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We would like to begin the third quarter results briefing for the fiscal year ending March 31, 2023, for LIXIL Corporation. This briefing is streamed live on the Internet. Thank you for being here this afternoon. I would like to introduce to you today's presenters. Director, Representative Executive Officer and President and CEO, Kinya Seto; Director, Representative Executive Officer and Vice President and CFO, Sachio Matsumoto; Senior Vice President, Leader of IR office as well as Finance and Treasury, Corporate Accounting and Treasury and Tax, Kayo Hirano.
I will be serving as the facilitator from IR office. My name is Fukushima. The material for today's briefing is on our website for the IR. I would like to briefly explain to you about today's proceedings. Mr. Seto will be giving the performance of the third quarter for the fiscal year ending March 31, 2023. His presentation will be followed by Q&A session. [Operator Instructions] We will be finishing at 6:00. Now I would like to ask Mr. Seto to explain about the results for the third quarter of the fiscal year ending March 31, 2023. Mr. Seto, please.
Hello, everyone. I will be giving you a presentation on the third quarter results for the fiscal year ending March 31, 2023. We had made downward revision for this fiscal year. And this -- in this quarter, we had proceeded as planned. There were many things going on in this quarter. I had been working as President for 26 years, and there were many new things happening each month. Yen depreciation, raw material prices, the parts price increase, those impact still remain, but there has been a good impact from the price optimization.
And in this quarter, we have been able to see improvements. Of course, there are some concerns left. For example, for Europe, there are impacts -- negative impacts from supply chain disruption, but it's being resolved. As for Asia Pacific, it's generally solid. As for Americas and China, at this point in time, I believe that Americas has bottomed out, and China is bottoming out soon.
As for Europe, we expect demand will soften. But by changing the supply mix, we believe that we can respond to the situation. One concern is the domestic market. The new construction start is now deteriorating. And the renovation demand is also sluggish. As for the cumulative results, the price optimization is going well. And as for the fourth quarter, because the cost structure will be improved, we believe that the profitability will be improved as well.
However, there was a delay in the shipment for the overseas market and especially for the European market, even though we have been able to conduct the price optimization, we have not been able to distribute as much as we wanted to. So the positive impact from the price optimization will be seen starting from around March later than we had expected. If we look at the third quarter results, we are seeing improvement in the margin.
If we look at the third quarter, it's 3.8% in CE margin. It is improving. As for LHT, due to yen depreciation, this sector was struggling, but price optimization had a positive impact. And as for LWT, with the price optimization in October and as for LIXIL International in February and March, the cost will be improved. So that was a positive for us. I would like to briefly go over many things that had occurred in this quarter.
So last February, there was Russia, Ukraine crisis, the energy prices had hiked and also there was increase in ocean freight costs due to COVID. There was a disruption in the supply chain and the ocean freight cost had increased. There was another element for LIXIL. We had distribution center in Russia and that had been distributing to the Eastern part of Europe, but we had to change the distribution center structure due to the Ukraine crisis.
Commodity prices have been peaking out in March. Copper and aluminum had been a record high in terms of the prices. In April, we conducted price optimization for Japan and the U.S. And starting from April, we had seen some improvement in the business. Europe and U.S. had seen a good economy. However, the container from Asia did not reach the port. And also there has been port strikes or labor shortages due to COVID and the truck drivers had a shortage. And because of that, we were not able to capture the strong demand from those strong markets that was very regrettable.
Starting from May, especially in the domestic LWT domestic suppliers, there was a price increase, and there was a time lag in the price increase. And for zinc and copper or aluminum, those commodities had increased its price within the year, and the supplier had conducted a price increase with the time lag. And because of that, for water faucets, we had seen negative impact in terms of the profitability. In June, there was a start of the commodity price decline.
We believe that the positive impact of that will be seen starting from March of this year. That's the copper. As for aluminum, we believe that it would be earlier than that. In the third quarter, we have seen positive impact from the reduction in aluminum prices. There was a sudden deterioration in China's real estate environment. And as for the Japanese yen depreciation, it started in May and in July and August, there was a rapid depreciation and Japan's sash business had significantly deteriorated during that time.
