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It's time, let us start the Analyst Meeting. Thank you very much for taking part in the results announcement and the teleconference call of LIXIL Group Corporation.
Now let me introduce the members on the stage from LIXIL Corporation -- Group Corporation representative Executive Officer, President and CEO, Kinya Seto; representative Executive Officer, Executive Vice President and CFO, Sachio Matsumoto; Senior Manager of IR office, Kayo Hirano. I am serving as an emcee today. My name is [ Uto ] of IR office.
First, Mr. Seto will be presenting on the first quarter results. And in the conference room, we will be using the slides, and we distributed to you the same size for your handout. And those of you who are participating via teleconference call, please download the materials from our website. Questions will be taken after the end of the presentation, and 4:30 is the end of this meeting. Mr. Seto, please.
Good afternoon, ladies and gentlemen. This is the results announcement for the first quarter for the fiscal year ending in March 2019.
First, revenue, which is the sales. Regarding revenue, performance was in line with our expectation. For the Japan business, as you are fully aware, usually, for LHT, new housing starts is the key indicator where in 3 to 6 month lagging behind, we -- our performance will be affected by the new housing starts. And this is heavily a facility-based industry. And, therefore, last year, the slowdown in the second quarter of the new housing starts affected our third and fourth quarter. And in fact, January to March period, we had a lower new housing starts in Japan. However, from April to June period, for our performance such, of course, as usual heavily dependent on the new housing starts was negative affected.
However, for the other business segments, our performance was not affected. And, therefore, our revenue was in line with our forecast. However, what was unexpected was that change in the product mix of the bath and also kitchen products, which has lower profitability, was accounting higher proportion. And for the facilities and others, which were exterior, which enjoys higher profitability, was lower. And such an exterior was quite sluggish because of a lower new housing starts, but for the others, we were able to end the first quarter as expected. But overseas performance was in line with our expectation.
In Asian market, the company has made already of investment, particularly showrooms. That was actually expected. And because of that reason, sales, particularly in Asia, was growing as expected. There were some unexpected slowdown in South Africa, but for the other regions, we were able to perform as is expected. Regarding the Japanese business, usually, the second, the third and the fourth quarter, this is the shape of the revenue and usually, toward the end of the year, that performance peaks, and the first quarter is lowest. And in fact, because of the start of the building -- construction start, the production mix worsens in the first quarter usually. For overseas business, the third and fourth quarter is extremely outperforming than the others. So September to December as well as in January to March, performance look good -- for overseas, in particular, the performance in March is quite good. And therefore, our performance overseas is considered to be very good.
Now there was a reduction of JPY 12 billion of loss in core earnings was observed, but 2/3 of that was actually anticipated. What were the initial forecast? In fact, in Japan, there were 2 key initiatives. The first was reorganization of the company, and the second one is the pricing system change. The change in pricing system affected our profit significantly. To explain this, starting in April, we have adopted a new trading system. Under this new trading system, which I will elaborate later, based on the function as well as the size of the customers, we will be rationally defined the price level, which means that we no longer decide on the prices over the counter basis one by one, rather we will be adopting a systematic approach of the prices. Some customers will have a higher prices, some customers will face lower prices because of the new trading system.
For the customer, we will have to accept higher prices. We need to fully convince, and we will register the new prices. However, it takes more time for the negotiation. What we expect to complete by the end of April to middle of May? We expect that the guarantee of the oil prices should be terminated. As a result of that, in the first place, we were expecting the lower gross margin level because of the guarantee of the oil prices. So JPY 1.3 billion was expected of the gross margin reduction in the old prices. And also there were raw material price increase of about JPY 1.5 billion negative effect -- negatively affected on the gross margin.
Lotte Tower completed last fiscal year and that posted a one-time profit last year. And we no longer have such one-time impact. And we were expecting that in the first place. So therefore, a total of JPY 3.6 billion of reduction in margin profit was expected in the first place. However, for the rest, the JPY 3.5 billion -- actually to be honest, it took longer than expected for customers to be fully convinced. We believe that new trading system is very convincing. However, because customer took more time to accept this system and, therefore, we took toward the end of June to fully convince the customers to accept this new trading system.
And also in regard to the registered prices. There were some cumbersome process to register the data and also we needed to up the agreement with the customers on the register prices. So therefore, registration around data and price will take until the end of September. And there were some overtime cost increased because of this work. So therefore, there were about JPY 3.5 billion of the cost overrun.
