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Edited Transcript of 5938.T earnings conference call or presentation 13-May-19 10:59am GMT

Full Year 2019 LIXIL Group Corp Earnings Presentation

Tokyo Jun 5, 2019 (Thomson StreetEvents) -- Edited Transcript of LIXIL Group Corp earnings conference call or presentation Monday, May 13, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hirokazu Yamanashi

LIXIL Group Corporation - Representative Executive Officer, President, COO & Director

* Kayo Hirano

* Sachio Matsumoto

LIXIL Group Corporation - Representative Exec. Officer, Executive VP of Finance, Treasury & M&A and CFO

* Yoshinobu Kikuchi

LIXIL Group Corporation - Director

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Conference Call Participants

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* Hiroki Kawashima

SMBC Nikko Securities Inc., Research Division - Senior Analyst

* Masahiko Komatsu

Polar Capital Holdings plc - Portoflio Manager

* Sachiko Okada

Goldman Sachs Group Inc., Research Division - Executive Director

* Sho Fukuhara

Jefferies LLC, Research Division - Equity Analyst

* Toshiyuki Anegawa

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you very much for waiting, and thank you for taking your precious time out of your busy schedule to attend this briefing. We now would like to start the briefing session for the fiscal year ended March 31, 2019, for LIXIL Group. And to your left, well we have the Director, Representative Executive Officer, President and CEO, Hirokazu Yamanashi.

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Hirokazu Yamanashi, LIXIL Group Corporation - Representative Executive Officer, President, COO & Director [2]

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I'm Yamanashi. Thank you very much for coming.

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Operator [3]

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Next, the Representative Executive officer, EVP, CFO, Sachio Matsumoto.

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Sachio Matsumoto, LIXIL Group Corporation - Representative Exec. Officer, Executive VP of Finance, Treasury & M&A and CFO [4]

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Thank you.

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Operator [5]

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And senior manager of Investor Relations office, Kayo Hirano.

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Kayo Hirano, [6]

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I will be serving as the moderator for this session and Uto from the public relations office.

First of all, Matsumoto is going to give you the overview of the financial results ended March 31, 2019. Mr. Matsumoto, please.

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Sachio Matsumoto, LIXIL Group Corporation - Representative Exec. Officer, Executive VP of Finance, Treasury & M&A and CFO [7]

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Good afternoon, ladies and gentlemen. I'm Matsumoto, CFO. As for the fiscal year ended March 2019, I'd like to give you the overview of the financial results and later in FY ending March 31, 2020, I'd like to give you the forecast. And as for the financial results on March last month, we disclosed the numbers and there has been no major change and all this were variances. So the differences is just the difference based upon the rounding, which is below JPY 1 billion. And as for the Permasteelisa, as we have already provide an explanation at the previous meeting, so I'd just like to update you as to the other businesses and leading up to the new fiscal year, and I'd like to really focus on the last 3 months of the fiscal year.

Please refer to Page 3 first, and this gives you the summary. And at the time -- with the timely disclosure last month excluding Permasteelisa, we have -- we've achieved the plan. And as you can see here, particularly in domestic Japan market in the last 3 months we had the strong performance and I am going to give you more details later. And -- well, all these technology business segment have seen the increase in their profits. And as with the overseas businesses, because of the raw material costs increase and other factors resulted in flat or decline in the profit. And, well, Permasteelisa has had a booking of the accrual of -- for the estimated future losses on construction contracts. And net profit was minus JPY 52.2 billion. And because of the loss of the Permasteelisa, we incurred this for a large deficit and I'm sorry for that. But as we have redescribed last month, we have included all the estimated future losses and all this have been really well booked in the last fiscal year ended March 31, 2019.

And please move on to Page 4. In this page shows our P&L. And on the left-hand side, the fourth quarter, the 3-month and year-on-year comparison and on the right-hand side you will see the Y-o-Y results. And a 12 month on a full year basis in terms of revenue and 1.5% growth on the year-over-year and core earnings minus 27.8% particularly in the first half in the domestic market, the sluggish performance has resulted in this negative result on a full year basis. And the latest for 3 months, a 3.4% growth in revenue and 21.2% were growth in core earnings and so they have just finished with a stronger performance than they were at the full year forecast. We have seen more of the momentum building up in the latest 3 month.

Please go to Page 5. And based upon the overall general P&L, and this is the business results by segment, which is a combination of both domestic and overseas businesses. And the Water Technology business segment -- in the 3-month and the fourth quarter almost flat against the previous year. And on the other hand, Housing Technology, well, domestic market has been driven to better performance and they have seen the growth on a year-over-year basis. And Building Technology, and because of this, well, it has been negatively impacted by the Permasteelisa. And well the growth in profit and revenue in domestic market can be shown on the next page.

And Page 6 please. And just extracting the Japan business revenue and core earnings. LWT revenue has a slight decline or almost flat. And as for the core earnings, and cost-reduction efforts and also our controlled SG&A in half will grown its profit. And though the growth percentage rate is not shown, minus 1% decline in revenue and a profit increase of 71%. And Housing Technology exterior or interior and new products have been performing very strongly and 5% increase in revenue and in core earnings will double that in 122% of growth. And Building Technology, 10% of our growth in revenue and core earnings and so it was pretty solid. In fact, 56% growth. And while for the fiscal year starting in April, well, this momentum has been continuing. And for the Japan business, starting from January-March quarter, we have continuing with a strong performance and that's the result of focusing on the last 3 months of the year. And next, the new fiscal year starting in April and forecast for the fiscal year ending in March 2020.