We are importing from Thailand and Vietnam, and that had negatively impacted our LHT business. And the widening impact was seen in the -- in Europe and Middle East because of the change in the product mix. Nonflushing system for Europe was the center of our product, but the flushing system had increased, especially in Europe and Middle East and to India, the volume of demand has increased and the production and the distribution center mix had changed dramatically.
What hit us the most is the destocking of the U.S. distributors, Lowe's, Home Depot, all these players started destocking from July and August at the latest. And the demand had stopped from them. And we expected it would continue for a month. But for us, it was a big negative impact because the delayed arrival of the container to the U.S. ports have been stuck there, and we were not able to sell it.
In October, we conducted price optimization in Japan and Europe and the profitability has steadily improved. However, there was weakening European economy after that, but the flushing system and the Near East business had offset that the weakening European market. And from November, the U.S. inventory situation had improved. And in December, we have been able to see normalization of distribution centers operation in Europe. It may take more time for the complete normalization, but we have been able to see improvement.
Though it's not written. But in December, the government decided to provide a large subsidy in the supplementary budget. The impact to this fiscal year may be limited. There will be a big impact in the next fiscal year. This is JPY 100 billion unprecedented level, only applied to windows. There has been various subsidies introduced, about JPY 150 billion for entire products lineup, but this time, it's only for Windows.
What it means is renovation of windows will be a key in reducing carbon dioxide emission in Japan, which was agreed by the government stakeholders, which is a big step for us. So many things have happened, but many things are expected to happen. So what are our concerns. First, a softening of demand. In Europe, clearly, in comparison to other companies, we were seeing a delay in softening demand. That is because we had a good situation in flushing system, and we are strong in Middle and Near East.
So the impact is delayed, but nonflushing system demand is slowing in Europe, in particular. But we have been maintaining revenue but that is thanks to the price optimization. However, in terms of unit sales, it's going down. While in the U.S., as mentioned earlier, from August last year, the situation started to deteriorate in November. Also destocking is completed and retail companies started to purchase our product. So situation started to improve.
And in January, we had a record high sales. We acquired a company, but even excluding that company acquisition in the organic portion, we were able to record higher sales. So the U.S. situation is improving a little bit. Now China, after the Chinese New Year, now there was no movement. However, with the government financing project started to recover. So by Spring situation should improve.
Now Japan from November, situation started to decelerate in particular for new housing. Demand has decelerated significantly in Japan. But as I mentioned, renovation of window -- when we talk about renovation in Japan, households conducting renovation for the water-related products. But when they deal with the exterior windows, there was a high impact on us starting from April.
Next is the price increases by small to mid-sized suppliers. As mentioned earlier, they did not ask for price increase when commodity price increases and price has gone up. And the government has a policy to accept the price increase request by small-to-medium sized company. So we have to accept their price hike request. And among SMEs, there are companies that say they are going to close their businesses. So we will have to deal with cost in that regard as well.
And on the Russian-Ukraine crisis, we have to expect for the prolongation of the crisis. And then for the fuel, there will be a long-term impact both in Europe -- Eastern and Western Europe, we may not have the robust recovery of economy. And now resumption of the Chinese economy activities would give us a positive impact on our business. But with that commodity price may go up significantly, which could be our concerns because we have to address them.
We have accumulated some experiences in that. And as to how we can optimize prices, we have more approaches. So from April onwards, there will be commodity price hike and copper and aluminum recently, we are seeing price increases of them. Now what kind of responses are we going to take against those challenges? We want to differentiate our products to earn profit. So how are we going to differentiate? We want to prepare products that is friendly to environment. We have a Revia product. In this quarter, we are going to launch this product.
So waste plastic is one of the feature. And most of the waste -- plastic waste is consumed, and it will be sold as the recyclable good. And we have shower related products that are chosen by end users. So we want to strengthen this product lineup. And one of the initiatives we have in the U.S. is when people choose a shower in the U.S. First, they choose shower door in the U.S. In order to beef up the shower door, we have acquired a Basco company that is a large player of shower door.
