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Edited Transcript of 5938.T earnings conference call or presentation 31-Jan-20 6:30am GMT

Q3 2020 LIXIL Group Corp Earnings Presentation

Tokyo Feb 7, 2020 (Thomson StreetEvents) -- Edited Transcript of LIXIL Group Corp earnings conference call or presentation Friday, January 31, 2020 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

* Yukiyo Uto;Investor Relations

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Conference Call Participants

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* Arisa Katsuyama

Morgan Stanley, Research Division - Equity Analyst

* Daisuke Fukushima

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

* Hideaki Teraoka

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

* Sachiko Okada

Goldman Sachs Group Inc., Research Division - Executive Director

* Sho Fukuhara

Jefferies LLC, Research Division - Senior VP & Equity Analyst

* Tomoyoshi Omuro

BofA Merrill Lynch, Research Division - Research Analyst

* Toshiyuki Anegawa

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

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Presentation

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Yukiyo Uto;Investor Relations, [1]

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We would now like to start the LIXIL Group Financial Briefing. Thank you very much for those of you who have visited us at our venue and joining us via the audio web streaming service.

Let me introduce today's presenters. Representative Executive Officer, President and CEO, Mr. Kinya Seto. Good afternoon. Representative Executive Officer, Vice President and CFO, Mr. Sachio Matsumoto; and Head of IR, Ms. Kayo Hirano. I'll be the facilitator. My name is Uto from IR office.

Today, first, our CEO, Mr. Seto, will explain the Q3 results for the fiscal year ending March 31, 2020, based on the presentation material. Please refer to the screen in front of you, and we have also provided handouts to those of you at the venue. For those of you with the web streaming service, please refer to the screen.

We will be taking questions after the explanation by President Seto. Those of you via the streaming service, please send us the e-mail to the same e-mail address that we sent you the invitation to this briefing to irg@lixil.com. Please put the title as (foreign language) question. And please be concise in your question. We will conclude at 4:30 today.

Today's briefing will be recorded, including the Q&A, which will be made public later on our company's web page. We ask for your kind understanding.

Now President Seto, please.

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

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Good afternoon. Without further ado, I would like to explain about Q3 results. If I may, I would like to start with Page 3, Q3, the third quarter. Well it's not so bad. Regarding the domestic business, the impact of the consumption tax hike started to appear in the third quarter and what was slightly different from usual was the impact of tax hike was more apparent on renovation business and last minute purchasing that happened in September were not accommodated fully because of the limitation in the construction capacity, and it has spilled over to October. And therefore, October was a rather good month. And the first 2 weeks of November remained good as well. But in the second half of November, it started to slow down, and December was a difficult month.

As a result, the Japan business compared with last year, the October to December period was below last year's level.

Turning to overseas business. There were some ups and downs, mixed results, but more or less, the trend was maintained. Having said that, the revenue is making good progress, and our core earnings and net profit -- the core earnings increased 39.3%, and the net profit increased JPY 28.6 billion year-on-year. And we have decided not to change the full year forecast at this point in time because there are so many uncertainties and based upon the slogan of Kawaranaito LIXIL or the LIXIL transformation and things -- some things are still unclear. And earlier, I talked about the consumption tax hike. And January, in January, we were seeing continued impact, a negative impact. But towards the end of January, we started to see the signs of recovery, and therefore, February and March remain uncertain.

In addition to that, the impact of the coronavirus is also unclear. And therefore, at this point in time, there are so many uncertainties, and that is the reason why we decided to keep the same guidance.

Moving on to the next page. As I briefly said, the consolidated business results. We're basically pretty good. But Permasteelisa was burdened in terms of the numbers. But these numbers are more or less in line with the plan and in line with what I explained to you in the past.

And in case of Permasteelisa, it's mostly restructuring costs that incurred and the problems of Permasteelisa, we are now trying to shrink its business to manageable level and then the capacity may become idle. So we will need to sell or dispose of excess capacity and reduce headcount. And core earnings ratio was 3.7%, which is 1% improvement from last year, but without Permasteelisa impact, it will be 4.6%. I will give you more details about the overseas business. But the domestic business, Japan business did better than overseas business. And overseas Permasteelisa was a burden, which I think was unfortunate.

