Komatsu Ltd. (OTCPK:KMTUY) Q1 2022 Results Conference Call July 29, 2022 2:00 AM ET
Masatoshi Morishita - Director, CTO
Hirokazu Miyagi - Mizuho Securities
Kentaro Maekawa - Nomura Securities
Tsubasa Sasaki - Mitsubishi UFJ Morgan Stanley Securities
Yuichiro Isayama - Goldman Sachs
This is Horikoshi, CFO, I will explain the business results for the first quarter of FY 2022.
Previously, the amount was rounded down to the nearest ¥100 million, but it is rounded off in this material.
Page 4 shows the highlights of business results for the first quarter FY 2022. Foreign exchange rates were ¥127.1 to $1, ¥136.9 to EUR 1 and ¥92 to AUD 1. Yen depreciated against dollar, euro and Australian dollar year-on-year. And although they are not listed here, yen depreciated against renminbi, South African rand and Russian ruble as well.
Consolidated net sales were ¥763.8 billion, up 17.8% year-on-year, and marked the record high for the first quarter. Operating profit was ¥93.6 billion, up 51.5% year-on-year, and the profit ratio was 12.2%, up 2.7 points.
Consolidated net sales increased due to the volume growth, improvement in selling prices and FX positive effects despite the impact by supply chain disruption. Operating profit increased due to the volume growth, improvement in selling prices and FX positive effects despite increase in material costs and our logistic cost.
Other income increased ¥19.2 billion year-on-year due to FX gains. Net income was ¥80.5 billion, up 96.7% year-on-year and marked the quarter record high.
Page 5 shows the segment sales and profit. Net sales of Construction, Mining & Utility Equipment were ¥715.3 billion, up 20.4% year-on-year. Segment profit was ¥83.3 billion, up 55.3% year-on-year, and the segment profit ratio was 11.6%, up 2.6 points.
Net sales of Retail Finance were ¥19.9 billion, down 2.5% year-on-year, and the segment profit was ¥7.7 billion, up 139.9%. Net sales of Industrial Machinery & Others were ¥34.5 billion down 15.4% year-on-year, and the segment profit was ¥35 billion, down 16.1% year-on-year. I'll explain the variance analysis of each segment later.
Page 6 shows the sales by region of Construction, Mining & Utility Equipment. Sales of Construction, Mining & Utility Equipment were ¥713.6 billion, up 20.3% year-on-year. Sales expanded sharply in North America, Asia and Latin America. The ratio of sales in Strategic Markets was 56% and that in Traditional Market was 44%.
Page 7 shows the causes of difference in sales and segment profit in Construction, Mining & Utility Equipment. Sales increased by ¥121 billion year-on-year, mainly supported by increased volume of sales, positive effects of foreign exchange rates and improved selling prices.
Despite the impact of higher material prices and logistics costs, segment profit increased by ¥29.7 billion year-on-year, reflecting the positive effects of ForEx and improved selling prices. Segment profit ratio was 11.6%, up 2.6 points year-on-year.
Page 8 is about the situation of Retail Finance. Assets increased from the previous fiscal year-end, mainly affected by foreign exchange rates. New contracts increased year-on-year, supported by increased sale of the construction, mining equipment business. Revenues decreased by ¥0.5 billion due to the impact of selling some used equipment, which offset an increase in new contracts and the positive effects of foreign exchange rates.
Segment profit increased by ¥4.5 billion year-on-year mainly due to the positive effects of foreign exchange rates and decreased allowance for doubtful accounts.
Page 9 shows sales and segment profit in Industrial Machinery & Others. Sales decreased by 15.4% year-on-year to ¥34.5 billion. Segment profit declined by 16.1% to ¥3.5 billion. Segment profit ratio was 10.2%, down 0.1 point.
For process and machine tools for the automobile industry, sales and profit decreased due to a reduction in sales of medium and large-sized presses. For products for the semiconductor manufacturing industry, sales and profits increased supported by excellent sales of the Excimer laser-related business.
Let me turn to the appendix to explain about the situation of orders and sales by Industrial Machinery on Page 30. The graph on Page 30 shows the book-to-bill ratio for Industrial Machinery. It shows the index of average orders in value divided by average factory shipment for the 6 months.
Komatsu Industries has been engaged in the sale and servicing of presses and sheet metal machines. The index is at 130% level, partly due to the recent orders for large presses. Komatsu NTC designs, manufactures and sells machine tools, including transfer machines, machining centers and crankshaft processing machines. The index is at 190% level, partly due to orders for machine tools for EVs and machines to manufacture EV batteries.
