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Edited Transcript of 5938.T earnings conference call or presentation 31-Oct-19 6:30am GMT

Q2 2020 LIXIL Group Corp Earnings Presentation

Tokyo Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of LIXIL Group Corp earnings conference call or presentation Thursday, October 31, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kinya Seto

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

* Sachio Matsumoto

LIXIL Group Corporation - Representative Exec. Officer, EVP of Finance, Treasury, M&A & Legal, CFO and Chief Legal Officer

* Teruo Suzuki

LIXIL Group Corporation - Outside Director

* Yukiyo Uto;Investor Relations

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Conference Call Participants

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* Daisuke Fukushima

Nomura Securities Co. Ltd., Research Division - Head of Infrastructure Team

* Hideaki Teraoka

Daiwa Securities Co. Ltd., Research Division - Equity Analyst

* Hiroki Kawashima

SMBC Nikko Securities Inc., Research Division - Senior Analyst

* Sachiko Okada

Goldman Sachs Group Inc., Research Division - Executive Director

* Tomoyoshi Omuro

BofA Merrill Lynch, Research Division - Research Analyst

* Toshiyuki Anegawa

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

* Yoshihiro Nakagawa

Mizuho Securities Co., Ltd., Research Division - Research Analyst

* Mizue Tsukushi;Good Bankers;President & CEO

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Presentation

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Yukiyo Uto;Investor Relations, [1]

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So now it's time to start. We'd like to start the result explanation about LIXIL Group. For those who are in the audience and also for those are listening to the web streaming, thank you for your participation today.

I would like to introduce the representatives from the company. Director, Representative Executive Officer, President and CEO, Mr. Kinya Seto; Representative Executive Officer, Executive Vice President, CFO, Mr. Matsumoto; and Outside Director, Chairman of the Board, Mr. Masatoshi Matsuzaki; Outside Director, Chairman of the Governance Committee, Mr. Teruo Suzuki; Outside Director, Chairman of the Nomination Committee, Mr. Yuji Nishiura.

I will be serving as your Emcee. My name is Uto from IR Division.

First, Mr. Seto, the CEO, will explain about the presentation of the result for the first half. We will be using the display in front of you, but we have also distributed the same material. For those who are listening through the web streaming on our website, we have uploaded the materials for the results. And next, Mr. Suzuki, the Chairman of the Governance Committee, will explain about the press release made regarding governance. After the presentations, we will have a Q&A session. We plan to finish by 4:30.

Today's meeting is recorded. The audio, including Q&A, will be disclosed on our website. We ask for your consent.

We'd like to hand over to Mr. Seto.

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [2]

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Good afternoon, everyone. I would like to explain the first half results. As usual, on the first page, the message is simple. IFRS operating profit is called core earnings, CE. There may be some people who are joining us newly today. I just wanted to confirm this.

So the results are not so bad. First, as for revenue, domestic, core, housing and water businesses were favorable. It's natural that this is due to impact of the consumption tax. Before that, there was a rush of demand before the consumption tax hike. Overseas, there were good and bad, but all in all, it's flat.

Looking at the local currency minor increase; in Japanese yen, minor decline. That's the overseas business.

Next, the core earnings. In Japan, there was a revenue increase and the sales mix has moved favorably. I will talk about this later. On LHT, exterior/interior sales proportion were high, which had higher profit that has pushed up profit. For overseas, relatively speaking, in U.S., the retail which is low-profit margin, declined and end-user renovation direct sales mix has increased. That has pushed up core earnings.

And in terms of cost for both Japan and overseas, looking at the marketing expenses, it has been moving back to the latter half of the year. So in the first half, we were -- the cost was not so heavy.

And looking at net profit. In addition to all these, 3 subsidiaries were sold, and there were some profit as a result. So the net profit has improved.

Now what will be the full year results forecast? We would like to keep the initial numbers because the impact of the consumption tax hike is for one thing. And the reason why it has been good is March and -- up until March and April, the new housing starts was good, which was reflected in our business performance. But from July, August, the new housing starts have started to deteriorate, and the impact of that started to appear in the first quarter next year. So we have some concerns about that. And the rebound of consumption tax was not seen in October. However, from November onward, we started to see this. So we want to take some cautious approach. And there are some marketing expenses, which have been moving back to the second half. And unfortunately, for 8 months or so, I was, in a way, absent unfortunately. And during that period, I failed to proceed with the renovation, which we have to accelerate. So we need to really accelerate this reform, spending some costs. So given this, I think we should maintain the full year numbers as is.

As written here, looking at the 0.1% improvement of the gross profit margin. SG&A declined by 1%. Gross profit margin improved by 1 point. Sales mix has improved. Sales mix may change, so interior/exterior were good. And for overseas, for example, in U.S., the higher profit margin products were sold in Asia. China, which had a higher profit margin, we're doing good. That has improved our profit.

