Edited Transcript of 6301.T earnings conference call or presentation 18-May-20 10:59am GMT

Next, I would like to explain about the effects on sales and business results. As for the status of our customers’ work sites and operations, there are some countries where governments have issued restrictions and we have seen some adverse effects, such as temporary suspension of businesses. However, some governments have designated industries, such as construction, mining, agriculture, forestry and transportation, as essential businesses that support the social infrastructure. So the work sites of customers in these industries are operating. We will continue to monitor KOMTRAX data about operation by customer and regions.

In sales and product support activities, our distributors are utilizing telework to assess the situation for supply routes and work shifts to continuously supply products, parts and services to our customers.

In the Retail Finance business, some of our customers and distributors are asking for extensions on their payments. We are responding accordingly, taking into account each specific situation. As for Komatsu Group companies, there is no problem as of today in terms of their cash position.

As for the impact of the COVID-19 to our sales, the construction, mining and equipment business as we see significant impacts as well as the industrial equipment and other business. We believe, in total, sales have declined by approximately JPY 40 billion due to this pandemic.

Lastly, as for the forecast for consolidated business results for fiscal year 2020, it is difficult for us to make an appropriate and reasonable calculation, so we have decided to leave them undecided for now. We will disclose the outlook as soon as possible as it becomes possible to make a calculation.

Next, I would like to explain about the progress on the midterm management plan. First, I will explain the progress around efforts of focus. The new midterm management plan, DANTOTSU Value: FORWARD Together for a Sustainable Growth, started last year with 3 strategic pillars for growth: valuation creation by means of innovation, growth strategies based on business reform and structural reforms for growth. We set forth our thinking about aiming for sustainable growth through a virtuous cycle of improving profits and solving ESG issues.

Regarding the first strategy, value creation by means of innovation. In fiscal year 2019, we implemented a series of new devices and applications, such as retrofit kits that accelerate the realization of digital transformation at construction sites from April 2020. We also announced that we will start offering SMARTCONSTRUCTION in a full-fledged manner in the United States and 4 countries in Europe. In mining, we have steadily received orders for AHS dump trucks and increased the total number of units in operation. In addition, we exhibited an electric mini excavator at bauma 2019 as part of our construction equipment electrification efforts and started to offer them in the Japanese market in April this year. From fiscal 2020 onwards, we will engage in overseas development of SMARTCONSTRUCTION, development of new mining platforms and develop automation, autonomy, electrification and remote control technologies.

Regarding the second strategy, growth strategies based on business reform. In fiscal 2019, on top of integrating and consolidating business sites of KMC, we launched new models for aggregate and cement application as well as conducted a model change of hydraulic excavators for use in Strategic Markets. Moreover, for the PC200 domestic spec model, we were first in the industry to offer the Human Detection & Collision Mitigation System as a standard feature. By doing so, we will contribute to realizing safer customer job sites. In the forestry field, we have strengthened our product range by newly adding TimberPro of the United States to our group. From fiscal 2020 onwards, we will work on enhancing the market position of the underground hard rock mining business, launching next-generation KOMTRAX as well as value chain reform to achieve life cycle product support.

The third strategy is structural reforms for growth. In FY 2019, we were awarded Prime Minister’s Award for KOMatsu Manufacturing Innovation Cloud System, or KOM-MICS, which is to connect manufacturing plants, including suppliers, by utilizing IoT. Also, we started construction of KMC’s new Milwaukee plant and Komatsu Forest’s new Umea plant. We will continue to promote operational reform by ICT and IoT, continuous cost improvement and strengthening human resource for global business and diversity in human resources. In FY 2020, which is the second year of our midterm management plan, DANTOTSU Value: FORWARD Together for a Sustainable Growth, will strive for sustainable growth by flexibly addressing major changes in external environment, prioritizing with assessment of cost effectiveness and strategic values as well as promoting efforts of focus based on 3 growth strategies.

Next, let me review the management targets for FY 2019, the first year of midterm management plan. The graph at the top shows changes in financial results in the past, and the table at the bottom summarizes the progress against the management targets of midterm management plan. Overall, in FY 2019, both sales and operating income decreased due to declined demand in Strategic Markets, such as Asia, as well as COVID-19 pandemic. It has become a very tough first year for the midterm management plan.

As for profitability, operating profit ratio was 10.3%. And for efficiency, ROE was 8.6%. Regarding ESG, we are taking actions to achieve the goals of reduction of CO2 emissions and rate of renewal energy use. As for evaluation by external organizations, we were selected for Dow Jones Sustainability Indices, or DJSI, which is a global index for socially responsible investment. And CDP, an international NPO that offers environmental information disclosure system, rated us with A for climate change and single A negative for water security. Retail Finance business could achieve the targets in both ROA and net debt equity ratio.

That is all for my presentation. Next, Mr. Horikoshi will explain the business results for FY 2019.

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [2]

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I’m Horikoshi, Chief Financial Officer. I’d like to explain the business results for FY 2019. Let me explain the highlights of business results for the fourth quarter FY 2019 on Page 11. Exchange rates were JPY 108.1 to $1, JPY 120 to EUR 1 and JPY 15.5 to CNY 1. And yen appreciated against all of U.S. dollar, euro and renminbi year-on-year. Yen also strengthened against Australian dollar and the South African rand, though not listed here, but yen depreciated only against Russian ruble. Consolidated net sales in the fourth quarter FY 2019 were JPY 617.4 billion, down 12.6% year-on-year. And operating income was JPY 42.8 billion, down 57.9%. Profit ratio was down 7.5 points to 6.9%. Consolidated net sales declined by demand contraction caused by COVID-19 in addition to volume decline and currency headwinds. Operating income declined due to volume decline and a geographical composition of sales. Net income attributable to Komatsu Ltd. was JPY 18.5 billion, down 74.3%.

I’ll explain segment sales and profit on Page 12. Sales of Construction, Mining & Utility Equipment were JPY 553.1 billion, down 12.6% year-on-year, and its segment profit was JPY 44.4 billion, down 52.1% year-on-year. Sales declined due to volume decline and currency headwinds, and profit declined due to volume decline and the geographical composition of sales. Sales in Retail Finance were JPY 17.9 billion, up 3.3% year-on-year, and its segment profit was JPY 1.7 billion, down 59.6% year-on-year. Increased average assets balance pushed up the sales, and profit declined mainly due to the absence of reversal of allowance for doubtful accounts recorded in China for FY 2019 (sic) [2018] and allowances for doubtful accounts related to mining accounts. Sales in Industrial Machinery & Others were JPY 50.5 billion, down 16.4% year-on-year, and its segment profit was JPY 4 billion, down 31.7% year-on-year. Both sales and profit decreased, reflecting declined demand for machine tools in the automobile industry regard the sales decline by about JPY 40 billion affected by the spread of COVID-19.

