Lixil Corp
TSE:5938
Earnings Call Analysis
Q3-2024 Analysis
Lixil Corp
In the narrative of the company's fiscal saga, the third quarter painted a financial landscape of moderation and cautious optimism. Revenue appeared nearly irreproachable, cruising at approximate parity with the previous year. Yet the devil lurks in the details, as stormy forex fluctuations could have ravaged sales but for a fortuitous yen performance. A victory, however, could be celebrated in core earnings, which swelled by JPY 5.6 billion, belying the stable picture painted by the flat revenue stream.
Unraveling the regional threads, the company found reassurance in Japan, where business exceeded its prophecies, in no small part thanks to stable raw material and component costs. Pricing strategies in response to past cost increases proved sagacious, enabling the company to recapture lost market share as competitors followed its lead. Additionally, government-subsidized home insulation renovations buoyed demand in this market segment. Contrasting this domestic bliss, the international scene bore the weight of sluggishness. Europe drowsily stumbled, and the United States, while showing signs of revival, struggled under the oppressive yoke of inflation and biting interest rates. The shadow of potential recession loomed, stealthily deterring investment in housing amid forecasts of fluctuating interest rates.
Peering into the crystal ball, the year 2024 radios faint signals of recovery. The company hedges its bets with structural reforms, already reaping the benefits in terms of cost control. Navigating the murky waters of the Red Sea disruptions and the threat of protracted conflicts in the Middle East, the company acknowledges these as peripheral shadows, yet not immediate storms. The focus remained laser-sharp on operational efficacy, restructuring assets and personnel, and anticipating the moment for the promised rebound.
The compendium of answers during the question-and-answer session further illuminated the corporate tactics in play. The fork in the road for capital expenditure loomed, with the board of directors deliberating whether to fortify the dividend bastion or to venture into the realms of R&D and market branding. The structural reforms, shrouded in boardroom secrecy, promised escalation in the coming fiscal year, though with undisclosed figures. Europe's uncertain rhythm along with China's oscillating economic heartbeat delayed any announcement of a medium-term plan, as strategic decisions awaited firmer ground.
The tactical conundrum of inventory management was addressed, with Europe nearing stabilization in its wholesale segments, while the proactive transition in the United States hinted at earlier resolution. Similarly, discussions regarding potential goodwill impairment for the grower portfolio hinged on the ebb and flow of interest rates and market conditions. An unfaltering commitment to structural reforms and cost-efficiency underscored the resilience strategy, aiming to cushion against market adversities and fortify future cash flows.
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It's the scheduled time, so we will now like to start LIXIL Corporation's Results Presentation for the third quarter of the fiscal year ending March 31, 2024. This session is broadcast live on the Internet. Please be advised of that.
First of all, we would like to introduce the presenters for today. We have Mr. Kinya Seto, Director, Representative Executive Officer and President and CEO. We also have Director, Representative Executive Officer, Executive Vice President and CFO, Mr. Sachio Matsumoto, and we also have Senior Vice President, Leader of IR office and Finance and Treasury and Tax leader, Kayo Hirano. The MC for today's session is [ Kawai ] from the IR department. The materials to be used for this presentation is available on the website of the company at the IR section. Please refer to them as necessary.
Let me just introduce the procedure for today. First, Mr. Seto, who will give an overview of the third quarter results for the fiscal year ending March 31, 2024. Then we would like to move on to the Q&A session. [Operator Instructions] We expect to finish at 6 p.m.
Now without further ado, I would like to invite Mr. Seto to present the third quarter results for the fiscal year ending March 31, 2024. The floor is yours, Mr. Seto.
Good afternoon to you all. We would now like to start the results presentation for the third quarter of the fiscal year ended March 31, 2024. At the outset, I would like to express my sympathy towards the people who are affected by the [indiscernible] that occurred on the 1st of January. I pray for the earliest possible recovery of the disaster [ striken ] areas. The purpose of the company is to offer a comfortable and affluent housing with that mission of our company, having this earthquake and disaster is a very saddening event for us. We as a construction material company, we would like to support the reconstruction of everybody's livelihood as quickly as [indiscernible] we would like to offer maximum support towards that end. Now I would like to begin the first quarter results presentation.