And looking at the cost element on the other side. Some costs have been shifted to the second half of the year. As you know, the CM personality had some issues, and in the first half we were not able to broadcast our commercials -- TV commercials much. So we are going to spend some -- do some of those activities in the second half. So the ratio of the gross profit margin and SG&A margin, there may be some decline and we have to improve this.

Now by segment. Our core businesses, LWT and LHT, on these businesses, things are going smooth and they have been leading our businesses.

And now our dividend, in accordance to the plan. And this was resolved and disclosed today.

And let me share with you more in details. For the water business, ever since I said -- as I said earlier, basically, the business was pretty much flat. Due to currency, it went down a little bit. But on local currency business, it improved slightly.

For North America or the U.S., Home Depot and Lowe's, those retail business, and also Ferguson, the wholesale business, are shifting to the private brand business. And with that, we have struggled a little bit. However, on the other side, we have the renovation products, the bathroom products, which is LIXIL home service products, which is a business we are doing in the U.S. And for 2 years in a row, it's been growing by 30%. This is for the end-users -- directly going to the end-users for the home renovation. That's why the profitability is good. And the hotel projects, we have some direct business there. So the sales came down slightly. However, we were able to reduce SG&A. Also, the profitability improved in the U.S.

And looking at the European market. We are doing very good in Europe. As you know, the European economy is not that great, but with revenue and profit, it's growing nicely. Also, we are faring well. The biggest good news is the African business, which was loss-making after Permasteelisa. But from September -- October, we have started to reach breakeven. For African business, the fundamental business is not that bad. But we have seen some unhappy situations, such as bankruptcy of our clients, strikes and also fires. So Africa is no longer a big drag, and that's why the European and EMEA market is improving.

Asia market is a mixed bag. China was very good. Compared to the other competitors, we're the only one who's growing in China. And looking at Southeast Asia, due to the U.S.-China trade friction, the Chinese products are not going into the U.S. It's going instead to the Southeast Asia. So Vietnam, Thailand, who are close to China, we are struggling in those markets. Looking at the competitive landscape on the Southeast Asia market, it's very tough with the local competitors. However, the sales mix has improved. The China profitability is highly profitable, and in Thai, Vietnam, the profitability is relatively lower. So in that sense, also personally, thanks to the reduction in SG&A, sales was decent but profitability improved in the Asian business.

In Japan, before the consumption tax hike, particularly for the renovation business, there was a last-minute demand hike. So we hope to continue this momentum.

Looking at the housing business. The product mix improved with interior and exterior products. The sales ratio increased for both interior and exterior products. The profitability are higher to begin with, so if the sales mix is higher with these, the overall profitability goes up. And the last-minute demand before the tax hike led to a revenue growth, and also product mix led to an improvement in profitability.

But what's great about this business was that for interior and exterior products, we were able to accelerate the shift to platform business model, and we were able to reduce the cost due to the commonization of the platform. And I think we can also be proud of the fact that for exterior, it was good because for one, last year, in full, there were a lot of typhoons, major typhoons. And with typhoons, there are demand for fences and the roof for the carport, and we get that alternative demand. And we were able to seamlessly supply the products. And we're probably the only company who are able to supply the product without any disruption. It was personally due to the fact that our factories were not damaged with the natural disaster, but we were also benefiting from the fact that with the platform model, we were able to offer stable supply.

But for the housing sash, we are still in the midst of converting to the platform structure. If we can complete that process, and if we can reduce SKU to rationalize the production line, we will be able to really see a strong improvement in LHT. But the concern is that the ratio of exterior/interior goes down or if the aluminum price goes up, then we will still have to deal with the essential issue of the low profitability with the housing sashes.

With the looks of building technology business, it's progressing in line with our projection. The Permasteelisa is still in red ink, but we have been able to restructure the business as planned within the cost budget.

And for Distribution and Retail and Housing and Services. For Distribution and Retail, for the first half, due to the last-minute demand hike before the tax hike, it was good. But in the latter part, the distribution costs will go up. So the profit contribution should not be as big.

But for the housing service, likewise, in the first half, there was the benefit of the last-minute demand hike before the consumption tax hike. But the nature of the business is gradually changing, and we are seeing an improvement in the business.

This is the consolidated balance sheet. What's complicated is that with adoption of IFRS 16, the operating lease are now perceived as liabilities. So on the balance sheet, it's the same, but the numbers look worse. But if we do an apple-to-apple comparison, the shareholders' equity ratio has improved by 1.1 percentage points. The net interest-bearing debt has gone down by JPY 8.7 billion. Also, we were able to generate good profit, and we also had sales of the subsidiaries. So that's why we have seen some improvement in the balance sheet.

Same thing on the cash flow. For cash flow, the operating cash flow increased and the financial cash flow increased as well. And this is due to the operating lease change, but it's offsetting each other.