I will now explain the consolidated balance sheet on Page 10. Total assets increased by ¥467.6 billion, affected by yen depreciation from the previous fiscal year-end to ¥4,815.1 billion. Inventories increased by ¥186.6 billion, mainly due to the responses to increased demand for Construction, Mining & Utility Equipment, yen depreciation and supply chain disruptions.
Shareholders' equity ratio was 50.8%, down 0.6 points from the end of the previous fiscal year. Net debt-to-equity ratio was 0.32. This concludes my explanation.
Next, Mr. Morishita will present the projection of FY 2022 business results.
This is Morishita, General Manager of Business Coordination Department. I'll explain the projection of FY 2022 business results and the conditions of major markets.
Page 12 shows the outline of projection for FY 2022. In the first quarter, despite the increase in material costs and logistic costs in addition to the impact of supply chain disruption on production and sales, demand was mostly stable in regions except China and yen depreciated more than our expectation.
Under such circumstances, we capture the expansion of the new equipment to demand steadily through cross-sourcing and the improved selling prices and the cost, as a result, net sales marked a record high for the first quarter and the profit ratio also improved to 12.2%.
As for the projection for the second quarter and onward, although we have not seen any notable change in orders lately, we expect the interest hike in North America and Europe might give negative impact on demand in future. As future uncertainty is increasing, we have not revised our full year forecast this time.
From next page, I will explain the actual and projected demand for 7 major products. This slide shows the actual and projected demand for 7 major products. It shows the demand of 7 major products, including mining equipment, the figure for the first quarter FY 2022 is our preliminary estimate.
In the first quarter FY 2022, global demand decreased by 7% year-on-year. And excluding China, demand increased 3% year-on-year.
In China, demand decreased substantially year-on-year due to the lockdown caused by pandemic in addition to the economic slowdown. In the areas, excluding China, major regions, including North America and Southeast Asia were robust, but demand in Europe, Japan and CIS were negative year-on-year.
Demand volume projection for 2022 remain unchanged from April as overall demand will be flat year-on-year, and excluding China, it should be from 0 to plus 5% year-on-year. But given the interest hike in North America and Europe, prolonged supply chain disruption may affect demand negatively. We will monitor the trend closely.
From next page and onward, I will explain the major market conditions. Page 14 shows the demand in Japan. In the first quarter FY 2022, demand decreased by 9% year-on-year. Demand decreased due to stagnated supply conditions resulting from supply chain disruptions while orders received were steady in public works and private sector construction.
In FY 2022, full year demand will increase between 0 to plus 5% year-on-year, and the projection remains unchanged from April. Construction demand in public works and private sector will continue to be firm and supply delay will be improving.
Contract average operating hours per month was minus 5% year-on-year in June.
Page 15 shows demand in North America. In the first quarter FY 2022, demand increased by 4% year-on-year. Demand increased centering on residential and nonresidential construction as well as road and traffic infrastructure and demand for rental equipment continue to recover.
In FY 2022, full year demand will increase between -- from 0 to plus 5% year-on-year, and the projection remains unchanged from April here also. Demand for infrastructure will continue to be in high level, but as the impact by interest hike is observed and slowdown in the growth in housing starts, we monitored the operation of equipment and demand trend closely.
Contract average operating hours per month was plus 6% year-on-year in June. Operation in rental equipment, construction and residential segment has been firm and operating hours in energy segment continue to be in recovery trend.
Page 16 shows the demand in Europe. In the first quarter FY 2022, demand decreased 13% year-on-year. Demand decreased, centering on major markets of Germany, the United Kingdom and France due to stagnant supply conditions resulting from supply chain disruptions.
In FY 2022, full year demand will increase between 0 to plus 5% year-on-year, and the projection remains unchanged from April. Demand will be flat or slightly increased over the previous year due to the major infrastructure project in major markets of Germany, U.K. and France, and order condition, but as demand may decrease due to the prolonged supply chain disruption, progressing inflation and the investment decline due to interest hike. We monitor the situation going forward closely.
Contracts average operating hours per month was minus 8% year-on-year in June. There was no major change in operational conditions, and we regard the result was affected by the number of operational days.
