LIXIL Corporation

We would like to start the earnings call for Lexal Corporation for fiscal year ending March 2026. This briefing is streamed live online. The materials for this briefing is disclosed in the investor relations page, so please take a look at those materials. I would like to introduce to you the presenters for today. Director, Representative Executive Officer, President and CEO, Kinya Seto. Next is Executive Vice President and CFO, Mariko Fujita. Vice President and Leader of Investor Relations Office, Aya Kawaii. Well, I will be serving as your emcee. From IR, my name is Seto Buji. Next, I would like to explain to you how we proceed with today's briefing. First, CFO Ms. Fujita will provide you with the overview of the financial results. And CEO Seto will be giving you the outlook for the performance as well as the progress of the management strategy. That will be followed by question and answer session. We expect to finish at 3.45 p.m. First, I would like to invite CFO Ms. Fujita to give you the overview of the results of fiscal year ending March 2026. Hello, everyone. My name is Fujita and I would like to give you the summary of results for fiscal year ending March 2026. These are the key highlights. This is the overview of the results for fiscal year ending March 2026. Core earnings was 38.5 billion yen. EBITDA was 121.6 billion yen. The core earnings exceeded the forecast. For the Japan market, all segments achieved year-on-year growth in core earnings. In the international business, core earnings have significantly improved. For America, the structural reform had seen the deriving of fruitful results, and in the month of March, core earnings had become profitable. Next, I would like to talk about the differences from initial forecasts for fiscal year ending March 2026. Core earnings exceeded the forecast, and in terms of the profit, it was in line with the initial plan. As for other income and expenses, in addition to the initially planned structural reforms, there were additional expenses were recognized, including further restructuring costs in the U.S. and impairment losses of fixed assets. In terms of the finance income and costs, there were some recognition of foreign exchange losses and tax expenses. There were impact from the change in the corporate tax rate. I would like to talk about the status of international businesses. As for Europe, we worked on the growth of the growing brand. In EMEA, we will ensure stable supply. For Asia-Pacific region, we will work on for market recovery and sales network expansion. In China, the market remains sluggish. Under that situation, we will work to expand the sales of differentiated products including the growy brand. I would like to now dig deeper into the progress on future initiatives in the Americas business. With regards to the Americas business turnaround, so there are effects of the various measures that we have taken. It didn't materialize at first, but even though there was a recovery lag, we were able to see the results of what we have done. So we have worked on optimizing workforce allocation, restructuring the supply chain, optimizing the business portfolio, and we would now focus on the premium toilets and growth of GROWE and the expansion of shower toilets and leveraging on ASB strength. I would like to talk about performance highlights. Revenue was 1 trillion 510.7 billion yen, up 6 billion yen year-on-year. Core earnings were 38.5 billion yen, up 7.2 billion yen year-on-year. Evita was up 7.1 billion yen year-on-year, and profit was up 6.1 billion yen year-on-year. The core earnings had improved and that had impacted positively to our profitability. This is the consolidated business results. Please take a look at the margin. The core earnings, EBITDA, compared to last year, we were able to see improvements.