LHT itself was affected by the sluggishness and the housing starts in January to March. And LWT, because of the product mix, the bath and kitchen was driving with the lower profitability and exterior was actually lower. And that was negatively affect our profit and for overseas minus JPY 2.4 billion.
Investment in marketing such as showroom was quite high. And for the core earnings, we had negative impact. And what is unexpected was South Africa, JPY 0.3 billion lower performance in South Africa. But mostly, the lower earnings unexpectedly was associated with the Japanese business. Perhaps, our forecast wasn't stringent enough, but process, which is expected to complete by the end of April, took longer to be completed in middle of May and until the end of June. And actual penetration -- the new price system to be starting this July. However, ultimate completion of this project will be taking until the end of September. So October, January next year and April next year, we will be gradually raising prices. For that price increase, because of the prolongation of introduction of the new trading system, probably we will have to count on the second half as to achieve the full year results. But we are still comfortable say that full year forecast is going to be achieved.
Now what where exact contents of this price revision and trading system? In fact, for our major products, the profitability had been declining over time gradually. For the housing facility, housing technology products, once the new products was launched and gradually, the price will be declining. Well, although our products were quite innovative, still competitor catch us up and also share -- in order to gain share, the price gradually declines. And we need to expedite the product development cycle. Asset-light model is something that we launched. And, therefore, we can launch a new product with a short period of product cycle. With that, we can resolve this issue.
Also product with lower margin. If we were able -- if we're not able to differentiate our products quite well then competitor catch us up and then ultimately, we will suffer from the lower margin. We need to migrate to the differentiated and higher end products. And for the last 2 years, we've been working. So for this shift to differentiate in higher products end, we are able to see some progress.
Now what are the new trading system? We actually see a -- our reliance on the smaller house build-outs. For the larger housing build-outs, they have stronger power to negotiate -- bargaining power against us, and therefore margin is declining. We will implement the negotiation one by one. And for the smaller scale, lower margin customers, we need to do negotiation, it becomes very cumbersome. And although, the size of the business is smaller, as a result, still we struggle with the higher cost basis.
In order to resolve this situation, what we did is that, rather than to negotiate one by one over the counter with the customers, why don't we implement a new rational trading system. And also we would like to change the prices, accommodating with the fluctuation in the market. So rather than to negotiate one by one, once the market changes, and we can review and adjust the price at once. So this procedure took longer than expected time frame of the -- at end of April. And, therefore, our execution wasn't stringent enough.
Some customer needed to submit more data. And data migration took a longer period of time than expected. As mentioned earlier, for the price reduction, no customer complaints. However, for the price increase, customer, of course, complaints. And therefore, the price -- new price and data registration is taking longer. For the shift to a new trading system, we completed that procedure and therefore, there is no longer effort required for the shift. And the data acquisition itself has completed, and the registration will complete by the end of September.
What will be the outcomes for us? The first is the productivity improvements. Regarding prices, we needed to negotiate one by one. And now we can expedite and rationalize that portion. We will be implementing price increase in October and in January next year and April next year, step by step. And we will be able to penetrate that new pricing scheme faster than before in the market.
Productivity improvement is something that we can enjoy a lower workload, but we can, at the same time, achieve fair and transparent prices. The customer with some sites, it's not that if we do everything, if that our customer does delivery and provides installation work as well. And then, we can provide a very competitive price for them. On the other hand, if the customer requires us to deliver and also do installation work as well, we charge for that person. So we can reduce a wasteful services on our side as well. And this is to aim for price strategy. We would like to improve productivity and reduce cost. But on a larger scale, we have a sense of urgency.
Our SG&A has been at a high level for a long time. Our SG&A level is about 30% of sales. And in the past few years, this ratio has actually increased. With regards to SG&A, we need to improve our competitiveness. We need to reduce our SG&A and improve our profitability. Currently, our profit -- our gross profit is 33%, 34%. And if we shift to more high-end products, then we can raise the gross profit margin by 2%, 3%. That means that we also have to reduce the SG&A ratio by 2% to 3% as well. Otherwise, we cannot achieve the 10% margin going forward -- op margin going forward. Otherwise, we'll never achieve that.
