LIXIL Corporation (5938) Earnings Call Transcript & Summary

It is time. So we would now like to start the briefing on the progress of management strategy and strengthening governance of LIXIL Group. First of all, I would like to thank all of you for joining us with this briefing session despite your busy schedule. Also, in view of preventing the further spread of coronavirus, this session is provided via live streaming on the Internet and also I'd like to introduce today's speakers. Facing the stage from left: Masatoshi Matsuzaki, Outside Director and Chairperson of the Board of Directors; Kinya Seto, Director, Representative Executive Officer, President and CEO; Teruo Suzuki, Outside Director and Chairperson of the Governance Committee; and Yuji Nishiura, Outside Director and Chairperson of the Nomination Committee. And I am Hirano of the IR office, and I will facilitate this briefing. Next, about the material for the briefing. Those of you watching the live stream, please look at the Web screen. And those of you on the call, please find the material in the IR section on the corporate website. Slide #3 of the material list announcements and releases to be covered in today's session. Next, I will explain today's proceeding. First, Matsuzaki, Chairperson of the Board, will talk about the purpose and outline of the briefing. He will be followed by Seto, Suzuki and Nishiura with detailed explanations. After the explanations, there will be time for Q&As. First, we will take questions from viewers watching the live stream on the Internet. And then later, we will take questions from those joining us on the call. We plan to finish at 6:00 p.m. We'd now like to get started. First, Matsuzaki, Chairperson of the Board. Please.

I am Matsuzaki, Chairperson of the Board. I would like to serve as moderator. In last year's AGM, the shareholders have made a decision to have Mr. Seto be back as CEO once again. And the director comprising the majority of outside directors will be supervising and auditing the executives. Also, the 3 committees under the law. In addition, we have decided to establish a governance committee, and each committee has been working very hard in order to meet expectations. Today, out of our initiatives, we have decided to focus on 3 points to explain to you. After myself, Mr. Seto, CEO, will talk about the MTP and the 3 management reforms under the current MTP that we have started. As you know, Mr. Seto, from 2018 April, have set out this current MTP and the topic or the main theme was for sustainable growth. The 3 management reform are all thinking things in a long-term perspective for sustainable growth. Under the healthy sense of crisis, we are taking country measures. We have also shared the sense of crisis with him, and the contents that he's trying to reform has been confirmed. As a result, the Board has approved the contents. The second point to be explained today is from the Chairperson of the Governance Committee, Mr. Suzuki, will talk about the merger between LIXIL Group Corporation and LIXIL Corporation. He will be explaining from the governance perspective. With the merger of the 2 companies the management execution will change, but not only that, there will be changes in the governance of the company. Until the effective date, the major -- this will be a major topic that the Governance Committee will be working on, which will be focused on in today's explanation. Lastly, from the Chairperson of the Nomination Committee, Mr. Nishiura, we have announced today the next term's director candidates as well as the appointment of executive officers. He will be explaining that this perhaps would be of great curiosity to you and as the committee, we took into consideration fairness and transparency in the election process, which will be the center of today's explanation. At the same time, the Nomination Committee, in order to prevent any arbitrary acts by the committee, we have changed some rules and regulations. So we would like to complete all the 3 presentations, and then we'd like to take time for Q&A. I would also like to serve as the moderator for the Q&A session as well. Mr. Seto, please. The floor is yours.

