LIXIL Group Corporation H1 Financial Results Briefing for the Fiscal Year Ending March 2021 for Investors and Analysts
October 30, 2020
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Event Summary
[Company Name] LIXIL Group Corporation
[Company ID] 5938‐QCODE
[Event Language] JPN
[Event Type] Earnings Announcement
[Event Name] H1 Financial Results Briefing for the Fiscal Year Ending March 2021 for
Investors and Analysts
[Fiscal Period] FY2020 Q2
[Date] October 30, 2020
[Number of Pages] 26
[Time] 15:30 – 16:41
(Total: 71 minutes, Presentation: 37 minutes, Q&A: 34 minutes)
[Venue] Webcast
[Venue Size]
[Participants]
[Number of Speakers] 3
Kinya Seto Director, Representative Executive Officer,
President and CEO
Sachio Matsumoto Director, Representative Executive Officer,
Executive Officer and Vice President,
Finance, Treasury, and M&A, and CFO
Kayo Hirano Senior Manager of Investor Relations Office
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Presentation
Moderator: Ladies and gentlemen, we would like to start the Briefing Session for the Second Quarter Results for Our Fiscal Year Ending March 2021.
Due to the COVID‐19 pandemic, we will be streaming live on the internet, as well as providing the session on the conference call. If you have connection troubles in the live streaming of the internet, we ask you to reconnect through conference call. It will be just voice, but you would be able to participate in the briefing session.
I would like to introduce to you the people who are present today from the Company. From your left, Director, Representative, Executive Officer, President, and CEO, Kinya Seto; Director, Representative, Executive Officer, Vice President, and CFO, Sachio Matsumoto; and Head of the IR Office, Kayo Hirano.
I will be serving as your MC. My name is Fukushima, from the IR Office.
In terms of the materials for this session, for those of you who are viewing the web streaming, please take a look at the screen. Those of you participating through a conference call, please download the materials from the Investor Relations information tab on our website.
I would like to inform you of today's timeline. First, President Seto will explain about the Financial Results for the Second Quarter of Fiscal Year Ending March 2021, which will be followed by a Q&A session. We expect to conclude at 4:45 PM. Thank you for your cooperation.
Now, President Seto will provide you the presentation on the performance of the second quarter performance.
Seto: Hello, everyone. I will be providing the explanation of the Second Quarter Results for the Fiscal Year Ending March 31, 2021.
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This is the usual chart that we use. In IFRS, core earnings is the operating profit under JGAAP. So please bear that in mind while you listen to my presentation.
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I think that the second quarter was pretty good. Compared to the first quarter, the second had seen significant rebound in all business segments.
On a cumulative basis, there were COVID‐19 impacts and also compared to July to September of last year because there was a last‐minute demand before the consumption tax hike on a YoY basis, it was reduction both in revenue and profit in the first half, but we were able to strongly recover.
In terms of revenue, there was a decrease by 13% YoY. But comparing the second quarter in the three months versus the first quarter, there is 5% increase domestically and 36% internationally.
In the core earnings, we returned to black from loss of JPY2.6 billion in the first quarter by JPY18.0 billion. The reason behind this was because there was a strong recovery in Europe and Americas and a resilience in the Japan business. The net profit for the first half was JPY10.9 billion.
For the forecast of the fiscal year ending March 2021, we will be revising the forecast of core earnings upwards from JPY25 billion to JPY40 billion, based on the first‐half results.
There was a strong recovery in the second quarter. And for Japan, as I have explained to you, we expected that the bottoming out was October through November. However, we now believe that the bottoming out was in September and recovering in October.
Considering these situations and the recovery in Europe and in the Americas, it would be best to revise the forecast upwards by JPY15 billion from JPY25 billion to JPY40 billion.
In terms of the subsidiaries, Permasteelisa share transfer closing was on September 30. For LIXIL VIVA, the share transfer has already been determined and it is scheduled to be completed in early November.
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Permasteelisa and LIXIL VIVA were the biggest concern for us, and those two items will be closed by the end of this year.