Page 17 shows the demand in China. This slide shows the demand of hydraulic excavators, excluding mini excavators. As referenced, demand including Chinese makers is also described, demand growth is that of foreign makers. In the first quarter FY 2022, demand decreased by 60% year-on-year, and the total demand including Chinese makers decreased 54%.
Demand dropped sharply, mainly due to the stagnant economic activities and the effects of lockdowns caused by resurging of COVID-19 infections.
The demand projection for fiscal '22 is negative 30% to 40% against the previous year. The projection for total demand, including Chinese manufacturers is negative 20% to 30%, unchanged from the April projection.
Construction investment-related indicators have been on the increase since the second half of last year, although the negative growth of demand is [indiscernible] slightly starting to ease, we expect this to remain negative for the time being. The monthly average operating hours of contracts in June was down 13% year-on-year. The trend has been negative since April of last year, and overall operation is low but the recent increase in the number of projects has reduced the rate of decline of the operating hours.
On Page 18, we will explain demand in the Southeast Asian market. In Q1 fiscal '22, unique demand seems to have increased by 22% year-on-year. Demand increased in Malaysia and some countries in the region, including the largest market of Indonesia, in which demand rose significantly 33% year-on-year.
In construction equipment, demand expanded in the construction sector due to the execution of public investment budgets and demand also grew in the agriculture sector. Demand for mining equipment for the coal industry also increased. We maintain our April projection of 15% to 20% year-on-year increase in demand in fiscal '22.
In our largest market of Indonesia, we expect demand for construction equipment to increase as public investment budgets are executed. Demand for mining equipment for coal industry is also expected to continue rising. Demand in countries like Malaysia are expected to remain strong.
In June, the average operating hours of contracts in Indonesia increased 5% compared to the same month last year. Operating hours in the construction sector are strong due to public investment as well as in agricultural sector.
On Page 19, I will explain the demand trend for mining equipment. In first quarter fiscal '22, global demand for mining equipment increased by 18% year-on-year. Although demand declined in CIS, it increased drastically in Indonesia and other Asian countries, partly due to the high coal prices.
In fiscal '22, we expect full year demand to decrease between 0 and 10% from fiscal '21 unchanged from the projection of April. As in the first quarter, we expect demand to grow in Indonesia and other parts of Asia or declines in CIS and other regions.
We will explain the status of orders and sales of mining equipment in the appendix on Pages 28 and 29. The graph on Page 28 shows the book-to-bill ratio for mining equipment. The graph shows the index of average orders in value for 6 months divided by average factory shipments in value for the same 6 months.
Komatsu America manufacturers and sells super large dump trucks. The index has risen to only 30% level due to an increase in orders from Australia and Chile. Komatsu Germany manufactures and sells super large hydraulic excavators. Recently, the index is trending above 100% level due to orders from North America and Africa.
For Komatsu Limited, the index is around 90% due to high level of orders from Indonesia and North America on one hand and an increase in sales on the other.
Book-to-bill ratio for KMC mining equipment is shown on Page 29. Orders for surface equipment increased in North America, Central and South America and Australia. Orders for underground equipment also increased mainly in North America and Australia and index, all in all, is at 150% level.
On Page 20, I will explain the sales of mining equipment. For the first quarter, sales increased by 22% year-on-year to ¥302.1 billion, which is an increase of 8%, excluding the impact of foreign exchange rate. Sales decreased in CIS but increased in Asia and North America. For fiscal '22, we expect sales to increase by 4% from fiscal '21 to ¥1,128.9 billion, unchanged from the projection of April.
On Page 21, I will explain the situation of sales volume of parts. Sales for the first quarter of fiscal '22 increased 34% to ¥201.7 billion year-on-year. Excluding the effect of exchange rates, sales would have increased by 19%. Sales of construction machinery increased in regions other than China, as operating hours of machinery increased in many regions, due to increased economic activity.
Sales of mining equipment increased in Asia, North America, Latin America, Oceania and other regions.
We expect fiscal '22 full year sales to be ¥692.1 billion, 6% increase year-on-year. No change from the April projection.
Major topical themes are explained on Page 31 and onwards. Komatsu has acquired Mine Site Technologies, a solution provider that enables communication between operators and mining equipment as well as their position tracking. The company's solutions enable users to visualize information from the underground mining environment and create a digital twin of the underground site in real time.
Page 32. Komatsu acquired Bracke Forest AB, which develops manufactures and sells attachments for silviculture. Since 2014, Bräcke and Komatsu have been conducting joint development and in fiscal '21, launched D61EM-23M0, The world's first auto operated three-planting machine based on bulldozers in Brazil.