And that means that we have to look at our complete organizational model and remuneration model because this has been built to fit the previous high-growth era. Organization is basically seniority based, and we have a lot of assets, capital-intensive, are not enough resource for design and development. And our products are mainly for the mass market. But there are ways of commoditization and mature declining market and aging society. Given these environmental challenges, we needed to really change the way we work. And also we need to incorporate environmental or security concerns and provide innovative and differentiated products. So we need to change our business model. That means that we are going to shift from a seniority-based system to a complete meritocracy-based system in a few years. And the people in the organization -- rather than like waterfall organization from bottom to top, we need each individual to build a career plan as experts. And we need our people to be able to really shine and provide value. Otherwise, they can choose a different career track.
In terms of production, we're going to shift to a more asset-light model. And for products, we're going to value differentiation and innovation. And we're going to develop our personnel so that they can meet such needs. And ultimately, we are going to reallocate human capital to aim -- to meet the productivity goals as well as optimize the production process. And by the end of the midterm, we are going to improve the core earnings by JPY 27.3 billion. This is about 3% against the domestic sales of JPY 1 trillion. So we can -- and just by these measures, we can get close to this level. And one way is to increase in-sourcing. Actually, when I was at MonotaRO, I had this in-sourcing philosophy. MonotaRO has a very counterintuitive strategy. MonotaRO was launched -- established in 2000. And at that time, the norm was that what is not core business should be outsourced. However, MonotaRO's philosophy is different. Even if it's not a core part of its business, by in-sourcing everything that could create value addition and higher productivity. For example, at that time, MonotaRO did not outsource IT and programming like other companies. In MonotaRO, everything from defining the requirements to coding and specification, everything was developed by MonotaRO employees.
Also for call centers and logistic centers. This may look like commodity and outsourceable service, we decided there is value addition there. And so the learning from the call center could be taken into the system. And also the logistic center in order to automate, we did the logistics ourselves to learn how we can automate the process. So by in-sourcing, MonotaRO became more competitive. And I think that we can do a similar thing in LIXIL.
I'll touch upon this earlier -- later, but one aspect is RPA. We're going to in-hour the robotic process automation, RPA. We're going to develop people who can develop RPA and be digital experts. In Japan, there is a shortage of such IT experts. However, we already have experience of developing such IT experts. Myself and Kanazawa-san and [ Yasis-san ] who were at MonotaRO with me, they already have that experience.
And also showroom and customer service. Almost everything is outsourced currently, but partly, that could be in-sourced as well in order to create value addition. For example, in customer support, currently, you just answer the questions from the customers. But by in-sourcing customer support, we could ask the customers' needs and propose product or service and lead to designer products, perhaps. Our biggest weakness was the lack of engagement with the end user, but the customer service could actually be an answer to that. And for showrooms, currently, this past employee simply explain the product. But if we have our employees there, we could actually close the deal at the showroom. Of course, not everything is going to be in-sourced, but by providing value-added service in-source, we can become closer to the end user and also we can find people who are not meeting their full potential in their current tasks to shine more in the in-sourced work. At FIT there is, we call it like sales FIT or HQ FIT. And FIT is focused on the important tasks. And we would like to have that. For example, the consulting function internally rather than depending on external consultants. There are some people who worked in consultancy firms in the past who are currently working at LIXIL. We want to use such expertise and look at each and every e-function and work process and decide whether it is really necessary or maybe we can do without. For example, our public affair, our PMO. There are 70 people who had been -- who are now working in other tasks or other divisions and providing more value-added work.
And the word span of control is mentioned here. So if a manager only has 3 subordinates, that is insufficient. Because normally, 1 manager could look after 10 subordinates. So if there are 2 managers, 1 looking after 3 people, the other also looking after 3 people, then these 2 teams could be merged and only have 1 manager. This will create more efficiency. And also we're going to conduct work salary form. Currently, we have a lot of overtime. And if there are more flex time or telework, if there are different ways of working, then we could reduce the overtime and also reduce the labor cost.
And another aspect is the optimization of the production process. We explained for SaaS in the previous meeting, but we're going to reduce SKUs and production lines, not just for SaaS, but for other products as well and standardize the platform. And the first year will be JPY 0.8 billion savings; and second year, JPY 9.5 billion; and third year, JPY 17 billion. And in total, the saving will be JPY 27 billion per year from the year 2021. Of course, this requires some investment, but most of the investment will be -- finished by 2020 March. And the reason why the saving is small this year is because this year, it's going to be more of a trial-and-error phase. How can we empower our employees? How can we in-source more the tasks? And what is the best way to improve productivity? So we're going to do various tests and conduct trial and error, so that we can improve efficiency.