Please turn to Page 8. And here, this is a very busy chart or table. And, well, the revenue and all the profits in different stages in Permasteelisa and also the continuing operations excluding Permasteelisa. There is -- they are breakdowns of the specific numbers. And if you look at the revenue from the previous year into this fiscal year, 1% growth in revenue is being forecasted.

On the other hand, core earnings-wise, the existing continuing operations, 9% growth and JPY 4.7 billion increase is being forecasted. And if I can just keep talking on this for continuing operations from the beginning of the year all the way down to the net profit. Operating profit was JPY 9.1 billion, increased 19% growth and profit before tax an 18.9% growth, 40% growth and a net profit was 67.2% -- sorry, 11.6% and 46% growth. And if you look at each individual set of the profit growth rate and the amount seems to be higher because of the 2 affiliate companies had to be well divested and transferred. And we are expecting the gain on the divestment of such affiliated companies, and these are factored in. And Ken Depot is one of them and Senior Life is another one. And for those 2 affiliated companies, well, the gain on the transfer of shares are being factored in. And so that is the reason why we have seen higher growth rate and a net profit.

Now while Permasteelisa's specific numbers and disclosure made on the 18th and all these numbers remain unchanged and the revenue's going to see a slight increase. However, in terms of the operating profit, unfortunately, because of the fixed costs, cannot be really well collected and the JPY 20 billion or more of -- or so of the losses is doing good, and they are now really well conducting the restructuring efforts together with LIXIL. And in that context, the reduction of the fixed cost and then we are estimating a certain restructuring cost. And in terms of the operating profit and profit before tax are shown in this table.

And as for this structure reforms, we have come up with a detailed action plans, and we have assigned the people responsible for those implementing these plans and to really collect these costs or expenses. In terms of the progress and the booking of the expenses, we need to scrutinize more, and we have not been able to break them down into the first half and second half. And I'd like to ask for your understanding on that point. And so this time, this is where the forecast is for the full year forecast and that's what we have announced.

Next, Page 9, regarding this page. As you saw on the previous page, this is the assumption for the plan regarding the Japanese domestic housing starts. On the first half there, was a last-minute demand increase before the consumption tax hike. But in the latter half, the government seems to be thinking of various initiatives. However, overall, for full year, it will be minus 3.4%. On the other hand, for renovation, it's a 2.2% increase.

In nonresidential towards the Tokyo Olympics, the nonresidential projects completions will increase, so there'll be minus 2.1%. And for exchange rate, these are the assumptions. For the plan and ROE and other KPIs, the just-ended fiscal year was the results that we were very sorry about. Therefore, the KPIs have been impacted largely. But for the new fiscal year, we are assuming that we'll be able to see this recovery and this is the internal plan.

Next, Page 10. These are the financial policies and also the dividend policies. Especially in the last fiscal year, Permasteelisa, they have experienced a large loss and we caused you a lot of worries and concerns. The majority of that was a noncash expense such as a depreciation of goodwill. And also, as I've explained at the beginning, the 2 businesses and shares have been transferred, therefore we have a cash inflow occurring. Therefore regarding the dividend, as we have been paying, it will be JPY 35, JPY 35 annual dividend, total of JPY 70, which is a stable dividend. And we are planning to have this approved in the Board of Directors meeting, and we have already made a proposal to them.

And lastly, on Page 11, as I have explained to you right now, these are the assumptions for the cash plan. So CapEx, depreciation and R&D expenditure explanation is written here. Main point is that within the depreciation, amounts that we will be making in the capital investment. However, for the new fiscal year, in Ojima of Kota Ward, we have a new headquarter office and that is construction, and it is a plan to be completed. So that expense is going to slightly increase.

But either way, what is supporting the midterm plan, which are the new products and the development of new products and including SG&A, we are going to improve the efficiency of our productivity. We are going to strengthen our shift to making investments that will increase the shareholder value.

And ROIC is what we are going to keep an eye on for the investments, meaning that the investments that is going to generate future profit, will be our focus and through that, we would like to strengthen our financial position and efficiency and that is the base for the CapEx plan.

And the following pages, we'll be showing you the information by segment. Today, we have multiple and various information that we need to explain to you, so we would like to skip the segments for each business and segments. So if you have any questions please ask during the Q&A session. From that, I have explained to you the results and the forecast. Thank you.

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Kayo Hirano, [8]

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Next, from Yamanashi, there'll be an explanation regarding the new management plan. Mr. Yamanashi, please.

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Hirokazu Yamanashi, LIXIL Group Corporation - Representative Executive Officer, President, COO & Director [9]

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Once again, hello. I am Yamanashi. Same as Mr. Matsumoto, you probably do have specific questions. So I think it's better that we allocate more time to receive your questions. So from my side I'm just going to limit my explanation to the major points and for the rest, I would like to respond through the Q&A sessions.

First page of the material. This time from last December and this way, we have created this new management plan spanning several months. As all of you know, the structure of LIXIL is that we have the holding company at LIXIL corporation, and we have the not-so group corporation and we have several domestic associated companies that is the structure and regarding the new management plan, it was not just made by the holding company management but each companies' business leaders and function leaders participated to create this plan and we repeatedly had discussions and the target was decided by the leaders that is going to be achieved by these leaders. But within that, there are 3 important beliefs that are underlying on this new management plan. And the discussions in the last several months was based on this.

