Komatsu Limited
Annual Report 2019

Plain-text annual report

KOMATSU REPORT 2019 Contents Outline of Operations 01 Komatsu’s Management Principle 02 History of Komatsu 03 Strengths of Komatsu 03 Global Production and Sales Systems 04 Business Segments 06 Developing Human Resources 08 Overview of Komatsu’s Business Komatsu’s Growth Strategies 10 Message from the President 14 Komatsu’s External Environment 16 Overview of the New Mid-Term Management Plan 18 Concepts and Stance of the New Mid-Term Management Plan 19 Three Pillars of Growth Strategies to Achieve Sustainable Growth 23 DANTOTSU Value Underpinning Three Pillars of Growth Strategies / Management Targets and Shareholder Return 24 ESG Solutions through Three Pillars of Growth Strategies Financial Strategies 26 Message from CFO ESG Issues Environmental Issues 32 Priority Issues 33 Environmental Initiatives Business Risk Management 36 Business Risks 38 Human Rights Policy Social Contribution Activities 40 South Africa: Education Program Instituted through Collaboration with Cummins 41 United States: A Partnership to Bring Back Forests Corporate Governance 42 Corporate Governance 52 Executive Officers and Global Officers Corporate Profile 54 11-Year Summary 56 Corporate Information 57 About KOMATSU REPORT Cautionary Notice regarding Forward-Looking Statements This report contains predictions, plans, forecasts, and other forward-looking statements that have been judged by management to be rational based on the information available at the time of publica- tion. Factors that may cause actual results to differ materially from those predicted by such forward-looking statements include, but are not limited to, changes in economic conditions or product demand in major markets, foreign exchange rate fluctuations, domestic or overseas regulatory revisions, or changes to accounting standards or practices. Reporting Period: April 1, 2018–March 31, 2019 • This report also includes information on activities after the reporting period in order to provide readers with the latest information. • “FY2018” refers to the period from April 1, 2018 to March 31, 2019, unless otherwise noted. • Performance forecasts for FY2019 are the forecasts announced together with the financial results for FY2018 on April 26, 2019. Editorial Policy KOMATSU REPORT 2019 was published for the purpose of providing clear explanations for all stakeholders on Komatsu’s medium- to long-term business strategies and the virtuous cycle generated as the Company resolves environmental, social, and governance (ESG) issues through its business. In preparation of this report, we referenced the International Integrated Reporting Framework released by the International Integrated Reporting Council and the Guidance for Integrated Corporate Disclosure and Company- Investor Dialogue for Collaborative Value Creation: ESG Integration, Non-Financial Information Disclosure, and Intangible Assets into Investment released by the Ministry of Economy, Trade and Industry. Outline of Operations Komatsu’s Management Principle The cornerstone of Komatsu’s management principle is to commit ourselves to quality and reliability and maximize the total sum of trust given to us by all stakeholders and society, which it defines as corporate value. Maximizing trust requires corporate activities that are founded on social responsibility along with efforts to strengthen corporate governance and enhance manufac- turing competitiveness. With the addition of Komatsu Brand Management into this principle, we are promoting awareness reforms that inspire all Komatsu Group employees to adopt the perspective of the customer from their standpoint in the Company as we move forward with human resource development to become a stronger company. Enhancing the trust placed in us by society →Further growth Is management in line with societal needs? →Always monitor Management Policy Management Strategy “DANTOTSU Value – FORWARD Together for Sustainable Growth” Mid-Term Management Plan Implementation of management principle →Contributing to society Maximizing the trust given to us by our stakeholders and society through a commitment to quality and reliability Mid-term Management Plan for securing sustainable growth Defines Komatsu’s Values, basic attitudes, and patterns of behavior The KOMATSU Way 1. Leadership/Top Management 2. “Monozukuri” for all employees 3. Brand Management Corporate Citizenship Resolution of Needs of Society 1. Komatsu’s Worldwide Code of Business Conduct 2. Policies, standards, and principles 3. Komatsu’s CSR Themes Enhancing Quality of Life/Developing People/Growing with Society Global Principles and international standards • The U.N. Global Compact • ISO 26000 • Keidanren (Japan Business Federation) Charter of Corporate Behavior • The U.N. Sustainable Development Goals (SDGs) All Stakeholders and Society Society Distributors Suppliers Employees Customers Shareholders Investors and Analysts Mass media Communities 01 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileHistory of Komatsu Komatsu was established in Komatsu City, Ishikawa Prefecture in Japan in 1921. Over the years, the Company has remained true to its commitment to improving quality and reliability, cultivating strengths as it gained experience through the process of tack- ling the challenges that emerged. Major Historical Events Major Milestones for Komatsu Subsidiaries and Affiliates 1918 End of World War I 1920 1929 Great Depression 1945 End of World War II Foundation and Establishment of Position in Japan 1921 Established Komatsu Ltd. 1924 Produced first commercially available press 1931 Produced Japan’s first crawler-type farm tractor 1940 1943 Produced Komatsu Model 1 Ground Leveling Machine (prototype of Japan’s bulldozers) 1951 Relocated head office to Tokyo 1955 First exports of construction equipment to Argentina 1961 Trade and foreign 1960 exchange deregulation in Japan (deregulation of machinery imports) 1971 Nixon shock 1973 First oil shock Transition to yen floating exchange rate system Pursuit of Global-Level Quality 1961 Commenced quality control measures and Companywide quality control program 1964 Opened Komatsu’s first overseas liaison office in India 1968 Commenced production of hydraulic excavators 1972 Entered into small press field 1975 Completed first Komatsu bulldozer produced offshore in Brazil 1967 N.V. Komatsu Europe S.A. 1970 Komatsu America Corp. Komatsu do Brasil Ltda. 1979 Komatsu Australia Pty., Ltd. 1985 Plaza Agreement (yen appreciation trend) 1980 Expansion of Overseas Production 1983 Commenced local production in Indonesia 1985 Commenced local production in the United States and Europe 1989 Made equity participation in Hanomag AG of Germany 1991 Dissolution of the Soviet Union 1994 Spun-off of industrial machinery operations to form and establishment of Commonwealth of Independent States 1997 Asian currency crisis Komatsu Industries Corporation 1996 Made equity participation in Modular Mining Systems, Inc., of the United States 1998 Developed KOMTRAX (Komatsu Machine Tracking System) 1982 PT Komatsu Indonesia 1985 Komatsu UK Ltd. 1988 Komatsu Dresser Company 1993 Komatsu Cummins Engine Co., Ltd. 1995 Komatsu Changlin Construction Machinery Co., Ltd. Komatsu Shantui Construction Machinery Co., Ltd. 1996 Demag Komatsu GmbH 1997 Komatsu Southern Africa (Pty) Ltd. 1999 Komatsu Middle East FZE. Komatsu Cummins Chile Ltda. Komatsu Mining Germany GmbH 2008 Global financial crisis 2000 Quest to Secure DANTOTSU 2001 Implemented 1st structural reforms 2006 Established The KOMATSU Way 2008 Launched Autonomous Haulage System and hybrid hydraulic excavators 2000 GIGAPHOTON Inc. 2004 Komatsu Forest AB 2008 Komatsu NTC Ltd. 2013 Launched ICT-intensive bulldozers 2014 Launched ICT-intensive hydraulic excavators 2015 Introduced SMARTCONSTRUCTION: ICT solutions to construction workplaces 2017 Acquired Joy Global Inc. 2017 Komatsu Mining Corp. 02 Outline of OperationsStrengths of Komatsu Global Production and Sales Systems Komatsu adheres to a basic strategy of manufacturing its products in the areas to which they will be supplied and has therefore established a global network of production and sales bases. The Company employs a mother plant system in which plants with development manufacturing in Japan are positioned as “mother plants” and assigned responsibility for safety, quality, costs, and delivery schedules at overseas plants manufacturing the same products (“child plants”). Leveraging the strengths of a flexible manufacturing system, we develop a business that is at the same time global as well as matched to our customers and to the communities that we serve. FY2018 Construction, Mining, and Utility Equipment Business Sales (to Outside Customers) by Region Strategic Markets 54% ● Latin America ¥325.6 billion ● CIS ● China ● Asia ¥134.6 billion ¥164.8 billion ¥339.0 billion ● Oceania ¥215.6 billion ● Middle East ¥30.2 billion ● Africa ¥124.1 billion Traditional Markets 46% ● Japan ¥312.7 billion ● North America ¥612.2 billion ● Europe ¥207.5 billion FY2018 ¥2,466.6 billion Production and Sales Bases (as of April 1, 2019) Europe / CIS ● 14 ■ 14 ▲ 7 ▲ 2 ▲ 7 China ● 9 ■ 4 ▲ 4 ▲ 2 ▲ 1 Middle East / Africa ● 1 ■ 5 ▲ 2 ▲ 1 ▲ 3 Japan ● 12 ■ 1 ▲ 5 ▲ 0 ▲ 2 Americas ● 35 ■ 21 ▲ 15 ▲ 2 ▲ 3 Asia / Oceania ● 14 ■ 12 ▲ 16 ▲ 6 ▲ 2 ● Manufacturing ■ Sales ▲ Parts Center ▲ Reman and Rebuild Center ▲ Training Center Americas Europe / CIS Asia*2 Middle East / Africa China Japan Total Number of Operations Mother plants*1 35 1 14 4 14 0 1 0 9 0 12 4 85 9 *1 Excluding Komatsu Mining Corp. *2 Excluding Japan and China 0303 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileStrengths of Komatsu Business Segments Focused on its core construction, mining, and utility equipment business and industrial machinery and others business, Komatsu is building upon the DANTOTSU Product, DANTOTSU Service, and DANTOTSU Solution that represent its distinctive strengths as it seeks to realize the safe, highly productive, smart, and clean workplaces of the future. FY2018 Consolidated Net Sales (Before adjustment for intersegment transactions) ¥ 2,725.2 billion Construction, Mining, and Utility Equipment Business ¥ 2,466.6 billion Komatsu supplies a wide range of products, services, and solutions including construction and mining equipment for use in construction and mining workplaces around the world as well as forklift trucks, forest machines, recycling equipment, and tunneling machines. We have established a position as the international leader in the construction and mining equipment field by delivering unri- valed quality and technological innovation together with this full lineup. Retail Finance Industrial Machinery and Others ¥ 57.3 billion Komatsu conducts a retail finance business aimed at helping reduce customers’ funding burdens and otherwise assisting in the purchase of its DANTOTSU products. Our strengths in this field include the prevention of overdue debt through effective utilization of KOMTRAX (location information, operat- ing status information, engine locks, etc.) technologies, swift inspections, and com- petitive financing conditions. These strengths have enabled us to build long-term relationships with customers. ¥ 201.2 billion The industrial machinery and others busi- ness stands alongside the construction, mining, and utility equipment business as a core business of Komatsu. Offerings in this business include the large presses used to mold automobile hoods and side panels as well as sheet-metal machines, machine tools, and light sources for semiconductor lithography systems (excimer lasers). In this business, we also contribute to the business activities of various customers through distribution of construction equipment and other goods and production of specialty equipment for Japan’s Ministry of Defense. Dump truck Large press 04 Outline of OperationsConsolidated Net Sales ¥2,725.2 billion 2,501.1 1,802.9 Operating Income / Operating Income Ratio ¥397.8 billion 268.5 14.6% 174.0 9.7 10.7 Net Income Attributable to Komatsu Ltd. / Return on Equity ¥256.4 billion 14.7% 196.4 12.1 113.3 7.3 FY2016 FY2017 FY2018 FY2016 FY2017 FY2018 FY2016 FY2017 FY2018 Products Thoroughly committed to quality and reliability, Komatsu seeks to supply safe and creative products to provide optimal responses to the needs and expectations of customers worldwide. In the future, we will utilize production automation, autonomous operation, electrification, remote control, and other technologies to create more sophisti- cated products in order to promote, on a global basis, SMARTCONSTRUCTION, a solution that organically links entire workplaces through ICT. Hydraulic excavator Wheel loader Electric rope shovel Forklift truck Harvester Mobile crusher/recycler Fiber laser cutting machine Excimer laser Komatsu offers a comprehensive range of spare parts and after-sales support services to prevent halts to the operation of customer equipment. Services We also supply KOMTRAX, a technology that provides information con- cerning vehicle location, cumulative hours of operation, and operating status of equipment installed on vehicles. We aim to deliver greater levels of value throughout the lifecycles of equipment via increased operating ratios and lowered maintenance costs. Solutions SMARTCONSTRUCTION is a Komatsu DANTOTSU solution that organi- cally links entire workplaces through ICT to resolve construction workplace issues, such as those related to labor shortages and the aging of operators. Through this solution, we link information pertaining to all people and objects (equipment, soil, etc.) at construction workplaces through ICT, performance analyses and simulations, and offer proposals. 05 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileStrengths of Komatsu Developing Human Resources Founder Meitaro Takeuchi established Komatsu Ltd. in Komatsu City, Ishikawa Prefecture roughly a century ago. Having witnessed Europe’s cutting-edge technologies at that time, Takeuchi put forth the four management principles of global expansion, quality first, technological innovation, and human resource development. The commitment to the development of human resources, an invaluable asset to Komatsu, lives on in the Company today. The KOMATSU Way The KOMATSU Way is the very DNA of Komatsu, an expression of the strengths of Komatsu, the beliefs supporting these strengths, the basic attitudes and patterns of behaviors established based on the experiences of our predecessors as they proceeded to tackle the challenges facing them. As the operating environment changes, Komatsu seeks to develop its operations on a global scale and to become a stronger company and grow. To accomplish these objectives, it will be crucial for us to transmit the KOMATSU Way to employees with different cultures and customs around the world and to implement these principles in a manner that aligns employees along the same vector. Human Resource Development through Quality Control Activities Komatsu began implementing quality control activities in 1961, and today these activities are being carried out worldwide. Our quality control activities entail an ongoing cycle of improvement in which we examine issues at the actual workplaces instituting corrective measures addressing the origin of issues. These activities underpin Komatsu’s unparalleled quality and reliability and spur improvements in productivity. Furthermore, workplace-driven quality control activities are entrenched as venues for human resource development that heighten employee’s’ on-site capabilities, communication skills, and leadership qualities. Komatsu’s quality control activities focus on total quality management—improving both product quality and the quality of all work processes. These activities are conducted on a global, Companywide basis including administration and back-office divisions. These activities will be continued going forward to help Komatsu employees improve their on-site capabilities and develop their careers. The All Komatsu QC Convention, an event for presenting superior examples of quality control activities from around the world, are held to stimulate further improvements in employees’ on-site capabilities. 06 Outline of OperationsEmployees Supporting Komatsu as a Global Company Komatsu develops its operations around the world, and approximately 70% of its employees are not Japanese. Accordingly, developing human resources that are rooted in the communities they serve while promoting mutual acceptance of the values and cultures of various countries and regions is becoming increasingly important. Operations around the world must be instilled with Komatsu’s manufacturing competitiveness, which includes the values that support Komatsu and the work- place improvement, driven by employees. Japanese 32% Non-Japanese 68% Japan 7% (14) Overseas 93% (201) Number of Employees 61,908 (consolidated) (as of March 31, 2019) Number of Consolidated Subsidiaries 215 (as of March 31, 2019) 1 Leadership/ Top Management 2 “Monozukuri” for All Employees Leaders must be directly involved in the workplaces and manage businesses with an emphasis on contributing to the entire Group, including distributors and suppliers. We have also defined guide- lines for leaders related to actively engaging in regular board meetings, communicating with stakeholders, complying with rules of the business community, managing risks, and grooming successors for management positions. Komatsu aims to pass on the manufac- turing competitiveness, perspectives, and values that, based on total quality management, have continued to drive Komatsu’s competitiveness and support its growth. We look to transmit these principles through a joint effort encom- passing all internal divisions as well as our suppliers, distributors, and other partners and to continue promoting involvement by all of these parties. 3 Brand Management (Customer Value Creation Activities) Komatsu defines “Brand Management” as all the activities that “make Komatsu indispensable to our customers”. This objective is accomplished by visiting customer workplaces to understand the ideal state of these customers and to build relationships that enable us to work together with them to help achieve their goals through concerted efforts by the Group and its distributors. Improvement and Transmission of Workplace Skills It is the exceptional skills accumulated at workplaces that enable Komatsu to deliver high-quality and highly reliable products built on cutting-edge technologies as well as services that offer peace of mind to customers. For further global development of its business, we work to improve and transfer workplace skills internally as well as at our suppliers and distributors worldwide. Komatsu’s production divisions have long been engaged in such skill improvement and transfer activities, is its steadfast efforts to improve workplace skills through the reinforce- ment of basics. To complement these efforts, we have recently been establishing technical skill training centers equipped with specialized educational equipment and machinery. These training centers are used to help technicians hone their fundamental skills. Furthermore, the annual All Komatsu Technology Olympics are held as an event for gauging the level of our technical skills. This event is seen as a step on the path toward excellence as a technician, and consistently draws participation from around 200 competitors selected from production bases in more than 10 countries. The All-Komatsu Technology Olympics are an opportunity for representatives from countries and regions around the world to mutually elevate the levels of their skills. This enables Komatsu to continuously improve the overall skill level of Komatsu while encouraging and motivating young technicians and instructors. 07 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileOverview of Komatsu’s Business In the pursuit of sustainable growth, companies are expected to build robust yet flexible earnings structures that respond to changes in the operating environment while addressing the increasingly more important ESG issues. With the strength of the manufacturing platform it has forged over the years, Komatsu will respond to social needs by linking customers, distributors, partners, and communities and all Komatsu workplaces through its DANTOTSU excellence. Major Inputs Production / Logistics Komatsu production bases: 85* Parts distribution bases: 48* * as of April, 1, 2019 Investment in production: ¥67.6 billion Intellectual Properties Development bases: Nine mother plants and Asia Development Center R&D expenses: ¥73.4 billion (2.7% of net sales) Utilization of information: Equipment with KOMTRAX: Approx. 560,000 units Human Resources Number of consolidated employees: 61,908 Partners Machine population over past 10 years: Approx. 570,000 units* * Estimate of construction equipment operational at customer workplaces based on aggregate 10-year sales volumes Sales and service distributors: 208 distributors in 146 countries (construction, mining and utility equipment business) Suppliers: Approx. 2,700 Shareholders: 193,434 Environment Energy use: 9.2 PJ Including renewable energy use: 71 TJ Note: 1 PJ (petajoule) = 1015 J (joules); 1 TJ (terajoule) = 1012 J Water use: 3.7 million m3 Steel (iron) use: 1,054,700 tons ¥ Finance Consolidated net sales: ¥2,725.2 billion Operating income: ¥397.8 billion Free cash flow: ¥15.3 billion Total assets: ¥3,638.2 billion Note: Above amounts are either for FY2018 or as of March 31, 2019. 08 Research and Development Procurement and Production • In-house development and • Collaboration with suppliers production of key components underpinning product performance (engines, hydraulic components, power trains, etc.) • Accelerated technological innovation achieved by merging core Komatsu technologies with external insight (Open innovation) • Digital transformation • Product development systems tailored to global market needs (Midori-kai) enabling the following: 1. “Monozukuri” (improvement of product quality, reliability, and competitiveness) 2. Stable supply of high-quality materials • Linking plants (visualization) utilizing ICT • Cross-sourcing: Flexible global production and procurement sys- tems that are resilient to demand and foreign exchange fluctuations • Mother plants structure enabling: Improvement of QCD (Quality, Cost, Delivery) • Skill transfer and TQM (Total Quality Management) Climate change impacts—Total CO2 emissions: 30,240,000 tons Enhancing Quality of Life —Providing Products Required by Society— Developing People B u s i n e s s A c t i v i t i e s a n d S t r e n g t h s ( C o n s t r u c t i o n a n d m n i i n g e q u i p m e n t o p e r a t i o n s ) I n i t i a t i v e s f o r R e s o v n g E S G l i I s s u e s Growing with Society Responsible Corporate Behavior Outline of Operations Operations at Customer Workplaces Product Cycles Products Services Solutions • DANTOTSU Product Unrivaled prod- ucts in terms of environment, safety, ICT capacities, and productivity • Full lineup of construction and mining equipment • Product creation focused on quality and reliability • Enhancement of mainte- nance contract services • Improvement of QCD (Quality, Cost, Delivery) achieved through close alignment of sales forecasts and production of spare parts Construction equipment • Utilization of information acquired through KOMTRAX Mining equipment • Utilization of information acquired through KOMTRAX Plus • Detailed support from directly owned distributors Construction equipment • SMARTCONSTRUCTION Mining equipment • Autonomous Haulage System • Global supply of high-quality used equipment, etc. • Remanufacturing and rebuilding* * Systems for selling used engines, transmissions, and other components that have been repaired to be of the same quality as new products • Global distributor network • Cultivation of distributor personnel • Brand management Climate change impacts—Total CO2 emissions: 30,240,000 tons CO2 emissions from product use: 26,419,000 tons (87.4% of total) The KOMATSU Way Targets for FY2021 Accomplishment of targets of Mid-Term Management Plan “DANTOTSU Value – FORWARD Together for Sustainable Growth” Building foundations for 100th anniversary and beyond 09 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileSTRATEGY Message from the President Hiroyuki Ogawa President and Chief Executive Officer On our quest to achieve sustainable growth, Komatsu will pursue DANTOTSU Value in order to maximize the total sum of trust given to us by society and all stakeholders. 