Komatsu Ltd. (6301) Earnings Call Transcript & Summary

This is Horikoshi, the CFO. I'll explain the overview of Komatsu's business results for fiscal '25 Q2. Page 4 shows highlights for the 3 months ended September 30, 2025. Exchange rates were JPY 147.3 to the USD, JPY 171.3 to the euro and JPY 96 to the Australian dollar. Compared with the same period last year, the yen appreciated against the dollar and Australian dollar, while depreciating against the euro. Net sales decreased by 2.6% year-on-year to JPY 982.1 billion. Operating income decreased by 6.7% to JPY 136.7 billion. The operating income ratio was 13.9%, down 0.6 percentage points from the previous year. Net income attributable to Komatsu Limited decreased by 8.1% year-on-year to JPY 84.5 billion. Page 5 presents the sales and segment profit of each business segment for Q2 on a 3-month basis for fiscal '25. In the Construction, Mining & Utility Equipment segment, net sales decreased by 4.1% year-on-year to JPY 897.3 billion, while segment profit decreased by 11.8% to JPY 119.7 billion. The segment profit ratio declined by 1.2 points to 13.3%. The Retail Finance segment recorded net sales of JPY 30.5 billion, down 2.5% year-on-year, while segment profit increased by 4.9% to JPY 7.5 billion. The Industrial Machinery & Other segment achieved net sales of JPY 63.5 billion, up 23.9% year-on-year, and segment profit increased approximately 3.3x to JPY 9.4 billion. I will explain the factors behind these changes in each segment later. Page 6 presents sales by region for the Construction, Mining & Utility Equipment segment in the second quarter of fiscal '25. Net sales in the Construction, Mining & Utility Equipment segment decreased by 4.1% year-on-year to JPY 895 billion. In Asia, both mining and construction equipment sales declined due to falling coal prices and reduced public investment in Indonesia, although sales increased in Latin America, Africa and the Middle East on an underlying basis, excluding foreign exchange rate impact, total sales decreased by 1.6% year-on-year. Page 7 presents the highlights for the first 6 months from April to September of fiscal '25. Exchange rates were JPY 146.4 to the U.S. dollar, JPY 166.9 to the euro and JPY 94.3 to the Australian dollar. Compared to the same period last year, the yen appreciated against the U.S. dollar and Australian dollar, while depreciating against the euro. Net sales decreased by 3.9% year-on-year to JPY 1,891.6 billion, and operating income decreased by 8.7% to JPY 277.1 billion. The operating income ratio declined by 0.8 percentage points to 14.6%. Net income attributable to Komatsu Limited decreased by 12.9% year-on-year to JPY 175.7 billion. Page 8 shows the sales and profit by segment for the first half of fiscal year 2025. Sales of the Construction, Mining and Utility Equipment segment decreased by 4.8% year-on-year to JPY 1,742.2 billion, and segment profit decreased by 13% to JPY 242 billion. The segment profit ratio declined by 1.3 percentage points to 13.9%. Sales of the Retail Finance segment decreased by 1.3% year-on-year to JPY 61 billion, while segment profit increased by 13.9% to JPY 16.9 billion. Sales of the Industrial Machinery & Other segment increased by 10.5% year-on-year to JPY 106.9 billion, and segment profit rose approximately 2.1x year-on-year to JPY 16.6 billion. The factors behind the increase and decreases in each segment will be explained later. Page 9 presents sales by region for the Construction, Mining & Utility Equipment segment in the first half of fiscal '25. Net sales in the segment decreased by 4.8% year-on-year to JPY 1,737.2 billion. While sales increased in Europe, Africa and the Middle East, it declined in Asia, particularly in Indonesia as well as in North America and in Japan. Excluding the impact of FX, sales decreased by 0.8% year-on-year on an underlying basis. Page 10 shows the factors behind changes in sales and segment profit for the Construction, Mining and Utility Equipment segment in the first half of fiscal '25. Although improved selling prices had a positive effect, the negative impact of FX and lower sales volume outweighed it resulted in JPY 88 billion year-on-year decrease in net sales. Despite the positive effect of higher selling prices, the negative effects of FX, reduced volume and higher cost predominated, leading to a JPY 36 billion year-on-year decrease in segment profit. The impact of tariffs for the first half, including mitigation measures was JPY 7.7 billion. The segment profit ratio declined by 1.3 percentage points year-on-year to 13.9%. Page 11 presents the results for the Retail Finance segment in the first half of fiscal '25. Assets increased from the end of the previous fiscal year as new contract volume exceeded collections. However, new contract volume decreased year-on-year, mainly due to FX impact. Net sales decreased by JPY 0.8 billion year-on-year, mainly due to FX impact, while segment profit increased by JPY 2.1 billion year-on-year, primarily owing to lower funding costs. Page 12 presents sales and profit segment profit for the Industrial Machinery & Other segment in the first half of fiscal '25. Net sales increased by 10.5% year-on-year to JPY 106.9 billion. Segment profit was approximately 2.1x higher than the previous year at JPY 16.6 billion, and the segment profit ratio rose by 7.4 percentage points to 15.5%. The increase in both sales and profit was driven by higher sales of large presses for the automotive industry and increased maintenance revenue from high-margin excimer lasers for the semiconductor industry. Page 13 presents the consolidated balance sheet. Total assets amounted to JPY 5,922.5 billion, up JPY 149 billion from the end of the previous fiscal year, mainly due to an increase in inventories. Inventories totaled JPY 1,579.4 billion, an increase of JPY 172.7 billion from the previous year-end. The shareholders' equity ratio declined by 0.7 percentage points from the previous year-end to 54.3%, and the net P/E ratio was 0.29x. Free cash flow for the first half of fiscal '25 was an inflow of JPY 33.5 billion, limited by an increase in working capital, primarily in inventories. That concludes my explanation. Next, Hishinuma is going to explain fiscal 2025 business results projection.