The third quarter results presentation. For this term, revenues were almost in line with the previous fiscal year. The core earnings increased by JPY 5.6 billion year-on-year on the other hand. As for the revenue, actually, there was an impact from the foreign exchange. So without the foreign exchange impact, the revenue decline, which is the previous fiscal year would have been larger. On the other hand, when it comes to [indiscernible], the Japan business performed better than expected. And as for international business, the recovery was low. The corporate headquarter expenses, we achieved a significant reduction, which was the factor behind this performance improvement in the third quarter.
As you can see from here, the Japan business, the raw material prices and component prices stabilized so those variable costs stabilized. So the cost increases in the past were passed on in our selling prices. So we lost the market share ahead of the competition, but we were able to recover this because the competition also follow suit and also increase their prices. And also the renovation products for improved home insulation continue to see a strong demand because of the subsidy. So that was a major factor behind the improved performance of the Japan business.
On the other hand, for the overseas business, Europe continues to be sluggish and also the United States is not really favorable either. The major reasons for this as we have explained to you repeatedly, the interest rates are increasing and also inflation happened in that environment. And of course, the product life cycle is very long when it comes to housing-related investments. So compared to other products, the investments will be deferred for housing-related investments compared to other commodities in this environment, especially when it comes to new housing construction and also the repurchase of homes, compared to previous loans, they will have to spend more expenses for mortgages this time around. So that's the reason why people are avoiding purchasing new homes. But the interest rate continues to be high, the housing demand will recover at some point of time but rather recently, people are now foreseeing the prospect of interest rates coming down at less, especially in Europe and the United States, there are speculation that interest rates will see a cut sometime in June.
So therefore, people are rather trying to wait for that. So because the interest rates are likely to come down, there is a temporary slowdown in the demand to recover. That's what we do that situation. That's how we view the situation. As I said earlier, with [ enter ] coming down sometime within this week. There is a good potential to see that. And also the other point that we are focusing on is that our customer, the wholesalers, the inventory level at those wholesalers are now starting to come down and to even a lower level compared to normal levels. So given this, the demand, I think, if we can be sure that the demand will pick up, I think the order placement to us will likely increase as well. And as for the United States, the demand situation is gradually recovering in reality.
So in the United States, we are working on the transformation of business model. So rather than selling low-priced toilets, we are now focusing on the more profitable fitting such as showers and also other fixtures. So I think quantity is limited. However, I think that will be a tailwind for us to recover the business in the United States. However, as we have said repeatedly, it is very important to improve the management resilience in this environment. So in terms of head count and also our assets such as factories, we will continue to work on structural reform on these areas. And by doing so, we shall be able to achieve reasonable results even when the environment is not really favorable and achieve a better performance when the market environment is truly favorable. We also recorded Permasteelisa related losses of JPY [ 40.8 ] billion. This does not accompany any cash outflows when we saw this company Permasteelisa, it was agreed that we will look at the cash situation at some point of time. And then if the cash level is at a certain level, we were able to recover our money. But that situation never happened, so we were not able to recoup that investment. However, when you think about this, during this period, COVID-19 struck us and also the -- a lot of our projects were suspended unexpectedly. So therefore, if you look into this factor from -- for us, I think it was the right decision to decide to sell off our Permasteelisa, I think that was a better judgment for us. And there are no -- as I said, no cash outflows and no additional losses will likely be recorded for this case.
Now for each business, I would like to comment on each business. First of all, regarding the Noto earthquake that I just alluded earlier. There were no casualties among our employee base. And of course, there are no significant damages to our factories and other facilities. We also have some plans in [ Hokuriku ] area, so we have to repair some of these plants or equipment, but there won't be any significant impact on our shipments. So in that environment, as I mentioned earlier, the reform for the insulation products is -- the reform products for housing insulation is a very big tailwind for us. The budget has increased to JPY 135 billion compared to JPY 100 billion last year, and this covers not only windows, but also doors at least, there is a tailwind for the LSG business in that regard.