Next page, please. Looking at this, the progress. I earlier on talked about the 9 months period, but what about last 3 months? The third quarter of FY 2019 and FY 2020, both revenue and core earnings declined. Well, you are very knowledgeable about this. I don't need to explain, but in our business, particularly the Japan business, October to December is the best season followed by July to September. And January to March is actually the worst season in terms of the profit and building business. Another major businesses and public sector business, there are some in both water and housing and projects tend to be concentrated in January to March. But except for that, October to December is the best.

But the situation is different for overseas business. For overseas business, January to March is the best, followed by October to December and July to September. So usually, the third quarter is the best 3 months.

Taking into account what I have just said, these numbers are not so excellent, but not so bad either, and we had an accumulation in the first 9 months. Thanks to that, the overall result for 9 months was not so bad. And core earnings, the 3 quarters of the annual forecast, so that's not too bad.

And what about January to March? As I said previously, there are many concerns and uncertainties. That is the reason why we keep the same guidance.

Next page, please, the domestic business, Japan business. So here, it talks about the same thing, but our Japan business is highlighted. In March 2020, things have slowed down. So what about the last minute buying and the impact of the consumption tax hike actual impact? It's rather difficult to calculate that. But when I explained to you in October, I said that the decline in revenue after the consumption tax will be quite limited. And now I know that it's about minus 2%.

In other words, the impact of consumption tax was somewhat larger than the last minute buying. And the new housing starts started to decline in July and the impact of that became more apparent in November. In other words, we were hit by both of those factors in November onwards. So that is the situation about the renovation business.

Moving on to the next page. This year, we made various announcements, and I would like to talk about the 2 qualitative things.

The other day, we announced the possible merger of LIXIL Group Corp. and its subsidiary in order to simplify our operation and to make it easy to manage by eliminating 2-tier structure. So we started considering a possible merger, but when it's going to be realized from a statutory point of view, the laws and regulation and permissions and approval are related. Therefore, at this point in time, I cannot say for sure when it will be possible. But in actuality, in April of this year onwards, we would like to operate the company as 1 entity, as 1 company.

And what about the statutory aspect? If things go in line with the plan, in April of next year, probably the 2 companies will be completely merged from a statutory point of view as well.

Next slide is part of the comprehensive HR program that we have named Kawaranaito LIXIL. We would like to make LIXIL a simple organization that is merit -- based on merit. Regardless of your gender or age, we'd like everybody to be able to perform at their best and meet the position -- be at the position that they should be in.

Also, we would like to exit from the organization, dependent on the past history and legacy into the organization for the future. There are several initiatives that we have announced. One is we would like to shift the B2B personnel to B2C personnel. And we would also like to in-house some of the work that we have outsourced.

Also, we would like to provide a Career Option Program. There are people who may not want to meet the new requirements from the company as the company continues to change or who are not willing or who are not able, we would like to provide a different career option for them.

And also, we are promoting the so-called work style reform, providing more flexibility in the place and the hour of work, and even mothers should be able to work more comfortably in our organization.

Further, starting from April, we would like to change the way we promote our employees to managerial positions or rotation within the organization. We would like to become a more modern and simple company. This is the strategy that we have for HR.

Sorry, I have not been giving you the page number. So results by business segment. First, Water Technology business. No page number on the slide -- oh, it's Page 10.

So I would like to explain more about the Water Technology business. First, Americas. Revenue was not that great, but core earnings increased. So Americas had challenges, which we have been counteracting, and this is being reflected in the results. Conventional American Standard business has been struggling. This was providing products to distributors and home centers. And this was on a declining trend. And the biggest cause was our brand equity. American Standard did not necessarily have higher brand equity than other competitors, so it was being overtaken by private brands.

Another fundamental challenge was that we were weak in bathtubs. We do not have plants -- many plants with bathtub manufacturing capability, so we were weak in the logistics, and so we were losing to competitors.

And the biggest way to change the situation was to increase the brand equity, which requires marketing investments and R&D investments, which we have been promoting. So of course, that business continues to be important. But in the U.S., renovation and project business are growing. The reason why renovation business is important, Europe and the U.S. are different. Europe is reducing bathtubs and showers. But in the U.S., actually, bathrooms are increasing more than the increase in houses. This is a change from before. U.S. average is close to 1 bathroom per 1 person. So in the past, 3 bedroom with 3 members used to have 2 bathrooms. But now there are 3 bathrooms for the 3 family members.