This is Hishinuma, GM of Business Coordination Department. Now I'm going to explain the projection for fiscal 2025 business results and the major market overview. Page 15 presents outline of projection for fiscal 2025. So we have a revised -- our -- the full year projection. Net sales was revised upward by JPY 143 billion from the April 2025 projection and will decrease by 5.3% to JPY 3,888 billion from FY 2024. OP was revised upward by JPY 22 billion and will decrease by 23.9% to JPY 500 billion year-on-year. And net income is projected to decrease 27.2% to JPY 320 billion. It was revised upward by JPY 11 billion year-on-year. And there are partial changes to demand outlook, which I will touch upon later. For Construction, Mining and Utility Equipment segment, against the April outlook due to the demand decline mainly in Indonesia, it is projected that there will be a negative impact on both sales and profit. Against that, we are going to partially absorb it by adding sales price improvement and the cost improvement from tariff mitigation measures. And foreign exchange of major currencies has been moving toward yen depreciation more than originally expected. So taking that into consideration, we have revised full year business result projection for fiscal 2025. Regarding foreign exchange rates, since the third quarter, JPY 140 to USD 1, JPY 163 to EUR 1 and also JPY 91 to Australian dollar. And for the full year average FX, the JPY 143.2 to U.S. dollar, JPY 164.9 to euro and JPY 92.7 to Australian dollar. And the fiscal '25 ROE is projected to be 10.3% and the cash dividend per share, it is going to be the same as the previous year, JPY 190, which is unchanged from April outlook and consolidated payout ratio is projected to be 54%. Page 16 presents the latest estimate of the impact of additional U.S. tariff incorporated into projection of business results revised this time. So based on the U.S. tariff policies and rates that have been disclosed as of October '24, the latest forecast for tariff the cost in fiscal '25 is as follows. This does not take into account the impact of additional tariff policy on China announced by U.S. government officials in October. Payment basis is JPY 90 billion, which is a decrease of JPY 50 billion from the April '25 projection, including cost reduction measures implemented during the period. The impact of profit and loss is JPY 55 billion, which is an improvement of JPY 13.5 billion from the April fiscal '25 projection. So the actual impact on profit and loss, including cost reduction measures for the first half of the year was JPY 7.7 billion. The impact is expected to increase progressively towards the end of the fiscal year. Page 17 presents projection of segment sales and profit for fiscal '25. Construction, Mining and Utility Equipment sales will decrease by 6% from fiscal '24 to JPY 3,571 billion, and the segment profit will decrease by 26.4% to JPY 441 billion. Retail Finance sales will decrease by 5% to JPY 117 billion, and the segment profit will increase by 0.3% to JPY 29.5 billion. Industrial Machinery and Others sales will increase by 6% from FY '24 to JPY 237 billion. Segment profit will increase by 20.5% to JPY 33 billion. I will touch upon reason for increase and decrease for each segment later. Page 18 presents projection for sales by region for Construction, Mining and Utility Equipment. In Asia, coal prices in Indonesia continue to sluggish and it is expected that it will not recover for the time being, leading to a significant decline in sales for both mining and construction equipment. Profit is expected to increase in the Central and the South Asia, Europe and Asia due to FX impact, but it will decrease by 6% to JPY 3,559.6 billion in total year-on-year. So on the -- and the currency basis, excluding FX impact, it will decrease by 1 point year-on-year. Page 19 presents Construction, Mining Utility Equipment. Causes of difference in projected sales and segment profit for FY 2025. Sales will decrease by JPY 227.2 billion from FY '24 despite the positive effects of increased selling prices due to the negative effects of foreign exchange rates and decreased volume of