10 Komatsu’s Growth StrategiesGreetings This is my first message as President and Chief Executive Officer management plan with record-breaking sales and profit in of Komatsu. I would like to take this opportunity to thank all of our FY2018 stemming from our ability to capture demand in the stakeholders for their ongoing support and understanding. Over construction, mining, and utility equipment business in various the three-year period from FY2016 to FY2018, we moved ahead regions (see page 16). with our previous mid-term management plan, “Together We This served as the backdrop for the launch of “DANTOTSU Innovate GEMBA Worldwide: Growth Toward Our 100th Anniversary (2021) and Beyond.” This plan was based upon three Value – FORWARD Together for Sustainable Growth,” a new three-year mid-term management plan covering the period from priorities under the harsh assumption that the market would not FY2019 to FY2021 (see page 14). Formulation of this plan was a recover: 1) growth strategies based on innovation, 2) growth key initiative I led before becoming President in April 2019, the strategies in existing businesses, and 3) structural reforms start of FY2019. I am committed to leading Komatsu in its further designed to reinforce the business foundation. Fortunately, the development, adopting a long-term perspective devoting my market began a rapid recovery from FY2017. We were thereby efforts to steadily advancing the new mid-term management plan able to achieve the management targets of the previous mid-term to help us achieve sustainable growth. Komatsu’s Operating Environment and New Mid-Term Management Plan The history of Komatsu is our chronicle of addressing various cannot expect the type of rapid market expansion seen previously social trends and operating environment changes. We posted its on the back of growth in emerging countries, and short-term market first operating loss in FY2001, and we have since proceeded to volatility is projected to be fierce. In the industrial machinery and develop a robust corporate constitution through selective focus others business, we project changes in industry structure to result on our core business and business structure reforms. At the same from the trend toward electric vehicles while the semiconductor time, we have remained committed to the supply of DANTOTSU market is forecast to enter into a temporary adjustment stage. Product (advancement of machines), DANTOTSU Service In the midst of the changes to the operating environment, (advancement of machine operations) and DANTOTSU Solution Komatsu remains committed to quality and reliability, as the (advancement of construction). management principle, and aims to maximize our corporate value, The rise of protectionism and multipolarity are concerning the total sum of trust from society and all our stakeholders, under trends in the global economy of today. Meanwhile, climate the new mid-term management plan. To this end, we work for change is having an increasing impact on corporate management. sustainable growth through a positive cycle of improving earnings We also expect various other changes to the operating environ- and solving ESG issues, which is driven by growth strategies. ment, including the spread of Internet of Things (IoT), artificial The three pillars of growth strategies under the new mid-term intelligence (AI), and big data technologies; the trend toward management plan are 1) value creation by means of innovation, electric vehicles and automation; workforce contraction; and 2) growth strategies based on business reforms, and 3) structural advancement toward a circular economy. reforms for growth. Centered on these three pillars, we will Demand in the markets for construction and mining equipment prioritize investments in growth fields to build an earnings is anticipated to remain firm over the long term. However, we structure that is not influenced by fluctuations in demand. 11 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate Profile STRATEGY Message from the President Moreover, the new plan contains the first ESG targets to be Our vision looking ahead is for Komatsu to become a company included in a Komatsu mid-term management plan. These targets that creates value by realizing, with high levels of excellence, the were incorporated to facilitate our efforts to address ESG issues. safe, highly productive, smart, and clean workplaces of the future. Through these targets, we will work to reduce CO2 emissions and By making this vision a reality, we aim to generate a positive cycle increase the rate of renewable energy use. In addition, Komatsu that drives the ongoing growth of Komatsu while simultaneously declared its endorsement of the Task Force on Climate-related contributing to the resolution of social issues and to the enrich- Financial Disclosures in April 2019. We are dedicated to improving ment of society. Accomplishing this goal will require strategies productivity and efficiency and reducing environmental impacts matched to our customers’ visions and missions and leadership across the supply chain through our core business going forward. clearly focusing on achieving growth together with customers. Commitment Encapsulated by DANTOTSU Value The new mid-term management plan was drafted through a “DANTOTSU Service” (advancement of machine operations) backcasting approach based on our roadmap for the future vision and DANTOTSU Solution (advancement of construction). Going of Komatsu. The slogan for this plan is “DANTOTSU Value.” This forward, we will build upon and accelerate these initiatives and to slogan encapsulates our commitment to link every workplace resolve ESG issues and improve earnings to co-create value with through excellence (DANTOTSU) to achieve sustainable growth our customers. This is the concept of “DANTOTSU Value” as together. Today, our world is changing, and so are the challenges defined in the mid-term management plan. of our customers and society as a whole. Recognizing this truth, Key words in this undertaking will be “workplaces” and “links”. the mid-term management plan was formulated around the ques- “Workplaces” refers to a place where anyone related to Komatsu tion of what can we do to help overcome these challenges while works, including the sites of customers, distributors, and suppliers remaining sustainable. worldwide. This term also encompasses Komatsu’s internal Up until now, Komatsu has strived to improve value for our production sites (plants), R&D facilities, sales, service and customers as well as to expand our value chain through the administration and offices. pursuit of “DANTOTSU Product” (advancement of products), DANTOTSU Value FORWARD Together for Sustainable Growth Linking every workplace through excellence Our world is changing. So are the challenges of our customers and society. What can we do to help overcome these challenges while remaining sustainable? Together, we can reach new, unrivaled heights of excellence in our products, services, and solutions to enable a better world. We can link every workplace and generate value with our global teams, customers, distributors, partners, and communities. We can make a difference. We can do it by delivering DANTOTSU Value. 12 Komatsu’s Growth Strategies The “links” we seek to form go beyond simply the IoT technol- employees. The “links” we seek are to foster a sense of unity ogy. Linking means aligning people along the same vector between everyone at all of these different workplaces and having towards one direction and getting a job done with a strong sense them work as one team. of teamwork. I come from a strong background rooted in produc- The ultimate goal of our new mid-term management plan is to tion both in Japan and overseas. Such production workplaces are link workplaces worldwide through excellence (DANTOTSU). characterized by steadfast daily action. Meanwhile, some of our Accomplishing this goal will put us in the best position to achieve employees are located at our customers’ construction or mining our other quantitative and qualitative management targets. workplaces, and we also have many people supporting those Milestone of 100th Anniversary and Beyond We will celebrate the 100th anniversary of Komatsu’s founding in fulfill its obligations to society and the environment as a global 2021. However, we recognize that this milestone is just that, a company. checkpoint to be passed. In order to be sustainable in the future I continue to thank all our stakeholders and ask for your that lies beyond, we aim to realize the safe, highly productive, continued support. smart, and clean workplaces of the future together with our customers. Our basic approach will be to work forward the resolution of the issues faced by society and customers through flexible management in tune with the times. Komatsu is committed to addressing the issues faced by soci- ety thereby raising the value as a company that develops together with society. We will also proactively participate in the United Nations Global Compact, the World Business Council for Hiroyuki Ogawa Sustainable Development, and other initiatives as we work to President and Chief Executive Officer 13 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate Profile Komatsu’s Growth Strategies New Mid -Term Management Plan (FY2019–FY2021) DANTOTSU Value FORWARD Together for Sustainable Growth Komatsu’s External Environment Today, protectionism is growing around the world, and multipolarity is becoming evident. We are also witnessing growing concerns over climate change. As the external environment is changing dynamically, in the construction, mining, and utility equipment business, we assume gradual growth of the demand in the medium to long term, but the volatility will remain high in the short term. In the industrial machinery and others business, we anticipate a structural change of demand in the automobile manufacturing industry, mainly resulting from ongoing progress toward electric vehicles. In addition, we anticipate assured growth in demand in the semiconductor manufacturing industry over the medium to long term, while a temporary adjustment phase is also expected. Achieving sustainable growth in this environment will require growth strategies that are not affected by demand fluctuations. Changes in the External Environment and of ESG Issues Politics & economy • Multipolarization of the world • Emergence of protectionism • Growth of emerging economies Technologies • Further spread of IoT, AI, and big data • The progress of electric and autonomous vehicles Environment & energy • Climate change • Growing demand for energy, foods and water • Decarbonization & renewable energy Society & values • Acceleration of diversity in advanced countries • A decline of working-age population • Achievement of a recycling-oriented society by accelerating the pace of sharing • Growing pursuit and needs for safety and comfort Expectations of achieving Our Tasks in the Growth Strategies 1. To solve ESG issues through the growth strategies of our core business 1414 Demand for Construction and Mining Equipment Period of the previous plan Period of the new mid-term management plan • Growth strategies based on innovation • Growth strategies of existing businesses • Structural reforms designed to reinforce the business foundation • Value creation by means of innovation • Growth strategies based on business reforms • Structural reforms for growth Growth above the industry’s average by focusing investment in growth areas Sustainable growth d n a m e D / s e l a S Demand recovery for mining equipment and in emerging economies We assumed demand recovery would start in FY2019 in the previous plan. (Actually it started in FY2017.) We assume gradual growth in the mid to long ranges, but the volatility will remain high in the short range. FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022~ Assumed range of demand change Construction, Mining, and Utility Equipment Business Sales (to Outside Customers) by Region (Billions of yen) 3,000 2,500 2,000 1,500 1,000 500 0 2,267.3 2,466.6 1,566.3 FY2016 FY2017 FY2018 Africa Middle East Oceania Asia China CIS Latin America Europe North America Japan Strategic Markets 54% Traditional Markets 46% a sustainable society 2. To promote sustainable growth based on our profit structure which is free of changes in the external environment and market demand 1515 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate Profile Overview of the New Mid-Term Management Plan The new mid-term management plan sets forth the future vision Komatsu should aspire to and hope to accomplish as it approaches and moves beyond the 100th anniversary of its founding in 2021. As part of this vision, we seek to become a company that can help realize the safe, highly productive, smart, and clean workplaces of the future together with customers while generating a positive cycle of resolving ESG issues through the creation of value for customers and improving earnings. Management Principle Make commitment to Quality and Reliability and maximize corporate value (the total sum of trust from society and all stakeholders) 1 Previous Plan (FY2016–FY2018) • Growth strategies based on innovation • Growth strategies of existing businesses • Structural reforms designed to reinforce the business foundation 3 Integration of KMC (FY2017) New Mid-Term Management Plan (FY2019–FY2021) Future Vision ESG Solutions Three Pillars of Growth Strategies 1. Value creation by means of innovation 2. Growth strategies based on business reforms 3. Structural reforms for growth Positive cycle = Sustainable growth Workplaces of the future: Safe, highly productive, smart and clean 2021 100th anniversary and beyond Positive cycle = Sustainable growth Improvement of earnings 2 Backcasting Growth strategies and management targets by backcasting the roadmap to our future vision 1 Review of the Previous Mid-Term Management Plan Demand for construction and mining equipment had remained in an adjustment phase, as affected by sluggish prices of commodities and the economic slowdown of emerging countries since around 2013. However, it began a recovery from 2017, earlier than what we assumed, at the time we developed the previous mid-term management plan of FY 2016-2018. Under such an environment, we steadily captured demand while working to strengthen our corporate constitution, and integrated Komatsu Mining Corp. (hereafter “KMC”) into the Komatsu Group. As a result, we posted expanded sales and profits for the last two consecutive years of FY2017 and FY2018. For FY2018, the final year of the previous mid-term management plan, we also achieved record-high sales and profits. Management targets were accomplished for all indicators with the exception of ROA (return on assets) in the retail finance business. Management Targets of the Previous Mid-Term Management Plan and Related Performance Management Target Growth Profitability Efficiency Shareholder return • Aim at a growth rate above the industry’s average • Aim at an industry’s top-level operating income ratio • Aim at 10%-level ROE • Keep a fair balance between investment for growth and shareholder return (including stock buybacks), while placing main priority on investment • Set the goal of a consolidated payout ratio of 40% or higher, and maintain the policy of not decreasing dividends as long as the ratio does not surpass 60% Financial position • Aim at industry’s top-level financial position Retail finance business • ROA: 2.0% or above • 5.0 or under for net debt-to-equity ratio Indicator Sales growth rate Operating income ratio ROE FY2018 Performance 9.0% 14.6% 14.7% FY2016–FY2018 Performance* 15.0% 11.7% 11.4% Consolidated payout ratio 40.5% 43.0% Net debt-to-equity ratio ROA Net debt-to-equity ratio 0.43 2.2% 3.64 0.34 1.6% 3.60 16 * Average for period from FY2016 to FY2018 Komatsu’s Growth Strategies2 Formulation of New Mid-Term Management Plan through Backcasting In formulating the new mid-term management plan, we first decided on the future vision Komatsu should pursue from a long-term perspective and then drafted a roadmap toward this vision. Afterward, a backcasting approach was taken to examine what Komatsu should do in the present in order to move forward with this vision. Clarifying our vision enabled us to establish a better understanding of the strengths that can be exercised toward the realization of this vision, the existing businesses needing to be reinforced, and the lacking resources. The scenario based on this understanding was discussed exhaustively, and growth strategies and management targets were set based on this scenario. Future construction equipment (Automated, autonomous, electric and remote-controlled) Optimization platform and solutions business (Reduction of environmental impact and improved safety and productivity) Promotion of smart forestry (Circular environmental protection) Future Plant (Connected plants with Zero impact on environment and workers) 3 Integration of Komatsu Mining Corp. Former Joy Global Inc. (currently KMC) was acquired in April 2017, and it has since been working to create synergies using KMC’s management resources together with those of Komatsu. With a history in the mining equipment business spanning more than a century, KMC is a global manufacturer, seller, and service provider dealing in super-large surface and underground mining equipment, an area in which Komatsu previously lacked offerings. Going forward, the manufacturing technologies of Komatsu, which emphasizes quality and reliability, will be integrated with those KMC. At the same time, we will go a step further, to merge and reinforce the sales and services systems of Komatsu and KMC, both of which has accumulated extensive experience and expertise cultivated over the process of earnest catering toward the needs of their customers. As we leverage the strengths of Komatsu and KMC, we will look to generate synergies equivalent to 10% or more of KMC’s sales in FY2021. 17 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileConcepts and Stance of the New Mid-Term Management Plan The new mid-term management plan defines three pillars of growth strategies: 1) value creation by means of innovation, 2) growth strategies based on business reforms, and 3) structural reforms for growth. By prioritizing investment on growth areas based on the three pillars of growth strategies, we will seek to achieve sustainable growth through a positive cycle of improving earnings and solving ESG issues that is resilient to fluctuations in demand. Expectations of society and stakeholders Growth Strategy Aligned with Management Principles Stakeholders Maximize Corporate Value which is the Total Sum of Trust Communities Enhance Corporate Brand Customers Solutions for ESG issues Sustainable growth Employees Distributors Suppliers Shared growth based on growth strategies Business partners Shareholders Investors Sustainable increase of earnings ESG Solutions Positive cycle = Sustainable growth Three Pillars of Growth Strategies 1. Value creation by means of innovation 2. Growth strategies based on business reforms 3. Structural reforms for growth Positive cycle = Sustainable growth Improvement of earnings 18 Komatsu’s Growth StrategiesThree Pillars of Growth Strategies to Achive Sustainable Growth Komatsu has defined three pillars of growth strategies in reflection of its operating environment and the challenges it faces. By advancing these three pillars of growth strategies, we will pursue sustainable growth. 