LIXIL Corporation (5938) Earnings Call Transcript & Summary

[Interpreted] Thank you very much for waiting. It is time for us to start the briefing for Q1 results for the fiscal year ending March 31, 2025. I would like to introduce to you the presenters. Director, Representative Executive Officer, President and CEO, Kinya Seto; Executive Vice President, and Chief Financial Officer, Mariko Fujita; Leader of the Investor Relations office, Aya Kawai. Serving as the facilitator is from IR office. My name is Setoguchi. The materials for this briefing is on our website for the in the corner for Investor Relations. Today's proceedings is as follows. Mr. Seto will explain about the performance for Q1. That will be followed by a question-and-answer session. [Operator Instructions]. Now President Seto will explain the Q1 results for fiscal year ending March 31, 2025.

[Interpreted] Thank you very much for being here. I would like to start the presentation. I will be talking about the performance for Q1. As I have said in the last briefing, for this fiscal year, we have said that we will see the difficult situation, and we will continue our structural reform. The environment continues to be difficult as we had expected. From January of this year, in Japan, the number of housing starts, had been lower than it was originally expected. For July to August, it is said that the new housing starts will be reduced by around 10%. However, the renovation demand was higher. And because of that, we have been able to perform as we had planned. In terms of the overseas business, as we have been saying since last year, the U.S. and Europe has seen a rise in the interest rates. And because of that, the demand has been sluggish in the housing market. The situation has not been changed. The sluggish situation in China has not changed either. The only good regions are India, and near East. We were in a very severe situation. And for the first quarter, we are almost at the breakeven level and the numbers are almost the same as the previous year. It is just as we had expected. As for the domestic market, we had seen a decline in the demand for new houses. However, we have been able to offset that with increase in the renovation demand. As for LHT, the window renovation demand has recovered, and we are seeing gradual recovery in that area. The situation for both LWT and LHT, are as we had expected. As for the overseas market, there are fluctuations in the U.S. and European market. When we look at the market objectively in the United States, the new housing starts had seen recovery. On the other hand, renovation demand is not so high as a result because we are strong in retail, the sluggish sales in the retail market had negatively impacted us. And also, there was additional write-down for DPI and because of that, U.S. had seen sluggish sales. However, in the European market, we had done better. The new housing starts in Europe is sluggish as well. However, we have been able to recover in our market share and order intake is increasing. So U.S. market and Europe are offsetting each other, and we have finished first quarter as we had planned. There are some signs of recovery, and we may see better second half. However, in July, the situation has not changed. Europe was relatively good, and U.S. was not so good. We have said that we would continue structural reform. And because of that, we have invested in that area. As for DPI, there was additional inventory write-downs. There was increase in the tax cost. So because of that, it impacted our performance. However, for the operating cash flow, it has been generated steadily and free cash flow was JPY 14.6 billion for the first quarter. The inventory is coming down, and we need to manufacture more for the overseas market. I would like to talk about the current status for fiscal year ending 2025. The new housing starts is sluggish. However, we are seeing increase in the visitors to the showroom from the mid- to end of May, we saw increase in the visitors. And in June, we had steady inflow of visitors. In Japan, when the customers come to the showroom, they would be conducting the renovation at 3 to 6 months out. And this would tell us that we would see better situation towards the second half of the year, and that would be positively impacting LWT. Towards the third quarter, we will be launching new products in almost all of the categories. We would like to capture the capture the demand from launching new products. As for LHT, this is a business centering around new housing. However, with the demand for renovation for doors, we are seeing positive movements, and we would be focusing on the overseas markets, and we believe that for the future, we will have strong performance. As for the overseas market, excluding India and near East, the situation is not so good. If we look at the end user market in Europe, U.S., China, we are seeing difficulties. For Asia, the first quarter was bad. But from second quarter on, we are seeing signs of recovery. In India and near East, we are seeing a steady growth. And we are seeing good performance in the water technology area. For the U.S. the new house demand is increasing. And our performance under that situation was not so good. On the other hand, for Europe, there was no objective recovery in the market, but the order is increasing in Europe. There is an increase in demand for showers, and those were individual demand. And as for the U.S., overall, when there is an increase in the new housing, the companies which are strong in trading will do better. And if the refurbishment demand does not go up, the retail remains weak. So in the U.S., we are dependent on the retail market. And because of that, we were sluggish. So another reasons for not doing so good was because of the DPI write-down. But in the second quarter, we would not have that kind of negativeness. So we will do better. So in the U.S., overall, we were sluggish. But if we look at the overall share from the previous year, in fiscal year 2023, if we look at the market data, the volume had been coming down for other companies. But for the water faucets as well as the toilets, we had increased the volume. However, for the bathtub, we were sluggish. And we need to work on this for its recovery in the coming years. So there may be some macroeconomic changes like the interest rate cut, but we will be responding towards that by improving our supply, and we would like to continue to conduct restructural reform, inclusive of the HR matters. We believe that the U.S. market will recover sometime during this year. But in U.S. and Europe, we would expect it to stay sluggish and we will do whatever we can.