So there are renovations, even with less number of family members still to increase the number of baths. So LIXIL has been able to grow the renovation business in the U.S., catering to such needs.

Also project-based business is growing. In order to grow the American Standard brand equity, project business is important, and these have higher profit margin compared to our conventional business. So because of the difference in the sales mix, and of course, because of our cost reduction measures, we are seeing higher core earnings. So we are growing in the focus business, but we are still lagging behind in our conventional business. This remains our challenge.

Now for EMEA.

For Europe, we have been growing beyond our competitors. We have been increasing market share, so we feel most of these with regards to Europe.

For the Middle East, this -- we have seen recovery compared to the uncertainty before, but now the political instability is increasing in Middle East. There are more instability in the region, so I do feel some sense of uncertainty for Middle East.

On the other hand, Africa is seeing more months with the returning profits. For example, we were able to churn breakeven from August onwards. And December, we fell back to losses because of the number of business days, but I do believe that from next fiscal year, we should see Africa in black ink. Africa remains small, but this is the region to see the largest growth in the water business going forward. And we -- not many others are investing in Africa at the moment. So we expect that this investment will pay off.

For Asia Pacific, the situation is different between China and Asia Pacific other than China. I believe that in China, we were the only Japanese manufacturer to grow the water business in China for this period. But we cannot project the impact of the coronavirus at the moment. So what's going to happen in the China market from February onwards remains uncertain.

On the other hand, Korea, Thai, India and Indonesia, in these Asian countries, we have been struggling. We need to take different initiatives as the reason for our difficulty is different for each market. But compared to 2, 3 years ago, the Asia region as a whole is not growing that fast. So we need to win against our competitors and take the necessary measures. And Vietnam has been turned around.

And Japan, same situation as explained before, very good numbers before the consumption tax hike, but December onwards, we have seen a slowdown.

Now going to the Housing Technology, Page 11. So we have divested Suzuki Shutter and LG-TOSTEM. So if we put aside these impacts, we have actually grown quite significantly, especially for core earnings, we have improved greatly. The market itself is not expanding, but we have taken the proper pricing policy and the platform strategy. And I think the results are showing. But going forward, the market conditions have become even more difficult. So we need to change our business and outpace the shrinking of the market.

Page 12, Building Technology. I will provide more details about Permasteelisa later. But for Japan, the Olympic Games are approaching. So the demand remained healthy, but the performance remains difficult. Building Technology is not as large as housing technology, but we need to significantly reduce our cost and take the proper pricing strategy to improve our profitability.

Now overseas business is mostly Permasteelisa. So please turn to the next page, Page 13. It shows the progression of the revitalization plan. So the numbers look poor, but this is actually going in line with our original strategy. So the restructuring is proceeding on schedule, and there are no major negative factors or concerns with regards to Permasteelisa at the moment. But as we conduct the revitalization plan, there are cashouts because of the restructuring efforts. So we need to inject cash accordingly, and I'm sure that you are all aware of this importance.

So about EUR 100 million has been the cash injection as of FY 2020 Q3. So we are implementing the revitalization plan accordingly.

And D&R, distribution and retail. In order not to mislead you, I would like to say the following. So now we only have LIXIL VIVA, which is a home center business. And they announced our results based upon JGAAP, but we are based upon IFRS. So there are differences. The biggest difference is about lease assets. Based upon JGAAP, the lease assets are lease assets, but this year onwards, we are using IFRS. And therefore, lease is recorded as a debt or liability. And therefore, the -- VIVA's assets or their lease assets accelerate. And our numbers are not exactly the same as what VIVA discloses. Please understand that.

And a reminder, the remaining portion, for example, LIXIL [Jyuken], which is housing, franchise, business and LIXIL Realty, which is real estate business centering around renovation and Japan Home Shield, which checks the soil -- strengths of soil.

And LIXIL Finance, which is, obviously, a financing business for housing. So those -- many businesses are included in this area.

