Komatsu Ltd IR Day Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Tsubasa Sasaki - UBS Investment Bank - Analyst : I look forward to continue working with you. Based on today's presentation, I'd like to ask Mr. Horikoshi, you mentioned that you are making various efforts toward corporate value creation. But on the other hand, if you look at the share price and its valuation, Caterpillar in the US, for example, is trading at a PER of 18 times to 20 times and Epiroc, a Swedish competitor in mining is also trading at a PER of around 20 times. In the case of Komatsu, despite the fact that you are making such efforts based on its fiscal year's plan, your PER is 10 times and I think that valuation multiple is considerably discounted compared to other companies and historical levels. From your perspective, based on what you have discussed today, what do you think are the factors that are causing the discount? And conversely, how can the company work to eliminate this discount? Since you have shown us a detailed slide, could you please tell us what you think about the discount in multiples?

Question: Kentaro Maekawa - Nomura Securities Co. - Analyst : Maekawa from Nomura Securities. I have two questions. One is about how you have shifted to management focusing on free cash flow? And as you showed us in the sales price, you mentioned that the pressure and incentive for overseas subsidiaries are working very well. But I'd like to know specifically from where changes have started to appear. Also, I think you have multiple overseas subsidiaries. So I wonder are there any differences by business, if you can elaborate on this?

Question: Kentaro Maekawa - Nomura Securities Co. - Analyst : One more thing. You briefly mentioned retail finance saying it has a high profit margin, and there was also the earlier discussion on leverage. So I wonder if you are going to expand this? It could be interpreted as a positive for PER, but I don't think you have talked about this much until now. So could you talk a little about it about retail finance?

Question: Yoshinao Ibara - Morgan Stanley - Analyst : I am Ibara from Morgan Stanley. I have two questions. First, you are managing your business using EVA and free cash flow. And from your perspective, are there any business units or companies that still have negative figures and you feel the need to fix them? You've done restructuring in China and revising your approach in Russia. And from the outside, it seems as if no such negative areas remain and basically, everything is well managed. But as CFO, are there any areas that you think need to be fixed? Or is everything basically okay?

Question: Yoshinao Ibara - Morgan Stanley - Analyst : Do you look at this and make decisions about what to do with the region or whether to withdraw from the business?

Question: Yoshinao Ibara - Morgan Stanley - Analyst : Secondly, in terms of acquisitions, from the CFO's point of view, regarding Komatsu's current M&A, I'm sure you face various conditions such as credit ratings. But what is the maximum M&A potential? You may not be going after large acquisitions in the first place. But from a financial point of view, how much capacity do you think you have?

Question: Yoshinao Ibara - Morgan Stanley - Analyst : In that sense, it seems that there is no bottleneck when it comes to your capacity. And I'm sure that there's many opportunities for JPY1 trillion.

Question: Yoshinao Ibara - Morgan Stanley - Analyst : And regarding acquisitions, actually, when you do share buybacks, your company puts importance on credit ratings. It's a minimum requirement. But for acquisitions, you also can account for future growth, right?

Question: Sho Fukuhara - Jefferies - Analyst : This is Fukuhara from Jefferies Securities. I have two questions. The first one regarding your view on cost of capital. Earlier, you mentioned that in order to further lower WACC, you need to lower the volatility of earnings. One option is to increase borrowings. If you were to increase borrowings, what will happen to the allocation of cash flow, which you mentioned earlier is 40% for shareholder return and 50% for investment. Will this change in the future? For example, by increasing the allocation to shareholder return and reducing investment or rather allocating more to M&A. What are your thoughts on cash allocation if borrowings were to increase?

Question: Sho Fukuhara - Jefferies - Analyst : Understood. Secondly, I would like to ask you about the upcoming midterm plan. Of course, I'm sure it's difficult to comment on it right now, but I would like you to share your thoughts. What are the core businesses and concepts that you expect will drive your next midterm plan? What are you planning to share with us?

Question: Graeme McDonald - Citigroup Inc. - Analyst : I have a question about your M&A of ABS. I believe your company paid about approximately JPY40 billion. It's basically a start-up company with almost no sales or profit contribution. The other day, the Nikkei reported that you are planning to increase the production capacity of batteries by about 4 times and that you're planning to make investments worth JPY10 billion going forward. To be honest, one thing I'm curious about is there was a company called Northvolt that went bankrupt in Europe. And I'm not that familiar with the ABS business, but I was wondering what the difference is between Northvolt and ABS. And if there are any common risks like Northvolt for ABS, can you tell me a bit about it?

