LIXIL Corporation (5938) Earnings Call Transcript & Summary

We will now begin the LIXIL Corporation the first quarter for fiscal year 2026 (sic) [ 2027 ] ending in March 2027 financial results briefing. This information session is conducted via live Internet streaming. Materials for this briefing are available on our website under Information for Shareholders and Investors. Please refer to the materials. Let me introduce today's presenters, Kinya Seto, Director, Representative Executive Officer, President and CEO. Thank you. Next, Mariko Fujita, Director, Senior Managing Executive Officer and CEO (sic) [ CFO ]. Thank you. Next, Aya Kawai, Managing Executive Officer and Head of the IR Department. Thank you very much. I am Kobayashi from the IR Department, and I will be your moderator today. Thank you very much. Now, I will explain today's agenda. First, our CFO, Fujita, will give us an overview of our financial results. Following this, we will have a Q&A session. During the Q&A session, CEO, Seto, will also join to answer your questions. This briefing session will be ended at 2:45 -- at 2:40. Now, we would like to ask Fujita-san to start explanation.

Hello, everyone. At the beginning of this meeting, I would like to express our condolences on the part of the company to the victims of the Kumamoto earthquake. We will work together with business partners and with our employees to support the reconstruction of the affected area. Let me begin with the earnings results. Today, I would like to focus on the full year forecast mainly. First of all, the Q1 results will be introduced. The revenues increased and earnings declined. The LHT aluminum price increased. And the renovation ratio has declined overall. That is the reason why we ended with lower earnings. Regarding aluminum price, please refer to the right-hand side. Next, I would like to talk about the forecast. After consideration, we have remained with no change in terms of full year forecast. From the second quarter, cost impact will be full-fledged. And the price revisions will gradually take effect from Q3 onwards. There is a lag in terms of the impact. Therefore, for the full year forecast, we believe that the original plan can be achieved overall. For Q1 and Q2, cost increase will occur how -- and with less earnings. But in the second half, we believe that recovery can be achieved. And there is no change in terms of dividend forecast as well. Next, I would like to talk about the impact of the recent situation in the Middle East and our countermeasures. First of all, in terms of manufacturing supply, cost inflation as well as supply concerns existed. However, the price revisions have been made, the cost reductions have been made, and hedging have been implemented in order to implement the countermeasures. In terms of product lead times, in the recent past, there is no concern in terms of supply and delivery. Please look at the chart below. It is clear to see that against the plan at the beginning of the fiscal year, additional measures have been implemented in terms of price revisions, as well as cost measures. And therefore, in March 2027, we have maintained the forecast of JPY 45 billion. Next, I would like to talk about the supply side impact of petroleum-based materials, aluminum as well as copper are subject to supply shortages, leading to price increase -- cost increase. However, with price revision, we will gradually implement measures in terms of price revisions in July and August and October. Depending on the type of business, timing will differ, but revision will be made accordingly. For Q1, there were some supply concerns. And therefore, the new housing was prioritized and renovation rate came down. And the subsidy details have been delayed, which has had an impact on the renovation. Going forward, cost increase of new housing is likely to become higher. Therefore, this will have an impact on new housing, and we believe that this will require close monitoring going forward. At the risk of repeating myself, I'd like to emphasize that regarding the cost increase for the fiscal year, price revision and other cost reduction will offset the impact. For the new housing demand, we have to monitor this on a long-term basis. Next, let me talk about the highlights of Q1. Regarding revenues, we ended at JPY 379.2 billion; core earnings, JPY 1.7 billion. In terms of profit for the quarter, minus JPY 3.5 billion. Here are the details. As you can see, in terms of SG&A, there was an increase. This is mainly because of the foreign exchange impact. This is the business results by segment. LWT, in Japan and International businesses, core earnings remained flat. And LHT, as I mentioned at the outset, due to the soaring raw material costs, CE declined. For Living, due to foreign exchange impact and higher material costs, CE declined. The consolidated financial position. Here, the equity ratio, which was about 35% last year, and this year, 33.8%. And factors for this, as you see at the bottom notes, this was due to the surplus funds utilized for the short-term investment. Therefore, net interest-bearing debt increased temporarily. But in the next quarter, in the second quarter, this is expected to be improved. Next, cash flow status and cash balance. Because of the increase -- slight increase in working capital and also the short-term investment of the cash reserves, as I mentioned earlier, due to this, investing cash flow worsened for us on time. But similarly, this is expected to improve in the second quarter. And free cash flow recorded as negative. So this concludes my presentation on the financial results. Thank you very much.