Good afternoon, ladies and gentlemen. Thank you for your continuous cooperation. The threat of the novel coronavirus in a surprising speed is becoming more and more serious. Our business isn't impacted in various ways. But we, as one LIXIL, would like to improve the sustainability of the business, and we are making efforts for future success. Various reforms have been started, especially simplification of organization, improvement of governance and securing transparency, reducing layers, having simple organization. Whatever difficult the LIXIL will be facing should be, we believe that all these are very important elements for us. As Mr. Matsuzaki has just explained, within the current MTP, we have 4 pillars as the center. One is establishing a purpose-driven entrepreneur company, the other is achieving competitive costing. And these 2 are deeply related to our reform. First of all, as for simplification of organization, LIXIL Group and LIXIL Corporation will be merged. I will briefly touch upon that because Mr. Suzuki will be explaining that later. Also, having a simple reporting line -- by having simplified reporting line, we would like to change into a simple and good organization. Sales, we would like to make the current double reporting into one single reporting. As for the improvement of the productivity of Japan organization, we'll be integrating LIXIL Building Technology Japan into LIXIL Housing Technology Japan in order to reduce cost and introduce new trading system as well. Next page, please. LIXIL Group and LIXIL Corporation will be merged. We had double layers -- dual layers up until now. From the Board members, LIXIL Corporation -- can only be seen through LIXIL Group Corporation. That was the problem, so we want to resolve that problem. And the dual functionality, it should be integrated into one in order to have agile decision-making and reduce costs. Next page, please. Furthermore, as for organizational changes, as you can see here, right now, the technology business and sales organization, LIXIL Japan Company, have our branch offices area -- branches in local offices, but they will have to make double reporting. In 2018 April, I -- development, production and sales should be one -- integrated into one unit in order to have agile operation. That was the aim of my plan. However, today, we have a dual reporting. So we decided to abolish LIXIL Japan Company. Water-related technology and housing-related technology, both as manufacturers, should be independent in order to engage in development production and sales. We had 8 branch offices and 50 area branches. But these 2 layers will be integrated into 1, into 17 branch offices. We will abolish double reporting, reduce 1 layer and at the same time, reduce the number of branch offices or area branches. As for -- and we will also like to streamline our local offices as well. LIXIL Building Technology will be integrating into LIXIL Housing Technology, building technology and housing technology, for example, sashes. Different organizations will -- we're developing and producing similar products. However, by integrating these 2, we will have much simpler systems. Also, we will have both -- with any businesses where WNH are overlapping will be simplified and have a common corporate function for these 2. As for the reporting line for the administration will be integrated into the headquarters. In Asia and in Europe, personnel and finance function existed. However, with regards to finance, they reported to the headquarters. But as for personnel, IT, legal, administration, we're reporting to the regional top. That has been changed so that they will be now reporting to the headquarters so that risk management will be more controlled. And cost-wise, there will be no coordination function necessary in between, which will be much simpler in structure, more modern and more agile organization. It will be different from the previous situation, where all different companies were just connected together. Next page, please. Last autumn, we announced Kawaranaito or LIXIL workforce transformation. We will change into more customer-oriented and change carrier and change the way we work. As for being more customer-oriented, we still used to do more B2B business. We only looked at partners, but now we would more focus on end users. So those who have been working on businesses will now work -- some of them will work for end users. Also by reducing some of our administrative functions, they will also be shifted to end-user jobs. That is talent shift. As a result of talent shift system, there will be customer support necessary and people at showrooms as well, we thought that those were secondary compared to business -- B2B business. We used to outsource, but we would now like to use our personnel and we can reduce outsource cost as well. In changing career of people, our organization has a lot of middle- to senior-aged employees because of the strategies in the past. As a result, the management are mostly comprised of senior population. But now, we would like to provide a platform where both the younger generation as well as the senior generation will be able to work. But if we do so, the senior people may lose the place to work. So -- and these people may seek for different opportunities to work at. Depending on the contribution of the past, we would like to provide them career option system. We had 500 people apply to organize -- to vitalize the organization and to rejuvenate the organization. This is effective. And if we want to streamline and make a leaner organization, then we may be short of human resources. Meaning that we will have to be more productive by having teleconference systems as well as flexworking and teleworking as well. Because of the coronavirus panic -- well, this effort that we have started from last autumn was very effective in the situation that we are facing today due to the coronavirus panic. We were able to become a leaner and more effective company. But we will not stop here. We would like to become even more leaner and become a company closer to a customer with a good business performance. With this, I would like to end my explanation. I would like to now ask Mr. Suzuki to talk about the merger.