sales. Segment profit will decrease by JPY 157.9 billion from FY '24 despite the positive impact of the improved selling prices due to the negative impact from the factors such as exchange rates, decreased volume of sales and the increased cost, including the impact of U.S. tariff and the segment profit ratio will be 12.3%, down 3.5 points from FY '24. So Page 20 represents retail finance projection. Assets will increase by JPY 42.2 billion from the previous fiscal year-end due to new investments exceeding recoveries. New contracts will decrease by JPY 45.7 billion from FY '24, mainly due to foreign exchange rates. And sales will decrease by JPY 6.2 billion from FY '24, mainly due to foreign exchange rate. And the segment profit will increase by JPY 0.1 billion from FY '24, mainly due to lower procurement cost and ROA will be 2.1%, 0.1 point down from the previous year. Page 21 presents Industrial Machinery and Others projections. For the automotive industry, sales of large press will increase for the semiconductor industry, sales of the high-margin excimer laser maintenance will increase. Sales will increase by 6% to (sic) [ JPY 233 ] JPY 23.7 billion year-on-year and segment profit will increase by 20.5% to JPY 33 billion year-on-year. From Page 22, I will explain actual and projection demand for 7 major products under the construction, mining and utility equipment. So demand for mining machinery is included into demand of the 7 unit -- major products. And the number of FY '25 Q2 are preliminary based on our estimate -- in the second quarter fiscal '25 demand increased by 1% year-on-year. This time, we have reviewed FY '25 full year forecast. As of April, taking into a direct impact of U.S. tariff to put demand downwards, we estimate the impact of 2.7% globally. So however, as of now, excluding some countries such as Brazil, we do not see clear tariff impact on demand. So for this outlook, we do not have a global figures. And for that reason, we do have the projection by region. Overall demand is 0.5% negative, which is same as the April projection. However, there is some fluctuation in regional demand. From next page onwards, I will touch upon each region. Page 23 presents demand in North American market. In fiscal '25 second quarter, demand increased by 5% year-on-year. The impact of U.S. tariff policies on demand is unclear and rental demand, which has been struggling, this shows signs of reversal. In FY '25, full year demand will decrease by between 0% to 5% from FY '24. It will change from the April '25 projection. So during the first half, North American demand has been stable, but we will be closely monitoring the impact of the increased U.S. tariff costs on demand. Page 24 presents demand in Europe. In fiscal '25 second quarter, demand increased by 1% year-on-year. And in fiscal 2025, the full year demand will remain about flat from FY '24, which was changed from the April '25 projection. Economy has been improved due to ECB interest rate cut and the fiscal expansion measures announcement and also demand hit the bottom. However, we will closely monitor the situation. Page 25 presents demand in Southeast Asia. In fiscal '25 second quarter, demand decreased by 4% year-on-year. In fiscal '25, full year demand will decrease by between 5% to 10%, which is changed from the April '25 projection. In Indonesia, which is the biggest market, we see huge demand decrease for both mining and construction equipment due to oil price decline and public works budget cut. We do not expect demand in Indonesia to recover for the time being. So we are going to closely monitor the situation. Page 26 presents demand in Japan market. In fiscal '25, the second quarter, demand decreased by 19% year-on-year. In FY 2025, full year demand will decrease by between 10% and 15% from fiscal '24, which was changed from the April '25 projection. Demand for rental is low and there is surplus in market population, which brings down the new machine demand. There are negative impact on construction industry due to the lack of manpower material price hike, demand will sluggish for the time being. However, we are going to closely monitor the situation. Page 27 