So let me also touch upon RPA. This is just 1 example. But from April to June, in 3 months, we have developed 200 RPA developers. I believe that for most of the large corporations, RPA programming or RPA service is outsourced. However, we have decided to in-source RPA. And the number 200 is probably higher than most of the RPA-outsourced companies. By the end of the year, we're going to have 500 RPA developers. This means that we're probably going to be the largest RPA developer company in Japan. And of course, these RPA developers will be in various divisions and segments. And the routine and recurring operations will be automated. Unfortunately, for the quarter from April to June, because of the pricing revisions and also organizational -- reorganizations, we needed to spend all of our efforts in the sales process, and we were not able to spend a lot of efforts on the renovation. That is one reflection upon this. But on the other hand, for LWT, as is mentioned earlier, we are utilizing the showroom in -- as a part of the marketing strategy. Full bathroom solution provider is set as the key notion, where all of the floor sets, also bathrooms and tiles and bathroom, everything is provided under a unified design. And we were able to provide that in the showroom. This is the example in Vietnam, but also Singapore and Shanghai, we were able to open new showrooms.
And we use the virtual reality and the visitors can experience the shower room firsthand. This is the new type of showroom. In addition, this is also a new initiative. This is a LIXIL full home room experience, where all of our LIXIL products, not just limited to water technology, but also windows, exteriors and everything, can be demonstrated in 1 showroom. I hope you are able to see in this photograph. This is KBC photos. But what it means is that, the wealthy population in China is quite interested in construction materials in Japan. None of the provider can provide one-stop shop services of everything. Japanese sashes and exteriors. We were wondering whether the Chinese customer would be interested in this particular area. But actually, once we launched, they are highly interested. Also in KBC, in Shanghai, GROHE, American Standard and LIXIL NX and DXV, which is American very premium brand, we were able to introduce these brands all across from 5 brands in China. And ISH, which is the largest expo in Europe and also Las Vegas show, we will be presenting these products as well. Regarding LHT. This August, next month, this LW product will be launched. This is very popular with a very large opening. There has been a lot of interest from architects. And since they are going to use LW, then they will purchase other LIXIL products. So in that sense, LW will boost the sales of various other products. And LW, it's a clearly differentiated product, which we have not been able to launch for several years, but this is a clearly differentiated product. And in India, India suffers from monsoons. But because the general income level was low, the PVC sashes were used. But there is a wave of aluminum sash that is up and coming. And we're going to use both the Thailand factory and India factory to provide goods. And the so-called prefabricated bath or Japanese unit bath, we have been preparing from last year. And this will also be launched in India. So we are going to be the first prefab bath provider in India.
And the main focus is window sash for renovation in China. In China, below the Yangtze River, hybrid sash and aluminum sash demand is growing rather than for PVC sash. And that is why we believe that there is going to be strong demand for our sash in the field of renovation. And this was announced 2 weeks ago. This is probably the first in the world UNICEF partnership to tackle sanitation issues. We have a product called SATO, which can be provided by less than $5. It's a very accessible toilet. And we have already sold 1.8 million units around the world. Currently, 1 in 3 people do not have access to decent toilets. And -- but we are not able to provide to such people because there are some people who are not accustomed to using toilets culturally or people who do not want toilets in their house. So there needs to be education and also promotion to municipalities or local governments. We need to have promotion and demand creation. And UNICEF is able to do that rather than us, and we can provide the products. So this partnership with UNICEF in the long term is not just to raise LIXIL's awareness around the world, but also really contribute to global issues. And we have divested 1 company this quarter, and the company's name is LIXIL Suzuki Shutter. Several years ago, we had stopped the production of Suzuki Shutter. And there has been OEM contract with Sanwa Shutter. However, looking at the future prospects and lack of synergy with LIXIL, we have decided to divest this business. So this is the overall situation for Q1. And one thing that I would like to share with you is the change of the new transaction system. And also that we have started an effort to significantly reduce our cost. In terms of the trading system, we wanted to start the price revision from July, but there has been a delay in implementing the new trading system. And so our overall profit is going to be more in the second half rather than in the first half. Because the -- this is not just because of the price increase that has been delayed, but also there is much labor cost that is in the first half or July to September period. And also for marketing, there has been some upfront cost. So the first half is rather cost heavy.