This is the monthly sales status by region. EMEA and Americas are indicated in the light blue and blue lines, respectively, and there was a significant recovery in June and July. In October for Americas, because October was very good last year and there was a retail adjustment, there was a decline, but for November and December we expect good sales. As for Europe, October was a very good month. Europe and US, it was a very good because of the pent‐up demand.
Another trend was because of COVID‐19, the same thing applies to the Japanese market, but when people spend more time at home, they want to improve the homes. Rather than going after the luxury products who are going to travel, they decided to invest in the improvement of homes like bathrooms. Also, we were strong in ecommerce, so people were able to buy our products while they're home.
The GROHE brand which is recognized highly by the consumers, and also the touchless water faucets and touchless toilets and the shower toilets that we are strong in, had large impact under this circumstance. We had conducted thorough promotion for those products which we do well with.
As for China, overall, it has made a comeback. On the other hand, Asia is still struggling. There are specific issues with Asia: tourism, travel, and project hotels. The Asia‐Pacific regions are dependent on those areas. Also, there was a very strict lockdown in the Asian countries and manufacturing sites were closed. Because of that, these markets are struggling.
If you look at Japan, in September it was negative 17% and it seems that it has gone down YoY. However, last year it was right before the consumption tax hike, so there was a last‐minute demand then. So considering that, the drop was not as significant as we had expected.
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We expected that October and November would be bad months. But in actual, it is recovering. So compared to the expectation that we had three months before, the situation is better. For example, in the housing starts.
The reasons why we thought that the Japan market would not be so good was because that because of COVID‐19, people were not able to come to the showrooms and the quotes numbers had come down. However, the number of quotes had come down, but the number of concluded contracts has become higher. Also, online showroom played a very big role in providing the recovery. For October, on a YoY basis, it would be the latter half of the single‐digit negative percentage of decline or slightly better than that.
Another point I would like to mention before I go on, there’s one concern that I have. Yesterday, France announced that it will have a lockdown again. There is a significant increase in the number of new infections in Europe. We are still bullish understanding the situation in France and Germany. The reason why we are bullish is because most of the governments are not imposing lockdown on the manufacturing facilities because they don't want to stop the economy from going. That's why we believe that we can be positive about the situation now.
Also, we are relatively strong in e‐commerce, and we think that it is a relatively advantageous condition that customers can easily buy from us.
Consolidated business results. Revenue had come down 13%, but the gross profit was down 0.6%. I think that it was pretty good. In the cost of the goods there are labor costs and the depreciation costs, which are fixed costs. Because of that, it seems that variable profit, but a lot of it is fixed. And the fact that the gross profit has come down from 33.6% to 33%, I think that there were a lot of initiatives taken to suppress the amount of the decline. We were concentrating on the products which we wanted to sell, and I think that took good effect.
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SG&A had significantly come down. There was COVID‐19, and because of that, business travel was not possible. There were no meetings held, we were not able to visit customers, and it had come down. But there are some permanent cost reductions that we were able to make.
In this period, we were able to learn a lot, which we would be able to use for the future. There was recovery in LHT and also organization reform. Had we not conducted those initiatives, I think that our profitability would have been a lot worse, and we would not have been able to expect a bullish second half. I think that we have been able to overcome one by one the challenges that has been faced by us.
Next is business results by segment. I will be talking about this later, but LHT did quite well. For LHT, I will be going into the details later. Revenue had come down significantly, but core earnings did not go as down as we had expected. We were able to keep the budget and we were able to exceed the budget that we originally had. As for LWT, Americas and European region in the second quarter has significantly recovered compared to the first quarter, and that worked positively for this segment.
Overall, the momentum of the second quarter makes us more optimistic about the third quarter.
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On this page, you see the comparison better first quarter and second quarter on top and the bottom you see the comparison with the second quarter of the previous year. What we can clearly see is that if you look at the top three, from first quarter to second quarter there was very good recovery.
The second point is compared to the previous year, there are two interesting points. One is that for LWT International compared to the second quarter of last year, the revenue and the core earnings have increased. And I think that this is very good. There was pent‐up demand from COVID, but overall, I think that we can evaluate highly that we did better than last year.