presents price trends and the projection for major minerals for mining equipment. So as for low-grade coal from Indonesia, its price is on downward trend, but other minerals price are expected to be high or stable. Page 28 presents actual and projected demand for mining equipment. In fiscal '25, the second quarter, demand decreased by 13% year-on-year. Coal price dropped in Indonesia and demand has decreased significantly. In fiscal '25, full year demand will decrease by between 10% to 15% from FY '24, which was changed from the April '25 projection. We do not expect demand in Indonesia to recover for the time being. However, the demand elsewhere remains steady. Page 29 presents actual and projected sales of mining. In fiscal '25 second quarter, sales decreased by 7.1% year-on-year to JPY 461.9 billion, excluding FX, the impact and sales decreased by 3.9%. In FY '25, full year sales will decrease by 7.5% from fiscal '24 to JPY 1,773.2 billion, excluding foreign exchange impact. Sales decreased by 1.6%. For mining equipment, Indonesia has dropped due to oil price drop, but excluding Indonesia against April outlook, sales increased excluding foreign exchange impact. So for mining equipment and services, in addition to decline in parts in Indonesia, we see customers work on cost reduction focused and it will decrease excluding foreign exchange against April outlook. Page 30 presents Construction, Mining and Utility Equipment actual and projected sales of mining. In fiscal '25, the second quarter, parts sales decreased by 2.5% year-on-year to JPY 260.6 billion. And the ratio of aftermarket, including service was 53%, excluding foreign exchange, aftermarket sales increased by 0.4% year-on-year. FY 2025 parts sales will decrease by 4.8% year-on-year to JPY 1,001.1 billion and aftermarket ratio, including service is 52%. Excluding foreign exchange impact, the total aftermarket sales is -- will increase by 1.1% year-on-year. So thank you very much. And now I would like to touch upon second quarter topics, starting from Page 47. Page 47. So Komatsu will establish a new training center in Cote d'Ivoire for construction equipment, mechanics and operators. This was announced at the 9 TICAD, which was held from 20th to 22nd August, and the completion is scheduled in 2026. So Komatsu aims to expand its function to include equipment stock and parts depot as well as marketing capabilities, positioning itself as the core facility for the West Africa, and it's going to be expanded to West African customers and distributors and local communities. Page 48. Komatsu and U.S.-based Applied Intuition will co-develop a unified software-defined vehicle, which is SDV and autonomy platform. So with Applied Intuition's proven capabilities across vehicle operating system, autonomy stacks and tooling, Komatsu's extensive expertise in off-highway autonomy and mining applications. The collaboration represents signals a bold step toward the future of increasingly autonomous software-driven mining operations. By having autonomy platform leveraging SDV architecture, AI and the machine learning, the productivity of mining field can be dramatically improved, and we can provide higher values to the customers, including equipment downtime reduction and also the highly precise and efficient operation. Page 49. Komatsu and its subsidiary, EARTHBRAIN have entered into a collaboration with TIER IV, a pioneer in open source software for autonomous driving to develop autonomous technology for construction equipment. [ Sister ] companies will -- the collaboration of all 3 companies will focus on autonomous operation, Komatsu articulated and rigid dump trucks for civil engineering and the quarry sites in Japan aiming for practice use by fiscal 2027. Page 50. On September 19, Komatsu issued the integrated report, Komatsu Report 2025. So this report introduces our management policies and the corporate activities aimed at sustainable enhancement of corporate value over the mid- to long term with a focus on the new 3-year medium-term management plan renamed strategic growth plan with the title of "Driving value with ambition". Please take a look at it. That's it from myself.

