Lixil Corp Stock

It is time for us to start the earnings call for the first half financial results for the fiscal year ending March 31, 2027, of LIXIL Corporation. This briefing is streamed live online. The materials have been uploaded to our website in the Investor Relations page.

I would like to introduce to you our speakers. Director, Representative Executive Officer, President and CEO, Kinya Seto; Director, Executive Vice President and CFO, Mariko Fujita; the Officer and Leader of the IR office, Aya Kawai.

I will be serving as the facilitator. My name is [ Setoguchi ] from the IR office. I would like to explain how we will proceed today. First, we will have our CEO talk about the financial results. That would be followed by a question-and-answer session. The expected time for ending is 3:45.

Now, I will invite our CEO, Seto, to give you the financial results.

Hello, everyone. This is Seto from LIXIL.

I will be explaining about the numbers today. And first, I will talk about what has been happening. In the last earnings call, I explained about the Middle East conflict impact. In terms of the response to the conflict, I think our company did well and worked steadily towards the alignment with our plan.

As for LWT, especially in Japan, we were able to see increase in the revenue and core earnings. But the cost increased first, and we had conducted the price optimization. From around June, we had seen sudden increase in the costs. We increased the price from August, and there was a gradual penetration of that increase. But in LWT, we were able to see increase in both revenue and core earnings.

In LWT International, we were able to see increase in both revenue and core earnings. The cost -- the price optimization was conducted in July. And also the big factor was that we were able to conduct the structural reform in the U.S., which has been completed.

In LHT, the profit has gone down significantly, and that's the biggest reason why the revenue increased, but the core earnings declined. In LHT, the cost increase in April and the price optimization was to be conducted in October. And because of that, compared to the last fiscal year, the performance has deteriorated. However, with regards to the response to what has been happening, we have been able to do well.

I talked about what we will be doing in July, and we have been able to do what we had set out to do in July. The cost increase comes first and the first half deteriorates, but the price optimization will start to take impact, and we will see the impact of that from October. What we are concerned about still is the demand. In the first half, there was some sluggishness in the demand, considering the external environment.

For Japan, conducting of the price increase, we had been concerned that the demand will be more sluggish. However, as of October, the demand is not as sluggish. However, what we are slightly concerned about is that the progress for the program regarding the products which are subsidy eligible, such as windows, the progress is sluggish. We need to closely monitor how the demand will evolve.

The international business is deteriorating more than we had expected. What we had seen in the first half is that the U.S. and China had seen deterioration in the market environment, but that has been complemented by EMEA and European regions. For the U.S. market, we had expected that the market will improve. However, it has further deteriorated. As it has been reported, the mortgage rate is now 7.3%. And with that rate, it is difficult for citizens to purchase housing. However, we have started our structural reform activities early compared to other manufacturers. We are seeing increase in the market share. We are doing pretty well, but the situation in the market is still bad in the U.S.

China's sluggish situation continues. And also Europe, where we had expected a strong recovery, has seen instability in the political situation. We see that in France and the impact from France have rippled to Spain and Italy. Spain was very strong, but now the situation is becoming more instable.

As for the Middle East, the GDP is coming down in a lot of Middle Eastern countries. And also there has been cancellation in the projects. And in this region, we have the production facilities. We have inventory there. And because of that, we are receiving orders and we have been able to supply our products to our customers. The environment in the market is deteriorating, but we are seeing increase in our market share. So, we need to closely monitor how we will do in this region.

Due to the conflict in the Middle East, the petrochemical products had gone up. Also, the metal prices had gone up as well, and we had aligned ourselves with increasing our prices of the product. So, there is an increase in the fuel cost and the distribution cost is increasing. And for the Middle East route, we need to change the distribution route almost each week, and that is increasing our cost. So in EMEA, in the first half, this had been the biggest concern for us. So, we need to closely monitor the situation continuously.

Overall, we have been able to respond to the biggest issues that has come to us, but we are seeing sluggish demand in the international business, and that causes us concern. But overall, I believe that there is an increase in the pent-up demand.

So, now I would like to go into the explanation of my presentation materials. Change of the slides, please?

So, please go to the next page. I would like to go into the explanation of the materials for today. These are key highlights for today. I may be repeating myself, but for the domestic Japan business, the cost has increased, but in the first half, we have been able to respond to the situation well. In the first half, there was a time when there was a cost increase, but we have not been able to increase the prices, so that had deteriorated our profitability. And for LHT, the price optimization is to be conducted in October, so that had negatively impacted us. And in terms of the new housing starts and the renovation demand, because of the possibility of the shortage in the materials, there was a focus in the industry for new construction. However, people did not focus so much on the renovation business. And because of that, in the first half, we did not see much growth in the renovation business. However, we are seeing a normalization in this area.

As for the international business, U.S. and China had been sluggish, but that had been complemented by the Middle East. However, the European market is now seeing the instability because of the political situation. So that concerns us a bit. But we have seen increase in the profit year-on-year. The biggest factor that contributed to the improvement is because of the completion of the structural reform that we had conducted in the U.S. So, there is no change in the dividend or the forecast for the full year, and we expect the dividend to be JPY 45. So, there has been some technical issues, and I'm sorry that there has been some slight issue. But I would like to talk about the domestic business now.

Sorry about the concerns that we have caused you. As for the water-related products, we conducted the price increase in August and metal-related cost increase. Reflection to the prices was conducted in October. And we were able to see increase in both revenue and the profitability and the price revision will penetrate into the market. So the situation will be better. And as for LHT, so we are now 31st of October and the price optimization is going smoothly. And we believe that we can recover in the second half for what we have lost in the first half.

The only concern that we have is related to the window-related business because the progress of the program for the subsidy eligible product is sluggish. So, we have not been able to conduct the promotion for the vendors because we needed to secure the raw materials and products in the face of the conflict and also the program for the subsidy has started later than we had expected.

On the other hand, in the LWT International business, we were able to have successful price optimization in July. We were able to see increase in both, revenue and core earnings. And the U.S., which has been dragging us down, had seen improvement in the business and the amount of the red ink has significantly decreased.

In the second half, the issues are the economic policies, as well as the political instability and the market overall is becoming more sluggish. In the Middle East, we were able to improve the market share even though the market itself is deteriorating. So, we would like to make efforts to make improvements in the market if that is deteriorating. What worries us is that increase in the copper prices.

It's used in the defense industry as well as in the IT industry, and that has negatively impacted us and also the fuel cost because of the Middle East conflict. The logistics -- so logistics issues have added to the costs. And you see the situation country by country. And in the U.S., the mortgage rate for the 30-year is 7.3%. And President Trump has said that the mortgage rate would go down to 2%, but now it's 7.3%. So the situation is very severe.

However, we were able to complete the structural reform in the U.S. at early point. And growing -- and the American standards have established their own sales principles, and that is working well. And there are months which are in the red ink, but there are some months which are improving to the black ink. So, we are seeing improvement in the U.S.

As for Europe, the market situation is severe, but the German market is holding up, but there are issues occurring in France, which has a rippling effect to South Europe. And Southern Europe has been seeing the fiscal issues already, and I am worried about the inflation as well as the hike in the interest rate.

As for the Middle East, the situation is, as I have explained. Middle Eastern countries have seen decline in the GDP. However, the population is increasing and economy is growing. So, even if the situation deteriorates for the company -- the countries which are facing the conflicts, the conflict-free Middle Eastern countries will continue to grow. So overall, I am not worried so much.

As for APAC, excluding Thailand, the situation is getting better. Overall, the revenue increased while core earnings decreased. But what we have set out in July that in terms of the response to the Middle Eastern conflict has been done. It has been planned, and I think that we would be able to come on par with the plan. But in the past 6 months, the costs increased faster than our price optimization. But in the full year, we would like to be able to improve.

So the gross profit margin, the cost increase first before the price increase followed. And so it did come down, and we were impacted by FX to an extent as well. So it deteriorated a little bit, but we intend to catch up in the second half of the year. And here -- and I'm repeating myself, but for LWT, we are seeing profit increase both in Japan and also international. And I feel that they made a pretty good effort given the environment.

LHT and aluminum has increased so much, and we were unable to increase the price for October. So, we have to continue to make efforts for the rest of the year. Leading kind of position between the 2, the LWT and LHT, so kitchen and the wash basins, the price increased in August and for the interior, in October, price increased. So, that kind of come into the middle of the 2 other segments. So the profit has decreased, but the amount of profit decrease is not as significant as the LHT.

And so next, the total asset has come down partially due to FX, and we issued corporate bond in the first half in the first quarter. So, that was also a factor. And we had to build up on the inventory because of the supply issues. We had to buy more materials, and we also had to hold a greater number of inventory of our product. And because of the extended -- the ocean freight period, we had to also secure a greater level of safety inventory. And so working capital increased as a consequence. And so the interest-bearing debt ratio increased and the equity ratio came down to 33.9%, but this is something that we can recover quite quickly based on the reasoning.

And for cash flow, because of the increase in working capital and the inventory. And in the first half of the year, the cost increased before the price increase, and that had caused the profit to come down. And as a consequence, free cash flow did come down on a temporary basis. But towards the second half of the year, we intend to certainly catch up for the gap.

So, I apologize for the presentation material jumping all over the place, but I intend to recover through the Q&A. Thank you.

[Operator Instructions] The first question from SMBC Nikko Securities, Kawashima-san.

My name is Kawashima from Nikko. I have 2 questions. The first question is related to full-year forecast. You have not changed the plan, but the market situation is changing and there is a severe situation for your volume. So, how would you be recovering for those severe situations? The price optimization will be helping you?

So, I would like to first respond to that question. Basically, when we created the budget compared to that, the volume, we expect it to decrease. But by conducting the price optimization, we believe that we can meet the target. So the revenue is expected to go up, but the volume is not necessarily increasing. So whether it will deteriorate or not is your question, I believe. And currently, aside from U.S. deteriorating very quickly, even though there are some countries which are seeing some deterioration, overall, there is no significant decline. So with the price optimization that we have put in place, we believe that we can cover the decline in the areas which have deteriorated, but we do have concerns.

My second question is related to the domestic market. So, I would like to hear about the market consolidation, YKK and Panasonic. I thought there would be some activities there, but we don't see it so much. Maybe there was something that had occurred, but the new housing market, I think that it's very difficult to recover when the costs are going so much. So, if LIXIL has already conducted the structural reform, but maybe you need to change more with the change in the demand from the domestic market.

From the manufacturer perspective, what are your views? Do you think that there will be a proactive action for consolidation? Or do you need to wait for the players to go out of the market?

I will not be able to comment about other companies. But we are not considering intervening in further market consolidation in Japan. But what I believe will change the market dramatically is the penetration of agentic AI. The past common sense was moving from the new housing to renovation. But when that happened, because each project will be smaller, the revenue may be going up, but the profitability may be coming down. And I don't think that a lot of players had room for pursuing the renovation activities.

So the travel, dining out, home appliances, so in those industries, the demand has been created by approaching the customers. In the case of our industry, the cost to increase the demand for each product and the profit that would come out of it, that would not match with each other. I could go on about this, but the frequency of the buying of the product is very low. So, SG&A tend to grow when we try to sell those small products in the renovation area. And because of that, we were not able to pursue the demand creation arena. However, using agentic AI, I think that we would be able to dramatically decline this SG&A, and we would be able to spend more for the generation of demand. With the advent of agentic AI, I think that the situation will change for demand creation.

So, next question from Daiwa Securities, Teraoka-san.

This is Teraoka from Daiwa Securities. I would like to ask 2 questions. First, in regards to domestic market. And you have increased your price quite significantly. So, did you have a kind of a rush demand prior to the price increase? So, that's the first point that I wanted to understand. So, I'll ask second question after your response.

Well, of course, there was a bit of a kind of the last-minute demand. But based on our experience thus far, we did actually a number of things to prevent that from happening. And so kind of coming up with a guarantee period, which expanded the order to kind of spread out. And if we have the last-minute surge in demand, we won't be able to produce -- address that demand. That's the reason we don't want it. But in comparison to the past, it's been relatively smooth. But for certain products, we did actually see last-minute demand, particularly for exterior type of products.

But even for the exterior products, in October, we did provide some guarantee. And so the orders for October has been quite steady. So, we didn't see a sudden drop after the price increase. And in this industry, apart from toilets, we cannot really build a lot of inventory. So, I think in that regard, the last-minute orders were quite limited. And so doing the projects earlier.

The second question. You have continued to maintain the dividend level. But from your financial position, what would be required for you to maintain this dividend level? Conversely speaking, so if there is a possibility for you to change the dividend level, what would drive that?

Well, depreciation and profit, I think these are the 2 key indicators. Well, should I say depreciation and investment? So, we feel that we are making sufficient investment, but if the depreciation is higher and so the cash flow being large with the profit level being lower, we have been able to maintain dividend, but we want to also expand our profit. And so it would look better as well. And that is what we would like to realize by next year.

And another point. So in terms of how we look in terms of the core earnings or the profit -- final profit, the tax expenses or the cost under the core earnings. And in order to reduce those, so -- and making the structure better in regards to the international business, we want to also address those aspects as well. And so normally, the tax cost should be between 30% and 40%. That's the kind of level that we want to settle to as quickly as possible, and that is also quite significant.

We would like to move on to the next question. From Nomura Securities, Fukushima-san.

My name is Fukushima from Nomura Securities. My first question -- so, I have 2 questions. And my first question is as follows. In LHT, you will be starting to increase the price in October for aluminum construction materials. And at that time, aluminum ingot prices had gone up when you have decided. But now, it's coming -- the aluminum ingot prices are coming down. And so for in LHT, aluminum/product profitability, do you think that the profitability will be better than you had first envisioned? Or even though the aluminum ingot prices are stabilizing because of the increase in other costs like fuels, you cannot be that optimistic. Could you talk about that? That's my first question.

As you have said, the aluminum ingot prices are now more stabilized and it's more stable than we had expected. So in the short term, it will be a positive factor for us. However, for aluminum, we cannot have accurate forecast and aluminum ingot prices may go higher than we had expected. So, we need to have a buffer in order to control the situation. So, I don't think that the aluminum price increase is -- I don't think it's too much increase. So, I don't think that you would be able to talk so much in an optimistic manner, but I don't think that the situation is that bad.

My second question is that the red ink is shrinking in the United States market because you have been able to complete the structural reform, but the business environment is not recovering so much. But for the sanitaryware in the U.S., what is the competitiveness of it compared to others? How is it impacting the revenue? Maybe there was a discussion about the increase of your share due to the Trump tariffs, but I would like to know more about the competitiveness in the U.S. market of your company.

I think the competitiveness is higher in total. They have a very strong product, the [ washstand ], and they have built that position in the past 30 years. So, they have competitiveness in the unit price as well as for the profitability. When we go to the showroom, there are customers who would like to have TOTO products. And there are not many areas where we can outperform them. However, Kohler is the biggest competitor for us in that market. We never compare American Standard and TOTO, but American Standard is compared to Kohler. And Glacier Bay in the Home Depot, their private brand is compared to our products.

Glacier Bay and in the other private brands, we are doing better than the private brands because they would not be able to supply at cheapest price possible with the materials that they have secured from China. So, there is no race to the bottom so much anymore. However, Kohler, the Kohler sales are sluggish outside of the U.S. And in China, there has been decline of sales by 30% to 40%. And also in India, their situation is not good. And in Southeast Asia, they are losing to competitors.

Kohler compared to American Standard, their position was slightly better than American Standard. So, there was no competition in the prices. So before the Trump tariffs, the competition was more about the -- the competition for American Standard was more about competing against the lower-level brands and not the upper level brands. But now Kohler is trying to capture the demand in the lower price point products.

So unit price-wise, we have been able to improve because the competition that's below us, they are not able to play the race to the bottom. However, we have not been able to get to the level of the more premium brands from the perspective of the competition with them. It would take a long time at American Standard to significantly improve the profitability.

So, we'd like to go to the next question from CLSA Securities, Mochizuki-san.

I have 2 questions. The first question is a very simple question. So the tariff refund from U.S., I think you had that. And how much did we have that in the first half of the year? And how much can we expect in the second half of the year? That's my first question.

Well, in the first half of the year, there was impact towards improving the loss level at JPY 1 point so many billion and that was booked in the first half of the year. For the second half of the year, we do have kind of a ballpark figure. But as to whether that will really be refunded or not, we don't know. And so please allow me to refrain from making a comment on that.

As an image, is it greater than the first half of the year?

Don't know. High likelihood that it will not be greater than the first half of the year. As for the refund, the large portion is related to what we transport from Asia. And so we have been reducing what we actually bring into the space from Asia after the Trump tariff was introduced. So in that regard -- and it takes quite a long time for the payment to be made until you make the filing, but I don't know how much still remains in the pipeline, but probably not likely to see a greater refund in the second half of the year vis-a-vis first half of the year.