And in the past, the businesses are focused on the newly built houses, but we have been shifting towards renovation. And comparing this year with last year, LIXIL Realty sold a major property. But excluding that this year, we saw good growth.

Page 15, our consolidated financial position. LIXIL VIVA numbers impact for here. The equity ratio seems to have come down from 25.9% to 24.7%, but that is because these assets now are classified as debt.

Without that, it should be 26.7%. And net interest-bearing debt also seems to have increased, but once again, this is because of that accounting standard. And actually, it's down to JPY 577 billion.

And cash flow -- as you can see in free cash flow, this has improved significantly. There are 2 reasons behind that. First of all, the business performance has improved dramatically. And also, right now is the timing for working capital to decrease and invest in cash flow. The sale of noncore subsidiaries also contributed to improving free cash flow. And as I said, the lease assets in net, it's 0.

So roughly, I have given you an overview, and I would like to take your questions.

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Questions and Answers

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Yukiyo Uto;Investor Relations, [1]

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Now we would like to take questions. First, we will take questions from those of you here in this venue. And then we will take questions via the e-mail.

For questions that we received on e-mail, we will read out the company name, your name and the text of the e-mail. And then if the question is asked in English, then there will be consecutive translation after the emcee receive the English text. Also, please understand that we will conclude at 4:30 p.m.

So first, we'd like to take questions from the floor. Our staff will bring you the wireless mic. Please state your name and affiliation and ask the questions. (Operator Instructions) First, the gentleman in the front, please?

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Daisuke Fukushima, Nomura Securities Co. Ltd., Research Division - Head of Infrastructure Team [2]

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Fukushima from Nomura Securities. I have 2 questions. My first question with regards to the results announcement today. So as of Q3, for core earnings, you have already achieved the full year guidance, but you have not changed the full year forecast. And one of the reasons that you have given was that you will be taking measures, initiatives in the fourth quarter, perhaps restructuring or other initiatives to meet the midterm targets. So in this fiscal year's results, how much of the gap to the midterm plan do you think that you can catch up? Or in other words, how much will remain as homework for the next fiscal year? From this year to next fiscal year, what is the profit trajectory that you foresee? That is my first question.

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [3]

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It's difficult to answer in a quantified manner because currently, we are looking at the career option. But we are not going to put any numerical limitations, so any applications will be met. So at this moment, we cannot project how many people will raise their hand to join this career option program. And this will also impact the initiatives -- other initiatives going forward. So I do apologize, but I cannot quantify this year this much, and next year this much. I cannot give you any specific numbers.

Having said that, when you look at the midterm plan, we are going to reduce the overall costs, but at the same time -- so we are going to lower the labor costs but additionally, we need to improve the productivity of LHT. So the initial plan concludes in the next fiscal year or 2021 March. That is the period for the current midterm plan, but we are lagging behind by about 1 year at the moment.

And productivity reform, I am not confident whether we can fully catch up by the next year, but we do hope that we can complete all the initiatives by 2021 March.

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Daisuke Fukushima, Nomura Securities Co. Ltd., Research Division - Head of Infrastructure Team [4]

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And let me add to that question. Maybe this is a hypothetical question, but this year, if there are not many people who apply for the Career Option Program, and perhaps you will deliver results that far outpace the full year forecast, that might mean that you will need to take further measures in the next fiscal year.

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

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I don't think that we will surpass the plan significantly by the number of people who will sign up to the Career Option Program, because this is a 5-year initiative. So I don't think this single year will be impacted that much.

And this kind of rationalization or streamlining is important to make the organization more flat and simple and change the way we work and reduce the amount of work, while we reduce the headcount. So we have to reduce the amount of work in accordance with the headcount decline. Because if we just reduce the headcount and don't reduce the amount of work, then the people who remain have a difficult time and vice versa, people who have nothing to do. So we have to match that balance.

So midterm plan is 1 pillar, of course, but in a sense, this is a never-ending challenge that we need to continue to pursue outside of the midterm plan. So I do not think that the Career Option Program alone will have such a significant impact on -- just on the mid-term plan. We are taking various other initiatives as well. But we would like to give you the numericals when we have further information.