[Interpreted] And the results for the first quarter. Based on what I have just explained basically speaking. As for revenue, we were more or less at the level we were at a year ago. And the core earnings were just slightly over breakeven as we have expected. But for profit for the quarter, because of the structural reform that we are working on or the increases in tax expenses, this has caused us to register a profit for the quarter below the level last fiscal year. So for the result for the first quarter, as I have explained for the international business, there was a DPI issue, which has caused the profit to come down. And this is reflected in a gross profit ratio, and core earnings ratio has deteriorated by 0.9 percentage point year-on-year. LWT for Japan and international business, slight increases, but the international business is still on the way for recovery. As I've explained before, LHT, as I explained before, the sales for new health that has been made up for by renovation. But we are starting to see these results generated gradually.

[Interpreted] As for the interest-bearing debt due to impact from Forex, there was increase, but it is not a significant change. Last but not least, is the cash flow, which I mentioned a little bit earlier. Cash flow continues to be good. So JPY 14.6 billion for free cash flow. And compared to last year, there was improvement by JPY 50.2 billion. Going forward, when the U.S. and European market demand recovers in full scale, we need to increase our inventory because our inventory level is relatively low at the moment. So that is the brief overview of our business, and we would like to take your questions now.

[Interpreted] Thank you very much. We would like to now take questions. [Operator Instructions]. In regards to DPI, we have to really ask the question first. I apologize. So I would like to introduce the first question. And the first question is from Fukushima from Nomura Securities. And there are 2 questions, but I would like to go one by one. And the first question, I understand that there were additional inventory write-downs associated with DPI, but how much was this actually? And what's the current level of inventory? And what is the outlook for DPI going forward?

[Interpreted] In regard to DPI and there is a loss above and below the core earnings and above about $6 million, which is about JPY 900 million. And we have all dealt with this completely. And so we're not going to register additional losses for DPI going forward.

[Interpreted] We would like to go to the second question of Kushiba san. You are conducting structural reform in the international market. In the Americas, Europe, could you refer to how the status is currently? What was the structural reform cost for the first quarter after the second quarter, how much will you be spending for structural reform. When we will be seeing positive impact from the structural reform and in terms of the value, how much would the positive impact be? And also in the fiscal year-ending March 26, the structural reform costs would remain. Has that remained unchanged?

[Interpreted] So there are several hundreds of hundreds of millions of yen for the first quarter. In the second quarter, we are considering some costs to be incurred. And in the case of structural reform, it is very difficult for us to talk about the future. As an example, for factories or in the sales offices are or for the talents who are working in the sales office, we would not be able to talk about the future in terms of the structural reform for those matters because of the legal issues. From the second quarter on, we believe that the positive impact will be seen. And from the third quarter, there would be even more impact in the positive. And there will be some things remaining for to be done for the structural reform in the fiscal year-ending March 26, but we will be doing whatever we can this fiscal year. But of course, there are some counterparties that we need to negotiate with. Sometimes the government is involved. So we would not be able to necessarily finish everything by the end of this fiscal year, but that's our goal.

