase ratio parts is currently set at high level.

By product segment of construction and mining, price increase in construction in the next year will be controlled as we have been raising price before. And that in mining equipment in FY 2024 will be higher as it has been controlled before.

Talking about the major resource companies. The price is set by formula and it is reflected after some time lag. So partly due to this, in the next fiscal year, price increase ratio in mining will be higher. But overall, including the supply years condition, price increase ratio is slightly down.

[Tomohiko Sano, analyst]

Do you think the selling price impact this time is a bit conservative? Although it is substantial as demand seems to be sustained, because in the last few years, results regarding the impact of selling prices exceeded that of the projection.

[Takeshi Horikoshi, executive]

One thing I can say is that previously, we have been pushing hard to increase prices and price increased. But this time, knowing the recovered supply chain, we are not pushing them as hard as before.

[Tomohiko Sano, analyst]

But this time, this is a figure based on the presented number by the operational side. So how shall we describe it?

[Takeshi Horikoshi, executive]

It can be slightly conservative view.

Question from Mr. Isayama from Goldman Sachs, cut off at the first question. So Mr. Isayama, would you ask second question?

[Yuichiro Isayama, analyst]

I wanted to ask about the production. I think that you sustain the high utilization and production to maintain the peak sales so far. Now you are on the declining trend in volume and is the production utilization also on the declining trend? Or don't we have to worry about that because you wouldn't have any issues in sell-through?

And of course, there's a profit difference, our volume and product mix and others were shown as negative factor. So I was interested in that point whether you expect the profit decrease due to the utilization is included. And also, please let us know if that factor is included in the plan for FY 2024?

[Takeshi Horikoshi, executive]

We have already cut back the production substantially from the second half of FY 2023, partly due to the build-up inventory. And in Europe, in particular, in some locations, we have already suspended the production. In the next fiscal year, we will reduce further. So the current utilization level will be sustained.

[Hiroyuki Ogawa, executive]

This is Ogawa. In FY 2022 and the first half of FY 2023, the utilization level itself was very high in each plant. But in the second half of FY 2023, production was substantially reduced. And in the second half alone, we reduced the production volume by about 7,000.

In FY 2022 and the first half of FY 2023, there was a lot of order backlog. And to meet the demand, we increased utilization and overtime. Then demand started to decline, and the gap led to the build-up inventory, and we had a drastic production adjustment in the second half of the year.

As the production adjustment progressed, the overtime in FY 2024 in plants in Japan will be more optimized to the level of 0.5 to 1 hour per day. But the condition varies by region. For example, for mini shovel in Europe, the inventory level is still high. So we need to have further production adjustment. But put simply, the situation was tough in the second half of FY 2023, but over time is coming back to the more appropriate level gradually.

[Yuichiro Isayama, analyst]

Based on what you just said, is it okay to think about this fiscal year with this assumption that the production operations already returned to normal and the first half is to be negative compared to previous year but it will be positive from the second half, that is if things return to normal?

[Hiroyuki Ogawa, executive]

We believe that we're getting closer to retail ecos wholesale, and we are making production plans while keeping this in mind. Although operating rate will not be as high as it was in the first half of 2023, but how should I say, it is gradually reaching to an appropriate operating state.

Next question from [ Nihon Keizai Shimbun, Mr. Motoaki ], please.

[Unknown Attendee]

I am Motoaki from Nikkei. This is related to the question from JPMorgan earlier, but I also have a question about price increase. I think JPY 105.1 billion for this fiscal year is quite aggressive. But you just told us about your outlook by product. But will you please elaborate about your strategy by region, for example, where should the prices be raised?

[Takeshi Horikoshi, executive]

Yes. This is Horikoshi speaking. In terms of value contribution from the sales price increase, the biggest markets are North America and Central and South America. We also have a very large project in the Middle East in each country. So we think we will be able to raise sales prices there as well. And in Japan, also, we plan to continue raising sales prices, although the rate of increase will be slightly lower than last year.

[Unknown Attendee]

You just mentioned that you raised prices in North America, Central and South America, but the outlook for the demand is going to slightly lower, right? So in that case, it will be difficult to raise prices simply by adding in the higher cost of the raw materials. Do you have a strategy to get customers to accept the price increase?

[Takeshi Horikoshi, executive]

I think there are areas where it will be easy to raise prices and areas that there will be more difficult to raise prices. If anything, North America, Central and South America have a culture of being able to raise prices in proportion to inflation price increase. So I think Latin America, North America, we will be able to continue raising prices. On the other hand, though, it is difficult to raise price in areas where competition fears, especially in Southeast America, the situation is same in the 2023, I think we remain true for 2024 as well.

Next question from SMBC Nikko Securities, Mr. Taninaka, please.