And lastly, regarding initiatives on ESG for 2016. We set up a vision to reduce the CO2 footprints by 8 percentage points. And that was our target. But we were able to achieve that target 2 years ahead of the schedule.

And obviously, on top of that, as we have presented to you before, we are trying to contribute to a better hygiene in the world. And recently, we announced an MOU with JICA. So as a company, we're not just simply looking for our growth in profit. We want to be a company to contribute to the society so that we can enjoy sustainable growth, which will be supported by the community.

Also, we were very honored to be included in the Dow Jones Sustainable World Index (sic) [Dow Jones Sustainability World Index] for the first time. So in that sense, our efforts has been appreciated and highly regarded by the external communities.

As a company, going forward, we want to be purpose-oriented. We want to showcase why the society and people would want to support LIXIL. So we want to be a good company in that sense.

Thank you very much for your attention.

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Yukiyo Uto;Investor Relations, [3]

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Next, the Chairperson, Suzuki, of our Governance Committee is going to explain about the announcement of review of corporate governance at LIXIL Group and the establishment of the Governance Committee as a permanent committee of the BoD.

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Teruo Suzuki, LIXIL Group Corporation - Outside Director [4]

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I'm Suzuki. Thank you very much for joining the meeting today despite your busy schedule.

During the Board of Directors' Meeting held after the Annual General Meeting of Shareholders held on June 25, 2019, it was decided to establish a Governance Committee in order to summarize the past governance issues, which had occurred since the last year until the AGM of this year. I was appointed as the Chairperson of the Governance Committee.

Since then, the committee had vigorous discussions and reviews, which have elucidated problems as well as direction for improvement.

So I would like to report the review. I would like to report that today. Reviews conducted by the Governance Committee are on the following points.

First -- there were 2 points. First, roles and procedures taken by the Nomination Committee in relation to the change of representative executive officers during last year. The full report created by the third party was reviewed using reports which had been published in the past, including corporate governance report, documents issued for timely disclosure of corporate information, past meeting minutes, internal documents as well as through interviews of 3 directors who were directors back then in order to confirm facts written in the report created by the third party and issued on April 9. The full report by third party announced in April included points about Mr. Ushioda, who was Chairperson of the Board of Directors and a member of the Nominating Committee. While these points were intentionally dropped out in the summarized version of report, it was confirmed that the report by the third party released on April 9, 2019, in general, did not contain unreasonable points.

Second important point of the review is in relation to the operation of the Annual General Meeting of Shareholders held on June 25, 2019. By getting the views by external legal experts, processes up to the decision announcement of director candidates were reviewed. In cooperation with external legal experts, various documents and processes in and outside of the company were reviewed, including the description of the convocation notice, forms of voting and proxy, an additional document proxy issued a week before the AGM, the operational status of the AGM, including an examination of independence of outside director candidates. As a result, a series of procedures regarding the AGM had extreme behaviors in order to vote down proposals by shareholders, which lack fairness and integrity as a company. And the Board and external directors back then failed to hold that back, which is a clear problem of the governance system. It is natural that the company endorses its own proposals versus shareholders' proposal, but the company should always be impartial for all stakeholders and should not act in a way deemed inappropriate, even if -- even though things may not be illegal.

So those were the result of the review. On the first issue, even if a governance structure is in place as a formality, if the power is overly concentrated through one individual or Board of Director, the other Board of Director will become reserved and those will not say anything against that individual. In that sense, the governance will not be effective to prevent this. The independent body must be able to monitor and manage how their decision-making process is done at the BoD meeting in order to secure objectivity and fairness.

So as a remedial action, we pointed out 2 measures: First, at the BoD and the statutory committees, in order to avoid confusion in the execution of the responsibilities, the guidelines for the operation of the BOD and the statutory committee must be clarified so that there is no room for different interpretations. That revision had to be made. So through the discussion with the committees and the Board of Director meetings, we have been amending other rules as needed. We are also checking if the revised rules and regulations are affecting the practicality of the operation of the committees. And we also need a mechanism as we continue to make improvement. As one of such mechanism, the Governance Committee will be serving its role within the Board of Directors structure.

And secondly, in response to the future risk of a lack of objectivity and fairness, the Board of Directors has established the Governance Committee within the Board of Directors as a voluntary improvement committee, thereby, fulfilling the monitoring and supervisory functions within the Board of Directors. This will also ensure that any individuals or committees shall not become overly influential and serve as the deterrent to prevent misuse of corporate governance mechanisms and the recurrence of procedural problems. The role of the Governance Committee is to monitor and supervise the company's corporate governance to continue to boost that structure. Also, the corporate Governance Committee will be collaborating with 3 committees under the Board of Directors to improve the corporate governance structure. The Governance Committee will inform shareholders and investors and other stakeholders about the status of progress through various disclosure documents, such as securities report, the corporate governance report and other types of disclosure documents.