First is putting importance on diversity and that is -- that the Lixil should value and fully leverage its diversity to maximize the group's growth and corporate value. Specifically speaking, if we can utilize the various assets that haven't accumulated within the group until now, we don't have to make a new large investment to have further growth and increase the corporate value. That's the meaning. And also from fiscal year 2019 to 2021, however, we have a 3-year midterm plan. From last December, I was in the process of creating this management plan. This is not denying that the 3-year midterm plan, but we can -- majority will be continued and in order to realize the outcome of this midterm management plan. We want to resolve the bottlenecks. And in addition to that, 2 to 3 important points is that depending on the business environment or also the performance environment, we will bring in new initiatives. And so from that perspective, we are going to think of things in a longer time period in 3 years and that's why we use this word, beyond.

And as you know, our industry, the market environment or the channel environment and the trade environment is changing largely. And within that, ourselves will have to make a major structural reforms. I will talk about the details later, but the structural reforms is not going to complete in 2 or 3 years. That is why we have made this a longer period at 5 years. So that we will able to thoroughly improve all the targets that we want to improve, and that is why we have used the word beyond.

And lastly, because we have such a diversity and we have a wide range of functions. And in order to have that all unified and effective, we need to have a strong team of leadership. That is why in order to create this new management plan, as I've explained at the beginning, multiple leaderships are involved and these leaders are going to function to take the lead of these initiatives.

I think this is something we have already shared with you in the past, so I will be brief. And we have gone through different stages, well, up to now and then find ourselves where we are now. And Mr. Matsumoto said, Permasteelisa, in last fiscal year we incurred a large loss. And for that particular point, we have caused a lot of inconveniences. And as for the stages going forward, we are to rebuild the business. And also as we have discussed and lately while we have seen a stronger performance in domestic market, we are to further grow that in line with the underlying philosophies where we are to build upon the growth in the shareholder values as well as the corporate values based upon the established foundation. And also we have to spend the next few years to work on the structural reform and also to re-enhance the governance and compliance in the group and that's the sort of the policy we have.

And in terms of the business environment overview, well, I would like to skip the details. And well globally in the mid- to long-term view, we do have the quality growth potential in the industry. However, the productivity and so we have to really deal with digital transformation and the very first thing is now becoming very obvious in North America.

Now in the domestic market, in the short term, major cities and other areas, we still see the strong performance. And with the consumption tax hike, the government is going to really implement majors to stimulate consumption and we ought to capture on this opportunities and we believe that. We can expect higher growth. And of course, we should be well on the conservative side. And based upon the assumptions that Mr. Matsumoto described, and we have come over the forecast and plans. But internally, in view of the rebuilding of the business of Permasteelisa and North America, we are beginning to see all the signs of the change and so in North America. And so we are to really work on this while accommodating and facilitating the changes in view of the changes in North America. And then so we need to implement fundamental change vis-à-vis the South Africa, and this is something which has become clearer in the past few months. And so with the new management team, at the beginning of this fiscal year -- well, from February to March this year we have started to implement some specific actions not only to Permasteelisa but for the South Africa as well, we have really developed the turnaround plan. And so as for the details, if you have any questions, we would like to entertain your questions later.

Now the major strategic directions. Well, all these were existing assets and technologies that we have really well accumulated over the years, and we are to really well grow our business and increase our profit. And if we have a way to stop bleeding and then we would take measures to stop bleeding. While inclusive of South Africa as well as Permasteelisa, we are really going to make this turnaround. And also in some areas we need to have the major structural reforms needed and that's something we have to work on and the details we'll give you. And also transformation is what we are intending to do. And we are to really -- not to really take on these opportunities based upon the existing business, but to really develop new growth engine, and Grohe has been taking the lead and to really have the water management business and the new types of filter business and water management businesses. And these are not just limited to Grohe but in other business segments and regions. We are beginning to see the first of such businesses. And so we should really accommodate that in our strategy. And also in terms of management we need to re-enhance something. And further beyond that, some time-consuming activities need to be implemented early on. And the human resources development as well as a new stage of the corporate responsibility activities should be pursued.

And I think the greatest interest to you might be the more of the business-related initiatives. And so capture. And by taking advantage of the existing assets and to really well capture more of the gross opportunities as well as the profit to increase opportunities. And just the major initiatives. In the first half of last year, unfortunately, in terms of the core earnings level, we have really underperformed by a significant margin and the major reason is the drop in market share and also our sluggish activity in our sales activities. And I'm sure you're familiar with that. And since November, with the new management team, we are to really increase our market share so that, that will result in the increase in the productivity. And under the leadership of Mr. Ootsubo, we have come up with 10 initiatives in the second quarter -- in the third quarter and fourth quarter announcements. And since December, I think these initiatives have been really effective in regaining our market share.