On the other hand, for the housing starts, the June number was not that great, and July, there was the heavy rain. So the numbers look slow. However, this will be recovering in the second half. And also there is another positive factor for the second half. The aluminum price is declining compared to the previous month. So the struggling sash business will be boosted by the lower aluminum price. So I think I covered everything. Thank you.
Now we would like to take questions from the floor. Now in this conference call, as well as those in the teleconference -- those on the teleconference, our staff member will be bringing a microphone. So once you are given the microphone, please state your name, you affiliation and please read question one by one. Now if you have any questions, please. The person in the front in the first row.
Crédit Suisse, Mochizuki. Well, for the forecast for the full year, JPY 12 billion, the core earnings was down, and in that JPY 4 billion was actually lower than your initial forecast. So, therefore, JPY 3.5 billion domestic and about JPY 0.3 billion for overseas. And on Page 23 of this slide and you are showing the breakdown by segment. And in particular -- 1 particular item that you were lower than expected, that I'd like to ask. And in your explanation, price increase was not put in place as is scheduled. And when price increase lag behind and price factor alone generated this lower-than-expected core earnings? Or is that the revenue -- size of the revenue? Is that a major reason? Could you elaborate on this?
Basically, price increase wasn't actually expected April to June. And we wanted to increase the price in July, however, that was postponed to October, that is 1 factor. For April to June, the domestic cost increase as well as the product mix were affecting the core earnings. But it was about JPY 2 billion guarantee of oil prices was the largest cost. In fact, starting effective as of the 1st of April, we failed to materialize the price increase, and JPY 2 billion was the cost associated with that price increase or guaranteed costs. And perhaps, I will explain the mix of products. As I mentioned earlier, the revenue itself wasn't that bad. However, the housing products and exterior wasn't growing as expected, on the other hand, bathroom and kitchen grow with a lower profitability. And, of course, bathroom and kitchen had a lower profitability. And, therefore, when it is mixed, it affect quite significantly. On year-on-year basis though, on Page 23, which is on quarter-on-quarter basis. On top of that, labor costs. For example, explaining the new pricing system to the customers. And also because of that, overtime work had happened.
And what part of this lower earnings was in line or out of the projection?
So I cannot answer right away. Based on this particular chart, there's no breakdown. And yet if I go back to Page 4, breakdown of vis-à-vis the forecast is compared. And on Page 3, which is the breakdown vis-à-vis, the biggest quarter, quarter-on-quarter. So I'm not sure my answer is refined to your question, but what is explained on 23 -- Page 23 is quarter-on-quarter change.
I was very perplexed because that was very complicated.
Well, listening to your question, probably, you want a waterfall chart between what was projected, what wasn't projected. And if you ask that, and please go back to Page 4, the JPY 12 billion of change from the forecast. In that, JPY 3.6 billion was within our forecast.
And what was your forecast in the first place, which is that guarantee of oil price, JPY 1.3 billion and raw material cost increase of JPY 1.5 billion?
On top of that, the fallout of the one-time profit of Lotte Tower was already gone. So these 3 factors was already expected. And that -- JPY 3.5 billion. And JPY 2.1 billion increase because of the labor cost increase and that was outside of our expectation -- projection, excuse me. Then there's no specific announced, but on Page 4, but product mix was changed and that was unexpected.
In the items outside of expectation and now what about Page 23, mix of sales price, minus JPY 1.2 billion?
That was a total of unexpected items, not everything, but most of it is considered as an out of expectation. Now in terms of outside of expectation, the lower operation rate of the factories because of the lower new housing starts. That was reflected as a part of cost increase, though it wasn't clear, but that is part of LHT. But exterior and sash, overall, a lower operation rate is about JPY 0.8 billion, lower earnings. Now we perhaps should re-prepare this document for better disclosure.
So items outside of your expectation, I think there are several items in the first quarter. Well, the price hike was postponed and there are negative affecting your performance. But you will continue to see an impact in the second quarter?