Question: Graeme McDonald - Citigroup Inc. - Analyst : Isn't ABS quite dependent on the automobile segment? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 17, 2024 / NTS, 6301.T - Komatsu Ltd IR Day

Question: Graeme McDonald - Citigroup Inc. - Analyst : It's not listed here, but for Proterra your company, invested into them previously, right?

Question: Graeme McDonald - Citigroup Inc. - Analyst : But then the relationship was terminated with them?

Question: Sho Fukuhara - Jefferies - Analyst : My name is Sho Fukuhara from Jefferies Securities. I have a question of your approach to M&A in relation to the future growth of your forestry business. Up until now, you have been buying machinery and attachments. But will you continue to look for companies with the same characteristics in the future? Or will you look for companies also in different genres, such as ABS? Or will you look for companies that can increase the service ratio in the future? Can you clarify your approach to M&A, please?

Question: Sho Fukuhara - Jefferies - Analyst : If I may just confirm, Slide 12 shows the trend in sales over the past few years. From FY '19 to FY '21, Komatsu Forest sales did not increase for about three years. But in FY '22 and FY '23, they saw an increase. What was the reason for this?

Question: Tsubasa Sasaki - UBS Investment Bank - Analyst : I'm Sasaki from UBS Securities. There are 2 things I would like to talk about, one, is the concept of FTL. I think it was a few years ago that Mr. Hara-san was a speaker at a briefing on the forest machine business and I think he gave a presentation at that time about the challenges of developing FTL. From that time, FTL has been difficult to develop. And it may be impolite to say that it is still challenging. Is it correct to understand that it is a different machine so it is difficult to build and that is why it has taken time? If I understand correctly, the development has progressed considerably. So can we understand that it will expand in the future? Could you please confirm your approach. This is the first point.

Question: Tsubasa Sasaki - UBS Investment Bank - Analyst : That's very clear. My second question is, although there was a sales chart, at the moment there may be no disclosure for the forestry business profit margin. But how should we understand the current state? In particular, how does it compare to the company average? And you also mentioned that you'll be raising aftersales service in the future. And if so, will the profit margin also go up? Is this interpretation accurate? Could you explain about the profit margin?

Question: Tsubasa Sasaki - UBS Investment Bank - Analyst : Then is it correct to understand that the profit margin will increase in the future when the product lineup is complete and sales increases along with aftersales services increases?

Question: Tsubasa Sasaki - UBS Investment Bank - Analyst : I understand very well.

Question: Kentaro Maekawa - Nomura Securities Co. - Analyst : My name is Maekawa from Nomura Securities. I'm sorry to ask a basic question. But you have said that the forestry industry is a third pillar, but the construction machinery industry is roughly around JPY2 trillion at the moment. So I think to aim for JPY2 trillion at one go may be challenging. From the current level of just under JPY150 billion, how much do you think sales will expand at what pace? As you said earlier, you're going to expand your product lineup and also there are markets that are not related to afforestation. Well, there are large companies that are in the industry, but maybe achieving your target by buying these companies will not be your point. Can you give us some quantitative direction of how you want to develop this business going forward?

Question: Kentaro Maekawa - Nomura Securities Co. - Analyst : You mentioned the tropics. But since Komatsu Forest original base is in the Nordic area, Sweden, I thought that Europe will be the main focus. Is that not the case?

Question: Kentaro Maekawa - Nomura Securities Co. - Analyst : How much is that ratio for Brazil?

Question: Satoshi Taninaka - SMBC Nikko Securities Inc. - Analyst : My name is Taninaka from SMBC Nikko Securities. I have 2 questions. The first is somewhat a basic question about the differences between your company and your competitors in North America. Why is it that your company is able to offer the longest extended warranty in the industry? Conversely, if there are any items that your company is unable to offer, what are they? I would like you to summarize the situation, including these issues.

Question: Satoshi Taninaka - SMBC Nikko Securities Inc. - Analyst : I also have a question about this LSP plan that your company focuses on. If there is a KPI like subscription rate that could be tracked by the stock market, that would be very helpful. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 17, 2024 / NTS, 6301.T - Komatsu Ltd IR Day

Question: Yoshinao Ibara - Morgan Stanley - Analyst : My name is Ibara from Morgan Stanley MUFG Securities. I have two questions. Earlier, you talked about expanding into regions where you have a low market share as part of your future strategy. I think you probably have a high market share for construction of original equipment, but your market share for spare parts is not that high. However, from our perspective, this situation sounds a little odd. If the original equipment is selling well, but the parts are not, what specific regions are you talking about? Normally, I feel that the market share of the original equipment and the parts are linked to a certain extent. But what is the reason for the current low market share? And is it possible to develop this area?