For the second question, this is more of a broader-based questions. And because of the global -- the political changes, inflation and interest rate remaining at high level, this may continue for a certain period. Now when that happens, then LIXIL's global business strategy, how do you intend to -- or should we change that? Have you already responded to this? And you probably will achieve your -- the forecast for this fiscal year, but inflation and higher interest rate, is there any adjustment to the strategy that may be required? And if so, what are you thinking of in that regard?

Well -- and this may be quite a long response. I hope it's okay. One example. And when we look at the situation, China is probably a good example. The Chinese market for water-related product, the market is divided into 2 segments, local versus international. Until 5 years ago, this was clearly distinguishable. International was the GROHE, the Kohler or TOTO were the players. For local, Huayi, [ Halo ], JOMOO and several hundred companies in that part of the market.

And so the local market and the international market, there was clear distinction in terms of pricing. And the players at the higher level of the local market, their quality wasn't too bad. So when it comes to toilet or showers, then the functions for usage were not all that different, but there was a significant price difference. But from around 5 years ago, as you know, the market and all of a sudden, cooled down or shrunk quite significantly in China. And it was Kohler that was damaged the most and TOTO as well to a certain extent. And what was the reason for that?

And so the brand equity closer to the local market was they damaged a lot. And particularly, in the case with Kohler, when the market was shrinking, then -- so they actually produced and entered where the local player was participating. But the local players, they actually fought in that area, so ended up losing out to the local players. And for GROHE and Hansgrohe, we saw their volume increase as well. So international with a higher brand equity, even when the market was poor, the sales increased. And we now know that this does happen.

I don't know whether it's a good example or not. But in the case of Japan -- and so the Japanese imported vehicles had a significant position. Mercedes didn't actually see their share come down even when the market overall was poor. It was the American brand, which has struggled the most. And this type of thing has happened for all sorts of different industries. And what is important for GROHE in terms of offence and defense, in terms of defense -- and for Europe, you have the installers and the plumbers. And so they have continued to protect down GROHE. But architects and designers, when they actually choose the product, they kind of think GROHE is clear that they choose. So, that is the offense.

So the Middle East, India-China market where this actually plays out for our benefit. And here, maintaining the margin is changing the market to increase in our market share or sales. So in that process, GROHE and the sales growth come from the region expansion, the project architecture or the designers choosing our product. And so we are able to achieve both. But American Standard in that regard, we have not been able to do that. That's the reason it is kind of struggling.

But American Standard, to change it to a brand like GROHE is not something that can be done all that easily. So, we will take a more lean approach for American Standard. And it does relate to your former question too. We may not be able to generate a significant profit, but this is an area where we would be more on a defensive end. So through influencers, we go at a higher level and the premium brand at a higher level to maintain a position like Mercedes-Benz and to expand upon that. That is the kind of strategy we will adopt.

So American Standard, the brand value, is it difficult to enhance that because of competitors? Well, American Standard's brand value is most felt by plumbers. Plumbers basically are not really interested in learning about new products, but they want to continue to use the same product. And they do have the biggest affinity to the product of American Standard. And so for American Standard, focusing on plumbers will enable us to raise our ranking. And U.S. and the Europe has the difference in terms of market nature.

U.S. is quite a unique market. We buy product as product, but we have installers that people hire separately. And so consumers compare products for products. But in Europe, the product and service is sold at the same time by plumbers. And so from the plumbers perspective, they are able -- there is no incentive in comparing the price of product. And so they will actually recommend the same product to the customers. And so the brand equity improvement is difficult in that regard.

If you do want to sell more GROHE -- if we increase the price, we probably are able to sell more because plumbers are able to generate more profit for higher-priced products. And so increasing the price of the product to an extent will lead to increase in sales. But American Standard product, if we want to sell large quantity, we need to lower the price, but we need to improve the price if we want to improve the brand equity. So in simple terms, we do have that type of nature. So GROHE in that regard, we have more buoyancy. But American Standard, the buoyancy and gravity are kind of fighting each other. And that is probably the difficult aspect regarding American Standard.

We would like to move on to the next question from Citigroup Securities, Miki-san.

My name is Miki from Citigroup. I have 2 questions as well. The first question. LHT renovation sales is sluggish. You said that sash is sluggish. You talked about the impact from the Middle East conflict. But is there impact from no more subsidy for the window sash? So is it -- is the situation same for the other companies? Or do you see decline in your share? And also in the second half, I would like to get your comment about the sales for the LHT.

So to your first question, so there are wins and losses each month for the windows sash business, but the other competitors are also seeing sluggish sales. So, there are several reasons behind this situation. First, in the past 6 months, everyone was focusing on other things, which is that there is a shortage of materials coming from the Middle East. We needed to secure adhesives because there was a shortage. And in the construction companies, they needed to build quickly because if they are waiting, the cost will be further increased. So, they were focusing on the new housing rather than the renovation. And also on our side, we wanted to do renovation, but other things kept us busy. We were not able to have capture the promotion opportunities for this.

And second is that the program changed drastically, and it took a long time in order for the start of the program. It started around June. And the information did not penetrate quickly. And also another is that the summer was short. There was lots of rain and people were not using the air conditioning so much. So, those were the seasonality factors. Out of the 3, the biggest factor was the first one.

We are seeing the stabilization in the situation and people are eyeing more on the renovation. So, how well we do in October and November will be very important. In the longer term, the second factor is very important. In May and June, we tend to start the new program after the previous program finishes. And the program was in the supplementary budget and going forward, it would be included in the actual government budget. So, I think there are things that we would be able to change.

And I would like to move on to the second question. On Page 12, LWT International business, the first half sales had been lower than the plan. But LWT overall, JPY 31 billion core earnings is being planned. And with this pace of increase in the top line, do you think that you would be able to catch up to the full-year plan? What are the initiatives that you are going to take in the second half in order to meet the full-year forecast?

So, there are concerns about the demand, of course. So, what we need to do includes increasing market share in each region. Where we have been able to do well is the colored faucets and also smart control products where we are strong in. Through that, we would like to maintain our revenue. For this fiscal year, the volume may be sluggish. So, selling higher-end products for improved profitability is what we have been doing and what we have been able to maintain.

I'd like to proceed to the next question from Morgan Stanley MUFG Securities, Yagi-san.

This is Yagi from Morgan Stanley MUFG Securities. I have 2 questions as well. The first question is on Page 12 related to sales international and Europe and U.S. And against the full-year sales plan, the progress has been somewhat weak. But my impression is that demand is likely to drop a little bit more in the second half of the year, but you are increasing price overseas as well.

So, when you consider the overall situation, inclusive of U.S. and Europe for the growth rate in the first half of the year, the growth rate in the second half of the year, will it increase? Is there a risk for this coming down? And I understand that we are having to compare against the last year. So, your comment could be somewhat qualitative, but inclusive of the pricing impact, to what extent can you actually catch up to the forecast?

Well, to begin with, in U.S., the high demand period is the October and December. So it's when the retail is strong overall. But for other regions, March is the biggest demand period. Why? Well, it is the trade people. So the discount rate for the next fiscal year is determined based on their performance. So, they tend to place a great emphasis in March. So, balance between H1 versus H2 for fourth quarter is quite strong for international market, that's a general trend. And U.S.? So, we do see some concentration of sales in November, December.

The second is in regards to the sales -- the price increase and where we are emphasizing on the promotion. So, we are trying to raise the buoyancy or we want to increase higher-grade product in order for us to increase the average unit price. And so that is the basis of the plan on this occasion. So within the plan on this occasion, my biggest concern is to do with the United States. And the U.S., for July and September, the market fell quite significantly. So Kohler and Jaquar, their numbers have also come down. So from our perspective, we felt that we did well given the environment. But to what extent, can we continue? And so we have some concerns and anxiety about the U.S.

For Europe, the current situation centered on France, will that spread or not? That could be a potential concern. So from our perspective, what we can do and additional thing that we can do is -- and that leads to what I was explaining about the domestic situation. But to what extent, can we improve productivity, including AI to reduce indirect cost? And this will be a means for us to protect our profit in the end.

My second question is LWT domestic for renovation and how you think in the future? Right now, I think the demand remains to be strong. But after you increase the price of the product, what type of impact can you foresee? And so given the inflation environment with product prices going up and the demand for LWT could potentially slow after the pricing increase, do you have any countermeasures that you're thinking of?

Well, simply put, like I said before, we are going to maintain sales by price increase to address the decrease in volume. But what we need to do is demand generation and certainly not something that you can do overnight. But like others, we do have online showroom. And so we don't have the restriction on capacity of the showroom. And we are implementing AI in sales activities. And so we are able to accommodate smaller customers in that regard.

So by progressing the automation here, we can expect the increase in incremental business. We are starting to see that gradually. But we want to accelerate this more in quite a significant way. Any concerns? We did have concerns. But for now, as of October, we have not seen a significant decrease post the price increase as we had potentially thought.

We have been able to answer all of the questions that has been posed up until this point in time. It seems that the questions -- there are no more questions. So, we would like to conclude the Q&A session at this point in time. We would like to apologize for the confusion that we have caused because of the issues -- technological issues.

We would like to conclude the financial results briefing for fiscal year ending March 2027 of LIXIL Corporation. Thank you very much for your attendance today.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

We will now begin the LIXIL Corporation the first quarter for fiscal year 2026 (sic) [ 2027 ] ending in March 2027 financial results briefing. This information session is conducted via live Internet streaming. Materials for this briefing are available on our website under Information for Shareholders and Investors. Please refer to the materials.

Let me introduce today's presenters, Kinya Seto, Director, Representative Executive Officer, President and CEO. Thank you. Next, Mariko Fujita, Director, Senior Managing Executive Officer and CEO (sic) [ CFO ]. Thank you. Next, Aya Kawai, Managing Executive Officer and Head of the IR Department. Thank you very much. I am Kobayashi from the IR Department, and I will be your moderator today. Thank you very much.

Now, I will explain today's agenda. First, our CFO, Fujita, will give us an overview of our financial results. Following this, we will have a Q&A session. During the Q&A session, CEO, Seto, will also join to answer your questions. This briefing session will be ended at 2:45 -- at 2:40.

Now, we would like to ask Fujita-san to start explanation.

Hello, everyone. At the beginning of this meeting, I would like to express our condolences on the part of the company to the victims of the Kumamoto earthquake. We will work together with business partners and with our employees to support the reconstruction of the affected area.

Let me begin with the earnings results. Today, I would like to focus on the full year forecast mainly. First of all, the Q1 results will be introduced. The revenues increased and earnings declined. The LHT aluminum price increased. And the renovation ratio has declined overall. That is the reason why we ended with lower earnings. Regarding aluminum price, please refer to the right-hand side.

Next, I would like to talk about the forecast. After consideration, we have remained with no change in terms of full year forecast. From the second quarter, cost impact will be full-fledged. And the price revisions will gradually take effect from Q3 onwards. There is a lag in terms of the impact. Therefore, for the full year forecast, we believe that the original plan can be achieved overall. For Q1 and Q2, cost increase will occur how -- and with less earnings. But in the second half, we believe that recovery can be achieved. And there is no change in terms of dividend forecast as well.

Next, I would like to talk about the impact of the recent situation in the Middle East and our countermeasures. First of all, in terms of manufacturing supply, cost inflation as well as supply concerns existed. However, the price revisions have been made, the cost reductions have been made, and hedging have been implemented in order to implement the countermeasures. In terms of product lead times, in the recent past, there is no concern in terms of supply and delivery.

Please look at the chart below. It is clear to see that against the plan at the beginning of the fiscal year, additional measures have been implemented in terms of price revisions, as well as cost measures. And therefore, in March 2027, we have maintained the forecast of JPY 45 billion.

Next, I would like to talk about the supply side impact of petroleum-based materials, aluminum as well as copper are subject to supply shortages, leading to price increase -- cost increase. However, with price revision, we will gradually implement measures in terms of price revisions in July and August and October. Depending on the type of business, timing will differ, but revision will be made accordingly. For Q1, there were some supply concerns. And therefore, the new housing was prioritized and renovation rate came down. And the subsidy details have been delayed, which has had an impact on the renovation.

Going forward, cost increase of new housing is likely to become higher. Therefore, this will have an impact on new housing, and we believe that this will require close monitoring going forward. At the risk of repeating myself, I'd like to emphasize that regarding the cost increase for the fiscal year, price revision and other cost reduction will offset the impact. For the new housing demand, we have to monitor this on a long-term basis.

Next, let me talk about the highlights of Q1. Regarding revenues, we ended at JPY 379.2 billion; core earnings, JPY 1.7 billion. In terms of profit for the quarter, minus JPY 3.5 billion. Here are the details. As you can see, in terms of SG&A, there was an increase. This is mainly because of the foreign exchange impact.

This is the business results by segment. LWT, in Japan and International businesses, core earnings remained flat. And LHT, as I mentioned at the outset, due to the soaring raw material costs, CE declined. For Living, due to foreign exchange impact and higher material costs, CE declined.

The consolidated financial position. Here, the equity ratio, which was about 35% last year, and this year, 33.8%. And factors for this, as you see at the bottom notes, this was due to the surplus funds utilized for the short-term investment. Therefore, net interest-bearing debt increased temporarily. But in the next quarter, in the second quarter, this is expected to be improved.

Next, cash flow status and cash balance. Because of the increase -- slight increase in working capital and also the short-term investment of the cash reserves, as I mentioned earlier, due to this, investing cash flow worsened for us on time. But similarly, this is expected to improve in the second quarter. And free cash flow recorded as negative.

So this concludes my presentation on the financial results. Thank you very much.

Fujita-san, thank you very much. Now, we would like to open the floor for Q&A session.

[Operator Instructions] The first question, Nomura Securities, Fukushima-san.

This is Fukushima of Nomura Securities. I have 2 questions. Regarding cost increase, I have a question. You said the rationalization as well as price revisions will be the measures that you will have implementing. Regarding these 2 points, please elaborate further.

Regarding price increase, August -- for LWT aluminum, will be from October. This has been announced. Now, in terms of price increase by your company, how does it compare with your peers? Are there any differences? In terms of price revision timing, do you think that this could lead to a change in the market share as occurred in the past? So how do you compare against your peers in this regard? Please elaborate.

Second is regarding rationalization. You have released recently Nobori plant will be closed by the end of this fiscal year. Therefore, the impact is likely to be manifested from next fiscal year onwards. Now, my question is regarding the rationalization impact this year. What are included this fiscal year? And beyond next fiscal year, what are you expecting in terms of amount in terms of rationalization, as well as the production structure that you will maintain?

Now, I will respond to the first part. And the second part will be responded to by Kawai-san. Next, comparison against our peers. In terms of the metal products, at the same timing, it is likely that we will have price revisions by the same margin. For sash and exterior, there is no significant time lag amongst -- in the industry.

Regarding housing, Toto has not announced its price increase yet. But for other manufacturers, price revisions have already been announced. So we have to watch how Toto is going to respond, and this may have an impact going forward. But regarding housing facilities, profit optimization is pursued. And I don't think that competition is going to be proceeding what is going to be conducted by LIXIL. So overall, I think each manufacturer will pursue their own initiatives in terms of price revisions to secure [indiscernible].

In terms of the housing equipment, there is likely to be a time lag, but this is not because of competitive intention, but the preparedness of the companies, as well as prior price revisions will have an impact. And overall, each of the companies impacted by the Middle East situation, they may have reduced orders. This will also have an impact as well. So intentions will differ from company to company, it is not the competitive dynamics that is coming to play. But in terms of possibilities, Toto has not made an announcement yet, so we don't really know for certain.

Now, I would like to respond to the second question. My name is Kawai, of IR. I would like to talk about the Nobori plant. You mentioned that additional measures and the path of rationalization Nobori was mentioned. But regarding the Nobori plant, closure is something that has been decided from the past. It is not being impacted by the Middle East situation. So I want to emphasize that point.

Regarding the Nobori plant, closure was announced in June of this year. In terms of the actual timing, up until the March of next fiscal -- next year, is the timing of closure that has been announced. And therefore, the impact will be brought to bear from the next fiscal year. Just because we close this plant, it isn't if the impact is going to be very significant. I will not give the actual numbers, but it is not a significant rationalization that is expected this fiscal year, nor is it expected for next fiscal year either. It's not just structural reform.

But in terms of rationalization that is mentioned here, the logistics expense has to be reduced as well. This is a major theme that we are tackling. As you know very well, there is some changes in terms of logistics-related costs. This is likely to be important cost effect. So in terms of dealing with these legal changes, we have to proceed measures so that the effectiveness can be maximized. In other words, we will try to consolidate cargo as much as possible. And for the logistics customers will be consulted so that we can consolidate more. And we will also try to integrate the timing of placing orders in a front-loaded manner as much as possible.

Further more, this type of impact, in various contexts, we will be changing the process by utilizing AI. But even without reducing people, we can replace outsourced work by AI, whether it be accounting or business operations. On our part, we have been planning to do so. We want to front-load such efforts because there have been so much price increases. That is the reason why these measures will be essential for us.