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Daisuke Fukushima, Nomura Securities Co. Ltd., Research Division - Head of Infrastructure Team [6]

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My second question, LIXIL Group and LIXIL Corporation's merger. LIXIL Group is a holding company. I'm not sure whether it's a business holding company or a pure holding company, but if these 2 entities are merged according to your announcement, then LIXIL D&R or H&S, will they be on the same level? Or the broad LIXIL Group will have manufacturing at a center and the service-related organizations will be considered as non-core. This may be a difficult question, but you will stop investing your management resources into the noncore or service business?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [7]

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That's a very sensitive question. So I need to be careful about how I respond. But let me answer you in a different manner. So merging LIXIL Group and LIXIL Corporation, and so this will become a business company, operational company. And technology-related business, our core business will be at the center. And for all other business, these will be subsidiaries, and we will ascertain the synergy with the core business in order to decide the company's future.

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Yukiyo Uto;Investor Relations, [8]

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The next question, once again, the person in the front row.

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Tomoyoshi Omuro, BofA Merrill Lynch, Research Division - Research Analyst [9]

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From Merrill Lynch, my name is Omuro. I have 2 questions. One about Permasteelisa. Restructuring plan was announced in last April, and things are progressing in line with the plan. And I do think that is true in terms of the numbers, and EUR 110 million have been injected thus far. And equity of the company, if it becomes undercapitalized, are you injecting capital? Is that how you think about this? Or the cumulative number, including EUR 100 million, am I right in assuming it's not going to increase going forward? Or do you think you will need to inject additional amount?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [10]

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To put it simply, we just need to inject a necessary amount at any given time. But restructuring is not yet completed, and we must compensate for the losses. And as a parent company, it will be probably most reasonable to do so in the form of a capital injection.

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Tomoyoshi Omuro, BofA Merrill Lynch, Research Division - Research Analyst [11]

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Are there any indices or criteria for us to look at? And to follow-up Permasteelisa, for example, because this number went up to this level, it means there was a capital injection?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [12]

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For indices, Page 13, at the bottom. This year, full year net profit, EUR 165 million and next year, minus EUR 31 million and 2 years from now, EUR 3 million. So this is the restructuring plan that we shared, and we are making activities based upon this plan. And every month, we hold a restructuring review meeting. And there are some projects that are moving ahead of the plan or falling behind the plan, but these are the numbers that form the basis about the capital injection. Looking at the quarterly balance sheet, we are making sure that the company doesn't fall into undercapitalized situation. So we inject minimum necessary amount.

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Tomoyoshi Omuro, BofA Merrill Lynch, Research Division - Research Analyst [13]

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My second question is, it's also about the Permasteelisa. Last time, regarding -- I asked the question whether the company will sell Permasteelisa or not. And I think the answer was, "I cannot tell you." So things are moving forward in line with the plan. What is your feeling? Do you still keep a no-comment-type posture?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [14]

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That is right.

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Tomoyoshi Omuro, BofA Merrill Lynch, Research Division - Research Analyst [15]

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So am I right in understanding that it's possible?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [16]

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I mean, either way would be possible. I'll let you assume what you want to assume.

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Yukiyo Uto;Investor Relations, [17]

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So the next question, please raise your hand.

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Sachiko Okada, Goldman Sachs Group Inc., Research Division - Executive Director [18]

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Goldman Sachs, my name is Okada. For the LHT future profit projection, that is my question. There has been a decline in demand after the consumption tax hike and there are cost reduction initiatives that you have been taking. And next year's forecast, it's very difficult for us to predict. So I would like to ask for your comments. Do you think that the continued -- there will be a continued impact from the consumption tax hike in the next fiscal year? And also, how much -- what is the speed with which you are implementing the cost-reduction measures?

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

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It's difficult to provide you with the organized explanation about this. To be honest, I do have quite a high level of confidence. Without any extraordinary events, I think that the LHT business is going well. So of course, there are impacts from the natural disasters and so on. But this year, without major demand from the natural disasters, we have been able to proceed quite well. In interior, we are increasing market share, we are increasing volume. And so we can see a good contribution from the interior business as well. And going forward, production transformation for sash is a big challenge and how to accelerate the sash production transformation, but we are taking bold measures. So to be honest, I do have a certain level of confidence on this matter.