Now from here on, we would like to take any questions that you may have.

This is Sasaki from UBS Securities. I have 2 questions. My first question is regarding numbers. Regarding volume, mix and cost impact, do you have a more detailed plans for this in the new plan, the revised plan compared to the beginning of the year plan. For volume and mix, it was revised down substantially by JPY 78.5 billion. But what was the reason, why it was revised down so substantially? That's my first question.

This is Horikoshi. Thank you for your question. First, looking at Page 10 and first half results for volume and mix, JPY 27.8 billion is what you see here. And for pure volume, it's JPY 19.3 billion. And other than that, for product or an area mix impact, it's JPY 6.4 billion, and it's likely to deteriorate. And there's one-off cost worth JPY 2.1 billion, which adds up to JPY 27.8 billion. For area and product mix, the reason why it's deteriorating by JPY 6.4 billion, and it's about half and half of a breakdown. But for area mix, it's because of Indonesia and its sales has been falling and it's a high-margin market. And conversely, margins are not as good in Europe, but its mix contribution is increasing. That's the reason why area mix is deteriorating. For product mix, especially regarding mining equipment or the parts ratio has been falling. And out of equipment, the low-margin products have sold more in the first half of the year, which was also a negative factor. So that was the first half. Regarding our expectations, looking at Page 19. On a year-over-year basis, JPY 82.8 billion is the negative impact from volume and product mix, et cetera. Pure volume impact is minus JPY 40.8 billion. Product mix, area mix are going to be -- in total, JPY 36.5 billion negative and also one-off costs, JPY 5.4 billion, which adds up to JPY 82.8 billion. For product and area mix, which is a large number, the reason is attributed to the same reasons as the first half and is likely to expand. And compared to the April PA, the public announcement, we're talking about our projection on an annual basis, right? On an annual basis. Compared to the difference between the public announcement in April for sales, it's about JPY 130 billion of a difference. It's worse by JPY 130 billion, out of which FX is better. Second half assumptions are now JPY 140. So it's a positive factor by JPY 220 billion. But conversely, for volume, we are expecting a decline in the order of JPY 100 billion. So that amounts up to JPY 130 billion of sales improvement compared to the April public announcement. But for the P&L -- for the P&L, compared to the April public announcement, it's better by JPY 13 billion, out of which FX impact is about JPY 75 billion and pure volume impact is about JPY 36 billion of a negative, which is equivalent to that JPY 100 billion. And for mix difference for product in area, this is big, JPY 42.5 billion. And tariff measures, price increase impact is about JPY 10 billion positive. And for costs, it's about JPY 12.5 billion positive. This is mainly due to tariffs have increased. Therefore, we were able to incorporate strong countermeasures. So net-net is JPY 13.5 billion and other costs are JPY 11 billion. So on a net-net basis, it's JPY 12.5 billion better. For fixed costs compared to the beginning of the year, it's going to be less. So it's JPY 13 billion better than the April public announcement, therefore. So Indonesia, which is relatively higher margin, it has deteriorated. So it's not just sales volume decline, but it has also led to a mix deterioration as well. Is that the right way to look at it? Yes. Area mix has deteriorated. This is attributed pretty much solely to Indonesia and also Europe conversely improved. So net-net, area mix deteriorated.