1 2 Value creation by means of innovation • Optimization platform and solutions business strategies SMARTCONSTRUCTION, Autonomous Haulage System (AHS), and platforms (LANDLOG and IntelliMine) • Automation, autonomous operation, electrification and remote-controlling of construction, mining and utility (compact) equipment • Smart forestry and agriculture Growth strategies based on business reforms • KMC integration synergies and business reinforcement • Value chain reforms and redefinition of the aftermarket business Preventive maintenance by applying IoT and AI, and Lifecycle support under serial number-based management; logistics reforms; and next-generation key components • Next-generation KOMTRAX • Stronger focus on aggregate & cement, forestry, agriculture and other segments • Efforts for “DANTOTSU No. 1 in Asia” and in the growing markets of India and Africa • Reforms of the industrial machinery business (Expansion of synergy with the construction equipment business and growth by capitalizing on core technologies) 3 Structural reforms for growth • Business reforms by means of ICT and IoT • Structural reforms of development operations Model based development Open innovation • Connected plants with Zero impact on environment and workers • Global human resource development 19 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate Profile 1 Value Creation by means of Innovation For construction workplaces, Komatsu will utilize the LANDLOG open platform along with ICT-intensive construction and other equipment as it steps up development of construction simulations and promotes SMARTCONSTRUCTION on a global basis. For mining workplaces, we will develop new optimization platforms and grow the AHS Center of Excellence, which was established in April 2019, into an organization to oversee the mining solutions businesses in the future. Komatsu will apply SMARTCONSTRUCTION technologies to propose smart forestry to streamline the entire process of forestry. Simultaneously, we will be working to commercialize ICT-intensive agricultural equipment, establish related businesses, and expand overseas operations centering on Asia. Topic: Evolution of Optimization Platform and Solutions Business Strategies Value creation by means of innovation in the construction equipment field will be promoted through the acceleration of the con- struction industry’s digital transformation, which entails the realization of the safe, highly productive, smart, and clean workplaces of the future. We will seek to realize such transformation by increasing the level of products (automation and autonomous operation) and processes (optimization) based on the SMARTCONSTRUCTION foundation we have cultivated thus far. Workplaces of the future: Safe, highly productive, smart and clean Digital Transformation of Construction • Automatic generation of daily tasks from daily optimized construction plans • Collaboration and autonomous operation of equipment on the workplace “Visualization” of workplace data “H”orizontal: connect digitized “V”s Planning Earth moving Inspection “V”ertical: contextually digitize CEs, labor, materials and earth into data Construction equipment (CE) Workers Drones Materials Dump trucks Fuel ICT Construction • ICT-intensive construction & machines • Visualization of progress • Utilization of topographical data ) n o i t c u r t s n o C f o l e v e L n o i t a z i m i t p O ( s e s s e c o r P Introduction of advanced ICT-intensive models Conventional construction Products (Level of Automation and Autonomous Operation) Level 1 Limited Operation Support Level 2 Advanced Operation Support Level 3 Advanced Solo Automation Level 4 Advanced Collaborative Autonomous Operation Level 5 Advanced Decision- making Autonomous Operation Level 5 Optimization of Construction Level 4 Automation of Construction Planning Level 3 3-Dimensional Construction Planning Level 2 3-Dimensional Topo- graphical Map Level 1 3-Dimensional Design Data 20 Komatsu’s Growth Strategies Processes—Optimization Level of Construction Since the launch of the SMARTCONSTRUCTION solution for construction workplaces in 2015, this solution has been introduced at an aggregate total of more than 8,700 sites in Japan (as of August 2019). Moreover, this solution led to a sharp increase in the digitization of processes through means such as condition surveys by drones. Going forward, we will link the 3D workplace information gained from digitized processes with our LANDLOG platform (product digitization) to promote the automation and optimization of entire workplaces. Komatsu has formulated a vision for the workplaces of the future. In these workplaces, soil quantities and other data collected at work- places will be utilized to optimize construction plans through cloud computing to send work instructions to ICT-intensive equipment. This information will also be used to automatically issue instructions for all other areas of the construction projects, including ordering of addi- tional construction materials and dump trucks, through the platform. Products—Level of Automation and Autonomous Operation At the workplaces of the future, all construction equipment will receive work instructions from the platform and then carry out these instructions autonomously while collaborating with other equipment at the workplace in order to realize safety along with high levels of productivity. To make these workplaces a reality, Komatsu will need to com- plete the development of Retrofit Kit (provisional name), a product that will be designed to install ICT functionality into existing equipment and thereby increase the amount of ICT-intensive equipment in use at workplaces. At the same time, it will be crucial to enhance ICT-intensive equipment, specifically through increased automation and through autonomy achieved via communication and coordination among equipment. Komatsu is moving ahead with research and develop- ment on sophisticated automation and autonomy technologies with an eye to the introduction of 5G and other ultrahigh-speed mobile communications systems and the utilization of high-precision global navigation satellite system technologies. Collaborative Control at Workplaces By installing digital technologies into all equipment, including conventional equipment already on the market, sophisticated ICT-intensive equipment will be able to function as “command towers,” facilitating communications between equipment as all equipment collaborates to carry out the work instructions issued by the digital platform. Equipment with SMARTCONSTRUCTION Retrofit Kit (provisional name) A demonstration showing a hydraulic excavator and a crawler dump truck, both completely unmanned, autonomously collaborating to excavate, convey via rotation, and load soil and then carry it to be expelled at a designated location. Advanced ICT-intensive equipment 21 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate Profile2 Growth Strategies Based on Business Reforms In the construction, mining, and utility equipment business, in the rising trend toward decarbonization. Meanwhile, in emerging addition to engaging in the development of new products, produc- countries and other growth markets, we will reinforce operation tion, and sales, Komatsu intends to strengthen its value chain busi- systems in accordance with the different market environments ness, which utilizes Internet of Things (IoT) and artificial and structural changes of our regions of operation. intelligence (AI) technologies. We will also seek to realize full In the industrial machinery and others business, we will work lifecycle support from our products, from when they are new to to generate synergy effects with the construction, mining, and when they are retired. In mining equipment operations, we will utility equipment business and develop new products. For the accelerate the integration and production of synergies with KMC semiconductor manufacturing industry, we will accelerate the while also seeking to improve the market position of our hard rock speed of our efforts to promote further growth by utilizing our mining business, which caters to non-ferrous mineral mines, amid core technologies. Topic: Ongoing Promotion of “DANTOTSU No. 1 in Asia” through Growth Strategies It is anticipated that, over the long term, the Asian region will grow to form one large economic sphere and that demand for construction and mining equipment will increase as such equipment becomes necessary for developing social infrastructure. The promotion of “DANTOTSU No. 1 in Asia” initiatives have once again been positioned as a priority, as was the case under the previous mid-term management plan. In these initiatives, we aim to elevate Komatsu’s strengths in this region to an unrivaled level. Komatsu established the Asia Development Center in Indonesia in October 2016 and then the Asia Training & Demonstration Center in Thailand in November of the same year. These facilities helped us form the necessary development and distributor networks for solidifying our operations in this region. Other strengths in this region include the strong reputation among customers for the quality and reliability of our products as well as the amount of Komatsu equipment (delivered units) operating in this region. By effectively utilizing these strengths, we will develop equipment with specifications that match the needs of the region while enhancing our lifecycle support, including support for rentals and used equipment, in order to heighten our presence in this market. In the future, we will look to grow operations in aggregate and cement, forestry, agriculture, and other market segments while promoting the introduction of SMARTCONSTRUCTION to create greater value. Distributor training at Asia Training & Demonstration Center 3 Structural Reforms for Growth Komatsu is moving ahead with Companywide structural reforms provide a solution to labor shortages as well as zero environmen- driven by ICT and IoT. In addition, production divisions are seeking tal and workload impact plants. We also continue to advance to decrease CO2 emissions and increase the rate of renewable global human resource and diversity initiatives. energy use by promoting next-generation connected plants that Topic: Connected Plants with Zero Impact on Environment and Workers Under the previous mid-term management plan, Komatsu endeavored to create connected plants in which all processes, spanning from production to sales, were linked using IoT technologies and coordinated into cycles in real time. Through these activities, data from the machine tools and welding robots of Komatsu and of suppliers is being collected via the KOM-MICS to be used to track metrics and improve efficiency across the entire value chain. The new mid-term management plan calls on us to continue and build upon our connected plant activities while also beginning initiatives for realizing future plants that will address long-term social issues. For example, Komatsu seeks to address labor shortages through the extensive utilization of automated and unmanned production lines. One facet of these efforts is the Smart Line installed at Komatsu’s Oyama Plant (see page 34). We will also endeavor to automate quality management at all bases to augment our quality assurance system with digital quantitative inspections that are not dependent on human judgment. In regard to the reduction of environmental impacts, Komatsu has set the targets of reducing CO2 emissions from production by 50% from 2010’s level and of increasing the rate of renewable energy use to 50% by 2030 (see page 34). Meanwhile, new initiatives have been launched to use ICT to track data related to workplace environments and employee health. 22 Komatsu’s Growth Strategies DANTOTSU Value Underpinning Three Pillars of Growth Strategies Komatsu is committed to further advancing and enhancing the DANTOTSU Product, DANTOTSU Service, and DANTOTSU Solution initiatives that have supported its growth thus far. At the same time, we will accelerate efforts to realize the safe, highly productive, smart, and clean workplaces of the future with customers. The resolution of ESG issues and improvement of earnings achieved through the creation of this customer value constitutes Komatsu’s DANTOTSU Value. We will strive for sustainable growth through link- ing every workplace and generate value through DANTOTSU with our global teams, customers, distributors, partners and communities. DANTOTSU Value (ESG solutions through the creation of customer value and improvement of earnings) Workplaces of the future: Safe, highly productive, smart and clean DANTOTSU Solution Advancement of Construction Commitment to safety and productivity DANTOTSU Service Next-generation e u l a V Advancement of Machine Operations Commitment to "visualization" of machine operations DANTOTSU Product Advancement of Machines Commitment to high quality and high value ICT-intensive model Electric shovel Level enhancement Speed acceleration Enhancement Conventional level and speed Expansion of the value chain Management Targets and Shareholder Return The new mid-term management plan sets the targets of realizing the industry’s top level in terms of growth, profitability, efficiency, and financial position while also setting new management targets for ESG indices. As we prioritize investment in the three pillars of growth strategies, we will also continue to issue shareholder returns through stable dividends with a policy of targeting a consolidated payout ratio of 40% or higher. Key performance indicators (KPIs) had been defined that are linked to our growth strategies and the ESG issues we seek to resolve. By working toward the accomplishment of the targets for these KPIs, we aim to resolve ESG issues through growth strategies in our core business. Index Management Target Growth Profitability Efficiency • Sales growth rate • Growth rate above the industry’s average • Operating income ratio • An industry’s top-level operating income ratio • ROE • ROE of 10% or higher Financial position • Net debt-to-equity ratio • Industry’s top-level financial position Retail finance business • ROA • Net debt-to-equity ratio • ROA of 1.5%–2.0% • 5.0 or under for net debt-to-equity ratio (New) ESG • Reduction of environmental impact • Evaluation by external organizations • Reduction of environmental impact CO2 emissions: Decrease by 50% in 2030 from 2010. Renewal energy use: Increase to 50% of total energy use in 2030. • Evaluation by external organizations: Selected for DJSI*1 (World & Asia Pacific) and CDP*2 A-list (Climate Changes and Water Risk) Shareholder return • Dividend payout ratio (including stock buyback), while placing main priority on investment. • Set the goal of a consolidated payout ratio of 40% or higher. • Keep a fair balance between investment for growth and shareholder return *1 Dow Jones Sustainability Indices: SRI indices operated by S&P Dow Jones Indices of the United States and RobecoSAM of Switzerland *2 International non-profit organization promoting protection of water resources and forests by advocating the reduction of greenhouse gas emissions by companies and governments 23 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileESG Solutions through Three Pillars of Growth Strategies Komatsu seeks to help resolve ESG issues by promoting the three pillars of growth strategies defined in the new mid-term management plan. We strive to realize a positive cycle of sustainable growth through improvements of earnings and resolutions to ESG issues. Our initiatives include reducing environmental impacts to combat climate change and supplying high-quality, high-performance products, services, and solutions ensuring safety. KPIs have been set to guide these initiatives solving ESG issues through our core business. CSR Themes ESG Solutions through Three Pillars of Growth Strategies Relevant SDGs Key Initiatives under New Mid-Term Management Plan FY2021 KPIs Reduction of CO2 emissions (in comparison to FY2010) • Reduction of CO2 emissions from product use (fuel-efficiency equipment, hybrid hydraulic excavator, rate of SMARTCONSTRUCTION use, enhancement of ICT-intensive construction, mine automation, and underground mining equipment) 16% reduction (in comparison to FY2010) • Reduction of CO2 emissions from production (plants with zero impact on environment and workers) 40% reduction (in comparison to FY2010) Plants with zero impact on environment and workers • Rate of renewable energy use (including purchase of renewable energy) 15% Enhancing Quality of Life —Providing Products Required by Society— • Provide products, service and solutions contributing to sustainable development of infrastructure, natural resources and circular environmental protection (remanufacturing and forestry). • Improve productivity, efficiency, safety and environmental impact (lower CO2 emissions and higher ratio of renewable energy use) through innovations, such as automation in the entire value chain. • Make commitment to DANTOTSU Value which will realize better Earth and future by means of technology and reliability (creation and maximization of customer value). • Develop a diverse workforce with a high level of productivity and technical skills. Developing People • Strengthen and develop diverse and global-scope talent to help achieve sustainable workplaces. • Develop talent with cross-value chain capabilities. Growing with Society • Offer resolutions for social issues through collaboration with stakeholders. • Act as a responsible corporate citizen ensuring corporate governance, compliance, and human rights. 24 • Work environment burden coefficient (particle matter density) • Water consumption • Spare parts sales Value chain reforms and redefinition of the aftermarket business • Reman component lifespan (compared to new components) Assurance of mine operation safety and productivity • AHS units’ population (promotion of mining platform business) DANTOTSU Product, DANTOTSU Service, and DANTOTSU Solution • ICT-intensive equipment introduced • Sites adopting SMARTCONSTRUCTION 　3. Automation of utility equipment 　4. Enhancement of mining equipment and hard rock mining businesses Agricultural solutions and smart forestry • Creation of construction equipment demand in agricultural field • Smart forestry projects IoT and ICT work reforms 30% reduction (in comparison to FY2018) 40% reduction (in comparison to FY2010) 11% increase 16,000 workhours (80% of new components) 380 (aggregate) 1,590 units (per year) 4,850 (per year) Development of technology for automated forklifts Expansion of product series Japan: Expand lineup of agricultural loaders Indonesia: Increase number of users of agricultural techniques employing agricultural bulldozers 50 Improvement of global surveys and indexes Total workhours of less than 2,100; introduction of telework system (Japan) Training hours and number of participants Shifting of human resources to projects and improvement activities; globalization of organizations on by-function basis Introduction (1) 12.5%, (2) 10.0%, and (3) 5.0% • Automation, autonomous operation, electrification, and remote-controlling of equipment 　1. Automation of construction equipment Test introduction of hydraulic excavators for automated loading 　2. Automation, autonomous operation, and remote operation of mining equipment Entry into mining bulldozer market • Sales in KOM-MICS platform business (visualization of production equipment operation) 1,900 units (including for internal use) Development of a diverse workforce with a high level of productivity and technical skills • Enhancing employee engagement • Work process reforms through expansion of diverse and flexible workstyles • Promotion of KOMATSU Way (global dissemination of KOMATSU Way) Strengthening and development of diverse and global-scope talent to help achieve sustainable workplaces • Revision of role of Japan in global management • Foundations for global measures (systems, frameworks) • Empowerment of female employees ((1) non-consolidated ratio of female employees, (2) non-consolidated ratio of female managers, (3) consolidated ratio of female managers (Japan)) • Rate of employment of people with disabilities (comply with requirements in Japan) Above 2.3% (legally mandated rate) • Support for regional human resource development for job creation (regional human resource development with Cummins Inc.) Chile, Australia, South Africa, others • Cultivation of SMARTCONSTRUCTION consultants (capable of proposing solutions using ICT to improve productivity 430 (aggregate) Development of talent with cross-value chain capabilities and safety throughout construction workplaces) Resolutions to social issues through collaboration with stakeholders • Promotion of industry-government-academia collaboration as well as of collaboration with customers Promotion of Brand Management and activities creating value for customers • Shareholders and individual investors (shareholder meetings, shareholder factory tours, individual investor meetings) Number of meetings held • Institutional investors (ESG meetings) • Communities (business site fairs) • Employees (meetings) Number of meetings held Number of fairs held Number of meetings held Action as a responsible corporate citizen addressing corporate governance, compliance, and human rights • Occupational health and safety, support for establishing environmental and safety systems at suppliers, response to Japan’s Corporate Governance Code (corporate governance reports), evaluations of effectiveness of Board of Directors, internal control, and internal audits Ongoing improvements made in reflection of relevant laws and regulations and social expectations Komatsu’s Growth StrategiesCSR Themes ESG Solutions through Three Pillars of Growth Strategies Relevant SDGs Key Initiatives under New Mid-Term Management Plan FY2021 KPIs Komatsu has continued to act in accordance with a basic policy of advancing CSR activities through its core business. These activities have been concentrated on three CSR themes selected by identifying priority issues from the social issues that are important to both the business and stakeholders of Komatsu. Furthermore, Komatsu has linked its activities to five goals from among the 17 United Nations Sustainable Development Goals that are particularly relevant to Komatsu’s business. Enhancing Quality of Life —Providing Products Required by Society— • Provide products, service and solutions contributing to sustainable development of infrastructure, natural resources and circular environmental protection (remanufacturing and forestry). • Improve productivity, efficiency, safety and environmental impact (lower CO2 emissions and higher ratio of renewable energy use) through innovations, such as automation in the entire value chain. • Make commitment to DANTOTSU Value which will realize better Earth and future by means of technology and reliability (creation and maximization of customer value). Developing People • Strengthen and develop diverse and global-scope talent • Develop a diverse workforce with a high level of productivity and technical skills. to help achieve sustainable workplaces. • Develop talent with cross-value chain capabilities. Growing with Society • Offer resolutions for social issues through collaboration with stakeholders. • Act as a responsible corporate citizen ensuring corporate governance, compliance, and human rights. Reduction of CO2 emissions (in comparison to FY2010) • Reduction of CO2 emissions from product use (fuel-efficiency equipment, hybrid hydraulic excavator, rate of SMARTCONSTRUCTION use, enhancement of ICT-intensive construction, mine automation, and underground mining equipment) 16% reduction (in comparison to FY2010) • Reduction of CO2 emissions from production (plants with zero impact on environment and workers) 40% reduction (in comparison to FY2010) Plants with zero impact on environment and workers • Rate of renewable energy use (including purchase of renewable energy) 15% • Work environment burden coefficient (particle matter density) • Water consumption Value chain reforms and redefinition of the aftermarket business • Spare parts sales • Reman component lifespan (compared to new components) Assurance of mine operation safety and productivity • AHS units’ population (promotion of mining platform business) DANTOTSU Product, DANTOTSU Service, and DANTOTSU Solution • ICT-intensive equipment introduced • Sites adopting SMARTCONSTRUCTION 30% reduction (in comparison to FY2018) 40% reduction (in comparison to FY2010) 11% increase 16,000 workhours (80% of new components) 380 (aggregate) 1,590 units (per year) 4,850 (per year) • Automation, autonomous operation, electrification, and remote-controlling of equipment 　1. Automation of construction equipment Test introduction of hydraulic excavators for automated loading 　2. Automation, autonomous operation, and remote operation of mining equipment Entry into mining bulldozer market 　3. Automation of utility equipment 　4. Enhancement of mining equipment and hard rock mining businesses Agricultural solutions and smart forestry • Creation of construction equipment demand in agricultural field • Smart forestry projects IoT and ICT work reforms Development of technology