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Ladies and gentlemen, it's now time to start LIXIL Group Corporation briefing session for the first quarter results for the fiscal year ending March 2021. This time, for prevention of COVID-19 infection, we are holding the session by Internet live streaming as well as by teleconferencing. Your understanding is very much appreciated. [Operator Instructions] Now would like to introduce your speakers today. From the very left-hand side, Director, Representative Executive Officer, President and CEO, Kinya Seto.
Very nice to meet you.
Director, Representative Executive Officer, EVP and CFO, Sachio Matsumoto.
Thank you.
Head of IR, Kayo Hirano. I will be sitting as the moderator for this session, and I am Fukushima from IR office. Next, for the presentation material, those watching web streaming, we hope you look at web screen. Those on teleconferencing, we invite you to visit our website, information for shareholders and investors, and you will find those presentation materials. As to the proceeding of today's session, first, President and CEO, Seto, will give you overview of the first quarter financial results for the fiscal year ending March 2021, which will be followed by Q&A session. And for your questions, those are on Internet live streaming, we hope that you will use the chat function. You'll find the instruction how to ask questions at the bottom of the screen. In case it's not working well, and those on teleconferencing system, please send e-mail to the address shown on the invitation letter. Your questions are welcome at any time during the live streaming session. The session is scheduled to end 4:30 p.m. Hope you stay with us to the very end of the session. We now would like to ask Mr. Seto to give the overview of the first quarter financial results for the fiscal year ending March 2021.
Good afternoon, ladies and gentlemen. I'd just like to explain the first quarter results for the fiscal year ending March 2021. Before I get into the presentation, I'd like to share with you 4 key messages: the first point, this time, because of COVID-19 pandemic, while the -- while core earnings resulted in red Ink. But with respect to the impact from the COVID-19, financially, there was what is called negative impact, which is a one-off time impact. And we believe that this is going to be over by the end of the first half of this fiscal year. And impact of the overseas business has bottomed out in May. And in Japan, it will hit the bottom well in August through September. Of course, while there may be some changes as we move on and there are going to be changes in this pandemic and also the arrival of the second wave. But there is not going to be long-term financial impact, but it's going to be temporary onetime impact because of the shutdown of the factory operations and lockdown and also the stoppage of the showroom activities. And these are the major factors for this temporary impact. And secondly, as to the potential recovery in the second half of this fiscal year compared to the previous year or the last fiscal year, at least, we think we are going to overperform that. And last year, because of this backlash from the consumption tax hike, well, the results in the second half was not so strong, but at least we are going to really outperform the previous year's level this year. The third point and the financial one-off type of the impact short term, but from the longer-term view, this time because this pandemic, work from homes and work style reforms have been progressing significantly. And SG&A cost has been improved significantly. And in other ways, the cost reduction in many ways for what to do about the offices and what to do about the overtime. And we have now come to really well the time where we can have to sort of better idea as to what to do. And also, we have been able to really see the path to new ways of selling products and services. And also because the customers are really spending more time at home and they really wanted to improve the home environment, while not going out and do shopping and going on trips and dining out, rather than spending time outside, they are spending more time in the home, and they really were wishing to improve their home environment. And so long term, we can expect stronger demand for that. And lastly, and this is the fourth point I'd like to emphasize. And from the next fiscal year and beyond, because of these background factors, well, I think we have already laid a good groundwork. And COVID-19 pandemic is very unfortunate, but essentially speaking and a well disguised blessing for our businesses. And so we think we can really well use it to turn our businesses for better. Now I'd like to get into the actual sort of overview, and this is the table that I share with you. And always, while we emphasize that the core earnings in IFRS is equivalent to J-GAAP’s operating profit. And we will be providing guidance for the core earnings. But as for the operating profit and below, we are not going to share the above forecast. And this related to what I have just described. And going forward, we are to realign a business portfolio and also we are really going to implement various human resources-related changes. And we are planning to announce all these initiatives in the 3 years -- sorry, the next 3 months' time. And so as for the net profit guidance, we hope that we will be able to disclose that at the next earnings call. Now the highlights of the financial results. And as you can see, what COVID-19 impact in terms of revenue and core earnings and revenue down by 15% and 22% reduction in overseas. As far as the domestic Japan is concerned, the first quarter decline was affected by the COVID-19, but it was also driven by the decline in the new housing starts. And as for the Japan business, inclusive of the COVID-19 impact, and we are expecting the business is going to hit bottom in August through September. As for the renovation business, we were not able to provide quotations for the renovation. And also we cannot really send our people to go into the homes of the customers to provide estimates or quotations, and that was reflected on the -- for performance of the businesses, but it