Fujita-san, thank you very much. Now, we would like to open the floor for Q&A session.

[Operator Instructions] The first question, Nomura Securities, Fukushima-san.

This is Fukushima of Nomura Securities. I have 2 questions. Regarding cost increase, I have a question. You said the rationalization as well as price revisions will be the measures that you will have implementing. Regarding these 2 points, please elaborate further. Regarding price increase, August -- for LWT aluminum, will be from October. This has been announced. Now, in terms of price increase by your company, how does it compare with your peers? Are there any differences? In terms of price revision timing, do you think that this could lead to a change in the market share as occurred in the past? So how do you compare against your peers in this regard? Please elaborate. Second is regarding rationalization. You have released recently Nobori plant will be closed by the end of this fiscal year. Therefore, the impact is likely to be manifested from next fiscal year onwards. Now, my question is regarding the rationalization impact this year. What are included this fiscal year? And beyond next fiscal year, what are you expecting in terms of amount in terms of rationalization, as well as the production structure that you will maintain?

Now, I will respond to the first part. And the second part will be responded to by Kawai-san. Next, comparison against our peers. In terms of the metal products, at the same timing, it is likely that we will have price revisions by the same margin. For sash and exterior, there is no significant time lag amongst -- in the industry. Regarding housing, Toto has not announced its price increase yet. But for other manufacturers, price revisions have already been announced. So we have to watch how Toto is going to respond, and this may have an impact going forward. But regarding housing facilities, profit optimization is pursued. And I don't think that competition is going to be proceeding what is going to be conducted by LIXIL. So overall, I think each manufacturer will pursue their own initiatives in terms of price revisions to secure [indiscernible]. In terms of the housing equipment, there is likely to be a time lag, but this is not because of competitive intention, but the preparedness of the companies, as well as prior price revisions will have an impact. And overall, each of the companies impacted by the Middle East situation, they may have reduced orders. This will also have an impact as well. So intentions will differ from company to company, it is not the competitive dynamics that is coming to play. But in terms of possibilities, Toto has not made an announcement yet, so we don't really know for certain.

Now, I would like to respond to the second question. My name is Kawai, of IR. I would like to talk about the Nobori plant. You mentioned that additional measures and the path of rationalization Nobori was mentioned. But regarding the Nobori plant, closure is something that has been decided from the past. It is not being impacted by the Middle East situation. So I want to emphasize that point. Regarding the Nobori plant, closure was announced in June of this year. In terms of the actual timing, up until the March of next fiscal -- next year, is the timing of closure that has been announced. And therefore, the impact will be brought to bear from the next fiscal year. Just because we close this plant, it isn't if the impact is going to be very significant. I will not give the actual numbers, but it is not a significant rationalization that is expected this fiscal year, nor is it expected for next fiscal year either. It's not just structural reform. But in terms of rationalization that is mentioned here, the logistics expense has to be reduced as well. This is a major theme that we are tackling. As you know very well, there is some changes in terms of logistics-related costs. This is likely to be important cost effect. So in terms of dealing with these legal changes, we have to proceed measures so that the effectiveness can be maximized. In other words, we will try to consolidate cargo as much as possible. And for the logistics customers will be consulted so that we can consolidate more. And we will also try to integrate the timing of placing orders in a front-loaded manner as much as possible. Further more, this type of impact, in various contexts, we will be changing the process by utilizing AI. But even without reducing people, we can replace outsourced work by AI, whether it be accounting or business operations. On our part, we have been planning to do so. We want to front-load such efforts because there have been so much price increases. That is the reason why these measures will be essential for us. In terms of rationalization, I would like to also add the following. For what we are expecting to do in the future, we cannot announce what is not being disclosed. And that is the reason why further details cannot be divulged at this time.

Next person to ask a question is from Goldman Sachs Securities, Okada-san.