Even after the merger, by taking in Bracke's technology and knowledge in silviculture, we will accelerate the mechanization of not only logging but all other processes.
Page 33, Komatsu Mining held an opening ceremony on June 27 to commemorate the official opening of its new plant in Milwaukee, Wisconsin, USA. The South Harbor campus, Komatsu Mining's new headquarters is the result of the investment of about $300 million which was designed to improve efficiency and productivity by consolidating the company's headquarters and production facilities previously scattered to a coastal location more suitable for production.
Page 34, Komatsu and Cummins have agreed to collaborate on the development of zero-emission power-source technologies, including hydrogen fuel cells for haulage equipment. This collaboration is complementary to Komatsu's development of the power agnostic drug.
Finally, Page 35. Komatsu in Chile's state-owned mining giant Codelco, have agreed to begin trials in 2024 to implement a new method of tunnel acceleration using mining TBM or Tunnel Boring Machine in underground hard rock mines. We will conduct trials of the mining TBM at Codelco's Chuquicamata Mine aiming for early introduction of this innovative technology. That is all from me.
Now we will take your questions.
[Operator Instructions] The first question is from Mr. Sasaki, Mitsubishi UFJ Morgan Stanley Securities. Mr. Sasaki, please.
Hello, do you hear me? This is Sasaki of Mitsubishi UFJ Morgan Stanley Securities. First question is about the demand environment. In your presentation, you said that latest demand has been very robust, but also said the interest hike and supply chain disruption may affect the demand trend.
In mining, the demand for mining equipment has been robust as well. But it is a fact that the recent price of various minerals, including copper and iron ore, except summer coal has been falling.
So I'd like to have your comment based on the feedback from operational site on whether you feel the slowdown in construction and mining equipment in Europe, America and Asia where demand has been robust. I'd like to hear your thoughts on the sustainability of the strong demand. Would you give us more color, more in detail? How do you feel about it as of now?
This is Morishita. The question is about how we feel about the market environment. I said our view for the market remains unchanged from the projection in April.
Looking at the operational side. In the last 3 months, there was no major change. As for the first quarter results, partly including the forecast. In traditional market of Japan and Europe, for example, the first quarter figure was negative year-on-year. And as mentioned before, the impact of supply chain disruption seems to be large.
And we were informed from the operational site that customers' request for equipment delivery is strong as they have backlog of construction for upcoming 1, 2 or 3 years from now.
So as for our projection, as explained in April, though in the first quarter, some regions posted negative year-on-year growth, we'll offset that through the following 3 quarters.
As for mining agreement, I explained that on the contrary, the first quarter result was plus year-on-year. And the full year forecast is from 0 to minus 10%.
We think that CIS mainly affect this. In FY 2021, in terms of the volume, CIS was our largest market. The decline in the first quarter was not so substantial. But in the second quarter and onward, we expect the dip will be deeper.
So based on this, our forecast for the overall segment is from 0 to minus 10%.
Regarding how we feel, in non-CIS region, orders have been firm and though commodity price volatility exists, so far, we have not observed any major change. That's all from me.
I learned your feeling that the demand is strong. As a follow-up question, though you talked about a good story. Generally speaking, there is a strong concern for the potential economic slowdown caused by interest hike and monetary tightening policy.
Now listening to your comment, I thought that customers' inquiry is strong, both in Mining and Construction. What is the background of such strong demand? Would you please share your thoughts on this with us.
In the guidance briefing in April, I said that FY 2022 forecast is extremely difficult with a mixed picture of positive and negative factors. And basically, such -- our view remains unchanged. We need to watch closely the interest hike and the decline in investment appetite.
For example, in the case of construction equipment in North America and Europe, to be honest with you, retail order has been gradually slowing down. This is certainly happening. But regarding how we interpret this, it entails various possibilities.
First, due to the supply stack, where we let customers wait for some time. Current order is weakening slightly. And the second view is customers' concern factors are increasing in the mid- to long term. They suspend their orders.
But as far as we are informed by dealers and retailers, immediate, fast economic slowdown on the side of customers is not observed.
It was extremely useful. Second question is a different topic. I'd like to know the supply chain disruption for Komatsu. I think the logistics disruption caused by semiconductor shortages and mainly the tight shipping space has been the issue originally. But for you, would you comment on the situation in material shortage and the shipping space in April to June period and your forecast going forward?