Of course, temporarily, however, the first JPY 100 billion budget, which would have lasted from April to March of this year. But actually, this was changed early on from around the fall of last year, that budget was depleted. And therefore, the government introduced a new program, and therefore, we have suspended the intake of some orders -- the next subsidy program was made available, and we were able to utilize this earlier than expected. But of course the targets or the subject of this subsidy program, was changed. So there was a temporary stoppage of the orders. And therefore, that's the reason why the shipment has come down compared to expectations. But there is -- this is still a major tailwind for us. So again, it's not about this renovation of this advanced window. But then when the government looks at this, the government is really trying to make sure they'd be able to reduce the subenergy through this type of subsidy programs. And of course, if you look at the entire society, energy cost is on the rise, and there's a lot of hardships because of that. And by -- and there are some cases, there could be some blackouts or brownout in the summertime if the energy is not controlled. And so those therefore, a lot of people are more interested in being able to use, to save energy to be able to invest in those areas.
And so when we talk about renovation, it was usually about how much better water areas that you'd be able to work on, but a lot of people are now more interested in renovating for energy purpose. Now for [ LPT ] purpose, again, we -- there were areas that we decided to go on a price hike, so that we'd be able to control some of the increased costs. And of course, we were losing some shares versus the peer. But we're seeing some recovery. We have actually started to regain our share in this 3 months. And so we're seeing more volume, which is contributing to increasing our profitability. However, when it comes to new housing built, I do have to admit that we're seeing a decline actually more earlier than we expected, which means we have to make sure we work more on the renovation area in the market more than we had been doing before. In other words, to make sure that we have more reliant on the renovation part than the new housing build.
Now in Q4, we do expect that, for example, if it's in Japan, this is really the time when we always see some slowdown seasonality in Japan, but we do want to make sure we'd be able to drive as much as we can. Looking into overseas, again, going back to what we have been discussing earlier. So Europe is very much the main market for us, but then we're not exactly seeing recovery in the market, especially in terms of the housing industry. So that is one big reason why we're seeing some difficulty and also high inflation, high interest rate is -- that is delaying the overall investment in this field. However, again, this is just a matter of time before we'd be able to find some change.
Now we're trying to drive more structural reform, which is contributing for us to have better control to the cost. We know that our users' inventory level is going down. So that's a good sign. So we do expect that some point of time in the future, we should be able to find some good turn, better churn. We expect that should happen somewhere in this year 2024. And final point, there's also another concern, especially in terms of some of the Red Sea disruption, the [indiscernible] are attacking the freight and a lot of ships would have to change their course. And so sometimes, we'd have to see the freight taking 2, 3 months longer and that is also increasing the cost, especially the fuel cost. And so that is also another concern, I understand.
Now looking at the overall trend, so when it comes to our products, for example, anything for Europe, like parts from China that would be sent to Europe and also, there are some parts that would be shipped from Europe to the Middle East markets. So those are some of the ITAD we'd have to expect some impact coming from this disruption. In other words, negative impact there. And if we want to go around [indiscernible], that means that we need to see another 1 month before everything could delivered. [indiscernible] we tried to go around [indiscernible]. That means we have to see another increase in the time. But then we know that overall, the inventory level is declining in Europe and also in the U.S. as well.
So we're not exactly foreseeing such a very large negative impact as we look but then the disputes that we're seeing in Middle East at this moment. If this is going to be prolonged, there will be some other issues. For example, inflation and the crude oil price, which is also going to boost up the inflation, which is going to slow down any recovery in the housing market. And again, if Red Sea becomes [indiscernible] some of the mega project in Saudi Arabia, that is very close to area, which means there could be some slowdown to the project progress in Middle East. But then at the same time, I can also say we're not exactly seeing some tangible impact at this moment. What is important is we expect that this is really going to be the high time that we really focus on what we can do, which is exactly about structural reform, which is about allocating our people, which is also about thinking of where we need to produce.
What kind of assets do we want to keep on holding? What is going to be our business or corporate portfolio? And then of course, it is something that we already have been doing, but it's really about how much more we'll be able to accelerate. There are a lot of initiatives that this is really the optimal time for us to drive. And so some of the investment required for structural reform is something that we will be building on Q4. About these activities, we expect it is going to probably -- we expect that it is going to contribute to the long-term profitability in the end. The recovery of Europe and the U.S. we probably would not be able to find that any full-fledged recovery during this fiscal year. It's probably going to happen in the next fiscal year, which means we need to wait for another 1 year. In other words, March 2024, we purely be able to enjoy a full recovery in these markets.