In terms of rationalization, I would like to also add the following. For what we are expecting to do in the future, we cannot announce what is not being disclosed. And that is the reason why further details cannot be divulged at this time.

Next person to ask a question is from Goldman Sachs Securities, Okada-san.

I have 2 questions. First question is, for -- at the end of the first quarter, the full year forecast and against which the progress is 3.8%, which seems to be very low. Going forward, you will carry out the price revisions and rationalization effort. You are going to achieve the full year targets. But having said that, this progress rate at the end of the first quarter seems to be very low. So what do you think about the risk for not achieving this full year target? And for us as investors, what do we need to monitor carefully going forward?

Impact of cost increase, including petrochemical products and aluminum and fuels, including over JPY 25 billion or in the high over JPY 20 billion. And the copper, we used to be increasing in prices, but we believe that in total, JPY 30 billion is going to be the impact of the cost increase. On the other hand, at least from April through June, we had to address the situation without having any offsetting benefit. Regarding the increase of the petrochemical costs affecting the inventory as well as the timing of the price revisions, therefore, such timing will come from June onwards.

During the first quarter, aluminum, part of the petrochemical, and the second quarter, petrochemical and aluminum products will give us the full impact. On the other hand, the price revisions in LI, particularly in order to, in principle, responding to the increase in the copper, and then we will just respond to it starting from October for the Living. And also, regarding the housing equipment, the petrochemicals have the impact, but we are not able to ready to increase the prices starting from the second quarter. Considering this, from the July through September, there will be -- about JPY 30 billion or so will be the impact of the price increases. So, that will be offset by the price revisions.

So in the third quarter and fourth quarter, that means that we need to overshoot what we are assuming now. So for this fiscal year, JPY 45 billion core earnings slated for the full year, and over JPY 30 billion cost increase has to be covered and offset by the price revisions. Therefore, in the first half and the second half, having the big unbalanced situation is something that is not avoidable. So according to our calculation, what we are estimating to have a certain level of sales, if that is realized -- this target of the revenue itself is not very aggressive. So we believe that we can cover that.

But what can be the changes from now on? Perhaps I assume there are 2 factors. One is inflation. Not only in Japan, but in other areas, inflation is progressing. The interest rates have kept unchanged. But going forward, the interest rate may be hiked and mortgage will be increasing, and then, that may dampen the intent of purchasing. Therefore, the market may be cooled down.

And the second risk is about commodities. Particularly, aluminum prices may fluctuate ups and downs, and in cases where there will be a sharp increase in aluminum prices. In the second quarter, aluminum prices will increase to JPY 3,500, JPY 3,600. But now currently, the price is down to JPY 3,200. So commodity price risk is limited. But I suppose that aluminum will fluctuate most and aluminum and copper prices will fluctuate. But copper, we have been able to address flexibly by increasing the prices. Aluminum, we have a little concern. However, considering the stabilization of the price of the aluminum so far, we think that we will be able to perform in line with our assumptions.

Second question, about LWT, international business, India, Middle East and Africa revenue, 16% increase from a year earlier. And on Page 18, regarding the analysis of the operating profit ups and downs, and minus JPY 1 billion from a year earlier, and margin 16.5% a year earlier down to 8.9%. So I can read the explanatory text in the earnings call materials. But if you can provide us more details, please do so.

Well, the Middle and Near East area business is damaged quite significantly. India, Dubai and other Gulf countries and Saudi Arabia and Northern Africa, so the -- or Africa as a whole, so these are the 4 major reasons split equally in this area, IMEA. And of course, in GCC country areas, centering of Dubai, demand is down significantly. And for Saudi Arabia, the momentum has been lost.

Why have we been able to maintain the business flat here? Because we have the local inventory and manufacturing. Therefore, we have been elected by customers. Although the volume is down, but by increasing the shares, we are able to maintain the business level as a whole. Why profitability is suffering? In Gulf GCC, which port and which road and infrastructure being utilized as available ones, and we need to move around our inventory or goods to and from ports. And once reaching the port and we had to wait for some time at the port or there are unconventional quarters that have been occurred during the first quarter. So, as a result of these, given the current level of revenue, we were not able to enjoy the expected level of profitability.

On the contrary, with the share in the market increasing and once the infrastructure is recovered, we believe that we will be able to enjoy more the profitability improvement in the region as a positive note. In the negative note, long term, the one quarter of business there, Gulf situation may deteriorate further. Having said that, Saudi Arabia, which has been growing, and India, as well as Africa, particularly northern part of Africa, grew significantly. Well, we are producing in Algeria locally. So in that sense, we have a strong point in the region. So that means that we would utilize that strength in the region to recover the weakening business in the Gulf GCC. And we have stayed the strong sentiment about the Middle East. Thank you very much for your question, Okada-san.

We will proceed to the next question, SMBC Nikko Securities, Kawashima-san.

This is Kawashima of Nikko Securities. I also have 2 questions. First question is overseas LWT related. So there is an increase in revenues, but the profit is flat. And depending on the regions, the factors may differ. But inflation cost increase explanation is given on Page 11. It's quite prevalent. What about price revisions overseas? It is not catching up. By catching up, do you think it can be recovered? Or is it going to be recovered with different factors? So revenue is increasing, but the profit is not growing. Why is this the case? And how do you intend to recover from this situation?

The second question is regarding Japanese renovation market. You said that this is slow. Please elaborate on the mechanism why this is slow. Generally speaking, the housing market is subject to supply and security. And therefore, I think there have been prioritization placed on new housing. But can you have revenue increase? Did you encounter any advantage in renovation as well? But it seems that the growth is declining. So compared to the past, it seems that the renovation is weaker. But in the first quarter, looking at the current situation of your peers, you could have enjoyed more advantages. Is it because renovation is not proceeding well? Is there any structural issues? Why is this the case?

Now, regarding the overseas market, from April to June, the profitability declined. This was explained to Okada-san previously. In the Middle East, it is an extreme case. But in Europe as well as in Asia, similar situation is occurring. Freight is increasing very significantly. We have to go through the Cape of Hope for delivery, which is leading to increasing costs. In terms of fuel, increase is also having an impact. And copper price increase is also having an impact as well.

Now, regarding LI, for overseas market, the price revision is around July. From April to June, profitability-wise, it was a difficult time frame for us. But in terms of July-September, there should be some recovery. But for the price revisions to take root for LI, there is going to be a bias towards the second half. LI, LWT and Living, LHT, in these areas, I would say that the LI is most balanced from first, second to third quarter. But in responding to Kawashima-san's question, I would like to say that price revision timing is July. That means that there is a deterioration in April to June time frame.

Now, to your second question, this is a quite complex issue that I would like to elaborate. So happens that it is not an issue. House makers are also involved in renovation and also builders who are involved in the renovation business. So it seems that prioritization is placed on new housing. And this situation is still continuing to a certain extent. There are some shortages. There is also a shortage of manpower as well. And against this backdrop, they have to build houses. That is the reason why new housings have been prioritized for April to June. So you might wonder why we cannot capture more business. But in terms of bathrooms, as well as the kitchens and toilets, we are receiving orders 5x, 6x the usual, when other companies are unable to supply. But this was a challenge for us because against this backdrop, other companies transfer orders.

There could be some orders because of uncertainty for the future. And if we accept such orders, it could be canceled or it could be deferred in some cases, which means that we have responded 100% or 120%, 130%. But if we receive orders, an irrational situation could set us in the time from May and June as a result of this. For toilets, Kawashima-san, you know very well, we can build inventory more than 100% level. We have been able to do that. But for bathrooms, as well as kitchens, the distribution inventory cannot be built up. We have to take it to the actual site, which means that the order has been placed, and if we accept the orders, they will defer delivery or even cancel in certain cases. Therefore, ultimately, the orders, which are plentiful, have not been covered. Even though we have received many orders, we have not been able to deliver the same amount. This is an industry issue that was [indiscernible] us. But demand is not increasing when levelized. It is increasing orders because everyone was uncertain.

And whether this is going to have an impact on the future demand, that is not necessarily the case. I think it will converge to the actual demand. For window renovation, there are special circumstances. This is the first year that the system has changed. And everything was decided as the new system in June. So there was a delay in the months of April and May in terms of window renovation. So the visible numbers and what is occurring are in a disconnect situation.

Thank you very much for your questions, Kawashima-san. [Operator Instructions] From CLSA Securities, Mochizuki-san.

This is Mochizuki of CLSA speaking. I have 2 questions. My first question is a simple one. For this fiscal year, aluminum and copper alloy prices, based upon the current assumptions, what is going to be the mean average purchase price for these? So, that is my first question.

In addition to that, there may have been a request for price increase from your suppliers, of course. So what portion -- how much of them is included in this forecast? Do you have a very tough forecast or not really -- or very weak forecast for that?

Regarding aluminum prices, we have kept our forecast unchanged at the very last of this presentation, JPY 3,600 at one time, but the price of aluminum has declined down to about JPY 3,200. So, that is the level of price of aluminum we are using as an assumption for the full year term targets. The copper, copper alloy, LME copper is not something that we are purchasing. Therefore, regarding more details, we would like to respond to you later separately. But what is used to be increasing as a price and based upon which we made our plan for the year, therefore, we do not believe that there will be significant impact on to the domestic business. And regarding international markets, what is increasing cost prices, that will be passed on to the selling prices. That is the basic policy. Therefore, we do not believe that there will be a significant impact on the entire copper business-wide.

Honestly speaking, prices are increasing, but aluminum $3,600, and we thought that it could reach $4,000. That was the assumptions from the market. And in reality, what is happening is, there is a shortage of supply of aluminum in Europe, but there is excess supply in Asia. Therefore, the price has been down to $3,200. So what will happen from now on? Well, Emirates has resumed its production of aluminum. And for aluminum, the places where bombs have been dropped and the resumption of the operation is quite early. Therefore, we do not think that the situation regarding aluminum will be uncontrollable. For aluminum, we are increasing our prices based upon the conservative take or view on the aluminum prices. Therefore, we will not have an uncontrollable situation.

And copper, suppose that the situation of the war is changing or IT demand is changing, of course, there will be an increase. But regarding the increased cost with a little lower resistance, and we believe that we were successful in increasing our prices in July as well. So we do not think that these are going to constitute a great -- big factor for concern for us. As Okada-san asked a question earlier, the biggest concern is how the entire demand is going to change.

What about the request for increase of suppliers' prices? That has been already done. Petrochemical suppliers' increase of price have been already settled. And aluminum and copper, these are based on the commodity price in the market. So once the market prices increase, we needed to accept that increase for purchase.

Understood. Regarding my second question, in LWT, could you please tell us about the trend of revenue, Americas and Europe? Because mortgage interest rates are staying at a high level and rather there is a higher risk of increasing mortgage rate. It's a macroeconomic situation. What about the business environment for you compared to 3 months ago? Do you think that there hasn't been any significant change? Or do you need to be more careful and conservative regarding Americas and Europe? Your take is appreciated.

As a consensus, yes, the situation continues to be worse than expected for Americas, and there hasn't been no signs of a recovery in Americas. And in Europe, it depends on the country. Situation differs from a country to another. So in a nutshell, it's better than Americas. To some extent, it is stabilized, but not a great recovery as we expected. In Europe, there can be a great recovery as a catalyst that is being expected. for Europe, perhaps the biggest potential catalyst can be the change in the war situation in Ukraine.

Thank you very much, Mochizuki-san, for your question. We'll proceed to the next question. Daiwa Securities, Teraoka-san.

Sorry to keep you waiting. I'm sorry, I had some issues. I have 2 questions. In the explanation material, please refer to Page 2 regarding price revision, let me see if I understand this. In terms of the LWT, 12% to 13% increase in price has been implemented. And domestic revenue is around JPY 500 billion. 12% to 13% price increase with additional measures, JPY 21 billion of price revision impact seems small overall. So, on a net basis, how is this calculated? Please elaborate.

Why don't you go ahead?

Yes. Let me explain this point and then ask Seto-san to weigh in as well. In terms of price revision, for this fiscal year, is shown here. LHT is from October. And there is -- it is as if from October, there will be a vertical impact all of a sudden, depending on -- so that's the reason why the price revision impact looks small, especially for LHT. Regarding LWT and Living, kitchen as well as vanity will be from August. So it is preceding October, but the impact will be manifested from second half and onward. Therefore, even with a more than 10% price revision, the impact will be reflected in the numbers that are presented here.

At any rate, we do have long-term contracts as well. And against this backdrop, LI has vertical price increase similar to that. But LHT, LWT is more gradual in terms of price revision being reflected, according to history. But in terms of profitability for this year, rather than this fiscal year, I think we can have higher expectations for the next fiscal year. And therefore, Teraoka-san, as you have already mentioned, the beneficial impact will be manifested increasingly next year.

In terms of simple calculation, for domestic, revenues is around JPY 1 trillion. That means that a 10% increase in price will have an impact of JPY 100 billion. But in reality, this amount is not reached, I believe. How can I understand this to be the case?

There are also reasons relating to negotiations. So we cannot elaborate in terms of details. But for all products, it is if we can have a price increase for all the products. That is not across the board. So, that is how it should be understood. In the past, we said 10%, but if a price increase of 10% is actually being achieved, it is all subject to negotiation. So I want to refrain from making further comments on this. But I'm just imagining that it should be more than JPY 21 billion. With the full implementation on annual basis, a significant number can be expected. But for this to run its course fully, we have to take into consideration long-term contracts as well. The contractual term must be taken into consideration as well. That is the reason why it's difficult to respond.

Understood. Second question is regarding material price. No, let me try to understand this. In the beginning plan, you have mentioned JPY 24.8 billion negative and increased by 2x. And you said that this is going to further increase previously, in the past 3 months, JPY 49.2 billion. Why is it increasing so much? Aluminum price is coming down. Why is it double the level? So please give further details.

And Seto-san, you mentioned that the cost [ increase ] is more than JPY 30 billion. And against that, how does it compare to JPY 49.2 billion? How should I understand the relationship between the 2?

Minus JPY 24.4 billion, this is domestic business. So hardly any copper is included. And JPY 5 billion or so increase is regarding copper. So in terms of copper, it's difficult to segment in terms of time frame. But with the increasing -- inclusion of copper should exceed JPY 20 billion. What I'm trying to say in cost increase is, petroleum, fuel, aluminum, altogether, that's JPY 240 billion -- JPY 24 billion. And this is comparing the beginning of the fiscal year. In aluminum, at the time of April, there's no change. In June, $3,750 was reached compared to the beginning of fiscal year. It isn't if major improvements that we made. So it declined and then improved thereafter from the beginning of the fiscal year. Therefore, in terms of the breakdown of the numbers, I think Kawai-san can give you more details. But basically, this is petrochemical and aluminum, as well as fuel, all inclusive in terms of content.

JPY 24.4 billion for 3 months, is that the additional JPY 24.4 billion and [indiscernible] of copper together will add up to this number?

This JPY 26 billion is a calculation that we have to make once again with Kawai-san. But this is going to be dealt with in the price revisions of July, August and October. I think cost increase can be expected so suddenly. At the time of April, for petroleum products, not everything was disclosed, and it hadn't been realized and had been realized from June. Therefore, from June to -- the JPY 24 billion in terms of plus alpha. And at that time, we were expecting some JPY 24 billion -- we expected JPY 20 billion or so. But how far we can realize price revision was not clarified yet. Therefore, ultimately, we evaluated the number. And based on that, we implemented price increase. It's not JPY 24.4 billion increase in 3 months. But in the 3 months, measures have been formulated and ultimately, we have increased the price.

Teraoka-san, thank you very much for your question. Next question is from Morgan Stanley MUFG Securities, Yagi-san.

My name is Yagi. I am from Morgan Stanley MUFG Securities. I have also 2 questions. My first question is related to Teraoka-san's question. As a follow-up, JPY 49.2 billion that you disclosed on Page 2, compared to the beginning of the year plan, the material prices, could you please break down by factors? Please give us the breakdown of JPY 49.2 billion. And based upon that, once again, I'd like to ask you regarding the current price increase is reflecting what cost increase that was recorded at which time -- point in time? And fuel, aluminum prices may increase further, and there may be some portions of the increase, which cannot be covered by the price increase. So with -- vice versa when the cost is declining. Could you please give us your take on the material prices and also cost increase and the price increase?

We have data by material, but we don't have the data by business. Or are we going to present those numbers separately? Well, Ms. Kawai? We have data by material type. So we will share with you those data. Roughly speaking, for LWTJ, cost increasing mainly due to the petrochemical products increasing product price. LHT aluminum is the main, and some is from petrochemical. LI, there is a little bit of petrochemical, but most of it is copper. So explaining the price increases and materials by product, that is it.