That's all for me. Thank you for your attention.

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Yukiyo Uto;Investor Relations, [5]

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Now we would like to take questions or comments from the floor. A staff person is going to bring a wireless microphone, then please identify yourself by saying your name and the company name.

I would like to ask one person to ask one question at a time. So if you have a question, would you raise your hands, please? The person on the left? The first row person.

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Questions and Answers

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Daisuke Fukushima, Nomura Securities Co. Ltd., Research Division - Head of Infrastructure Team [1]

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I'm Fukushima from Nomura Securities. I would like to ask one question. So full year business outlook will not be changed because there was a demand in the last minute before consumption tax and delay of the innovation reform. And about the delay of innovation, could you elaborate on that? So as a result of the delay in reform, when you conduct the second half, you are going to incur some expenses for the structural reform. That is why you are going to -- you will not change the profit. Concretely speaking, what are the delay in innovation? And what are the things that you would like to conduct as reform?

This may be a second question. How much was the last-minute demand hike before the consumption tax increase?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [2]

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The first question, so the latter part, when you look at our sales revenue, not much decline is expected. So we expect some rebound as a result of the consumption tax hike. But if you make comparison of profit between first half/second half, not much things. There are 3 things: costs. There will be heavier costs in the second half because in the first half, we were not able to spend much of our costs. And we will spending them in the second half, that is marketing expense. And the second is structural reform. And the third one, which I didn't talk about earlier, is the ForEx. In euro, some sales are booked as well as in dollars. In comparison to the first half and in the second half, in those places, there will be more impact in terms of profit. So we don't disclose the respective impact for those 3 items, but first 2 things are big or substantial.

Now what do I mean by structural reform? I think that was your question. A little while ago, in 2017, the midterm plan to be started in April 2018 was announced or explained. And one of the big pillars that I explained back then is to reduce costs for domestic business, which includes manufacturing reform, production reform as well as sales and marketing reform as well as reducing headquarter costs. In that regard, the company costs need to be reduced all in all, and various measures have been announced. And as to details on individual part, they are very sensitive to be disclosed so we refrain from disclosing them in detail. But from 2018, in particular in this financial year, it's a year before the Olympic Games as well as before the consumption tax hike. So it was easier for us to conduct all those reforms. However, we failed to do that. So we have to do all those reforms from now on, and we need to start them even one day or we have to start it quickly. So we will be buying time by spending some on costs. So that's the expense or cost part.

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Daisuke Fukushima, Nomura Securities Co. Ltd., Research Division - Head of Infrastructure Team [3]

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And the consumption tax hike impact, do we know the impact in terms of sales and revenue?

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

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JPY 5 billion to JPY 6 billion was the onetime impact. That's how we have calculated. And it is rather difficult to do calculation, but the gross profit is about 30% of that. Having said that, last time, the increase was 5% to 8%. Back then, for 3 to 4 months, sales and profit have increased.

But this time, at the end -- in the latter part of September, we saw onetime demand hike. So in October, as for shipment, not a big decline was observed in October this year. But in November and December onward, how it's going to develop, and the new housing starts, it started to decline, and that impact would be felt in a few months' time. And how we can see that it's very difficult to quantify.

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [5]

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And additional comment. There was subsidy, of course. But honestly speaking, the construction capacity was not enough, sufficient. As a result, this construction delay this October, in comparison to September, things were not so bad. So gradually, we will start to feel some body blow, meaning that we started to see the housing start starting to decline. That is giving us some impact. That is going to give us some impact. So as for manufacturing reform, it takes time. It will take time.

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Yukiyo Uto;Investor Relations, [6]

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Next question, please. So the person in the second row.

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Toshiyuki Anegawa, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [7]

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My name is Anegawa from Mitsubishi UFJ Morgan Stanley. I have 2 questions. The first one is on Page 17, looking at the change. Versus the full year plan, the domestic sales increase and decrease, already close to change, is something that you outperformed in the first half. And listening to what you were saying, I guess, the reactionary drop is not going to be that big. So I guess you don't see a big increase in costs and that should not deflate the profit. What is your outlook for the second half?

And also for SG&A, versus the full year, I think it was an increase of JPY 9.2 billion for the full year. But in the first half, it declined by JPY 700 million. But in the second half, you mentioned about the spending that will increase. So for the full year, would it be pretty much close to the full year guideline? Can you talk about the sales outlook and the SG&A outlook for the second half as well as the full year?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [8]

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So I will give you some numbers. A rough trend, as you may know. Our business in Japan peaks in the first quarter, second and the third quarter and peaks down in the fourth quarter, which means that in the second half, it's going to be bigger. So the sales is as projected, but the first half was actually better than the projection.

On the other hand for SG&A, it's pretty much close to what you just said. So what we did not spend in the first half will be spent in the second half. So if you combine the 2 halves, it will be close to the full year budget.