Page 13 is the status of the sales of the Construction, Mining & Utility Equipment business by region. Sales went down by 12.6% year-over-year to JPY 551.5 billion. Sales dropped sharply in Asia, North America and China. As sales declined substantially in the Strategic Markets, such as Asia and China, the ratio of Traditional Markets rose to 51% from the previous year, 50%.

Page 14. From this slide, I would like to explain about the highlights of the business results for fiscal year 2019. Exchange rate was to JPY 108.7 to $1 and JPY 120.8 to EUR 1 and JPY 15.6 to CNY 1. Yen became stronger against the dollar, euro and renminbi year-over-year. Although it is not shown on the slide, yen appreciated against the Australian dollar, South African rand and Russian ruble as well. Consolidated net sales declined by 10.3% year-over-year to JPY 2,444,008,000,000 due to the decline in sales volume and the negative impact of the exchange rate. Operating income went down by 37% to JPY 250.7 billion due to sales volume decline and the change in the regional mix. Operating margin declined by 4.3 points to 10.3%. Net income decreased by 40% to JPY 153.8 billion. Cash dividends per share for fiscal year 2019 has been changed from what we announced at the beginning of this fiscal year from JPY 110 to JPY 94. The consolidated payout ratio is expected to be 57.7%.

Page 15. This slide is about the sales and profit for each segment. Construction, Mining & Utility Equipment segment sales was down by 10.8% at JPY 2,211,002,000,000, and segment profit declined by 37.8% to reach JPY 227.3 billion. Sales declined due to the decrease in volume and the negative impact coming from the exchange rate. Profit decline was attributable to volume decline and change in regional mix. Revenues of Retail Finance was up by 11.5% year-over-year, reaching JPY 70.9 billion. Profit declined by 27.6% and was JPY 12.6 billion. Revenues increased supported by the increase in average asset balance. However, profits decreased as there was no more reversal of allowances for doubtful accounts, which was recorded in China in fiscal year 2018. Another reason was that allowances for doubtful accounts for fiscal year 2019 related for mining accounts was booked. Sales of Industrial Machinery & Others decreased by 12.6% from fiscal 2018 to JPY 177.5 billion, and segment profit declined by 26.5% to JPY 13.7 billion. Both sales and profits declined due to reduced sales of presses and machine tools to the automobile industry as well as declined sales of Excimer laser-related products for the semiconductor market. I will explain the factors behind the changes in each segment later.

Page 16 shows the sales by region in the Construction, Mining & Utility Equipment segment. Sales of Construction, Mining & Utility Equipment decreased by 10.6% from fiscal 2018 to JPY 2,205.9 billion. While sales increased in Europe, it declined sharply, especially in Asia, North America, China and Africa. The ratio of Traditional Markets increased from 46% in the previous fiscal year to 50% due to the decrease in Strategic Markets, such as Asia, China and Africa, et cetera.

Page 17 shows the causes of difference in sales and segment profit in the Construction, Mining & Utility Equipment segment. Despite the effect from raising selling prices, sales decreased by JPY 267.7 billion from fiscal 2018 due to reduced sales volume and the negative impact of foreign exchange rates. Segment profit, like sales, benefited from higher sales prices but declined by JPY 138 billion year-on-year due to lower sales volume, change in the geographic sales mix and higher fixed costs due to strategic investments for growth. The segment profit ratio was 10.3%, down 4.4 points.

Page 18 shows the status of the Retail Finance business. Although assets increased mainly in North America and Europe, overall, it was flat compared to the previous fiscal year due to foreign exchange rate impact. New contracts declined mainly in North America, China and Latin America due to a decrease in sales of construction equipment. Revenues increased due to higher average asset balance, et cetera. Segment profit decreased year-on-year due to the drop-off of reversal gains related to allowances for doubtful accounts, which was recorded in the previous fiscal year as well as provisioning for doubtful mining accounts.

Page 19 shows sales and segment profit for Industrial Machinery & Others. Sales of this segment was down 12.6% year-on-year to JPY 177.5 billion due to decreased sales of presses and machine tools for the automobile manufacturing industry as well as declined sales of Excimer laser-related products in the semiconductor market. Segment profit declined by JPY 4.9 billion year-on-year to JPY 13.7 billion, and segment profit ratio was down 1.5 points from the previous fiscal year to 7.7%.

Now let me show you Page 40 to explain orders and sales of Industrial Machinery. Page 40 shows changes in book-to-bill ratio for Industrial Machinery. These graphs indicate the changes of the index obtained by dividing orders in value in the most recent 6 months by sales in the same 6 months. Komatsu Industries, shown at the top, sells and provide services for stamping presses and sheet metal machinery. The index declined to almost 60% as orders got weak with decreased demand in automotive industry. Komatsu NTC, shown below, is engaged in design, manufacturing and sales of machine tools, such as transfer machines, machining centers and crankshaft millers. Its index has been below 100% for a long time due to weak orders with declined demand in automotive industry as well.

Please turn to Page 20 for the balance sheet. Total asset grew JPY 15.4 billion from the previous fiscal year-end to JPY 3,653.6 billion. While we could make progress in collecting account receivables, cash and deposits increased as we increased cash in the end of the fiscal year to secure liquidity on hand. Also as a result of adopting the new accounting standard, right-of-use assets under operating lease increased year-on-year in other assets. Interest-bearing debt rose JPY 81.6 billion from the previous fiscal year-end to JPY 1,012.3 billion. Shareholders’ equity ratio was down 1.4 points from the end of the previous fiscal year to 48.5%. Net debt equity ratio was 0.43.

Page 21 is about status of capital expenditures, et cetera. Investment in production and other facilities, excluding investment in rental assets, increased year-on-year, mainly due to KMC’s restructuring of plants. While R&D expenses and fixed costs increased due to focused investment in growth areas, overall costs remained flat by the reduction of other expenses.

That is all for my explanation. Next, Mr. Imayoshi will explain the demand dynamics and the business conditions.

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Takuya Imayoshi, Komatsu Ltd. – Executive Officer & GM of Business Coordination Department [3]

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I’m Imayoshi, General Manager of Business Coordination Department. I will explain the conditions of major markets in FY 2019. As for demand in FY 2020, projection as of the time budget and business planning is shown as reference. And please take note that this is not the projection as of today.

As for China market, CIS market settled down with the resolution of COVID-19 pandemic. The current projection is listed.