Then let me move on to my second question. Regarding Indonesia, for mining and construction equipment, what kind of things are happening on the ground? Can you give me more detail on that? For example, what are the conditions of the customer? What are they saying to you? And for mining, the idle rate, I believe, is increasing. So can you talk about the background as to why sales is deteriorating by explaining about what's happening on the ground there? That's my second question.

This is Hishinuma speaking. Regarding Indonesia, starting off with construction equipment. It hasn't really deteriorated demand-wise in agriculture, but construction equipment demand has been deteriorating. Public works budgets compared to our initial assumptions have become lower in structure. It's probably due to policy. They are actually allocating more to making school lunches free. And that is why they decided to cut public work project budgets, which has had in turn an impact on our construction equipment demand. As for mining, like we've been communicating from before, the 4,200 kilocalorie thermal coal prices, there is a strong correlation in the market. That's what we've been explaining from before. And prices are quite sluggish, as explained at $42 or $43 a ton. About a year ago, it used to be about $52 or $53. So price levels have been coming down quite substantially. So customer profitability has been deteriorating. So that's hard. But we may have communicated this at Q1 results, but regarding cost, for biodiesel policies, B35 has been revised up to B40. So that has been leading to higher prices and worsening of fuel efficiency. So operation cost is increasing. Also regarding royalties that you need to pay to the government has been increasing as well. Therefore, profitability for the customer has been deteriorating, and that is why [ mining ] Japan is likely to be sluggish for a while going forward.

How about the idle rate? Do you have any numbers on that?

Well, we only have numbers up until August, but it was 9.6%. So compared to before, it has been deteriorating. It used to be about 8% in Q1, I believe.

We are going to take the next question. Mr. Maekawa from Nomura Securities.

This is Maekawa from Nomura Securities. I am going to ask 2 questions. My first question is about the tariff cost and also your measures against it. That is my first question. As you can see on the Page 16, there is the JPY 50 billion mitigation. And I'd like to know what specific measures you're going to have. And also regarding steel and aluminum, I think there was the impact on the August -- during the August on the end. And first of all, I would like to ask about cost.

So now we are having more the measures. Regarding the tariff cost, excluding April, JPY 77.5 billion. However, this time, we are projected to be JPY 80 billion. And for the mitigation or the improvement and for April, we were projected to have it as the JPY 10 billion. However, now that we are accumulating this to the JPY 30 billion, and there is the JPY 8 billion more the tariff. And for the measures that we are going to have about JPY 20 billion additional. And against the cost, the difference or the cost gap, I said that it's improved and these are where we have gains. And for our improvement measures, what specific measures we have, first of all, as it was mentioned in April, there's a procurement or the source of procurement are going to be changed. And U.S., Canada and Mexico, they have the treaties among these countries and the -- especially for steel and the aluminum tariff, we are going to expand where the treaties will be applied. That is one of the measures. And regarding the steel and aluminum, so if we do nothing and it's going to be 50%, so that we are going to look at the accurate number about the content. So that is what we are going to do.

So regarding increased numbers, the -- was it mainly because of steel and aluminium?

Yes.

And there is a price increase. So you talked about the increase of the sales price. However, I was wondering if you're going to have the further increase of the sales price? Or how do you see the competitors move, especially in the U.S. market?

As I mentioned in April, starting from August, there's a 40% price up in the States. And compared to April public announcement, we do see the difference for that reason. However, there are some negative numbers. So meaning that there is a slight decline from the number we originally had. And regarding what competitors are doing, so competitors are increasing their prices and the U.S. companies for the time being, we have not heard that they are increasing their prices. In 2022 and 2023, they had the big price increase, which was more than 10%. And from the second half of the '24, actually, they are now going to -- they are decreasing the price. And during that period, we really didn't have much price increase. So probably we still have the room for a price increase. So that's why we have executed that this August. And for this projection regarding the U.S. for construction, actually, we have revised the sales upward. And we look at the current situation and from the physical beginning, especially for the second half, we were projecting that we will have the downward trend. However, probably that is not going to happen. And for the construction, especially in the States, we are going to project the upward revision.

