Komatsu Ltd. (PNK:KMTUY) Q3 2024 Earnings Call Transcript
Komatsu Ltd. (PNK:KMTUY) Q3 2024 Earnings Call Transcript January 31, 2024
Komatsu Ltd. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Takeshi Horikoshi: 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 Peninsula earthquake on January 1, 2024. In terms of production, damage to our production bases into 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 some 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 affected partner companies to support their restoration. Furthermore, the impact of the earthquake on our consolidated business performance is negligible.
For reconstruction assistance, we have donated a total of JPY600 million as emergency relief funds, JPY500 million went to Ishikawa Prefecture and JPY100 million to Toyama Prefecture. In addition, we are cooperating with our distributors to meet the requests of the disaster stricken areas by providing water and food supplies, blending construction equipment and forklifts, etcetera 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 JPY149.7 to the dollar JPY159.9 to the euro and JPY96.7 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 JPY972 billion. Operating income increased 15.9% to JPY156.4 billion. The operating income to net sales ratio rose 1.4 percentage points to 16.1%. Net income increased 42.4% to JPY98.7 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 will 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 JPY918.2 billion. Segment profit advanced by 22.2% to JPY149.1 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 JPY27.2 billion. Segment profit decreased by 10.6% to JPY5.7 billion. Net sales for industrial machinery and others increased 7.7% from the corresponding period a year ago to JPY46.5 billion, while segment profit declined 72.8% to JPY1.3 billion. I’ll talk about the factors impacting the changes in each segment later. Page 6 shows sales by region in the construction and mining and utility equipment segment. Sales to outside customers increased 5.1% from the corresponding period a year ago to JPY904.7 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’ll explain the highlights for 9 months. Foreign exchange rates were JPY143.4 to a dollar, JPY155.0 to euro and JPY94.0 to Australian dollar. Yen depreciated against dollar, euro and Australian dollar year-on-year. Net sales in three quarters of 9 months FY 2023 increased by 10.1% year-on-year to JPY2.795 billion. Operating income increased by 30.8% to JPY453.4 billion and operating income ratio was 16.2% up 2.6 points. Net income attributable to Komatsu Ltd increased by 31.2% to JPY304.3 billion. Due to improvement in selling prices and the positive impact by foreign exchange, both sales and profit increased. All net sales segment profit, operating income, income ratio and net income for three quarters of 9 months mark the record highs.
On Page 8, I’ll explain segment sales and profit. Sales in construction, mining and utility equipment increased by 10.8% year-on-year to JPY2.6258 trillion and segment profit increased by 38.9% to JPY429.9 billion. Sales in retail finance increased by 17.5% year-on-year to JPY74.7 billion and segment profit decreased by 12.0% to JPY18.7 billion. Sales in industrial machinery and others increased by 3.7% year-on-year to JPY171.5 billion and segment profit decreased by 63.7% to JPY5.7 billion. I’ll 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 Q3 to JPY2.6075 trillion. By region, sales increased in North America, Latin America and Oceania, but decreased in CIS, China etcetera.
Page 10 shows causes of difference in sales and segment profit in construction, mining and utility equipment. Sales increased by JPY256.2 billion year-on-year due to the positive effects of foreign exchange rates and improved selling prices. Segment profit increased by JPY120.3 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 contract increased year-on-year due to foreign exchange rates and increased sales in the construction equipment business.
Revenues increased by JPY11.1 billion year-on-year due to the positive effects of interest rate hikes and foreign exchange rates. Segment profit decreased by JPY2.5 billion year-on year mainly due to the absence of a gain on reversal of allowance for doubtful 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 JPY171.5 billion, segment profit decreased by 63.7% to JPY5.7 billion and the segment profit ratio decreased 8.0 points to 4.3%. Sales increased mainly due to the increased sales of large purchase for automobile manufacturing industry, but profit decreased due to a decline in high margin maintenance revenues for excimer lasers and others against that backdrop of declining global demand in semiconductors.
On Page 13, I’ll explain the consolidated balance sheets. Total assets increased by JPY493.6 billion year-on-year to JPY5.3694 trillion affected by depreciation of yen. Inventories increased by JPY232.5 billion due to the depreciation of yen and increased demand for mining equipment and parts. Shareholders equity ratio was 52.8% up by zero points and net debt-to-equity ratio was 0.30. This concludes my presentation. Next, Hishinuma, General Manager of the Business Coordination Department will explain the business projection for fiscal ‘23 and demand trends.
Kiyoshi Hishinuma: I am Hishinuma from the Business Coordination Department. I will 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 explained 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 UK, 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, etcetera. 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 etcetera 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-over-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’ll explain the sales of mining equipment on Page 23. In the third quarter FY 2023, sales increased by 20% year-on-year to $448 billion. Excluding the foreign exchange impact, it was 17% increase. In FY 2023, sales are expected to increase by 11% year-on-year to JPY1.5759 trillion, which remains unchanged from the projection in October.
I will explain the sales of parts on Page 24. In the third quarter FY 2023, sales increased by 7% year-on-year to $239.4 billion. Excluding the foreign exchange impact, it was 5% increase. In FY 2023, sales of parts are expected to increase by 4% year-on-year to JPY916.3 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, Komatsu introduced a 13-ton class PC138E-11 electric excavator with a lithium-ion battery to the domestic market and the rental machine in January 2024. Komatsu positioned the 2023 as a first year to introduce the electrified construction equipment into the market. By responding to the customer’s news through the expanded product line up in the construction equipment market, where a 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 our battery manufacturer to develop and produce diverse battery pack, including lithium-ion battery for commercial and industrial vehicles and supplies optimized battery system to meet the customer’s 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 newly acquired, we will accelerate the development of battery type electrified vehicles toward the carbon neutrality in 2050 and contribute further to create market for electrified construction and mining equipment and to achieve decarbonization 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 parts repair, we can contribute to reduce the total lifecycle 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 have provide a 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 a hydrogen fuel cell module for Komatsu 930E super heavy duty dump truck that company is a flagship model in mining. Two companies are planning to test a prototype equipped with a HYDROTEC, the hydrogen fuel cell LGN in Komatsu test base in Arizona in the middle of 2020s. This concludes my presentation. We will now move on to Q&A.
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