will just last until August, September. And as for the core earnings were negative minus JPY 2.6 billion, but well, from June, it returned to black. And April and May, because of the lockdown, well, all these higher-margin business in overseas markets were not really active because of the lockdown. And so I'm going to come back to this point later. Now the net profit for the quarter and -- well, we have seen a significant drop from the previous year's level. And last fiscal year, we recorded a [ dipping ] on transfer of interest in a former associate company for JPY 11 billion, which is going away. And also 25% of the revenue were LIXIL VIVA and Permasteelisa are going to be sold. And LIXIL VIVA, as for the share transfer and TOB was completed. So going forward, we will complete all these for the TOB and the share transfer will be completed in November this year. And as we have for Permasteelisa and while the closing conditions, and we have already received regulatory approval in 3 of 4 required markets. And as for the remaining 1 country, we do not have the substantial operation in that country. And so it is our expectation that we will be able to really receive this regulatory approval from this country and then conclude all the necessary procedures for this sale. And as you can see in the results and core earnings have worsened and also the gross profit. As far as the first quarter is concerned, well, we have seen a lower composition ratio of the overseas businesses. And also, we have seen a decline in the utilization ratio of the production lines. But in this first quarter, we were able to reduce the SG&A by JPY 9.1 billion. And so in the month of June, JPY 2.6 billion loss of the core earnings was really well achieved, despite all these negative impacts. And going forward, we are going to talk about mainly as to the latest update as the status of business and also the business forecast. First, on the sales side, please take a look at the graph. You may notice that Americas and EMEA are showing significant recovery. For Europe, in June, it was an increase by 1% for the month of June. However, in the month of July, we are seeing 15% increase year-over-year. I believe the month of July is going to be a record sales for that region. For Americas, we have a factory in Mexico. And because of COVID-19, there may be a possibility that the factory may be shut down because of lockdown. But we are seeing increased demand in the Americas and overall sales are trending strong. For China, we are seeing the trend to be rather flat, but slightly on the recovery side. And Asia, excluding China, is not doing well. India and the Philippines have -- was still in lockdown until recently. Australia, some cities in Australia are under lockdown again. So the region is experiencing a very difficult situation. For Asia, compared to other regions, Asia relies heavily on tourism, airline, hotels and other industries. And our products are based on project related to these industries, therefore, the region is more affected compared to other regions. However, we are seeing monthly sales for the Asia Pacific to minus 25% year-over-year. So we are seeing recovery there as well. As for Japan, we're seeing some ups and downs, but there was a slight deterioration in July. We believe we hit our bottom in August or September. As I said before, we are experiencing COVID-19. Of course, that's affecting business and also a significant decrease in new housing starts is affecting Japan business. It's the same in international business as well, but particularly so for Japan, these physical factors, for example, factories shutdown, suspended showroom activities are, obviously, causing decrease in demand. On the other hand, customers still have a strong desire to buy, to look at products. So showroom bookings fall until -- quite in the future. So we believe there is a great potential demand. For our forecast, as I said before, as for the core earnings, we forecast JPY 25 billion for the full year. We believe a significant portion of that will come in the second half. We believe we will achieve stronger growth compared to the previous year in the second half. For operating profit and other profit levels, because we are now reviewing the business portfolio and implementing HR measures to transform our business, and -- these measures will be announced within the next 3 months, and there will be costs that need to be integrated into the forecast. We plan to announce these operating profits -- net profits at our first half earnings call. As I said before, we expect the demand to be strong and, therefore, for the dividend plan, we plan to provide JPY 70 per share of dividend for the full year. As for the progress of our management strategy, because -- of course, COVID-19 presents a onetime issue, but our priorities remain unchanged. Rather taking this as an opportunity, we plan to further drive our business. These strategic priorities have been shared with you on some occasions, but we have 4 key areas of execution. First step is to simplify the organization and focus on the core. Regarding this, through transfers of Permasteelisa and VIVA, we've made significant progress. There are some still being planned. But we believe majority of the initiatives have been completed. For simplifying the organization, we've reduced the number of officers and simplify the reporting lines, making it more flat. In the past, we had the branches, sales offices and other offices, we've simplified the organization to just the branches and sales offices. And 1 manager overseas, at least 6 of his or her team members. So these are some measures that contributed to simplifying the organization. And we believe all of these initiatives are almost completed. The second step is to transform the Japan business into a cash-generating business or profit-generating business. We're making good progress here as well. The profit structure in the past had high breakeven point and therefore, the housing business tend to be rather volatile. But through our transformation, we've shifted to a platform-based production. For Housing business, we've already achieved the profit level that was planned before the onset of COVID-19 pandemic. We were able to