And going back to Mr. Fukushima's question, on top of that, overall, we still have revenue growth but the profit should increase with that. But frankly speaking, I would like to spend that extra profit on the structural reform and other expenses.

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Toshiyuki Anegawa, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [9]

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Well, then, you have the domestic sales increase, which was a big plus of JPY 10.7 billion in the first half. But for the full year -- or the second half, is it going to work negatively and that's going to be a decline in the numbers? Are you going to still enjoy this incremental growth in the first half for the full year?

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Sachio Matsumoto, LIXIL Group Corporation - Representative Exec. Officer, EVP of Finance, Treasury, M&A & Legal, CFO and Chief Legal Officer [10]

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Well, in the first half, as I said earlier, it was small but there was an impact of the consumption tax hike and also the new housing starts was brisk. So that's also led to revenue growth. But that should fall off in the second half. That is what we're projecting in the plan. And the challenge is how much of that we can offset to recover that. And that's what the sales forces are working on, and that is also one of the reason why the SG&A will go up.

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Toshiyuki Anegawa, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [11]

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So that was my big first question. And the second question is that in March, you had the redemption of the hybrid bond. How are you going to react to that? How are you going to treat that?

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Sachio Matsumoto, LIXIL Group Corporation - Representative Exec. Officer, EVP of Finance, Treasury, M&A & Legal, CFO and Chief Legal Officer [12]

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For the redemption of the CB, last month, we made a public announcement. It's JPY 130 billion of funding we got domestically. And we will use that proceeds to redeem the hybrid bond.

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Yukiyo Uto;Investor Relations, [13]

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The person in the third row, please, as the next question.

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Tomoyoshi Omuro, BofA Merrill Lynch, Research Division - Research Analyst [14]

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My name is Omuro. Slide/Page 16. Permasteelisa is my question. To understand, what is your strategy about Permasteelisa? So under the strategy to sell, are you taking some actions? If that's the case you -- earlier, I think you said that you want to add values, additional values and then sell it relatively high. How do you that? And what is the aspiration of performance improvement of Permasteelisa. This is my first question.

May I ask a second question?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [15]

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So one question per person. So let me answer to that question. In the past, in this meeting, I gave a talk about this. The management -- there was a possibility of sell an asset -- or we plan to sell an asset. There is nothing like that available. So for a specific asset, do we have possibility to sell or do we have a possibility to close that business? This is something not appropriate for management to say such a thing. So this is something I'm not able to comment. Do I want to buy some specific assets? The same thing. As soon as the management wants to talk about selling, if we say we want to sell, the price will go down and vice versa. So I'm not able to talk about that.

As for the status of Permasteelisa, there are various issues and the one root cause of Permasteelisa is the following: beyond the ability -- in the past, there was a strategy to expand the sales beyond the capacity, meaning that to the extent that the company does not able to manage, they will try to increase the sales. And that failed to control the operation.

And the bigger issue is that -- I talked about this business in the past, but all in all, in the initial stage of the project, profit is incurred -- in the latter part, profit is not incurred. So when you apply pressure, people try to get new projects. That is an incentive. So to control order is very important in this business. So while controlling the orders an appropriate-sized project number should be handled by the company. So when we control that, that is important. And we also need to sort assets out to create profit. That is what's important for Permasteelisa.

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Tomoyoshi Omuro, BofA Merrill Lynch, Research Division - Research Analyst [16]

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As I look at Page 16, in the first half, the Perma is minus JPY 4.7 billion, and JPY 12 billion minus is the full year. So in the second half, there will be more minus. Are there any special factor about this?

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Sachio Matsumoto, LIXIL Group Corporation - Representative Exec. Officer, EVP of Finance, Treasury, M&A & Legal, CFO and Chief Legal Officer [17]

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In principal, in the previous term, negative things have been patched. So this term, gross profit in this term are 0. But the fixed costs, that will be spent. SG&A will be spent. And how can we reduce fixed costs and SG&A? These are the reform that we are working on.

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Tomoyoshi Omuro, BofA Merrill Lynch, Research Division - Research Analyst [18]

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And the second question, in Asia, related to business. For you, China was very good, you said. Looking at competitors, they are having tough time, while your company's performance was really good. What has contributed to that? Could you elaborate on that, please?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [19]

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For China, honestly speaking, it's good. But I have some concerns. The current China situation perhaps is similar to the bubble economy situation with Japan. The real estate price has been going up, and yet the number of projects been going up in China. And for profit, we have to capture business very carefully in China. So it is not a situation that we can be 100% happy about China.

Then why our company's performance is good in China? In the past, in China, there were 2 layers of customers: a lower layer preferred less expensive products, captured by local manufacturers in China; and the upper layer, they would like to purchase regardless of pricing. So there is top-end customer and low-end customers. They were the dichotomy in the Chinese market. However, China -- in China market, gradually, middle to high market is expanding most quickly or rapidly in China. And to them, our American Standard brand were very favorably accepted.