Another point is LHT Japan. If you look at the lower right, the revenue had gone down by about 17% compared to the last second quarter. On the other hand, the core earnings have come down only 18%. I think the institutional investors who have been invested with us for more than three years, I think that you will understand the significance of this.
Three years ago, there was a decline in revenue which was less than this year, but the core earnings had gone down a lot more than the amount of decline in revenue. There was a question that why LHT was so volatile in terms of the revenue and core earnings? What I had responded was that LHT has a higher breakeven point with the higher fixed cost, and when there is a decline in the revenue, it goes down into the red ink very quickly. And we were able to solve that problem.
We are now able to provide the solution to the issues in LHT, so now we were able to show what we are doing . It is not about market share. We will go after the profitability. And our focus had enabled the decrease in the breakeven point. Because of that, even if the revenue comes down, we were able to have a good amount of core earnings. So it's stable, even in the bad times.
I remember that I received the questions related to this three years ago, so I am glad that I am able to respond to that. Maybe it was Spring two years ago. From that perspective, LWT revenue have gone down similarly to
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LHT and the core earnings had come down to half. But it's not about the manufacturing, but more about the sales team problem. I think that if we are able to solve that problem, we would be able to create a situation where when the revenue comes down, the core earnings would not go down so much.
Now forecast for the full year. As I have mentioned, the core earnings will be revised upwards to JPY40 billion. There are, of course, many costs involved, but as net profit, we believe that it would be JPY19 billion, which would be above the level of the previous year.
Operating profit is coming down. What is included here in the decline is the structural reform cost, including the voluntary retirement program “New Life.”
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I would like to talk about the assumptions. As for the housing starts, NRI in May had announced pessimistic figures. But in reality, it did not go down as we had first expected. Of course, there are fluctuations, but there are people who started working home and they decided to build in the area outside of the metropolitan areas. And also there are people who are dependent on the internet; the outcome was not so bad. As for our business, company such as LIXIL Housing Research Institute was doing pretty good.
Also for renovation, it was not so bad. We believe that, in the longer term, it would be even stronger. With the spread of COVID‐19, people stayed home, and people started thinking if they are staying home rather than spending on travel or eating out, they want to spend more to improve the home. So for renovation, as I have said earlier, the number of visits to showrooms, as well as the number of the quotes from October to November, three months ago, we thought those months will be the bottom. But the bottoming out was in September, and in October we have seen recovery. I think that we can be more bullish about the situation.
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We've been speaking with investors for many years, and one of the major themes that we want to work on is to become asset light. This Company had somewhat of a higher breakeven point because we have invested a lot in facilities. We wanted to make improvement on that, and I think we have been able to achieve concrete results. So CAPEX or depreciation, these have come down.
But not only that. If you look at the details, the IT investment or IT depreciation, they have increased but investment into facilities for repairs or investment into manufacturing facilities, these have come down. Even for IT we have done a major investment for L‐One (note: core system integration) in the past. We still have to depreciate them, but by transitioning to a new cloud, or by separating SoR and SoE, we are starting to achieve greater investment efficiency.
But R&D expenditure has not been reduced because innovation is important for us.
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Now this is quite an important page for us. We introduced “Kawaranaito LIXIL” last year that LIXIL needs to change; we need to change LIXIL. We've been thinking about this for quite a while. But when the new housing starts start to come down, for LIXIL we not only look at the builders or the contractors or the distribution; we wanted to look at the end users more. What we need to do going forward is to become more global. We need to transform it to be more digital.
Also, we wanted to be closer to the end users. If we think about that, we cannot just continue to work in the same way that we have in the past with the same employees. We want to have women employees, be broader, people with disabilities, people with different nationalities. We want these people to be more active. We wanted to also have younger people play a more significant role, not just depending on people with long experience. And how people work. People can work from home, a more flexible way of working, not on the regular working hours.
These are the things that we've done in order to transform ourselves. The activities we've done as part of that is reflected in what we achieved.