I have 2 questions. First question is, for -- at the end of the first quarter, the full year forecast and against which the progress is 3.8%, which seems to be very low. Going forward, you will carry out the price revisions and rationalization effort. You are going to achieve the full year targets. But having said that, this progress rate at the end of the first quarter seems to be very low. So what do you think about the risk for not achieving this full year target? And for us as investors, what do we need to monitor carefully going forward?

Impact of cost increase, including petrochemical products and aluminum and fuels, including over JPY 25 billion or in the high over JPY 20 billion. And the copper, we used to be increasing in prices, but we believe that in total, JPY 30 billion is going to be the impact of the cost increase. On the other hand, at least from April through June, we had to address the situation without having any offsetting benefit. Regarding the increase of the petrochemical costs affecting the inventory as well as the timing of the price revisions, therefore, such timing will come from June onwards. During the first quarter, aluminum, part of the petrochemical, and the second quarter, petrochemical and aluminum products will give us the full impact. On the other hand, the price revisions in LI, particularly in order to, in principle, responding to the increase in the copper, and then we will just respond to it starting from October for the Living. And also, regarding the housing equipment, the petrochemicals have the impact, but we are not able to ready to increase the prices starting from the second quarter. Considering this, from the July through September, there will be -- about JPY 30 billion or so will be the impact of the price increases. So, that will be offset by the price revisions. So in the third quarter and fourth quarter, that means that we need to overshoot what we are assuming now. So for this fiscal year, JPY 45 billion core earnings slated for the full year, and over JPY 30 billion cost increase has to be covered and offset by the price revisions. Therefore, in the first half and the second half, having the big unbalanced situation is something that is not avoidable. So according to our calculation, what we are estimating to have a certain level of sales, if that is realized -- this target of the revenue itself is not very aggressive. So we believe that we can cover that. But what can be the changes from now on? Perhaps I assume there are 2 factors. One is inflation. Not only in Japan, but in other areas, inflation is progressing. The interest rates have kept unchanged. But going forward, the interest rate may be hiked and mortgage will be increasing, and then, that may dampen the intent of purchasing. Therefore, the market may be cooled down. And the second risk is about commodities. Particularly, aluminum prices may fluctuate ups and downs, and in cases where there will be a sharp increase in aluminum prices. In the second quarter, aluminum prices will increase to JPY 3,500, JPY 3,600. But now currently, the price is down to JPY 3,200. So commodity price risk is limited. But I suppose that aluminum will fluctuate most and aluminum and copper prices will fluctuate. But copper, we have been able to address flexibly by increasing the prices. Aluminum, we have a little concern. However, considering the stabilization of the price of the aluminum so far, we think that we will be able to perform in line with our assumptions.

Second question, about LWT, international business, India, Middle East and Africa revenue, 16% increase from a year earlier. And on Page 18, regarding the analysis of the operating profit ups and downs, and minus JPY 1 billion from a year earlier, and margin 16.5% a year earlier down to 8.9%. So I can read the explanatory text in the earnings call materials. But if you can provide us more details, please do so.

Well, the Middle and Near East area business is damaged quite significantly. India, Dubai and other Gulf countries and Saudi Arabia and Northern Africa, so the -- or Africa as a whole, so these are the 4 major reasons split equally in this area, IMEA. And of course, in GCC country areas, centering of Dubai, demand is down significantly. And for Saudi Arabia, the momentum has been lost. Why have we been able to maintain the business flat here? Because we have the local inventory and manufacturing. Therefore, we have been elected by customers. Although the volume is down, but by increasing the shares, we are able to maintain the business level as a whole. Why profitability is suffering? In Gulf GCC, which port and which road and infrastructure being utilized as available ones, and we need to move around our inventory or goods to and from ports. And once reaching the port and we had to wait for some time at the port or there are unconventional quarters that have been occurred during the first quarter. So, as a result of these, given the current level of revenue, we were not able to enjoy the expected level of profitability. On the contrary, with the share in the market increasing and once the infrastructure is recovered, we believe that we will be able to enjoy more the profitability improvement in the region as a positive note. In the negative note, long term, the one quarter of business there, Gulf situation may deteriorate further. Having said that, Saudi Arabia, which has been growing, and India, as well as Africa, particularly northern part of Africa, grew significantly. Well, we are producing in Algeria locally. So in that sense, we have a strong point in the region. So that means that we would utilize that strength in the region to recover the weakening business in the Gulf GCC. And we have stayed the strong sentiment about the Middle East. Thank you very much for your question, Okada-san.