And as for the LHT, from January to March in the domestic market for the very first time in many years, well we have achieved the growth on year-on-year, which is far above the competitors. And also in terms of product lineup and optimization of production. In the current or midterm management plan is we're looking into that and we have to continue on that. In shower toilet, we do have the existing [wall] strategy as well as existing plan, but we have seen changes in the market. And particularly in China market that local competitors is increasing its number and also the market itself in the next 5 years is really going into increase by 2x and also the shower toilet market will take off. The adoption was very slow in Europe and because of the cultural background, but there is a change. And so European -- manufacturers are really were focusing on shower toilets, and so shower toilet growth strategy is being redeveloped and Grohe is indeed a very strong brand.

But globally speaking, we have not been able to capture all the adequate market shares and it stop bleeding. Permasteelisa and South Africa would be the major focus and Permasteelisa in a long-term view. And channel and sales strategy needs to be changed and because we have to be ahead of others in implementing changes and to really start the transformation in view of that. And that means that will be leading into the global deployment and not just in terms of channels but the head offices and direct and also sales formation type of activities need to be revamped. And in this kind of era, digitalization should be given more of the priority in terms of channel as well as in head offices and to really achieve the productivity quantum leap.

In North America, short term, in order to respond to the changes in the marketplace and the cost reduction and also we have to review the quality investment and others and spending the next 3 to 5 years fundamentally while product lineup and production bases and production network needs to be reviewed. Therefore, generally speaking, the entire business model transformation needs to be implemented. And lastly create: in Japan, the health reform or renovation. And I will come back to this point later for details and our target is housing space and the working space and there is -- the new needs were emerging. So we have to [capture them]. And so within the same houses, we will be able to really create the new demands and we should be the front-runner in this field. And renovation itself, as you're very familiar with this and because of -- excluding the time affected by the [digitizers] in the last JPY 6 trillion or JPY 7 trillion is the market size per year, and we need to come up with a strategy to expand this particular market. And then as for the water business, I have already touched up on this. In Asia LHT compared to LWT where we had been more of -- the opportunities were identified in the domestic markets, but the Housing Technology and business model established may be deployed in Asia to capture more growth opportunity, and however, the plan is to be really implemented in this. And so these are the major initiatives.

This is the major issues that we will be -- major initiatives that we will be working on. You will have a full picture perspective. It's by business and regions. We have the initiatives that are established. And regarding 2/3 of these initiatives, it has been started to be executed or specifics have been decided. And as I've explained at the beginning, all the leaders have been involved to make this plan so each function and business leaders have to execute this and progress is left up to the leaders. And also for the special projects that is across regions, there are 1 or 2 leaders that have been selected and they will be leading these projects.

Going back to the main material. As for the numerical plans, these are our target numbers for the 5 years. By 2024 March, in revenue, we'd like to reach JPY 2 trillion and the headquarters and IT consolidated adjustments, we are aiming at a core earnings of JPY 165 billion (sic) [JPY 1.65 billion], an 8.3%. And as for the headquarters and IT control adjustments, we are aiming for JPY 40 billion (sic) [JPY 400 million], 2.0%. And for core earnings we have the overall target of JPY 125 billion (sic) [JPY 1.25 billion], 6.3% increase. And we have all these plans and initiatives that haven't accumulated, and these are the numbers that have been accumulated from each of our businesses and functions. And the total number is here. But I want you to understand is that the CAGR of 2% is something that we would like to surely achieve. And as for the core earnings, we, for the main businesses, it's 8% -- excuse me, for the business' overall, it's 8%. But the major business' core earnings, we're going to aim 10% and above. That is the plan.

Regarding Permasteelisa's large loss, we have reported you on this on April 18. But other than that in an individual basis, we have been receiving concerns of if other businesses are all right especially the ones of the overseas businesses that we have acquired in the past. And that's why we have created this page. For Grohe, it has a very high profitability at 15%, and it has been maintained. We would like to continue that. And the CAGR also, it has been increasing the market share and at the same time, achieving a CAGR of between 2% to 3%. What that means is that in the next several years, we would like them to continue this. And also at the same time, the new type of filter of business or the water management system of business within the household, they have started their initiatives very successfully. So we would like them to surely continue that. And I think it's more of a business model that they're moving towards than the strategy and we would like them to continue it.

For American standard in the mid and long term, they definitely need a transformation. But while we work on the transformation, we have to make sure that the profitability is not going to be lowered and based on that, we are implementing various planned initiatives. For Asia, as you know, there are small markets and large markets mixed together and there's also a large potential in the area but we would like to focus in the major markets. And the characteristics of Asian market is that we can actually experiment new initiatives and we would like to use this region as a base that we can make improvements. And for Permasteelisa, we just focused too much on increasing the size and by having various large numbers of projects and their large projects that took several years and within the change in environment, the unprofitability has increased and that was not thoroughly controlled. And because of that, at the end, we experienced this type of a result and we had to post a loss as we did for the last fiscal year.

And as I already shared with you, on April 18, we're going to downsize the business. We're going to reduce the fixed cost. We are going to carefully select the projects that we are going to be involved in, and we are going to improve the control and management of these projects. And in order to do that, we have already changed the CEO and we are going to further tighten LIXIL's direct control on products selection and performance.

With this, we are going to surely progress the restructuring initiatives and strategies. By doing so, this fiscal year, it will still remain as a negative number. But next year and 2 years from now, we are going to realize the business to be making a profit and we have just started those initiatives.