In addition, we have KINUAMI [indiscernible]. We have a unique product, which have strength. And we would like to focus our business on these shower businesses, so that we are able to differentiate our products versus competitors' product. And we would also like to differentiate our raw materials as well. As I have been talking shift of yellow brass to zinc, which is, of course, friendly to environment, but of course, there is a big difference in terms of cost. Yellow brass 65% is copper and 35% zinc. And the price of yellow brass itself is approaching to that of the copper.
When the yellow brass is used, [indiscernible] yellow brass and use it. As a result, the yellow brass price is going up. And the price gap between that and the zinc is increasing. So we should be able to elevate the portion of zinc to 30% in the next fiscal year. That is faucet for water products. And as for shower, we started to transform to resin.
And by so doing, we don't have to rely too much on yellow brass. At this time, the good news for us is R70/R100 recycle-based aluminum products were introduced. From virgin ingot, when you make aluminum to make 1 kilogram aluminum, 10-kilograms of CO2 is emitted. Then when you manufacture aluminum from the aluminum scrap in order to create 1 kilogram of aluminum, only 0.3 kilograms of CO2 is emitted meaning that we can improve emission by 93%, which is substantial -- 97%.
For example, general contractors, they are told they have to reduce the carbon dioxide emission by 40%. But the embedded product, they use iron steel, concrete aluminum, and they don't have ways to reduce them. Well, only with aluminum, you're able to reduce emission by 97%, which is very innovative. And who can do this. In Norway, there is a [indiscernible] the only players who can do that. And we are the only one who use this approach in the products in a large scale. So we receive a lot of attention as a result. So this product will be a key differentiator for us.
Now R70 products have warranty, which was launched last month. But we have been promoting recycling approach. So on average, Vietnam, Thailand, Japan, we are at the level of 70%. And at the end of this year, we are going to launch a product at the level of 100%. So the goal to make everything from the aluminum scrap we want to achieve in 2030, which will be a big advancement. And the streamlining of supply chain is another important thing. I talked about the U.S. and Europe. So we had big supply chain issues.
So in thinking about the disrupted supply chain, it's important to have supply in respective region and to transport things in a long distance is not eco-friendly. So we want to change from global supply chain to regional supply chain. So we were able to reorganize the supply chain significantly. For example, U.S. was relying on Asian products. But now 80% can be supplied from the Americas, mainly from Mexico and Europe products. They are shifting the manufacturing in Asia and other parts. When that is complete, we will have more solid, robust supply chain.
As for China, we manufacture them in China and sell them in China in principle. So Middle East and India, when we sell products in those countries, we were exporting the finished products. But now we only bring some core products there. And the rest are manufactured in the knockdown approach locally. So by having this kind of a shift, we will be able to solidify our cost structure as well as supply chain structure.
And with the energy cost increase, the market is dramatically growing in the Middle East. And in India, I think those supply chain streamlining have been improving this ratio. Now U.S. and China. In particular, in the U.S., as I have been explaining so many times, the toilets are sold to -- mainly to big box retail, but we want to change this. So we want to focus on showers and also washing type water faucets. So we have been increasing trade but we want to increase the business of builder and renovation.
As for project related to business in China, not only large private that we want to reduce significantly, but the government-related customers or dealers who have a very good credit line are the area that we want to focus on more. And the premium water faucet, the one that we want to sell to improve the profitability.
So the results highlight both in terms of revenue and core earnings, Japan, 1%; and the international 9%, looking at the past 3 months, but the ForEx impact is significant. We exclude that overseas minus 2.9%. Now China, Europe and Americas, they are becoming a little weakish all in China and the U.S. in this quarter or from the next quarter onward, the situation is likely to improve.
And for Europe, now that we have completely supply chain realignment in the Middle East, India and the flushing system that we want to become stronger. If we rely on them, we should be able to increase revenue. But now we are in a transitional phase.
Now core earnings, we were able to recover in the third quarter to lift to JPY 21 billion. So we want to continue this improvement to continue the good momentum to the next fiscal year. Now balance sheet, I talked about the supply chain disruption earlier on, and we struggled. The products which were brought from China, we increased the inventory. And also after bringing the other products to the U.S., there was destocking situation. In Europe, there was preparation for the change in the product mix. And because of that, all of that led to inventory increase. On the other hand, cash. We declared building a partnership with suppliers to decrease the payment site.