[Interpreted] Next question is from Fukuhara san from Jefferies Securities.

[Interpreted] Two questions. And the first question. So how much was the DPI inventory write down? And what was its nature? Was it limited to first quarter? Was it included in the plan at the start of the fiscal year. From the second quarter onwards, can we expect the U.S. business to register profit and additional personnel measures would that does that mean the additional JPY 10 billion that you have registered in the previous plan regarding annual structural reform cost?

[Interpreted] Well, in terms of the write-down, we are somewhat embarrassed by this. And in March, so DPI had this level of inventory in this amount of write-down. We did that kind of evaluation at that point in time. But when we were to sell, we were able to sell that was the fact. And so it should have been something that we could have registered in the previous quarter. But unfortunately, when it came time to sell, the market was weaker than what we had expected or the DPI inventory was not evaluated at the level that we had expected. So that led to this write-down. From the second quarter onwards, we are working to register profit. And from third quarter, we're quite sure that we can register profit. But in the second quarter, we are implementing various initiatives. And so we don't expect anything special like the DPI. But in that regard, we are seeing a gradual improvement. And from our perspective, we feel that we are okay for the second quarter. And the JPY 10 billion additional, this is quite a rough number because we are doing various things at this moment. And so like Fukushima explained, for March 2026, to make that 0 or no. Now if we were able to do that, then we don't expect this to increase. But at this point in time, we have not changed this number of JPY 10 billion.

[Interpreted] The second question from Fukuhara san.

[Interpreted] So you would be improving the cash flow. And how would you be conducting the shareholder returns? Is there any risk for decreasing the dividend? Would you be conducting the share buyback? Is there any possibilities?

[Interpreted] As a CEO, I would not be able to talk about the dividend because the determination of the dividend is being made by the Board of Directors meeting and it's not my place to say. And in terms of the dividend, we are not thinking about increase or decreasing the dividend. And in terms of the share buyback, it is a onetime thing, and in the event where we currently, we are not thinking about the share buyback and less than something that unexpected happens.

[Interpreted] Next question is from Takigawa san from Mitsuru Asset Management.

[Interpreted] Two questions. And the first question is, Mr. Seto is considered to be one of a very strong manager of our company, but please explain as to why where you are struggling to manage this company? I think it is because of you who has the losses to this level. But what are some of the unexpected thing that is continuing external factors are likely to change going forward? And it's difficult to see the profit level at business-as-usual level. And so what level of profit are you to achieve by when?

[Interpreted] Well, I don't know whether I've been praised or whether be scolded, but I would like to express my appreciation for thinking of me highly. Now the biggest factor for us right now is that the European profit that has continued to support us quite significantly is not contributing at the same level because of the housing market slowdown in Europe. So if the U.S. and Europe go back to 3 years ago, the economic the situation, we should be able to get the JPY 100 billion of profit and 7.5% of the earnings ratio could be achieved. And we should be able to get back to those levels within 2 years on the assumption that the markets return. And 10% further beyond. I think it's a little too early to premature for us to talk about that now, but that is where we want to aim for in the end. Now it's not that we didn't expect it, but the earlier arrival of the new housing starts coming down all of a sudden, so it was some of them the unexpected that the new housing start in Japan dropped at this level. But I think against the level of population, the new housing starts in Japan were quite high. And what has supported this was the low housing for lower income owners. And so we should have expected this given the inflationary environment that this will slow down. But it was as a result of not being able to assume that we expect the situation as we should have. And the difficult situation for managing this company, well, there is nothing that I can refer to as a means of excuse. But if I'm to point to something, the business portfolio of this company is somewhat low in terms of profitability. And we are a company with many assets, many facilities. And if that is the case, then when the demand comes down, then when the utilization comes down, then the expenses and the cost fixed cost for those factories and to cause us a significant burden. The challenge going forward is that, and on this occasion, we do expect recovery to come. But in the future as well, there could be some reasons that could cause demand to come down, but we have to still generate profit. And in that regard, we need to think of becoming more asset-light. And I apologize for closing of worries. But from our perspective, we are confident of being able to return the level.