We will proceed to the next question, SMBC Nikko Securities, Kawashima-san.

This is Kawashima of Nikko Securities. I also have 2 questions. First question is overseas LWT related. So there is an increase in revenues, but the profit is flat. And depending on the regions, the factors may differ. But inflation cost increase explanation is given on Page 11. It's quite prevalent. What about price revisions overseas? It is not catching up. By catching up, do you think it can be recovered? Or is it going to be recovered with different factors? So revenue is increasing, but the profit is not growing. Why is this the case? And how do you intend to recover from this situation? The second question is regarding Japanese renovation market. You said that this is slow. Please elaborate on the mechanism why this is slow. Generally speaking, the housing market is subject to supply and security. And therefore, I think there have been prioritization placed on new housing. But can you have revenue increase? Did you encounter any advantage in renovation as well? But it seems that the growth is declining. So compared to the past, it seems that the renovation is weaker. But in the first quarter, looking at the current situation of your peers, you could have enjoyed more advantages. Is it because renovation is not proceeding well? Is there any structural issues? Why is this the case?

Now, regarding the overseas market, from April to June, the profitability declined. This was explained to Okada-san previously. In the Middle East, it is an extreme case. But in Europe as well as in Asia, similar situation is occurring. Freight is increasing very significantly. We have to go through the Cape of Hope for delivery, which is leading to increasing costs. In terms of fuel, increase is also having an impact. And copper price increase is also having an impact as well. Now, regarding LI, for overseas market, the price revision is around July. From April to June, profitability-wise, it was a difficult time frame for us. But in terms of July-September, there should be some recovery. But for the price revisions to take root for LI, there is going to be a bias towards the second half. LI, LWT and Living, LHT, in these areas, I would say that the LI is most balanced from first, second to third quarter. But in responding to Kawashima-san's question, I would like to say that price revision timing is July. That means that there is a deterioration in April to June time frame. Now, to your second question, this is a quite complex issue that I would like to elaborate. So happens that it is not an issue. House makers are also involved in renovation and also builders who are involved in the renovation business. So it seems that prioritization is placed on new housing. And this situation is still continuing to a certain extent. There are some shortages. There is also a shortage of manpower as well. And against this backdrop, they have to build houses. That is the reason why new housings have been prioritized for April to June. So you might wonder why we cannot capture more business. But in terms of bathrooms, as well as the kitchens and toilets, we are receiving orders 5x, 6x the usual, when other companies are unable to supply. But this was a challenge for us because against this backdrop, other companies transfer orders. There could be some orders because of uncertainty for the future. And if we accept such orders, it could be canceled or it could be deferred in some cases, which means that we have responded 100% or 120%, 130%. But if we receive orders, an irrational situation could set us in the time from May and June as a result of this. For toilets, Kawashima-san, you know very well, we can build inventory more than 100% level. We have been able to do that. But for bathrooms, as well as kitchens, the distribution inventory cannot be built up. We have to take it to the actual site, which means that the order has been placed, and if we accept the orders, they will defer delivery or even cancel in certain cases. Therefore, ultimately, the orders, which are plentiful, have not been covered. Even though we have received many orders, we have not been able to deliver the same amount. This is an industry issue that was [indiscernible] us. But demand is not increasing when levelized. It is increasing orders because everyone was uncertain. And whether this is going to have an impact on the future demand, that is not necessarily the case. I think it will converge to the actual demand. For window renovation, there are special circumstances. This is the first year that the system has changed. And everything was decided as the new system in June. So there was a delay in the months of April and May in terms of window renovation. So the visible numbers and what is occurring are in a disconnect situation.

Thank you very much for your questions, Kawashima-san. [Operator Instructions] From CLSA Securities, Mochizuki-san.

This is Mochizuki of CLSA speaking. I have 2 questions. My first question is a simple one. For this fiscal year, aluminum and copper alloy prices, based upon the current assumptions, what is going to be the mean average purchase price for these? So, that is my first question. In addition to that, there may have been a request for price increase from your suppliers, of course. So what portion -- how much of them is included in this forecast? Do you have a very tough forecast or not really -- or very weak forecast for that?