And other than that, there is an increase of the cost related to fuel and fuel efficiency. Fuel -- of course, aluminum, which consumes a lot of energy and for transportation cost to bring things to Japan, it depends on the region from where you are bringing products to Japan. So are we able to provide those numbers by types? I believe that there may be some data available. So what else did you ask?

At which time point, cost increase is reflected on your price revisions?

Well, at which point in time? So back in May, we decided to increase our prices, and the range of a price increase was determined in May. But for LI, we considered even before that. Regarding price increase from May through June, considering the future projections, and we decided the range of price increase. So in that sense, there may be some overshooting and undershooting. But adding all these up, as a result, as regards to price revision, the copper, aluminum price increase continued since April, and the petrochemical cost increase since June onwards. So for that, we are responding by increasing prices in July, August and October. So we have been able to address respectively to those increases in the cost. For aluminum and copper prices, vertically increasing suddenly and continues to be at the plateau. So, that is about the prices, and petrochemical starting to increase in price from June and then it stays at the plateau now.

Regarding price revisions of us, in July, for international business, July price increase was almost a sudden, a vertical ramp-up, but it depends on the customers. Therefore, there is a gradual increase, and in August, LWT. Japan's price increase for all customers and for all types of products will be realized by the end of this calendar year, December or January. So -- and for LHT, we will start increasing prices from October, and then we will be able to fully implement the price increase by the end of the calendar year. So the overall price increase benefit is gradually increasing in a triangular shape.

As related to Teraoka-san's question earlier, as a result, the greatest benefits of price revision to secure operating profit, to reach the appropriate and reasonable level is next April. Kawai-san?

Regarding the cost increase breakdown, JPY 24.8 billion at the beginning of the term plan, I believe, we gave you the assumptions. And regarding the additional numbers, I would like to supplement, minus JPY 24.4 billion. About 65% of it is for domestic Japan business. Petrochemical materials and other materials, price increase account for 65%, and 35% is due to aluminum price increase compared to the beginning of the term. These were included in our plan, but it used to be JPY 290 billion. So 35% includes the incremental portion. And the remainder 10% is due to logistics and fuel cost increase. So by segment, through the individual interviews, we would like to respond to you. But for the entire domestic Japan business, that is the roughly split of the breakdown.

Understood. My second question is about Americas, operating profit situation in Americas. During the first quarter, red ink number is shrinking, but still you are making the losses during the first quarter. What is the background for discontinuing losses? From the second quarter onwards, you are going to reach the breakeven point. If the demand continues to be slump, and do you think that there is a risk of us continuing sluggish loss-making situation? Or even with that, do you think that we will be able to turn into the black ink? Or you'll be able to hit the breakeven point even if such a sluggish demand continues? Could you please give us your view on the current status in Americas?

Yes. How much decline in demand are we going to see in Americas? For this year, we are concerning price increase in Americas towards the latter half of this year. Starting from September onwards, towards the peak season, we are going to see the recovery in the profitability. I said price increase, but rather than price increase, but with customers, relatively profitable mix of products will be asked with the customers, and that will be kicking in. So towards the end of this fiscal year, we will become more bullish.

Well, last -- in the past, we have continued to say that we are going to turn into the black ink, but we haven't been able to do so. So about 10% in total of our personnel has been reduced in headcount. So currently, we believe that we have a lean operation, which can allow us to reach the breakeven point. So revenue was still weak during the first quarter.

So why you are making a loss? Yes, that is true. And also mix shift is not completely done through. So starting from September onwards, there will be a change in the mix of revenue. So, that is the more bigger factor. Of course, towards the Christmas season in America, there will be a peak in demand. So it really matter for us how much we are able to make money when it comes to the breakeven point to be reached towards the end of the fiscal year.

Yagi-san, thank you very much for your questions. So we have responded to all the questions that have been posed so far. Thank you very much for the many questions we have received. Sorry about that. Citi Securities.

Citi Securities, my name is Miki. I just have one question. Now, domestically, a major price increase has been implemented. Regarding price increase, did you have a surge in demand prior to the price increase in April to June or from July to September? Do you think there's going to be a price increase? Because the price increase is very large, there should be a surge in demand before the price increase, which will fall off after the price revision. Is that going to happen?

Yes, there will be some. In terms of water-related other than toilets for the bathroom, as well as the kitchen, in the distribution phase, they cannot build up inventory, but it does occur in July for toilets. So we could have a surge and backlash in -- around the time frame of August. But this is type of business where you can have such a surge before the price increase. For exterior products, there could be some surge. But generally speaking, in terms of volume, regardless of whether there is a surge before demand -- price increase and before and after price increase, if you look at the 2 or 3 months, it turns out to be the same. So it's just that the profit manifestation will be delayed. That is how this plan has been formulated.

I would also like to have a follow-up question. The price increase is very large. And if other peers follow suit, the share should not change. But in terms of the housing demand as well as the renovation demand could decline, what is your outlook? What are your thoughts?

In terms of inflation occurring, there is a possibility that demand could decline. We cannot negate that. But renovation is such that -- compared to new housing, it is stable in terms of business. I don't think there's going to be a significant decline. That is not the case, but it is a possibility that we have to be concerned about. Thank you very much.

Thank you very much for your questions, Miki-san. Now, time is almost up. So this is going to be our last question. From Mizuho Securities, Nakagawa-san.

This is Nakagawa speaking from Mizuho Securities. I have a quick question. Domestic LWT, the renovation final demand, what is the current status? During the first quarter, for new housing, which has been prioritized, therefore, there has been some reservation of the purchasing, postponing of purchase may have been seen, but showroom visitors, traffic, and what is your view on the renovation market forecast?

Overall, for everything, the renovation as well as new housing, the duration of the construction work is being extended. As a result, panning out demand and also the visitor traffic to our showroom have been weaker to what we saw last year. On the other hand, we are resolving the out-of-stock situation. Considering that, how we are going to see the changes towards the end of the year? We need to closely monitor the change.

Nakagawa-san, thank you very much for your question. We have responded to all the questions that has been posed so far. Thank you very much for the many questions. And the time has come to bring this Q&A session to a close. If you have additional questions, please put your questions to the IR department.

With this, we would like to conclude the earnings call for LIXIL Corporation Q1 financial results for the fiscal year ending March 31, 2027. Thank you very much for your participation today.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

We would like to start the earnings call for LIXIL Corporation for fiscal year ending March 2026. This briefing is streamed live online. The materials for this briefing is disclosed in the Investor Relations page. So please take a look at those materials.

I would like to introduce to you the presenters for today, Director, Representative Executive Officer, President and CEO, Kinya Seto. Next is Executive Vice President and CFO, Mariko Fujita; Vice President and Leader of Investor Relations Office, Aya Kawai. Well, I will be serving as MC from IR. My name is [ Setoguchi ].

Next, I would like to explain to you how we proceed with today's briefing. First, CFO, Ms. Fujita, will provide you with the overview of the financial results. And CEO, Seto, will be giving you the outlook for the performance as well as the progress of the management strategy. That will be followed by a question-and-answer session. We expect to finish at 3:45 p.m.

First, I would like to invite CFO, Ms. Fujita, to give you the overview of the results of fiscal year ending March 2026.

Hello, everyone. My name is Fujita, and I would like to give you the summary of results for fiscal year ending March 2026. These are the key highlights. This is the overview of the results for fiscal year ending March 2026. Core earnings was JPY 38.5 billion. EBITDA was JPY 121.6 billion. The core earnings exceeded the forecast. For the Japan market, all segments achieved year-on-year growth in core earnings. In the international business, core earnings have significantly improved. For Americas, the structural reform have seen the deriving of fruitful results. And in the month of March, core earnings had become profitable.

Next, I would like to talk about the differences from initial forecast for fiscal year ending March 2026. Core earnings exceeded the forecast. And in terms of the profit, it was in line with the initial plan.

As for other income and expenses, in addition to the initially planned structural reforms, there were -- additional expenses were recognized, including further restructuring costs in the U.S. and impairment losses on fixed assets. In terms of the finance income and costs, there were some recognition of foreign exchange losses and tax expenses. There were impact from the change in the corporate tax rate.

I would like to talk about the status of international businesses. As for Europe, we worked on the growth of the GROHE brand. IMEA. In IMEA, we will ensure stable supply. For Asia Pacific region, we will work on for market recovery and sales network expansion. In China, the market remains sluggish. Under that situation, we will work to expand the sales of differentiated products, including the GROHE brand.

I would like to now dig deeper into the progress on future initiatives in the Americas business. With regards to Americas business turnaround, so there are effects of the various measures that we have taken didn't materialize at first. But even though there was a recovery lag, we were able to see the results of what we have done. So we have worked on optimizing workforce allocation, restructuring the supply chain, optimizing the business portfolio. And we would now focus on the premium toilets and growth of GROHE and the expansion of shower toilets and leveraging on ASB's strength.

I would like to talk about performance highlights. Revenue was JPY 1,510.7 billion, up JPY 6 billion year-on-year. Core earnings was JPY 38.5 billion, up JPY 7.2 billion year-on-year. EBITDA was up JPY 7.1 billion year-on-year and profit was up JPY 6.1 billion year-on-year. The core earnings had improved and that had impacted positively to our profitability.

This is the consolidated business results. Please take a look at the margin. The core earnings, EBITDA compared to last year, we were able to see improvements. This, as I said at the start, at all segments compared to the previous year, the businesses are showing improvement and the details are listed here. And as for -- the same information under the previous reporting segments, so I would like to skip the explanation.

Consolidated financial position, the impact of the foreign exchange impacts and recognition of profit for FY ending 2026, equity increased. The equity ratio is 35.3% and the net interest-bearing debt has landed as flat compared to the previous year.

And the cash flow status. Operating cash flow has declined year-on-year. However, the free cash flow has maintained positive. Last year, it's JPY 91.9 billion. This year is JPY 59.1 billion, but it has remained positive. That is the explanation from the CFO, Fujita. I would like to conclude now.

Thank you very much, Fujita-san. Next, we would like to invite Mr. Seto, the CEO, to explain the full year forecast for fiscal year ending '27 and progress of management strategy. Seto-san, please go ahead.

Outlook for the fiscal year ending March 2027 is what I would like to talk about. Year ending March 2027, the revenue, JPY 1,600 billion, core earnings, JPY 45 billion and the profit attributable for owners of the parent, the profit, JPY 12 billion is the forecast. However, the impact of the situation in the Middle East, there are many variables. And so it is difficult to reasonably factor in at this time. That is why that part is not included. And that is why at the next timing of disclosure of the information, I would like to share with you with the planned numbers, including the impact. The annual dividend is JPY 90 per share is forecasted, which is the same amount up to now.

The business environment and outlook. Later on, I would like to touch upon the Middle East situation in more detail. But for the other statuses, for Americas, as Fujita explained previously, FY 2025, they have struggled. However, at the ending, the Transition Service Agreement has ended, and we had the major structural reforms. And as a result, the last 3 months recovered. And especially for the last 3 months, it finally turned into profit making.

Regarding the U.S. economy, we were forecasting that it will be better than what it is right now. However, unfortunately, from the challenge of affordability, the demand is strong and the wide demand is apparent, but the housing prices became too high, so people are not able to purchase it. So some sort of government policy measures will be necessary is what I think. However, that is why for Americas for the near future, we will probably not see a major recovery. However, we were able to turn into black ink. Therefore, the loss-making business up to now -- is now not going to become a burden anymore, which is a positive news.

And for Europe, this was the most disappointing part. Starting this fiscal year, we thought the economic situation is going to largely turn around. However, from the mid last year, I think everybody has a consensus that that was the bottom. And each country or major markets like Germany, France, Italy and the Netherlands, which are the major markets, the housing prices have started to go up and also the housing starts -- number of housing starts are also for the lease property, it is starting to increase. So it is showing a recovery. However, the recovery pace is going -- is about a year behind than what we have originally expected. But for the last 2 years, which was really bad, during that time, we're able to increase our market share and the GROHE's average profit also was able to increase. So this part, if it does grow, we will be able to enjoy a large positive impact.

IMEA, that's India and Middle East. There are various concerns. However, currently, we're not seeing any negative impact. The area that is called IMEA, basically, you can break it down into 4 areas, and the sales is kind of divided equally in those areas, which are Saudi Arabia and the Gulf area, including UAE and India and Africa.

Now first of all, what we can foresee most of the impact will be the Gulf area, mainly led by Dubai. Basically, the foreign residents have left the area. And regarding the future projects, there are major concerns of the progress. But currently, we are not seeing any decline.

On the other hand, for Saudi Arabia, moving forward, if they have further attacks from Iran, the situation may change, but they are performing strongly. Regarding Saudi Arabia, there is a negative factor. And because of the confusion, the financing for large-scale projects may be delayed. However, the crude oil price is going to go up, which means that it will give some room for the government. So related to the public type of projects that we are involved, there's no impact at this point.

And for India and Africa areas, the fuel prices are increasing. So there may be an impact from that, but it is not a major impact. So for now, out of the 4 areas regarding the 3 areas, we do not have a negative forecast. However, for the Gulf area, we have to keep a close monitoring. And also moving forward, if the attacks from Iran expanded, there will be a certain impact is what we are thinking.

In terms of economic situation and negative impact, Southeast Asia, Thailand, which was in the trajectory of recovery is still a concern. And for China, the bad situation is continuing. But it's not just APAC and China, but at each region for GROHE is performing strongly. Even China, the sales for GROHE is increasing. And that's a bright news, and we're able to launch many differentiated products.

And for Japan business this fiscal year, looking at the new housing starts up to now from April to February, I don't think that anyone decided it is more than 10% of a decline. There was a forecast that it will decline, but it actually declined more than what people expected. But given that situation, we're able to offset that weakness with the renovation demand. And we believe that the new housing starts weakness is going to continue for a while.

The background on that is that one thing, the insulation materials are -- there's a shortage on that. So new housing starts will be delayed. And due to the Article 4 of Special Exemptions, the licensing or permits that are submitted by the SMEs, the submission itself is delayed and granting the license and permit is going to delay. And that adjustment of those timings has not been completed. But Japan's new housing starts is going to continue to decline is our outlook. However, having said that, next year, we think that it is going to go up on. Reason being is that there is an accumulation of the permits and license that is going to actually be realized.

And for the insulation material, I'll touch upon it later, but this shortage is not going to last forever. But these recoveries, I believe is going to be next year. But in Japan, the new housing starts is not that strong. But this year, the decline was more than 10%. And -- but within that, we're able to offset that through renovation. So we do have a confidence towards renovation to a certain level.

This is the forecast of the performance. In addition to what was discussed earlier, in terms of the dividend, because EBITDA has grown steadily, we are maintaining it at JPY 90 per share.

Risk related to the Middle East situation. It is difficult to predict. There are a lot of variables regarding the Middle East situation. Because of this, it would be too misleading to talk about the future relating to the Middle East. So we decided not to factor that in, and we will continue to scrutinize the situation. The supply concern is the biggest factor for us. Currently, the crude oil-derived products, we have been able to secure the products that we need. And after July, we don't have too big of a concern.

As for aluminum, 80% is scrap aluminum. So we do not -- we are not in a situation where we have 0 material at hand. However, the prices of these commodities are going up. We will work to transfer the cost to our pricing also related to raw materials. Rather than buying from the same suppliers, we need to increase the variety of suppliers, and that's what we did in COVID, and that's what we will do now.

These prices are going up not because of the Iranian war, but for other fundamental factors. What makes the reading of the future difficult is as follows. So there are many cases where you predict that this price increase will continue in the long-term, but I don't feel that way. As for the crude oil-based products, even before the Iran war from the end of last year to the beginning of this year, there was a concern about excessive supply. And in Japan and South Korea, there were adjustments to production.

And in 2027, there are naphtha and plastic-related facilities, which were to come online in the U.S., China and Middle East, those facilities are coming online even with the excessive supply. And I think that there are many reasons behind that. In the case of the U.S., they need to use it because they would not be able to export the natural gas as is and they need to create naphtha. And in the case of China, acetylene and ethylene process, the naphtha is used a lot. So PE, PS, PP, if we consider the global supply and demand, it's in excessive supply and how that would be reflected in Japan is something that we need to consider.

So there are cases where China would not export it because of the dual use, but the oil-derived products, there are many types of it. And some of it may stop and become a bottleneck, but I don't think that the price of those commodities will be going up in a linear way.

As for aluminum, the price had come up because Mozal and Century, which are the big players of ore supply for Europe, decided to shut down for maintenance for a year. And in Bahrain and UAE, the aluminum plants in Abu Dhabi have been --- had stopped. And even though Japan had been buying 10% of the aluminum from this area, Century and Mozal will resume its operations next year. And in Middle East, the facilities would probably restart their operation sometime next year. And the aluminum may become $4,000 from $3,600. But next year, so some of the sources expect it will come down to around $2,800 to $3,000.