Page 23 shows demand dynamics of 7 major products of Construction, Mining & Utility Equipment. Figures in the fourth quarter FY 2019 is our projected preliminary number. In FY 2019, demand decreased presumably by 8% year-on-year. In the fourth quarter, in particular, total demand declined by 16% as adversely affected by the spread of coronavirus infections, mainly in China, North America, Europe and Asia. Demand in FY 2020 is the projection as of February before the spread of coronavirus, and it was projected as flat year-on-year. Direct and indirect effects of coronavirus are still uncertain, but we’ll continue to monitor demand trend cautiously.

Next page and onwards show the major market conditions. Page 24 shows demand trend in Japan. In FY 2019, demand increased presumably by 5% year-on-year. The increase was mainly supported by the recovery from reduced sales affected by the backlash from pre-buy demand prior to the new emission control regulation enforced in September 2017 and firm demand of infrastructure-related constructions. Initial projection of FY 2020 was minus 5% to plus/minus 0%, anticipating prolonged sluggish demand after the consumption tax hike. Average operating hours per month of KOMTRAX is shown as the latest condition. In April, it was up 2% year-on-year.

Page 25 shows demand trend in North America. In FY 2019, demand increased presumably by 3%. By segment, demand increased 3% year-on-year with a strong demand in the construction and rental industries despite weak energy-related demand caused by the crude price declines. The demand continued to grow for 3 consecutive years. But in the fourth quarter, demand fell sharply by 12% due to the spread of coronavirus infections. By country, demand increased in the U.S., but Canada remains weak with demand declining 5 quarters in a row. Initially, for fiscal year 2020, we anticipated demand will be minus 5% to flat year-over-year as we thought the market will take away and see attitude with the presidential election in sight. The average operating hours per month of KOMTRAX was down 12% for April year-over-year. This marked a double-digit decline for 2 months in a row.

Page 26, this is the demand trend in Europe. Demand presumably decreased by 2% for fiscal year 2019. Demand in the major markets of Germany and France continued to be firm due to infrastructure projects. However, demand declined in the U.K. as the outlook of Brexit continues to be unclear. Furthermore, as COVID-19 spread among Europe, demand nosedived in the fourth quarter. Earnings forecast for fiscal year 2020 was that the conditions of fiscal year 2019 will continue into this year, and demand will be between flat and 5% growth year-over-year. Average operating hours per month of KOMTRAX was down 9% in March year-over-year and down 16% in April.

Page 27 is the China market. The numbers for demand is for foreign manufacturers. Demand volume for fiscal year 2019 is assumed to be down by 21%. For your reference, total demand for hydraulic excavators, including mini shovels and Chinese makers, was up by 2% year-over-year. Demand declined sharply as the share of Chinese makers increased and demand in February after the Chinese New Year was very weak due to the spread of coronavirus. Demand has started to recover from March onwards. Going forward, although it depends on what kind of economic stimulus measures the Chinese government is going to take, but the current outlook for demand growth in fiscal year 2020 is between 0 to 10%. Average operating hours per month of KOMTRAX was down by 17% in March but went up by 3% in April year-over-year.

Page 28. Next is about the trend in the Southeast Asian market. Demand seems to have gone down by 24% year-over-year. Indonesia is the biggest market in this region, but there has been no change in the government’s stance towards infrastructure investment after President Joko Widodo took office for the second term, and demand remained stagnant. As customers are hesitant to invest in mining equipment due to stagnant price of thermal coal and uncertainty of the future outlook, demand continues to be depressed. In the Philippines, Thailand, Malaysia, although we were gradually starting to see signs of a recovery in the fourth quarter, the market retreated substantially thereafter due to the spread of COVID-19. Initially, our forecast for fiscal 2020 was that demand would decline by approximately 5% to 10% overall, expecting weak demand to persist in Indonesia, the largest market. As for current trends, monthly average operating hours of KOMTRAX in Indonesia was minus 4% in March compared to the same month in the previous year and was plus 2% in April.

On Page 29, I will explain the trends in demand for mining equipment. Demand for mining equipment at fiscal 2019 decreased presumably by 18% from fiscal 2018. Demand in Indonesia remains weak due to sluggish thermal coal prices. In addition, in Africa, although demand for mining equipment in Southern Africa was brisk, overall demand declined year-on-year due to sluggish demand in other regions. Also in the CIS region, declining demand trends are continuing due to the impact from the decline of thermal coal prices. The initial forecast for demand in fiscal 2020 was minus 10% to 20% in anticipation of the decline in demand in Indonesia and CIS to bottom out.

Here, I’d like to talk about the status of Mining Equipment orders and sales of Mining Equipment, using the reference materials on Pages 38 and 39. On this page, we show the indexed trends of Mining Equipment orders and sales. The graph shows trends of the index, which represent new equipment orders of the last 6 months divided by sales also from the past 6 months. Komatsu America, at the top, manufactures and sells super large-sized dump trucks. Orders and sales remained solid. But due to increased uncertainty in North America, the ratio continues to trend below 100% since the fourth quarter. We will continue to closely monitor the investment trends of our customers. Komatsu Germany, in the middle, manufactures and sells super large-sized hydraulic excavators, but current ratio is below 100%. As for Komatsu Ltd, at the bottom, the ratio reflects the weak demand for 100-ton class dump trucks for Indonesia. Since March, the ratio has exceeded 100%, but the level of orders are trending low.

Page 39 shows changes in book-to-bill ratio for KMC Mining Equipment. Current orders continue to be weak, especially with coal customers in North America, and the index has declined to almost 60%. We will continue to closely watch the development.

Page 30 explains sales of mining equipment, sales in FY 2019 was down 9% year-on-year to JPY 954.6 billion as sales decreased in Asia and CIS due to declined fuel coal prices. Excluding the effect of foreign exchange rate, it was a year-on-year decrease of 6%.

Page 31 is about sales of parts. Sales in FY 2019 was down 6% year-on-year to JPY 587.5 billion. Excluding the effect of foreign exchange rate, it was a decline of 3% year-on-year. Sales decreased due to weak demand in overhauls, especially for mining equipment parts.

Lastly, I’d like to touch upon some of our major activities during FY 2019 by slide from Page 41. Page 41 shows CONEXPO held in March in the U.S., where we made an announcement about providing digital transformation of SMARTCONSTRUCTION. This will help us to advance digital transformation widely in overseas markets. Page 42 shows retrofit kit for SMARTCONSTRUCTION, which was launched in April. Page 43 is about launching electric mini excavator in Japan. Page 44 is about human detection system. This is the first time in industry to introduce this system as a standard feature. Page 45 is the last page to explain our ESG efforts. We could earn a high reputation from external organizations, Dow Jones and CDP. Going forward, Komatsu continues to pursue quality and reliability to maximize the corporate value as well as strive for realization of safe, productive, smart and clean construction sites of the future.

