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The three years of the mid-term management plan, "DANTOTSU Value –Together, to “The Next” for sustainable growth ("previous mid-term management plan")," were extremely challenging, as demand for construction and mining equipment declined for a third consecutive year, with the exception of China. Despite the challenges, we achived record-high net sales and operating profit for a third consecutive year (Figures 1 and 2), aided by a weakening yen stemming from government interest rate hikes around the world in response to inflation, as well as our own aggressive efforts to improve selling prices to absorb cost increases.
In this section of the report, I will cover the three years of the previous mid-term plan in the context of three topics: (1) Improved selling prices, (2) Controlled fixed costs, and (3) Expanded mining equipment sales.

We began the first fiscal year of the previous mid-term plan with an economic recovery from the pandemic and the global supply chain disruption caused by the situation in Ukraine. We also saw significant increases in materials and logistics costs. Komatsu began raising selling prices to counter rising material prices, and, by late fiscal 2022, the increase in selling prices had come to surpass increases in production costs and fixed costs. For the first time since fiscal 2021, selling prices in the fourth quarter of fiscal 2023 exceeded the increase in cost of sales and fixed costs in terms of cumulative income (Figure 3).
In fiscal 2023, we began visualizing consolidated profit and loss by region and destination, fostering comparability under identical conditions. This practice has incentivized group companies to improve selling prices further. In the past, we managed profit and loss with a focus on individual companies. This new approach overcomes the disadvantage of significant fluctuations in the profit of individual companies depending on intra-group transfer pricing. In fiscal 2024, we linked the compensation of the top management of group companies to the consolidated performance of each region, further ensuring improvement in selling prices.

Komatsu managed to keep fixed costs flat between fiscal 2017 and 2021, despite changes in the business environment and sales fluctuations, by following a basic policy of separating growth from costs and executing structural reforms for efficiencies during our sales growth phase (Figure 4).

Now, I will explain how the management targets of our new Strategic Growth Plan, "Driving value with ambition" (SGP), tie to improved corporate value (Figure 6).
Komatsu breaks down Price-to-Book Ratio (PBR) into Price-earnings Ratio (PER) and Return on Equity (ROE). We then break down PER into its components: 1) Cost of capital and 2) Expected cash flow growth rate. We break down ROE into 3) Net income ratio, 4) Total asset turnover, and 5) Financial leverage. Finally, we compare each item with competitors to discuss and implement measures to improve PBR.
At the same time, SGP includes five financial targets: 1) Growth, 2) Profitability, 3) Efficiency, 4) Retail finance business, and 5) Shareholder returns. Growth is linked closely with 2) Expected cash flow growth rate, while Profitability is linked closely to 3) Net income ratio, and Efficiency is associated most closely with 4) Total asset turnover. Our Retail finance business management targets are linked closely with with 3) Net income ratio and 5) Financial leverage. Shareholder returns is associated with 1) Cost of capital and 5) Financial leverage. We address all management targets through corporate value enhancement activities.

As in the previous mid-term plan, our goal is to achieve a growth rate above the industry's average. This is an aggressive and challenging goal for management leadership, and reflects our strong will to grow through strategic M&A in addition to organic growth. To accelerate growth, we allocate management resources emphasizing research and development investments, capital investments, and M&A.
Komatsu has long utilized M&A actively as one of the more important means to achieve the future vision of our business portfolio. Today, approximately 30% of consolidated net sales come from M&A activities conducted to date (Figure 7). At the moment, the principal targets for M&A activities are solutions business, the underground hard rock mining business, the forestry machinery business, and electrification and other components (Figure 8).
Post-merger integration consists of deepening a mutual understanding while converting the acquisition target to the Komatsu business management system. We regularly monitor contributions to corporate value by checking the status of Economic Value Added (EVA®), or after-tax operating profit less the cost of capital. We also look at the synergistic effect on consolidated financial performance.

In terms of R&D investment, Komatsu set management targets of reducing CO₂ emissions by 50% by 2030 (compared to 2010) and becoming carbon neutral by 2050 (stretch goal). To realize these goals, we intend to accelerate development toward the future over the term of SGP. This development will include more advanced automation and remote operations of construction and mining equipment, as well as compatibility with various power sources, including electric power (Figure 9).

In addition to the target of industry top-level profitability carried forward from the previous mid-term plan, we set a new numerical target for profitability to generate Free Cash Flow (FCF) of ¥1 trillion over three years (excluding M&A-related outlays). This new target will help secure earnings and continued investments for growth. FCF improvement is related closely with the topic of the next section, Efficiency, and I will discuss this area in greater detail later.
The direct costing method, which we call Standard Variable Margin (SVM; adopted in fiscal 2002) control, plays an important role in improving profitability. SVM control allows us to unify the definition of variable costs and fixed costs (Capacity Cost: CC) globally, and to compare profitability across different regions of the
world. This method forms the basis of our global cross-sourcing system that results in products of the same specifications and quality at any production site. This method also makes it easier to see the target level of fixed costs to achieve profit ratios, helping us take action quickly in response to sales fluctuations.
We standardized KPIs to be as simple as possible, given that approximately 70% of our employees work outside of Japan and an increasing number of local national employees serve at the top of our overseas subsidiaries. We want these indicators to be understood intuitively by employees of diverse nationalities and non-accounting positions, as well as to improve selling prices, promote cost reductions, and focus on detailed fixed cost management.