[谷中 聡, analyst]

Taninaka from SMBC Nikko Securities. I have 2 questions. The first question is about the change in the view for the demand from the third quarter. Is it correct to think that your company's major thinking has not changed much? And since interest rates remain high in the macro environment, do you think that the demand outlook takes into account the risk that demand in North America was stagnant?

[Takeshi Horikoshi, executive]

Yes. That's how we are seeing it. Your current question is mainly about North America, right, in that area, right?

[谷中 聡, analyst]

Yes, yes. And please let me know if there are any major changes or general changes.

[Takeshi Horikoshi, executive]

The main reason is, of course, the inflation and also interest rates remaining high. We thought that this will be resolved sooner, but they have been -- they have not been resolved. Also, the political instability and uncertainty for the future of the election will continue. So we think that the demand in North America will not increase.

[谷中 聡, analyst]

I understand very well. My second question is about progress in the midterm business plan. It is written in your materials, but would you please tell me about the progress again. Your company's business goals include the sales growth rate that exceeds the industry standard and a profit margin that is at the top level of the industry. However, though your competitors are also growing quite a bit. So would you please tell me whether your company's current performance you consider as good or bad compared to your competitors or in the industry? Or is it just a passing grade? What's your sense?

[Takeshi Horikoshi, executive]

This is Horikoshi speaking. I think our growth potential is not bad compared to other companies. In terms of profitability, CAT is at the top amongst its peers, perhaps in part to its ability to flexibly raise selling prices. And I think Komatsu's at a level second only to CAT.

[Hiroyuki Ogawa, executive]

This is Ogawa. Let me jump in. I think that we need to be comparing our profitability always against Caterpillar's. Until a few years ago, the difference in profitability between our company and the CAT was 3 to 4 points, but recently the difference has widened considerably. Most of that is due to construction equipment.

The difference in the main battlefield for construction equipment between the 2 companies has a big impact on profitability. CAT's focus is North America, Latin America, while our focus is on Japan and Asia. So that's a big difference. Caterpillar's sales in North America and Latin America accounts for about 60% to 65% of the total sales, while ours is a 40% to 45%.

As I mentioned earlier about the price increase, one of the reasons is that it's difficult to raise prices in our main battlefield. And furthermore, Caterpillar's sales scales for construction companies overwhelming large than Komatsu. They are about twice the size of ours. On the other hand, the sales of mine equipment are almost the same for both companies since acquiring Joy Global sales have remained almost same for both company. The Komatsu's profit margin will surpass Caterpillar because we produce and sell directly.

This trend has hardly changed in recent years. Therefore, a major issue for us is how to increase the profit margin of construction equipment. We have reflected this fact in our operating profit margin. It's inferior to the Caterpillar's, which is one of the management targets in the midterm plan, and we would like to move forward while thoroughly discussing what measures we need to be taking in this area.

I'd like to take the next question from Citigroup Securities. Mr. McDonald, please.

[Graeme McDonald, analyst]

Sorry for having to participate remotely online today. I have 3 questions. The first question concerns the reports that the BHP is proposing to acquire on Anglo American. If this acquisition goes through, what impact will this have on your company? That's my first question, please.

[Hiroyuki Ogawa, executive]

This is Ogawa speaking. At this point, nothing has been confirmed, so I have nothing to comment on. However, if this actually happened, we will need to keep a close eye on it. But I'm not particularly worried about it at this point.

[Graeme McDonald, analyst]

Just to confirm, Mr. Ogawa. Your company currently does more business with Anglo American, right?

[Hiroyuki Ogawa, executive]

Sorry, I don't have the exact figures in front of me now. So I'll need to get back to you later.

[Graeme McDonald, analyst]

Yes. Got it. Second question, I'd like to ask you a quick question about the share buybacks. Japanese companies in general announced share buybacks over 1-year time frame. But this time, your company announced that the Komatsu buy back its own shares for about 6 months until September 30. Does your company have a message behind this that this is over 6 months is the usual 1 year?

[Hiroyuki Ogawa, executive]

Regarding share buybacks, Japan's corporate law stipulates that share buybacks must be completed within 1 year. So your question is why you have a plan for a 6-month period? I would like to answer with example. For example, if you want to buy back 100 billion shares and the stock price is JPY 4,500, the first estimate is how many business days it would take? If you look at the range of ups and downs in stock prices, there are 245 -- and since there are 245 business days in a year, and in order to finish within the time limit, you have to set a buffer from that.

And furthermore, we will be looking at fluctuation of the share prices to some extent, too. So if we do a share buyback of, say, JPY 1 billion, a share price of JPY 4,500, we would expect it to be completed in about 63 business days. Then if you have a little buffer against that, it will be about September 30. I believe on this day, for example, even if you have some fluctuation, our share buyback's policy, can be completed. That's our approach.