And these are the new needs in houses. I don't have to spend that much time at this point, I can respond during the Q&A session. But Japan, the household structure hasn't changed. Meaning that the majority of the household is not 2 or 3 people, even 1 or 2 people as a household, even though it's increasing. Actually, the age is increasing too. That is so the family structures are changing, the age is changing and how people live are going to change, then the needs from these consumers are going to change. And for us to grasp those needs ahead of the time, I don't know if it's going to be a newly built or renovations, we will be able to gain new business opportunities.

Therefore, we would like to provide improvement of the quality of the living and working spaces and also improve the quality of the people's health. And through that, they will be able to achieve -- improving their living environment. And our mission is to contribute to the future living space and living environment, and we will have to build our initiative based on that. And when we think about that, the water technology and the Housing Technology, we have both businesses. And because we have both, we will be able to achieve that mission, which is unique to LIXIL. And as all of you know, with the SATO projects we have been involved in corporate responsibility activities and social contribution activities. And through that, LIXIL, globally, what we are working on and the new business direction will start to mix. And through that, we'll be able to create our new business environment moment for LIXIL. And based on that, we have started incorporating the new business strategies.

And lastly, this is the re-enhance LIXIL Group management bases. I'll just read this up. It's the further enhancements of governance and control within the group and outside the group. And also, we are going to thoroughly enhance the compliance and risk management. Unfortunately, within the 2 group companies, there was a misconduct in terms of compliance and we're not just going to leave it as trying to prevent that. But using this as an opportunity, we are going to implement in multiple layers of measures to enhance and strengthen the compliance risk and management. And regarding the group management scheme, the holding company's function and also the group companies and regions of functions are going to become clarified and create a structure that risks do not occur and move forward in the management of the business.

In the next page, what we'll be aiming at achieving in the next stage. And the flagship activities and CSR activities need to be enhanced to next stage and also to really develop the next generation top management people from within. And also, we do have the LIXIL core and behaviors and this should be re-enhanced once again. And also in view of the productivity improvement and we have to really improve the direct and indirect ratio, not just in terms of numbers, but we should really focus on front line. And so we enhanced the front lines into core culture and to something we already do more thoroughly. And the very last page is what talks about the direction in terms of the management. And that's all for me.

And in the Q&A session, I'd like to take more of your questions.

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Questions and Answers

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Kayo Hirano, [1]

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We'd now like to start the Q&A. And as with the director candidates, Mr. Kikuchi will share of the -- member of the nomination committee is going to provide more explanation and then we are really well behind the schedule. And from around 3:45 we would like to go into our next session of the director candidates. And please raise your hand, just one question per person please. And that women in the first row and please identify yourself by your name and affiliation. Just one question, please.

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Sachiko Okada, Goldman Sachs Group Inc., Research Division - Executive Director [2]

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Okada from Goldman Sachs. Page 7 where numerical target is shown on the new management plan. And core the earnings of JPY 165 billion (sic) [JPY 1.65 billion] target. How achievable would that be? And based upon this [JPY 104.9 billion] increase when compared to March 2019 and the gross margin of 30%. And as for the JPY 50 billion investment and the remaining JPY 50 billion or so might be coming from the cost-reduction efforts. And what kind of cost-reduction efforts and improvement activities are you going to implement? And if we could just give us the indication as to the how achievable this is?

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Unidentified Company Representative, [3]

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I would like to respond to your question. First of all, for each of our business line and particularly water and Housing technology businesses, these are the major business segments, they are to really aim CE margin of 10%. And for that, the cost improvement and to make a shift to a more profitable business in terms of the margin and also SG&A should be reduced. Therefore, in each of the business segments vis-à-vis these were 2 main pillars, 10% is the sort of target for the core earnings for rate margin. And particularly, Permasteelisa, they are too, really, will be getting out of the red ink, but it would not be close to 7%. And likewise for the domestic operation and housing and services and the related business. And unfortunately, these business segments were not really achieve 10%. And so the major driver for the improvement in profitability, housing and water. And as for the housing and water technologies business segments. And the water technology, Grohe, and they are already achieving higher than 10% CE margin in U.S. and Asia and Africa and there is room for improvement. As for Mr. Yamanashi mentioned, Grohe brand needs to be more leveraged and to really make a shift to more higher gross margin products, and I think that's sort of what we are really going to do.

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Kayo Hirano, [4]

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The third person -- sorry, the person in the third row from the front, please.

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Hiroki Kawashima, SMBC Nikko Securities Inc., Research Division - Senior Analyst [5]

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SMBC Nikko. My name is Kawashima. March 2020, the domestic LWT is planned to decline profit-wise. And even though there's a hike in the raw material prices and you have already increased your product price, it was this plan. And with the midterm plan, within the 5 years -- you said instead of 2 or 3 years of improvement, you'll spend 5. But within this business environment, if you spend 5 years then the end of business environment is now going to change too. So at the very end, it is still going to be difficult, won't it? And that means that the recent LWT situation is not going to be improved either. So can you explain more?

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Unidentified Company Representative, [6]

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When you just look at the single year, especially depreciation including IT for LWT business area, there is a large depreciation number there. And that is why compared to this year, next year seems to look like it's not good. But from the time that we made the plan, the end result was more than the plan and that is why next year the plan may seem that it just going to be all right. I just want you to understand that point.

But in a long-term perspective, before I explain about Americas or the United States and Asia, but as for Japan too, we have been working on shifting over to a higher-value product especially kitchen and bathrooms. The products have been launched in the past, the high-value products, with that, the gross profit margin is increasing for that. So we would like to shift our focus on that and move forward.