However, we still are able to see this performance even when these Europe or U.S. market is really struggling. And so I think this is something that we can have confidence. And again, for revenue, if we think about the FX, if we exclude FX, that means that we should -- we're seeing some decline in the revenue by 20%. But then we know that our fundaments is really improving internally because our earnings is increasing. LHD recovery seems to be doing really well. And then also profit for the quarter, again, the Permasteelisa. This is one-off loss that we had to book. But then it's not -- it doesn't mean that we're seeing this additional cash out. And this is just a one-off. It is not going to continue to happen. So that means, I think it is fair to say that we have been seeing a very good Q3.
This is the consolidated business result for Q3. So we know that our gross profit is turning better. We know that SG&A is -- it seems like it is increasing. But then if we exclude FX, that means we are having better control of SG&A at the moment. Some of the head office cost is also declining, which is also producing good contribution. If we can go back a slide. And so again, on this slide, once again, one characteristic of our company. When it comes to core earnings, there's more we need to do, certainly. But when it comes to EBITDA, we are finding some -- we are able to keep some certain percentage. Like we have been able to recover this to like 9.8% more recently. That means we have ability to generate profit. It's just that we do need to do a step more depreciation, amortization before we'd be able to have a more comfortable number in terms of core earnings.
But again, this is something that we should be able to drive as we try to make progress on our structural reform. Now our [ result ] by segment. It is exactly self-explanatory on the slide. But as you can see, basically, overall, LHT especially the renovation for home insulation is creating recovery, add office cost is going down, which is contributing to the core earnings. For [indiscernible] comparing our -- what we have been doing compared to like a year before or Europe still was not that bad in the housing industry last year or 2. And so compared to that, we have been finding a sluggish results nowadays. When we look at how we're doing in Japan. Some of the new housing build.
Now again, I mentioned about how we want to focus more on renovation, but there's still is a negative turn that we're still finding from the decline in the new housing start. And as a result, if we look at the consolidated status, again, FX impact is increasing on the asset. But then if you look at the actuals of the total asset, it's really being controlled down. Some of the major news here, for example, could be like FY '22 compared to December 2022 -- 2023 December, it seems like our interest-bearing debt is increasing, but then from this June, if we just look at this 3 months, it's gone down by JPY 70.1 billion, which means it seems like overall, the -- we're seeing a better momentum. Structurally, we are turning favorably and the largest reason behind that is, again, the better control in our inventory level.
Here, we show the cash flow. And again, one major news is operating cash flow is now turning positive. This is because we're seeing a better working capital and inventory level is being improved, which is bolstering the operating cash flow. Obviously, operating cash flow or be it interest-bearing debt. There is some seasonality in the trend. But with that said, we are structurally seeing a more favorable momentum nowadays. And I think that is something that we can say with a good confidence. So that's the overview of our business. And as for details, I hope I'd be able to cover as I answer to your questions.
[Operator Instructions] Let me introduce the first question. This is a question from CLSA Securities. [indiscernible] has given us one question. The growing profitability is deteriorating quite rapidly. The fourth quarter core earnings margin, would it be the same as the third quarter? If my understanding is correct, the -- among the changes of the core earnings of LNG. As far as the SG&A is concerned, I think the full year was down JPY 7.9 billion. The third quarter is plus JPY 0.7 billion. Would that mean that the fourth quarter will see a decline of JPY 8.6 billion in the core earnings?
That's a calculation overall. Grow it profitability rapidly deteriorating. Actually in the 1-year period. So all about the comparison with which term are we compare -- if you compare December 2022 and 2023 December, naturally, we are seeing a decline naturally. And the reason behind this would be basically as I've been covering for some time already, the inflation is now making progress. And of course, the interest rates is not favorable, and therefore, people are not spending money for housing and therefore, number of houses being constructed is coming down, and therefore, the sales quantity come down and the fixed cost ratio has increased. So the rapid deterioration is already something that happened in the past. It's not that it is continuing to deteriorate. And I think we have seen the situation from March of last year continuing all the way up to the third quarter.