[Graeme McDonald, analyst]

I understand. Final question. Regarding your increase and decrease analysis, I think that the logistic costs are included in the cost difference. But I think that the forecast for the past and the current period has changed due to various reasons such as shipping costs, the resi issue, Baltimore bridge issues. It's a minor question, but how do you think about the actual results for the past period and the forecast for this period regarding logistic costs?

[Hiroyuki Ogawa, executive]

Comparison between 2022 and '23 is on Page 7. The cost difference is a loss of JPY 17.3 billion. But in fact, the shipping freight cost is a positive of about JPY 15 billion. Shipping freight has dropped significantly from 2022 to 2023. So we have included that as a plus but if we include that, netted the cost difference is a loss of JPY 17.3 billion. And Suez -- this is Suez Canal, now it's closed due to Israeli issues, but now we have to go around the Strait of Malacca. But even so, the actual shipping freight has not changed all that much, and the period is longer and the shipping freight has not changed all that much although it takes more time compared to 2022. The shipping rates have decreased. This is reflecting actual results.

So regarding 2024 compared to '23. Currently, we have a loss of JPY 25.7 billion due to difference in costs. But here, the shipping fee is almost impact is 0. Therefore, we assume the '23 level will continue in 2024. For example, the route of the Panama Canal is currently being restricted due to a lack of water or the bridge is broken. But it's also possible to use other ports and send goods. And we haven't heard nothing that is causing a major problem. So the price for the next year is at the same level as this year.

And in terms of logistics, domestic logistics cost has risen considerably. We are also trying to eliminate the time that the trucks spend in our factory premise. So what we used to ask the logistics supplier, we are bringing all the transportation loading, unloading of goods in-house work. We used ask the transportation company to do it, but we are doing it.

So that effort is costing us. We are now bringing the workload of about 40 people to in-house. In addition there's cost, the Ministry of Land, Infrastructure, Transport and Tourism has issued a guideline for an 8% increase for logistics cost. So we also reflected that in our 2024 plan.

Thank you very much for your question. We are running out of time. So I'm sorry, but this will be the last question. Next question from Daiwa Securities. Mr. Tai, please?

[Hirosuke Tai, analyst]

This is Tai. I'd like to ask Mr. Ogawa. This is a very -- I would like to get your rough impression. My feeling is that your company's view on demand has toned down a bit compared to 3 months ago. You explained the mining in Indonesia situation in quite a good detail. I'd like to know from you, how you feel about the demand environment in regions such as U.S., Europe, Asia and Japan from your perspective before we end this call.

[Hiroyuki Ogawa, executive]

Well, I think America demand is a little bit on the conservative side. This is my personal feeling though. But I think so because infrastructure energy are relatively strong and housing demand is still very strong in the U.S. and housing stores are also rapidly increasing reaching 1.57 million units in February. I mean it went up. So I think there's a bit of conservative outlook on demand for the United States, but things are still rough in Europe. However, intuitively speaking, I feel that we have hit a bottom.

As for Asia, as I mentioned earlier, Indonesia will probably return after October when the presidential election frenzy comes down. And as for mining, this also, as I mentioned earlier, expected to remain almost flat, except for Indonesia and Indonesia will fall, but I think this is a bit conservative, too.

If the current coal price is maintained, I think that there will not actually be such a big job. However, though, when the price of thermal coal was very high in 2021, there was a lot of equipment replacement. So I feel that we need to keep a close eye on demand for a new equipment. And on the other hand, as I mentioned before, operations are operating at a very high level. So I'm not worried at all about the aftermarket.

[Hirosuke Tai, analyst]

What about Japan?

[Hiroyuki Ogawa, executive]

It's not very large, but there are almost no change in Japan. But as you can probably tell by looking at our materials, it remains a 0 for almost the entire time, so no change. We're not expecting much demand for new equipment from Japan, but rather, we are pitching solution business in Japan. I think that's a key in how to grow smart construction.

[Hirosuke Tai, analyst]

I understand I'd like to ask you one more thing to Mr. Ogawa, please. Regarding the rate of price increase, it is true that the 10% increase in the past may have been a bit abnormal and the rate has now fallen to around 34%. I think you were saying 3 months ago at the end of the year that the price increase for the parts will be one of the focus for 2024. But I felt that the rate of price increase is not factored in very well. What do you think about it? If the current operating unit is high? I thought it would be possible to increase the price of 1 trillion parts more and incorporate the price increase? I understand that equipment is a different story.

[Hiroyuki Ogawa, executive]

Relatively speaking, you're right, the parts prices are easier to raise. For example, based on the actual results for '23, we've been able to raise prices by 5% to 6% and current proposal also incorporate the price increase to approximately 4% to 5%. Whether you can raise prices further is really depending on our customers. So relatively speaking, it is easier to raise prices on parts.

Thank you very much. And now it is time to close. So I'd like to conclude Komatsu's 2023 financial results briefing. Thank you very much, everyone, for joining us today.

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