The SGP continues to emphasize ROE, a comprehensive indicator that covers profitability, asset efficiency, and financial leverage. Accordingly, estimating that our cost of equity is around 8% on a global level, we have set an ROE of 10% or higher as a management target, which exceeds the estimated cost of equity. Toexpand equity spread (ROE – cost of shareholders’ equity), Komatsu works to both improve ROE and reduce the cost of shareholders’ equity.
At the same time, using ROE as a common management indicator for all group companies is unfair, as capital level differences arise due to differences in the type of business and regulations in each country. Further, the construction, mining and utility equipment business is subject to large fluctuations in demand, which makes managing accounts receivable and inventories extremely important.
In fiscal 2017, we adopted Return on Invested Capital (ROIC) as an internal management indicator to complement SVM. We define the ROIC formula as operating profit divided by the sum of working capital and property, plant and equipment (use of invested capital). ROIC helps us identify problems and the degree of improvement in profitability and asset efficiency at each Group company in a timely manner. We monitor Group companies monthly based on ROIC. However, ROIC is impacted significantly by earnings, and if earnings improve, ROIC improves, even if asset efficiency worsens. In addition, indicating results as a ratio makes it difficult for business units to see improvement directly. These two disadvantages make ROIC difficult to link directly to improvement.
Therefore, we introduced FCF as a management indicator for all Group companies in fiscal 2023 to facilitate further improvements in consolidated ROIC. The goal of this move was to make group companies more conscious of changes to their asset efficiency in terms of amounts over rates. By adding certain elements to the regular cash flow statement, we can break down the sources of FCF generation into four
categories: 1) Profit, 2) Working capital, 3) Fixed assets (depreciation - investment), and 4) M&A. Clearly identifying and addressing the elements and absolute numbers we must improve directly helps us maximize future cash flows as we aim to achieve the management target of generating ¥1 trillion in FCF over three years (Figure 10). 

Komatsu regards the retail finance business as an important sales tool for construction and mining equipment. We have expanded our operations progressively in strategically important regions while leveraging our strength in Komtrax (equipment operation management system) to protect receivables. During the previous mid-term plan, we expanded coverage in Northern Europe, Africa, and other regions. As a result, we increased asset scope by 1.4 times over the past three years, while achieving management targets of ROA of between 1.5% and 2.0% and net D/E ratio of 5 times or less (Figure 12).
The retail finance business is more profitable than other segments. The net D/E ratio of this business is higher than that of the construction, mining and utility equipment business due to the nature of finance. The business improves ROE in two ways to create enhanced corporate value: By increasing net income ratio and by expanding financial leverage.
In addition, the retail finance business secures stable interest income over an average financing period of approximately four years. This factor provides the same impact as parts and services in that we equalize profits and achieve a profit structure that is more resilient to demand fluctuations.
To date, our focus in the retail finance business has been on soundness and a target net debt-to-equity ratio of less than 5 times. However, in light of our policy to expand the retail finance business further under SGP, as well as our accumulated knowledge and expertise in risk management, we raised the net D/E ratio
target to 6 times or less. We will continue to expand our retail finance business while monitoring operational soundness.

Over the past four mid-term management plans (FY2013-FY2015; FY2016-FY2018; FY2019-FY2021; FY2022-FY2024), we allocated approximately half of operating cash flow to capital investment, which has been the driving force for enhancing corporate value. Shareholder returns have also grown significantly over the course of the previous mid-term plans, reaching approximately three times the size of the FY2013- FY2015 mid-term plan (Figure 13).

We allocate operating cash flows to one of three uses in accordance with existing policy: (1) Capital investment (investment for growth), (2) Shareholder returns, and (3) Balance sheet improvement (preparation for future M&A) (Figure 14).

In addition to the two mandatory criteria of credit rating and shareholders' equity ratio, we have added ROE, consolidated FCF, net cash position, dividend payout ratio, and PER as other criteria. In fiscal 2025, we have decided to implement a share buyback program with an upper limit of ¥100 billion, as well as fiscal 2024, after comprehensively considering factors such as fulfillment of the relevant criteria (Figure 16).

We conduct a wide range of investor relations activities primarily in Japan, North America, and Europe, in line with the regional disposition of shareholders. Each year, top management holds direct dialogues with nearly 100 overseas institutional investors to explain Komatsu's current situation and growth strategy. Most recently, our activities have focused on the Middle East and Asia, and we continue to provide fair and timely disclosures to shareholders, investors, and other stakeholders in our efforts to enhance corporate value.
In addition, we removed the net D/E ratio from management targets, as we believe we have already established a stable financial base ensuring sufficient financial soundness.

1) Monitoring corporate value
Komatsu regularly examines the improvement of corporate value from two perspectives. The first is the increase in the total of market capitalization and net interest-bearing debt with a focus on invested capital. The second is the difference between ROIC and WACC focusing on aggregate EVA®. In both cases, we have seen significant improvements over the medium to long term (Figure 17).

In the next fiscal year and beyond, we plan to continue our efforts to select and calculate the impact of priority initiatives, as stated in SGP.
We have assigned the finance and accounting-related departments the role to drive solutions to social issues by visualizing non-financial impacts in this manner, linking solutions to the future enhancement of corporate value.