Well, actually, let me be very clear. There is no negative impact on the postponement of the price increase. Because, initially, the price hike was expect in July and that was postponed to October. So July to September, there were some expected benefit in the July to September, which is postponed partially to October and onwards. And it is very hard to announce the expectation, however, there will be some impact. So in JPY 12 billion, those under our forecast was JPY 3.6 billion for domestic, and JPY 2.4 billion overseas was about marketing costs and these were in line with our forecast. On top of that consolidation adjustment elimination, JPY 2.4 billion or so was subject to negatively affected results. So about JPY 4 billion was unexpected. So in the item out of expectation of JPY 4 billion because of the product mix change and the labor cost increase and also lower housing starts. So other than JPY 4 billion, which was struggling with our price increase, there is no imminent impact. But some portion of price increase of April to June was postponed to July to September, so that was actually negative impact. But some unexpected benefits as well. For example, aluminum price is improving as we speak. And also another factor that we are counting on the second half more is because of the massive disaster. Because of the heavy rain that had happened in July will be recovered in October and onwards because of the demand -- higher demand for reconstruction. So overall, on full year basis, we do not expect a significant impact at this point. Thank you very much.
Next question, please. In the center, please.
Fukushima from Nomura. I have 2 questions. My first question is about the price revision. So this is for domestic market. Aluminum sash, exterior, plumbing, you have different shares and different positions in the market. But for the price revision, what is the strategy for these different products? That is my first question. And the second, you are going to raise prices from October. So what is the plan for price revision for each of the product lines? And that is already, I believe, incorporated in the March 2019 guidance, but am I correct?
So on July 31, we have issued a press release on the price revision. And this is what we can talk to. In October and in January, we are going to revise the price for sash. For October, aluminum sash, but for January for other types of sash as well. And in January, we're going to revise the prices for interiors. And in October, we're going to revise prices for bath products. And for all other products, we do not have a concrete plan yet. But overall, from next spring, we're going to revise prices. And in the press release, we have provided some percentage of the price increase.
Sorry, as I have not seen the press release yet. And is that already incorporated in the annual guidance?
Yes. We were planning to implement some of this in July. So originally, a part of this price revision should have been reflected in the July to September numbers, but this has been delayed to October.
So and the difference in the price change, is that because of your market position?
Well, we have been providing a similar price for even very special or small lot product. However, for products with lower productivity or product deficiency, we have revised the prices more significantly.
Next person, please. The person sitting right next.
Teraoka of Daiwa Securities. I have a question about price revision. Price increase, which has been put in place, and what about the cost competitiveness -- price competitiveness vis-à-vis the competitors? Should we consider the share losses?
YKK and Sankyo, these companies already announced the price revision. They are ahead of ours. We could have been raising prices in July, but because of the new trading system, our price increase lag behind, that was unfortunate. Therefore, with this price increase, we were not considered a risk of reducing the share. Now going forward, pricing increase -- the prices we determined automatically in a way.
So from a customer's point of view, the customer will carefully monitor the market situation and be able to forecast the price that you will be purposing. And with that, vis-à-vis the competitors' pricing strategy, you may be actually giving your competitors a hint, tips about your price increase or price trend?
Well, for the companies, which customer can choose the supplier among the 2 or 3 players, such as power builders and we will still need over-the-counter negotiation one by one. So we will not automatically increase the price. However, pricing scheme was irrational in the past so far. Everything was negotiated one by one over the counter, which means that in the past, some customer purchase a lot and, therefore, discount a lot. But now, they are not purchasing a lot, that's worth discounts. Or some type of a customer, we did everything, for example, control of stocks and also installation and this is -- we offered all possible services and negotiated based on that, and we failed to charge that -- our part of the cost in the past to a particular customer. For a particular area and for the particular history about that particular customer, our price scheme was irrational to some extent. So with that new trading system, we were able to set a fair pricing, and ultimately, we will be able to gain competitiveness in the future.
Through a single transaction basis, can we ensure our competitiveness?
We did similar initiatives at MonotaRO with Internet sales.
And can we apply unique price all across?
There are some sense of security on the side of the customers and also cost reduction of a fixed cost by applying unique price and that was leading to a higher efficiency at the MonotaRO. Therefore, I think that the way in which we do business will be rationalized going forward. And we needed do this at some point in the future. So that's what we did this time. Thank you very much. Next question, please.
And the gentleman in the front.
Kawashima from SMBC Nikko. My question reflects to what you've been speaking on Page 5 and Page 6. So you're taking logical policies, but it has not really penetrated in the market and not as effective in the market. Housing market from the outside looks very inefficient. So maybe a slight change could improve productivity significantly and such new entrants were not so successful. In the past, INAX and TOSTEM merged and it was predicted that you will gain a more of a sales share. But you were not able to win against competitors, and the plan was to combine sash with windows and expand sales. It makes a lot of sense, but in the end, it was not that effective. So we have already had a history of logical policies not being effective. How can you really change that trend? And if there are 50% of the people who agree with your policy, then you can gain larger market share and maybe that's good. So you mentioned, there were illogical, irrational aspects in the market or how you do business. But how do you think you can really penetrate your more logical policy? And your strategy is based on your benefits, but how can you really gain the understanding of other partners or users?