This is Suzuki, Chairperson of the Governance Committee. First, regarding the merger of LIXIL Group Corporation and Excel Corporation, I would like to provide the background and the proceedings that led to the decision for the merger. Since the previous AGM, the new Board has been studying the governance structure of LIXIL Group and LIXIL Corporation and we've had multiple discussions in the Board about governance. And in parallel, the Governance Committee has also looked at this governance issue, LIXIL Corporation being the largest subsidiary in the group and having the current structure was obstructing a group-wide governance. The Executive Team was well aware of this issue. Therefore, the merger of LIXIL Group Corporation and LIXIL Corporation, along with some other reform initiatives, were submitted to the Board of Directors from the Executive Team. The Board then studied those proposals, and this led to today's announcement. The merger of LIXIL Group Corporation and LIXIL Corporation, what is the significance and the purpose of this in terms of governance? As you can see on the slide, first and foremost, we would like to strengthen monitoring and supervision by the Board of Directors, and this encompasses such elements as the pursuit of effectiveness of monitoring and supervision. In the past, the Board was mostly responsible for monitoring and supervision of the portfolio management of the holding company. However, the Board of Directors need to monitor and supervise the business operations. The second point here is to improve the management transparency. As you heard earlier from our President and CEO, dissolution of the 2-tier structure will lead to the Board of Directors supporting the decisive management executions of LIXIL, particularly on the execution side. The governance structure as a result of the merger and the reorganization will undergo significant change. This leads to group-wide governance enhancement and efficiency in management. As this was touched upon earlier, this enables faster decision-making. It also eliminates duplication of management and human resources. This reduces additional operating costs as well. And also, this enables improvement of management control and supervision across the group by headquarter function. Based on this background, the significance and the purpose of the merger is to, first, eliminate the 2-layer structure. The Board of Directors and each member of the Executive Team will thereby monitor and supervise the business more actively so that they may respond to the company's shareholder mandate. If you could now turn to Page 11 in the PowerPoint slide. This shows the previous governance structure before the merger. We have the holding company, LIXIL Group, at the very top. And between the holding company and the group companies, we have operating company, LIXIL. This is the largest operating company in the group, and this entity has its own Board of Directors as well as corporate auditors. The parent company -- holding company has the Nomination Committee and the compensation Committee as well. The LIXIL and its subsidiaries account for 70% of the group's total sales. This speaks for the significance of the LIXIL Corporation. In the previous structure, LIXIL Corporation was operating as a -- more like a pure operating company. It was managed and supervised by the holding company for its business portfolio. For the group companies, it was LIXIL Corporation, the operating company, that manage and supervise the business management. The group companies had to experience delay in decision-making because of the 2-tier structure between the LIXIL Group and LIXIL Corporation, and this also required additional coordination efforts. Through the merger, LIXIL Group and operating company, LIXIL, will become one and integrated. If you could now turn to Page 12 in the PowerPoint. This shows the governance structure after the merger. We have the holding company, which is the LIXIL Group, and operating company, LIXIL Corporation, will be merged. And with the Nomination Committee, Compensation Committee and so on, with the Governance Committee also, they will monitor and supervise the business portfolio and business management of the group companies and there will be enterprise-wide control across the group. The management functions will be integrated, allowing enterprise-wide control through centralization of core functions. However, this proposed merger was not to be implemented right away. We continued our study in the Board and also with the executive team, and we determined that the best approach is for the holding company, which is the parent company, to absorb the subsidiary, the operating company, LIXIL. Looking back on the history of the company, LIXIL Corporation has a number of permits and licenses for operating construction business. So there was another approach to this merger. The reverse merger in which operating company, LIXIL, absorbing holding company was one possibility. However, we determined that it will be problematic for the structure of the LIXIL Corporation to survive through the merger. Therefore, we determined that it will be best that LIXIL Group be the surviving company through this pure absorption-type merger. So permits and licenses currently held by LIXIL Corporation will be transferred to the LIXIL Group, and this requires that we follow certain procedures and this requires time. Therefore, the effective date of merger is currently planned for the 1st of December. And now please turn to Page 13 in the PowerPoint slide. As I've just explained, in relation to the licensing by the government agency, this merger cannot take place right away. However, elimination of the 2-tier structure between LIXIL Group and the operating company should take place as soon as possible in order to strengthen the group corporation's corporate governance. Therefore, prior to the conclusion of the legal proceedings, planned for December 1, 2020, effective April 1, LIXIL Group Corporation and LIXIL Corporation Management will be integrated, enabling agile operations. This we call advanced integration. LIXIL Corporation is a 100% subsidiary of LIXIL Group, and we have already made efforts to have more integrated management. So we will continue these efforts. And effective April 1, we will have a new structure in place. And we will, in fact, be operating as one. The Governance Committee will confirm that this transfer to more integrated management will take place in a smooth manner and how the oversight and executive should be divided in the future. And the new organization should also be studied. As Chairperson of the Governance Committee, that's all for me to report. Thank you very much. Next, Mr. Nishiura. Please.