[Interpreted] Second question from Takigawa san.

[Interpreted] So have you been able to nurture successors?

[Interpreted] Well, I think that we have been able to grow a good talent and so there are many talents who have been developed within the company who are now able to work in the international market and I think that the successor of me it should be coming from inside the company.

[Interpreted] Next question is from Mochizuki from CLSA Securities.

[Interpreted] Two questions. And the first question is the recent spot on the copper alloy pricing is probably transitioning at a level that is above the company's plan based on yen-denominated pricing. When this increase in the copper alloy price be reflected in the performance this year, next fiscal year?

[Interpreted] For spot 6 months out, it should really be reflected. But on the other hand, more recently, the volatility has been quite high. And so this type of copper alloy price increase in paying premiums for the -- or charging premium, we now are able to charge premiums. And so just based on this reason, we're not expecting our performance to come down significantly as if this was the case previously.

[Interpreted] The second question from Mochizuki san.

[Interpreted] The core earnings ratio of growing has recovered to 5%. Has it gone above the corporate plan? Could you elaborate on the business environment, the revenue trend as well as margin?

[Interpreted] So it is true that it was better than expected. For Europe, the demand has slightly recovered, especially in the area of shower. We have been able to regain the market share. There was mention about the copper. So when the copper prices went up, we had increased the price for the shower. And for shower, it's almost all plastic. And because of that, we have been able to improve the market share because the customers did not follow suit. And the wholesalers are now buying. And I think that people are more optimistic about this market. As I have said, the new housing starts in Germany and France, it is still a pessimistic situation, but depending on the wholesalers, there are companies who feel that the market will be improving. And I think that we see positive signs, but we have not gotten to the level of recovery, which we want.

[Interpreted] Next question is from Kawashima from SMBC Nikko Securities.

[Interpreted] It seems that the pace for applying for subsidies for the window renovation business is somewhat slow, 22% as of July 30th. Is that because the demand has started to settle down? Or can we see further improvement towards the end of the year based on effort to capture additional demand? How are you reading the market right now?

[Interpreted] Well, the situation that you have referred to is what we are seeing. In fact, last year, the subsidy as when it was introduced, then the market rumored that the subsidy could be used up immediately with a very large number of orders, and that could have potentially laid for a long delivery timing. But this year, the start has been somewhat slow. In fact, quite slow. In that regard, 22% as of 30th of July is slower than what we had expected. That is a fact. But if we look at the situation for us alone, 135% year-on-year increase of 135% so JPY 100 billion becoming JPY 135 million. So that's the kind of level we are seeing for us right now. But our competitors in comparison to last year, showing less than 100% in some instances based on what we have heard. And so in that regard, for Japan, overall, we have this 22%, but we want to capture this type of opportunity more and this is what we are thinking. And as for large change, in fact, there are 3 different changes. First is that because of the extreme heat in summer this year, the air conditioner demand increases. And so there is an increase in window renovation demand associated with that. The second is the increase in energy cost. And so there are people who purchased the window for renovation in that in mind and for winter. Last year, the subsidy almost ran up. But for winter demand period, we may be able to achieve growth because of the current consumption rate of the subsidy. So it's something that could be different this year vis-a-vis last year. And the difference from last year is that we can now use the subsidy for doors. But it's partially due to a lack of effort. But based on our investigation, the consumers, the renovation for the window, majority of people still don't know about this program, the fact that one can renovate the window and there is subsidy provided. In fact, less than 30% people aware of this type of program. And so we need to make the effort to have these people know about this type of program, which should cultivate some demand. So our corporate effort is required or the effort as the industry may be lacking in that regard.

[Interpreted] Next is a question from Yagi san from Morgan Stanley.