That is all for my explanation. Now we’d like to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Mr. Saito of Nomura Securities.

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Katsushi Saito, Nomura Securities Co. Ltd., Research Division – MD, Head of Asia-Pacific Industrials Research, Machinery Analyst & Head of Equity Research [2]

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Do you hear me well?

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Unidentified Company Representative, [3]

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Yes.

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Katsushi Saito, Nomura Securities Co. Ltd., Research Division – MD, Head of Asia-Pacific Industrials Research, Machinery Analyst & Head of Equity Research [4]

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Firstly, on Page 17, for segment profit variance analysis. Would you share with us the breakdown of volume, product mix, et cetera?

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Unidentified Company Representative, [5]

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Mr. Horikoshi, please?

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [6]

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Yes. Horikoshi speaking. You’re asking for the breakdown of JPY 133.5 billion, right?

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Katsushi Saito, Nomura Securities Co. Ltd., Research Division – MD, Head of Asia-Pacific Industrials Research, Machinery Analyst & Head of Equity Research [7]

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Yes.

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [8]

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Volume impact was JPY 77.9 billion. Cost difference, cost to increase impact was JPY 9.5 billion. Geographical composition and product mix were JPY 16.7 billion. And although we don’t touch on this often, there was the impact by the consolidated parent differential. In the fourth quarter, in particular, Komatsu Ltd. reduced inventories sharply with reduced sales and operation. But consolidated sales, on the other hand, didn’t fall because of the buildup of intermediate stocks. In other words, unrealized profit of inventories was not highly realized. That resulted to JPY 11.4 billion of cons parent differential. And the changes in the consolidation scope and methods in accounting procedures made up about JPY 17 billion in total.

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Katsushi Saito, Nomura Securities Co. Ltd., Research Division – MD, Head of Asia-Pacific Industrials Research, Machinery Analyst & Head of Equity Research [9]

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May I confirm that volume impact was JPY 77.9 billion?

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [10]

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Yes. Remaining part is rather substantial, JPY 17 billion.

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Katsushi Saito, Nomura Securities Co. Ltd., Research Division – MD, Head of Asia-Pacific Industrials Research, Machinery Analyst & Head of Equity Research [11]

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So are there any other major factors?

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [12]

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Others include accounting change and increase of allowances.

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Katsushi Saito, Nomura Securities Co. Ltd., Research Division – MD, Head of Asia-Pacific Industrials Research, Machinery Analyst & Head of Equity Research [13]

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Are there any major changes in the JPY 17 billion from the end of the second announcement?

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [14]

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No. No major change occurred since then.

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Katsushi Saito, Nomura Securities Co. Ltd., Research Division – MD, Head of Asia-Pacific Industrials Research, Machinery Analyst & Head of Equity Research [15]

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Second question is for Mr. Ogawa. When you compare the situation after COVID-19 and February when you made the plan, do you think which prospect is globally more uncertain or unstable affected by COVID-19 out of those of construction machinery and mining equipment? And as for Southeast Asia, Mr. Imayoshi mentioned that contracts in Indonesia recovered slightly in April, but overall tone was very green, including mining equipment, thermal coal, construction machinery demand in the Southeast Asia. Would you tell us how we should understand the recovery of KOMTRAX under such circumstances?

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Hiroyuki Ogawa, Komatsu Ltd. – President, CEO & Representative Director [16]

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First question was, which impact is bigger on construction machinery or mining equipment? To be frank with you, I don’t have a clear answer yet, but comparatively, impact on construction will be bigger. As I said before, large mining customers have been continuing operation as the essential businesses, and confirmation request from large customers have been coming to us for the supply of parts and new machines. Therefore, for mining equipment, we will not see material impact after the COVID-19.

As for the second question, how we should view Southeast Asia? Mining demand in Indonesia will decline further. As summer coal price has been sluggish, and due to ample supply of new equipment in FY ’17 and ’18, the renewal of the fleet progressed. And FY ’20 demand for the new equipment will continue to be tough. KOMTRAX picked up slightly in April, but we don’t know the exact reason. And they might be up and down, but as we have been monitoring KOMTRAX, at least in Indonesia, even after the COVID-19, machine utilization did not drop substantially according to data taken from KOMTRAX.

We were informed by local sources that coal mines continue to be operational as the large mining customers are, as mentioned. So I think machines also continue to be operational. But due to the fulfilled demand for new machines in FY ’17 and ’18, demand for mining new machines will be tough this year. The latest idle rate in Indonesia of 17% indicates rather challenging situation. When I was in Indonesia in FY ’15, when mining in Indonesia hit the bottom, the idle rate then was about 20%. So almost comparable condition has been continuing now.

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Operator [17]

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Next question is from Mr. Sano of JPMorgan Securities.

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Tomohiko Sano, JP Morgan Chase & Co, Research Division – Analyst [18]

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I’d like to have the additional comments on the background. On Page 18, would you comment on the geography and the business type? Considering the future risk, how much mining-related assets do you have? This is my first question.

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Unidentified Company Representative, [19]

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Sorry, initial part was inaudible.

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Tomohiko Sano, JP Morgan Chase & Co, Research Division – Analyst [20]

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Sorry. I would like to know the background of the allowances for mining equipment in retail finance in terms of geography and minerals type. And secondly, how should I view the future risk concerning mining-related assets in the total assets?

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Unidentified Company Representative, [21]

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As shown on Page 18, the allowance increased for the company which went bankrupt in FY ’16 as credit balance and disposal was finalized. The company was in the U.S., with 80% of assets in the U.S. and the allocation of allowance was a little higher on mining side based on the regular allowance rule. And in this year, as we had more new contracts in mining, that increased general allowances as well. And in Mexico, credit collection didn’t proceed as expected, and we set aside the allowance for that.

Future prospect is not very certain to tell you the truth. In April, we received considerable number of request for rescheduling. Overall policy for those rescheduling requests in terms of acceptable terms, extension and others was decided. And each retail finance company is responding to its respective customers based on the policy. We are not able to accurately expect the growth of rescheduling request. But if the delinquent credit increased, some may think that would push up the borrowings. But on the asset side, with a slow increase of assets, sales would not grow nicely. So we do not foresee the explosive growth of borrowing demand. Does that answer your question?

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Tomohiko Sano, JP Morgan Chase & Co, Research Division – Analyst [22]

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Yes. My second question is on AHS. When you refer to the progress of the midterm plan, you said that currently, 221 AHS are operational. According to the figure for FY ’21 in midterm plan, it has shown as 380. Would you comment on the environment to achieve the target? You said before, the idle ratio in Indonesia is high, but I assume COVID-19 might boost demand for autonomous unmanned trucks and services. Do you see any change of idle rate of 221 AHS? And competitors’ fleet size is about 300 or so. And given that, how do you think about increasing that fleet size in FY ’20 and ’21? This is my final question.