Good afternoon, ladies and gentlemen. I'm the Chairperson of the Nomination Committee, Yuji Nishiura. I would to talk about the way of thinking of the appointments of directors as well as the executive officers. Please look at the contents. As for #1 and #2, we would like to explain the appointment of director candidates for the next term; and #3 and #4, about the appointment of executive officers. And the way of thinking and policy of Nomination Committee will be explained at #5. When you have opportunity look into the materials, in Appendices #1 through #3, you will have some details more elaborately. So as for the next slide, the results of the appointment of director candidates for the next term. This gives you an overall picture. As you can see on the left hand, current term, we had 14 directors, 5 internal directors and 9 outside directors. If you look at the far right, candidates for the next term will be 9 in total, 3 internal and 6 outside directors. This will be the composition. If you look at the persons to be retiring, 7 people out of the 14 will be retiring. This will be a significant reduction of the number of people. There are 3 points that I would like to focus on. First, as I just mentioned, the -- we have reviewed the scale of the Board of Directors. Secondly, the ratio of outside directors have been increased largely. The corporate governance guideline states 1/3 of the total. However, in our case this time, 2/3 are outside directors. Number three, although not stated here in the election process, diversity of Board of Directors, including attributes as well experience and skills and knowledge, have been taken into consideration. This is the overall picture. Next page, please. The election process for the next term's director candidates, please focus on just 3 points. As for A, composition of the Board of Directors. Before going to concrete process, we summarized the results of the questionnaire survey of all directors, the scale of the directors as well as the ratio of inside and outside directors have been discussed. As a result, 9 or before, below 10 was considered to be appropriate before going into the selection process. And if you look at the outside directors’ column, it says we held a vote with all directors. This perhaps would be -- is very unusual in Japan. Both for internal directors and outside directors, excluding themselves, have voted on those who they want those people to be continuing as directors. And also the background of why they selected or voted, we conducted individual hearings. As for internal directors, we did not go into a voting process, but we organize viewpoints regarding appointments, not the executive officers or executives who are overseeing business. For example, CFO, Mr. Matsumoto, who is in charge of the corporate function, who is overseeing the whole company, was the person we prefer to be invited into the Board member to play a role of a bridge between the employees and the Board. Next page, please. The results of the appointment of executive officers for the next term. Needless to say, the legal authority of selecting executive officers is not included in the nomination committees, right? However, in this company, the Nomination Committee will be making recommendations to be provided to the board. So in today's Board of Directors meeting, the idea proposed has been resolved. As a result, executive officers for this term was 9. But as of April 1, from next term, we will have 8. One more point that I would like to add is the term of the executive officers. Up until today, after the AGMs, BOD, the executive officers were selected. And for 1 year, they had the tenure. However, we thought that it would be more reasonable to align executive officers' term of office with fiscal year. So it will be from 1 year from 1st of April. And accordingly, we have decided to amend the articles of incorporation. This will be submitted to the AGM this year for resolution. This is the result of the appointment of executive officers. Next page, please. In the process of executive officers, I would like you to see steps 1 and 2. The -- how the Nomination Committee will be involved in the process of selecting executive officers, there were a lot of ambiguities in the past. So we decided to change. That exclude ambiguity, also exclude any arbitrary decisions and revised rules and guidelines for the appointment of executive officers. And then in step 2, as you can see, we performed individual interviews as the Nomination Committee. If you look -- can look at step 5, for retiring and new candidates as well as those to be reelected, we also conducted interviews and confirmed their individual intentions. Those were the way of thinking in process of selecting Board of Directors and executive officers. And lastly, I would like to add a little more on the overall concept. First, if I may repeat, we wanted to prevent arbitrary interpretations, abuse of systems and out-of-control actions. In order for that, we decided to revise the Nomination Committee's rules and Corporate Governance guidelines. And number two, we enhanced minutes of committee meetings. This has become much better. All Board of Directors can view the minutes freely. Number three, in order to eliminate bias in opinions and decisions, as I mentioned earlier, the composition of Board of Directors and election, we have reviewed policies, standards and procedures and also collected the opinions of all directors. And in this process, the individual directors' current circumstances, intention and the observation of -- within the Board of Directors have all led to the selection. Number four. We formulated a CEO succession plan. Well, this is still, as a matter of fact, halfway. Up until today, as a Nomination Committee, we have positioned that the selection of CEO succession plan is a clear role of Nomination Committee. And there are more than 10 people in the pipeline as of last autumn, but we believe that this pipeline needs to be renewed every year and the evaluation criteria should be more clarified. And number five. Shareholders, executive officers and employees, there are a lot of stakeholders. So we would like to promote interviews with the -- these stakeholders. Still, this is not sufficient enough, but we would like to further promote interactions. So the activity of Nomination Committee tended to be believed as a black box, but we would like to be more open and transparent in order to gain the understanding of shareholders and employees. This will be meaning that we would have the acts of Nomination Committee be supervised by the shareholders. So far, I have talked about the appointment of director candidates and executive officers and the process. Perhaps, there will be questions, but I would like to add by answering to your questions using the appendices. Thank you very much.

