TOKYO -- Construction equipment group Komatsu is expected to generate about 180 billion yen ($1.63 billion) in free cash flow in the current fiscal year, using the funds to increase its dividend and pay down debt.
The Japanese company plans to slash its interest-bearing debt by 300 billion yen over the next three years. The goal is to improve its finances to the level seen before last year's large acquisition of American heavy equipment manufacturer Joy Global.
Komatsu spent about $3.7 billion yen to buy Joy Global, now known as Komatsu Mining. Demand for construction machinery soared last fiscal year in North America, China and elsewhere, and building up inventories required more operating funds. Accordingly, the debt balance had climbed to 810.5 billion yen as of the March 31 fiscal year-end, up about 400 billion yen on the year. The company's capital ratio fell 10 percentage points to 49%.
This fiscal year, demand for construction equipment is seen remaining robust, particularly in China and Southeast Asia. But Komatsu plans to limit its use of operating funds as it does not need to boost inventories. As a result, operating cash flow is seen more than doubling to 320 billion yen.
Cash flow from investment is expected to stay in the red in fiscal 2018, at around 140 billion yen, compared with negative cash flow of 377.7 billion yen last fiscal year, when the company acquired Joy Global. Capital expenditures are projected at 67.5 billion yen this fiscal year, up 11 billion yen, but the company will rein in capital outflows significantly.
The 180 billion yen in free cash flow anticipated for this fiscal year would be an improvement from roughly 230 billion yen in negative free cash flow the prior year. The company plans to use half of the cash to hike its annual dividend to 96 yen a share, up 12 yen on the year. The remaining cash will likely be used to finance bond redemptions and repay loans from Sumitomo Mitsui Banking and other lenders.
The net debt-equity ratio, an indicator of net interest-bearing liabilities divided by shareholders' equity, stood at 0.4 at the end of March. Komatsu intends to cut interest-bearing debt by 50 billion yen in the current year to around 760 billion yen by the end of March 2019. It will give priority to debt repayment for the time being, but aims to lower the ratio to 0.2 or so, the level seen prior to the Joy Global acquisition, by fiscal 2020.
The addition of Joy Global, Komatsu's biggest-ever acquisition, has given the company an edge in the mining machinery market. But competition is heating up from U.S.-based Caterpillar and rivals in China and South Korea.
With its management mantra of providing innovative products and services, Komatsu seeks to build a tight-knit community of business partners and other outside companies. It now offers access to data from its Komtrax remote machine monitoring service and topological data obtained by drones.