In particular, just yesterday, a competitor said that the logistic disruption will grow more serious starting from the first quarter. So please let us know the update on material shortage and the shipping condition of Komatsu.
This is Horikoshi speaking. It is also related to the difference between the first quarter results in April to June period and the initial projection. In the first quarter, in particular, due to the lockdown in Shanghai, material supply from a part of suppliers was stagnated and the volume went down compared with our initial forecast.
But it was mostly offset by FX gain as we originally assumed ¥118 to a $1 and we achieved the sales almost in line with our projection. But we were informed that the stagnated supply will recover in July to August. So the decline in the first quarter will be recovering in the second quarter and onward.
As for the containership, at the beginning of this fiscal year, we thought its cost will rise by about ¥17.9 billion in this year, and that projection remains unchanged. As for the shipping period of container, it took almost double the time before. But now it came back to almost 1.3x of the normalized period. So shipping conditions seems to be considerably calming down as of today.
And as for the marine transportation to other regions, at present, we do not see any particular issue in securing shipping space.
This is Morishita. Let me add some comments concerning logistics. As for shipping, it is not yet smooth. What happens in shipping now is delayed and the tight space is also observed. And the sudden change of route to skip port is happening, and they are being managed every month.
But it is nothing new, and this condition has been continuing for some time. We thought the situation was coming down in May and June. But in July, it is picking up again. Presumably, after the lifting of lockdown in China, goods began to move again. And that led to the tightness.
However, that does not indicate that the situation deteriorated in the first quarter in this year, but it was in line with our initial forecast. And the cost was as Horikoshi mentioned, almost as we expected.
Next question comes from Mr. Isayama of Goldman Sachs.
This is Isayama of Goldman Sachs. Do you hear me?
Thank you. First, as usual, can you give me the breakdown of volume mix in various analysis? Mr. Horikoshi mentioned before that container cost remains unchanged from the forecast but I thought it was rather substantial. So would you give us the breakdown of volume, cost, mix and container cost impact and maybe some others, please?
And you commented on the impact of lockdown in China? So can you give us any quantitative information of this impact on sales and operating profit for the company basis? My first question is the confirmation of numbers. Thank you.
You are referring to Page 7 for the breakdown, right?
Within the minus ¥10.2 billion, plus ¥7.1 billion was the volume that corresponding to sales of ¥21.9 billion. Cost increase was ¥28.1 billion. And the third factor is the combination of product mix and regional mix, which is plus ¥7.1 billion.
As for the product mix, in the first quarter, due to the procurement delay of the components, as mentioned, sales of equipment were weak but component sales increased proportionally, and that led to the increase in product mix. And at KMC, the mix of service [indiscernible] profitability is high, increased, and that also affected positively in product mix.
As for regional mix, proportion of Indonesia increased considerably year-on-year and that led to the increase in regional mix. So the total profit increase was ¥7.1 billion.
The third factor is the impact of containership as mentioned. It was minus ¥3.8 billion year-on-year. Others was plus ¥7.7 billion. That is related to the inventory which increased as of the end of June, and the gain was posted with the allocation of indirect cost to inventory.
So this is a breakdown of volume product mix and et cetera and what was another question?
Can you quantify the impact of lockdown in China?
Yes, there were impacts in the part of components. Impact on sales was from approximately ¥20 billion to ¥30 billion, which is whole sale impact.
Thank you very much, Mr. Horikoshi. As for the cost, the initial briefing, I think you said the cost impact was minus ¥46.8 billion, and the cost impact in the first quarter was ¥28.1 billion. Did it increase because you produced more volume than plan, and that led to the increase in the parts and the material cost? Or is it because the material cost is higher than expected? You would have a variety of sourcing, including from the spot market and the contract base. This is a follow-up question, but I feel that cost impact is slightly large. So would you comment on this, please?
Let me comment on the initial projection and the results. As for sales, as mentioned before, volume decline due to the part supply delay caused by Shanghai lockdown affected sales. And that was offset by foreign exchange gain. And then compared to the initial forecast, sales were slightly down.
Talking about the profit. As for the cost in the first quarter compared to the initial forecast, the loss was large and the container ship cost will be almost in line with the forecast for the full year, as mentioned before. But the cost impact was large.
As for the full year projection, we did not revise our full year projection this time. Originally, in April, we calculated sales and profit projection based on ¥118 to a $1 assumption. If the current – the first quarter average rate ¥127 to a $1 is applied, sales will be much higher, positively affected by FX gain. And selling price was proved up higher than planned, and that plus would be added.