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In terms of organizational simplification, we worked on the Permasteelisa or VIVA. We have divested these to simplify our portfolio. We have also worked on the title simplification; working on promoting a digitalization with RPA. With regards to RPA, for the Company overall we have provided education to 1,250 people and 650 people ended up getting qualification as part of that education.
We are not an IT company, but as an operating company to be able to use RPA and to implement RPA, I think this is a maximum number of qualified people. As infrastructure for remote, we have implemented the EAA from the VPN in the past. There are several tens of thousands of people who were able to use CAD at the same time, and able to handle the important sales information, or to have meetings on Zoom.
But even with that, we won't have the infrastructure congestion. Unlike others, we have been able to continue the showroom activities in online showroom and provide online customer service. We have expanded on these sales activities. And distribution or the builders or contractors we used to do an online type of sales activities; we have those tools now. And we have, well, gradually shifted to being able to do this type of work on a remote basis.
As for work‐style reform, we have introduced a super flextime system and second job arrangement. We encourage people to take the paid holidays, and then the New Life, a new program which I'm going to talk about in a little more detail later on. In this type of situation, we have worked on really working on improving productivity.
By doing that, we should be able to also benefit from the cost aspect, which is through reduction of people. But if we just work on reducing headcount, the Company will become weaker. But when we just work on improving productivity, the excess people that we end up with will end up doing other things, and therefore lead to the Company registering greater cost. We need to work on both aspects at the same time.
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On this occasion and if we, say, take today for example and the employees working in the head office today, it's only about 5% of the total employees who work at this office. We have really advanced at remote working. In Tokyo, we have about 23 sites, and we're going to consolidate all the 23 sites into this one headquarters.
Also, for the branches, so we had the branches that are the branch office, area office, and local office, but we've actually removed area office layer and we are also working on remote working. For 2020, 2021 and 2022, we will spend these years to achieve even greater consolidation.
So these improvements in productivity have enabled us to work on this in our New Life program. And added to that, LHT introduced the platform strategy. We've done that for interior, then exterior, and we are now going to launch a platform based product for windows sashes. We will start to reap the benefit from that beginning next year for that.
As a result of implementing these initiatives, inclusive of New Life, we have been able to do many things, not just New Life, but the site consolidation and so forth, the amount of cost we will spend this fiscal year will be JPY25 billion.
How much cost we will see being reduced on an annual basis? It's difficult to compare this year because we had the COVID‐related aspect, so it's difficult to make comparison. If we consider last year to be normal, so we make comparison to last year, and last year we had the Career Option program. So pre that Career Option cost then, if we compare that to the current costs or the next year's costs, and we're expecting about JPY23 billion of cost reduction over a year period. In other words, we are going to generate greater profit to the tune next year or the year after.
Not just that, we will continue with the initiatives that I have described before, and there are other areas of benefit that we can still reap. So many things that we are thinking of right now. And there are things that I can speak about. There are things that we can't speak about. But we feel that there is additional increment to the numbers here.
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Now let me explain the situation on a business segment basis. Starting with LWT. Like I've explained before, the Americas and Europe started to see improvement in the latter part of the first half. China, there's been ups and down. But overall within China, for us, I think we are starting to see things improve finally.
Asia, the situation remains tough. Hotels or tourism or projects or government‐related infrastructure, these essentially have come to a halt. In the case of Asia, despite the COVID infection being low, they have implemented quite a strict lockdown program, like in India, Singapore, Vietnam. Even when the infection situation wasn't too bad, they still implemented a lockdown. So the situation was quite tough, but we are now starting to see light at the end of tunnel.
In the case of Japan, like I've explained before, the bottom was September and we can see improvement starting from October. This fiscal year, we want to exert ourselves and hopefully be able to come up with good numbers.
But as I explained before, we feel that we have been able to increase our market share. And this also applies to LHT and LWT. What we have really focused on is that during the period of COVID when people needed to stay at home, customers essentially had to—they can't choose from various products, so they want to buy a product that they know and they know there is a benefit.