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Sachiko Okada, Goldman Sachs Group Inc., Research Division - Executive Director [20]

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So what will be the hindrance? What could be -- prevent us from a positive trajectory?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [21]

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If the aluminum price shoots up and if there is a weak end then, for the time being, we will see lower numbers. And sometimes, given the past history, it takes about 6 months to recover. And the housing starts may decline more than expected. That's another scenario. But looking at the recent development, we are still able to be profitable, even if there is a decline in the housing starts. December -- January numbers are not that bad. So what we need to do is be proactive and take bold measures in reforming our production rather than saying that this product is sacred, and we cannot stop production. We should take all necessary measures to improve productivity. I apologize that my comment is quite qualitative. But for the production reform, I don't think there will be any events that will prevent us internally, but rather a weak end -- or aluminum price or the sudden declining housing starts, these will have a negative impact because the fixed cost is rather high. So it's very difficult to quantify because it depends on how much of a drop or slow down it will be. But given the current pace, I don't think we should be that worried.

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Sachiko Okada, Goldman Sachs Group Inc., Research Division - Executive Director [22]

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My second question is about the business in the Americas. You said that bathtub plants are lacking in the U.S. So if you are able to make bathroom packaged proposals then perhaps you need to invest in manufacturing plants in the U.S. What are your thoughts on strengthening the bath business?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [23]

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Investing in bathtub plants, we see some restrictions in -- depending on areas, due to environmental issues and so on. So we can invest in some areas and not. To be honest, in Europe, the bathtub business is declining because European people tend to shower. And the U.S. as well, the bathtub is more like simple furniture because most of the people simply shower. So whether or not the bathtub business will continue to grow, there is still some uncertainty. So we have not made any decisions on that matter. And if the shower rooms grow in the U.S. like Europe, then shower room investment may be necessary. So bathroom investment is not necessarily bathtub investment, but how to develop the sophisticated modern bathrooms. And the LIXIL home service, our renovation business, is providing us a clue to that because this allows us to learn the demand of the U.S. market. And if there is a shift in the demand for bathrooms, then we should change the way that we invest.

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Yukiyo Uto;Investor Relations, [24]

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Next one. So lady in front.

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Arisa Katsuyama, Morgan Stanley, Research Division - Equity Analyst [25]

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This is Katsuyama from Morgan Stanley MUFG Securities. So I have 1 question. Page 21, LWT, LHT cost reduction. Can you talk about the contents of this vis-à-vis full year plan? There seems to be an upside -- not Page 21, I guess -- Page 19. Sorry about that. Vis-à-vis full year plan, there is already an upside, but up to Q2, I think it can be explained. But in Q3, the profit is further increasing. Is that because of a platform-based business? Could you give us more details?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [26]

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LHT platform, as you rightly said, exterior and interior new products are doing very well, very well accepted. So the mass production and cost reductions are also included in the numbers and LWT bath and kitchen cost reduction pertaining to them as well as volume increase fueled the growth. So in full year, the impact of volume and product mix, both in terms of those factors, this business is doing well.

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Yukiyo Uto;Investor Relations, [27]

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Next question, the person in the back.

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Hideaki Teraoka, Daiwa Securities Co. Ltd., Research Division - Equity Analyst [28]

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Teraoka from Daiwa Securities. I have 2 questions. One, from April, you said that the operation will be integrated with LIXIL Corporation? And can you elaborate on that? Speaking about the actual changes.

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [29]

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First of all, the governance structure will be simplified, basically, LIXIL Group right now has a Board of Directors, centering around outside Directors and a Board of Executive Officers and LIXIL Corporation has a Board of Directors. The members of Fitch are all internal people, but by integrating them, the Board of Directors of LIXIL Corporation and the LIXIL Group can be integrated in order to face the same direction and reducing redundancy.

And as we had heard in the previous question, we would like to make things simpler right now in terms of the organization. Right now, on the LIXIL Corporation, there are many subsidiaries, but they will be placed under the entities that do the businesses of those subsidiaries as a core business. And the statutory LIXIL Group will keep some members who need to stay in LIXIL Group because of the legal perspectives like Matsumoto's and [Ms. Jean's] department. There are some redundancies, but we can integrate those departments going forward.