Regarding aluminum prices, we have kept our forecast unchanged at the very last of this presentation, JPY 3,600 at one time, but the price of aluminum has declined down to about JPY 3,200. So, that is the level of price of aluminum we are using as an assumption for the full year term targets. The copper, copper alloy, LME copper is not something that we are purchasing. Therefore, regarding more details, we would like to respond to you later separately. But what is used to be increasing as a price and based upon which we made our plan for the year, therefore, we do not believe that there will be significant impact on to the domestic business. And regarding international markets, what is increasing cost prices, that will be passed on to the selling prices. That is the basic policy. Therefore, we do not believe that there will be a significant impact on the entire copper business-wide. Honestly speaking, prices are increasing, but aluminum $3,600, and we thought that it could reach $4,000. That was the assumptions from the market. And in reality, what is happening is, there is a shortage of supply of aluminum in Europe, but there is excess supply in Asia. Therefore, the price has been down to $3,200. So what will happen from now on? Well, Emirates has resumed its production of aluminum. And for aluminum, the places where bombs have been dropped and the resumption of the operation is quite early. Therefore, we do not think that the situation regarding aluminum will be uncontrollable. For aluminum, we are increasing our prices based upon the conservative take or view on the aluminum prices. Therefore, we will not have an uncontrollable situation. And copper, suppose that the situation of the war is changing or IT demand is changing, of course, there will be an increase. But regarding the increased cost with a little lower resistance, and we believe that we were successful in increasing our prices in July as well. So we do not think that these are going to constitute a great -- big factor for concern for us. As Okada-san asked a question earlier, the biggest concern is how the entire demand is going to change. What about the request for increase of suppliers' prices? That has been already done. Petrochemical suppliers' increase of price have been already settled. And aluminum and copper, these are based on the commodity price in the market. So once the market prices increase, we needed to accept that increase for purchase.

Understood. Regarding my second question, in LWT, could you please tell us about the trend of revenue, Americas and Europe? Because mortgage interest rates are staying at a high level and rather there is a higher risk of increasing mortgage rate. It's a macroeconomic situation. What about the business environment for you compared to 3 months ago? Do you think that there hasn't been any significant change? Or do you need to be more careful and conservative regarding Americas and Europe? Your take is appreciated.

As a consensus, yes, the situation continues to be worse than expected for Americas, and there hasn't been no signs of a recovery in Americas. And in Europe, it depends on the country. Situation differs from a country to another. So in a nutshell, it's better than Americas. To some extent, it is stabilized, but not a great recovery as we expected. In Europe, there can be a great recovery as a catalyst that is being expected. for Europe, perhaps the biggest potential catalyst can be the change in the war situation in Ukraine.

Thank you very much, Mochizuki-san, for your question. We'll proceed to the next question. Daiwa Securities, Teraoka-san.

Sorry to keep you waiting. I'm sorry, I had some issues. I have 2 questions. In the explanation material, please refer to Page 2 regarding price revision, let me see if I understand this. In terms of the LWT, 12% to 13% increase in price has been implemented. And domestic revenue is around JPY 500 billion. 12% to 13% price increase with additional measures, JPY 21 billion of price revision impact seems small overall. So, on a net basis, how is this calculated? Please elaborate.

Why don't you go ahead?

Yes. Let me explain this point and then ask Seto-san to weigh in as well. In terms of price revision, for this fiscal year, is shown here. LHT is from October. And there is -- it is as if from October, there will be a vertical impact all of a sudden, depending on -- so that's the reason why the price revision impact looks small, especially for LHT. Regarding LWT and Living, kitchen as well as vanity will be from August. So it is preceding October, but the impact will be manifested from second half and onward. Therefore, even with a more than 10% price revision, the impact will be reflected in the numbers that are presented here. At any rate, we do have long-term contracts as well. And against this backdrop, LI has vertical price increase similar to that. But LHT, LWT is more gradual in terms of price revision being reflected, according to history. But in terms of profitability for this year, rather than this fiscal year, I think we can have higher expectations for the next fiscal year. And therefore, Teraoka-san, as you have already mentioned, the beneficial impact will be manifested increasingly next year.