That's what we have really promoted in terms of the plumbing. For water related products, we have promoted a product which allows you to wash your hands when you return home and touchless faucets. Or in the case of LHT, we promoted door that allows ventilation, and renovation‐related shutters or screen doors. Also, shades to make the house cooler when you need to close the house. We have really focused on these products, and that has enabled us to increase the market share.
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In terms of housing, as I explained before, I think we did quite well. In terms of core earnings, the forecast for full year was the 13% drop in revenue, but for the core earnings, we have expected 0.6%. I think this is quite a great effort.
We had some follow wind, because renovation or sales of special demand products such as the delivery box or the screen doors has high profitability, and that had helped. But I think we have transformed our production system to be more platform‐based and we have pursued profit rather than sales and we've worked on cost reduction. I think all these initiatives have paid off in this way.
Going to Building Technology. Here in comparison to last year, as for the revenue, it has come down, but the margin has improved. In a similar way, we have pursued profitability. Even if we see the revenue come down, we wanted to focus on projects where we can generate profit and also, we wanted to focus on selling differentiated products. I think the focus on these have enabled these efforts.
For Housing and Services, we have some decline because the demand for new houses has come down. But for the LIXIL Housing Research Institute, as I've explained before, even in the current situation they've been quite successful in gathering customers through the internet.
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For the consolidated financial position, we had COVID so we wanted to have more cash on hand, and that is probably one unique point. Given the current situation for LIXIL VIVA, that transaction has not been reflected into the numbers here, but the transaction is expected to complete in November. For December, we're expecting 5 percentage points improvement in equity ratio, and our equity ratio should come close to 30%. We are now back being a normal company in that respect.
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As for cash flow, given this situation, the operating cash flow has improved vis‐à‐vis last year, which is a good thing. The financial cash flow, there's an increase because of COVID. Investment cash flow, we sold Ken Depot, which was in the first half of the year, but VIVA proceeds is expected to come in at the end of the fiscal year.
I rushed through my presentation in the last part, but that is my explanation regarding the result for the first half this year.
Thank you.
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Question & Answer
Moderator: We will move on to the Q&A session. The first question from Jefferies Securities, Fukuhara‐san: You have presented about the voluntary retirement program. In the Career Option program last year, 497 people had applied for it and you had to spend JPY5.5 billion. To the 1,200 people [to the application] that means there is a possibility of the extraordinary cost of JPY10 billion. What are the contents for the remaining other income/expenses of JPY20 billion? For the voluntary retirement program, for the motivation of employees, for example, their bosses retiring early, how would you respond to those situations?
Seto: The Career Option program, which was an early retirement program, the New Life program is quite different from that. In the Career Option, it was a benefit program, so permanently we are to do that for five years, at least. As for the New Life program, the Company itself is changing. As a Company, the heads of the departments should work closely with their subordinates. For the people who believe that they could not stay at LIXIL under this changing situation, we will give them an option to leave the Company.
For the choice of people leaving the benefit goes two ways for the Company, as well as for the employees. We will be providing the special benefits for the provision in the New program. In that sense, it is an amount that a simple calculation does not hold for this program.
These initiatives should not occur when we have to change. If we do that, the Company would not be able to change fully. And the people who apply to the program would not be getting enough benefits. If you look at the early retirement program in other occupations, the benefit is quite small, but the amount that we are providing in this program is not so bad. I think the amount will be bigger than the calculation that you have given us, and a large part of JPY25 billion would be cost for this program.
In terms of the bosses leaving and how would we motivate the employees who will be left behind, we believe that this New Life program is a positive program for everyone. We need to change as a Company. We need to have women, younger generation, people with disabilities, people who are from countries other than Japan work more actively in the Company.
Currently, the people who have longer experience in this industry at the management level, but if we only have those long, experienced people at the top, we may not be able to change. It would be a problem if all of those people are gone considering that we need to deal with digital, global, and end‐user thinking, but we can't select new people unless we have a certain number of changes. I think that the New Life program would be providing the opportunity to the younger people to go higher on the ladder. Also, the people who would be leaving through this program, they would be able to find a new opportunity. That's why we call this program New Life program.
We want to engage people. We want to motivate people more through this program. I think it's a responsibility of the management to motivate people. Management must think in the long term so that the Company will be sustainable.