achieve this through a reduction of SG&A expenses and also the shift to platform-based production. And on the other hand, we are also promoting work style reform initiatives, promoting work from home and transition to meritocracy. This all contributed to optimizing costs. Going forward, we will further optimize our production and workforce systems. We've already developed a road map or plan. It is not yet concrete enough to be able to share with you. But within this fiscal year, we believe all these measures will be completed. At the next earnings call, we believe we'll be able to share the overall design for such optimization. So turning Japan business into a current cash eater to cash generating business, we believe we already have developed the plan. So going forward, we will make sure that the plan is executed. And again, we believe this execution will be completed within this fiscal year. The third step is to drive the international growth of Water business. We are going to allocate more resources to the Water business portfolio. We will identify which areas of business are going to be most profitable and most effective. And so we are making plans here as well and making good progress. And the last point is a new area. This is to invest in innovation to strengthen our next business. When we consider to what extent we can digitalize our business in the future, I consider this a mission given to me. Digitalization in our industry is quite challenging. If you look at our business and also international business, there's no business that's fully digitalized. However, at this time, we've made magnificent progress in this area through online showrooms and activities. And this is different from conventional showrooms. We have showroom concierges providing service. And in the background, we have a configurator that combines our products and tool for price estimation, 360-degree showroom kind of service to show customers our showrooms. We also have a factory tour available online. In addition to these efforts, the contractors or distributors are also joining in a meeting via telephone, so they can engage in business discussions all online. So today, we have both the digital and physical platforms. But through our activities, we will obtain knowledge, and we put this through machine learning. This time, we had about 3,000 business negotiation through these virtual showrooms. We believe we have been able to increase our customer experience. And also our strongest forte in the water purification and faucet technologies will be leveraged to tackle global water issues in the future. I think water in the future is going to be something similar to what energy was regarded in the past. In the next 50 years, I think water will be in the greatest demand. So we would like to tackle that water issue through our technologies. Now turning to results by business segment. And firstly, Water Technology. In case of Water Technology, half of the businesses are carried out in overseas, and there are so many areas where we have faced lockdown. And so it was very challenging. But as I said earlier, in the Americas and also Europe, where all these were higher-margin regions, and we have seen a very quick recovery. On the other hand, as far as Japan is concerned, not just because of the decrease in new housing starts, but because of the current COVID-19 and appointment -- the number of appointments for the showroom should be restricted. And as for the renovation, to really visit customers' homes, it is quite restricted. And so that has resulted in a smaller number of the estimates or quotations. And so in the short term until the third quarter. July, August and September and most probably into October, there may be some challenges for remaining. But in terms of long-term demand, we feel a very strong demand here. Next, please. As far as Housing is concerned, as I have already shared with you, looking at the number and minus 30% on a year-year basis. However, while [indiscernible] the demand hike before the consumption tax hike. And because of the natural disaster, there was stronger demand for exterior. And so in view of that, well, the core earnings for the plan, which we have developed prior to the COVID-19, we have outperformed that. And so despite this very challenging circumstances, because of the COVID-19 by reducing SG&A, we were able to really manage this business. And because of the higher breakeven point and then there really have seen this decline of the revenue by 13%, it could have been that we were finding ourselves a more challenging result. However, of course, there was this tailwind of the lower aluminum prices. But because of this well-structured changes, we were able to really weather through this difficult time. And so environment wise, it was very challenging. But we were able to really weather through with very minimum issues. And on this for the consolidated results, because of the VIVA deal this time, the interest-bearing debt ratio was reduced significantly. Our equity ratio is not showing much improvement at this time. But once the deal is completed, we believe this will be improved. As for cash flow, there is one area that I would like you to look at. For profit, we are looking the negative number. But for the operating cash flow, we're actually seeing an increase. As I said before, profitability of the business was mostly the domestic business. But due to lockdown, considering the same depreciation, we believe that this contributed positively to the cash flows from operating activities. On the other hand, we are seeing deterioration in cash outflows from investing activities. This I also mentioned before, this is due to the absence of transfer of shares of consolidated subsidiaries and sale of interest in former associates. Given the current situation, we want to make sure we have sufficient cash. So we've increased short-term borrowings and commercial paper that contributed to the net cash outflows from financing activities to increase.
We now like to start the Q&A session. And I'd like to introduce the questions we have received. And you're welcome to send your questions, either by chat or email. Well, then the very first question. Goldman Sachs, Okada-san's question.