But in the fourth quarter, fourth quarter performing [indiscernible] throughout third quarter, it's very difficult for us to make a comment at this juncture because it all depends on demand as I have been talking about this for some time already, I think we already hit the bottom already. So I don't think things will deteriorate any further from this level. It's difficult to think about that possibility because the interest rates are likely to come down, and there are people waiting for that to happen and taking a wait-and-see situation. So that might have an impact on some revenue. But if you look at the January performance, the performance was not that bad. So I don't think the situation will turn worse. So therefore, level comparable to third quarter or something better than that is something that we can anticipate.
Well, I'm not really sure in terms of disclosure, what is the adequate level of disclosure, but I don't think things will deteriorate any further from the current level and it's all about when it will turn the tide and start -- things start to get better. For the core earnings, it's just about the plus and minuses compared to the business plan. So I don't think we will see a year-on-year decline in core earnings. The numbers will be covered by Hirano-san later, I think. But compared to the original business plan, it's just about ups and downs compared to that. So I think the progress has been favorable. So I don't think we will see a deterioration from now onwards. As far as the SG&A is concerned, in March because a lot of expenses will be incurred in the month of March, but I don't think there is a factor that will lead to a significant plunge in terms of core earnings in March.
Next [ Kash Mason ] from [ SMBC Nikko Securities ]. We have 2 questions raised from [ Kash Mason ]. So first question. So how do you make up for the slow overseas business in achieving your full year's result?
Well, in Q3, overseas progress was struggling, but then the slow overseas was covered by domestic LHT. And at the same time, our structural reform is now paying off, and that's also what contributed and for the structural reform part, we expect that we should be able to harvest more in Q4 versus Q3. Now for Japan, seasonally speaking, we know that Q4 is going to become a slower quarter versus Q3. So it's really about how we'd be able to [ bal ] everything.
Next, this is the second question from [ Kash Masa ]. Please introduce your views about domestic volume sales. And if we exclude the impact coming from price hike, how do you look at the trend of new [ housing ] renovation, if there's any new products that you'd be able to share with us?
Well, excluding the price hike impact, again, 10% or more has -- we need to see less volume, excluding the impact from the price adjustment. No 10% may not be the right information. So we're just looking at Japan. So if we try to exclude price adjustment amount, we know that there's been a decline. And we're seeing a more decline in new housing build. In terms of product, anything about Kitchenware or kitchen? There's more change or a decline and so again, we -- this is an area where we lost the market share, especially in the first half because we just ahead of others. But then we have been able to see some recovery in Q3 but we did see a decline there in the kitchen technology, but I think that is something that we actually kept finding in Q3.
Now for the bathroom, we do not believe there have been such a bad trend. For toiletry toilets, we find that we are relying more on new housing built and so that did not really bode well. So overall, anything around water technology. Compared to peers, I think we are still more reliant to new housing build rather than renovation. And so we have not really been able to shift ourselves fully to the renovation segment. And so that is, I think, one reason why we have been struggling. On the other hand, for LHT, anything around window, for example, if we exclude home installation for windows, product-wise, we still do rely on new house build. For example, if it's a usual [indiscernible], this is something that we sell in new house.
So again, when we find a new house build go down, even if we don't exclude the price adjustment, we know that it had been going down. But again, LHT, the home insulation has been able to really make up for any of the slowdowns in other areas. Now volume-wise, I'm sure Hirano-san will be able to introduce some of the numbers that we can disclose.
The next question is from Morgan Stanley [indiscernible]. Two questions. The first question, [ ASP ] recorded losses in the third quarter. What's the background of this? And could you also comment on the outlook of core earnings going forward?
I'll talk about the first part then. The third quarter, 3 months, we achieved a black ink of profits. If you compare with the second quarter numbers, I think the amount of losses has been trimmed over compared to the second quarter. The overall demand is coming down and that was a factor behind this. And that happened throughout 2023. And compared, including our competitors, everybody lost quantity. So that is a major factor behind this. But on the other hand, we have been working on structural reform. So therefore, in the third quarter, our inventory level came down and we were able to achieve profitability as a result of that.