for automated forklifts Expansion of product series Japan: Expand lineup of agricultural loaders Indonesia: Increase number of users of agricultural techniques employing agricultural bulldozers 50 • Sales in KOM-MICS platform business (visualization of production equipment operation) 1,900 units (including for internal use) Development of a diverse workforce with a high level of productivity and technical skills • Enhancing employee engagement • Work process reforms through expansion of diverse and flexible workstyles • Promotion of KOMATSU Way (global dissemination of KOMATSU Way) Strengthening and development of diverse and global-scope talent to help achieve sustainable workplaces • Revision of role of Japan in global management • Foundations for global measures (systems, frameworks) • Empowerment of female employees ((1) non-consolidated ratio of female employees, (2) non-consolidated ratio of female managers, (3) consolidated ratio of female managers (Japan)) Improvement of global surveys and indexes Total workhours of less than 2,100; introduction of telework system (Japan) Training hours and number of participants Shifting of human resources to projects and improvement activities; globalization of organizations on by-function basis Introduction (1) 12.5%, (2) 10.0%, and (3) 5.0% • Rate of employment of people with disabilities (comply with requirements in Japan) Above 2.3% (legally mandated rate) • Support for regional human resource development for job creation (regional human resource development with Cummins Inc.) Chile, Australia, South Africa, others Development of talent with cross-value chain capabilities • Cultivation of SMARTCONSTRUCTION consultants (capable of proposing solutions using ICT to improve productivity and safety throughout construction workplaces) Resolutions to social issues through collaboration with stakeholders 430 (aggregate) • Promotion of industry-government-academia collaboration as well as of collaboration with customers Promotion of Brand Management and activities creating value for customers • Shareholders and individual investors (shareholder meetings, shareholder factory tours, individual investor meetings) Number of meetings held • Institutional investors (ESG meetings) • Communities (business site fairs) • Employees (meetings) Number of meetings held Number of fairs held Number of meetings held Action as a responsible corporate citizen addressing corporate governance, compliance, and human rights • Occupational health and safety, support for establishing environmental and safety systems at suppliers, response to Japan’s Corporate Governance Code (corporate governance reports), evaluations of effectiveness of Board of Directors, internal control, and internal audits Ongoing improvements made in reflection of relevant laws and regulations and social expectations 25 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileMessage from CFO To strive for the sustainable increase of our corporate value, we are building a sound financial position and strengthen our competitiveness, which are resilient to changes in the external environment and market demand fluctuations. Takeshi Horikoshi Executive Officer and CFO Our management principle is to maximize corporate value, as we are committed to Quality and Reliability. We believe the maximization of our corporate value should result from balanced dialogues with an extensive range of stakeholders, from customers, distributors, suppliers, business partners and communities to employees, shareholders and investors. Society Stakeholders Distributors Suppliers Employees Customers Shareholders Investors and Analysts Mass media Communities To strive for the sustainable increase of our corporate value, we are building a sound financial position and strengthen our competitiveness, which are resilient to changes in the external environment and market demand fluctuations. To maximize growth and profits, our accounting and finance departments play the responsible roles of developing business plans, managing business performance and studying indices and methods thereof, as well as setting up investment decision-making criteria and making judgement on investment projects. They also strive to engage in a well-balanced allocation of our funds to 1) investment for growth, 2) improvement of the balance sheet (maintaining financial soundness), and 3) shareholder return. In the following pages, I am going to explain our efforts according to the items upheld as the management targets in our new mid-term management plan. 26 Investment (Growth strategies) • Sales growth rate • Operating income ratio • ROI ROE Improvement of the balance sheet (Maintaining financial soundness) Shareholder return • Net debt-to-equity ratio • Consolidated payout ratio Komatsu’s Growth StrategiesGrowth Sales growth rate We believe it is important for us to achieve sustainable growth staying free from demand changes in spite of the fact that the construction and mining equipment business is highly volatile. Having designated sales growth rate as a management index, we have set the target to achieve a higher rate than the industry’s average. Selective focus Since the start of the 2000s, we have promoted selective focus on business, allocating and shifting management resources, mainly to the construction, mining and utility equipment business, the retail finance business for our customers, and the industrial machinery business, the initial business of Komatsu, which we expect to generate synergy with the construction, mining and utility equipment business. Under the new mid-term management plan, we are going to place priority on allocating management resources to the three pillars of growth strategies, 1) value creation by means of innovation, 2) growth strategies based on business reforms, and 3) structural reforms for growth. In this way we will work to achieve growth above the industry’s average. M&A By positioning M&A as one of the means of growth, we have actively engaged in M&As under the policy of selective focus. Examples include Partek Forest AB (currently, Komatsu Forest AB) in 2004, NIPPEI TOYAMA Corporation (currently, Komatsu NTC Ltd.) in 2008, and Joy Global Inc. (currently, Komatsu Mining Corp. or “KMC” hereafter) in 2017. When we consider M&A, in addition to the importance on our business strategies, we emphasize ROI (Return on Investment) being above WACC (Weighted Average Cost of Capital) as one of our decision-making criteria. Even after closing the acquisitions, we regularly monitor their contributions to improving our group-wide corporate value as we compare ROI and WACC of the acquired companies, and check on synergy effects on consolidated business results. We believe M&A will remain an important means of growth strategies of our core businesses in the new mid-term management plan. Net Sales and Operating Income Ratio (Billions of yen) ■ Domestic construction, Mining and Utility equipment ■ Overseas Construction, Mining and Utility equipment ■ Industrial machinery and others ■ Retail finance ■ Electronics ■ Operating income ratio (right scale) (%) 6.5 7.7 7.0 5.2 4.2 2.1 4.5 3.9 4.2 3.2 2.7 1.6 1.8 3,000 2,000 1,000 0 14.8 12.9 10.1 7.1 7.5 12.9 12.1 12.3 12.2 11.2 11.2 9.7 14.6 15.0 10.7 10.0 2.5 1.6 2.6 2.3 0.4 –1.3 4.7 5.0 0.0 –5.0 –10.0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (FY) Business strategies Construction equipment and industrial machinery Mid-term Management Plan Structural reforms Diversification Selective focus (DANTOTSU Product → DANTOTSU Service → DANTOTSU Solution) 3G ((G)97, (G)2000) G to the 21st Move the World Global Teamwork Together We Innovate GEMBA World Wide 1st structural reforms 2nd structural reforms Note: Concerning the figures for the fiscal year ended March 31. 2002 and earlier, Komatsu Electronic metals Co., Ltd. and its subsidiaries and outdoor power equipment (OPE) of Komatsu Zenoah Co. and its subsidiaries engaging in the OPE business were not reclassified as discontinued operations resulting from the sale thereof. 27 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileMessage from CFO Profitability Operating income ratio It is important for us as a leader of the industry to maintain and improve selling prices and continuously reduce production and fixed costs. As the operating income ratio reflects those efforts comprehensively, we believe it is an important index which evaluates the value of our corporate existence. As the management target for our operating income ratio, we will aim at the industry’s top level. Cost control While making investment needed for growth, we have thoroughly ensured the unfailing reduction of costs simultaneously, thereby work- ing to secure profitability (separation of costs from growth). To build a financial position capable of weathering drastic market changes, we will continue to thoroughly control fixed costs. Fixed Costs (Billions of yen) 600 300 0 Acquisition of Joy Global Inc. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (projection) (FY) Note: Amounts for performance from FY2009–FY2018 have been translated based on the foreign exchange rates in the projection for FY2019 performance (JPY105.0 = USD1, etc.). Decision-making of investment While seeding steadily for future growth, such as investment and R&D in growth areas, we will shift investment from conventional areas to growth areas, thereby working to suppress the increase of fixed costs. Concerning specific investment projects, we make careful decisions after considering payback periods in our Strategy Review Committee and Steering Committee. Based on these efforts, we are working to achieve growth and improve profitability above the industry’s average. Investments in Production facilities and others and Depreciation ■ Construction, mining, and utility equipment ■ Industrial machinery and others ■ Depreciation (right scale) (Billions of yen) (Billions of yen) 150 55.3 63.9 100 50 0 51.8 54.5 48.7 63.9 49.9 79.8 43.6 67.8 50.2 66.1 52.6 49.2 60.1 56.8 52.7 56.5 60.0 90.0 57.7 67.6 60 40 20 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (projection) (FY) Note: Excludes investments in rental assets R&D Expenses (Billions of yen) 100 3.2 2.7 2.8 46.4 49.0 54.8 ■ Construction, mining, and utility equipment ■ Industrial machinery and others ■ Ratio of R&D expenses to net sales (right scale) 3.2 60.8 3.3 64.4 3.6 70.7 3.8 3.9 70.7 70.5 2.9 73.6 2.7 73.4 3.1 82.0 (%) 4.0 0 –4.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (projection) (FY) 50 0 28 Komatsu’s Growth StrategiesEfficiency ROE (Return on Equity) is a general index, covering profitability, asset efficiency and financial leverage. Thus, we monitor it as one of our management index while continuously keeping close attention to cost of shareholders’ equity. We estimate that our cost of equity is around 8% on a global basis. Thus, we have set up an ROE of 10% or higher as the management target. To expand equity spread (ROE – cost of shareholders’ equity), we will work to both improve ROE and reduce cost of shareholders’ equity. To promote sustainable improvement of ROE, as I have already mentioned, we will work to improve profitability by giving weight to growth. Concerning asset efficiency, we apply ROIC (Return on Invested Capital) to internal control. To control working capital appropriately in response to the volatility of market demand, we periodically monitor the cash conversion cycle of working capital through ROIC, for which invested capital in the ROIC formula is defined by the corresponding working capital plus tangible fixed assets. Meanwhile, for suppliers, we conduct early payment in line with the Future-oriented Trade Practices required by the Japanese government. For employees, we return as a business results-linked bonus. In this manner, we are working to improve ROE and vitalize employees’ motivation at the same time. For shareholders and investors, we are working to become a company, which they can invest in at ease, by improving IR programs and information disclosure. We are also working to reduce cost of shareholders’ equity through a positive cycle of solving ESG issues and improving and stabilizing earnings in our core businesses, as we strengthen our governance in compliance with Japan’s corporate gover- nance code, and provide high-quality, high-efficiency products, services and solutions, reducing environmental impact and ensuring safety. ROE Profitability Separation of costs from growth ROE (%) 20.0 Thorough control of fixed costs 17.2 17.3 Efficiency Fixed assets: Assessment of investment Outstanding days of working capital (overdue receivables and slow-moving inventory) To set up the guidelines for financial indexes which subsidiaries should achieve. Financial leverage To optimize funding on a consolidated basis To manage net debt-to-equity ratio by considering business characteristics 14.7 12.4 11.5 10.6 9.0 12.1 7.3 15.0 10.0 5.0 0 4.1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (FY) Concerning cross-shareholdings, unless they are necessary due to business relations or collaboration with Komatsu, under the policy of not owning stocks of listed companies in light of avoiding the risk of stock price fluctuation as well as ensuring the efficiency of assets, we had sold all concerned stocks by the end of FY2017 (ended March 31, 2018). Cross-Shareholdings (Non-Consolidated) (Number of holdings) 34 33 40 30 20 10 0 19 15 12 11 9 7 5 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 2017 (March 31, 2018) (FY) 29 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileMessage from CFO Financial Position Monitoring of net debt-to-equity ratio We believe it is important to maintain a sound financial position in order for us to achieve sustainable growth, being free from changes in market demand. Taking into account of business characteristics of retail finance and future investment opportunities, we monitor net debt-to-equity ratio as an index of soundness. Interest-Bearing Debt and Net Debt-to-Equity Ratio (Billions of yen) ■ excl. Retail finance business ■ Retail finance business ■ Net debt-to-equity ratio (consolidated) (right scale) 0.60 0.50 0.56 0.49 0.37 0.32 0.23 0.18 0.40 0.43 2,000 1,500 1,000 500 0 (Times) 0.9 0.6 0.3 0 –0.3 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (FY) Optimization of funding on a consolidated basis To optimize funding on a group-wide basis and reduce foreign exchange risks by matching assets and liabilities in each currency, we have built a funding operation by region and maintain the policy of local funding. Equipped with a local funding function, each regional headquarter company advances funds to Komatsu Group companies regardless of business segment in the corresponding region mainly through the cash management system (CMS) for the region. Furthermore, through the global CMS, we are making efforts for funding efficiency on a consolidated basis, as we complement funding means in each region. Concerning each business base of KMC which became a wholly owned subsidiary in FY2017, we have been integrating them into the CMS in each region. We will continue efforts to enhance asset efficiency on a consolidated basis into the future. Improvement of financial positions of subsidiaries We have set up the guidelines for subsidiaries to achieve their financial indexes. Having set up those, specifically, concerning soundness, safety and the ability to fulfill obligations, we strive to maintain and improve their financial position. Concerning the debt of subsidiaries, we set the upper limit for each subsidiary. By doing so, we can not only help them improve their balance sheets but also have established an operational system which monitors soundness of their balance sheets through the trends of debt and takes necessary action promptly. Retail Finance Business Segmentation of the retail finance business Our retail finance business, which handles financial products for customers to purchase our products, is responsible for promoting sales of construction and mining equipment by placing importance on efficiency and soundness in operation (management targets in the new mid-term management plan: 1.5%–2.0% for ROA and 5 or under for net debt-to-equity ratio). In FY2016, we created the retail finance business as an independent business segment, ensuring transparency of profitability and financial conditions. Risk management of the retail finance business In an effort to reduce risks in the retail finance business, we diversify portfolios, match the interest rates and periods of lending and fund- ing, and match the currencies of lending and funding. In addition, we also work to safekeep our credits by taking advantage of our strengths, for example, by using KOMTRAX (Komatsu Machine Tracking System), installed in our construction equipment as a standard feature, for credit management (monitoring on the location and operating conditions of construction equipment). 30 Komatsu’s Growth Strategies Total Assets and ROA of Retail Finance Business ■ Japan ■ North America ■ Europe ■ China ■ Oceania ■ Others ■ ROA (right scale) (Billions of yen) 900 600 300 0 2.0 0.9 2.9 2.5 2.5 2.4 2.0 2.2 1.9 2009 2010 2011 2012 2013 2014 2015 0.7 2016 2017 2018 (FY) (%) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Shareholder Return Concerning cash dividends, we have the policy of continuing stable payment of dividends after comprehensively considering consolidated business results and reviewing future investment plans, cash flows and the like. Specifically, we have the policy of maintaining a consolidated payout ratio of 40% or higher. Concerning stock buyback, we plan to do so timely and flexibly in response to market and financial conditions. Looking ahead, we will promote efforts to achieve management targets of the new mid-term management plan and maximize our corporate value, as we play the roles of accounting and finance departments. Cash Flows (Billions of yen) 400 200 0 –200 –400 ■ Net cash provided by operating activities ■ Net cash used in investing activities ■ Free cash flow 109.1 61.8 82.6 151.9 161.8 170.9 122.8 –18.9 15.3 –229.3 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (FY) Cash Dividends per Share (Yen) 120 60 0 Stock buyback of approx. ¥30.0 billion conducted in FY2008, FY2011, and FY2014 in addition to dividend payments 38 42 48 16 110 110 84 58 58 58 58 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Dividend policy Consolidated payout ratio (Total return ratio) 38.0%* 24.4% 20%–40% 24.2% (42.2%) * Excluding structural reform expenses 36.2% 34.7% 30%–50% 35.8% (55.2%) 40%–60% 2019 (projection) (FY) 40%~ 39.8% 48.2% 40.3% 40.5% 48.3% 31 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileEnvironmental Issues A step ahead of its peers in environmental preservation activities, Komatsu has continued to address environmental, social, and governance (ESG) issues through its business activities. The Company’s new Mid-Term Management Plan—DANTOTSU Value – FORWARD Together for Sustainable Growth—calls upon us to supply high-quality, high-performance products, services, and solutions that are designed for reduced environmental impacts, particularly in relation to climate change, and for safety. These efforts are to further us toward the realization of a sustainable society. Priority Issues With the increasing frequency of abnormal weather events, In its capacity as the operator of a global business, Komatsu is climate change is having an ever-greater impact on our lives. poised to help combat climate change by supplying the world The adoption of the Paris Agreement sparked a large global move- with low-carbon products, services, and solutions that contribute ment toward the realization of a low-carbon society. In recognition to reduced CO2 emissions during use and, of course, by cutting of this issue, Komatsu put forth the bold target of halving its CO2 the emissions from its own production activities. emissions by 2030. Construction Equipment Lifecycle Spanning from Production to Disposal 2030 Targets Procurement Manufacturing Sales / After-sales Services Use Recovery / Disassembly • CO2 emissions from production: 50% reduction (from 2010) • CO2 emissions from product use: 50% reduction (from 2010) • Rate of renewable energy use: Approx. 2% of total lifecycle Approx. 90% of total lifecycle 50% CO2 emitted during production CO2 emitted during use Komatsu is working to reduce the CO2 emitted during the use In addition to combating climate change, the focus of the of its construction equipment through the development of fuel- initiatives described thus far, we believe that the effective use of efficient products, such as those using high-efficiency engines resources is another important task needing to be addressed in and hybrid systems. We are also going further by taking part in order to realize a sustainable society. On this front, we are initiatives for addressing CO2 emissions throughout work sites by expanding our “Reman” business in which we remanufacture automating sites or using autonomous operation to increase used engines, transmissions, and other key components so that construction efficiency. Another angle through which we are they can be reborn with the same quality as new products and combating climate change with innovations is the development then sold on the market. In FY2018, the scale of the “Reman” of electric construction equipment. business was more than four times larger than in FY2004, At production sites, we are looking to lower CO2 emissions by demonstrating its increased contributions to the establishment of reducing energy consumption. These efforts are taking the forms a sound material-cycle society. Targets for 2030 for reductions to of improvements to the efficiency of individual pieces of waste and water use have been set, and we are promoting the equipment and the utilization of IoT technologies to heighten the effective use of these resources to accomplish these targets. overall efficiency of production lines and entire factories. In In regard to biodiversity, the Declaration of Biodiversity by Komatsu addition, we are pursuing increases in efficiency throughout was unveiled in 2011. Guided by this declaration, each operating production processes, including at suppliers. Renewable energy site chooses one biodiversity theme to address, with examples has also been positioned as an important tool for cutting CO2 of themes including conservation activities targeting woodland emissions. We have therefore set the target of increasing the areas, waterfronts, or rare animals. These sites are advancing rate of renewable energy use to 50% by 2030. initiatives pertaining to their themes both inside and outside of The Komatsu Earth Environment Charter, established in 1992, the premises through collaboration with local community defines four environmental issues to be addressed in our members and organizations. efforts to preserve the global environment: 1) climate change; Going forward, Komatsu will continue to use products and 2) establishment of a sound material-cycle society; 3) conservation solutions with superior environmental performance realized of air, water, and other environments as well as management of through cutting-edge technologies while innovating its production chemical substances; and 4) biodiversity. sites to enrich our lives today and help realize a sustainable society to be passed on to the future generations of tomorrow. 