We had to secure the financing for -- to do that. And for this fiscal year, because of all of this, the cash situation is not so good, but we would like to reverse the situation to make it more positive. From here, I would like to take your questions. So I would like to open the floor for questions.
From here, we will go into the Q&A session. [Operator Instructions] The first question from Goldman Sachs. Okada-san has put 2 questions. I would like to go one by one. In order to achieve your target for the full year for LWT, 7.8%, LHD, 10.5% and CE margin must be met in order to meet your target. The price optimization impact and the current -- the demand -- the current demand, how sure are you to achieve the target?
With regards to LHD, it's definitely improving. The price is increasing at the moment, but the raw material prices are coming down. So we have been able to enjoy the positive impact from the price optimization and the competitors are also increasing prices. And if we look at the next fiscal year, there would be JPY 100 billion subsidy for the window renovation. This would be a business that would be profitable for us.
So I believe that LHT is improving steadily. As for LWT, the situation is different for Japan and overseas. As for the domestic market, the improvement in CE margin, the -- we have to think about the impact from the increase of prices from suppliers? And for the fourth quarter, we believe that the significant improvement cannot be expected. But as for LIXIL International, there is a cost structure improvement and the U.S. market is improving.
Considering those factors, we believe that LWT overall will see some improvement.
So to his second question, the domestic renovation demand. I would like to ask about that. With the COVID dwindling, there would be less demand for remote working and staying at home, how would that impact your business? And also, how is your trend for the windows sash product?
I talked about how from November, the new construction starts have been deteriorating in terms of the numbers. And the number of showroom visitors are decreasing. So there has been some negative impact. But in terms of the replacement of the window sashes, there is up to a JPY 2 million subsidy or 50%, and that is drawing a lot of attention. So 50% subsidy means that either construction work or the window itself will be free for the customer.
So we changed our production. And as for the renovation window, including the interior windows, we can now increase the production by 3x. In the past, renovation was more about the water-related products, but I think that now that situation will change.
[indiscernible] Asset Management, [ Takigawa-san ] has 2 questions.
I would like to introduce one by one. This term CE plan and the third quarter progress status is 50%. In the fourth quarter, how much recovery do you think you're able to make? LWT Japan International, LHT International division, Japan, can you tell us the level of achievement or the gap.
So we suffered this year. So first half, 15% of the core earning achievement versus the plan. So we have recovered to 30% in the latter half. So we have been able to recover smoothly. So as mentioned earlier, LHT. We don't have much things to change the trend, while LHT in the fourth quarter, we're going to improve furthermore due to the supplier situation is so so.
Now international, there are a lot of uncertainties in the U.S. In January, we were able to have record high sales. So U.S. is recovering. And China, January, February not good, but it is expected that March, the situation is good. So the situation so far was very poor. Europe, though there has been slowing down, but we have maintained the sales level and the profit margin is expected to recover in March.
So I think we should be able to play well in respective area.
So second question, the situation of each country -- various countries. Can you explain? Japan new housing starts a decline. It is because people are going back to the office, but why is remodeling decelerated? The demand declined due to price optimization or windows remodeling is not going as you expect? What kind of measures are you going to take?
And the U.S., Europe, deceleration is concerned. So against this backdrop, how do you increase the quantity of sales as well as securing profit.
So remodeling question is related to the previous one. water-related products, it is true. The situation is worsening. Though it's not declining like the new housing starts, but for the water-related products, so special demand for the staying at home as people stay at home when there is glitches in the restroom and the bathroom or maybe they have some issues in the corner. They want to change to touches.
So such kind of surge is going -- slowing down, but the window is about to become better. So people who are waiting for the subsidy in the fourth quarter. But in December, window remodeling increased to -- by 1.5x. So it is expected that window remodeling will grow. As for the remodeling business windows, in our sash business, the annual business size is about JPY 20 billion and the subsidy of 33% or 50% subsidy of JPY 100 billion and the JPY 2 million per household subsidy is provided. So I think with this package in mind, we can have high expectation to subsidy measures.
Well, in the U.S., there are still room for discussion as to there is deceleration of economy already taking place or not, yes, it is becoming worse. But looking at this at the -- by the end of this year, in the short term, now destocking is over. So January result was good, very good. So the U.S. situation may not be as bad as one might think.