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Hirokazu Yamanashi, LIXIL Group Corporation - Representative Executive Officer, President, COO & Director [7]

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And if I may add what you pointed out, I do understand your concern. But because of that plan, the business environment that's going to occur 2 or 3 years from now is something that we need to project and the major factor within that is the distribution structure and what kind of products are going to be in demand, so shifting over to that. We cannot make that shift or transformation in 2 or 3 years to meet that business environment. So while we have a sound business, we are trying to prepare ourselves so that we will be ready to respond to changing business environment that will happen 2 or 3 years from now and change the product mix or respond to the changing channels.

In Japan, especially in the business, there's quite of a demand for renovation, so we would like to also focus on that too. And although, I cannot give you any specifics but that is the direction we are thinking.

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Kayo Hirano, [8]

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And very sorry, due to the time limitation, we would like to end the Q&A session.

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Presentation

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Kayo Hirano, [1]

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And next we would like to move on to the Board of Directors candidates. The people that will be speaking will change.

Thank you for waiting. We'd now like to explain about the director candidates and once again we would like to introduce the participants from the right. Director and Member of the Nomination Committee, Yoshinobu Kikuchi; Executive Officer and Chief Legal Officer, Yutaka Nakamura; and Kayo Hirano, Senior manager of the IR office.

And we would now like to really ask for Mr. Kikuchi to explain.

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Yoshinobu Kikuchi, LIXIL Group Corporation - Director [2]

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Kikuchi is my name and I am a member of the nomination committee of LIXIL Group Corporation. And the nomination committee is chaired by Lady Barbara Judge. And in this particular explanation, well, it would be better if we explain in the Japanese language. And so that is the reason why I am going to explain and please allow me to be seated and speak to you.

As for the decision of the director candidates in each member of the nomination committee is to really fulfill the mission and the duties as the members and we have to engaged in serious discussion. And in that context, we had the very good discussion with the institutional investors as well as the directors. And we have thoroughly discussed as to what is expected of the Board of Directors meeting. And from the various stakeholders and there have been various suggestions and information provision to the nomination committee. And based upon the information while the final decision was made in a neutral position of the nomination committee and as for the specific directors candidates list and in a nutshell if I could summarize, we are to replace all the existing directors and to have all the new directors to serve as the Board, and that will be the best way to go about while renovating the management structure in order to really resolve all of these confusions in the management of the group. And we should not intensify the conflicts amongst directors and we are to really have more of the neutral outside independent director to serve on the Board and to have the robust oversight functions. And with this kind of very robust Board of Directors and should really select executive officers, and I think that would be the ideal sort of oversight to be really provided by the company with the committees.

And so in order to really remove any potential conflicts, we have to really have the larger scale Board of Directors meeting, and we have to really downsize that. And we used to have 12 of our directors on the Board. But it was deemed appropriate to have about 8 directors and that is included in the recommendations from the nomination committee despite -- and as for considering the actual candidates who direct this and, of course, inclusive of the company proposal and members of the director candidates, our dear shareholders and vis-à-vis for of the outside director candidates we had the interviews. And what is expected of the Board and as the expected role and we really selected those who are deemed to be qualified for the directors and as for the details, please refer to the press release and from the institutional investors there were some recommendations offered. For example, those are people who have really experienced our working as their management for the listing company and customers and also to really promote and support more of the overseas business expansion. And based upon the misconduct identified in the last fiscal year, they are to really have more of the stringent and robust audit functions. And so in view of the company-specific issues and challenges we have decided and selected director candidates.

Lastly, I would like to explain the executive side. Within the candidates at this time, the existing directors all have resigned but one is selected internally. And regarding this, I would like to explain.

As explained in the press release, the new executive team and new CEO will be selected based on the new Board of Directors meeting and the nomination committee. That is the basic stance. But within from my many institutional investors, there were some concerns regarding the management of the company. And regarding that, as a personnel -- excuse me, their concerns regarding the business continuance. So for as a person, that will be able to overcome those concerns, we have named Mr. Ootsubo of the LIXIL Corporation President and CEO of LIXIL corporation and he asked a long experience of the LWT and has been well received by the customers and the shareholders because of his experience in water business and also the construction material, and he has been involved heavily in the recovery of the business from last November onwards. And that's why we have nominated him.

So in order to have a smooth transition from the old executive team to the new executive team, we'd like to have a thorough discussions with the existing executive team and I think with the new executive team. So that there is a smooth transition can be conducted. That is all from my side.

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Kayo Hirano, [3]

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And now I'd like to move on to the Q&A. For those of you who have a question, please go ahead.

(Operator Instructions)

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Questions and Answers

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Unidentified Analyst, [1]

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Merrill Lynch, Japan Securities, [Odi] is my name. Well regarding the selection of the candidates for Directors. But before that,in the nomination committee, Ms. Barbara Judge, or there was some outside directors that used to formally work in the regulation side? But even with that situation in reality, it has a cause this confusion of the change in the CEO. And just looking at that candidate names this time there were former bureaucrats or the judge of the Supreme Court, Judge from ASIP Supreme Court Justice but with the -- other than that, what kind of checking process are you going to have with the governance and through the interviews with these candidates, are you starting to see the direction how you can have a thorough control in the governance or not? Can you explain that?