This said at the start, at all segments compared to the previous year, the businesses are showing improvement, and the details are listed here. And as for, it's the same information under the previous reporting segment, so I would like to skip the explanation. Consolidated financial position, the impact of the foreign exchange impacts on recognition of profit for FY ending 2026, equity increase, the equity ratio is 35.3%, and the net interest-bearing debt has landed as flat compared to the previous year. And the cash flow status, operating cash flow has declined year-on-year. However, the free cash flow has maintained positive. Last year, it was 91.9. This year, it's 59.1 billion, but it has remained positive. That is the explanation from the CFO, Fujita. I would like to conclude now. Thank you very much, Fujita-san. Next, we would like to invite Mr. Saito, the CEO, to explain The full year forecast for fiscal year ending 2027 and progress of management strategy. Sitafan, please go ahead. Outlook for the fiscal year ending March 2027 is what I would like to talk about. Year ending March 2027, the revenue, 1,600 billion yen, core earnings of 45 billion yen, and the Profit attributed for owners of the parent, the profit, the 12 billion yen is the forecast. However, the impact of the situation at the Middle East, there are many variables, so it is difficult to frequently factor in at this time. That is why that part is not included. And that is why at the next timing of disclosure of the information, I would like to share with you with the plan members, including the impact, the annual dividend, 90 yen per share is forecasted, which is the same amount up to now. The business environment and outlook. Later on, I would like to touch upon the Middle East situation in more detail, but for the other statuses for America, as Fujita explained previously, FY 2025, they have struggled. However, at the ending of The transition service agreement has ended and we had the major structural reforms and as a result the last three months recovered and especially for the last three months it finally turned into profit making. Regarding the U.S. economy, we were forecasting that it will be better than what it is right now. However, unfortunately, from the challenge of affordability. The demand is strong and the wide demand is apparent, but the housing prices became too high, so people are not able to purchase it. So some sort of a government policy measures will be necessary, is what I think. However, that is why for America, for the near-sharing improvement, and the details are listed here. And as for the same information, under the previous reporting segment, so I would like to skip the explanation. Consolidated financial position, the impact of the foreign exchange impacts on recognition of profit for FY ending 2026, equity increase, the equity ratio is 35.3% and the net interest bearing debt has landed as flat compared to the previous year. And the cash flow status, operating cash flow has declined year on year, however, the free cash flow has maintained positive. Last year is in 91.9. This year is 59.1 billion, but it has remained positive. That is the explanation from the CFO Fujita. I would like to conclude now. Thank you very much, Fujita-san. Next, we would like to invite Mr. Saito, the CEO, to explain. the full year forecast for fiscal year ending 27 and progress of management strategy. Siddhasan, please go ahead. Outlook for the fiscal year ending March 2027 is what I would like to talk about. Year ending March 2027, the revenue, 1,600,000,000,000 yen, core earnings of 45,000,000,000 yen and the Profit attributed for owners of the parent, the profit, 12 billion yen is the forecast. However, the impact of the situation at the Middle East, there are many variables, so it is difficult to reasonably factor in at this time. That is why that part is not included. And that is why at the next timing of disclosure of the information, I would like to share with you with the plan numbers, including the impact, the annual dividend, 90 yen per share is forecasted, which is the same amount up to now. The business environment and outlook. Later on, I would like to touch upon the Middle East situation in more detail, but for the other statuses for America, as Fujita explained previously, FY 2025, they have struggled. However, at the ending of The transition service agreement has ended, and we had the major structural reforms, and as a result, the last three months recovered, and especially for the last three months, it finally turned into profit making. Regarding the U.S. economy, we were forecasting that it will be better than what it is right now. However, unfortunately, from the challenge of affordability the demand is strong and the wide demand is apparent but the housing prices became too high so people are not able to purchase it so some sort of a government policy measures will be necessary is what I think however that is why for America for the near future we will probably not see a major recovery however we were able to turn into black ink therefore the loss-making business up to now is now not going to become a burden anymore, which is a positive news. And for Europe, this was the most disappointing part. Starting this fiscal year, we thought the economic situation is going to largely turn around. However, from the mid-last year, I think everybody has a consensus that that was the bottom. And each country or major markets like Germany, France, Italy, and the Netherlands, which are the major markets, the housing prices have started to go up. And also the number of housing starts. Also for the lease property, it is starting to increase. So it is showing recovery. However, the recovery pace is about a year behind than what we have originally