The current panic is not something that would linearly continue in my opinion. However, I think that the copper price will be going up. It goes without saying that the fuel prices will be going up. There are many assumptions, but if the oil prices had stayed around $80 per barrel, I don't foresee that the plastic prices will be going up indefinitely. So there may be some bottlenecks which may occur for the Japanese market. And also, there are some bottlenecks in the area of solvent supply. And these things may occur. So we need to diversify where we supply -- we get the supply from our suppliers and their suppliers. There may be some of the bottlenecks, which occur in the products that we don't buy or our customers for products that we don't sell to them, and it may cause a problem.

There are -- because the oil prices are going up, the prices -- the cost is going up and also because of the route suspension, there are distribution costs added, but we will be taking measures to counter that. Sorry, I'm going on for a long time in my talk, but I would like to talk about core earnings.

We did not factor in the Middle East situation. The cost increase and the price revision. The bar on the right will be higher if we factor that in. But rather than just simply increasing the prices, we will increase the productivity using AI and bringing the cost down. We will work to sell differentiated products, which have higher margin. The methodology that we succeeded in Europe, we would like to use that in other parts of the world as well.

In the midterm, we will work to pursue improvement in the CE margin to 10% and ROIC to 10% as well as a long-term target, and we will turn around where necessary and divest where necessary as well. We will continue to work on these initiatives. The inflation, which occurred in COVID as well as due to Ukraine war, what will happen in the middle -- what happened in the Middle East would probably impact us even more from that perspective. But we are increasing our revenue compared to the previous years. So we have been able to take necessary measures under these difficult situations.

And last year, we have said that we would like to get to JPY 65 billion, but we have revised it down to JPY 45 billion in terms of the core earnings. And there are a variety of negative factors. And also, we have identified positive factors that would fix it. The biggest negative factors included the lagging behind of the recovery in European housing market. Our profit center is the European market. And when it's not recovering, our business overall would not recover. Also, towards the end of the fiscal year, the commodity prices started going significantly up rapidly, and we have not been able to pass that on to our prices. So those are the 2 key factors which led us to revise the outlook down.

On the other hand, Europe is having the same kind of revenue, but we were able to improve the margin. So once the housing market gets better in Europe, we would be able to spread that positivity to other areas. And also the Middle East, even though there are concerns, there are good things coming out of the market like improvement in the market share of GROHE. Also the Japanese renovation business had done well with the -- even in the face of decrease by 10% in the new housing starts. European market, the commodity prices -- from next year, I think that there would be a virtuous cycle. So we should not be pessimistic about seeing the business coming down a bit.

So in terms of the risk, the biggest risk is Middle East. And most of what's on here would be multiplied by what's happening in the Middle East. The European market was bottoming out last year. And our main markets are getting better. But because of the issues in the Middle East, the inflation is increasing and the interest rate is going up.

In the U.S. and China, the real estate market and the housing market had deteriorated. However, those bottom out. So I think that we are in a wait-and-see mode for recovery. Also, what would impact us is what kind of policies Donald Trump will be implementing towards the midterm elections. If the Trump administration will work on the affordability of the housing issue, I think it would impact us for the better.

As for Japan, there are some specific concern for Japan. So last year, there was a significant and rapid decrease in the new housing starts more than we had expected. We are expecting it to get better next fiscal year. The reason it has come down is because of the Article 4 Exemption factor and the SMEs had difficulties in improving their businesses.

In the short-term, the heat insulation materials are short in supply. So because of that, the housing starts is sluggish. So this fiscal year, we are facing a challenge, but that will work towards recovery next fiscal year.

In terms of the cost, I think that we may be able to increase the prices by transferring it for next fiscal year. And what I strongly felt this time is that I did share this at the COVID pandemic, inflation or the product delivery difficulty. What's important is to recycle the materials, especially in a country like Japan, which has not much of the natural resources. And PremiAL, the product, we're able to use 80% of the overall material -- scrap material. But we don't have to face the problem of procurement.

But on the other hand, revia, what was considered to be waste, we can use that as a material and make it into a product. I think this is still going to become important for a country like Japan. And also, there was subsidy that was provided for like Inplus and [ indiscernible ]. Of course, the crude oil prices are going up, and we have to reduce the energy cost in Japan. When we face that time, these products are going to become an important product. And this time, at the very start, in this industry, we were told that there's going to be a shortage was going to be the insulation material and ethylene polymer that is used for the bathtubs. And what can replace that is this fabric of bathtubs.

And for the bathtub material, we do have visibility on the procurement of the material. So we're not causing any trouble to the customers. But I think moving forward, being able to procure the materials within Japan is going to become important. I did speak for a bit long time, but I would like to open the floor to questions and answers. Thank you very much.

Seto-san, thank you very much. Now I would like to take questions. [Operator Instructions]

So we would like to receive the first question from Nomura Securities, Fukushima-san.

This is Fukushima from Nomura Securities. I have 2 questions. The first question is related to the Middle East and the risk related to that on the supply chain, the procurement of materials and for your company, can you truly manufacture the products and also the cost issues? You did explain. But once again, the supply concern up to June, the materials up to there, you have visibility. And from April onwards, you said that you don't have a major concern. But even though you say that from July onwards, what kind of risks do exist? Probably you can't really say much at this point. However, at this point, can you elaborate on the risks that you can foresee at this point?

And my second question is related to the Americas business. Looking at the single month of March, you said that it turned to profit making. And the bathtub business in March, you completed the -- what you need to do. But moving forward, you're going to the sanitary products, the toilet business mainly. But the business in Americas, your competitiveness and the outlook, is this profit-making situation going to continue or not? Can you share your thoughts?

Thank you. Well, first of all, regarding the raw materials, we do have visibility. Well, given the current situation, depending on the company, there may be worries or the volume may go down. So in the very short-term, we kind of diversified our source of supply. So we're okay on that point. If there are some worries against or concerns against the supply, maybe there are some things that we didn't foresee beforehand. The most recent situation for a specific product, there's a plastic screw and the supplier of that screws, there was a situation where they may not be able to supply. So if we just look at this case, the material itself, the plastic manufacturer has a formula -- a special formula for this plastic material. And for us, regarding that raw material, the original material, we do know that. But it's not that the formula can be completed right away. And at that time, can they replace that ingredient? Their case is that they're not able to do that right away. Well, in that case, we are -- we solved it by consulting the parent company of that supplying company.

So generically speaking, this particular product, there's a shortage to it. That situation is being resolved. The government is putting efforts into that, and we are looking at many vendors. So there are areas that there is a bottleneck buying it from China or South Korea or Taiwan, we have such cases, and we're able to do that. However, for example, within the solvents that we use for this paint, we need to use this specific solvent. Companies that have that, they do struggle. So the supplier, suppliers may face problems. And also, as I have explained, our customers may buy something from other places. And because of that, may not be able to build the houses right away.

So the challenge we're facing regarding insulation material, similar challenges may occur. However, everybody is making their own efforts. So the procurement is now starting to normalize. So the panic situation that started at the outset of the situation, I think it is starting to calm down. But we do have the experience during the COVID pandemic, at that time, what took the longest time and what we struggled for the procurement and did not have sufficient level of the product is the rubber resin material that's used for the bathtub to prevent vibration. But something that we are concerned at this point, we have reached a point that we don't have to be worried about it. That is due to the efforts made by the employees.

And also regarding the second question about the Americas business, which is the faucet products and toilet or sanitary products. As a market, there's Home Depot or Forte brand, all of them for this fiscal year has quite of a difficult outlook. So the market itself is not so good. And the month, March is a month that volumes go out. So it doesn't mean that because March was a profit making that the following months will be the same. So we need to continue our efforts. But as per the Transition Service Agreement, we don't have that additional cost anymore. So we'll be able to reduce the number of distribution centers moving forward. And in terms of headcount, we are able to optimize this month.

Therefore, in this sense, of course, if the market further worsens, we do not know what is going to happen. But once we turn into black ink, of course, still concerns will continue. And it's not that we don't have any concerns, but I think we're able to make a certain level of improvement to maintain profit making.

[Operator Instructions] Next is Fukuhara-san from Jefferies Securities.

My name is Fukuhara from Jefferies. There are 2 questions. The first question, how you create your plans? If you look at Page [ 40 ] on your slide, so there is [ indiscernible ] of the negative. And I think this is because of the copper -- and copper and aluminum price issues. But if you look at the other page compared to February, there is an increase. So JPY 24.8 billion, is it possible that it would be further increasing?

And also in addition to that, the revenue plan on Page 28. So it's in yen base. But if we look in the local currencies, I think that there is a significant increase. So from the cost perspective and the top line, how did you use the numbers to create the plan?

We expect the cost to go up, especially plastics and aluminum, we believe that -- and also copper, it would go up compared to the original plan. We are working on to revise the price and increase the price even more. If the product is limited, the price increase will be limited, but we believe that we would need to increase the prices generally across the board. And I am not able to give you the specific numbers in terms and also when it will happen, but we would like to work on that as quickly as possible.

Copper price issues had already been clear, and we were to increase the price on July 1. And as for sash products. So for aluminum, we were to increase the prices in April and May, but we need to do that once more. We would like to do that as quickly as possible so that we can cover the cost that has been increased.

With regards to the revenue, currently, excluding China, all of the markets had bottomed out. There are, of course, differences market-by-market. And in the Middle East, it's growing more than 10% year-on-year. In terms of Japan, if we look just at April, compared to other companies, we were able to secure the products quicker. And because of this, we are growing about 3% to 4% year-on-year. So the current situation is not bad. But we need to see how the problem in Iran would spread and whether it would impact inflation, would it be impacting the interest rate. that's our concern. And our biggest concern is whether the new housing starts in Japan will again significantly go down. So currently, revenue-wise, I think that we are faring well.

I would like to go to the second question. Please look at Page 14. I would like to check the numbers. The core earnings and the in between core earnings and operating profit, there is something in between. And I think it was around JPY 10.1 billion for fiscal year '25. And it's -- the plan is JPY 7.5 billion. And I was wondering how you came up with JPY 7.5 billion. If this involves structural reform? I want to know your progress for the structural reform at this point in time.

Currently, there is no specific residual items that we need to work on for structural reform. But in China, the speed of the deterioration has been quicker. And also, we have to think about the contingency like in the Middle East. So that's why we have this number. So this is not a cumulative number of what we have at hand. But in other words, it's like a buffer. Is my understanding correct? Yes, because something would happen. And so it's not a structural reform figure, but because we are in a situation where the situation changes very quickly and also we probably need to close some of the plants in Japan, considering the market situation.

[Operator Instructions] Next question from Goldman Sachs Securities, Okada-san.

This is Okada from Goldman Sachs Securities. Regarding the Japan business, I have a question. Just before you said that various raw materials price is increasing and whether that's going to last for the medium to long term, and you do not know about that. But the thinner price has gone up by 75% and also paint and other products, the prices are also increasing. So probably the price of the house itself will increase. And if that is the case, the new housing starts I believe that there will be some people that will give up on the idea of purchasing a house. You are increasing the price. And if the overall industry increases their prices, I think there's a risk that the consumers themselves will not be able to catch up to that. So can you share your thoughts on this situation?

I may deviate from your main purpose of the question. However, what the shortage we experienced is like tolerant, acetone and thinner, all which is a solvent-related products. They are used in large quantities at the semiconductor manufacturing stage. And for manufacturing, they use acetone to cleanse or wash the molds. And if there's a shortage, they will not be able to move forward. So they kind of bought an excessive volume all at once. That is why this price increase has started. But how long is this going to last? I'm not sure. They're not just making one thing, but by various things being manufactured, the necessity of these raw materials will differ.

And just looking at solvents, yes, at the very first, they were -- solvent-related products are the ones that at the start experienced a shortage. But having said that, it is for sure that we need to increase the prices. And as a result of that, as we experienced like that post-COVID, because the overall prices are going up for those -- the first-time homebuyers, meaning that an affordable price housing, that is going to be difficult to be built. As a result, what the speed of that is going to be for such a situation to occur, the number of new housing starts, the declining speed may be quicker than what we expect.

So when we do face those times, what are we going to do? Well, Japan, as you know, against the population we have, the new housing starts -- we have a large number -- so the demand towards the houses is high, and we're able to grasp that good. So even though there's a 10% decline in the new housing starts, we're able to maintain a certain level of business. They gave up on building a new house, but they will do more of an insulation material in the house, but they gave up on building a new house, but they will renovate their kitchen and others.

So it's how we're going to bring in that demand in doing such a thing. So they say that they have JPY 30 million that they want to spend a new house, but they can use in the concrete or steel instead of using it for those materials, this JPY 30 million budget, they'll use it for kitchen or windows or using at several existing house equipment. If they do that, our share within that JPY 30 million is going to increase. So as -- this housing material or construction material manufacturers, how are we going to create the market? Through that, we'll be able to respond to the given situation. But the new housing starts itself, as you have pointed out, we expect that to go down. And we need to make a -- we need to do in a way that we will be able to offset those negative factors. So we need to increase the margin of the business. But towards the small-scale businesses, we'll use AI or BI so that we'll be able to suppress the overhead costs.

So last fiscal year, we were able to kind of embody on that situation. But I do understand your concern. And this fiscal year regarding the insulation materials, the supply stopping it. And in the long-term, if it's going to decline. So in the short-term, such a situation may happen. But thinking under the assumption that there's going to be a difficulty of procurement for a long time and all the products are price going up to 50%, 70%, setting that as an assumption, I think that's too extreme and misleading.

We would like to go to the next question from SMBC Nikko Securities, Kawashima-san.

This is Kawashima from SMBC Nikko. So there may be some overlap with other questions. The international LWT, how did you assume that there will be a significant increase? So in U.S., I don't know whether the red ink will be gone or significantly improved. And if that happens, there will be an improvement to the profitability by billions. But it seems that the plan is not that high. So do you expect other negative factors? So I want to understand what the balance is between the increase in the revenue and the profitability?

The U.S. business of American Standard, breaking even in that business would be conducive to improvement in the profitability. We had thought that we would be able to do more, but because European market had not done so well, we were not able to get to the level that we want it to be. So that's the biggest factor for the situation for the profit. So there -- the contribution to the profitability was not so high, it had gone from negative to 0. And last year, we were able to improve the value added in Europe, but we don't believe that we can continue it like that for this year.

This is Kawai from IR. I would like to make a supplementary comment. As you have seen, Kawashima-san, in the waterfall chart of Page 40, a JPY 9.2 billion increase for LWT and this is coming from the breakeven in the U.S. And it was JPY 55 million negative in the previous fiscal year. And also, there are some positives from the European market. So the recovery in the Americas market is something that's positively impacting this business.

So in terms of the revenue, is it -- was it too big in your assumption? So we have a lot of business from Europe and the exchange rate positives impacts a lot. So I don't think that the revenue plan is not too big. So the unit is not increasing so much, but the revenue is increasing, and that would impact the full year.

Next question from Daiwa Securities, Teraoka-san.

This is Teraoka from Daiwa Securities. This time, the impact of the Middle East situation is not reflected is what you said. And once you can foresee what's going to happen that, that will be reflected. This -- when you reflect the Middle East situation, is the guidance going towards a revised downwards or because you're considering the price optimization or increase that it is not necessarily the case that it will become that way. Can you share your thoughts on this?

Yes. At this point, actually, I think that there is a possibility that it will go both ways. That is why we wanted to fine-tune the numbers further before we share them. For example, as I have shared with you before, for us, in April, the revenue and the sales is very strong in the Japan business. The reason being is because us compared to the other peers at an earlier stage, we're able to normalize the procurement situation. How long is that going to last? We do not know.

However, even at this point, we're receiving multiple times -- more of orders than usual. And within that increase, there are things that are included where the delivery date is far down the road or it's just a temporary order. And if the other companies normalize, that this will probably disappear. So we do not know what the true situation is yet.

At the beginning of April, it was not completely clear in terms of the procurement. So probably year-on-year, it's about 103% or 104%, but it may be higher in May or there's a possibility it will not be that way as well. So for us, it's difficult to gain visibility on the situation.

And cost-wise, we are purchasing from various suppliers. Therefore, it's difficult to change from our original guidance or outlook. But we have our own price optimization. And that for us at a quick speed, we are going to apply it to a large volume of products. So we need to consider what that impact is going to become.

Sorry, it's not a straight answer. However, which direction are we going to go towards? We are not having the visibility on that at this point. Okay. We are -- I'm hoping that it will go towards a good direction.

The next question from CLSA, Mochizuki-san.

My name is Mochizuki from CLSA. So I can ask one question. But I would like to ask about the price revision. You would like to conduct the price revision to as many products as possible as quickly as possible. But in order to absorb the cost in the past, it took about 1 year or 2 years to do that. So this time around, the uncertainty is very high. So how long do you think it would take to absorb the cost, whether you would be able to absorb the cost in just one go or whether you would need to go in phases? Could you talk about the speed of how you would be able to absorb?