This is [indiscernible], I would like to also comment. If you look at Page 22 of the presentation material. I think that is -- this question relates to Page 22. If you look at it, I think you'll be able to see that in the 9 months of 2023, JPY 5.3 billion, JPY 5.3 million, losses last year. But this year, in the first 9 months, in the same period, JPY 140 million loss in losses. So there was a significant improvement year-on-year. When the -- there was a [indiscernible] decline in revenue, although it was in the [ red ] and we still saw some improvement. So that's one thing I wanted to comment and the other thing was that, as Mr. Seto mentioned, in the third quarter, if you just single out the third quarter only, we have achieved profitability lacking as a result of many structural reform initiatives and also -- and among those things that are sellable, we -- especially we focused on those fixtures for the water systems, which are more profitable. And that's the reason why we were able to achieve improvement in the profitability. Thank you.
And also the second question from Mr. [ Yaghi ]. If you can share with us your views towards dividend payment for next fiscal year to the extent possible, that would be appreciated.
Well, I've been talking about this all the time. But basically, it is very -- it is not something that only the management can talk about the approach to a dividend because this has to be decided at the BOD level. So to the extent possible, if I just comment on to the extent possible, our basic philosophy is that, of course, we do understand dividend payout ratio is one approach to look at it. But we're also looking at the EBITDA level of the company. So if by growing the capability to generate cashes, we don't see any deterioration there. And actually, we are working to further improve the cash generation capability. So in light of that, I don't see any need to make -- carry out a major change in terms of our dividend policy at this point of time.
Next, [indiscernible] raised 4 questions, so let me introduce one by one. First is about the Japan business. So what is your outlook for the new housing start renovation market next fiscal year, excluding any impact coming from the subsidy for home insulation.
Yes. So for the new housing start, we are seeing a slowdown, and I think this is something that -- actually, we're seeing a decline probably faster than any other people -- anyone be able to expect specially for homes that people would own. Now in December, we actually did see some -- a bit of an increase. So there are ups and downs. But then overall, if we look at this overall trend, for example, the owned homes new housing. This is exactly an area that is going down overall, which is quite a pain for us. Now for B2B area -- from the demand supply balance, the market itself is actually increasing. I don't know how long it would continue but the market trend itself is seemingly turning favorably.
Now for the renovation side, compared to the decline we're seeing in the new housing start, does it mean we're seeing an increase in renovation? The answer is no. because depending on the product, like I have been saying before, anything around LHT, the renovation for window installation is really playing a large part. But then otherwise, the growth in LHT when we look at each of the products, it's quite limited. On the other hand, LWT, demand for renovation is not robust enough yet to offset the decline we're seeing in new housing start. And so this is an area where we need to work more so that we'd be able to offer products in the renovation space. Another large trend the route for procuring purchasing renovation items seems to have changed, diversified from the customer perspective, which also means we need to think of other new ways in terms of the selling route.
This is the second question from [indiscernible]. This is about the return -- shareholder return. So in the BOD, what kind of discussions are being done in regards to offering shareholder return? Do you -- any discussion around investing more like capital expenditure or for people rather than [ dividend payout ]?
Of course, there's a lot of discussion about how much investment we'll be able to do for our people. But when it comes to CapEx, we have to make sure that we'd be able to align this compared to the overall trend, especially in terms of demand. So the type of investment that we're trying to do is more in the upstream, if you will, like be in the R&D or more for the development side or perhaps marketing brand activity. So those are the areas where we want to increase our investment. And so it's really about balancing what we need to invest in. There was a history of corporate acquisition. And so when it comes to assets or for capital expenditure, we are not really at the point where we have to increase that part of the investment.
This is the third question from [indiscernible] how much structural reform expense do you think you'd have to expect in the coming 2 years, next year as well as the fiscal year that follows?
The structural reform, we do not disclose how much expense we expect to use. So this is not exactly a question that I would -- it's not a question that I'd be able to answer off, but we expect that we're going to be spending more next fiscal year compared to this year.