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Hideaki Teraoka, Daiwa Securities Co. Ltd., Research Division - Equity Analyst [30]

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My second question is Permasteelisa restructuring, Permasteelisa's a problem. The Permasteelisa focus too much on the revenue and it accepted more orders than it can handle. But because of this restructuring, the business will be shrinked, and there will be excessive capacity. And my question is, do you really need to shrink business that there will be excess capacity?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [31]

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So on the capacity, when I say capacity, it means that the capacity of managing business, and it was more than the manageable level. And the headcount needed to be increased and plant needed to be increased in order to handle those orders. And if the company focuses on profitable business, it can achieve high profit margin. And focusing on those businesses, there are capable people who can control those lines of business. But the fiscal [CNC] need to be increased and the plants need to be increased, and we will need the managers who will manage the managers. Unless we do this at this time it will be totally unmanageable. For example, if you build 2 stories, you may think that the total area will be doubled. However, that is not the case, actually. In order to build 2 stories, the pillars must be bigger and therefore, the area, the total area will be smaller than level. And when it exceeds 100 stories, then -- so it's a managerial limitation and Permasteelisa, because the people kept increasing and there were people -- the managers who manage the managers, in that sense, we need to decrease the headcount. And we also need to reduce the number of plants. And capacity, overcapacity, when I say that, I mean that the size became larger than the company could manage. So that is what I meant.

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Yukiyo Uto;Investor Relations, [32]

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Next question, gentlemen in the front, please.

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Toshiyuki Anegawa, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [33]

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Mitsubishi MUFG Morgan Stanley, my name is Anegawa. I have 2 questions. My first question for the Americas. So you have discussed multiple points, but LIXIL home service and project-based business with the high profitability, when this business grow in volume. And when do you think that you'll be able to lead the profit? But in the meantime, you need to improve the brand equity. But there is still a trend of the lowering -- lower brand power as well. When do you think that will hit bottom? And when do you think the brand equity will improve?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [34]

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The brand equity itself is actually growing. It's improving at the moment. Now why are we losing to competition, in spite of the higher brand equity? The reason is that distribution wholesalers, home centers are changing with the mergers and acquisitions. They are becoming more powerful and creating private brands. In Japan, there are not so many home centers with strong private brands. But in the Americas, it's very strong. And for the Americas, the private brands target the large company with relatively low brand equity. And so we were the perfect target. So even if we had been able to raise the brand equity somewhat, we have not been able to stop the takeover by the private brands at the moment. We need to further raise our brand equity to protect us. So if you look at the overall situation, it is quite tough.

But in the U.S., there is this special situation where the bathrooms are increasing. So for the next 4 and 5 years, everybody in the industry believe that the market itself will grow. So if we make efforts, and we continue to brand -- improve the brand equity, then I believe that there is much room for grow in the U.S. But practically speaking, we need to take countermeasure against the private brands. But the e-commerce is finally growing as well. So fundamentally, that is an area where we should strengthen in Japan as well. We need to further promote our e-commerce business because we can grow in both margin and volume. So the time frame, I do think that it's going to take several years, but the current situation is not that we are losing and losing to competition.

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Toshiyuki Anegawa, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [35]

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My second question, from January to March, Toto, I believe, will be launching a new product in the water technology. I'm sure that you have more information than we have. What will be your way to contract Toto's new products?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [36]

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This is probably the question that I should not answer. But we believe that this kind of simply contracting our competitors' product is not the strategy that we should take. For toilets and faucets, Toto is stronger, and we are stronger in bath and kitchen. But of course, we are often asked to -- how we compete with Toto because I guess the investors think that Toto is stronger than us. So when the market expects Toto to be stronger than us, and if we simply launch a new product to match Toto's new product, then we will never win, because we're simply following Toto. And if we simply follow our competitor, then the -- we are never going to be appreciated by the market, and the profitability will always be lower than the front runner. So what we need to do is to develop a completely new or different product. Of course, we will monitor and study Toto's new products and we'll take necessary measures, but the last thing that we should do is for our employees and R&D to think about product developments from the perspective of competing against Toto.

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Yukiyo Uto;Investor Relations, [37]

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The person in the second row.