expected. but for the last two years, which was really bad. During that time, we were able to increase our market share, and the growers' average profit also was able to increase. So this part, if it does grow, we will be able to enjoy a large positive impact. India and Middle East, there are various concerns. However, currently, we're not seeing any negative impact. The area that is called Aimea, Basically, you can break it down into four areas, and the sales is kind of divided equally in those areas, which are Saudi Arabia and the Gulf area, including UAE and India and Africa. First of all, what we can foresee most of the impact will be the Gulf area, mainly led by Dubai. Basically, the foreign residence has left the area, Regarding the future projects, there are major concerns of the progress, but currently we are not seeing any decline. On the other hand, for Saudi Arabia, moving forward, if they have further attacks from Iran, the situation may change, but they are performing strongly. Regarding Saudi Arabia, there is a negative factor, and because of the confusion, the financing for large-scale projects may be delayed. However, the crude oil price is going to go up, which means that it will give some room for the government. So related to the public type of projects that we are involved, there's no impact at this point. And for India and Africa areas, the fuel prices are increasing, so there may be an impact from that, but it is not a major impact. So for now, out of the four areas regarding the three areas, we do not have a negative forecast. However, for the Gulf area, we have to keep a close monitoring. And also moving forward, if the attacks from Iran expanded, there will be a certain impact is what we are thinking. In terms of economic situation and negative impact of Southeast Asia, Thailand, which was in the trajectory of recovery, is still a concern. And for China, the bad situation is continuing. But it's not just APEC in China, but at each region, for Grohe, it is performing strongly. Even China, the sales for Grohe is increasing. And that's bright news, and we're able to launch many differentiated products. And for Japan business, this is Goyer. Looking at the new housing starts up to now, from April to February, I don't think that anyone decided more than 10% of decline. There was a forecast that it will decline, but it actually declined more than what people expected. Given that situation, we're able to offset that weakness with the renovation demand. And we believe that the New Housing Starts weakness is going to continue for a while. The background on that is that one thing, The insulation materials, there's a shortage on that, so new housing starts will be delayed. And due to the Article 4 special exemptions, the licensing or permits that are submitted by the SMEs, the submission itself is delayed and granting the license and permit is going to delay. And that adjustment of the timings have not been completed. But Japan's new housing starts is going to continue to decline is our outlook. However, having said that, next year we think that it is going to go up once. Reason being is that there is an accumulation of the permits and license that is going to actually be realized. And for the insulation material, I'll touch upon it later, but this shortage is not going to last forever. But these recoveries, I believe, is going to be next year. But in Japan, the new housing start is not that strong. But this year, the decline was more than 10%. But within that, we're able to offset that through renovation. So we do have a confidence towards renovation to a certain level.

This is the forecast of the performance. In addition to what was discussed earlier, in terms of the dividend, because EBITDA had grown steadily, we are maintaining it at 90 yen per share. Risk related to the Middle East situation. It is difficult to predict. There are a lot of variables regarding the Middle East situation. Because of this, it would be too misleading to talk about the future relating to the Middle East. So we decided not to factor that in, and we will continue to scrutinize the situation. The supply concern is the biggest factor for us Currently, the crude oil-derived products, we have been able to secure the products that we need. And after July, we don't have too big of a concern. As for aluminum, 80% is scrap aluminum. So we are not in a situation where we have zero material at hand. However, the prices of these commodities are going up. We will work to transfer the cost to our pricing, also related to raw materials. Rather than buying from the same suppliers, we need to increase the variety of suppliers, and that's what we did in COVID, and that's what we will do now. These prices are going up not because of the Iranian war, but for other fundamental factors. What makes the reading of the future difficult is as follows. So there are many cases where you predict that this price increase will continue in the long term, but I don't feel that way. As for the crude oil-based products, even before the Iran war, from the end of last year to the beginning of this year, there was a concern about excessive supply. And in Japan and South Korea, there were adjustments to production. And in 2027, there are NAFTA and plastic-related facilities which were to come online in the U.S., China, and Middle East. Those facilities... are coming online even with the excessive supply, and I think that there are many reasons behind that. In the case of the U.S., they need to use it because they would not be able to export the natural gases as is, and they need to create NASA. And in the case of China, as Lynn and Evelyn process, APSA is used a lot, so P-E-S-P-P. If we consider the global supply and demand, it's in excessive supply, and how