And why is it appealing to them? Our competitor, overseas manufacturers, quickly create a supply chain in those -- in China than us. So a similar situation in India. But in many cases, they use exclusive distributors and their royalty is very high, but at the same time, they spend a little cost. Because they are exclusive distributors, they build showrooms and they build the distribution networks on their own. And the margin they enjoy is also very high, that's a fact, meaning that price becomes rigid. So it's really difficult to low down -- go down to middle to high. Since we are latecomer in Chinese market, we dealt with distributors in a flexible manner for American Standard brand. Then the margin to distributors was smaller than competitors. So we were able to take a flexible approach, and that is why we're able to capture middle to high end. That's American Standard.

As far GROHE, for a long time, they were -- their image of the product were well perceived. And GROHE is an exclusive full set brand, and that has led to the success in the Chinese market. Our strength in China -- we have 3 brands, and I think that's our strength: American Standard, GROHE, INAX. As for INAX, as a brand to contractors, INAX is succeeding. So each brand can conduct a marketing exclusive to its unique feature. That has been the key success factor for us.

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Yukiyo Uto;Investor Relations, [20]

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Next question, please? So please, just one question.

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Hideaki Teraoka, Daiwa Securities Co. Ltd., Research Division - Equity Analyst [21]

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My name is Teraoka from Daiwa Securities. I would like to ask about the medium- to long-term growth opportunities. From the second half of this year, the domestic situation will be severer than the first half, and the overseas will be flattish. And looking beyond the next fiscal year onward, how are you planning to grow? Previously, you said that you will not be able to grow sustainably without the differentiation of the product and service. And I believe, from this year, I think you used to have a plan to launch a new window product for the [volume zone]. Can you elaborate on that, too?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [22]

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The sash product will be launched in December. But from a technological point of view, I think it will take another year or 2 to come up with something that's very innovative. But I think we can offer something really nice for [volume zone], and we expect that to have a contribution to revenue and profit.

And looking out over the medium to longer term, what's important is that in the Japanese market, we have to brush up our products to differentiate and we need to export that through to the overseas market. And I think that is becoming more possible for us as an opportunity.

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Yukiyo Uto;Investor Relations, [23]

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Next question, please? The lady behind the previous person.

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Mizue Tsukushi;Good Bankers;President & CEO, [24]

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My name is Tsukushi from Good Bankers. Good Bankers is a research company on ESG. And I would like to ask about the governance. And thank you very much for the explanation about governance and how you have established the improvement in Governance Committee to overcome the previous governance issues. And you intend to improve the corporate value in that sense.

But looking at the current management, what do you think is your appeal to the employees? How are you raising the morale of the employees? Have you done any kind of survey on the morale of employees?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [25]

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Once every year, we do a survey called Heartbeat. So to all the employees, we ask about the impression of -- their thoughts about the company from different angles. But the timing of this survey is from early June until the timing -- right before the AGM. But that was a timing when we had the turmoils in the company.

So for the management, how many employees have criticism about the stability and the prospect of their business opportunity, and there were also comments made about the governance structure in the group. But the Board of Directors have been renewed, and as has been explained, we have conducted various reforms. So in terms of governance, I think we have seen a substantial improvement in how that is regarded by the employees. I think to get that information 2 years out will be too late. But Heartbeat was something that was done in a conventional manner in a large scale. But we are now thinking of using a different tool to conduct a survey to the employees about the governance structure. At this point, I forgot the exact name of what we are trying to do, but we are going to do it like an online survey to facilitate the process. So hopefully, by next year, when things have stabilized, we are hoping to conduct an employee survey regarding what they think about the new management.

But what I feel firsthandedly is that the credibility toward the management team. For instance, now we have the [Workbook], which is Facebook company version. And we get lot of feedback and comments. And I think to a certain extent, the employees have trust in us.

Also, it's not just a matter of governance structure. Going forward, we have to conduct the structural reform in the domestic business, which would include changing the seniority system to more meritocracy system and also changing the way people work. Also, the credibility in the trust toward the management team will be under pressure, and we will have to do something that will be very severe, not making everyone happy. So that is the challenge that we are facing today. So we also believe that it's an important communication that we need to do to get the trust from our employees.

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Yukiyo Uto;Investor Relations, [26]

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A person with the next question, the one --

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [27]

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Excuse me. And so what we are feeling, not just in the workplace. But for the last 4 months that I have rejoined the company, I've spent a lot of time with my employees, town meetings, roundtables. We've had a very open discussion with the employees, and everyone understands the needs of the structural reform. And the -- I also believe that there's an increasing number employees who feel structural reform will be beneficial for the company.

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Yukiyo Uto;Investor Relations, [28]

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Next question, please.