Thank you very much. So now we'd like to have a Q&A session. First, we will take questions from viewers watching the live stream. And because of -- in the interest of time, we can only accept questions until 5:50 on the Internet in the chat box. I'd like to now read out the first question. This is a question from Fukushima-san of Nomura Securities. Please confirm the reported segments for year ending March 2021. So LBT domestic division will be integrated to LHT and H&S. This is the sales development division. Does that mean H&S segment will be gone? How is DNR positioned?

We have not taken consensus yet on disclosure, but H&S and LBT in principle, for the sake of convenience, we will disclose the results. But in the future, H&S and LBT, in the past, LKT was integrated with LWT. So we will follow the same approach, and we will have more simple disclosure, but we will continue to disclose numbers for the time being.

Okay. Next, we have an English question. Please use the receiver. From Platinum Asset Management, Jamie Halse.

Could you please give more detail on the new trading system you described for Building and Housing Technology?

New trading system? I don't understand. What is the trading system? Oh, pricing. Basically, it's going to be same as we price in 2018. So basically, we are going to give that pricing to customers having the more functions, and that means that we do not need to give them that to the customer service to the customer. He can get it at favorable pricing. And so this is going to be at a very fair and structured pricing system applied to Building, too. And I think that compared with LHT-J, LBT-J has more a bigger customer. So that means that there were more a negotiation leverage. But we will try to apply this new pricing trading structure to the LBT-J, too.

So are there any questions from participants on the Internet via live stream? If not, then we will now take questions from people on the call. Are there any questions? If not, although it is early, but it seems that there are no more questions, so we would like to finish this briefing session. If you have further questions, please contact the IR office. We would like to respond at that time. Again, we are a bit early, but this concludes the briefing on the progress of management strategy and the strengthening of governance of LIXIL Group. Thank you very much for your continued support. [Statements in English on this transcript were spoken by an interpreter present on the live call.]