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Takuya Imayoshi, Komatsu Ltd. – Executive Officer & GM of Business Coordination Department [23]

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Imayoshi speaking. As of the end of March, the AHS fleet size was 221, but as many negotiations are ongoing towards achieving 380 in FY ’21, the progress is basically in line. Prior to the COVID-19, consolidation for cost reduction by customers on unmanned dump truck has been increasing. So investment condition remains unchanged. No notable change was observed after COVID-19. Mines continue to operate, as mentioned, and we were not informed of idling machines.

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Tomohiko Sano, JP Morgan Chase & Co, Research Division – Analyst [24]

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May I confirm that utilization in the mines with AHS is better than those without AHS?

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Hiroyuki Ogawa, Komatsu Ltd. – President, CEO & Representative Director [25]

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Ogawa speaking. As I mentioned before, as for large mines, both of with man — manned and unmanned machines, continue operation. So as of today, there is no major difference in the level of operation between manned and unmanned machines AHS.

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Operator [26]

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Next question is from Mr. Isayama of Goldman Sachs.

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Yuichiro Isayama, Goldman Sachs Group Inc., Research Division – MD [27]

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I’m Isayama of Goldman Sachs. Do you hear me well?

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Unidentified Company Representative, [28]

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Yes.

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Yuichiro Isayama, Goldman Sachs Group Inc., Research Division – MD [29]

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My first question is about mining, especially of KMC. In the slide commented by Mr. Imayoshi, on the segment information, mining and energy in North America was negative and KOMTRAX marked notable negative. But on the other hand, on Page 30, North America sales in the fourth quarter seemed to be firm. As President Ogawa commented on Indonesia, would you comment more on the customers’ condition of KMC in North America? And I would appreciate if you comment on the profitability of FY 2019.

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Takuya Imayoshi, Komatsu Ltd. – Executive Officer & GM of Business Coordination Department [30]

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Imayoshi speaking. Although I cannot show you the data in detail, KMC has many underground coal customers in North America and their utilization is basically not very good. And as shown in the BB ratio, latest orders declined heavily. So this means that in the previous fiscal year, what seems to be a good fourth quarter for the North America was simply, there was a concentration of the backlog and projects, and we should be prepared to see a substantial deceleration of business from now on. If you just look at the BB ratio, it seems that it dipped a lot. But for KMC, the ratio of new equipment is low, and the aftermarket business is stable. So the decline won’t be that substantial.

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [31]

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Horikoshi speaking. For fiscal year 2019, if you look at KMC as a whole, and as I have been saying from before, integration was ongoing with Komatsu. So this may not be an apple-to-apple comparison. But that said, sales volume has been going up in fiscal year ’19 compared to fiscal year ’18. The share of the North American business of KMC has been historically between 40% to 45%. But as Mr. Imayoshi has been saying, due to the weak business conditions for coal in 2019, this ratio has gone down slightly.

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Yuichiro Isayama, Goldman Sachs Group Inc., Research Division – MD [32]

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Forgive me for pressing on this issue. But if you look at Slide 30 and the North American sales and mining equipment, it seems to me that it is doing well. So that’s the reason for my question. So you’re saying that in real business terms, that adverse business conditions will start to kick in, correct?

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [33]

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We have various businesses or various surface mining equipments. So overall, as you can see in this graph, things are not that dire. Within the mining business overall, Indonesia and some African countries and the CIS regions that are — the regions that are suffering, we have given you our idea for the next fiscal year’s demand outlook, but we basically think this trend will continue. In the mining business, Indonesia and some CIS countries is struggling.

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Yuichiro Isayama, Goldman Sachs Group Inc., Research Division – MD [34]

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Understood. My second question is about dividends and investment. Please inform me about this, including the level of cash you have. In terms of the payout ratio, you used to have a range between 40% to 60%. But last year, you stopped saying that 60% was the upper limit. I took it as a form of commitment to the actual cash dividend payment. However, you have announced that you’re going to reduce the dividend. If you consider the current situation, maybe that is unavoidable. But that said, I would like to understand your thinking behind how much cash you feel it is necessary to have right now. Also in terms of investment. Currently, are you thinking it should be below depreciation amount based on tangible fixed assets value? So would you please recap your thinking about dividends, cash levels and investments.

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [35]

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This is Horikoshi. It is true that for dividends, we’re saying now that the payout ratio should be 40% or above. We have reduced the dividend compared to what we have said at the beginning of the fiscal year. However, when we announced our second quarter results in October, and when we explained about the outlook for the year, we said that the payout ratio at that point would be 57.7%. We decided that we should be maintaining this level. Another point is that currently, the future outlook is unclear, and we do not hold much cash on hand in the first place. Nobody knows what is going to happen next. So now we have increased our cash level and we have negotiated with the banks. So our commitment line is quite large right now.

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Yuichiro Isayama, Goldman Sachs Group Inc., Research Division – MD [36]

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What about investment? I understand that you have not announced your plans. Are you controlling it under depreciation level, limiting it to absolutely necessary ones?

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Unidentified Company Representative, [37]

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So not only for investments, but also for new projects, all is frozen for the first quarter. We will consider the timing to restart these projects, closely observing the situation surrounding the coronavirus.

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Hiroyuki Ogawa, Komatsu Ltd. – President, CEO & Representative Director [38]

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This is Ogawa. I don’t know whether this will answer your question. But as for investment for production equipment or facilities, this will be controlled so that it will be quite below the depreciation level, and growth-related investment will be conducted on top of that.

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Operator [39]

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Next is Mr. Mizuno from UBS Securities.

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Hikaru Mizuno, UBS Investment Bank, Research Division – Director and Associate Analyst [40]

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My first question is about the earnings structure. In your midterm business plan, you have been saying that Komatsu will maintain a top level of profitability within the industry. But if you look at the past year, putting aside the question whether the comparison should be made with these companies compared to Caterpillar and Volvo, your profitability seems to have been declining on a relative base, that is. Internally, do you recognize that you have new challenges? Or is it more technical such as the difference in regional and model mix? I would like to get your input on this point.

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Unidentified Company Representative, [41]

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The recent trend, as you have pointed out, compared to Caterpillar and Volvo is true. So recently, it is true that Komatsu’s profitability is declining. That is because the proportion of strategic markets have continued to go down. Markets such as Indonesia, Russia where Komatsu is strong and is profitable, has been declining. And when I analyze about of the profits, I always explain about this, and the impact of these markets are large. On the other hand, if you look at Caterpillar, their home market is the U.S. I don’t know about 2020, but the U.S. market has been strong for the years of 2017, ’18 and ’19. So that is the reason that the profitability is improving.