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Sachiko Okada, Goldman Sachs Group Inc., Research Division - Executive Director [29]

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Goldman Sachs. My name is Okada. So structural reform has been talked about today. Moving forward, what is the span of this? And at around when do you think you will see the impact to performance -- business performance?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [30]

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As of today, there is nothing I can disclose or announce. As I mentioned earlier, in the midterm plan, we have given you overall explanation how are we going to make reform in manufacturing and how do we reduce domestic costs. So overview was already disclosed or explained.

And it relates to what Fukushima-san asked. So in the coming 1 to 2 years or at least it would take 1 year. Including the manufacturing management, it would take 2 years or more than 3 years.

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Yukiyo Uto;Investor Relations, [31]

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Next question, please. The person on the right side.

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Hiroki Kawashima, SMBC Nikko Securities Inc., Research Division - Senior Analyst [32]

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My name is Kawashima from SMBC Nikko. The water tech business in Japan, what is the direction of that to reinforce that business? On Page 17, you showed a change in the revenue and the earnings, the selling price for LWT is decreasing. You have introduced a new sales systems and also you have revised the prices with LHT, and now the volume and the product mix benefit is all coming from LHT. But for the direction of the company, I think it's more water faucet-related.

And also for the [sash-rich] LHT, I think the media is suggesting that the business is going to get tougher. But looking at the numbers, what Ushioda-san was saying, which was that the bigger volume will contribute to growth, and I think the current strategy of reinforcing on LWT has not been effective. I know that you were absent for a couple of months, so they were things that you were not able to do. But can you explain what needs to be changed? Or do you still think the current direction of focusing on LWT is the right path?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [33]

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Well, getting volume obviously will give you better results over the short term. But the volume -- if you pursue just volume, it's going to reduce the price. And if the market declines, then volume-oriented business will not be viable. So if you just take a snapshot and if you have to choose between volume or not, then getting volume is good over the short term. But if we think about the product mix and the same price, the biggest contribution is coming from the growth of interior and exterior business. And that is for sure.

Also, we were lucky a little bit. With the impact of typhoon, the exterior business increased and the platform model is successful. And that will be more of a medium to longer-term benefit. But going forward, if volume comes down, not due to competitive landscape, but when we look at the reality in 10 years that new housing starts are going to definitely come down, also we have to take measures to respond to that. That's why we're doing the manufacturing reform.

And for LWT, the product mix of sales price for water is bad because tile is coming down. Because tiles have the highest profitability. And the tiles declining in Japan has been happening over the last 3 decades. So as an industry, it will take time for us to take some measure. But something that's unique, like [eco product], is an initiative that we can roll out to grow.

And the next profitable business is the bathrooms and the water stand cabinet. For 2 years, we have not launched any new product. But from the fall of this year and now toward next year, we're hoping to grow with the new product launches. And for the water stand cabinet, next year, we'll be launching a new product, which should be important for us. For the bathroom and kitchens, the profitability is lower, but that provision is increasing. And that's why it has a negative implication on the whole business. What I wanted to say is that for bath, we're not just going to -- we have been selling not just a high-end product but the one that's a layer lower, so mid-end. But overall, we are not questioning about the direction of the business and the new product launches have been relatively successful.

However, what I've been seeing is just the short-term issues. So with the product mix, over the short term, it improved. But if it works the other way, it will work negatively. So what we need to focus on is how we can differentiate our product in the domestic market and how we should exploit that to overseas. Filter and water cleansing is something that we can be competitive. So that's the capability that we would like to bring to the overseas market.

For the system bathrooms, we also have competitive edge overseas. There is an issue of unskilled workers for installations, so we will rectify that. LIXIL home service that we are doing in the U.S. has been able to overcome that issue, and that's why we have been able to be successful. Shower toilet is another opportunity that we are seeing. And we also need to look at the future prospect of the age business.

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Hiroki Kawashima, SMBC Nikko Securities Inc., Research Division - Senior Analyst [34]

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My understanding was that LHT, you are #1 in Japan. But for LWT, you're #2. For you to do a global business for LWT, that's nice. But I think you have to be more competitive in the domestic market. And you said that competitive product that you want to bring to overseas, I think, Toto will have a better advantage over you. So unless you have something of a good strategy, globalizing the LWT business will be challenging. That's the concern I have.

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [35]

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So I hope that you can renew your understanding in the perception. But the LWT Japan, and if you compare that to Toto, in terms of products, just looking at sales, the toilet and the faucet and also for bath, Toto might be the top maker, but for kitchen and the bathrooms, LIXIL is stronger. And the product difference is coming from that. Tile is another story. We are #1 in tile. But if Toto had the same product mix versus us, Toto would have a lower profitability. And if we had the same product mix to Toto, we have a better profitability. This means that in the different product categories, we have a better profitability over Toto. That itself means that as a product, our products are not necessarily inferior to that of Toto. Also, where we are weaker in Japan against Toto is that for toilet and faucet, the household facilities, we are not strong in the retail channel for those products.