And I have one additional question related to that. So other companies are doing the strong in the America. However, they had a very -- the last minute, the price increase. And do you have the same concern? Or do you see any improvement in North American market?

So as we mentioned when we talked about projection, so we are now having the upward demand projection in the North America, meaning that the current situation is not that bad.

So -- and regarding the free cash flow and cash allocation for the share buyback, I would like to ask some questions. Regarding the free cash flow, JPY 240 billion is projected. And for the total, I remember that the number given was JPY 320 billion. So I feel like it was revised downward for the cash allocation, is there any other things that we should take into consideration? Or is there anything we have to look at?

JPY 240 billion is the number we gave in July. And from July projection, we have the same number. And there are 2 reasons for this. So first of all, there is the inventory assets. And the tariff impact is bigger than we projected in April that was incorporated for this number. And for sales, especially for mining, there was the difference of timing, especially for the second quarter, and there is going to be a big sales, especially from the Central and the South America. So if it will be delayed, we will not be able to have -- we will not be able to realize the recovery. So that is why we do see decline. So having said that, there is not the huge decline and there is nothing we really should pay attention regarding the cash allocation. Yes, this is just the delay or the difference of the timing, and there is no change in cash allocation.

Let's move on to the next question from Jefferies, Fukuhara-san.

This is Fukuhara from Jefferies. My first question is regarding Slide 28. Regarding demand in Indonesia, it says that it's not going to recover for the time being. Are you talking that until the end of this fiscal year, end of March? Or is this going to persist going into next fiscal year as well? So can you talk about the demand environment in Indonesia? Is this year going to be a bad year, but are you expecting a pickup next fiscal year? That's my question.

This is Hishinuma speaking. Well, our outlook applies to this fiscal year-end. Regarding our outlook for next fiscal year, it's hard to say at this point in time. But for coal in Indonesia, the impact from China is quite substantial. So China, with production within the country increasing, they have been reducing the amount of imports. However, if there is a turning point once again where they import more, and I think that depends on prices as well, then that will impact Indonesia. However, like I explained in the presentation, regarding cost, costs have been running up higher. So if there is a policy change regarding royalties that I explained earlier, that should be a positive, but we'll need to scrutinize the details going forward. So in other words, this is impacted by the external environment. It's not really due to your company's competitiveness or should we be concerned. Regarding product competitiveness, dump trucks from China may gradually come into the market. But when you look at the overall big picture, we don't believe its impact is going to be that substantial.

Okay. I see. My second question is about Page 45, B/B ratio. What caught my eye is KMC. When you look at the chart, it is looking upwards. If it's possible for the demand for an order-taking situation for underground mining, have you been seeing any changes?

We haven't been seeing any major changes. So the order environment hasn't really deteriorated. Well, it may look low, but it doesn't mean that the environment has deteriorated.

We are going to take the next question. Adachi-san from Goldman Sachs.

This is Adachi from Goldman Sachs. I have 2 questions. My first question is regarding the cash flow. So you talked about full year projection. And before the sales cash flow, the JPY 410 billion and for the first half, JPY 130 billion. And I would like to see what is project to be improved during the second half.

This is Horikoshi speaking. First of all, there is the inventory asset. And as you can see, when you look at the balance sheet, the inventory asset compared to the end of the March, it's increased by JPY 170 billion. And excluding U.S. dollars, especially there is the base depreciation of the yen. And toward the end of the year, we are going to decrease this. And that is going to be effective and therefore the operating capital that will be effective.

Okay. Just to follow up. When you look at the cycle in the fiscal beginning, I believe that the situation was stabilized in the North America. And the -- when you look at the current situation, there will be more impact from the second half. And I feel like now you're in the phase to expand production and inventory. However, at the same time, I feel like -- looking at the situation for the mining equipment, you are going to decrease it some. So I would like to look at what you're going to decrease?