In a sense, I think this is the responsibility of the management. We need to do things faster than others. If we are reactive, that would not bear fruit. If we act early, we would be able to motivate people more. Of course, change in any way is most of the time it's painful, it requires efforts, but if we change early, we would be able to switch it to a more positive atmosphere at earlier point. So the fact that we are able to have this program at this point in time would enable a brighter future.
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Moderator: From Macquarie Capital, Mochizuki‐san’s question: The management directionality. You have announced the voluntary retirement program. I think that you're working on improvement in efficiency. As the element of the increase in the profitability, I was wondering how long this efficiency program would go on? When should we expect the increase in the revenue, second half of next year? Or would that be organic growth from the fiscal year ending March 2023?
Seto: Relating to organic growth through the sales growth, for international markets, we expect to see organic growth. As for the domestic market, the number of new housing starts is coming down and we are recovering through renovation demand.
In that sense, the sales growth in Japan is quite difficult to foresee. We will be improving the profitability through efficiency. And in international markets, we would like to grow the profit through organic growth through the increase in the revenue.
At some point in time for international businesses, we believe that the sales will be bigger in terms of the ratio to the overall revenue. But at this point, the sales ratio is insufficient. So just with the organic growth in the sales of the international markets, it will not increase the profitability as much as we want. We need to improve the efficiency further.
Moderator: Mochizuki‐san from Macquarie Capital Securities has a second question: In your explanation you talked about this, but for the Europe and the Americas, when we see the increasing number of COVID infections for the business or as we’re ongoing, is there a positive or negative factor? Could you explain that in more detail?
Seto: If there is any headwind, that will be when the production facilities are subject to lockdown. In France right now, there is a lockdown; also Germany and Spain, there is a discussion. In the case of France or in the case of Germany, the government did not instruct the production facilities to also be subject to lockdown because of the significant impact to the economy.
In the case of Americas, the production facilities in Mexico, if they come under lockdown, that would have quite an impact but I feel that the probability of that occurring is relatively low.
As for a tailwind, I think there are two aspects from a long‐term perspective. One is that given the current situation with COVID, when people ask what people will spend in terms of their disposable income, if it is not for luxurious product or eating out, then I think a lot of people will spend the money to improve their homes. That's one long‐term perspective.
The other is that we are relatively strong in the e‐commerce channel. Customers who use e‐commerce, I think, for their perspective, they tend to choose us more, and we are able to make a better prediction, so supply chain‐wise, it's also easy to maintain.
In terms of production facilities, the headwind is not only unique to us. It is also applied to the competitors. With manufacturing facilities around the world such as in China, Thailand, Vietnam, Europe, Mexico, and Japan, I think we are better able to respond to a situation, should something occur. This is also an additional comment.
Moderator: Omuro‐san from Merrill Lynch has a question, which was almost the same as the other questions, so we will skip his question. Next is from SMBC Nikko, Kawashima‐san's question: Cost structure reform. Do you think that the New Life would complete everything? Or would there be a second and a third stage structural reform program? This time around you're getting the application for the voluntary retirement. I think that there is a possibility that you would be able to close down some of the other plants, but you would not be doing that. Why is it?
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Seto: We would work to improve the efficiency, but this is a very sensitive matter. And we would not be disclosing anything other than we have already announced. But we will continue to work to improve our competitiveness and to create a situation where we would be profitable. We will work from various perspectives to do so.
The New Life program is a big program both by in amount and number of applicants, which we don't foresee doing something like this in the near future.
Moderator: Next is a question asked through a chat function from Morgan Stanley MUFG Securities, Katsuyama‐san: In terms of business restructuring impact versus fiscal year ended March 2020, you're expecting a JPY23 billion of the profit increase. Can you give us a breakdown? Are the two major items personnel and IT depreciation cost?
Seto: Yes, the personnel expense is going to be a large portion. That is a fact. But there are some related facilities as well. Say, for example, consolidation of sites, this also has some benefits.
For the details, I am unable to speak in too much detail. But in terms of direction in IT depreciation, there isn't going to be much of that next year.
