Explanatory Meeting for the First Quarter Ended June 30, 2016 Outline of Answers to Main Questions
Q: Please let us know the main reasons for the downward revision on the full-year earnings forecast for FY2016.
A: In response to the sudden rise in the exchange rate of the yen after our disclosure of the initial forecast for FY2016, we revised the assumed exchange rate for the projection as follows: ¥110→¥100/$, ¥120→¥110/€, and ¥17→¥15/Chinese Yuan. The negative impacts of the foreign exchange fluctuation are ¥33.0 billion on revenue and ¥14.7 billion on adjusted operating income and operating income, as compared to the initial plan.
Regarding the foreign exchange sensitivity on adjusted operating income and operating income from the beginning of 2Q/FY16 to the end of 4Q/FY16, we expect (i) the impact of ¥1 fluctuation against the US dollar will be ¥700 million, (ii) the impact of ¥1 fluctuation against the Euro will be ¥400 million, and (iii) the impact of ¥0.1 fluctuation against Chinese yuan will be ¥100 million.
Q: In the profit and loss forecast disclosed in July, we see ¥5.1 billion of improvement in overhead costs, from ¥20.7 billion in the initial forecast of FY2016 (disclosed in April 2016) to ¥25.8 billion. What are the main reasons for this increase?
A: The following three factors remain unchanged from the initial plan disclosed in April 2016: (i) expected cost reduction of ¥22.5 billion due to the elimination of costs regarding structural reform, which were incurred during FY2015, (ii) ¥7.5 billion (including outsourcing expenses) in the expected reduction of human resources related costs, and (iii) an increase of ¥5.5billion in the costs associated with the consolidation of KCM. For the other factor, we expect to reduce ¥1.3 billion year-on-year with additional cost reduction efforts across all group companies in this plan though we assumed the cost increase of ¥3.8 billion year-on-year at the initial forecast. As a result, we anticipate ¥5.1 billion of improvement in total overhead cost compared to the initial forecast.
Q: Regarding the market environment, the demands for hydraulic excavators seem to have declined to the level at the time of the financial crisis. Do you think the stagnation has bottomed out?
A: Viewing by region, the demand for hydraulic excavators in India has increased significantly. There were diverse signs observed in China during the period from April to June. While the used machineries’ market became slightly active, we are not certain that the sluggish demands for new machineries have bottomed out. Our demand forecast in North America already reflects the persisting stagnation in energy-related demands. We believe the future recession risk in Europe also deserves continued attention. In our opinion, recovery of the demand for mining machinery may start in or after FY2017.
Q: The revenue of mining business in the first quarter remains unchanged year-on-year. Does this mean that the revenue has virtually increased with absence of the negative impact of exchange rate fluctuations?
A: Not all the transactions in all regions are foreign currency denominated; however, the revenue, on a local currency basis, is higher than previous year both in the first quarter and the full year. Despite the continuously severe market environment, we virtually achieved revenue growth in the first quarter by capturing new demands in emerging countries for machinery sales business and by expanding sales of remanufactured parts and implementing the fine-tuned service program for parts service business.