What you ask for the outlook of the U.S. business. And from June and beyond, looking at the earnings results of other competitors, the smaller scale renovation has become positive. And as for ASB, do you think that you'll be able to maintain this for the upward trend?
As far as the U.S. business is concerned, even before the COVID-19 pandemic, quality housing facilities and particularly Water Technology business is expected to see growth. And that's what was really being said. Now this time, there are so many ups and downs, but the major factor, whether we can operate a factory or not, and that was a major factor. In that context, for up until now, our factories have been operational in almost all cases, but we have a plant in Mexico. And in some cases, we're going forward because of this COVID-19 pandemic. If there is a sort of closure or shutdown of the factory in Mexico, then we might be faced with difficulties. However, with the supply chain, we can really bring some product from Asia or in some cases, from Portugal. And so in that sense, in the long-term view -- but there may be some problems, but we think that we are able to manage to address these issues. And so for the time being, we are quite positive in the outlook of the U.S. business.
Next another question from Okada-san from Goldman Sachs.
Regarding the domestic home renovation demand, given the increased number of confirmed cases in Japan, I think people may be negative towards renovation in Japan. How do you view the situation?
Actually, we are seeing a very strong demand. As a result of the COVID-19 pandemic, and I would say this is not just for Japan, but throughout the world, people feeling that rather than spending time on travel, dining out or going out, they want to make sure they have a comfortable home environment. That is why we see a strong demand for renovation. However, we see two issues at the moment. One is because of COVID-19, we need to make sure we have social distancing measures even inside showrooms. So showroom capacity has been diminished significantly. Also, we have been restricted from going into customer homes. Some customers feel they do not want contractors coming into their homes. Once these issues are resolved, we believe this will contribute positively to the business. To address these two issues, of course, we are increasing online showroom, which I talked about earlier, and whether vendors can come into people's homes, most of our business negotiations can now be done online. It's not just the visiting showrooms virtually, but having business talks online. We are seeing increased number of such business negotiations happening online. The number of estimations, it usually takes -- we you are not able to give quotes. I believe the situation will start to recover.
Next from Nomura securities, and this is a question from Fukushima-san.
HR policy and also [indiscernible] the business portfolio, you're going to really work on that in the next 3 months. If you could give us more of the concrete terms [indiscernible] share transfer of LIXIL VIVA and Permasteelisa.
And we're really going to really well look into the sort of synergy effect after doing all these activities. And more in [ corporate ] terms, I find it difficult to really give you more details. But we are now considering, rather than just focusing on a specific business, but in the domestic Japanese business and to really transform the overall cost structure. That's our focus.
Next is another question from Fukushima-san of Nomura Securities.
The Chinese economy is appearing to normalize and recovering quicker from COVID-19, but your sales were below previous year level in May, June and July. Why is that?
Probably it is, I think, in our competitors, because of the timings different, we are not seeing the results yet. But for the Chinese economy, of course, it is true that the economy is recovering and being normalized quickly. But in the current situation, especially for retail, we are finally seeing some recovery in retail. There's much ups and downs. January and February were not good, and we started to see numbers getting better in March, April. This is the pent-up demand. As for May, because of KBC, every year, this generates a huge demand every year. However, this year, because people are not able to come, this KBC did not generate any demand. That was one factor. In June, July, we are seeing gradual recovery. It is true. But compared to our competitors, we believe our share is increasing.
This is Matsumoto, CFO, speaking. I would like to add one more thing to that explanation. The competitors are recording the results for the China business with 3 months delay. Because we have adopted IFRS, we record results in the same month, but other companies who adopt JGAAP, sales in overseas markets consolidated with 3 months delay. Therefore, it's not an apple-to-apple comparison. Current company situation is just as you heard from Mr. Seto.
Nomura Securities, Mr. Fukushima-san for the next question.
Because of the COVID-19, clean and noncontact or touchless product demand is going to increase. What is the sort of the status of the sales and touchless forecast -- faucet sales result by country?
And as for the touchless faucet, it is growing significantly. And in July in Japan, 160% growth. And overseas, more than 200% in many countries. On the other hand, in shower toilet. And rather than clean and touchless, but because of the shortage of the toilet paper, there was a significant increase in demand in shower toilets. And you have all these for electronic or [ parsing ] components. And there was the shortage of supply in China. And so given time, particularly in March, there was a big increase both in China and the U.S., but it's not reflected on any significant growth in any other month. And in terms of cleanliness and touchless and sensors, and while this was -- since it operated as toilet cover, and we have seen significant growth in sales, and on overall, touchless faucet is really the most growing product. But what we are really promoting -- and anyway you can wash hand and just into the entrance of the room, you can really provide facility to wash your hand. And not for the cleanliness, but ventilation, screen doors and also the doors with the ventilation functions. And when you need to have this air conditioning and when the windows or doors need to be closed and to improve the efficiency of the air conditioning and sunshade, and all these products are selling well. And one thing which is noteworthy in the best-selling products in Japan is quite limited. And we are really well focusing on 20 product lines of these product segments.