Another point is that their scale is bigger so they can enjoy scale merit. As for Volvo, although I am not in a position to comment about other companies, they have a high proportion of business in Asia for construction equipment, 40% of their business is in Asia and China’s proportion is large. And their strategy is different from us. So even if we are both doing business in China, Volvo’s sales decline in China is moderate compared to ours.

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Hikaru Mizuno, UBS Investment Bank, Research Division – Director and Associate Analyst [42]

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So you’re implying that the business mix is different. So this can’t be helped. Do you think as business volume recovers, you’ll be able to see your profitability recover as well?

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Hiroyuki Ogawa, Komatsu Ltd. – President, CEO & Representative Director [43]

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This is Ogawa speaking. I don’t think that this can’t be helped. I am aware that the operating margin is an issue. Besides of what our CFO, Mr. Horikoshi, has said in the mining business, we have distributors and engage in direct sales and direct services. And in some of the construction equipment business, we own distributors. This may be attributable to the difference. But that said, if you look at our profitability, because we have been conducting M&A in the previous years, and this has led to an increase in the capacity cost that is fixed cost and profitability has declined. But if you have the same sales level of fiscal year 2018, we can achieve this level of profitability as shown in the slide. And we are planting various seeds based on our midterm business plan. This means that when the top line starts to recover, operating margin will recover as well.

On the other hand, we are aware of issues in fixed cost. We are discussing internally how to reduce fixed cost.

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Hikaru Mizuno, UBS Investment Bank, Research Division – Director and Associate Analyst [44]

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Another question. This is a more big picture issue. In slide — Page 8, you explained about the progress of the midterm business plan. Thank you very much for the explanation. If you consider the aspect of value creation, of course, this plan was announced before COVID-19 was widespread. But if you look at innovation, some has been provided and implemented from this April. I’m sure you have seen steady progress in these initiatives. What I want to ask is, in the post-corona world, do you think there will be any pivotal points that allows your innovations to be accepted more in this new environment by your customers?

From the CEO’s point of view, can you give me some insight about this issue?

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Hiroyuki Ogawa, Komatsu Ltd. – President, CEO & Representative Director [45]

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So talking about the post-corona world, our stance is unchanged in terms of steadily implementing measures in our midterm plan. However, as we have given a press release from this April, we have announced this initiative, [DX] SMARTCONSTRUCTION. This initiative is to digitalize the job sites. This allows us to get data without physically being in the field. As we go request to avoid close spaces and close contact with people, I feel that SMARTCONSTRUCTION business to be even more appreciated. We are committed to further growing this business by promoting this business to our customers.

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Operator [46]

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The next question is from Mitsubishi UFJ Morgan Stanley Securities, Mr. Sasaki.

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Tsubasa Sasaki, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division – Analyst [47]

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I have 2 questions. One is a follow-up on the previous question. This is related to Page 8. Currently, the external condition of mining equipment is not good. And it is difficult to foresee what’s going to happen because of COVID-19. However, if you look at the manufacturing companies of Japan, an old saying comes to mind. In times of difficulty, you can tell the true worth of a person. Some companies are using this pandemic as an opportunity such as reducing fixed cost, strengthening sales capability and improving productivity. I think many Japanese companies are using this crisis to strengthen their company foundation. So for Komatsu, your utilization rate at the plants are declining due to this pandemic. I think this is a good opportunity to strengthen your foundation, such as reducing fixed cost. So considering that you have this opportunity, what measures, initiatives do you have to strengthen your business foundation? Can you elaborate on this point?

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Unidentified Company Representative, [48]

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Regarding your question about whether we are going to strive to strengthen our corporate structure and become leaner in light of COVID-19, as the impact was so fast and significant, honestly speaking, we have not thought about measures that are specific and a response to COVID-19 in particular. However, at Komatsu, currently, about 90% of our employees who work at the headquarters office are now working from home. So to that end, we believe there may be opportunities to reallocate people where appropriate.

Apart from this, as Mr. Ogawa mentioned, we are currently conceptualizing a structural reform plan that includes drastic fixed cost reduction. The plan will be put together going forward.

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Tsubasa Sasaki, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division – Analyst [49]

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Are the details of the fixed cost reduction plan yet to be made?

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Unidentified Company Representative, [50]

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We are currently considering it.

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Tsubasa Sasaki, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division – Analyst [51]

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My second question is about mining equipment demand trends. Earlier, you talked about KMC and weakness in underground and Indonesia. Relatively speaking, mining was not as affected by COVID-19. And as you said in the presentation, your initial demand forecast was minus 10% to 20% year-on-year. If you break demand down by coal and noncoal applications, I presume coal is weak, but how is noncoal demand trends? Can you comment on your assumptions behind your minus 10% to 20% forecast? Also, if you have a sales breakdown for mining equipment by commodity for last year, that would be great.

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Unidentified Company Representative, [52]

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On Page 29, the demand outlook for new original equipment in mining is shown, which is minus 10% to minus 20%. Like mentioned earlier, we expect Indonesia to continue to be weak. And weakness is also anticipated in the CIS region due to coal prices. The mining measures continue to be brisk. However, we forecasted demand to decline due to the weak regions. Also by commodity, for Indonesia, we expect low coal price impact to continue. Commodity price-wise, as you know, currently, gold is strong and so is iron ore and copper. Going forward, we need to monitor the impact that COVID-19 has on demand, which will affect price trends and we will also need to watch customer investment behavior closely. We are not able to give a forecast at this moment. But in any case, we will closely monitor the situation.

Regarding the breakdown by commodity, last fiscal year, out of close to JPY 1 trillion of mining sales, coal accounted for approximately 40% of sales. The next largest commodity was copper at about 20% to 30%. Iron ore was smaller in contribution at 10% to 15%. Gold was close to 10%. That’s the rough breakdown. Does this answer your question?

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Tsubasa Sasaki, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division – Analyst [53]

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Is it fair to say that demand related to copper and iron ore is still brisk?

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Unidentified Company Representative, [54]

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Like we always explain, there is infrastructure-based demand. And for copper, investment base, electricity or automobile-related demand is the driver. So our basic view is that, it’s robust. Also, from a demand and supply point of view, we expect customers to continue to invest into copper.

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Operator [55]

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The next question is from Mr. Tai from Daiwa Securities.

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Hirosuke Tai, Daiwa Securities Co. Ltd., Research Division – Research Analyst [56]

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This is Tai speaking. My first question is about dividends as well. For the new fiscal year that started, you don’t offer guidance for the full year. But hypothetically, if profits were to decrease year-over-year, how should we think about the payout ratio? If profits were to decrease and the payout ratio were to exceed 57.7%, will you still maintain dividends? Or although you took away the cap on the payout ratio in the new midterm plan, will you look at 57.7% as a benchmark when deciding the level of dividends? This is my first question.