But due to future uncertainties in demand that might be caused by U.S. interest hike as Morishita mentioned before, we did not revise the sales projection.
On the profit front, of course, our FX gain will be large. And as mentioned before, selling price will have gained as well because we increased price more than initially planned. But on the other hand, cost increase is substantial.
Since April, steel cost has been surging. And this is partially affected by the depreciation of yen also. But this large cost increase made the substantial adverse impact. So with the foreign exchange impact, if things move as it is, profit will be higher versus the initial projection. But due to the uncertainties, as mentioned, we did not revise the profit projection either.
My second question, can you tell us a little bit more about mining equipment trends in the 3 regions of CIS, South America and Oceania? In your explanation, you said that you thought the CIS would fall a bit more, but it turned out okay.
Sorry to talk about other companies, but I hear about suspension of order backlogs and developments like that so it may become more difficult to book sales. You seem to be doing okay so far.
My question is whether this is a ground last year or whether we should be concerned about a big drop for CIS going forward? As for South America and Oceania, sorry if I am misreading the graph, but it seems that both demand and sales are a bit negative, if you compare them to local terms. Are you working off a high base last year? Or is it the impact of the iron ore market, which is apparently falling? Can you tell us about the current development for these 2 regions based on the market conditions?
Yes. Thank you. You are asking about demand or market trends for mining. First, to your question of what will happen in CIS going forward? I think we have to assume that the CIS will decline quite rapidly.
At the time of our guidance at the beginning of the year, we said that we had made our plan for CIS solely based on local inventories and inventories in transit and ships. This situation has not changed. In that sense, inventory that was still available in the first quarter has been sold and at our company that will now gradually decrease.
In fact, export restrictions from Japan, the U.S., the Europe have been tightened considerably since then. In this sense, I think that for not only our company but also other machinery manufacturers as well, you can’t expect too much in the CIS.
For Central and South America and Oceania mainly Australia, you are right. In fact, last year, in fiscal ‘21, there was a fairly large chunk of sales, especially in Q1. If you look at it by quarter, Q1 was quite strong last year. Compared to that, Q1 fiscal ‘22, in Oceania appears relatively quiet compared to other regions.
Now for the next question, [Mr. Tsuge] from [Mike Shimbun], please.
This is [Tsuge] from [indiscernible]. Can you hear me? Thank you. First of all, I'd like to know the sales price difference and the price increase. Mr. Horikoshi, CFO, told us that the price increase has progressed more than expected. If the current pace of price hikes continues, how much of a contribution do you expect that to make over the course of the year?
You also mentioned that the price of steel materials is also rising, but when you compare raw material price increases and the price pass-through, is the price pass-through progressing at a faster pace? Can you elaborate a bit more on this?
First of all, we said at the beginning of the term, that the sales price increase for the year would be ¥75.3 billion, but it has gone up considerably more, and we think it could easily reach ¥100 billion.
In terms of sales price, we are now forecasting a level a little shy of 4%. And the other thing was about the cost of goods sold?
Yes, the pace of its rise.
Yes. Looking at the cost of sales for the current term, we expect that the increase in selling prices and increase in cost of sales, which includes the increase in container shipping prices will be about the same. Maybe the rise in cost of sales will be slightly larger than the selling price, but about the same. So for this year, we will be able to cover cost increases.
At the beginning of the term, it was my impression that price increase of ¥75.3 billion was larger than the increase in container and material cost. But you mentioned that the price increase was about ¥100 billion. So raw materials, mainly steel and container cost increases will be about ¥100 billion as well?
That's right. Compared to the initial forecast as of April, we expect more than ¥40 billion additional rise in raw material cost.
Okay, understood. One more thing. I'd like to ask about the competitive situation in Southeast Asia. You said that sales in Southeast Asia, especially Indonesia, are quite strong. I think you have introduced mid-price excavators and hybrid excavators there. But what has been the market response for those products? And how is the competitive situation compared to other manufacturers, such as Sany?
This is Morishita. In Indonesia, we have just started to introduce 30-ton hybrid product to the market. Some of them have actually been delivered to customers. We are now targeting nickel mines exclusively, and we have already studied customer deliveries.
We are also in the process of conducting on-site demonstrations so that our customers can actually use the system and experience the fuel consumption advantages.