that would be reflected in Japan is something that we need to consider. So there are cases where China would not export it because of the dual use, but the oil-derived products, There are many types of it, and some of it may stop and become a bottleneck, but I don't think that the price of those commodities will be going up in a linear way. As for aluminum, the price had come up because Mazara and Century, which are the big players for supply for Europe, decided to shut down for maintenance for a year, and in Bahrain and UAE, The aluminum plants in Abu Dhabi had been stopped, and even though Japan had been buying 10% of the aluminum from this area. Santeria Mozart will resume its operations next year, and in Middle East, the facilities would probably restart their operations sometime next year. and the aluminum may become $4,000 from $3,600. But next year, some of the sources expect it will come down to around $2,800 to $3,000. The current panic is not something that would linearly continue, in my opinion. However, I think that the copper price will be going up. It goes without saying that the fuel prices will be going up. There are many assumptions, but if the oil prices had stayed around $80 per barrel, I don't foresee that the plastic prices will be going up indefinitely. So there may be some bottlenecks which may occur for the Japanese market. And also there are some bottlenecks in the area of solvent supply. And these things may occur. So we need to diversify where we get the supply from. Our suppliers and their suppliers. There may be some bottlenecks which occur in the products that we don't buy or at our customers for products that we don't sell to them and it may cause a problem. Because the oil prices are going up, the cost is going up and also because of the route suspension, there are distribution costs added, but we will be taking measures to counter that. Sorry, I'm going on for a long time in my talk, but I would like to talk about core earnings. We did not factor in the Middle East situation. The cost increase and the price revision. The The bar on the right will be higher if we factor that in. But rather than just simply increasing the prices, we will increase the productivity using AI and bringing the cost down. We will work to sell differentiated products which have higher margin. The methodology that we succeeded in Europe, we would like to use that in other parts of the world as well. In the mid-term, we will work to pursue improvement in the CE margin to 10% and ROIC to 10% as well as a long-term target, and we will turn around where necessary and divest where necessary as well. We will continue to work on these initiatives. The inflation which occurred in COVID as well as due to Ukraine war what will happen in the Middle East would probably impact us even more from that perspective. But we are increasing our revenue compared to the previous years, so we have been able to take necessary measures under these difficult situations. And last year, We have said that we would like to get to 65 billion yen, but we have revised it down to 45 billion yen in terms of the core earnings. There are a variety of negative factors. And also, we have identified positive factors that would fix it. The biggest negative factors included the lagging behind of the recovery in European housing market. Our profit center is the European market. and when it's not recovering, our business overall would not recover. Also, towards the end of the fiscal year, the commodity prices started going significantly up rapidly, and we have not been able to pass that on to our prices. So those are the two key factors which led us to revise the outlook down. On the other hand, Europe is having the same kind of revenue, but we were able to improve the margin. So once the housing market gets better in Europe, we would be able to spread that positivity to other areas. And also the Middle East, even though there are concerns, there are good things coming out of the market, like improvement in the market share of growing. Also, The Japanese renovation business had done well even in the face of decrease by 10% in the new housing starts. European market, the commodity prices. From next year, I think that there would be a virtuous cycle. we should not be pessimistic about seeing the business coming down a bit. So in terms of the risk, the biggest risk is Middle East, and most of what's on here would be multiplied by what's happening in the Middle East. The European market was bottoming out last year, and our main markets are getting better, but because of the issues in the Middle East, the inflation is increasing and the interest rate is going up. In the U.S. and China, the real estate market and the housing market have deteriorated. However, those have bottomed out, so I think that we are in a wait-and-see mode for recovery. Also, what would impact us is what kind of policies Donald Trump will be implementing towards the midterm elections. If the Trump administration would work on the affordability of the housing issue, I think it would impact us for the better. As for Japan, there are some specific concerns for Japan. So last year, there was a significant and rapid decrease in the new housing starts, more than we had expected. We are expecting it to get better next fiscal year. The reason it had come down is because of the Article 4 exemption factor and the SMEs had difficulties in improving their businesses previously. the short term the heat insulation materials are short in supply so because of that the housing starts is sluggish so this fiscal year we are facing a challenge but that will work towards recovery and next fiscal year in terms of the cost I think that we may be able to increase the prices by transferring it for next fiscal year.