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Unidentified Company Representative, [57]

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Horikoshi will take your question.

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [58]

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Regarding dividends. At the timing when we are able to set forth guidance, we will also announce our dividend policy. Also, you do not need to be mindful of 57.7% as a benchmark.

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Hirosuke Tai, Daiwa Securities Co. Ltd., Research Division – Research Analyst [59]

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All right. Understood. My other question goes into detail a little, but it seems that last fiscal year, Q4 profits were down quite substantially. Comparing Q3 to Q4, sales were flat or slightly up, but profits were down quite significantly. Can you give us your analysis on this?

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Unidentified Company Representative, [60]

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Horikoshi will take your question.

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [61]

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For Q4, there were some one-off expenses. To your point, Q4 operating margins were 6.9% compared to 10.7% in the previous year. So margins were down substantially by 3.8%. Sales volume declined due to COVID-19 had a fairly large impact. And in addition, as was mentioned when we talked about retail finance, write-offs related to a mining customer that went bankrupt in 2016 was confirmed, and there was also an increase in provisions. Furthermore, at the end of the fiscal year, a subsidiary recognized inventory valuation losses. Other than that, outside of the segment, Cabtec, which is a subsidiary that manufactures cabs, took a goodwill impairment hit. These one-off factors had approximately a 2.7 point impact on margins. So our analysis is that if the one-offs are added back to margins, this quarter would have been 6.9% plus 2.7%, which is about 9.6% or close to 10% in operating margins.

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Hirosuke Tai, Daiwa Securities Co. Ltd., Research Division – Research Analyst [62]

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Mr. Horikoshi, you mentioned that COVID-19’s impact on sales were about JPY 40 billion in the presentation. How about the impact on profits?

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [63]

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Well, it was probably close to JPY 10 billion.

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Operator [64]

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The next person is Mr. Ouchi from SMBC Nikko Securities.

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Taku Ouchi, SMBC Nikko Securities Inc., Research Division – Senior Analyst [65]

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This is Ouchi. My first question is about your thoughts on production volume. In the fourth quarter, you were talking about reducing inventory quite substantially. But even so, turnover was quite high. Due to uncertainty, it might be hard to give us your view. But with China’s economic activity resuming and if mining operations are not deteriorating as much as you think as it’s an essential business, what kind of production trends are you anticipating? Would the fourth quarter be the low point of production volume?

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Unidentified Company Representative, [66]

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From a cash flow point of view, this year, free cash flow exceeded JPY 100 billion, although it was lower than what we expected at the beginning of the year. Net profits were lower by a little bit over JPY 60 billion compared to the beginning of year plan. Also due to COVID-19, inventory levels ended up being slightly higher than beginning of year expectations. Especially regarding Q4, inventory was high at Komatsu Ltd. and we reduced utilization.

The view for Q1 this fiscal year is that we expect inventories to increase slightly as we progress from April, May and into June. This is the assumption of which we have compiled our plans for factory operations. The backdrop to this is that we understand the necessity to be cautious as we move ahead, but we also need to ensure that inventory shortages do not happen when the market picks up again. That is why inventory will increase somewhat during the first quarter. I hope this answers your question.

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Taku Ouchi, SMBC Nikko Securities Inc., Research Division – Senior Analyst [67]

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My second question is, you mentioned that the impact from COVID-19 is greater on your construction equipment business compared to mining. Can you give us more detail by region? And also give us more flavor on how much you expect demand to drop off going forward compared to your initial February outlook. It may be hard to give an answer, but it would be great if you can talk particularly about the impact on construction equipment.

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Unidentified Company Representative, [68]

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As we explained already, we are not sure about the impact yet. It is yet to be determined. But we have set forth the original forecast as referenced. By region, the outlook will depend by market. Some markets have a high exposure to mining, whilst others do not. Even for mining, we presume that markets with the majors are doing fairly well, whilst in coal markets, such as Indonesia and other regions are seeing difficulty. It’s not the direct impact from COVID-19, but lower prices, as a consequence of the pandemic, will more or less lead to a pullback or a postponement in investments.

Regarding the outlook for construction equipment. We monitor customer job sites through KOMTRAX, but we will need to closely monitor infrastructure investment trends by countries going forward.

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Hiroyuki Ogawa, Komatsu Ltd. – President, CEO & Representative Director [69]

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This is Ogawa speaking. The reason I said construction equipment is likely to be affected more at the beginning is because apparently regions that are construction equipment centric are expected to be impacted more. That would be countries such as India, Europe and North America. Regions with a high construction equipment ratio went through lockdowns, and hence, we expect the impact to be greater.

As for mining equipment, on the other hand, fleets are operating at major mines and even in Indonesia, coal mining customers are operating. So that is the reason why I said the negative impact on construction equipment is likely to be greater.

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Operator [70]

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The next question is from Morgan Stanley MUFG Securities, Mr. Ibara.

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Yoshinao Ibara, Morgan Stanley, Research Division – MD and Research Analyst [71]

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Let me ask my first question to Mr. Horikoshi. In the fourth quarter, you said COVID-19 impact was JPY 40 billion for sales and slightly less than JPY 10 billion for operating profit. If we look at this impact on a monthly basis, I guess you had little impact in January. But how about February and March, was it even in those 2 months or did it intensify over time? And in this context, although I know the forecast is not available, can you tell me your feeling about the impact in April, if it seems to be larger than February and March? I’d like to know how you see the impact on February, March and April. I assume it is very difficult to capture the effect of COVID-19 accurately in the first place.

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [72]

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Let me tell you how we reached the amount of impact as about JPY 40 billion. China was affected first, and its sales decrease was mostly in February, and the demand recovered rapidly in March. And in April, it turned positive year-on-year. So regarding China, negative impact was mostly felt in February. Then COVID-19 impact started to move to Europe and the U.S. as reported by media, and those regions were mostly affected in March.

Next, the impact is moving to Central and South America. Regarding how we estimate the impact of COVID-19, for instance, in case of China, as its sales dropped sharply in February, we calculated the decline of actual sales compared to the forecast for February and March developed in January, and we regard this as impact of COVID-19. As for other regions, we look at the decrease of actual sales compared to the forecast for the sales in the end of fiscal year estimated in February. Combining all of these severe effects of COVID-19, we assumed the total is about JPY 40 billion.

In April, while China has recovered, the impact moved to other regions. So April results are worse than March.