So when we talked about actual first half, I talked about comparison against the April public announcement, and there's around JPY 100 billion volume difference, which was declined from the April. And for the construction equipment, around 10% was -- excuse me, JPY 10 billion was unachieved and only JPY 90 billion was negative. And among JPY 90 billion, JPY 40 billion can be accounted to the Indonesia and also the North America as well. So there is the difference of equipment and also the coal price drop and also overhaul was delayed, so which is around JPY 30 billion from the North America. And looking at the Central and South America, there's the timing difference, which is around the JPY 10 billion. So it's going to be -- it is up to JPY 90 billion, this is for the first half. And when you look at the full year and JPY 100 billion was achieved. And for the full year, it's around JPY 20 billion unachieved. And when you look at the breakdown, Indonesia accounts for the same or the higher compared to the first half. And for North America, we are expecting to see significant improvement. And for Oceania, there is the easing of the housing policy. And from 2023 June, we have been seeing continuous decline. However, now we are seeing the improvement of the situation. So for the construction equipment, as you say, the situation is actually not that bad. However, mining, JPY 90 billion was unachieved during the first half and JPY 80 billion is going to be the unachieved full year. And from Indonesia, JPY 100 billion is going to be unachieved and for the Central and the South America, it was the JPY 10 billion unachieved in the first half. However, for the second half, it's going to be JPY 40 billion overachieved. And for North America, during the first half, JPY 30 billion unachieved. However, we are going to see the slight recovery from that number. So for the construction equipment, I'm not sure, however, mainly this is because of mining.

My second question is about tariff. I would like to ask about next fiscal. So as long -- as much as you can answer, I would like you to answer. So now the JPY 500 billion and the JPY 35 billion inventories. So as much as you can say, the -- what will be the number for the next fiscal?

So this year cost was JPY 8 billion net or its JPY 55 billion net. And this is we are projecting to see as a cost. And for the payment basis is around JPY 90 billion. And during the fiscal beginning, the inventory asset, which do not get the tariff impact. And that is why the number is a little bit mitigated. However, for the next fiscal, we are now going to have this -- the impact of the inventory assets. And during the fourth quarter, there's going to be the payment basis, which is basically same as the PL, and that will be 4x bigger. So it's just a rough estimate. However, the payment basis, which is equal to the PL it's going to be around JPY 120 billion.

So now we would like to take questions over the phone. [indiscernible] san.

This is [indiscernible]. I have 2 questions. First question is about -- you talked about margins being better in Indonesia compared to Europe. Regarding this difference of margins, is this because of the difference in the competitive landscape? And for Europe, are there any signs of margins improving or any measures you're implementing in order to improve profitability?

Regarding Indonesia, we have a strong partner or distributor there called United Tractors, UT, and we sell through them, especially for mining equipment. Fortunately, our market share is very high. So we have a competitive advantage leading to a relatively higher margin.

For Europe, should we expect any changes in profitability or not really?

This is Imayoshi speaking. For Europe, originally, it's mainly a construction equipment market and competition is pretty tough. So compared to other regions, structurally, profitability is lower on a relative basis.

My second question is about Latin America. You revised up your expectations there. When I look at your financial statements, you were talking about an improvement in copper demand. Regarding tariff impact on demand, is that the case where the tariffs didn't really have that much of an impact on demand?

This is Horikoshi speaking. In Latin America, conditions are better. In regions like Chile or actually, Brazil is not -- has deteriorated and also Mexico and Peru. Those are the regions that have been decelerating. And Brazil's impact is quite large. However, Chile is doing better, Ecuador as well and Colombia. For Chile, initially, when copper is to be imported into the U.S., we were concerned that tariffs were going to spring up, but that's not the case. Copper from Chile is 98% refined. Therefore, that is not subject to tariffs. So regarding copper production in Chile as well as demand for mining equipment, tariffs did not have an impact.

Regarding tariffs not being imposed on what you explained about Chile, is that included in the mitigation measures?

We originally did not account for it. So no, it's not included.