Europe, there is a concern of deceleration of economy. So volume went down, but we were able to secure revenue, thanks to the price optimization as well as we were able to gain new market like Middle East. Fuel or energy cost is going up. So we have a booming economic situation in the Middle East.
Fukushima from Nomura Securities. Fukushima san has 2 questions. In the third quarter material, Page 4, if we look at the monthly chart for core earnings in December, on a monthly basis, it was JPY 7 billion from January to March. JPY 7 billion x 3 equals JPY 21 billion. And that would be in line with the full year plan. But usually, October to December is a high demand period and not January to March In the U.S. The house -- the housing starts is -- in Japan, the housing is deteriorating. Could you be able to maintain the pace?
So February and March, we need to make more than JPY 7 billion. We are eying on LHT for domestic market and for the international business there has been some reaction from -- recovery from the destocking situation that we had seen. So whether we would be able to achieve the target depends on Europe. There were still order backlogs. And in the coming 3 -- in the last 3 months, how we would be able to recover with that backlog is something that would determine our success.
The second question, Japan, Europe, and in U.S. markets. You have been able to conduct price optimization, but sales is not going up. So there is no full reflection of the price optimization. Maybe that's the case. But how much reduction in the sales had been seen? And how would you be able to improve the quantity going forward? Could you go one by one with Japan, U.S. and Europe?
It's a difficult question to answer because the product mix is changing. It is true that we have not been able to capture the increase in the sales due to price optimization, the quantity is going down, the volume is going down. The product mix is significantly changing, especially in Europe. There was a shift from non flushing system like the water faucet or shower to the flushing system. And as for the U.S. market, ceramics demand had come down. Also in Japan, the product mix is changing. So it is very difficult to answer your question from that regard. But overall, in terms of the quantity, we believe that there has been at least 5% decline.
[indiscernible] has given us multiple questions, so I would like to explain in 2 sessions. First. In the fourth quarter, Basco's contribution. How do you foresee the Basco contribution in the fourth quarter? In the full year results, consolidation adjustment was increased to minus JPY 47.9 billion. In the fourth quarter, does that mean you will spend a lot of expenses?
So first question, I will ask you to answer.
Matsumoto is going to answer to that question.
As for Basco's contribution, roughly speaking, per year, JPY 12 billion sales is generated at Basco. So 1/4 of that and profitability at the early 10% range. So it's a very good business. So if you multiply these numbers in the previous number, then you should be able to generate the profit. Now consolidation adjustment of JPY 47.5 billion. In the fourth quarter, it's not the case that we have a large amount of expenses, but rather -- there is a seasonal expenses.
But we don't expect like a restructuring or streamlining like a big expense forecasted there.
Next question. softening of demand. To what extent has that been observed? What are the regions and products that have been most seemly hit?
At the end of the day, U.S. destocking gave us the biggest blow because there was excessive inventory level and this is the -- basically the toilet sanitaryware business. In Japan, little by little the situation has deteriorated versus plan. That's the main feature of this year.
Europe, softening of demand has not given great impact on our business, but in April to June, if there is no delay in the delivery in Europe and the U.S. in hindsight, our business performance should have been much better.
CLSA. There are 2 questions from Mochizuki san. I would like to go one by one. ASP in the third quarter was in the red ink. For the fourth -- from the fourth quarter on, is it okay to understand that they will go into the black? Or is it better to expect them to turn into the black from the next fiscal year?
As I have said earlier, American Standard had the record-high sales in January. And I believe that we can say that they are in the black. And also Basco will be contributing to our performance and from fourth quarter from January, they are in the black already.
The second question, globally, cost push inflation is continuing and not only in fiscal year ending March 2023, but also in the following fiscal year, your procurement cost may be high, and it might may be a risk for you. So for the fiscal year -- for the next fiscal year, do you believe that there would be demand from the suppliers for a price hike?
There are 3 elements to this: LWT Japan, so they use a lot of wood, suppliers supplying the wood product and the steel product. And the price hike started from July and August. The request was made in May and the price hike was reflected from July. And these kind of suppliers will fix their pricing for a year. So we had seen more of that in the latter half. And the price increase impact will be hitting LWT. However, the wood cost, the steel cost is coming down. And from June, there was a price decrease.