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Yoshinobu Kikuchi, LIXIL Group Corporation - Director [2]

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May I explain this? I will answer your question. This time of the candidates for the outside directors in the process of selecting them, the role that the nomination committee has been serving until now. We also thought of what was lacking of our committee. And in addition to that, there were a lot of feedbacks and proposals from the shareholders and the institutional investors, and we have considered all of them within the process up to now. And within the process of selecting the candidates, Page 2 in your materials, we have incorporated the qualifications. We have confirmed within the nomination committee clearly what will be the qualifications of the directors that will be required for the new board and for the candidates, we have selected people that will meet those necessary qualifications and regarding these items are these qualifications, regarding effectiveness of the Board, we have actually conducted a survey of the Board. And from the results of that survey, we picked up ones that were insufficiently served and so these elements are from that. So we have selected these candidates that will meet these necessary points or qualifications. Four of the outside director candidates, for all 4 of them we have a conducted an interview. The internal candidates, of course, have experience and knowledge of the business too. And within the interview, Mr. Suzuki and Ms.[Onimader] -- are the 2 that can secure our independence, and the other candidates, we believe, will not be able to secure independence so we have removed the others names from the proposal made by the shareholders.

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Toshiyuki Anegawa, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [3]

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Anegawa from Mitsubishi UFJ Morgan Stanley. To increase the ratio of the outside directors and it's going to be increased, and not probably not to that high. And Ootsubo-san is remaining and rather TOSTEM-affiliated person, it seems like. And would a technology-related person can be really well included as one -- didn't you have that kind of perspective to include somebody from the Water Technology not just from TOSTEM-related?

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Yoshinobu Kikuchi, LIXIL Group Corporation - Director [4]

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During the course of various discussions, most of them will be the outside directors and then just one internal directors and we just will come to that conclusion in the very final stage. And then we only have one internal director and who would that be and the President of the largest operating company, Mr. Ootsubo. And as I have already explained in this kind of confusion, the confidence from the customers and also the confidence from the employees has really been joined by Mr. Ootsubo and Mr. Ootsubo would be us to lead the Board of Directors and that in the end will reveal the governance of the group and that was the judgment. Whether a person is from the TOSTEM or INAX, we didn't have that kind of perspective. And those in the mass media talks about where they came from. And we had 5 companies integrating 2011, not just TOSTEM and INAX. Sunwave employees and Shin Nikkei employees and [TO Exterior] employees were all integrated. And so conversely put, if we are talking from that perspective and that would create a major confusion inside the group. So since 2011, while the water contained in one glass, it is just the same. And then we would not talk about where they come from originally. And that is sort of the mentality and philosophy we have embraced on the part of the management team. Any other question from the floor, please?

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Kayo Hirano, [5]

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The person in the third row from the front. Please go ahead.

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Masahiko Komatsu, Polar Capital Holdings plc - Portoflio Manager [6]

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Komatsu from Polar Capital. Before the long week holidays-- your company's senior management person gave us a letter. And in that it says the business -- within the 14 business board members, 10 had the consent towards the being against Mr. Yamanashi and Mr. Ushioda. And within the members and Mr. Ootsubo is not included. What I think is your company's function deficiency. In order to resolve that, I think you need to thoroughly remove the influence of control of Mr. Ushioda. But looking at the candidates of the directors at this time, just at a glance, it's centered and have a more outside directors. So at a glance formality-wise, it seems like it's quite independent. However, the majority of the candidates don't know of the LIXIL business at all. Mr. Ootsubo is from TOSTEM and Mr. Yamanashi, it seems that has the intention of being involved in the business execution, but Mr. Yamanashi together with Mr. Ushioda caused this confusion. But even though you have more outside directors, I think that the involvement of who knows the business is going to be even stronger.

I think the most important thing is to eliminate the influence of Mr. Ushioda thoroughly is the main point and -- I think the anti-Ushioda force, the strongest force I think will come from the members of that Mr. Seto has a name as a candidate, which is the proposal from the shareholders. And so as a nomination committee, we said that why don't you accept the proposal from the shareholders and add several. And today Ms. Barbara Judge is not here, who's the chairperson and at the beginning she is -- doesn't speak Japanese, so it's better to have a Japanese speaker to make the announcement due to a nuance.

But I think it's fine if Ms. Barbara Judge -- was here. And I don't understand why Mr. Kikuchi is explaining it. I don't know why you came up with these candidates, but these candidates I think it's kind of foolish and I don't think it's going to work and Ms. Barbara Judge, what she told me is that she liked to have the outside directors and more than half have non-Japanese directors and bring in the people who work in the global companies. And she's not here today and the content of these candidates are totally different from what Ms. Barbara Judge has explained to us. So I want to know how come it became this content? I do know that you came up with your own proposal, but the thoughts and feelings of Ms. Barbara Judge is not reflected in here whatsoever. So I just wanted to know why you ended up being like this.