So this is the first -- so I think that you were the first one who had put the video on for this call. Thank you very much. So we want to be on a different speed level. That's because we are reflecting upon what has happened in COVID. It took a lot of effort to increase the prices during COVID, and we were not able to be aligned with each other division-by-division, and we had to think about how the competitors would do.

So what has happened is that we went first and the others followed. So what we need to do is to raise the price to the level that we require as quickly as possible. But how much in terms of the time period we would be able to cover is a different question. So if it's October 1, it would be 6 months, if it be 9 months, if it's July 1.

And another 2 factors that we need to think about is that next year, I believe that the aluminum prices will be coming down. Also, the plastic prices would probably stabilize. If we think about that, if we can raise the prices to where it needed to be in one go, I think we -- that would put us in a better situation than having to take a longer time to convince others. So if I talk too much, I would be giving too much tips to the competitors. So I will not say more, but we would like to get to the level where we would be able to absorb the increase in the cost in one go.

I'd like to take the next question from Morgan Stanley MUFG Securities, Yagi-san.

My name is Yagi from Morgan Stanley MUFG Securities. One question, and I may be overlapping with other questions. One thing, the situation in Middle East regarding the risk of it. Listening to your explanation, it seems like basically, it will depend on how it will last long or will be longer. And how much of a cost reduction can you make and how much of a price increase or price revision you can pass on is the key point for the procurement or the difficulty of procuring materials for July onwards, you do see have a visibility as well? So is it okay to have the understanding of that setup?

Yagi-san, I'm very happy that I can see your face and speak to you. As you said, what we have the most concern at this point is what we have to think of is that what can we do on our own? And what can we do on our own? There are 2 things.

The first is to have a wide diverse source of suppliers and at early timing to revise the prices as early as possible. But on the other hand, the things that we have no control over or there's a possibility we cannot control is consumers. They're trying to build a new house, but they don't have insulation material, but we don't handle insulation materials. So well, we do a little bit of it, but we're not the major player in the insulation material.

So is it 0 concern regarding that? That is not the case at the customer or where from our suppliers, they may experience a problem, and that may become the bottleneck. But thinking of the panic situation at the start, we have come into a stabilized situation. So towards your question, Yagi-san, it's like that. But having said that, there are many other things that we are worried about.

Sorry, just one thing. So in that sense, for the areas that you have no control is the insulation material? Is there anything else that you have a concern that you have no control over, for example, like raw materials? Where we have visibility is the installation material? But as Okada-san from Goldman Sachs is saying that when everything goes up in terms of price and the customers' interest shifts from houses to something else, how are we going to bring them back for the interest in renovation? Yes, of course, those type of concerns do exist. Understood. Thank you very much.

So thank you very much for all the questions. And because of the time, we apologize that we needed to limit the questions to 1 question. So if you could contact the IR office, we would like to respond to your further questions.

So related to Okada-san's question, there is something that I failed to respond to and also related to Yagi-san's question and also Mochizuki-san's question. There are difficulties to increasing the prices all in one go. But compared to the overseas competitors, the Japanese players are -- have not finished increasing the prices. The overseas competitors -- so they have been able to complete the price increases at an earlier stage of even after the COVID -- during COVID as well as Ukraine war. So as a Japanese player, we need to work on price increase.

Thank you, Seto-san. With this, we would like to close the earnings call for LIXIL Corporation for fiscal year ending March 2026. Thank you very much for your participation to this call.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

It's time for us to start the third quarter financial results briefing for fiscal year ending March 31, 2026 for LIXIL Corporation. This briefing is streamed live online. The materials for this briefing is on our website for the shareholders and investors.

I would like to introduce to you the presenters. Kinya Seto, Director, Representative Executive Officer, President and CEO; Mariko Fujita, Executive Officer, Executive Vice President, CFO; Aya Kawai, Senior Vice President, Leader of the Investor Relations office. I will be serving as the MC. My name is Setoguchi from IR office.

I would like to explain to you the proceedings for today. First, Fujita, the CFO, will be providing you the overview of the financial results for the third quarter. That will be followed by a presentation by Mr. Seto to explain to you about the earnings structure of LIXIL. The presentation will be followed by Q&A. We are expecting to end the session at 3:45 p.m.

I would like to invite Mr. Fujita, the CFO, to give you the financial results briefing.

Hello, everyone. This is Fujita. I would like to give you the overview of the financial results for the third quarter. This is a summary of results for the third quarter. Core earnings is JPY 36.5 billion and EBITDA is JPY 98.4 billion. In Japan, LWTJ and Living have continued to do well with increase in revenue and earnings. The renovation products was robust even though the new housing demand was sluggish. As for LHT, it was on par with the previous year, both for the revenue and earnings. The subsidy eligible products contributed to the sales growth.

In Europe, Middle East and India, has seen strong performance. The Americas and China's sluggish business had been covered by the strong performance from Europe, Middle East and India. So there was ForEx losses. And because of that financial cost had increased year-on-year. Just like Q2 the expense consolidated subsidiary decreased year-on-year due to changes in the corporate tax rate in Germany.

Next, I would like to talk about the outlook for fiscal year ending 2027. This talks about business environment. Overall, the commodity prices are going up, ForEx as well as the government policies have changed from what we had first expected. The commodity prices had significantly increased. In January, there was a rapid increase. And it is hovering high.

In Japan, new housing starts -- remain weak, but the subsidy for the window renovation would continue. As for Europe, we had expected in our road map that in fiscal year ending 2027, the housing market would recover, but the timing of the recovery is being delayed. As for IMEA, it's doing well, and China continues to be sluggish. Those are the outlook for fiscal year ending 2027.

Next is performance highlights for the third quarter. Revenue decreased slightly, but core earnings increased year-on-year. Revenue was JPY 1,138.5 billion, core earnings and EBITDA as well as profit have improved.

Next is consolidated business results. What I would like to highlight here is a gross profit. It was 1.3 points up year-on-year. Because of this, core earnings ratio had improved by 0.5%.

And here is the overview of business results by segment. LWTJ performed well. And -- so the improvement in revenue in Europe and the Middle East has contributed, LHT improved and price optimization and renovation sales contributed enabling the segment to maintain the level from last year. Living, we saw a strong performance of the renovation area. And this is the business results by segment using the former segments, which I will skip.

Next is consolidated financial position. And the assets in Europe, this has increase due to currency translation impact. Equity ratio is at 34.4%.

Lastly is cash flow status as well as cash balance. And because of the accounts receivables and inventories increasing operating cash flow has decreased year-on-year. However, as for the free cash flow, we have been able to maintain the positive territory.

So that completes my report. Thank you very much.

Thank you, Ms. Fujita. Next, I would like to invite CEO, Mr. Seto, to talk about LIXIL's earnings structure. Mr. Seto, please.

So we talk -- we have been talking about this to the investors as well as institutional investors, but I would like to give you more detailed information, so to avoid misunderstanding.

So moving on to the first slide. Compared to EBITDA, the core earnings as well as the net profit tend to be lower. So that's our structure. However, this is because of large depreciation. In the past, we had used a lot of cash for acquisition. And because of that, our core earnings tends to be smaller because of the depreciation. So the tax expenses increase, it's due to the unoptimal tax management, but we do have cash at hand, and our strength is not shown in those numbers.

So going back to Page 1. So in our case, PER, PBR, ROA, EBITDA multiple had not been explained in a coordinated manner. PER, because the profit seems to be low, it tends to be very high at 65x. PBR is 0.8x. On that matter, the -- there are assets which are -- with whose utilization is not high, but the -- it's generating cash. And as for ROA and ROE, the after-tax profit compared to cash, it is evaluated low on an accounting basis, and that has become a huge issue.

So in improving these figures, so we would, of course, work to improve the business for the improvement of EBITDA. But at the same time, we -- there are -- we are looking at the assets which are not generating cash, and we will be sorting that out so that we can have improved efficiency in the assets. So the -- so there will be less difference between EBITDA and core earnings. And we will also work on to better manage taxes. This is something that we will be working in the coming 1 to 2 years. It's not just about improvement of EBITDA, but we will make reform so that we can have better core earnings.

So EBITDA for cash earning power. I think that we are doing fairly well. This slide shows the comparison with competitors. On the far left is LIXIL followed by TOTO, then Takara, Cleanup, YKK. Compared to those companies, you can tell that EBITDA, the earning power that we have is very high. In the case of TOTO, they have semiconductor products. The -- so we are not able to make apple-to-apple comparison with our competitors, but our EBITDA level is quite high.

So in the Masco, Fortune Brands, Geberit, those are the highest earnings companies and their EBITDA is high. But from FY '23 to FY '25, the reason for growth, you need to have some footnote. So Geberit is using Swiss franc and has been appreciated from JPY 140 to JPY 200 and euro is also being appreciated. So there are positive factors for Masco as well. The Fortune Brands, they are working centering around U.S. dollars. So the growth rate compared to the other 2 is lower. However, their profitability rate is very high, 70% gross profit for Geberit and Fortune Brands and Masco, and in the faucet, they are -- that's their main product. So we have a bigger line of product. So our EBITDA level is quite good. So Roca and Villeroy & Boch in 2025, you see a significant increase in the numbers. This is because they have acquired Ideal Standards. So Fortune and Masco, they have been growing because of M&A. So considering that our organic numbers is not bad. So our -- we want the world to understand our core earnings power. So we want to normalize our core earnings and EBITDA.

And lastly, where we generate the EBITDA and from our perspective, we've been saying this, we have too much asset. And so we don't have to have too much capital expenditure. And investment was the software element like a brand or intellectual property or R&D-related investments. For those areas, they are essentially expensed. And because of that, they do lower the profit margin directly. But in the end, we are not investing in hardware, but we are investing in software that does linked to generating a large amount of cash in the end. So I'm sure some of you are fully versed in this type of information, so nothing new. But just in case, we wanted to provide this explanation. Thank you.

Thank you, Mr. Seto. We would like to now move on to the Q&A session. [Operator Instructions] First, I would like to ask Fukushima-san from Nomura Securities.

This is Fukushima. I have 2 questions. My first question, the price strategy in Japan is my first question. As you have said at the onset, the commodity prices are going up. On the other hand, if we look at the competitive environment, YKK had acquired the subsidiary of Panasonic and there is a big company who would be competing against you, under that environment, how would you be pricing your products? How would you be profitable in that environment?

So can I answer the first question?

Yes, please.

As you have said, what I am concerned the most about is the aluminum and copper prices, which have risen very rapidly. You may be aware of this, but it is not the increase in the demand. So there has been sluggish supply for aluminum [indiscernible] last year because the power -- electricity prices had gone up, they decided to conduct maintenance for a year. And Century, because of the operational issues, they had shut down and they decided to continue because of the electricity prices and also there is reluctancy from Rio Tinto.

And the supply of aluminum to Europe had dwindled and the price increase, the premium had gone up. The -- so because that's the situation. And when the prices had gone up at this level for April, because we had assumed last year's levels, we have to think about whether we would be increasing the price. We have to think strategically and we have to think about the competitive environment. One thing that works in our favor is that we are using scrap to 80%.

So there will be a time difference in getting the impact and the merger of YKK and Panasonic subsidiary. The -- it is not an increase in the competition because the lineup is separate and the number of competitors would remain the same. The competitors like YKK, so they were -- they had seen the less profitability when decided -- they decided not to raise the prices, but gotten the share. So for them -- so considering the business environment, I don't think that they would be taking that choice again.

Thank you very much. So from April, you will not be -- you may not be able to respond to the price increase, but considering the ratio of scrap, you would not be facing a situation where the profitability will be deteriorating rapidly, you would still have some time.

Well, there will be deterioration in the profitability, but it would not be in the extremes. And also, we would be able to buy time to take new initiatives.

Understood. My second question, I would like to ask about the U.S. business. So the U.S. Standard, it is posting the ordinary losses and the operational losses and you would be stopping the outsourcing, and you would be making the improvements. But as for the sanitary ware, I think last time you said that you would be increasing the prices to improve the profitability. So I would like to know the progress towards the next term, how do you see the situation of the profit for the U.S. business?

So having better product mix and better pricing that is being accepted in the market. So I think that the profitability will be improved but the environment is worse than what we had expected, and that's our concern. In terms of the deterioration in the market environment, One thing that concerns us is the ceramics and also the housing distribution is 30% less.

And so there is an affordability issue. President Trump had said that he would be making huge announcement in January, but he has not been able to do much so far. So I don't think that there will be easy improvement in the demand unless something happens towards the midterm elections. The market recovery is being delayed than what we had assumed. But we have been taking measures for rationalization. So I think that we would be good for the next term. But for -- but the bathtub business losses would continue, so we would still be in difficulties, but we will be able to improve next year. The competitors for the U.S., like China or the Asian players.

So if they are not able to sell because of tariffs, are you -- have you been able to improve the share?

Since November, we had seen increase in the share. So up to October, the inventories that the players had acquired before the tariffs had remained. But from November, we have been able to do take shares, but the demand is not increasing. So it's still sluggish. So thank you very much.

[Operator Instructions] So Miki-san from Citigroup Securities.

This is Miki from Citigroup Securities. I hope you can hear me. I'd like to ask 2 questions myself. The first question, you talked about the dispersing assets generating cash. But what type of the asset reserve are you thinking of right now? For example, structural reform in Japan. And from 2019, I think you've done something quite significant and you worked on the international after that. But -- so in the meantime, so you had inflation or interest rate increasing, which has caused the business environment to change quite significantly. So do we expect a very large structural reform in Japan domestically over the next year or so? That's my first question.

So as we have announced recently that we're going to stop. This is a subsidiary for exterior works, and so we will stop the operation of this entity and we announced that this will be embedded into the LIXIL. But your question, it's very sensitive. So anything we haven't announced, we can't talk about, of course, because from our perspective, whether it be Japan, domestically or for international, as I said before, we want to look at those businesses with a very low level of asset efficiency.

So we have this course of direction to try to -- we organized -- reorganized those or disposal of them. But even if the core earnings is negative, but we have already acquired, and we have already paid the cash. But on the other hand, the gas distribution is still being done right now. For those, we won't sell unless there are buyers for that. So it's difficult for me to give any further, I suppose, response in regards to your question. I hope you understand.

Well, then for the second question. You did not adjust your -- the earnings forecast. So whether it be core earnings or the net profit when you look at the progress, and I think you are performing well against the full year plan. So why didn't you not make adjustments? And segment-wise, if there are any changes to the initial -- the forecast? And so JPY 45.5 billion, but the JPY 29.6 billion, there is the slowness in terms of progress with zero buffer. So maybe if you could at least explain about the situation there?

So what we have not announced and we certainly cannot talk about, that's quite obvious. But for January to March quarter. Basically speaking, there are increasing, as opposed to uncertain elements. And the biggest one and the commodity price increasing to this level in January, this may have some impact on a short-term basis. We need to ascertain that. So that's one point. And subsidy in Japan, and decision has been made to have that being provided. But the next subsidy -- and for this year's, the subsidy starting in April, the details have not been finalized as yet. We have not been able to engage in activities on that at this point in time, not just the commodity pricing now, but whether it be Europe or U.S. or the world is seeing a lot of developments.

But for the demand for the new builds, I think there is people are waiting for the new policy to be announced. And so how would that reflect into the fourth quarter numbers. We don't have, I suppose, the conviction on that as yet. And also something that I mentioned before, we need to implement various initiatives, address various things. And so jump into the conclusion, we can't announce what we don't know. That is where we have kind of arrived at. And the numbers right now is good. We -- and probably the numbers until now have been better than we had thought, but fourth quarter, this is going to be a quarter we need to be very careful about, be cautious about and this is as a result of the commodity price, the global situation as we have explained thus far.

And also the new housing starts in Japan too. This year, so we expected about 2% decrease, but we saw a 13.7% decrease from April to November. And this is unlikely from the impact of amendment or Building Standards Act abolition article for special provision. So would there be a pent-up demand associated with going forward, would we see further deterioration of the succession from where we are? We don't the science of where we may end up with at this point in time. And also the general construction companies may be announcing this, but the projects are delayed all around the world.

As of March, project that we had expected completion, but the Japanese general construction companies are saying that they are likely to be pushed back into April onwards. And the reason for that is lack of the craftsman and in the case of Japan, the facility providers lack capability or capacity, not being able to address the demand and so this is happening in other countries in different ways.

So in the case of U.S., immigrant workers cannot go to the site of work, and that has led to the project not being completed, leading to delay in the case of Europe politically and, inability to make decisions. And there were -- there's been a lack of strong majority, have not been able to make decision about policies, which has led to delays in permit leading to the project delays. And so overall, there are projects being delayed. The demand does exist, but the projects are being delayed. This is also a worrying situation for us as well.

The next question is from Goldman Sachs, Okada-san.

This is Okada from Goldman Sachs. I have 2 questions for you. As for the European market as well as the Middle East market. It is doing well in the cumulative third quarter, Germany and France, which are the central players in Europe. Overall, the economy is weak, is what I have heard. The growing sales growth is in the positive. But I would like to know the background to it. And France and Germany are sluggish. But would they be giving a negative impact to the overall business? That's my first question.