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Sho Fukuhara, Jefferies LLC, Research Division - Senior VP & Equity Analyst [38]

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Fukuhara from Jefferies Securities. I have 2 questions. Core earnings is basically making better progress than expectation, but other revenue and losses, Q3, it's about JPY 6 billion. And annually, it's JPY 9 billion minus. And Q3 and Q4, there will be early retirement, and the number may become even bigger or is it going to be smaller than expectation? Could you share with us how you are thinking about this career option?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [39]

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Career option is not included in others, but it is included in SG&A.

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Sho Fukuhara, Jefferies LLC, Research Division - Senior VP & Equity Analyst [40]

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Then what items are included in others?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [41]

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The major ones are, for example, retirement of idle facility and restructuring, turn around the plant, the reserves that are necessary for restructuring and turnaround plan, and we decided not to change the full year forecast. So probably, we will progress in this direction. To be quite honest with you, with regards to Q4, there are so many uncertainties, it's not clear. And at this juncture, we are still thinking whether it will be a good thing to explain about the actual situation.

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Sho Fukuhara, Jefferies LLC, Research Division - Senior VP & Equity Analyst [42]

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About the next year, so you will keep making efforts on -- based on the plan. And do you think you will face the same size of the negative number?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [43]

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The same size of a negative number, I'm not sure if I really understood what you said. But do you mean that negative number similar to what we saw last year? Like Asia, it's JPY 9 billion? And is it going to be similar next year?

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Sho Fukuhara, Jefferies LLC, Research Division - Senior VP & Equity Analyst [44]

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Other expenses, and it's difficult to forecast, but if there are major cost items or profit items, then it has to do with an asset. But other than that, if we have any concerns, major concerns?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [45]

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No, not at all.

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Sho Fukuhara, Jefferies LLC, Research Division - Senior VP & Equity Analyst [46]

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My second question is quite simple. It's about China. So the impact that you can imagine and assume towards Q4.

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [47]

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So right now, we are in the middle of Chinese New Year and very few people can give a quantitative response to such a question. And in our case, the revenue in China is not that big.

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Sho Fukuhara, Jefferies LLC, Research Division - Senior VP & Equity Analyst [48]

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Is it like a 4%, 6%?

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Kinya Seto, LIXIL Group Corporation - Representative Executive Officer, President, CEO & Director [49]

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6%. So our revenue in China has been growing, but it's still minimal. So no major impact. And we have a plant in -- interior plant in Dalian and Tianjin, Shanghai, Suzhou, Guangdong. We have a water technology-related company. Other than that, in Guangdong, we also have a facility of Permasteelisa. And Dalian is probably not affected, and I will be able to resume operation on February 3. So once again, it's 6%. The revenue in China is 6% or the production accounts for 6% and the revenue 3%. So it's not so big in any case. And the water related, probably, it will be 1 week after the end of Chinese New Year. In other words, at the end of February. And Permasteelisa, that plant, we have already decided to close or stop, so no problem.

And what will happen going forward depends upon the prevalence of coronavirus. And the biggest concern is whether or not the workers will be able to come back to the plants after the end of the Chinese New Year. And next year, I think we will have more clarity, but when the Chinese New Year started and people left because there was no announcement about this contagious disease and if they have contracted late in the period, that is 2 weeks, we will know for more sure what will happen. And one of the characteristics of this disease is that there are no particular symptoms for quite a long time even if the person has contracted. And also, another concern we have is that whether we can have enough supply of parts and components, not just China, but plants in Japan, many of them buy from Chinese suppliers. And Japanese vendors, some of the Japanese vendors may buy from Chinese suppliers as well. But as part of BCP, we always source from multiple suppliers. And we have been able to investigate the situation. When a situation becomes even more difficult in China, whether we can respond smoothly and whether production in Japan will be affected or not, I cannot say for sure at this point in time. But compared with other companies in Japan, I think we are in a somewhat better situation. But I feel sympathetic to the Chinese workers and their families because the future is unclear, and they are living every day with discomfort, with concern. So we need to support them, and we have been sending them necessities like surgical masks and so forth.

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Yukiyo Uto;Investor Relations, [50]

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I am sorry to say, but this is the time to close the press break. I would like to thank you for your participation today.

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