There are reasons for past failures. For example, the reason why glass was not that effective was because the logistic calculations were lacking glass and window. And for distributors, sash distributors did not immediately increase because number of end users were the same. So even with the housing products included, the number of distributors or distribution did not increase. But I believe that in this new trading system, I think everything makes sense up until the very end. Because providing the pricing based on function will motivate the customers to incorporate those functions for a lower price. So in that sense, we can reduce service level by adjustment of the price, and we can reduce cost. So up until now, everything was based on the customer's requests. So different pricing, different service for each and every customer. So it was all, like [ indiscernible ] or order-made products, not standardized. But with a shrinking market, we cannot answer to order-made customers in every case even with small customers. And we are not able to going to endure that. So we have JPY 1 trillion of sales, 30% SG&A, which means JPY 300 billion SG&A. So when JPY 1 trillion becomes JPY 900 billion, the 30% SG&A will make it very tough for a company. So somebody has to initiate this change, whether or not all the partners agree or all the market agree. So 1% in the share and 1% of the total demand have need to look to toward both. The big trend is shifting fixed cost to variable cost. And also changing outsourcing to in-sourcing, so that we can be more flexible in allocating internal personnel and taking more of the vertical values.
So you said that the housing market is illogical and your entrants come in with a more logical policy, but it doesn't go well. But in this market with a lot of assets and facilities, unless you just compete with service, you cannot be -- you need to be a full-service provider. That was the norm?
But in MonotaRO, we were able to set prices for each product and we were able to get the various customers.
So what if competitors choose to reduce prices drastically in order to gain market share? LIXIL, being the biggest player, maybe you could discount prices to crush your competition.
I don't think any company has won that strategy, General Motors or DuPont in a sophisticated or in a maturing market, the absolute #1 company has never beat the competition by simply raising service level or gaining the monopoly. We need to create this good strong products into cash cow. And the growth market is not in Japan, but outside of Japan. So we need to convert the Japan market into a cash cow and converting the know-how and experts that -- expertise that we have gained in the Japanese market to overseas. So we do not need to discount prices and fight a price war because that means that we will lose the future opportunities.
Person on the right.
Mitsubishi UFJ. My name is Anegawa. There were 2 questions. First, regarding overseas market, American Standard is eroding the margin and one reason is the increased SG&A cost and marketing cost in Asia. In America, revenue is growing, but the profitability is eroding. What is the reasons behind this? Second, GROHE is having a sluggishness in revenue. Is that rebound back from the price increase? South Africa's subsidiaries would not account all of the reasons. And why is top line of GROHE is not growing? Is that -- does that can be explained by the South Africa alone?
First, regarding American Standard, for April to June, raw material cost increased drastically, that is 1 factor, same applies to GROHE as well. But mostly, our copper material cost has increased for LWT. That is the reason behind this. And in March, the peak time [ would the band ] comes. And therefore, from April to July, the inventory adjustments had happened because we source a lot in March and therefore, those not pre-selling will carry a higher level of inventory. Therefore, inventory adjustment is happening in April to June usually. For GROHE, in April to May -- April to June, performance very good. And in May, because of the calendar dates, the performance wasn't very good in the first place. But to analyze by region, Middle East market wasn't performing quite well. So March to April was performing quite well because right before the price increase, we had a higher demand. But after that, there were some sales slowdown. Immediate before the price hike, other people purchase the products and peak time folds and March to April. But there is no fundamental issues in such market. When we look at European market overall, the Hansgrohe and [ Gebet ] growth, GROHE's growth is several percentage higher than them. And situation in America is different. A slight slowdown is observed.
Next question, and this will be the last question.
Nakagawa from Mizuho. I have 1 question. For the domestic sash business, March 2018, you said that product mix has deteriorated, and that is why the profit has decreased, especially the PVC sash ratio was higher than expected. However, for April to June period, has the profitability of sash improved?
It has not improved, but it's not that the resin sash is growing. The total sales decreased and the lower utilization led to lower profit. Thank you.
This concludes today's presentation. Thank you very much for your participation.