From Morgan Stanley MUFG, we have a question from Katsuyama-san.
The SG&A expenses, are you going to control at the same level of SG&A expenses in the second quarter onwards?
This is Matsumoto. I would like to respond to that question. As was explained before, in the first quarter, SG&A expenses was reduced by about JPY 9.0 billion. From second quarter, we will continue to control expenses where possible. On the other hand, from second quarter, we believe sales will increase. Otherwise, volume is going to increase. In proportion to that, SG&A expenses, especially logistics cost in the SG&A is going to also be bigger. So it's not going to be the exact same amount of JPY 9.0 billion in reduction that we are going to see. It will be proportionate to the sales. And as Seto said before, we are currently planning various measures, which will be announced in 3 months' time. We will consider a cost associated with those initiatives. And when we have the next earnings call, we we'll be able to talk more about the SG&A plan for the future quarters.
Morgan Stanley MUFG, another question from Katsuyama-san.
Housing Technology business and you are planning to increase prices for some of the products starting from September. And if you will increase prices, where there was a worsening of the product mix, and so you are seeing quick recovery of the sales by distributors? And what would be the sort of product mix based upon [ following ] the price increase?
It is very challenging because we have the competitors. And whether we will be able to do it in line with the schedule or not, we would be having resolve to increase prices going forward. And it will -- some of the house manufacturers really were seeing the quicker recovery in taking orders. And taking that into consideration, we are going to really increase the prices and the product mix. And rather than just increasing prices, overall, we are focused to be offset. We would like to really overcome that phenomenon.
From Southeastern Asset management, we have a question from Manish-san.
Financial leverage, net debt position, does it make sense to raise equity capital to shore up the balance sheet?
No, I don't think so. I cannot say what's the level of the comfort. I think that this was kind of the combination of the net debt and the cash generation ability. And because of that, our focus of creating a better cost of structure plus improving the profit structure of the domestic business. Once -- we are somewhat confident that we can change our domestic business from cash eater to cash generator, so that means that, that can sustain more leverage in long term. Plus, the current and the financial leverage was somewhat misleading from the 2 reasons. One, in this kind of a difficult economic situation, like caused by corona, I think that general old wisdom was building up the cash whatever it is. So it doesn't matter that whether you may need like JPY 1 billion or JPY 2 billion as much as possible was kind of the general wisdom. So we tried it. So that's why the ratio -- looking at the ratio right now might be misleading. Second point was -- I think that the chart itself might have shown that the lower net debt. Because of that, we could sell VIVA. But it hasn't -- I think that the actual ratio of the net debt ratio itself was not influenced until we complete the sales of the VIVA. So I think once you saw that in the result, consequence of the sales of the VIVA, you will be able to see the whole picture, which we feel very confident and comfortable.
I would like to introduce the mail. We have received by mail, Merrill Lynch, Omuro-san's question.
This fiscal year and the next fiscal year, what is the sort of your expectation of the new housing stats number? For this fiscal year and the next fiscal year. In teleconferencing, you're expecting the recovery from the second half of this fiscal year. And also, as we have seen more people working from home and when do you think that the actual results will reflect that? Can we expect that to really become obvious from the next fiscal year and beyond?
Nomura Institute, a minus 17% was published. And so we have looked at that number. But I think compared to that, it will be better, and it's not going to drop down to minus 14%. When we look at this -- the updated number, but we have not provided the full year forecast. But in our business, the changes in the new housing starts, we see that to reflect 3 months or 6 months later. And so the new housing starts in domestic market for the -- this fiscal year and the next fiscal year. And our business guidance will not be really being consistent. And as we see the recovery in renovation, and we do have a very well high-level rough estimate, but I'm afraid, I cannot really want -- I don't really want to give you a misleading number. But I think we would see the better recovery than minus 14%. And also as we see, more people working from home and the actual sort of results, we'll see that reflection starting from the next fiscal year and onwards, exactly as said.
And we still have some more time. And so we would like to receive more questions, either by the chat function or email. Those of you who have questions, please give us your questions. It seems like all the questions have been addressed. And so we would like to conclude the Q&A session. And with this, we would like to conclude the briefing session for the first quarter financial results for the fiscal year ending March 2021, and we would like to solicit your continued support and understanding. Thank you.