32 ESG Issues Environmental Initiatives 1 Initiatives for Products and Services Approximately 90% of the CO2 emitted over the course of the construction equipment lifecycles occurs during use. For this reason, Komatsu is working to reduce the CO2 emitted from its products as a result of use. Through our three-step approach of focusing on DANTOTSU Product, DANTOTSU Service, and DANTOTSU Solution, we are targeting a reduction in CO2 from product use of 50% from 2010’s level by 2030. Three-Step Approach toward Reducing CO2 Emissions from Product Use STEP 1 Reduce CO2 Emissions through DANTOTSU Product By delivering hybrid and electric equipment and other sophisticated products with exceptional fuel efficiency, we aim to reduce CO2 emissions from product use. • Research and Development of Electric Mini Excavator Komatsu’s Electric Mini Excavator was developed with a view to the future. This excavator was first exhibited at bauma 2019, an international construction equipment trade show held in Munich, Germany. Built upon the technologies cultivated through the creation of hybrid construction equipment and battery- powered forklifts, the miniature excavator is equipped with a newly developed charger and high-voltage transformer, which enables it to achieve excavating capacity equivalent to that of engine-powered excavators with the same output. Moreover, emissions are zero and noise pollution is greatly reduced, making this excavator friendly both toward the environment and people. These features will no doubt prove to be valuable in construction projects at hospitals, schools and in residential areas, where it was previously necessary to take steps to mitigate exhaust and noise pollution, in addition to tunnels, which could fill with exhaust gas. We are currently testing the excavator at actual construction sites with the aim of realizing a swift market launch. Electric Mini Excavator exhibited at bauma 2019 STEP 2 STEP 3 Reduce CO2 Emissions through DANTOTSU Service Komatsu is pursuing reduction in CO2 emissions by using next-generation KOMTRAX systems and Internet of Things technologies to track equipment operating conditions in order to realize increased work efficiency. Reduce CO2 Emissions throughout Construction Projects with DANTOTSU Solution Through the provision of ICT equipment and optimal solutions for customers’ operations, Komatsu aims to realize improvements in on-site construction methods and thereby reduce CO2 emissions. Reduction of CO2 Emissions from Product Use Basic unit by 2030 –50% (vs. 2010) Targets for CO2 Reductions from Product Use (%) 100 50 0 100 12% reduction 50% reduction 2010 2018 2030 CO2 Reduction Measures • Product improvements (fuel efficiency, etc.) • Construction method improvements • Development of electric and hybrid equipment 33 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileEnvironmental Issues 2 Initiatives for Production Komatsu is endeavoring to reduce CO2 emissions, waste production, and water use in its production activities. In regard to CO2 emissions, the Company aims to accomplish the following targets by 2030. 1. Reduce CO2 per unit of production at major production sites worldwide by 50% (in comparison with 2010) 2. Source 50% of the electricity used at major production sites worldwide from renewable energy Reduction of CO2 Emissions from Production Basic unit by 2030 –50% (vs. 2010, integrated global target) Targets for CO2 Reductions from Production (%) 100 50 0 100 20% reduction 50% reduction 2010 2018 2030 CO2 Reduction Measures • Energy conservation • Renewable energy (in-house generation) • Purchase of renewable energy Production Activity Energy Conservation Initiatives In January 2019, the Smart Line developed together with Group company Komatsu NTC Ltd. was installed at the Oyama Plant for use in major engine component machining processes. The Smart Line comprises six horizontal machining centers, a gantry convey- ance system equipped with inspection functions, a submerged high-pressure washing machine, and a vacuum oven. The specifications of this line are being improved to ensure that each piece of equipment is able to deliver the best possible performance in its respective process. In addition, optimal design and control are employed to supply the drive systems of coolant pumps, hydraulic pumps, and other equipment with power in the necessary amounts at the necessary times. The line has thereby been able to achieve an 80% reduction in energy consumption compared to the previous line. The Smart Line was first installed at the Oyama Plant. Going forward, we intend to introduce such lines at other plants that perform machining. Expansion of Renewable Energy Use In response to a request from the Thailand Board of Investment to take part in an energy conservation project,* Bangkok Komatsu Co., Ltd., a Group company in Thailand, commenced the installation of solar roofs. The first phase of the installation plan entailed the building of a solar roof on the company’s manufacturing plant. This roof generated 690 MWh of solar energy in FY2017. The amount generated in FY2018 was 885 MWh, which contributed to a year-on-year increase in renewable energy generated of approxi- mately 30% and accounted for 13.7% of power consumption at the factory. Bangkok Komatsu plans to install solar roofs on its assembly plant and casting plant going forward. * Project that allows for a tax deduction equivalent to 50% of the cost of introducing a solar system should certification be received Solar roof installed in FY2018 34 ESG Issues3 Initiatives with Suppliers Komatsu views its suppliers as important partners that support its manufacturing activities by enabling it to procure materials, parts, components, and other articles. As we seek to build mutual trust and mutually beneficial win-win relationships, we are advancing the following initiatives together with suppliers. • Implementation of Komatsu’s Green Procurement Principles • Assistance for developing of environmental management systems at suppliers • Support for reducing environmental impacts at suppliers Support for Reducing Environmental Impacts at Suppliers Komatsu continues to advance the energy conservation activities it launched at its operating sites in 2011 while retooling these activities with the aim of reducing CO2 emissions at suppliers. These activities target 50% reductions in energy use through product reforms. In addition, the Company is pursuing reduction in water use by suppli- ers. As one facet of these activities, we have been visiting selected suppliers offering advice on better water use since FY2017. FY2018 water risk assessment at Midori-kai member company 4 Biodiversity Preservation With the establishment of the Declaration of Biodiversity by Komatsu and the Biodiversity Guideline in January 2011, Komatsu business units worldwide began activities designed to preserve biodiversity. Komatsu is becoming directly involved in the preservation of biodiversity and at the same time expanding its “one-site, one-theme activities” to raise employees’ awareness of the need to preserve local ecosystems. Activities at Komatsu do Brasil Located in Suzano, in the state of São Paulo, Brazil, Komatsu do Brasil Ltda. (KDB) is situated on an expansive site covered in forests that house a great variety of wildlife. A survey conducted in 2013 found that the site of KDB was located in part of the Atlantic Forest, and that the site was home to approximately 70 different species of fauna and 82 different species of flora. Among this rich variety of fauna and flora was the endan- gered and rare species pau-brasil (Paubrasilia echinata), a tree that is emblematic of Brazil. Going forward, KDB plans to expand the greenery around its facility while taking into account the ideal conditions for fauna and flora that inhabit the area. In addition, employees and members of their families take part in tree planting activities to raise their environmental awareness; adult fruit trees and saplings are donated to city offices; and other environmental education activities are conducted by KDB both inside and outside of its facility. Pau-brasil tree registered as an endangered species Green-billed toucan (Ramphastos dicolorus) living in greenery area of Komatsu do Brasil Ltda. 35 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileBusiness Risks Komatsu operates on a global scale with development, production, sales and other bases established around the world. Komatsu has identified the following as its current primary business risks. (Any forward-looking statements included in the descriptions below are based on current Komatsu’s judgement as of June, 2019.) the effects of short-term foreign currency exchange rate fluctua- tions. Despite Komatsu’s efforts, if the foreign currency exchange rates fluctuate beyond Komatsu’s expectations, Komatsu’s results of operations may be adversely affected. 3 Fluctuations in financial markets While Komatsu is currently improving the efficiency of its asset management, its aggregate short- and long-term interest-bearing debt was ¥930.7 billion as of March 31, 2019. Although Komatsu has strived to reduce the effect of interest rate fluctuations using various measures, including procuring funds at fixed interest rates, an increase in interest rates may increase Komatsu’s inter- est expenses and thereby adversely affect Komatsu’s results of operations. In addition, fluctuations in the financial markets, such as fluctuations in the fair value of marketable securities and inter- est rates, may also increase the unfunded obligation portion of Komatsu’s pension plans or pension liabilities, which may result in an increase in pension expenses. Such an increase in interest expenses and pension expenses may adversely affect Komatsu’s results of operations and financial condition. 4 Laws and regulations of different countries Komatsu is subject to relevant regulations and approval proce- dures in the countries in which it operates. If any new laws and regulations or amendments to existing laws and regulations relat- ing to customs duties, currency restrictions and other legal requirements are implemented in the countries where Komatsu operates, Komatsu may incur expenses in order to comply with such laws and regulations or its development, production, sales and service operations may be affected adversely by them. With respect to transfer pricing between Komatsu and its affiliated companies, Komatsu is careful to comply with applicable taxation laws of Japan and the concerned foreign governments. Nevertheless, it is possible that Komatsu may be viewed by the concerned tax authorities as having used inappropriate pricing. Furthermore, if intergovernmental negotiations were to fail, Komatsu may be charged with double or additional taxation. When facing such an unexpected situation, Komatsu may experi- ence an unfavorable impact on its business results. 1 Economic and market conditions The business environment in which Komatsu operates and the market demand for its products may change substantially as a result of economic and market conditions, political and social circumstances, competitive conditions, or the like, which differ from region to region. In economically developed countries in which Komatsu operates, Komatsu’s business is generally affected by cyclical changes in the economies of such regions. Therefore, factors which are beyond Komatsu’s control, such as levels of housing starts, industrial production, public investments in infrastructure development and private-sector capital outlays, may affect demand for Komatsu’s products. In newly developing countries in which Komatsu operates, Komatsu constantly pays attention to the changes in demand for its products. However, these economies are impacted by a number of unstable factors, such as sudden changes of commodity prices and in the value of currencies and thus, changes in these factors could adversely affect Komatsu’s business results. Furthermore, when economic and/or market conditions change more drastically than expected, Komatsu may also experience, among other things, fewer orders of its products, an increase in cancellation of orders by customers and a delay in the collection of receivables. These changes in the business environment in which Komatsu operates may lead to a decline in sales, and inefficient inventory levels and/or production capacities, thereby causing Komatsu to record lower profitability and incur additional expenses and losses. As a result, Komatsu’s results of operations may be adversely affected. 2 Foreign currency exchange rate fluctuations A substantial portion of Komatsu’s overseas sales is affected by foreign currency exchange rate fluctuations. In general, an appre- ciation of the Japanese yen against another currency would adversely affect Komatsu’s results of operations, while a depre- ciation of the Japanese yen against another currency would have a favorable impact thereon. In addition, foreign currency exchange rate fluctuations may also affect the comparative prices between products sold by Komatsu and products sold by its foreign com- petitors in the same market, as well as the cost of materials used in the production of such products. Komatsu strives to alleviate the effect of such foreign currency exchange rate fluctuations by locating its production bases globally and engaging in production locally. Komatsu also engages in hedging activities to minimize 36 ESG Issues5 Environmental laws and regulations Komatsu’s products and business operations are required to meet increasingly stringent environmental laws and regulations in the numerous countries in which Komatsu operates. To this end, Komatsu expends a significant share of its management resources, such as research and development expenses, to comply with environmental and other related regulations. If Komatsu is required to incur additional expenses and make addi- tional capital investments due to revised environmental regula- tions adopted in the future, or if its development, production, sales and service operations are adversely affected by such revised regulations, Komatsu may experience an unfavorable impact on its business results. 6 Product and quality liability While Komatsu endeavors to sustain and improve the quality and reliability of its operations and products based on stringent stan- dards established internally, Komatsu may face product and qual- ity liability claims including recalls or become exposed to other liabilities due to unexpected defect in its products or systems or accidents. If the costs for addressing such claims or other liabili- ties are not covered by Komatsu’s existing insurance policies or other protective means, such claims may adversely affect its financial condition. 7 Alliances, collaborations, mergers and acquisitions, etc. Komatsu has entered into and implemented alliances, collabora- tions, mergers and acquisitions, etc. with various business part- ners to reinforce its international competitiveness. Through such arrangements, Komatsu is working to improve and expand its product development, production, sales and service capabilities as well as its solutions business. However, Komatsu’s failure to attain expected results or the termination of such alliances or collaborative relationships may adversely affect Komatsu’s results of operations. 8 Procurement, production and other matters Komatsu’s procurement of parts and materials for its products is exposed to fluctuations in commodity and energy prices. Price increases in commodities, such as steel materials, as well as energies, such as crude oil and electricity, may increase the pro- duction cost of Komatsu’s products. In addition, a shortage of product parts and materials, bankruptcies of suppliers or produc- tion discontinuation by suppliers of products used by Komatsu may make it difficult for Komatsu to engage in the timely procure- ment of parts and materials and manufacture of its products, thereby lowering Komatsu’s production efficiency. With respect to an increase in the cost of production as mainly affected by an increase in the cost of materials, Komatsu mainly strives to reduce costs and make price adjustments of its products. Komatsu also strives to minimize the effects of possible procure- ment or manufacturing issues by promoting closer collaboration among its related business divisions. However, if the increase in commodity and energy prices were to exceed Komatsu’s expec- tations or a prolonged shortage of materials and parts were to occur, Komatsu’s results of operations may be adversely affected. 9 Information security, intellectual property and other matters Komatsu may obtain confidential information concerning its cus- tomers and individuals in the normal course of its business. Komatsu also holds confidential business and technological infor- mation. Komatsu safeguards such confidential information with the utmost care. To forestall unauthorized access by means of cyber-attacks, tampering, destruction, leakage and losses, Komatsu employs appropriate safety measures, including imple- menting technological safety measures and strengthening its information management capabilities. However, when a leak or loss of confidential information concerning customers and indi- viduals occurs, Komatsu may become liable for damages, or its reputation or its customers’ confidence in Komatsu may be adversely affected. In addition, if Komatsu’s confidential business and technological information were leaked or lost, or misused by a third party, or Komatsu’s intellectual properties were infringed upon by a third party, or Komatsu were held liable for infringing on a third party’s intellectual property rights, Komatsu’s business results may be adversely affected. 10 Natural calamities, wars, terrorism, accidents and other matters If natural disasters (such as earthquakes, tsunamis and floods), epidemics, radioactive contamination, wars, terrorist acts, riots, accidents (such as fires and explosions), unforeseeable criticism or interference by third parties or computer virus infections were to occur in the regions in which Komatsu operates, Komatsu may incur extensive damage to one or more of its facilities that then could not become fully operational within a short period of time. Even if Komatsu’s operations were not directly harmed by such events, confusion in logistic and supply networks, shortages in the supply of electric power, gas and other utilities, telecommuni- cation problems and/or problems of supplier’s production may continue for a long period of time. Accordingly, if delays or disrup- tion in the procurement of materials and parts, or the production and sales of Komatsu’s products and services, or deterioration of the capital-raising environment or other adverse developments were to take place as a result of such events, Komatsu’s business results may be adversely affected. 37 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileHuman Rights Policy Komatsu established its Human Rights Policy in September 2019, thereby declaring its commitment to promoting respect for human rights in line with internationally accepted standards. Through human rights due diligence based on the United Nations Guiding Principles on Business and Human Rights, we will implement measures for preventing or mitigating negative impacts on human rights. In addition, frameworks will be put in place to allow for corrective measures to be instituted should it be found that the Company was directly or indirectly involved in activities that had a negative impact on human rights. Human Rights Policy 1 Respect for Human Rights The KOMATSU Way describes the values that all officers and employees in the Komatsu Group, including those at top management level, should inherit in a lasting way. To implement the KOMATSU Way, it is necessary that we act responsibly in accordance with the expectations of society. Komatsu believes that it is essential to ensure that respect for human rights is firmly embedded within our company and therefore applies the human rights policy to Komatsu’s worldwide operations to conduct its business. This policy is formulated based on international human rights principles encompassed by the Universal Declaration of Human Rights. In addition to promoting business activities in line with this philosophy, Komatsu promotes activities that respect human rights such as the prevention of child labor and forced labor and the elimination of excessive working hours, the prevention of discrimination and harassment, the right to freedom of association, the right to collective bargaining, minimum wage, health & safety, etc., in accordance with the “United Nations (UN) Guiding Principles on Business and Human Rights” and the “ILO Core Labour Standards”. Komatsu Group will comply with the laws and regulations of all countries where it conducts its business activities. Where established international human rights norm exists as well as national laws, we will follow the higher standard; where they are in conflict and will seek ways to respect internationally recognized human rights to the greatest extent possible. 2 Stakeholder Engagement When we talk about “stakeholders”, we refer collectively to all parties that are affected by our business activities. Stakeholders include customers, shareholders, investors, distributors, suppliers, local communities and employees. We will consult with independent external knowledge on human rights issues and respect dialogue and discussions with internal and external stakeholders to understand human rights related issues. We will regularly and publicly communicate our activities on human rights based on this policy through our reports and/or Group website. 3 Local Communities Companies cannot continue to exist without maintaining good harmony with the local community. Komatsu wishes to be the most transparent company which actively seeks harmonious balance of interests with the local communities through close communication and contributes to the local communities as a valued corporate citizen. 4 Human Rights Issues (Assessment and Due Diligence) In our effort to apply the major principles for protecting human rights, we conduct human rights risk assessments for our existing and new construction/mining equipment and forestry machinery businesses worldwide with the help of external experts. In addition to risk assessments, we will conduct CSR procurement assessments for suppliers and promote CSR procurement through improvement activities based on the results of the assessments. 38 ESG Issues5 Guidance for employees, distributors and suppliers In order to ensure the effectiveness of this policy, we will conduct appropriate training and activities to raise awareness in employees throughout the Group. We will also expect and encourage our distributors and suppliers to comply with this policy in their own operations. 