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Yoshinao Ibara, Morgan Stanley, Research Division – MD and Research Analyst [73]

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Let me clarify one point. Looking at your monthly sales and its decline from March to April, in most regions, decline in April seems larger. Am I correct?

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [74]

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Sales is usually strong in March. I mean the sales tends to be higher in the end of fiscal year, and we recorded significantly strong sales, specifically in the fourth quarter of FY 2018. What I meant by saying April was worse than March is, first, in terms of year-on-year results and also about the rate of decline in comparison to the original forecast. So it is worsening in both terms.

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Yoshinao Ibara, Morgan Stanley, Research Division – MD and Research Analyst [75]

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Then now in May, you may not have much data available yet, but can you share updates on this month performance, if you have any? As we are seeing some areas have lifted lockdown restrictions.

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Takeshi Horikoshi, Komatsu Ltd. – CFO & Executive Officer [76]

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We have no such information available for May.

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Yoshinao Ibara, Morgan Stanley, Research Division – MD and Research Analyst [77]

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Okay. Now I’d like to ask my second question to Mr. Ogawa. In your explanation about construction machinery operations, I understand construction is considered as essential business. But as you explained about India earlier, I’d like to know if there are any places where even construction machinery cannot operate. Also, operations in North America and Europe decreased, but it seems the decline is not so significant. Can I assume decline in operations directly affects demand? Can you explain the relationship between operations and demand? I can see the situation for the areas where KOMTRAX data is available, but I’d like to know about situations in other areas as well.

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Hiroyuki Ogawa, Komatsu Ltd. – President, CEO & Representative Director [78]

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We can look at various regions in details with KOMTRAX. As I said earlier, countries like Japan, Indonesia, Thailand, the U.S. have not reduced operating time according to KOMTRAX. This means their equipment is in operation. On the other hand, operations have significantly decreased in Malaysia, the Philippines, India, the U.K., France, Italy in Europe and also South Africa, which is currently locked down. However, according to the latest data, France, Italy, Spain in Europe are recovering their operations. We can see more details by KOMTRAX like North, Central and South Italy. And we found that operating time is gradually increasing in all those regions in Italy.

As we see Europe is recovering operating time, we expect their sales will recover as well when working from home restriction on sales representatives is eased and resume their activities with customers. What concerns us most now is the potential impact by the second wave of the pandemic, and I think this is applied to China as well. Therefore, although I cannot say anything for sure, we assume we might need to develop separate forecasts based on 2 scenarios that is with or without the second wave.

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Yoshinao Ibara, Morgan Stanley, Research Division – MD and Research Analyst [79]

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Of course, we do not want the second wave, but considering its possibility, when can you provide the forecast, which is currently undecided? Many companies say they decide by the end of the first quarter. So can I assume if the second wave does not come about that time, then you can provide the forecast?

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Hiroyuki Ogawa, Komatsu Ltd. – President, CEO & Representative Director [80]

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I’m sorry to say this, but at this moment, we cannot say for sure when we can make it available. So let me say that we will disclose as soon as we are ready to do this.

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Yoshinao Ibara, Morgan Stanley, Research Division – MD and Research Analyst [81]

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Okay. Then earlier you mentioned, Japan, Indonesia, Thailand and the U.S. are declining demand even without decreasing operations. Is that related to customer sentiments? Also, can you expect demand recovery relatively sooner once operations make recovery? Or do you rather expect demand will not recover so soon due to time lag? This is an unprecedented situation, so it may be difficult to make predictions, but I’d like to have your comment on it.

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Hiroyuki Ogawa, Komatsu Ltd. – President, CEO & Representative Director [82]

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We assume at least customers demotivated to purchase new equipment now. And we are not sure when their willingness to buy comes back. Still, equipment is in operation. So parts and services are required. So I expect demand for parts and services will be back when operations recover to some extent. As for demand for new equipment, customers’ confidence itself seems to have gotten lower. And I am not sure how long this situation continues at this moment.

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Unidentified Company Representative, [83]

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I’m afraid we are running out of time. So I’d like to make the next question as the last one.

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Operator [84]

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[Mr. Yamanaka] from Nikkei.

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Unidentified Analyst, [85]

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I’m [Yamanaka] from Nikkei. Can you hear me?

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Unidentified Company Representative, [86]

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Yes, we can hear you.

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Unidentified Analyst, [87]

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I have 2 questions for Mr. Ogawa. First question is about overseas market. And maybe it is similar to the earlier questions by the analysts. Am I correct in understanding Chinese market is recovering in March and April? You have launched products for rental use and for strategic markets. What is the response do you receive about them from the market?

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Hiroyuki Ogawa, Komatsu Ltd. – President, CEO & Representative Director [88]

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As I said earlier, we did not have any demand in sales in February. But in March and April, sales seemed to have recovered after the Chinese New Year. In China, we executed various measures in FY 2019 and we expect they will gradually bear fruit, especially Komatsu does not participate in price competition and have focused more on large machines over 20 tons. In April, the sales of over 20 tons equipment have significantly grown. As we count the total number of units only, this may not clearly [visible] for you, but we have been tracking the status of demand, sales and market share so far for both over 20 tons and less than 20 tons equipment. This is one of our KPIs to watch our presence in China.

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Unidentified Analyst, [89]

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Next, I’d like to ask about the U.S. market. I think its performance has been relatively steady in FY ’17, ’18, ’19, but demand in the fourth quarter declined due to COVID-19. How much decline do you estimate for this fiscal year ending March 2021? I know it will be difficult to provide specific numbers, but can I assume the decline will be larger than your forecast in February, which was minus 5% to 0%?

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Hiroyuki Ogawa, Komatsu Ltd. – President, CEO & Representative Director [90]

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At this stage, we cannot tell what is going to happen to the demand in North America as there are many combined factors. Whatever the case may be, it will be difficult to imagine the demand in FY 2020 will be higher than FY 2019.

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Unidentified Analyst, [91]

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I’d like to ask one more question, if I may. With the COVID-19 pandemic, I suppose you can strengthen digital areas in your business, as you suggested earlier. Can you elaborate more on this about specific digital areas of focus by region, if you have any?

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Hiroyuki Ogawa, Komatsu Ltd. – President, CEO & Representative Director [92]

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As I said earlier, in this April, we announced 4 IoT devices and 8 applications to accelerate digital transformation. Also, retrofit kit, which enables 3D construction was launched in April. As such, digitization will make steady progress going forward, especially [DX] SMARTCONSTRUCTION and 3D retrofit kit are going to be deployed globally. We will introduce them in the U.S. and 4 European countries, the U.K., Germany, France and Denmark to grow the business further.

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Unidentified Company Representative, [93]

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Now I’d like to conclude Q&A.

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Operator [94]

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That is all for the business results briefing. Thank you very much for your participation.