[Interpreted] The first question. The core earnings for LWT International business is expected to significantly recover the international LWT's core earnings for first quarter was as expected. I think the situation is different for ASB and GROHE, but could you elaborate?

[Interpreted] As for the core earnings for LWT overseas, we had set it up so expecting that their demand will not increase. In the first quarter core earnings is we had expected, but the U.S. has been worse than we had expected. And on the other hand, in near East and Europe, it was better than we had expected. So as a result of that, it has resulted in the performance as we had expected. And when the U.S. returns to normal after all of the issues of DPI had been resolved, I think it would do better.

[Interpreted] The second question and I think you have described that there is a recovery at was the in the sales to the distribution with the expected rates coming down for Europe in the first quarter. But can we see sustaining the trend of the recovery right now? And what are some of the factors for you to expand the market, please explain about the demand forecast for Europe.

[Interpreted] Well, when we look at how they start the forecast in the market, they are not really showing a recovery trend. But for us, as for orders, we are just hardly keeping up with the manufacturing for some product against the orders received. So I'm not saying that this is a situation overall, but we are starting to see products that are selling better. And that is the situation quite different from last year. But on the other hand, and this is just a side information, but the square competitor, they are, I think, adopting a view that there will be a pickup towards the second half of the year. And so what's happening with us should also occur to others. And so some companies are starting to take on more aggressive views. But numbers shown statistics and based on the interest rate, we are not seeing the notable the pickup, but we are seeing increase in orders and the change, the interest rate change could be quite significant.

[Interpreted] The next question is from Mr. Okada from Goldman Sachs.

[Interpreted] There are 2 questions. The first question, the LWT business in the domestic business had increase in revenue, but the core earnings ratio has come down. What is the background for that? And what is your prospect for the future?

[Interpreted] There are some temporary issues. The appraisal for the past inventory impact from that was coming has seen in the impact on a later date. And also, there was impact from inflation. And in LWT and LHT, there are some differences. For the water-related products, I mean the showrooms, there are a lot of quotes, which has been requested. So for LWT, we believe that the core earnings ratio will be going up. And when there are new products launched, the revenue and the profit tend to go up. So when the new products are launched, the situation will be better. And generally speaking, our products for the construction materials as well as the interior products. The earnings ratio tends to go lower as they age, and we need to launch new products in order to maintain the profitability. And I think that with the new launch of new products, it would improve.

[Interpreted] The second question, it seems that the original sales growth rate of a LWT business overseas seem to be somewhat weak against the company plan. Can we see a recovery in the second half of the year?

[Interpreted] Well, the company plan was a weak growth to start with. And so it's not the case that we are significantly behind against the company plan. But regionally speaking, the U.S. is not as strong as we had expected in China, but as for Europe and the Middle East, the situation is better than what we have expected as explained previously. And so there, we expect to be able to make up in the second half of the year to an extent.

[Interpreted] The next question is additional question from Fukuhara san from Jefferies Securities.

[Interpreted] LHT business, revenue for first quarter was JPY 137.1 billion. How do you see internally seasonal season wise, the revenue is expected to increase. But how do you think about the accuracy of the achievement of JPY 595.5 billion plan for the full year. So how is it compared to the previous year?

[Interpreted] So the first quarter, JPY 137.1 billion, it was lower than we had expected. The new housing starts had been lower than what had been expected in the market. On the other hand, as for the renovation, there was a recovery from April compared to the period of transition from the change in the program. So we believe that there would be further improvements in that area.

[Interpreted] How do we see the future?

[Interpreted] I would like to work on the improvement in getting the orders, which involves the usage of the subsidies for renovation. Also, the exterior and SAS shares are increasing. So we believe that we can achieve the annual plan, there are various plans and projects going on, and I think that the international market will grow further.

[Interpreted] So we have responded to all of the questions that we have received thus far, but we still have some time. And so we would like to welcome further questions from the participants. [Operator Instructions]. We still have some time left. And so we will be able to respond to additional questions from participants? We have received an additional question. And the question is from Fukuhara from Jefferies Securities.