We are also making steady progress with the CE series. As I think I mentioned in April, our market share in Asia in general and in Indonesia, in particular, has increased by 2 to 3 percentage points since the introduction of the CE Series.
This has continued to the present. Of course, our competitors, the Chinese players are also working hard. And so we are facing a very tough competitive environment.
However, the various supply chain issues we are confronting does not escape our Chinese and other competitors. The most recent trends in the past months or seem to indicate a slight decline in sales of Chinese products. How this will evolve going forward is something we will have to keep a close eye on, we think.
Next question, Mr. Maekawa of Nomura Securities.
This is Maekawa from Nomura Securities. I'd like to ask just one question regarding your view on the demand environment and your response or your stance against that. In the mining equipment market, for example, in the case of copper and coal or hard rock and all else, depending on whether it is for contractors or resource measures. Is the situation difference there from the resource price situation? For example, is copper more resilient?
Or in the area of construction machinery, you mentioned that there are region-based risks, but I wonder if there are subtle differences by region. After all, in the U.S., housing is falling quite a bit I wonder if that is where the risks are. You mentioned earlier several risk factors in each business field, and I'd like to know the more nuanced differences among them and the resilience of your business, including parts and services. In terms of your response and the degree to which you can make up for or mitigate the impact, is there nuanced differences by each segment? Could you elaborate on that, please?
Thank you. That is a very difficult question. We mentioned earlier that there is a mixture of positive and negative factors. For example, you mentioned the price of copper. That is actually declining recently.
However, the sense on the ground is that both miners and contractors aren't quickly losing their appetite to invest. In fact, we are receiving quite strong orders especially for dump trucks. We also talked about the housing situation in infrastructure in North America.
As you point out, I think this segment is a negative factor but on the other hand, last November, the Biden administration passed a bill to invest USD 1 trillion in infrastructure.
At that time, we projected that this would emerge as actual demand for construction equipment from the second half of fiscal '22 onwards. Although that demand has not exactly kicked in yet, I believe that this will be a positive factor going forward.
You talked about resilience. For us, the volatility of the construction equipment and mining market is something we have been dealing with for a long time. In contrast to that, aftermarket, especially the parts business does not see big fluctuations. And as I explained earlier, sales of parts have been very strong in this quarter as well.
In fact, this business continues to see year-on-year increases on a quarterly basis. And in Q2 and beyond in this fiscal year, we think it's likely that this business will continue to grow steadily.
What I want to say is that for the main equipment sales, we see no major deterioration this year, but we need to be watchful next year onwards. But for parts there will be steady demand and sales will continue to grow. That is what we expect.
I'm sorry, but our time is running short. So the next question will have to be the last one. Mr. Miyagi from Mizuho Securities.
I am Miyagi from Mizuho Securities. Can you hear my voice?
Yes, we can hear you.
I am sorry that I am asking this for the last question, but I'd like to check the nuances of the Q1 results and the progress against the plan. Our sales and operating income in Q1 up or down compared to what you had initially expected? How about in yen terms and when you remove the foreign exchange impact, for sales and OP, respectively, please?
Horikoshi here, although there is a positive factor from the exchange rate, sales are slightly negative compared to the initial plan, almost flat, slightly negative. As I mentioned earlier, the impact of foreign exchange rate was offset by problems on the supply side, resulting in a slight negative.
As for profit, there was a decrease in volume as a result of supply side issues and an increase in cost of sales. But as I said earlier, the ratio of parts in the product mix is increasing because equipment sales are down, the ratio of parts have increased and they have a higher profit margin and there was also the positive impact of geographic composition.
Also, the inventory has increased slightly, so there was a gain from the allocation of overhead expenses. So profits are up against the initial plan.
I see. Understood. However, from the nuance of what you just said, it does not seem that there was a huge increase in profit since there were some negative factors as well. So against the full year operating profit of ¥346 billion, you had more than ¥90 billion in Q1, and you say that is only a slight increase. Does that mean that in the current fiscal year, you were expecting profits to be disproportionately large in the first half?
Do you mean that we expect disproportionately large profit in the first half?
That is not the case at all. Sales normally increase over the year from Q1, Q2 to Q4 and we are following that trend. But for Q1, we were a little bullish compared with ordinary years.
I understand. Sorry, that was the last question. That was instructive.
We have received other questions, but we have reached the scheduled closing time. So we will now end the Q&A session. This concludes the business results briefing. Thank you very much for your participation today.