Question: Yoshinao Ibara - Morgan Stanley - Analyst : My second question is about the first speaker today, Mr. Horikoshi. During the past briefings, he has been saying that aftersales service would be fine even if it was difficult to raise the price of new original equipment. I would like to ask the person in charge of aftersales business, whether it will be possible to raise the price of parts properly next year, even if it is difficult to sell new original equipment in the US and other countries. I do believe you, but may I ask you to confirm this again.

Question: Yoshinao Ibara - Morgan Stanley - Analyst : Yes.

Question: Yoshinao Ibara - Morgan Stanley - Analyst : Based on your past experience, have there been any cases where you are unable to raise the prices of parts because the market was too tough?

Question: Yoshinao Ibara - Morgan Stanley - Analyst : I see, I'm relieved. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 17, 2024 / NTS, 6301.T - Komatsu Ltd IR Day

Question: Tsubasa Sasaki - UBS Investment Bank - Analyst : This is Sasaki from UBS Securities. I also have two questions. Firstly, in the presentation, you mentioned that reman is profitable, and it is easier to raise prices. And I also understood well how you intend to expand sales. On that basis, how do you plan to strategically increase the profit margin in the parts business? Could you tell us what kind of strategy you have in mind?

Question: Tsubasa Sasaki - UBS Investment Bank - Analyst : We recognize that the reman aftermarket business is the key. From the customer's point of view, it's a good business because the quality is good and it's cheaper. And from your point of view, the profit margin is high. So if you can expand this, it will become a solid business. Is that correct?

Question: Tsubasa Sasaki - UBS Investment Bank - Analyst : My second question is about the market share and coverage. I believe there was an explanation about the aftersales business about five years ago. The speaker was a different person back then. At that time, the market share was set to be roughly 60% in mining, 50% in developed countries and 20% to 30% in emerging countries. What is the current situation? If we assume that the addressable market for mining, construction in developed countries and in emerging country is 100%, what percentage of that is Komatsu's share? If you have any hint, explanations or numerical data as KPI, would it be possible to introduce them?

Question: Takeru Adachi - Goldman Sachs Group, Inc. - Analyst : This is Adachi speaking from Goldman Sachs. Earlier, Mr. Sunada mentioned the differences between mining and construction equipment. Could you delve deeper into this? We recognize that Komatsu has secured a significant market share in mining, which regions then have not yet reached this level of market share and still have room for improvement? Conversely, in construction machinery, the dynamics may be different from developed and developing countries and the customers are different and competitor is different, what strategies and areas for improvement do you have in each of the businesses? Specifically in developing countries beyond new machines, isn't there any possibility for second line -- secondary lines in price hike, is price hike feasible in developing countries as well? Could you talk about the mining and construction equipment strategy separately?

Question: Hirosuke Tai - Daiwa Securities Co. Ltd. - Analyst : This is Tai from Daiwa Securities. I just have one question. I would like to ask about the risk of future parts demand not growing as expected. For example, with the advent of autonomous driving and remote control in terms of wear rates, failure rates and operation errors, these are likely to go down. So that means a diminishing demand for your components, while items like filters will have a constant demand, but there are other types of components. Additionally, with the progression of electrification, for example, mini equipment may become fully electric in 5 to 10 years. Given the different volume of components for electric, how are you balancing these factors in your business? If you have any insights, please share that with us.

Question: Hirosuke Tai - Daiwa Securities Co. Ltd. - Analyst : Regarding your earlier point about targeting overhauls. With advancements in remote control and computerization -- computer control, reducing human errors wouldn't that -- wouldn't the lifespan of machines will be extended. For example, equipment previously decommissioned after 20 years, may be decommissioned in 30 years or 40 years. Would that increase the frequency of overhauls? Wouldn't that be business opportunities?

Question: Hirosuke Tai - Daiwa Securities Co. Ltd. - Analyst : There is another question regarding -- what was the name? That is the lifetime warranty. Okay. Regarding lifetime warranty with features like 3D view becoming standard recently, the fewer failures that occur, the less Komatsu has to cover in terms of the warranty. Potentially increasing profit isn't it? So as such features become more prevalent, I believe risks will decrease and the profit margin will increase. Or does it also lead to reduced warranty fees, keeping profit margins relatively unchanged?

Question: Kentaro Maekawa - Nomura Securities Co. - Analyst : This is Maekawa from Nomura Securities. Regarding the parts segment, you mentioned that the total market size is JPY3 trillion and your sales was JPY1 trillion. So it's one-third market share. Considering the challenges in increasing market share in Construction segment, you are taking the twin line approach. How much of this JPY3 trillion market do you anticipate capturing in the future? With the competition going on, maybe it's not favorable to talk about this, but could you answer this question? Additionally, concerning reman and rebuild service, well, both are offered from Komatsu, which one is more preferable for Komatsu to grow your profitability?