As for the market in Europe, we have the same view. The reason why growing has been doing well is because of the high-end products like G4, G5 applied products, which are the color products. So the -- so it is replacing a Nickel-Chromium products. And even though the number of units does not change so much, the ASP is higher. And because of that, we have been able to grow in Europe.

So going forward, the situation is mixed. So when we look at the project pipeline, we have a very enhanced pipeline but in Europe, the administration is unstable and the approval is now lagging behind in European countries. In 2026, we had expected that starting from April, there would be a recovery of the economy, but the policies, which were supposed to be in place is not in place yet. So we believe now that the recovery will be towards the second half of the year.

You talked about the earnings structure. And you talked about tax management. And with regards to that, you talked about the potential of divesting assets. But is there a need to have negotiation with the competent authorities or with the accounting firms, and the reason why the tax management is not optimal, it's probably because of the acquisitions that you have made in the past. But could you talk a little bit more about that?

We are working for optimization in this area. We don't need to convince the tax authorities or the accounting firms. But when we had acquired the companies in the past, we did not think thoroughly and we were not able to get to the optimal tax management. So we would like to fix that. And we are not getting any warnings or anything from the tax authorities or the accounting firms at this moment. So how we distribute the product, how we allocate our technology. We need to scrutinize that, we believe that the burden is too high for Japan.

So we need to sort that out. But to your question, we do not need to change the formalities that we have in place. But rather it will be about where to place the earnings and where to allocate the technology too. So we need to review those things. And it would take about 1 to 2 years on that.

Yes. I would like to make a supplementary comment on that matter. As Mr. Seto mentioned, so where IP is as well as how the distribution system works. So upon the acquisition, we were not able to structure it in an optimal manner. So we would work on to optimize that within our compliance framework and the tax expenses, which go beyond the effective tax levels, we would like to get it to the effective tax levels.

So next question is from SMBC Nikko Securities, Kawashima-san.

This is Kawashima from Nikko Securities. I would like to ask 2 questions. The first question is in regards to the image for the medium-term performance, and so you shared with us the image for the 2027 and 2028, March and the outlook and the commodity and the market condition, I think you talked about that external environment remains to be tough, but positive impact internal factors, which is going well towards those -- if you could share some information in that regard?

Well, things that's not going as well as back then. Well, the recovery in Europe the economic condition, this has been slower than what we had expected, but something that has performed better than we had expected that is conversion to the renovation business in Japan. And as I was explaining before, but the Japanese housing starts from April to November and the 8 months, it came down by 13.7% year-on-year, but we were still able to increase the revenue and profit.

And the reason why we were able to do that was firstly, and this is something that we always talk about that the renovation business has higher profit margin, but SG&A also ends up being higher. And so that does have impact on profitability. So we were using AI or DX digital transformation, utilizing digital technology. And we have essentially worked on lowering the cost, which has enabled us to improve profit margin, and we've been able to do that in terms of demand cultivation, and we were able to secure an extension of the subsidies on this occasion.

So given the backdrop for us how can we have the understanding of our customers in regards to the window renovation. I think we have a better idea as to how we can do this. So despite the poor market condition, we have been able to grow the Japanese business despite the headwind. I think this is a positive. And another positive factor and that's actually balanced against what is good, but China is probably worse than what you had expected, but we were able to see improvement in the middle and near East, which was able to offset that negative in China, which is a pretty good thing.

The second question, and I want to ask about numbers. In terms of the profitability structure as you have explained, right now, the depreciation is greater than investment and once they balance, then due to decreasing the depreciation and amortization, we expect there to be a profit improvement. But because of the FX impact, we are not seeing the decrease in differentiation and amortization cost. But in terms of the tangible asset, how many years are depreciated over, so that will have impact.

But overall how long period can we see the balance between depreciation and investment and how -- do you have any numbers in mind of improvement? And so the depreciation of the acquisition of the tangible assets as reported in the financial statement. I think there is probably JPY 4 billion to JPY 7 billion -- sorry, JPY 6 billion to JPY 7 billion of the gap there.

Well, it's not easy to respond because of various things. But from our perspective, the -- in terms of tangible fixed asset, what is the biggest factor for reduction and would be factory facilities. And there, from our perspective, and does relate to the previous question. But again, I can't talk about what we haven't announced as yet, but in Japan or in Japan and -- sorry, overseas as well to generate profit with a relatively small asset. That is the course of direction that we're trying to pursue.

And so the facilities or the plants we have the possibility of being able to work on that aspect. It's not just the how many years that we have those plans are being depreciated over, but I think there are still a lot of room that we are able to work on to make improvements. But if I start to talk about numbers, I end up talking more specifics so I can't really do so. But we are looking at the greater number than what you have referred to in terms of reduction of depreciation expense.

So investment and the depreciation, it's not just the cycle there, but you're going to do something that is a little more significant. Is that right?

Yes. Well, investment itself. So investment was a tangible asset, we are not thinking of doing anything major in that area. So conversely speaking, and by organizing the assets to an extent, we will no longer require maintenance investment for that, that would lead to a reduction in the amount of investment required. And so in that regard, so we already have a structure of being able to generate cash. And so in terms of accounting profit, in order for it to become more visible, I think there are things that we can do.

We would like to move on to the next question from CLSA, Mochizuki-san.

I have 2 questions. The first question is related to the outlook for the next fiscal year. I think you have given some tips today, but the business environment is very bad. So if we look just at the net profit, I -- is it okay to understand that the net profit may be in the losses. So I don't know about whether core earnings will be going up or not. But if you are going to conduct structural reform, then there will be costs associated with it. So I thought that you may be in the net losses, so regardless of the numbers.

So well, we don't want that to happen. So in the past 2 years, we have worked on the areas where it would incur losses first in the past 2 years. So in terms of the structural reform, the area where we would work on, I would have less losses. And also, there are -- there is a possibility that it would generate the profit. So considering the net profit levels now, we cannot go lower than that. So we are not expecting the net profit to be in the negative, and we believe that we can increase the core earnings.

But of course, the difficult environment continues. But what I would like you to understand is that this fiscal year, we had in a very severe situation even worse than last fiscal year. But we have been able to post better performance. In terms of next year, we don't believe it would be as difficult as the previous years. Of course, we need to wait and see how the commodity prices would impact us. But this is something that we have already experienced in the past. We would like to continue to work on things in a steady manner.

My second question...

Sorry, Kawai-san from IR has supplementary comment.

So this year, there has -- a JPY 12 billion has been decreased from the tax system change, but this is one time. So it would not happen next year. So please understand that this JPY 12 billion is a onetime thing, which occurred this year.

JPY 12 billion less tax.

Right, that impacted net profit. But we would not have that kind of tax reduction next fiscal year. So please compare it to make the comparison without that JPY 12 billion. But we will not be decreasing the net profit. That's what we are aiming for.

So the tax cost, onetime positive impact would not be there next year, but you want us to expect that you would work hard to improve your performance?

That's correct.

My second question is related to ROE. So Seto-san, you have said that we should look at EBITDA in terms of your earnings power? And the cost is different region by region under EBITDA, but the -- a lot of shareholders are focusing on ROA. And I think regrettably, that your level of ROA is still low. It -- so for the coming several years, I believe that it would be difficult to improve the ROE, considering the capital cost. Do you think you would be able to improve it?

Of course, we believe that we can improve it. We would work on to reduce the depreciation and we will improve the tax management so that the net profit will be improved and thus better ROE. And also for the denominator, if we are able to sort out properly, we would be able to get better and ROE will be improved. But compared to capital cost, there may be some difficulties.

So there are cash flows in the past, and how we view it is the issue here. For example, we had acquired something at JPY 10 billion, but the -- and the cash outflow is JPY 20 billion to JPY 30 billion. But the past cash outflow should -- it's a past cash flow. But if it's generating JPY 20 billion to JPY 30 million cash, that would be -- that's a good thing for the shareholders. And if it's in the negative like Permasteelisa, we should be divesting it right away. But even if it's inefficient, you -- it may be generating cash. And if it's hard to sell, we -- it may be better to keep it.

So that's why I have been saying that please look at EBITDA. If we are to improve ROE, one way is to sell everything, which are inefficient, but that would not be at all positive for the shareholders. So of course, capital cost is very important to us, but capital costs should not be looked at just with snapshot. And so sometimes, we need to consider it as a sunk cost. So we should avoid the -- putting too much cost into the sunk cost. But Mochizuki-san, but I don't want to keep my company hovering low. And if it's optimal, we would be selling the assets where we can. So please monitor us.

So we are supporting you, and I will do my best to write good reports.

So next question is from Morgan Stanley MUFJ Securities, Yagi-san.

Thank you for the explanation. This is Yagi from Morgan Stanley MUFJ Securities. I have 2 questions. First question is regards to American Standard. So for the American Standard, if we only look at the third quarter, then the metal loss has deteriorated year-on-year. Now this is due to demand related reason only? Or is there other factors that has led to that result?

And demand and forecast remains to be quite tough. But for next fiscal year to -- I think you expect a turnaround to generating profit, but based on the forecast right now, the timing of this, is it likely to be later than what you had initially considered. So please explain your thinking in regards to American Standard.

As for the third quarter, what you said is right. Demand was quite significant. But another factor is that ourselves in the second quarter, we introduced a new system and the installation of the system did not go as well as hoped. And so there were delay in shipment to the customer. So that is what we have experienced in the second quarter. And so as a consequence, some of the orders were canceled in the third quarter. So we did have that kind of special reason.

But the third quarter overall was not strong, mainly because of demand factors. And for the third quarter and the fourth quarter, home repair, the rose of Ferguson, they has downgraded their forecast more than we had expected. And so the demand is poor, that is without a fact -- without a question of fact. And that may have impact on turnaround next year. And so the fact that demand is weak. So we are implementing additional measures with that in mind, and that is what we are doing to reduce cost additionally. And so we don't feel that there is a need for us to change our position that we're going to achieve a turnaround next year.

If possible, anything you can mention in terms of measures to reduce cost?

Well, sorry, I can't talk about the initiatives in that area.

Okay. My second question is in regards to your thinking about domestic business, so the new starts are quite poor right now, but the remodeling is quite good, but I can't really expect a significant increase in revenue. But in terms of the cost pass on, you have explained about this, but if this is delayed, then the impact of the cost increase, how can you offset that to achieve increase in profit going forward. So could you explain the factors to enable profit increase next fiscal year for Japan domestically?

First, in regards to commodity pricing and just to make sure, aluminum and copper accounts for most largest portion, aluminum domestic, copper is more for international business. For international business, relatively speaking, we have G4, the product lineup, which is more premier and G3 is upper mass. This is also the main area. So it's easier to pass on cost.

But for our medium product in Japan domestically on the other hand, so it's not that easy to pass on our cost. But our competitors, they didn't actually increase the price when a situation like this occurred, and they went after market share. But in the end, they did not really generate good business performance. So in that regard, from the number gains, and I think they will respond to that the next time. So that is likely to see greater progress in terms of the cost pass on. But for April, we have prepared until December to see the price increase. And so we probably have to do something additional to address that.

Now in that regard, what can we do additionally? Well, what was successful in the past is for now, we have not been able to fully use our subsidy a couple of years ago. But last year, in the second half of the year, we were able to utilize the subsidy at quite a high ratio. So how can we consume a subsidy. We now know how to do that. So we should be able to make a good start post April with a new subsidy being provided. And we have this strength of the digital and AI progress. And so we still are able to generate profit even if we go to a smaller project, I don't think we have advantage of others in that regard.

The next question from Jefferies, Fukuhara-san.

This is Fukuhara from Jefferies. I have 2 questions. The first question. The raw material prices that you have mentioned, the copper and aluminum. Towards the end of the slides, there was a chart of the evolution of the pricing. And you also have written the assumption for those prices. So in the recent days, there has been rapid increase in the copper and aluminum. Could you explain about how much impact that there would be in terms of sensitivity of the price fluctuation in those raw materials. And in terms of the rapid increase of those raw materials, I would like to think that it would not be impacting the fourth quarter figures, but what's the situation? So please talk about sensitivity.

Fukuhara-san, thank you so much. This is Kawai from IR office. And in terms of the sensitivity, we do not disclose that. So the -- and we do not disclose the amount of the procurement. So I would like to talk about that when you come for the IR meeting.

So in terms of the fourth quarter impact, so the increase in the pricing in the third quarter will be impacting in the fourth quarter, and the price increase in fourth quarter will be impacting the first quarter. So when we look at the whole year, the project delays would be impacting the sales and the commodity prices, then will have a full effect in terms of the impact.

So in terms of how much, well, we are calculating right now because this is ongoing in January. But what would be most beneficial for us is to increase the ratio of scrap. The scrap ratio at our company, the usage is a lot higher. So for aluminum, 80% is scrap. We had tried increasing the ratio, and we have experimented the 90% aluminum scrap ratio, and we have succeeded in that. So by using the scrap, we would be able to delay the impact of the price increase.

So that would be a competitive edge for us. So under the current environment, what we don't know is the consumers' behavior, whether they would place an order before the price increase? Or would there be impact, more impact from the delay in projects. So there has been a rapid increase in prices of raw materials. So we have not decided the next step yet. That's my frank response to your question.

Understood. My next question. So I think there are a lot of things that you still cannot say about the fourth quarter. But at the end of April, you have given us the outlook for next fiscal year in March. And for core earnings, you have eyed on JPY 65 billion, and you have not gotten to that level yet. So this JPY 65 billion in core earnings for the next fiscal year. To me, it seems that it's difficult to accomplish, but how close would you be able to get to the JPY 65 billion?

I would not be able to provide an answer at this moment in time. But the environment surrounding us is changing and the delay in recovery of the European market is hurting us and also in the short term, the commodity price hike. And also, we did not envision that the new construction starts would be declined so much. And also now we have clarity to how we would be using the subsidy and also how we can reduce the cost in the renovation business is something that's more clear to us. And also in the mid- to nearest East, we are a forerunner there, and we are doing better than we had first expected in that market. So we would like to reflect that into the next budget. I am not able to talk about the specific figures because it would be misleading.

So we have responded to all of the questions that we have been asked thus far. It seems that there are no further questions. So with this, I would like to conclude the Q&A part. So with that, we want to conclude the third quarter financial results for the fiscal year ended March 31, 2026, the analyst and investor explanation meeting. So thank you very much for your participation. The meeting is concluded.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

It is time for us to start LIXIL Corporation's first half financial results for the fiscal year ending March 31, 2026. This briefing is streamed live online. The material for this briefing is on our website in the Investor Relations page.

First, I would like to introduce to you our presenters. Director, Representative Executive Officer and President and CEO, Kinya Seto. Next, Executive Officer, Executive Vice President and CFO, Mariko Fujita; Senior Vice President, Leader of the Investor Relations Office, Aya Kawai.

I will be serving as the moderator. My name is Setoguchi from IR office.

Next, I would like to explain how we proceed. First, Fujita, the CFO, will give you the overview of the financial results. It would be followed by a Q&A session. During the Q&A, CEO, Seto, will join and entertain your questions. We expect to conclude at 3:45 p.m.

Ms. Fujita, the CFO, will give you the overview of the financial results. Fujita-san, please.

Hello, ladies and gentlemen. My name is Fujita. I would like to give you the financial results for the first half for the fiscal year ending March 31, 2026. This is the overview of the results. Revenue decreased while core earnings and EBITDA increased year-on-year. As for the Japanese market, in Q1 there was a surge in demand. So in Q2, we saw reactionary slowdown. However, the renovation sales of water-related products remained solid. LHT's core earnings remained flat due to additional costs associated with the ceramic siding business. Because of this, the core earnings were flat, but renovation sales were trending upward from September onwards, driven by promotional efforts.

As for the international market, the revenue decreased, but the profits substantially improved. Europe and Middle East and India has seen strong performance. As for Americas and China, housing markets remain sluggish. As for others, in Germany, there was a change in the corporate tax rate. Because of this, the tax expenses decreased. The full year earnings forecast remains unchanged. We are now scrutinizing various elements currently. There is no change in the full year dividend forecast. So resolved interim dividend remains JPY 45 per share.

Next is business environment outlook for fiscal year '26, the Japan business. So the new housing starts remain sluggish, but renovation sales is driving strong performance. Each business is facing different situation. But as for LWT in Japan, showroom visitor numbers saw upward trend in August and September. As for LHT, we have conducted the promotion for products eligible for the window renovation subsidy and the sales is expected to increase from quarter 3 onwards. In the Living segment, we are focusing on the higher-end products.

So next is the international market. There is a global trend of interest rate cuts. But in Europe, because of the instability in the government in Europe, there has been delays in policy decisions to promote housing construction.