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Yoshinobu Kikuchi, LIXIL Group Corporation - Director [7]

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There are several questions within the question you asked. Towards the end, Ms. Barbara saying I want to include this type of person, that kind of person meaning I'm sure she spoke about diversity and others but within the nomination discussion this time, that type of comment has not been conveyed to the members of the nomination committee between the customers and Ms. Barbara Judge. What specifics have been discussed has not been conveyed to us as an information but from various investors and various shareholders, we have received the information that such and so a proposal has been made. Therefore this time within the candidates from the nomination committee, if we exclude Ms [Onimader] there will be no female candidates and until now we had Ms. Barbara Judge and Ms. Kohda. But anyway as a result, it has become this way. So it may be different from the ideal structure of directors. We do understand that thoroughly but that's it.

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Masahiko Komatsu, Polar Capital Holdings plc - Portoflio Manager [8]

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But the thing is Ms. Barbara Judge said that. I don't think that non-Japanese is the best and in all cases but it's fine what I said has having conveyed to her. But what she said or what her opinions has been mentioned in the discussions in the nomination committee. But even that, at all even with that, that discussion has not been reflected in this list of candidates and so I just think there's some force at work. So can you explain?

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Yoshinobu Kikuchi, LIXIL Group Corporation - Director [9]

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No forced like from the outside of somewhere from the founding family there was no force or power influence on us. Maybe you may think that I'm from TOSTEM but I myself even though there's a conflict in opinion with the Mr. Ushioda, I have in public been against him when I need to and I was never convinced by him if I don't agree with it. And that has been my stance for these years. Therefore, this time whatsoever no decision that was influenced up by -- none of the decisions have been made based on the influence of the founding family.

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Kayo Hirano, [10]

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There was no other person who raised their hands. With this, I would like to conclude the Q&A.

And before regarding the financial results and also the new management plan, the Q&A session time is very short. So we like to take about 10 minutes or so and have them Mr. Matsumoto and Mr. Yamanashi to come on stage again to answer questions regarding these 2 materials if there is any.

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Hirokazu Yamanashi, LIXIL Group Corporation - Representative Executive Officer, President, COO & Director [11]

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Thank you for waiting. For the financial results as well as the new management plan, if you have any questions please go ahead. And the person from the first row from the front.

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Unidentified Analyst, [12]

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From Merrill Lynch Japan. And I just ask 1 question only if that is the case and I'd like to ask a question related to the renovation strategy. And in the last 10 years, so the renovation will market in the domestic for has been, which is ranging from JPY 6 trillion to JPY 7 trillion and the Government of Japan is trying to really stimulate that but it has not been that effective. And you are really trying to develop strategy to make a breakthrough and that's what I heard from the present. If you could really share with us some concrete ideas, definitely I would like to hear. And so the new product which would be next to the shower toilet or in the industry and also having engagement of the government of Japan and not institutionally are really going to establish some [setting] to really promote that kind of market. What is your ideas?

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Unidentified Company Representative, [13]

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And the strategy and the new business domain if we talk too much it will not be good for a competition. But there are 2 stages or 2 phases in our strategy and JPY 6 trillion to JPY 7 trillion market has been assumed. And how to really secure market share in an efficient manner, and then that strategy has already been established. And then going beyond that, if we can really expand that market to JPY 8 trillion to JPY 9 trillion market and there are several elements. And I have discussed in housing environment is going to change, and then the health and also the healthy longevity will become more at the topics and the industry-wide initiatives and also our customers, for example, the major housing manufacturers and together with them the collaboration and also more the scientific data and we need to really come up with some evidence. And we have started to really work on that and to gather and collect more of the data.

And then probably I may be really were blowing up this picture. But JPY 6 trillion to JPY 7 trillion. And the consumption is in various consumptions, at JPY 300 trillion in total. And so it just represents 2%. And the household of 2% or more and JPY 240,000 to JPY 250,000 is the consumption and then the housing-related spending is just about JPY 10,000. So those shares is in the second idea not to compete against the peers in the same industry but we are to really take more shares from the competitors providing the different sources -- services that we have to really take some of the spending from those who are competitors and the other sectors. And then they used to spend a lot of time in the living room, but to really make the housing environment comfortable for the senior citizens. And then if we can really offer solutions and then people will be able to spend more and so how deep can we tap into this kind of market. And the health solution is 1 of them and the solutions for the senior citizens and we are trying to build up some of the products and then the NWT and -- both will work together and also the innovative products if we assume the plan based upon that, that could be very well unstable and so these are not factored into our plans so that how we come up with this new particular management plan. Are there any other questions?

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Kayo Hirano, [14]

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The person in the very front row please.

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Sho Fukuhara, Jefferies LLC, Research Division - Equity Analyst [15]

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My name is Fukuhara. The content of this fiscal year's plan, I want to understand it more. It was mentioned before, LWT there was a minus JPY 6.9 billion domestic business. What is specifically incorporated in it? Or did you not just change the original plan? I would like to know the assumption of these numbers. Well, the IT system depreciation especially in the showrooms we have right now, we have a three-dimensional virtual type of image, and that leads up to the stage of placing the order. And this system is quite well received in our showrooms. But that needs to be depreciated and also the distribution and logistics costs, the kitchen and bathroom products, the sizes are large so that transportation cost is quite large in terms of impact. And also, we have selected the -- very selective in terms of promotional expenses including TV commercials in the first half. But moving forward, there will be new products that we launch so we will have some sales promotional campaign and that type of expense and cost is also included this time.

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Kayo Hirano, [16]

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If you have any question please raise your hand.

If there are no further questions, we would like to conclude the briefing session for the financial results. Thank you very much for your attendance.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]