This is the final question from [indiscernible]. Do you think you'd now be able to announce your next midterm plan?
We don't have specific plans to announce our next midterm plan. At this point, we're looking at Europe and the U.S. We know the economy trend is changing. That's something that we can also say with China. We need to see the economy stabilize before we'd be able to really start announcing at MTP. And of course, it doesn't mean that when the economy stabilize, we have to announce the midterm plan. We also do have to revisit visit whether or not we need to.
The next question is from [indiscernible] of Daiwa Securities. Two questions. The first question. The overall inventory is likely is coming down. But when do you think you can finish the adjustment of inventory. If you could comment by region, I would appreciate it.
That's a very difficult question, very difficult for me to answer. The inventory adjustment, especially -- we believe the European market is a major portion for our business. And the major factor for the European business is that, first and foremost, the wholesalers. If you look at the total market, the wholesaler and us, we have to add them all together. So if you look at the total inventory, the wholesaler inventory adjustment is already done, I think. So then that means -- the next is when will they start the buying again? That is the question. So the inventory adjustment, the timing when that finishes, it's about -- that has to be calculated based on stable demand. Otherwise, it's going to be very, very difficult to calculate in the first place. So that makes it difficult for me to answer the question. So if the inflation finishes by summer and the interest level is stabilized. I think by then, I think the inflation -- I mean, the inventory adjustments will run its course by then.
In the United States, rather, we are consciously focusing on the transition from the commodity products, low profit margin products. We are staying away from them and focusing rather on the more profitable products, we are making that transition intentionally. So those are low-priced commodity products and sell anytime. So I think in that regard, inventory adjustment in the United States will finish earlier than in Europe, I believe. Then in terms of volume, or quantity. When you look at Asia Pacific and China, most of these are for related to projects. So we don't really carry so much inventory in these regions. But if I dare make a comment, as far as China is concerned, naturally, obviously, from retail, the retail players are now showing interest to carry inventory. So I think we'll see an improvement in the inventory level retailer in the future.
This is the second question from [ Teraoka-san ]. So far, you explained that you don't need to carry out any impairment for the goodwill of grower. But what if the European market continues to be sluggish in the future, next fiscal year? Will that still be needed?
You see a need for impairment. Of course, there are 2 elements here. This is Matsumoto by the way, I would like to answer your question. The first is about the interest rate is now coming down. So for the discount versus the total cash flow. If you look at that, that stayed at a very high level for such time, but this is now gradually coming down, which I think is going to be a positive impact for us. And then on the other hand, the market is now in a very difficult situation, as Mr. Seto-san mentioned for several times already. So against that, we are working on structure reform and therefore, SG&A has been trimmed and of course, the cost of production is also trimmed in order for us to sustain the profitability.
And I think that will have a positive impact on the future cash flows. So even if the conditions is not really favorable, we just don't want to do -- we don't want -- we -- it's not that we do nothing to offset that. So if I may add one more point, we are based on the assumption that the market condition will remain unfavorable for us, and we are conducting impairment with that assumption. So if the interest rate comes down and inflation stabilizes, this will have a positive impact on the demand side also. So I don't think there are no factor that will deteriorate even further from the current level. That's one thing that I wanted to add.
Next -- this is another question from [indiscernible] from CLSA. Let me confirm again. So ASP core earnings for first half was minus JPY 10 million. And in Q3, 9 months year-to-date, that's minus JPY 14 million. Is this correct? And if that's going to be the case, I understand that Q3 could be minus [indiscernible], that's going to be the CE. So can you give us the background behind this loss in CE for Q3?
Allow me to get back to you. So the statutory versus the managerial accounting could have some difference. I don't want to misleading, so I'll get back to you later.
[indiscernible] being given to us so far. We have answered every question that has been received so far. We still have some more time. If you have any questions, we will be able to accommodate them. [Operator Instructions] It doesn't seem that we have any further questions. So we would now like to finish the Q&A session at this point of time.
Thank you very much for giving us so many questions. With this, we would like to finish LIXIL Corporation's results presentation for the third quarter of the fiscal year ending March 31, 2024. We look forward to your continued patronage to our company. Thank you very much indeed for today.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]