Matsumoto: Items such as rent payment will be included.
Moderator: Next question is from Goldman Sachs, Okada‐san's question: In Europe and Americas, it is recovering from the second quarter. The strong momentum, do you think it would continue to the next term? Or is it just demand coming in advance?
Seto: Maybe the demand is coming early. There is a pent‐up demand, and that is a capturing of the demand in advance. When we made the estimate three months before, we believed that it was an advanced demand, and we thought that the third quarter will be weaker. However, if you look at Europe in October, there was no lessening in the demand. At this moment, there is no change in the trend.
As for Europe, where we are very strong is that we are strong in e‐commerce and we have a strong GROHE brand. And as for Americas, in October it's on par with the previous year, but our retail customers, there has been some adjustments. But in November and December, the orders seem to be very strong for the US also. The reason why the strong momentum has continued is because the way people use money is changing. People are using more for bathrooms, and the US investment is strong towards real estate.
For example, in remodeling that was very strong even before COVID. People will not discontinue conducting the remodeling just because COVID occurred, and everyone is staying home, and they are spending more on homes.
Moderator: Next is Fukushima‐san from Nomura Securities: The plan for the fiscal year ending March 2021, the revenue remains the same. Core earnings has improved from JPY25 billion to JPY40 billion. Product mix change and cost suppression probably are the reasons for this, but more specifically can you explain? And could you give out the quantitative explanation? That'd be great.
Seto: When we assumed JPY25 billion in core earnings, we thought that the numbers for the second quarter will be much lower. Response to the pent‐up demand was one thing, but we had expected Japan to be worse. for October and November, but that had improved. Also in the case of Japan, we are not spending money, but able to maintain business. That is the assumption. And for the third and fourth quarters, demand is picking up.
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In terms of the revenue, the sales remaining at the same level. Frankly speaking, maybe the revenue level could be a little bit higher but given the overall balance, we didn't change that. To be more frank, for the third quarter and fourth quarter, it's very difficult to make prediction about the numbers for the third and fourth quarters right now as similar to difficulty in predicting the numbers accurately three months ago. But despite that, we feel that we can achieve this number, and therefore, we decided to increase the number by JPY15 billion.
Moderator: Question in the chat box from Mizuho Securities, Nakagawa‐san's question: Page 13 of the presentation material. In the fiscal year ending March 2022, you expect the sash platform‐based product to be sold in the market. How would that contribute to your performance? Considering the number of housing starts, the sash sales probably would not change. Do you think that even in that situation you would improve the profitability?
Seto: The sash platform‐based product contribution is to reduce the depreciation costs going forward. Another important point is that in one of the characteristics of the industry is that when there is a model change, the price will go up.
On the other hand, there is a gradual price reduction each year. So through having a platform‐based structure with less investment, we would be able to have newer products more quickly and we would be able to improve the margin.
I don't have the quantitative analysis on this matter, but in terms of the depreciation, there will be a huge change through this initiative. And as for the margin, we would be able to maintain it more easily. That's the biggest contribution.
Moderator: This question is from Mitsubishi UFJ Morgan Stanley Securities, Yagi‐san: For March 2022, you expect JPY23 billion improvement in core earnings. This is mainly due to a reduction in personnel costs. But is there a large benefit from production improvement for LHT? Or should we expect the benefit of the production reform for LHT that was explained at the LHT briefing session would likely occur after March 2023?
Seto: Impact from LHT production reform is not that significant, but the benefit of production reform has already been generated this year and it will also be generated next year so those numbers are not included in the number here. On the other hand, this is the benefit from the platform‐based production or line downsizing. And for March 2023 is the major timing for these efforts.
Moderator: Next is from Merrill Lynch, Omuro‐san's question: In the first quarter you have explained about the contingent liabilities related to divestment of Permasteelisa. Is that already gone?
Matsumoto: I would like to explain. The contingent liability is still remaining, but in the past three months it has not been newly generated.
As we have put in the flash report, there are some litigation costs such as for trials, which had been present before the share transfer. The ruling from the court has not come out yet. Because of that, the contingent liabilities has not come down, but it has not gone up either. We have no more performance bond.