If I may elaborate, looking at the Japanese interior facilities and the construction material industry, the quality of the products are not necessarily determining factor for the success of the companies because the end-user's opinion is not always reflected. It's more the installment constructors or the middleman's feedback that are more reflected.

Also, it's not the price or the quality of the product that is determining the competitive landscape. Also, we need to capture the distribution channel. Also, we said Toto has been better with INAX and TOSTEM was better than YKK. Also, if we install in Japan, the person who makes the purchase decision is not sensitive to price, and it's been determined by the retail channel. And that's what happens when the economy is growing. Also, that was what's happening in the Japanese market. But when the market is mature, rather than capturing the retail channels, we have to have a better product offering. When the end-users are choosing, the price sensitivity and the quality of the product will become more important. So in that sense, we are going to focus on the quality of the product because Japan is a matured market. And it's also important we try to sell that the overseas market.

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Yukiyo Uto;Investor Relations, [36]

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Someone with a question? Would you raise your hand? The second one from the left, second from the front, please. There will be only one more question.

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Unidentified Analyst, [37]

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[Oono from Meriton Asset]. I have 2 questions, I'm afraid. But briefly, first question is about the introduction of IFRS. Why did you decide to introduce IFRS? What are the benefits? What do you want to achieve?

And since Governance Committee was established, I have a question. There were many things happened, and one of the issue was on governance, that is shareholders and external directors' communication did not exist -- hardly existed. And the prior outside directors representing the shareholders, they tried to secure interest of shareholders. However, we failed to see such behaviors. So looking at the review by the Governance Committee, you looked at the -- what's good and bad for the past. But looking in the future, what kind of measures are you thinking about the communication that I have talked about?

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Sachio Matsumoto, LIXIL Group Corporation - Representative Exec. Officer, EVP of Finance, Treasury, M&A & Legal, CFO and Chief Legal Officer [38]

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About the IFRS, it's a global standard. So in the past, the sales percentage in Japan was 3%, and as we go outside Japan it, it was inevitable for us to introduce IFRS. And IFRS, it's just a means and not objective. So as we introduce IFRS, transparency of our accounting is going to be improved and we would like to have global result conclusion to have alignment. So in order to improve the quality of accounting within the company, we have introduced IFRS.

Suzuki, please, about Governance Committee?

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Teruo Suzuki, LIXIL Group Corporation - Outside Director [39]

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As for the past, I have given explanation, and no new things was revealed. But looking at the composition of the director -- BoD, 9 are external directors and 5 are internal directors. In the past, 7 were internal and 5 were external. So within the 7 internal directors, the chairperson of the BoD had a strong influence -- no, authority. And those who -- there were 4 who followed that person, and the fairness and equity of decision-making as a BoD did not exist. But that was improved in the new Board of Directors.

The issue is that there are many new external directors joining without knowing the company history. Can they function? Within the Board of Directors' monitoring and the supervision function, looking at last year's example, the -- maybe Nomination Committee had a reckless situation. And in fairness within the BoD was (inaudible) and the external directors did not function properly in the past. Now we have established a Governance Committee with 5 members. Some of the members are representatives from the other committees, and Mr. Matsuzaki who joined the Governance Committee is the Chairperson of the BoD. By so doing, more equitable, more objective decision or the coordination would take place.

And corporate governance structure is under vigorous reform right now. And at a different opportunity, we would like to announce about the renewal status of the governance structure. So the communication between the shareholders and external directors is very important. That is why this meeting was supposed to share with you the results. However, taking this opportunity, external directors are present in order to have -- and I understand it's important to have communication with shareholders. So Governance Committee is a permanent committee within the BoD. That's the key. So assessment of the implementation is going to be led by the Governance Committee.

So what is required in the corporate governance score, that is dialogue. Dialogue with shareholders, is it done properly? That will be checked by the Governance Committee -- or through Governance Committee. And wherever there is room for improvement, we would like to improve them.

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Yukiyo Uto;Investor Relations, [40]

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Well, we'd like to take the last question, please. Please, given the interest of time, make it simple, please.

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Yoshihiro Nakagawa, Mizuho Securities Co., Ltd., Research Division - Research Analyst [41]

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My name is Nakagawa from Mizuho. I have just one question. On Page 17, you have the LHT, plus JPY 1.6 billion of mix sales price. You explained that the interior and exterior mix improved. But if we look at the products, how much was the contribution coming from the housing sashes?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [42]

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For housing sashes, I think you should look at the revenue change or growth. Mix and sales pricing, if you can look at the profitability of the sash interior/exterior and the proportion of the sales mix, that's how we are explaining this slide.

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Yukiyo Uto;Investor Relations, [43]

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Thank you very much. So this will conclude our result meeting. Thank you for your attendance today.

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