But in Japan, there was a price increase due to special factors, the wood product because of the specification of [indiscernible], it was -- it could not be freely used. And as for steel, there was a price increase due to increase in investment. So compared to other countries, the price hovered high for wood and steel, but now it's declining. So for LWT Japan, we are expecting that there would be an increase in the price from the suppliers, but we don't expect it should be a concern, it would be within our plan.
We will be passing on the price increase to our pricing, and I think that we can manage LWT situation. As for LHT. So last year in April, it was around $4,000 and it had come down to $2,000, but because of the yen depreciation, we were hit by that factor. So there are 2 elements, aluminum pricing and yen exchange rate. But we have been able to pass on the price -- cost increase to our price. So we don't have much concern about that. And as for LIXIL International, the biggest cost factor is copper, but we would be shifting to zinc and resin, and we have been steadily been conducting that shift.
So depending on how much increase there would be the situation will change. But in terms of the cost push inflation, we don't believe that the commodity costs will be going up significantly considering the economic situation. And also, we have more advantage against our competitors. So I think that we would be able to have alternative options [indiscernible] materials.
BofA Securities, Omuro san, in the revised plan, you have reflected depreciation of the yen significantly but that buffer with what was it offset in the revised plan, what are the major negative impact that was not reflected in the revised plan?
First, To begin with, the revenue was not growing that much. In the U.S. in September, we thought that the destocking will be over, but it has taken until November. For Europe, we have a lot of backlog, but we were not able to ship those products, which has changed due to the product mix change. So sales did not go up.
And we had excessive inventory and we had to stop the operational plans to a certain period. And as for this sanitaryware, we had to bear the fixed cost for that portion that has impacted the U.S. business.
And as for the demand decline in Japan, the sales was lower by 5% vis-a-vis the plan. And what are the major factors for that?
New housing start forecast and the renovation demand did not grow vis-a-vis our expectation.
So SMBC Nikko. Kawashima-san has 2 questions. The first question, the exchange rate compared to 3 months ago, trend has changed, but I would like to know how that would impact your performance?
The biggest impact from ForEx is the aluminum price used in aluminum sash. The ForEx rate, when it goes to yen appreciation, it is a positive for us. On the other hand, it is true that aluminum price is gradually going up.
As I have said earlier, we will be using more aluminum scrap for manufacturing our sash for differentiation purposes. But if we are using aluminum scrap, we would not be able to hedge, so there would be higher volatility, we need to increase the price for the environmentally friendly products. The ForEx rate impacts the most in aluminum. And also, we are importing from Vietnam. So it is more about LHT. So import from Thailand and Vietnam.
In the case, the dollar is appreciated. The American business will benefit from that. But as it was asked in the earlier question, we are seeing the red ink. But going forward, when there is an improvement, the situation will be better, but the yen appreciation will be better for our business.
The second question, the impact of inflation to the consuming power, the quantity decrease and also the consumers wanting lower-priced products, do you feel the impact in the markets that you operate in?
We feel that in Europe, renovation and remodeling, it is becoming more small in scale and DIY demand is increasing. Two years ago, we launched a brand called QuickFix. This is a DIY product. And the product mix is greatly changing because of that. It is a low price range product compared to the former growing products, but it is profitable. And the SKU tends to be -- SKU sales tends to be lower.
So I think that we have been able to hedge the inflation risk. In terms of the U.S. market, the commodity open price sanitaryware products, the sales from that, we expect will decrease. However, we need to discontinue that in order to reduce the volatility, so we need to shift to more shower products or water faucets. And also look for different customers. So in terms of Japan, we don't see much impact from that at this moment.
In the new housing starts, where we are selling to is the condominium sales or the detached housing. So there is a risk that we may be decreasing the share of the high-end housing but we would like to differentiate our products so that we would be able to be received well in the market.
So we have been able to respond to all of the questions that has been asked so far. We still have some more time left. [Operator Instructions] It seems there was no other question. So we would like to finish Q&A session. With this, we would like to conclude third quarter financial year ending March 2023, result briefing of Lixil Corporation. Thank you very much for your participation.