[Interpreted] What are you thinking of in terms of the balance between first and second half of year in terms of profit?

[Interpreted] Well, I think this is something that we have explained previously. It hasn't changed very much. Second quarter to fourth quarter slide. And but this type of breakdown has not changed very much. About 1/3 in slightly less than 1/3 in the first half of the year and slightly more than 2/3 in the second half of the year and particularly October to December is going to be the key. But many things that have happened, but we are taking somewhat of a conservative view.

[Interpreted] We have been able to respond to all of the questions which have come up to this point. There is additional question from SMBC Nikko Securities, Kawashima's question.

[Interpreted] The price optimization impact has been able to cover the impact from the raw materials. But if you consider the addition in the cost for others, would you need further price optimization, we are considering that. What was worse than we had expected related to the aluminum procurement was the Forex?

[Interpreted] We were able to make progress in hedging. But related to copper, we are seeing a flat price decline, but there is a possibility of a price hike there. So we have to think about the response should that happen. Overall, the zinc plastic usage is what we would like to increase in terms of the product rather than using brass. So we will be considering various options. But we are considering further price optimization.

[Interpreted] Next question is from those of Japan value investors.

[Interpreted] So even if we do not see a full-on recovery of new housing starts in Japan and international market, can we expect to see increasing sales and profit over a medium term centered around renovation demand. Domestic, the new has started, we're not expecting recovery and going down going forward. So for domestic business going forward, we need to really respond to the renovation business, and we want to achieve increase in sales and profit for the Japanese business by focusing on that area. That general course of the region has not changed. And the last 2 years, saw a significant decline in the new housing starts, but we have been able to respond to that to an extent based on the Japanese business. And so the new housing starts. So there was a rapid increase in the materials for new housing. So younger, the first the income earners and their demand has essentially disappeared. Would that become a pent-up demand? Or will they go to the used health market renovating us. In some way, there will be implications of that. And so the new housing demand, the decrease will be more gradual, but if we are able to improve the renovation, not maybe an immediate basis, but we should be able to achieve increase in sales and profit over the medium term. But for international market, new health will return because there is an increase in population and there is more income. And right now, because of the high interest rate, people are not investing in housing, but rather they are buying something else. That's where the demand is going. But housing is something that is required over a long term. And so not seen a full recovery is not possible in my view.

[Interpreted] The next question is an additional question from Okada san from Goldman Sachs.

[Interpreted] In the European market, after the pandemic, there are some situations where the competitors have gone bankrupt, and the players seem to have decreased. How is the competitive environment?

[Interpreted] So the high end, there are high-end players who have gone bankrupt and also IDL standard who had been struggling for a long time. So they have not gotten much share. So there is not much difference in the environment for competition. So for water faucets, [ Hans Core ] is the biggest competitor and the others are all small players and outside of Geberit for flushing systems, we don't see many competitors. So sanitary ware is where there are a lot of competitors. We have not established a positioning in the sanitary ware. So in terms of the situation, not much has changed. In any case, in Europe, the competitive environment does not lead to any change in the prices like price decline. So the competitive environment is impacting more in prices in the U.S. market.

[Interpreted] This question is from Teraoka san of Daiwa Securities.

[Interpreted] Can you explain in more detail the reason as to why your market share is increasing for [ Share ] in Europe?

[Interpreted] Well and we are regaining back where we had kind of failed in terms of pricing strategy. So copper price went up and the share price also went up at the same time. But others did not follow. And so we are making corrections to that situation. That's the first point. And recently, for sharers, for us, we have been able to launch many popular products. So Tempest will be one good example, but this new product has become quite popular. And on a global basis, there are many changes, but the demand for [ Shares ] itself is probably the strongest.

[Interpreted] We responded to all of the questions that have come up to this point. We still have some time left. [Operator Instructions]. It seems that all of the questions have already arrived. So we would like to conclude the Q&A session now. With this, we would like to conclude the briefing for the first quarter briefing for fiscal year-ending March 2025. We ask for your support for Lixil. Thank you very much for coming today.