6 Remedy We have established and maintained a Global Compliance Hotline at its headquarters to take reports relating to non-compliance, including regarding human rights issues and make this Hotline number known to all Komatsu Group Members. Any employee who believes a conflict arises between this policy and the laws, customs or practices of the place where he or she works, or who has questions about this policy or would like to confidentially report a potential violation of this policy, should raise those questions and concerns with the Hotline anonymously. In addition to the Hotline for Komatsu Group Members, anyone other than Komatsu Group Members who become aware of any circumstance or action that violates or appears to violate this policy or applicable law with respect to human rights, can file a report anonymously. They can contact us at https://home.komatsu/en/ inquiry/ or call at +81-3-5561-4711. Human Rights Training and Awareness-raising Recognizing it is important for all employees to correctly understand and adhere to the Human Rights Policy, Komatsu will conduct ongoing activities to raise awareness along with human rights training such as human rights e-learning program to be instituted in FY2019. In addition, we publish the monthly Compliance Newsletter to further contribute to awareness-raising in employees. This newsletter contains articles explaining important legal regulations, highlighting the lessons to be learned from episodes at other companies, and describing comprehensive principles in business today with regards to human rights, prevention of harassment, traffic rules, etc. Future Human Rights Initiatives Komatsu has established the CSR Committee on Human Rights, which comprises the President and CEO as well as the heads of relevant divisions and departments (Construction Equipment Marketing Division, Mining Business Division, Production Division, Procurement Division, Human Resources Department, and legal affairs, risk management, compliance and CSR promotion divisions). This committee will serve as a forum for in-depth understanding of human rights issues. Going forward, the CSR Committee on Human Rights will endeavor to identify priority issues and lay out clear policies for addressing individual issues. In addition, concrete implementation plans will be established for implementing to these issues in actual business practices. 39 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate Profile Social Contribution Activities Komatsu recognizes that social contributions to the communities in which it conducts its business activities are an important corporate responsibility. Komatsu defines the social contribution activities as activities related to its three CSR themes that are not directly aimed at generating earnings. Based on this definition, we seek to contribute to society in a manner that leverages the strengths of our core business. Social Contribution Activities in FY2018 The following chart shows expenditures for social contribution activities by Komatsu Group aggregated based on six general categories. Academic and Industry-Academia Collaborations 16% Culture & Sports 23% Disaster Relief 8% FY2018 Social Contribution Expenditures (Consolidated) ¥1,981million Human Resource Development 28% Local Community Support 23% Environment 2% Type of Social Contribution Expenditure Cash contributions Employee dispatchment and time contributions ¥528 million ¥445 million Expense related to providing own facilities for public use ¥352 million Expense related to events for the community Total ¥656 million ¥1,981 million South Africa: Education Program Instituted through Collaboration with Cummins Technical Education for Communities (TEC) is a program designed The companies that have to provide students majoring in mechanical and/or electrical engi- been playing a major role in neering with a curriculum of technical and practical vocational training. promoting TEC in South Africa This program is implemented by leveraging the strong partnership are Cummins Africa, Cummins between Cummins Inc., a U.S. engine manufacturer, and Komatsu. Middle East FZE, and Komatsu In May 2018, we started implementing a three-year curriculum Africa Holdings (Pty) Ltd. at Sedibeng TVET College in Johannesburg, South Africa, accept- In providing this curriculum, ing 31 students into this program. In this curriculum, students these companies worked to learn how to maintain engines and operate construction and dispatch dedicated instructors; Students of Sedibeng TVET College and President Ohashi of Komatsu (current Chairman) mining equipment. provide educational materials; and support the creation of the Through the TEC program, students acquire knowledge that is training curriculum. Since the launch of the curriculum, the useful for practical application, which increases their ability to companies have been providing ongoing, finely tuned support for access job opportunities with favorable conditions. Also, in the the entire program. long term, the students are expected to play an active part in local Moving forward, Komatsu will build upon its collaboration with companies and thereby contribute to the local economy. Cummins and promote the operation of TEC programs globally. 40 ESG Issues United States: A Partnership to Bring Back Forests In April 2019, Komatsu announced that it will be involved in a forest restoration project at the site of a closed mine in the Appalachian region of the U.S. Partnering with Green Forests Work (GFW), a nonprofit organization specializing in mine reclama- tion and greenification techniques that utilize the benefits of forests, Komatsu embarked on a three- year project through which it plans to restore 1,000 acres (4 square kilometers) of West Virginia’s Monongahela National Forest by 2021. For this project, we will be supported by the U.S. Department of Agriculture and Forest Service. In this project, Komatsu will offer support for land reformation and sapling purchases, rent equipment, and provide employee volunteers for tree planting activities. We will also work to spread sustainable mine reclamation techniques that are friendly toward forests and other vegetation. More than one billion people directly depend on forests for their livelihood. And the rest of the world’s population relies on forests for a variety of economic, social and environmental benefits. “These forests provide all of our recreation, all of our value to why we live here,” said Shanda Minney, executive director of the Appalachian Stewardship Foundation and a resident of West Virginia in the Appalachian region of the eastern United States. “It makes a huge difference to our quality of life as well as the environmental sustainability of the land around us.” Minney’s foundation works to protect and restore natural forested environments in Appalachia, an area impacted significantly by the long-term mining of natural resources. One of her partners in this effort is Dr. Christopher Barton, founder of Green Forests Work, a non-profit organization dedicated to proper mine reclamation methods and the reforesting of formerly mined lands. “What we were seeing in the Appalachian region was a shift in land use and the elimination of these vital forests,” Barton said. “What was predominantly a forested environment prior to mining was being reclaimed as grasslands because it was the only thing that grew in the tightly compacted land required for mine closure. And as time went on the amount of that grassland got larger and larger. We got to the point where, looking at Google Earth, you can see these huge footprints of former forest land where trees no longer grow.” Since the organization was founded in 2009, Green Forests Work (GFW) and its volunteers have planted millions of trees to restore more than 4,000 acres of formerly mined land in Appalachia. Now, through a partnership with Komatsu, GFW is on track to restore an additional 1,000 acres in West Virginia’s Monongahela National Forest by 2021. “Our equipment digs the earth and it’s part of our job to make sure that we’re good stewards of that earth and doing things that are helping our local communities,” said Rod Schrader, chairman & CEO— Komatsu Americas Corp. Schrader and the leaders of Komatsu’s North American subsidiaries joined GFW, the Appalachian Stewardship Foundation, the U.S. Forest Service and others this May to plant thousands of trees as part of the restoration efforts in the Monongahela. Using Komatsu excavators and bulldozers, the land is first prepped for planting by ripping up the tightly compacted soil left from outdated mine reclamation methods. GFW advocates for a more natural approach to mine closure—one that accounts for erosion concerns while still allowing natural forested environments to thrive for generations to come. “The fact that we make equipment that mined the resource out of the ground and now we can be a part of making sure it’s restored to Former mine site that was inhospitable to trees in 2009 (top) and same site after forest restoration activities by GFW with 75% tree survival rate seven years later in 2017 (bottom) its natural habitat, also with our equipment, is very exciting,” Schrader said. “It’s part of our job to make sure that we are good stewards of the earth and doing things that are helping our local communities.” Komatsu’s partnership with GFW includes equipment loans, em ployee volunteers to plant, money to cover the costs of site preparation and tree seedlings, and shared advocacy of the need for mine reclamation methods that allow growth of natural vegetation and forests. “With Komatsu’s support, we’re taking what we’ve done here in Appalachia and hopefully moving it to other parts of the world,” Barton said. “We see this as an opportunity for doing the same type of engagement with local communities on a global perspective.” An added benefit to local communities is the creation of vital new jobs, tied to the reforestation efforts. “Our idea was to create what we called a regenerative economy,” Barton said. “To regenerate the forest, hire local people to run equip- ment to do site preparation, hire local people to collect seed and to plant the trees … We work to put all that money right back into these areas that were impacted.” “Willing partners are necessary to make the impact required”, Minney said. “There’s an endless need and that need can’t be met by any one group on their own. Partnerships are critical to bringing all of the resources and all of the money in to do this important work.” With the power of Komatsu and our industry partners behind reforestation efforts, the opportunity to affect positive change grows exponentially. “I think this is a great example of a major effort Komatsu is making to contribute to the community and to the planet,” said Jeffrey Dawes, president & CEO—Komatsu Mining Corp. “The concept to be working in reforestation is great but we needed a catalyst. We needed someone to help us join. Green Forests Work has the ideas and the know how. We’ve got the resources and we’ve got the intention. So we’re a great match to get this done.” John Fiedler, president—Hensley Industries, Inc., who was with Dawes and Schrader at the May planting, agreed wholeheartedly. “Komatsu stepping up and saying this is something that’s important, to be conscious of the environment and give back, is great,” Fiedler said. “I think us contributing will make a big difference.” Tree planting event for employee partici- pants in Monongahela National Forest (May 2019, approx. 1,500 trees planted) 41 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate Profile Corporate Governance Basic Stance on Corporate Governance To become a company which enjoys more trust from shareholders and all other stakeholders, the Company is working to strengthen corporate governance, improve management efficiency, advocate corporate ethics and ensure sound management on a group-wide basis. To further improve the transparency of management for its shareholders and investors, the Company discloses information in a fair and timely manner and actively engages in investor relations’ activities by holding meetings with shareholders and investors. Corporate Governance Framework At the Company, the Board of Directors is positioned as the core Company has separated management decision making and of corporate governance, and to improve the effectiveness of supervisory functions from executive functions to the extent discussions at meetings of the Board of Directors, the Company permitted by laws and regulations, and while appointing both has worked to put in place a system to ensure thorough discus- Outside Directors and Outside Audit & Supervisory Board sions of important management matters and prompt decision Members, limits the Board of Directors to a small number making, and reform their operational aspect. Having introduced of members. the Executive Officer (Shikko Yakuin) System in 1999, the Corporate Governance of the Company (As of June 30, 2019) General Meeting of Shareholders Elect / Discharge Elect / Discharge Elect / Discharge Audit & Supervisory Board (Standing 2 / Outside 3) Collaboration Audit Office of Corporate Auditors’ Staff Advise / Suggest Board of Directors (Standing 5 / Outside 3) International Advisory Board Audit Elect / Discharge / Supervise Report / Submission Audit reports Recommend Recommend Accounting Auditors (Audit corporation) Human Resource Advisory Committee Compensation Advisory Committee Internal Auditing Dept. Executive Functions President and CEO Strategy Review Committee Internal audit Komatsu Group’s Global Operations Executive Officers and Global Officers 62 • Japan 36 • Global 26 (including 18 foreign nationals) Major Committees Product Safety Committee Compliance Committee Risk Management Committee Export Control Committee Information Security Committee Earth Environment Committee CSR Committee Disclosure Committee Collaboration Decide on the details of the items including election and discharge / Confirm suitability or independency of the Accounting Auditors Recommend Audit reports 42 ESG IssuesComposition of the Board of Directors The Company holds Board of Directors’ meetings periodically at To promote efficient management of the Board of Directors, least once every month. The Board of Directors deliberates and the Company has established a Strategy Review Committee makes resolutions on important matters, determines manage- consisting of Senior Executive Officers and senior managers. ment policies of Komatsu, and rigorously controls and supervises Based on the reviews of the Committee, Executive Officers and the execution of duties by all members of the executive manage- senior managers execute their duties within the authority delegated ment team including Representative Directors. Of the eight (8) by the Board of Directors. Directors on the Board, three (3) are Outside Directors to ensure transparent and objective management. Directors’ Execution of Duties In FY2018, the Board of Directors met 15 times. The Board made and the Company has adopted a process of raising important decisions on important management matters based on the matters for discussion and decision-making on predetermined Standards for Matters to be Referred to a Meeting of the Board of days over two meetings of the Board of Directors. Directors, and reported on business execution. Business execu- The Board of Directors also receives a monthly report from tion reports cover virtually 100% of businesses on a consolidated the President regarding recent important matters and topics, net sales basis. Even extremely small-scale businesses are such as safety, compliance, and risk. The CFO also reports each reported at a meeting of the Board of Directors, mainly with month on the status of sales, profits and losses, orders received, respect to safety, compliance, and risk. Sufficient time is secured and borrowings. to ensure full discussions at a meeting of the Board of Directors Human Resource Advisory Committee The Human Resource Advisory Committee, consisting of three (3) Outside Directors (one of them as Committee Chairperson), Members of the Human Resource Advisory Committee Chairperson of the Board and President, discusses appointment Chairperson: Masayuki Oku and discharge of senior management officers including President Members: Mitoji Yabunaka, Makoto Kigawa, (CEO), and reports the results to the Board of Directors. Based on Tetsuji Ohashi, Hiroyuki Ogawa the report, the Board of Directors discusses and decides appoint- ments of the candidates for directors and Audit & Supervisory Board Members as well as appointments and discharges of executive and other officers. Compensation Advisory Committee In an effort to maintain an objective and transparent remuneration system, the policy and levels of remuneration for Directors and Members of the Compensation Advisory Committee Audit & Supervisory Board Members of the Company are deliber- Chairperson: Tsuguoki Fujinuma ated by the Compensation Advisory Committee, which consists Members: Hirohide Yamaguchi, Eiko Shinotsuka, of four (4) external members (one (1) outside expert, two (2) Masayuki Oku, Tetsuji Ohashi Outside Audit & Supervisory Board Members and one (1) Outside Director) and one (1) internal member. Taking its reports and rec- ommendations into consideration, the remuneration for Directors is determined by the Board of Directors, and the remuneration for Audit & Supervisory Board Members is determined by discus- sions by the Audit & Supervisory Board Members, respectively, within the range previously determined by resolution of the General Meeting of Shareholders. 43 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileCorporate Governance Corporate Governance Reforms The Company has proceeded to implement reforms to its corpo- execution of duties. As a means to supplement executive func- rate governance system in order to ensure effective and adequate tions, the Company established the International Advisory Board performance of matters related to decision making, management (IAB) in 1995. Through the IAB, the Company aims to secure and supervision, such as separation of corporate management objective advice and suggestions from experts from Japan and from business execution, enhancement of corporate manage- abroad about how to function as a global company by exchanging ment decision making by the Board of Directors, strict manage- opinions and holding discussions. Going forward, the Company ment and supervision of business execution, measures will pursue increases to the effectiveness of the Board of undertaken by Outside Directors to improve transparency and Directors while appointing Outside Directors to ensure transpar- objectivity of management, and measures undertaken by the ency and soundness and promoting openness and accountability Audit & Supervisory Board to appropriately audit Directors’ in management. Board of Directors 28 members (0 Outside Directors) Audit & Supervisory Board 3 members (1 Outside Audit & Supervisory Board Member) Other organizations and systems 1999: 8 members (1 Outside Director) 2003: 8 members (2 Outside Directors) 2005: 10 members (3 Outside Directors) 2017: 8 members (3 Outside Directors) Audit & Supervisory Board (1994) 1994: 4 (2 Outside Audit & Supervisory Board Members) 2006: 5 (3 Outside Audit & Supervisory Board Members) Executive Officer System (1999) Compensation Advisory Committee (1999) 4 outside members, 1 standing member Global officers (2016) Human Resource Advisory Committee (2015) 3 outside members, 2 standing members International Advisory Board (1995) 3–4 domestic and overseas experts Hitech & Innovation International Advisory Board (2015) 4–6 overseas experts Compliance Committee (2001) Members of senior management and labor representatives 44 ESG IssuesDirectors 3 7 1 6 2 8 4 5 Chairman of the Board and Representative Director 1 Tetsuji Ohashi President and Representative Director, and CEO 2 Hiroyuki Ogawa Apr. 1977 Joined the Company Apr. 1985 Joined the Company Director and Senior Executive Officer Director and Senior Executive Officer 3 Masayuki Moriyama 4 Kiyoshi Mizuhara Area of responsibility: President of Mining Business Division Area of responsibility: President of Construction Equipment Marketing Division Apr. 1982 Joined the Company Apr. 1983 Joined the Company Product Control Section, Planning & Coordination Department of Awazu Plant Oct. 1998 General Manager of Planning & Cooperation Department of Awazu Plant, Production Division Oct. 2001 Plant Manager of Moka Plant, Production Division Jan. 2004 President and Chief Operating Officer Apr. 2007 (COO), Komatsu America Corp. (until Mar. 2007) Took office as Executive Officer of the Company President of Production Division Took office as Senior Executive Officer Apr. 2008 Jun. 2009 Took office as Director and Senior Apr. 2012 Apr. 2013 Apr. 2019 Executive Officer Took office as Director and Senior Executive Officer Took office as President and Representative Director, and CEO Took office as Chairperson of the Board and Representative Director (current) Director and Senior Executive Officer 5 Kuniko Urano Area of responsibility: Supervising Human Resources & Education, Safety & Health Care, Corporate Communications, and CSR Apr. 1979 Joined the Company Apr. 2005 Apr. 2010 Education Section, Human Resources Department General Manager of Logistics Planning Department, Production Division General Manager of Corporate Communications Department Apr. 2011 Took office as Executive Officer Apr. 2014 General Manager of Human Resources Department Took office as Senior Executive Officer Took office as Director and Senior Executive Officer (current) Apr. 2016 Jun. 2018 Apr. 2004 Production Engineering Section, Production Engineering Department of Kawasaki Plant Plant Manager of Chattanooga Manufacturing Operation, Komatsu America Corp. (until Mar. 2007) General Manager of Planning & Coordination Department of Osaka Plant, Production Division Apr. 2010 Took office as Executive Officer Apr. 2007 Apr. 2013 Apr. 2014 Plant Manager of Ibaraki Plant, Production Division President of Procurement Division, Production Division Representative of All Indonesia Operations Chairperson of PT Komatsu Marketing & Support Indonesia (until March 2016) Apr. 2015 Took office as Senior Executive Officer Took office as President of Production Apr. 2016 Division Apr. 2018 Took office as Senior Executive Officer Jun. 2018 Director and Senior Executive Officer Apr. 2019 Took office as President and Representative Director and CEO (current) Apr. 2014 Apr. 2015 Apr. 2017 Apr. 2018 Jun. 2019 Technology Management Department, Vehicle Development Center of Kawasaki Plant Mar. 2000 Komatsu America Corp. (until March 2003) Apr. 2010 Took office as Executive Officer of the Company General Manager of Construction Equipment Technical Center 1, Development Division President and Chief Operating Officer (COO) of Komatsu America Corp. Took office as Senior Executive Officer President of Mining Business Division (current) Took office as Senior Executive Officer Took office as Director and Senior Executive Officer (current) General Sales Department, Export Sales Division Sep. 1988 Komatsu Dresser Company (currently Komatsu America Corp.) (until Mar. 1993) Mar. 1997 Joined Komatsu Hanomag GmbH Apr. 2008 (currently Komatsu Germany GmbH) (until Mar. 2003) General Manager of Business Control Department, Construction & Mining Equipment Marketing Division General Manager of Construction Equipment Corporate Planning Department, Construction & Mining Equipment Marketing Division Apr. 2013 Took office as Executive Officer Apr. 2011 Representative of All India Operations President of Komatsu India Pvt. Ltd. Apr. 2017 Took office as Senior Executive Officer President of Construction Equipment Marketing Division (current) Apr. 2019 Took office as Senior Executive Officer Jun. 2019 Took office as Director and Senior Executive Officer (current) Outside Director 6 Masayuki Oku Outside Director 7 Mitoji Yabunaka Outside Director 8 Makoto Kigawa Apr. 1969 Joined the Ministry of Foreign Affair hereinafter “MOFA” Jan. 2008 Took office as Vice-Minister for Foreign Affairs Aug. 2010 Took office as Adviser to Ministry of Jun. 2014 Foreign Affair Took office as Director of the Company (current) Apr. 1968 Joined The Sumitomo Bank, Ltd. (currently Sumitomo Mitsui Banking Corporation, hereinafter the “Bank”) Jun. 1994 Took office as Director of the Bank Nov. 1998 Took office as Managing Director of the Jan. 2001 Apr. 2001 Bank Took office as Representative Director and Senior Managing Director of the Bank Took office as Representative Director and Senior Managing Director of Sumitomo Mitsui Banking Corporation (hereinafter “SMBC”) Dec. 2002 Took office as Representative Director and Senior Managing Director of Sumitomo Mitsui Financial Group, Inc. (hereinafter “SMFG”) Jun. 2003 Took office as Representative Director and Deputy President of SMBC Jun. 2005 Took office as Chairman of the Board and Representative Director of SMFG Took office as Representative Director and President of SMBC Apr. 2011 Retired from SMBC Jun. 2014 Apr. 2017 Jun. 2017 Took office as Chairman of the Board and Director of SMFG Took office as Director of the Company (current) Took office as Director of SMFG Took office as Honorary Advisor of SMFG (current) Apr. 1973 Joined The Fuji Bank, Limited (currently Mizuho Bank, Ltd.) Apr. 2004 Took office as Managing Director, Chief Risk Officer / Head of Risk Management Group, and Chief Human Resources Officer / Head of Human Resources Group of Mizuho Corporate Bank, Ltd. (currently Mizuho Bank, Ltd.) Mar. 2005 Retired from Mizuho Corporate Bank, Ltd. Apr. 2005 Joined Yamato Transport Co., Ltd. (currently Yamato Holdings Co., Ltd.) Jun. 2005 Took office as Managing Director of Yamato Transport Co., Ltd. (currently Yamato Holdings Co., Ltd.) Nov. 2005 Took office as Representative Managing Director of Yamato Holdings Co., Ltd. Apr. 2006 Took office as Representative Director and Managing Executive Officer of Yamato Holdings Co., Ltd. Jun. 2006 Took office as Representative Director and Senior Managing Executive Officer of Yamato Holdings Co., Ltd. Mar. 2007 Took office as Representative Director and Executive Officer of Yamato Holdings Co., Ltd. Took office as Representative Director, President and Executive Officer of Yamato Transport Co., Ltd. Took office as Representative Director, President and Executive Officer of Yamato Holdings Co., Ltd. Apr. 2011 Apr. 2015 Took office as Chairman of the Board and Representative Director of Yamato Holdings Co., Ltd. Jun. 2016 Took office as Director of the Company (current) Apr. 2018 Took office as Director and Chairman of Yamato Holdings Co., Ltd. Jun. 2019 Special Advisor of Yamato Holdings Co., Ltd. (current) (as of June 30, 2019) 45 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate Profile Corporate Governance Audit & Supervisory Board Standing Audit & Supervisory Board Member Kosuke Yamane Standing Audit & Supervisory Board Member Hironobu Matsuo Apr. 1981 Joined the Company Apr. 1982 Joined the Company Accounting Section, Administration Department of Awazu Plant Accounting Section, Administration Department of Osaka Plant Aug. 1991 Touche Ross & Co, UK (until July 1992) Mar. 1999 Financial Officer, Komatsu Asia & Pacific Pte Ltd. Apr. 2003 (until March 2003) General Manager of Corporate Communications & Investor Relations Department of the Company General Manager of Corporate Communications Department Apr. 2004 Jan. 2006 General Manager of Finance & Treasury Department Apr. 2008 General Manager of e-KOMATSU Technical Center Apr. 2011 Took office as Executive Officer Jun. 2016 President of Information Strategy Division Took office as Standing Audit & Supervisory Board Member (current) Dec. 1992 Hanomag AG (currently Komatsu Germany GmbH) (until Oct. 1995) Oct. 1995 Komatsu Baumaschinen Deutschland GmbH (until Jul. 1997) Jan. 2006 Vice President of Komatsu (China) Ltd. (until Apr. 2008) Apr. 2008 General Manager of Corporate Controlling Department of the Company Jun. 2012 General Manager of Internal Auditing Department Apr. 2013 Took office as Executive Officer Jun. 2017 Took office as Standing Audit & Supervisory Board Member (current) Outside Audit & Supervisory Board Member Hirohide Yamaguchi Outside Audit & Supervisory Board Member Eiko Shinotsuka Outside Audit & Supervisory Board Member Kotaro Ohno Apr. 1974 Joined the Bank of Japan Oct. 2008 Took office as Deputy Governor of Bank of Japan Mar. 2013 Retired from Bank of Japan Jul. 2013 Took office as Chairman of the Advisory Board of Nikko Financial Intelligence, Inc. (currently Nikko Research Center, Inc.) (current) Took office as Audit & Supervisory Board Member of the Company (current) Jun. 2014 Apr. 1993 Took office as Professor at Ochanomizu University Apr. 2008 Took office as Professor emeritus at Ochanomizu University (current) Took office as Audit & Supervisory Board Member of the Company (current) Jun. 2015 Apr. 1976 Appointed as Prosecutor Jul. 2009 Took office as Vice-Minister of Justice Jul. 2012 Jul. 2014 Took office as Superintending Prosecutor of Tokyo High Public Prosecutors Office Took office as Prosecutor-General of Supreme Public Prosecutors Office Sep. 2016 Retired from the position of Prosecutor-General of Supreme Public Prosecutors Office Nov. 2016 Attorney at law, Special Counsel of Mori Hamada & Matsumoto Jun. 2017 (current) Took office as Audit & Supervisory Board Member of the Company (current) (As of June 30, 2019) Audit & Supervisory Board Members Audit & Supervisory Board Members attend important meetings They also periodically exchange opinions with the Internal Auditing such as meetings of the Board of Directors, Strategy Review Department and the Accounting Auditors and maintain close contact Committee, Compliance Committee, and Risk Management to enhance the effectiveness of audits. Committee, visit and inspect offices and plants of the Company The Company has allocated the required employees to the Office and its subsidiaries in Japan and overseas, exchange opinions of Corporate Auditors’ Staff to assist the Audit & Supervisory Board with the representative directors, other Directors and Audit & Members in their duties, and allocates, and appropriately manages Supervisory Board Members, and management of the Company and executes, a budget to cover the anticipated expenses necessary and its main subsidiaries, and hold liaison meetings and individual for execution of the Audit & Supervisory Board Members’ duties interviews with the standing Audit & Supervisory Board Members based on the audit plan. of subsidiaries in Japan. Through these activities, they monitor the upgrading and implementation status of the internal control system. Komatsu’s Independence Standards for Outside Directors and Outside Audit & Supervisory Board Members The Company emphasizes independence when selecting Outside Directors and Outside Audit & Supervisory Board Members, and has therefore established its own “Independence Standards for Outside Directors and Outside Audit & Supervisory Board Members.” In addition, through its departments engaged in business transactions with the companies where candidates for Outside Board Members are concurrently employed (or execute business thereof), the Company reviews the business relationship of these companies by making direct inquiries to the concerned companies and implementing other means, thereby evaluating their independence from the Company. 46 Basic Stance Independent Outside Board Members are defined as Outside Board Members who have no potential conflict of interest with ordinary shareholders of the Company. In the event that they are critically controlled by the top management of the Company or they can critically control the top management of the Company, they are deemed to have a conflict of interest with ordinary shareholders of the Company. Therefore, the Board of Directors determines that they have no independence from the Company. ESG Issues Major Activities of Outside Directors and Outside Audit & Supervisory Board Members in FY2018 Outside Directors Name Attendance to the Meetings Details of Major Activities Masayuki Oku Mitoji Yabunaka Makoto Kigawa Meeting of the Board of Directors 100% (15 meetings out of the 15 meetings held) Meeting of the Board of Directors 100% (15 meetings out of the 15 meetings held) Meeting of the Board of Directors 100% (15 meetings out of the 15 meetings held) Mr. Masayuki Oku previously served as Representative Director of Sumitomo Mitsui Banking Corporation. During FY2018, based on his rich experience in the business world, he provided comments at meetings of the Board of Directors concerning such issues as valuation indicators for the mid-term management plan, growth strategies following M&A activities, and financing. In addition, he was a member of the Company’s Human Resource Advisory Committee and Compensation Advisory Committee. Mr. Mitoji Yabunaka previously served as Vice-Minister for Foreign Affairs. During FY2018, based on his standpoint as a specialist in international affairs, he provided comments at the meetings of the Board of Directors concerning such issues as projection of demands in the mid-term management plan, trade policies in various countries, and country risk. In addition, he was a member of the Company’s Human Resource Advisory Committee. Mr. Makoto Kigawa previously served as Representative Director at both Yamato Holdings Co., Ltd., and Yamato Transport Co., Ltd. During FY2018, based on his rich experience in the business world, he provided comments at the meetings of the Board of Directors concerning such issues as target and execution of the mid-term management plan, the ICT strategy for SMARTCONSTRUCTION, and inventory control on a global basis. In addition, he was a member of the Company’s Human Resource Advisory Committee. Outside Audit & Supervisory Board Members Name Attendance to the Meetings Details of Major Activities Hirohide Yamaguchi Meeting of the Board Eiko Shinotsuka Kotaro Ohno of Directors 100% (15 meetings out of the 15 meetings held) Meeting of the Audit & Supervisory Board 100% (15 meetings out of the 15 meetings held) Meeting of the Board of Directors 100% (15 meetings out of the 15 meetings held) Meeting of the Audit & Supervisory Board 100% (15 meetings out of the 15 meetings held) Meeting of the Board of Directors 100% (15 meetings out of the 15 meetings held) Meeting of the Audit & Supervisory Board 93% (14 meetings out of the 15 meetings held) Mr. Hirohide Yamaguchi previously served as Deputy Governor of the Bank of Japan. During FY2018, based on his professional standpoint, he provided comments at the meetings of the Audit & Supervisory Board and the meetings of the Board of Directors concerning such issues as overseas economic trends, governance of Komatsu Group and audit frameworks. In addition, he was a member of the Company’s Compensation Advisory Committee. Ms. Eiko Shinotsuka possesses wide-ranging knowledge and experience in fields such as economics, labor relations and law. During FY2018, based on her professional standpoint, she provided comments at the meetings of the Audit & Supervisory Board and the meetings of the Board of Directors concerning such issues as human resource development with global perspective, diversity and risk management. In addition, she was a member of the Company’s Compensation Advisory Committee. Mr. Kotaro Ohno possesses rich experience in the legal profession. During FY2018, based on his professional standpoint, he provided comments at the meetings of the Audit & Supervisory Board and the meetings of the Board of Directors concerning such issues as legal risk, internal reporting system and strategy for intellectual properties. In addition, he was an observer of the Company’s Compliance Committee. Independence Standards (Excerpt) Based on the basic stance above, the Board of Directors determines an Outside Board Member who is listed below has no independence from the Company. 1) Person engaged in transactions or execution of business with the Company or its subsidiary as his/her major business partner (This is applicable to a business partner or a person engaged in business execution with the Company or its subsidiary, and the Company or its subsidiary can give significant influence on decision making of the concerned partner or person.) 2) Main business partner of the Company or person engaged in business execution thereof (This is applicable to a business partner or a person engaged in business execution with the Company, and the concerned business partner or person engaged in business execution thereof can give significant influence on the Company’s decision making.) 3) Consultant(s), certified public accountant(s), lawyer(s) or other professional(s) obtaining large amounts of money or other financial benefits, other than remunerations of Outside Board Members of the Company (when such financial benefits are obtained by an incorporated entity, this matter applies to a person belonging to such organization.) 4) Person who is applicable to any of 1) through 3) above for last one year 5) Spouse or a relative in second degree of an important person among the following persons (person engaged in business execution of subsidiaries of the Company, etc.) 47 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileCorporate Governance Evaluation of the Effectiveness of the Board of Directors Komatsu is working to improve the effectiveness of the Board of Directors and performs annual evaluations and analyses of the effective- ness of the Board of Directors for this reason. Evaluation Process ❶ Survey After discussion by the Board of Directors on the method to be used for FY2018 evaluation, based on the method applied in the previous year and the results thereof as well as the 2018 revision to Japan’s Corporate Governance Code, the Company conducted a survey out of consider- ation for the nature of an effective Board of Directors. ❷ Collection of survey results from all Directors and Audit & Supervisory Board Members ❸ Discussion among Outside Directors and Outside Audit & Supervisory Board Members based on survey responses ❹ Report of discussion results, evaluation and analysis of effective- ness, and discussion of the matters for improve- ment at meeting of Board of Directors Survey Topics: • Composition of the Board of Directors • Contents of agendas • Straightforward and meaningful discussions • Provision of information and presentation of agendas by executives • Structure through which important matters are reported, proposed, and followed up • Succession plans for CEO • Other items Overview of Results of FY2018 Evaluation The assessment shows a generally high level of achievement for each item and confirms that there were no serious problems concerning the effectiveness. As in the case of the previous survey, the Company received excellent evaluations for monthly reports by the President himself in Board meetings. The Company also enjoyed high marks for new efforts, such as improved diversity of the Board with a female inside director, the holding of the Board meeting at Komatsu Mining Corp. (acquired in 2017) as part of Board of Directors’ visit and discussions and reviews held four times by the Board when the Company was developing the new mid-term management plan. With respect to the conducting of Board meetings, there were a few suggestions for improvement. The Company will make those improvements and work to make the Board of Directors further effective in the future. Succession Plans One of the items that has been contained in the Code of Conduct for Leadership/Top Management described in the KOMATSU Way since its establishment in 2006 is “continue to think about your succession plan.” The KOMATSU Way positions the cultivation of management successors as an important task that can only be entrusted to top management. Members of top management are thus expected to always have clearly defined successors and to take steps to foster within these successors the capacity to identify the underlying causes of issues by providing them with opportunities to experience and gain understanding of various work sites. The Human Resource Advisory Committee, which comprises the chairman of the Board, the president, and outside directors, consistently engages in discussions regarding the selection and cultivation of candidates for positions as next the president (CEO) and the next president (CEO) to follow. 48 ESG IssuesRemuneration Systems In an effort to maintain an objective and transparent remuneration Remuneration A) as well as the performance-based remuneration system, the policy and levels of remuneration for Directors and (Stock-Based Remuneration B) that will reflect the degree of Audit & Supervisory Board Members of the Company are deliber- achievement of the targets raised in the mid-term management ated by the Compensation Advisory Committee. Taking its reports plan, so that it will further contribute to the enhancement of the and recommendations into consideration, the remuneration for medium- and long-term corporate value of the Company, by linking Directors is determined by the Board of Directors, and the remu- the remuneration. The remuneration for Outside Directors only neration for Audit & Supervisory Board Members is determined consists of basic remuneration (fixed remuneration) designed to by discussions by the Audit & Supervisory Board Members, support their role to make recommendations with respect to the respectively, within the range previously determined by resolution overall management of the Company as a member of the Board of the General Meeting of Shareholders. With regards to remu- of Directors. Furthermore, the remuneration for Audit & neration levels, their comparison by position at other key, globally Supervisory Board Members only consists of basic remuneration active manufacturers in Japan is made by the Compensation (fixed remuneration) designed to support their independent posi- Advisory Committee and is reflected in its reports and recom- tion with authority to audit the execution of duties by Directors mendations. The remuneration for Directors excluding the without getting fettered by the movements of corporate perfor- Outside Directors (hereinafter “Internal Director”) comprises mance of the Company. The retirement allowance system for basic remuneration (fixed remuneration) and performance-based Directors and Audit & Supervisory Board Members was termi- remuneration linked to the Company’s consolidated performance nated as of June 2007. for a single fiscal year (bonus in cash and the Stock-Based Composition of Remuneration of Directors and Audit & Supervisory Board Members Internal Directors Outside Directors and Audits Basic Remuneration (Fixed Remuneration) Performance-Based Remuneration for a Single Year (Monthly Remuneration x 0–24 months) Performance-Based Remuneration Linked to Performance of Mid-Term Management Plan (Monthly Remuneration x 0–3 months) Monthly remuneration x 12 months Bonus in Cash (2/3, in principle)* Stock-Based Remuneration A (1/3, in principle) Restricted Stocks Stock-Based Remuneration B Restricted Stocks Basic Remuneration (Fixed Remuneration) Monthly remuneration x 12 months Not influenced by Company performance * The upper limit for Bonus in Cash is set at 12 months’ worth of monthly remuneration; the remainder of bonuses is to be paid as Stock-Based Remuneration A. * The upper limit for director bonuses is set at 12 months’ worth of monthly remuneration; the remainder of bonuses is to be paid in stock-based remuneration. Performance-Based Remuneration Linked to Performance of Mid-Term Management Plan The Company will pay Internal Directors the equivalent of a three-month portion of monthly remuneration every fiscal year as remu- neration linked to the period of the Company’s Mid-Term Management Plan by granting restricted stock as stock-based remuneration, after the expiry of the period of the mid-term management plan, the number of shares on which to lift transfer restrictions (within range of 0-100%) will be decided based on the achievement of the management targets of the Mid-Term Management Plan and as a general rule, the restriction of transfer on the shares will be lifted after three years from delivery. Management Targets, Valuation Bases and Valuation Indicators in Previous Mid-Term Management Plan (FY2016-FY2018) Management Targets Valuation Bases and Valuation Indicators Growth (Aim at a growth rate above the industry’s average) Comparison of growth rate of consolidated sales with those of major competitors*1 Profitability (Aim at the industry’s top-level operating income ratio) Comparison of consolidated operating income ratio with those of major competitors*1 Efficiency (Aim at 10%-level ROE) Achievement of a consolidated ROE of 10% or More Financial Position (Aim at the industry’s top-level financial position) Comparison of net debt-to-equity ratio*2 with those of major competitors*1 Management focused on ESG (Environment, Social and Corporate Governance) Achievement rate of targets in respect of mid-term ESG activities *1 Relative comparison with domestic and foreign major competitors in the same industry *2 Net debt-to-equity ratio = (Interest-bearing debt – Cash and cash equivalents – Time deposits) / Shareholders’ equity of the Company 49 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileCorporate Governance Risk Management While continuing to make efforts to raise its corporate value, the measures in place, and take control of risks when they emerge. Company recognizes the problems related to legal compliance, The Risk Management Committee regularly reports its reviews environment, product quality, disasters and information security and activities to the Board of Directors. in particular, and other matters, as major risks for continuous 3) The Company shall establish an emergency headquarters when growth and has been thus implementing the following serious risks emerge, and work to minimize damage(s) and countermeasures. implement appropriate measures. 