Seto: Out of the contingent liabilities, the tens of billions of yen performance bond was the biggest and we don't have that responsibility anymore. And the remaining is the litigation cost, the indemnity cost, etc.
Moderator: Omuro‐san from Merrill Lynch Japan has another question: The structural reform cost, can this increase potentially?
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Seto: Yes, because we have decided on a number to be subject to the program, but there are people with a higher cost. If many of those people with the highest salary leave the Company, the restructuring costs may increase. There are possibilities of it increasing, but if that was to increase then the benefit from next year onward would be even greater. It's not necessarily a bad thing.
Moderator: Next is from SMBC Nikko, Kawashima‐san's question: On slide 32, H2 forecast increase/decrease in core earnings for the fiscal year ending March 2021. In the elements for increase, there are mix/pricing and cost decrease. Do you think that would be possible with the revenue decreasing? LHT we can expect the better product mix, but what about LWT?
Seto: In terms of the improvement in the product mix for LHT, it is not just about platform‐based production. For response to disaster shutters, we are behind in the production because they're very popular. Also, we expect increase in sales of screen doors and INPLUS inner windows. Those are the products which would be contributing a lot to the improvement in the product mix.
As for LWT overall, in the showroom the order had gone down in largely for kitchen and bathroom. But toilet and faucets had gone up in demand, which has high profitability. And as a result, we expect LWT to see improvement in product mix.
Moderator: Next question is from Goldman Sachs Securities, Okada‐san: In November 2017, you announced a medium‐term plan. But unlike then, Permasteelisa or the LIXIL VIVA has now been divested, and so I feel that the medium‐term plan needs to be updated. Do you have a plan of announcing a new medium‐term management strategy?
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Seto: We are not planning for that right now. But what we need to do has been announced, and we have been working in line with the medium‐term plan.
In the case of the medium‐term plan for this fiscal year, 7.5% was the promise that we have given. But unfortunately, because there was a period that I wasn't with the Company and there were COVID impacts as well, so if you could give me a little bit more time, I will continue to do my utmost to try to achieve those numbers.
The direction itself will not be changed in a qualitative way. But what we are trying to do, as I have explained before, is first to divest from non‐core business and the corporate organization will be simplified and will create a low‐cost competitive company, and the Japan business will become a cash generator from being a cash eater.
Thirdly, the International business, we will implement a portfolio strategy to achieve a profitable growth. Lastly and on linear business growth, digital and water filter, we will increase those businesses.
So that strategy itself remains the same qualitatively, but the portion for the first part, I think for divestiture we've been able to do quite a lot, and simplification of the organization and creating competitive organization, in line with the direction we shared on this occasion, I think we've been able to show that. And the Japane business changing from cash eater to cash generator, I think we've implemented all the measure needed, and the results will be generated over the next two years or so.
Regarding the change of portfolio for International business, , our portfolio will be changed to focusing on where we can generate greater profitability. We've only started on this effort, so if you could give me a little bit more time for that.
The last part, digital and water filtration, if you could give us a little bit more time for that as well.
Moderator: From Daiwa Securities, Teraoka‐san's question: In the Housing Technology Business, I think it's positive that the profitability didn't go as much down with the reduction of revenue. Do you think that going forward the growth in the profitability will be higher?
Seto: When there is an increase in the revenue, with the breakeven point being low, the marginal profit will be bigger. Therefore, I think that there would be an expectation of growth.
Moderator: We still have a little time, so we continue to welcome questions from the participants. If you have a question, please use the chat function or to send in your questions by email.
It seems that there are no further questions, so I would like to conclude the Q&A session.
With this, we'd like to conclude the LIXIL Group the Second Quarter Results Announcement Meeting.
I look forward to continued support from all of you. Thank you very much for your participation.
[END]
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Document Notes
1. Portions of the document where the audio is unclear are marked with [Inaudible]. 2. Portions of the document where the audio is obscured by technical difficulty are marked with [TD]. 3. This document has been transcribed based on interpreted audio provided by the Company.
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