KOMATSU LTD. Q3 FY2026 earnings call

Company Overview and Core Competitive Advantages

• Komatsu was founded in 1921, with FY2025 March total consolidated revenue of 4.1044 trillion yen, 91% of revenue from overseas, 16% operating margin, 66,697 employees (70% based overseas).
• 62 global production and development locations, with ~60% of production conducted overseas. Core components are produced in Japan for uniform quality globally, with local assembly to enable rapid customer delivery, supported by the mother factory system that integrates product development and production for consistent quality control.
• All key performance-determining components are developed and produced in-house, enabling product differentiation and stable after-market revenue from replacement parts, plus a profitable remanufacturing business for used components.
• Resilient production and sourcing: Global cross-sourcing and multi-source procurement systems that rely on no single region for critical components, mitigating geopolitical and disaster supply chain risks.
• Industry-leading innovation: Early commercialization of connected machine platform Komtrax (2001), autonomous haulage system (AHS) for ultra-large mining trucks (2008), and Smart Construction digital solutions (2015).

Mid-Term Management Strategy (2025-2027)

• Re-defined mission: Become a "solution partner for safe, high-productivity, clean work sites", with three core strategic pillars: value co-creation through innovation, pursuit of growth and profitability, and innovation of the management base.
• Carbon neutrality target of 2050, with development across multiple alternative powertrain technologies: battery for small machines, hydrogen engines and diesel-trolley electrification for large mining trucks, paired with digital improvements to reduce product emissions.
• Expansion of mining automation: AHS autonomous haul trucks have reached 940 operating units as of September 2025, targeting over 1,000 cumulative installed units by 2027, with ongoing software-defined vehicle (SDV) development to resolve current central control scalability limitations.
• After-market business reinforcement: This high-margin, low-volatility business is a core strategic priority, targeting +15% revenue growth (ex-foreign exchange) over the 3-year mid-term period. Initiatives include extended warranty contracts for genuine parts in general construction machinery, and expanded remanufacturing of high-value mining components.
• Forestry machinery is positioned as the third core business pillar after construction and mining machinery, with expected high growth driven by increasing global wood demand and growing mechanization and sustainable forestry needs.
• AI is deployed for predictive maintenance via Komtrax data, with ongoing exploration of AI for optimized production planning.

Financial and Shareholder Return Strategy

• Financial targets: 10%+ ROE (minimum target), 1 trillion yen cumulative free cash flow (ex-M&A) over 3 years, increased retail finance net D/E ratio target from 5x to 6x to support expansion into low-demand regions like Middle East and Africa. M&A is prioritized for free cash flow use, with excess FCF returned to shareholders if no large M&A opportunities arise.
• Dividend policy maintains 40%+ payout ratio, with opportunistic share repurchases; the past two years have seen 100 billion yen annual repurchases, with total payout ratio reaching ~85% recently.
• Non-financial KPIs: 14%+ female management ratio globally, 1,000+ AHS cumulative installations, 39% CO2 reduction in production (vs 2010 baseline) and 32% CO2 reduction in product operation (vs 2010 baseline) by 2027.

1. Construction Machinery and Vehicles: Total revenue contribution is 92.3% of consolidated revenue. For the FY2025 March full year, this segment accounts for over 50% of revenue from mining machinery (exceeding general construction machinery revenue), with 51% of total segment revenue coming from after-market parts and services (65-70% for mining machinery alone). For FY2025 (fiscal year ending March 2026), the segment expects year-over-year revenue and profit decline due to yen appreciation and lower demand in Indonesia. By region, North America is the largest share, followed by Central and South America; China accounts for only 2% of segment revenue, down from ~20% around 2010.
2. Industrial Machinery and Others: Total revenue contribution is less than 7.7% of consolidated revenue. This segment produces excimer lasers for semiconductor lithography, temperature control equipment for semiconductor manufacturing, and large AC servo presses for the automotive industry, holding leading market share for its product lines. For FY2025, this segment expects either revenue decline with profit growth or revenue and profit growth.
3. Retail Finance: Total revenue contribution is less than 7.7% of consolidated revenue, supporting construction machinery sales in emerging markets.

• For FY2025 (fiscal year ending March 2026), the full-year earnings guidance has been slightly upward revised from the April 2025 release, despite an expected overall year-over-year decline in revenue and profit driven by yen appreciation and lower demand in Indonesia.
• For construction machinery: North America demand guidance has been raised from April levels; European demand is seen as bottoming, with guidance also raised from April levels; Southeast Asia (particularly Indonesia) expects significant demand decline for both mining and general construction machinery, with no near-term recovery expected.
• Mid-term: Mining machinery is expected to deliver sustained stable growth driven by ongoing demand for copper, gold and other critical minerals; general construction machinery demand is stable in developed markets, with growth opportunities in emerging market regions outside China. After-market revenue targets +15% growth (ex-foreign exchange) over the 2025-2027 mid-term period.
• 2050 carbon neutrality target is maintained, with an interim target of 50% reduction in scope 1/2 emissions by 2030.

• Chinese construction machinery market has become increasingly competitive, with domestic brands capturing large market share, reducing Komatsu's revenue share in China to just 2% from ~20% in 2010.
• Demand for new construction and mining machinery is cyclical, sensitive to macroeconomic conditions, commodity prices, and currency exchange rate fluctuations.
• No definitive technology has yet emerged to deliver full carbon neutrality for heavy construction and mining machinery, requiring expensive multi-directional development investment with uncertain commercial outcomes.
• Indonesia, a key Southeast Asian market, is seeing significant demand decline driven by lower Chinese coal imports reducing coal prices and customer profitability, with no near-term recovery expected.
• Supply chain disruption risk from geopolitical tension and natural disasters is elevated, mitigated but not eliminated by Komatsu's multi-source procurement system.

Q: What are Komatsu's priority business areas and growth outlook for the mid-term? / A: Komatsu's core business pillars are mining machinery and general construction machinery, which will remain the focus of investment and growth. Mining machinery is seeing sustained high demand for gold and copper, with coal demand not declining as fast as expected, supporting stable long-term growth. General construction machinery demand is stable in developed markets, and the company is positioned to capture future growth from new emerging market demand expansions. Other smaller businesses will also be expanded where profitable.

Q: Why are third-party parts not competitive in the mining machinery after-market, and why is Komatsu's after-market share so high? / A: Global annual demand for new mining machinery is only ~5,000 units, compared to 500,000-600,000 units for general construction machinery. The small market size creates very high entry barriers for third-party manufacturers, as they cannot recover the development and tooling costs for specialized mining components. Mining customers also prioritize long-term lifecycle cost over upfront cost, since mines operate 24/7, so they prefer genuine Komatsu parts for reliability.

Q: How does Komatsu's CO2 reduction effort create competitive advantage versus peers? / A: Komatsu is the only manufacturer in the world mass-producing hybrid hydraulic excavators. While the hybrid model costs ~30% more upfront, it also delivers ~30% better fuel efficiency, which is accepted by customers as a cost-effective way to reduce emissions, even before full electrification is feasible. This hybrid technology is a current competitive advantage for Komatsu in the transition to carbon neutrality.

Q: What is driving growth for the industrial machinery segment? / A: For semiconductor-focused industrial machinery, growth is driven by ongoing AI-led expansion of semiconductor demand, and the segment already has a large, high-margin after-market/subscription business that grows alongside installed base. For automotive-focused machinery, Komatsu is shifting product development to serve new demand from EV production, such as battery manufacturing equipment, to offset declining demand for traditional engine components.