1) The Company shall establish“Risk Management Rules”to correctly recognize and manage risk. In accordance with the In FY2018, the Risk Management Committee met twice a year. rules, the Company has appointed personnel in charge of indi- The Committee evaluated status of implementation of risk vidual risks, further promoting the build-up of a solid foundation measures and worked to prevent risks from surfacing. It also for risk management. reported on its reviews and activities to the Board of Directors. 2) The Company shall establish Risk Management Committee to The Committee also worked to improve the risk management devise risk management policies of Komatsu, evaluate risk systems on a group worldwide basis including at subsidiaries. Compliance The Company shall establish the“Compliance Committee”as The Compliance Committee conducts various activities, such Komatsu to oversee compliance, and the Committee regularly as revising the Komatsu Code of Worldwide Business Conduct, reports its reviews and activities to the Board of Directors. The providing various education and disseminating information, and Company shall also establish a system to ensure all Directors and upgrading and operating internal reporting system. It also reports employees thorough compliance to business rules as well as laws on its reviews and activities to the Board of Directors. The and regulations through a variety of measures, including the Compliance Committee met twice in FY2018. The Committee provision of“Komatsu Code of Worldwide Business Conduct,” also conducted a “visualization survey” of latent risks. Monthly appointment of the Executive Officer in charge of compliance, publication of the Company bulletin “Compliance for Everyone” and establishment of the Compliance Department. Through all of continued into its 14th year. The Committee also conducts peri- these, we work to supervise, educate and train Directors, Audit & odic audits with regard to major compliance risks and strives to Supervisory Board Members and employees. prevent them from surfacing. In addition, the Company shall establish the internal reporting system where those who are discretely reporting questionable actions in light of laws and regulations and business rules will not be given any disadvantageous treatment. Compliance and Risk Audits As a part of its risk management activities, Komatsu has been Implementation Status of Compliance and Risk Audits conducting compliance and risk audits (CR audits) since FY2008. These audits cover areas not included in the J-SOX audits.* CR (Times) 600 audits also seek to identify latent compliance risks, with a particu- lar focus on confirming and evaluating the status of legal compliance. Through these audits, we strive to raise the control and compli- ance awareness levels at each company and in every department. Going forward, we aim to improve our case-by-case audit meth- ods and raise the operational level of CR audits as a part of risk management functions. * A udits conducted in accordance with the Financial Instruments and Exchange Act of Japan to evaluate internal controls related to financial reporting 50 500 400 300 200 100 0 FY2014 FY2015 FY2016 FY2017 FY2018 ■ Workplace instruction ■ Safety ■ Environment ■ Labor ■ Accounting ■ Audits of sales bases ■ Quality assurance / recalls ■ Vehicle inspections / specified self-inspections ■ Export control ■ Information security ■ Antitrust laws ■ The Subcontract Act ■ Overseas liaison offices ESG Issues Stakeholder Engagement In order to gain more trust from all stakeholders, the Company is strengthening corporate governance and top management is practicing direct engagement with stakeholders. Corporate Value = Total Sum of Trust Given to Us by Society and All Stakeholders Share information on the Komatsu Group’s vision and the issues it faces (employees, suppliers, distributors) Provide as many opportunities for engagement as possible and practice proper information disclosure to facilitate understanding of Komatsu Society Distributors Suppliers Employees Customers Shareholders Investors and Analysts Mass media Communities Distributor meetings Midori-kai General meetings with management Meetings with the president Visits from top management General Meeting of Shareholders Shareholder meetings Visits to investors worldwide Analysts meetings Financial results briefings Interviews Meetings with mayors, governors, etc. Direct Communication by Top Management Major Investor Relations Activities in FY2018 To further improve the transparency of management for our shareholders and investors, we disclose information in a fair and timely manner and actively engage in investor relations activities by holding meetings with shareholders and investors. For Shareholders and Individual Investors Homepage For Institutional Investors Shareholder meetings (2 times) Factory tours for shareholders (10 times) Individual investor meetings (9 times) Gifts of appreciation for long-term shareholders Financial information • Financial results briefings • Sales and profits gains reports • Quarterly reports, etc. Web interviews with the president (4 times) KOMATSU REPORT, etc. Financial results briefings (4 times) Small meetings (8 times) Business briefings (2 times) Business site tours (1 time) Overseas investor relations activities (5 times; approx. 80 companies) Individual meetings (over 250) Visits to overseas business sites (21 times) 51 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileExecutive Officers and Global Officers (as of June 30, 2019) Executive Officers Senior Executive Officer (Senmu) Executive Officers Yuichi Iwamoto Chief Technology Officer (CTO) Supervising Research & Development and Environment Senior Executive Officers (Jomu) Ichiro Nakano Vice President, Development Division Susumu Ueno President, Japanese Domestic Marketing, Construction Equipment Marketing Division Masaki Nobuhara President, Production Division Taiichiro Kitatani Vice President, Construction Equipment Marketing Division General Manager, ICT Project Department Naoki Fujita Supervising Industrial Machinery Business Seiichi Fuchita President, Development Division Yoshiharu Sato President, Quality Assurance Division Kazuya Kuriyama President, Procurement, Production Division Hiroyuki Terada Vice President, Production Division (Responsible for Parts & Reman) Keiko Fujiwara General Manager, Department for Promotion of Distributor HR Development, Construction Equipment Marketing Division General Manager, Business Reform Department, Construction Equipment Marketing Division Akihiko Nakazawa General Manager, Komatsu Economic Strategy Research Center Assistant to President, Construction Equipment Marketing Division Chikashi Shike President, Smart Construction Promotion Division Yasuo Suzuki Ibaraki Plant Manager, Production Division Yuushi Oshikawa Vice President, Development Division General Manager, Future Mining Equipment Development Department Taisuke Kusaba General Manager, Vehicle Development Center 3, Development Division Kazuaki Miura Vice President, Japanese Domestic Marketing, Construction Equipment Marketing Division President, Komatsu Customer Support Japan Ltd. Takeshi Horikoshi Chief Financial Officer (CFO) Nozomu Okamoto Awazu Plant Manager, Production Division Masami Naruse General Manager, Vehicle Development Center 1, Development Division Koichi Honda General Manager, Human Resources Department Yasuji Nishiura Vice President, Mining Business Division General Manager, Marketing Department, Mining Business Division Takuya Imayoshi General Manager, Business Coordination Department Kosei Okamoto General Manager, Vehicle Development Center 2, Development Division Kenichi Tanaka President, Defense Systems Division Shinji Maeda President, Information Strategy Division Norikatsu Nishiyama Himi Plant Manager, Production Division Hiroshi Makabe Supervising Legal, General Affairs & Compliance Mitsuko Yokomoto General Manager, General Affairs Department Responsible for Risk Management Hidefumi Obikane Oyama Plant Manager, Production Division Toru Sunada President, Service Division, Construction Equipment Marketing Division Hiroyuki Umeda President, Product Marketing Division Takayuki Furukoshi Osaka Plant Manager, Production Division 52 ESG IssuesExecutive Officers (Global) Note: Executive officers overseas concurrently serve as global officers. North America Latin America Senior Executive Officers Senior Executive Officer Asia/Oceania Executive Officer Rodney Schrader Chairman & CEO, Komatsu America Corp. Yasushi Sakano Representative of All Latin America* Operations Pratjojo Dewo S. President, PT Komatsu Indonesia President, Komatsu Cummins Chile Ltda. President & CEO, Komatsu Holding South America Ltda. China * “Latin America” does not include Brazil. Senior Executive Officer Jun Ohshima Executive Vice President and President, North America R&D Division, Komatsu America Corp. Jeffrey Dawes President & CEO, Komatsu Mining Corp. Vice President, Mining Business Division Korekiyo Yanagisawa EVP & COO, Komatsu Mining Corp. Europe Senior Executive Officer Mitsuru Ueno President and CEO, Komatsu Forest AB Executive Officers Executive Officer Hideyuki Takatsuki President & COO, Komatsu America Corp. Gary Kasbeer Executive Vice President and CFO, Komatsu America Corp. Masatoshi Morishita President and CEO, Komatsu Europe International N.V. Yasuhiro Inagaki Representative of All China Operations Chairman, Komatsu (China) Ltd. Executive Officers Quanwang Zhang President & CEO, Komatsu (China) Ltd. Takashi Yasukawa President, Production & Procurement Division, Komatsu (China) Ltd. Global Officers North America Europe China Peter Salditt President, Underground and Hard Rock Mining, Komatsu Mining Corp. Paul Blanchard Managing Director, Komatsu UK Ltd. John Koetz President, Surface Mining, Komatsu Mining Corp. Jorge Mascena President & CEO, Modular Mining Systems, Inc. John Fiedler President, Hensley Industries, Inc. Ralf Petzold President and MD, Komatsu Germany GmbH Göksel Güner Executive Vice President, Komatsu Germany GmbH President, Construction Division, Komatsu Germany GmbH Enrico Prandini Managing Director, Komatsu Italia Manufacturing S.p.A Asia/Oceania Somsak Techacheewapong President, Bangkok Komatsu Co., Ltd. Sean Taylor Managing Director, Komatsu Australia Pty. Ltd. Fangchang Liu President, Komatsu (Shandong) Construction Machinery Corp. Dechun Tian President, Komatsu Shantui Construction Machinery Co., Ltd. Africa Michael Blom Managing Director, Komatsu South Africa (Pty) Ltd. 53 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate Profile11-Year Summary Net sales Operating income Operating income ratio (%) 2,021,743 1,431,564 1,843,127 1,981,763 1,884,991 1,953,657 1,978,676 1,854,964 1,802,989 2,501,107 151,948 7.5 67,035 4.7 222,929 12.1 256,343 12.9 211,602 11.2 240,495 12.3 242,062 12.2 208,577 11.2 174,097 9.7 268,503 10.7 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Income from continuing operations before income taxes and equity in earnings of affiliated companies 128,782 64,979 219,809 249,609 204,603 242,056 236,074 204,881 166,469 291,807 377,471 Net income attributable to Komatsu Ltd. Capital investment Depreciation and amortization*1 Research and development expenses Total assets Shareholders’ equity Shareholders’ equity ratio (%) Net interest-bearing debt*2 Net debt-equity ratio (times) Net cash provided by operating activities Net cash used in investing activities Net cash provided by (used in) financing activities Cash and cash equivalents, end of year 78,797 162,512 97,241 53,736 33,559 96,191 90,215 46,449 150,752 97,738 88,442 49,005 1,969,059 1,959,055 2,149,137 814,941 41.4 509,248 0.62 78,775 (145,368) 57,219 90,563 833,975 42.6 502,818 0.60 182,161 (72,967) (116,363) 82,429 Number of common share issued (thousands of shares) 998,744 998,744 Net income attributable to Komatsu Ltd. per share (yen) Cash dividends per share (yen) Consolidated payout ratio (%)*3 ROA (%) ROE (%) Exchange rate for the U.S. dollar (yen)*4 Exchange rate for the Euro (yen)*4 Exchange rate for the Chinese Renminbi (yen)*4 79.95 40.0 40.0 6.3 9.3 101 143 14.7 34.67 16.0 38.0 3.3 4.1 93 131 13.6 167,041 122,038 89,015 54,843 2,320,529 1,009,696 43.5 563,814 0.56 105,608 (124,539) 18,781 83,079 983,130 173.47 42.0 24.2 11.2 17.3 79 110 12.4 923,843 43.0 459,110 0.50 150,402 (88,509) (56,365) 84,224 998,744 155.77 38.0 24.4 10.7 17.2 85 113 12.7 Number of employees (persons) 39,855 38,518 41,059 44,206 46,730 47,208 47,417 47,017 47,204 59,632 61,908 Overseas employee ratio (%) CO2 emissions in Japan (kt) CO2 emissions overseas (kt) Waste generated in Japan (kt/year) Waste generated overseas (kt/yen) Volume of water used in Japan (thousand m3) Volume of water used overseas (thousand m3) 51.4 276 172.8 29.8 95.4 7,570 814 51.9 188 140.2 14 66.5 5,436 721 55.5 264 287 19.5 93.8 6,347 1,136 57.5 264 315 19.8 102.3 5,652 1,228 *1 Depreciation is the total of depreciation on property, plant and equipment and on intangible assets. *2 Net interest-bearing debt = interest-bearing debt – cash and equivalents – time deposits. *3 Figures for FY2008 and FY2009 exclude structural reform expenses. *4 Average exchange rates for the fiscal year. 54 126,321 136,962 88,005 60,788 2,517,857 1,193,194 47.4 585,926 0.49 214,045 (131,397) (71,814) 93,620 983,130 132.64 48.0 36.2 8.5 11.5 83 107 13.2 64.3 209 258 15.8 97.8 4,734 1,081 159,518 179,070 85,837 64,479 2,651,556 1,376,391 51.9 513,918 0.37 319,424 (167,439) (155,349) 90,872 983,130 167.36 58.0 34.7 9.4 12.4 100 133 16.3 61.8 200 239 16.9 84.2 4,144 970 154,009 192,724 100,666 70,715 2,798,407 1,528,966 54.6 481,817 0.32 343,654 (181,793) (143,983) 105,905 971,967 162.07 58.0 35.8 8.7 10.6 110 140 17.7 61.0 190 211 15.2 67.7 3,475 789 137,426 160,051 111,174 70,736 2,614,654 1,517,414 58.0 349,081 0.23 319,634 (148,642) (173,079) 106,259 971,967 145.80 58.0 39.8 7.6 9.0 121 132 19.0 60.7 167 165 12.7 49.4 2,994 633 113,381 142,006 103,219 70,507 2,656,482 1,576,674 59.4 286,512 0.18 256,126 (133,299) (107,718) 119,901 971,967 120.26 58.0 48.2 6.3 7.3 109 119 16.2 62.7 180 193 14.1 69.2 2,660 670 196,410 145,668 132,442 73,625 3,372,538 1,664,540 49.4 663,740 0.40 148,394 (377,745) 243,949 144,397 971,967 208.25 84.0 40.3 9.7 12.1 111 130 16.8 66.7 203 244 16.3 96.9 3,295 720 Millions of yen 2,725,243 397,806 14.6 256,491 179,210 129,860 73,447 3,638,219 1,815,582 49.9 779,890 0.43 202,548 (187,204) (3,660) 148,479 972,252 271.81 110.0 40.5 10.8 14.7 111 129 16.5 68.4 206 264 18.1 99.6 2,885 878 Corporate ProfileNet sales Operating income Operating income ratio (%) 2,021,743 1,431,564 1,843,127 1,981,763 1,884,991 1,953,657 1,978,676 1,854,964 1,802,989 2,501,107 151,948 7.5 67,035 4.7 222,929 12.1 256,343 12.9 211,602 11.2 240,495 12.3 242,062 12.2 208,577 11.2 174,097 9.7 268,503 10.7 2,725,243 397,806 14.6 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Income from continuing operations before income taxes and equity in earnings of affiliated companies 128,782 64,979 219,809 249,609 204,603 242,056 236,074 204,881 166,469 291,807 377,471 Millions of yen 126,321 136,962 88,005 60,788 2,517,857 1,193,194 47.4 585,926 0.49 214,045 (131,397) (71,814) 93,620 983,130 132.64 48.0 36.2 8.5 11.5 83 107 13.2 159,518 179,070 85,837 64,479 2,651,556 1,376,391 51.9 513,918 0.37 319,424 (167,439) (155,349) 90,872 983,130 167.36 58.0 34.7 9.4 12.4 100 133 16.3 154,009 192,724 100,666 70,715 2,798,407 1,528,966 54.6 481,817 0.32 343,654 (181,793) (143,983) 105,905 971,967 162.07 58.0 35.8 8.7 10.6 110 140 17.7 137,426 160,051 111,174 70,736 2,614,654 1,517,414 58.0 349,081 0.23 319,634 (148,642) (173,079) 106,259 971,967 145.80 58.0 39.8 7.6 9.0 121 132 19.0 113,381 142,006 103,219 70,507 2,656,482 1,576,674 59.4 286,512 0.18 256,126 (133,299) (107,718) 119,901 971,967 120.26 58.0 48.2 6.3 7.3 109 119 16.2 196,410 145,668 132,442 73,625 3,372,538 1,664,540 49.4 663,740 0.40 148,394 (377,745) 243,949 144,397 971,967 208.25 84.0 40.3 9.7 12.1 111 130 16.8 256,491 179,210 129,860 73,447 3,638,219 1,815,582 49.9 779,890 0.43 202,548 (187,204) (3,660) 148,479 972,252 271.81 110.0 40.5 10.8 14.7 111 129 16.5 Number of employees (persons) 39,855 38,518 41,059 44,206 46,730 47,208 47,417 47,017 47,204 59,632 61,908 64.3 209 258 15.8 97.8 4,734 1,081 61.8 200 239 16.9 84.2 4,144 970 61.0 190 211 15.2 67.7 3,475 789 60.7 167 165 12.7 49.4 2,994 633 62.7 180 193 14.1 69.2 2,660 670 66.7 203 244 16.3 96.9 3,295 720 68.4 206 264 18.1 99.6 2,885 878 55 Number of common share issued (thousands of shares) 998,744 998,744 Net income attributable to Komatsu Ltd. Capital investment Depreciation and amortization*1 Research and development expenses Total assets Shareholders’ equity Shareholders’ equity ratio (%) Net interest-bearing debt*2 Net debt-equity ratio (times) Net cash provided by operating activities Net cash used in investing activities Net cash provided by (used in) financing activities Cash and cash equivalents, end of year Net income attributable to Komatsu Ltd. per share (yen) Cash dividends per share (yen) Consolidated payout ratio (%)*3 ROA (%) ROE (%) Exchange rate for the U.S. dollar (yen)*4 Exchange rate for the Euro (yen)*4 Exchange rate for the Chinese Renminbi (yen)*4 Overseas employee ratio (%) CO2 emissions in Japan (kt) CO2 emissions overseas (kt) Waste generated in Japan (kt/year) Waste generated overseas (kt/yen) Volume of water used in Japan (thousand m3) Volume of water used overseas (thousand m3) 1,969,059 1,959,055 2,149,137 78,797 162,512 97,241 53,736 814,941 41.4 509,248 0.62 78,775 (145,368) 57,219 90,563 79.95 40.0 40.0 6.3 9.3 101 143 14.7 51.4 276 172.8 29.8 95.4 7,570 814 33,559 96,191 90,215 46,449 833,975 42.6 502,818 0.60 182,161 (72,967) (116,363) 82,429 34.67 16.0 38.0 3.3 4.1 93 131 13.6 51.9 188 140.2 14 66.5 5,436 721 150,752 97,738 88,442 49,005 923,843 43.0 459,110 0.50 150,402 (88,509) (56,365) 84,224 998,744 155.77 38.0 24.4 10.7 17.2 85 113 12.7 55.5 264 287 19.5 93.8 6,347 1,136 167,041 122,038 89,015 54,843 2,320,529 1,009,696 43.5 563,814 0.56 105,608 (124,539) 18,781 83,079 983,130 173.47 42.0 24.2 11.2 17.3 79 110 12.4 57.5 264 315 19.8 102.3 5,652 1,228 *1 Depreciation is the total of depreciation on property, plant and equipment and on intangible assets. *2 Net interest-bearing debt = interest-bearing debt – cash and equivalents – time deposits. *3 Figures for FY2008 and FY2009 exclude structural reform expenses. *4 Average exchange rates for the fiscal year. Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate ProfileCorporate Information (as of March 31, 2019) Name Komatsu Ltd. Head Office 2-3-6 Akasaka, Minato-ku, Tokyo 107-8414 Date of Establishment May 13, 1921 Common Stock Outstanding Consolidated: ¥68,311 million based on U.S. GAAP Non-consolidated: ¥70,561 million Number of Employees Consolidated: 61,908 Non-consolidated: 11,537 Shares of Common Stock Issued and Outstanding 972,252,460 shares (excluding shares of treasury stock) Number of Shareholders 193,434 Number of Shares per Trading Unit 100 Securities Code 6301 (Japan) Major Shareholders The Master Trust Bank of Japan, Ltd. (Trust Account) Japan Trustee Services Bank, Ltd. (Trust Account) JP MORGAN CHASE BANK 380055 (Standing proxy: Mizuho Bank, Ltd., Settlement & Clearing Services Division) STATE STREET BANK AND TRUST COMPANY 505223 (Standing proxy: Mizuho Bank, Ltd., Settlement & Clearing Services Division) Taiyo Life Insurance Company Nippon Life Insurance Company (Standing proxy: The Master Trust Bank of Japan, Ltd.) SSBTC CLIENT OMNIBUS ACCOUNT (Standing proxy: The Hongkong and Shanghai Banking Corporation Limited, Tokyo branch) Japan Trustee Services Bank, Ltd. (Trust Account 7) THE BANK OF NEW YORK MELLON AS DEPOSITARY BANK FOR DEPOSITARY RECEIPT HOLDERS (Standing proxy: Sumitomo Mitsui Banking Corporation) Sumitomo Mitsui Banking Corporation Notes: 1) Shareholding ratio is calculated by subtracting treasury stock. 2) Although Komatsu Ltd. holds 27,864 thousand shares of treasury stock, it is excluded from the major shareholders listed above. Stock Information (excluding shares of treasury stock) Stock Listings Tokyo Transfer Agent for Common Stock/ Management Institution for Special Account Mitsubishi UFJ Trust and Banking Corporation 4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-8212, Japan Depositaries (ADRs) The Bank of New York Mellon 101 Barclay Street, New York, NY 10286, U.S.A. Tel: +1-(201)-680-6825 for international calls and 888-269-2377 (888-BNY-ADRS) for calls within U.S.A. URL: http://www.adrbnymellon.com Ticker Symbol: KMTUY Number of shares held (Thousands of shares) Shareholding ratio (%) 62,825 52,363 36,906 36,633 34,000 26,626 18,484 18,419 18,018 17,835 6.65 5.54 3.90 3.87 3.60 2.81 1.95 1.95 1.90 1.88 Breakdown of Shareholders (%) ● Financial ............................35.1% 341,334,249 shares 204 shareholders ● Foreign ..............................39.9% 388,893,581 shares 1,058 shareholders ● Individual and other ...........18.2% 177,688,128 shares 190,543 shareholders ● Corporate ............................2.2% 21,797,926 shares 1,456 shareholders ● Securities ............................4.3% 42,538,576 shares 173 shareholders 56 Corporate ProfileAbout KOMATSU REPORT Published annually, KOMATSU REPORT (integrated report) provides financial and non-financial information on the Company’s efforts to realize continuous, long-term improvements in corporate value. Separate reports are prepared and disclosed to provide detailed financial information and information on environmental and social initiatives. Structure of Komatsu’s Annual Reports KOMATSU REPORT (Integrated reporting) Annual Securities Report (Financial conditions) ESG Databook (Social activities and Environmental performance) * KOMATSU REPORT, Annual Securities Report and ESG Databook, in both Japanese and English, are uploaded on Komatsu’s website. * Komatsu Ltd. issues the KOMATSU REPORT only on the website. Please refer to “Annual Securities Report” for more company and financial information. Please refer to “ESG Databook” for more information concerning social and environmental efforts. • Overview of the Company and Its Consolidated Subsidiaries • Business Overview • Property, Plants and Equipment • Information on the Company • Financial Information • Stance on CSR Efforts • Theme 1: Enhancing Quality of Life (Safety, environmental indexes, etc.) • Theme 2: Developing People (Diversity, etc.) • Theme 3: Growing with Society (Compliance, risk management, governance, etc.) WEB WEB https://komatsu.disclosure.site/en/ • Komatsu has signed the United Nations Global Compact (UNGC). Click this link for more information about the Ten Principles advocated by the UNGC and how they pertain to Komatsu’s initiatives. Komatsu has joined the World Business Council for Sustainable Development (WBCSD). 57 Komatsu’s Growth StrategiesOutline of OperationsESG IssuesCorporate Profile2-3-6, Akasaka, Minato-ku, Tokyo 107-8414, Japan https://home.komatsu/en Corporate Communications Department e-mail: JP00MB_info@global.komatsu 

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