So I would like to go one by one in terms of the region. First is the U.S. U.S. will be entering an interest rate cut phase. Mortgage rates are declining somewhat compared to peak levels. However, the tariffs and immigration policies is slowing down the housing market recovery. So we believe that the difficult circumstances to last through this fiscal year. However, we have worked on the price optimization as well as structural reforms, and we expect the result of that to materialize gradually. And we believe that the situation, the sluggish situation has bottomed out in the first half.

Next is Europe and IMEA regions. In Europe, we expect the full market recovery to happen next year onwards. Sales improved and the color products have improved and the sales improved by 5% year-on-year. So you see in the bottom graph, the composition ratio of color products to total faucet sales and the revenue grew 32% year-on-year.

As for Asia Pacific and China, I would like to talk about China for this region. China sanitary ware market remains challenging due to weak economic condition and intense competition. However, growing products are a strong point, and we are focusing in that. And we saw improvement of the sales of the growing product by 25%.

This is the performance highlights for the first half. Revenue was JPY 735.9 billion, core earnings, JPY 16.9 billion. So there was revenue decrease and core earnings increase. EBITDA and profit has improved as well.

Next is the consolidated business result for the first half of the year. The numbers have been explained on the previous page, but if you look at the gross profit ratio, it has picked up by 1.6 percentage point year-on-year. And this is a point that I wanted to highlight on this page.

Next page is the business results by segment. For LWT, both for Japan and international business, we saw profit increase. And this was due to high profitability, the Europe and Middle East showing recovery in sales making contribution. LHT, the sales did come down slightly, but price optimization and renovation increases has enabled profit to remain flat. Living, the sales for renovation has progressed strongly. As a consequence, we were able to see both revenue and profit increase. This page is essentially, the previous page described based on the previous reporting segments. So allow me to skip this page.

Next page is the situation concerning our balance sheet and consolidated financial position. For total assets, this increased slightly. And this is due to the assets held in Europe increasing due to foreign currency translation. The impact of -- the foreign currency impact is JPY 46.6 billion.

And the final page, and this is the cash flow and the cash balance. As for the free cash flow, we have been able to remain positive. As for the operating cash flow, this did come down year-on-year. However, this was due to the increase in inventory assets. So we consider this to be only temporary.

And that completes my explanation for today. Thank you.

Thank you very much, Ms. Fujita. We will move on to Q&A session now. But before taking your questions, Mr. Seto, the CEO, will give supplementary comments about the financial results.

Mr. Seto, the floor is yours.

Middle East, near East and India, excluding those regions, the situation was not so good. But even facing that situation, we were doing relatively well. In Japan, there was a last-minute demand in April and the new housing starts had deteriorated after that. April to September, there was a decline by 18% in the new housing starts. This was the record high decline. However, we were able to improve our profitability. We were able to grow both revenue and profit. That was good news for us in the area of renovation. The only weak area was a window renovation but from September, we are seeing a very speedy recovery. So in Japan, the situation overall is bad, but we were able to do well.

In the international market, the biggest concern is the U.S. In the first half, we are confident that we have bottomed out in that market. Towards the second half, we would be seeing the results of our structural reform materialize and the structural reform in the backup that we have conducted as a significant reform, we will see fruitful results in the second half. So we believe the situation has bottomed out in the U.S. market.

As for Europe, the color products have seen increase in the share. Compared to the first half, the one concern that we have is that -- so we had expected the interest rate will be cut and the policy decisions will be made for the construction area, but we are seeing delay in the policy decisions made by the government. In the European countries, there are a lot of instability in the government. There are right wing governments, left wing governments. And because of this fluctuation, there has been no decision -- policy decision being made. However, what we can say is that the demand is high. However, because of the increase in the cost of supply has been insufficient the customers in the mass segment to below, they cannot buy the houses. And this applies in the U.S. as well. So there needs to be some policy decisions made by the government in this area.

As for China, we believe that they would -- the market will face difficult situation for quite some time. However, even in that situation, it is growing 25% year-on-year. The high-end products have been faring well even under difficult circumstances. As for the IMEA region, we have been doing better and the market share is growing. The second half concerns, if we look in the longer term, will be the policy decision made by the government in Europe and U.S. So we want to see a better situation for that.

Thank you very much, Mr. Seto. So we'd like to receive questions from the participants. [Operator Instructions]

[Operator Instructions] I would like to go to the first question from Nomura Securities, Fukushima-san.

This is Fukushima from Nomura Securities. Can you hear me? I have 2 questions. So now the first question. For Japan to begin with, so as the CEO has explained, the -- from April to September, 18% decrease in new housing starts and the impact of this, would this be reflected with a delay to your sales? Should we consider this as a risk or not?

Also, in terms of the window renovation, the advanced window renovation, if we look at the government, the web page, only 43% of the budget has been consumed thus far, it's quite low. And so I am somewhat concerned as to whether budget will be provided for this purpose next year or not. So please comment on that as well. That's the first question.

In regards to the new housing starts, there have been delayed. Well, from our perspective, we don't expect that to appear with a delay because we are planning based on a low level to begin with. So in that regard, even in this type of situation, the fact that we have been able to generate this level of sales means that we have been able to strengthen our position inclusive of our renovation business. And so I don't think you need to be too concerned about this. And the market overall is showing demand decrease, but we feel that we have been able to increase our market share.

Now in terms of window renovation, true, in the first half of this year, it was quite challenging. So during the summer, we've conducted a campaign targeting the Tokyo Metropolitan area in general, particularly for the Tokyo, window renovation, in addition to the national program, there is a Tokyo -- the Metropolitan Government and the 23 Wards, they all provided separate subsidies. And so in the Tokyo, you can undertake window renovation at a very low cost. So we've conducted the campaign. And so we have had a very strong demand from September to November. And so we have recovered to a level greater than what we saw last year.

But what will happen to the national policy? That is not something we can really make comment on. But what we have heard is that the related, the ministries and agencies -- so we're thinking about the carbon neutrality policies and what they can count on is the housing area, particularly the impact of window is quite high. And so whether it be METI or the Ministry of the Environment or the Ministry of Land Infrastructure, Transport and Tourism, they all share that view. And so the government changing their support for window is not something that I'm expecting at this point in time. So we now have the new government. So we are not able to talk anything specific in this area, but our expectation is for the program to continue. So that is our hypothesis.

So I'd like to ask the second question. And so the sanitary ware business in the U.S. Previously, I think you've mentioned that for yourself in U.S., what you are selling, the sanitary ware is produced in Mexico. And so you are competing against China and the Asian companies, but it seems that the tariff is going to be applied to China and the Asian companies, but no tariff is applied to Mexico. So that would lead to enhancing your competitiveness leading to potential increase in the market share. I think that was what you have said previously. But are you really seeing that right now? So if you can explain the current situation in that regard. So that's my second question.

What has happened in practice is that we are expecting tariff to increase in April. And Asia and China, the sanitary ware, the manufacturers, they actually consume a lot of inventory. And so as of September, the rush or the last-minute demand has kind of disappeared. And we stopped importing from Asia as well from ourselves. And so the number supplied is being reduced, but we have changed the portfolio to increase pricing on average. And that was kind of an initiative that we have implemented and that the pricing impact will be shown in November, and we will see a lot of these materialize in January.

And again, another materialization in April next year. And so October, January and April next year. And so the restructuring of the business that we've done last year will show result because the transition service agreement will be disappeared at this point in time. So we will see the improvement in 3 stages going forward.

In other words, the market share has not increased right now, but you're expecting the share to increase going forward. And you're going to see that increases even with the price increase. And so essentially, the economics will also improve.

Well, we are not expecting market share to increase because in regards to those with a low profitability towards the low end, we are not going to continue with those. And U.S. overall, when the China or Asian product come in, the retail sales for lower-end product, when you look at the market overall, the market share of the low-end product kind of increase. And so if the Asians are not providing the low-end product and for us not coming up with too much product there, we want to change the market structure in U.S. overall to that, which is a little bit more higher end. And so we're not going to go for market share at the lower end.

So volume-wise, what we brought from Asia, we do have some portion of that we will be reducing those. So the market share for the market overall is not going to increase necessarily, but we want to increase the average price. That's what we want to target.

Understood. By the way, what is the level of price increase? Do you have any quantitative benefit of that?

Well, sorry. And so we have a number of our customers and distribution. We have a confidentiality agreement with them. So I'm unable to speak about those numbers. And there are different timings for that to be implemented. If I mention these numbers, then from the customers' perspective, they understand what we are doing. So please allow me not to refer to that.

So a different perspective. So that's already reflected in this -- the guidance. It is included in the forecast, but April to September, and if we look at the balances, the first versus second half of the year, larger weighting towards the second half of the year.

The next question from Goldman Sachs, Okada-san.

This is Okada from Goldman Sachs. I have 2 questions. My first question related to LWT business in Japan. In the first quarter, the renovation products sales had gone up by 11% year-on-year. In the second quarter, plus 7%. So there is an increase. So compared to competitors, I think that this ratio of increase is higher. So have you been able to gain market share? Or are the competitors doing something to counter that?

So it's like prisoner's dilemma. The demand overall is coming down, and it would be better not to go for a race to the bottom. And we decided to increase the price first. So this kind of message not to compete to get to the lowering of the prices. So lowering of the price will be digging the gray for all the players in the industry. So the industrial understanding of that is improving, but there are some companies who would still try to capture the customers by price. I would not be naming them. But there are several companies like that. They would decrease the price once their market share would even slightly go down but this is not a game that we are playing on our own. So it's very difficult to navigate through this industry, but LIXIL has differentiated products.

And LIXIL has digital services, inclusive of the retail industry. And we have been received well by the construction companies as well as the builders. And we believe that we can increase our market share through those initiatives.

My second question, I would like to know your prospect for the U.S. business. You said earlier that through structural reform that you have conducted in the past, you expect improvement in the profit. The interest rate in the mortgage is decreasing, but there has been declining in the employment, for example. And I was wondering if those things would negatively impact you? And how do you see the market situation from the next year on?

I wanted to talk about that myself. Last year, in the fall, around the same time of last year, there was builders conference at Harvard University. The builders had expected at that time that 2025 will be a good year for them. However, in reality, 2025 was not a good year. And 2 weeks ago, the same conference occurred and the builders had expected that next year will be even worse year. So the bad situation will continue into next year.

The supply shortage had remained in the market for a long time. The high-end customers are building, but mass to low-end customers have not been able to buy the houses, and there has not been new housing starts for the rental housing as well. So the U.S. is facing very critical situation. There are 1 million homeless people. In Japan, there are only 1,000 homeless people. So the significance of the homeless problem is very big in the U.S. And the loan -- the mortgage rate is not coming down so much. And also the timber, the aluminum, steel all of them are seeing increase in the price because of the tariffs. So the affordability of the housing is significantly coming down. So 5 to 6 years ago, the housing average price was about 3x more than the average income. Now it's 5x the average income to buy a house.

So frankly speaking, everyone wants to buy a house, but they cannot buy homes. So this -- so if you try to change the situation around for the better, the central government, the Trump administration should do something or the state government should do something that would enable the middle to low-income people to be able to buy housing. And this problem is happening in Europe as well. The interest rate cuts have been happening in Europe already. And in Europe, there is also inflation. And another issue about building a house is that there are many policies related to environmental friendliness, and it's very difficult to build a house.

In spring of this year, in Germany and France, in bigger markets, we had expected that there will be a policy implemented to promote the buying of the houses. However, in Europe, the ruling parties are very weak now because there are many small the small parties, which are going against the ruling parties, and it's very difficult to implement policies. So what we see in the U.S. and Europe is that there are a lot of demand, but supply is small. And even if there are supply, the price tends to be very high. So the actual supply in the market has been very difficult. So the situation in the U.S. is more severe in the U.S. than Europe, and there's not been a policy solution for this.

And this is related to Fukushima-san's question earlier. But rather than going after the market share, we should be improving our portfolio position. Toto, our competitor has been doing very well in this area. They had very good portfolio position. So compared to us or car, I think they are having a very stable business. So what LIXIL has to do in the U.S. market is to pursue improvement of the portfolio position rather than increasing the market share.

So I'd like to proceed to the next question from SMBC Nikko Securities, Kawashima-san.

This is Kawashima from Nikko Securities. I have 2 questions. First question is simple. So the ceramic findings, the additional cost was something that you have mentioned. Could you explain the details of that? So I think this was booked as some other expenses, but is there something that will have impact on the core earnings?

And the second question is to do with the core earnings in Japan. If we compare the first quarter to the second quarter, and from a seasonal perspective, you should generate greater profit in the second half of the year. But LWT and Living, that wasn't the case on this occasion, it seems. And the factors were the rebound to the last-minute demand or the expense timing of SG&A, but renovation increase rate was a lot slower in the second quarter versus the first quarter. So was the first quarter too good as a result? Was it more the competitive landscape that has having impact? Or is there other factors where we are seeing some slowdown in the second quarter? So if we look at the situation on a Q-on-Q basis, could you give some explanation of how that had occurred?

Well, the fact that if we had continued with the ceramic business more, LHT would have achieved a stronger growth in the second quarter. And it's not -- what will have impact on the core earnings rather than the other expenses. So if we were to discontinue with the business, of course, the orders will come down. And so the business will become more difficult. So it may be difficult to secure the fixed cost. And if it is inventory, long-tail inventory, of course, so if we expect to be able to sell that in the future, then it's the inventory. But if we are going to discontinue with the business, we may have to dispose of those inventory, write them off. So more difficult.

And of course, capacity utilization rate will come down as a consequence, too. But there is a responsibility to supply. We need to continue for a certain period. So it's quite a tough environment under which we need to conduct our business and also from the customers' perspective, so there could be a complaint if we don't address this immediately. So inclusive of those in the second quarter for quite a large portion, inclusive of what could occur in the future. Maybe we didn't have to actually take so much into consideration now, but we've actually expensed some quite excessively. So we did see quite a significant drop in terms of our core earnings. And so we want to discontinue the ceramics business by the end of this fiscal year. So we've actually took quite a full sided view in the second quarter as well.

And this is Kawai from IR Department. Please allow me to respond to your second question. And as Kawashima-san has explained, in comparison to the first quarter and the second quarter, LWT, Living in both segments, the new housing so there was a rebound decline in the second half -- second quarter vis-a-vis the first quarter because of the last-minute demand there.

In terms of renovation growth rate, if we make the Q-on-Q comparison, the second quarter was slightly slower than the first quarter. As a consequence, the business -- the core earnings did come down slightly. And in terms of Living, so we saw a strong performance for the kitchen in the first quarter, particularly the high durability product, but there was a slight slowness in the second quarter vis-a-vis the first quarter.

So the first point, so ceramic sidings, is there anything that you can share quantitatively? And the renovation growth slowing down somewhat. Are you saying the level in the second quarter that is a more normalized level or meaning that the first quarter was too good?

Roughly, about JPY 2 billion, so more than expected overall in terms of ceramics in the second quarter. And this was as a result of quite a bold the response that we have implemented. Comparing first and the second quarters, the last minute demand in April was, of course, quite notable. And of course, it is quite a sizable business that ends up reducing cost, SG&A ends up being lower as well. So if you say that the first quarter was too good, then I certainly cannot negate that.

[Operator Instructions] So I would like to ask Mochizuki-san from CLSA to ask their question.

This is Mochizuki from CLSA. I have 2 questions. The first question is more of a macro question. On 27th of October, the corporate tax expenses you said would be decreased. And because of the corporate tax rate change in Germany, there will be a decrease of tax expenses by JPY 12 billion. And there was no revision in the plan. So I don't think that you had reflected it. And I would like to know why you did not revise your plan? Core earnings is better than planned. So you were uncertain how much improvement to the core earnings there would be. And you didn't know much -- and you didn't know much about how the cost would be going forward. But I would like to know how the impact of the JPY 12 billion decrease in the tax cost would be.

And also, in the second half, you would be improving the business in the U.S., for example. So when do you think that U.S. will turn profitable? I understand that the red ink will be decreased, but when will the situation turn around to be in the profitable side?

In the next disclosure, we would be able to say something more clear, inclusive of the revision in the plan. It was very difficult for us to foresee. We have many entities around the world, and we have to review how the balance of the corporate taxes would be for the various entities that we hold.

Deferred tax liabilities had decreased. So because of that, the profitability had improved, but there are some deferred tax assets that we have to think about, which fluctuates year-by-year. So it's very difficult to foresee how the concrete situation would be. I am not able to say anything concrete, but we want to create a situation where we would be able to make more accurate prospects inclusive of the tax costs. We want to create a more predictable situation, and we want to optimize the payment of our corporate taxes. To that end, we want to have some time to consider what would be the optimal way to go about this.

Anything from you, Fujita-san?

In the German entity, DTA and DTL, there -- we have conducted a recalculation of the costs, et cetera. And in each entity, there has been some tax movements. So we need to review overall of the tax payment structure. So that's why we had not conducted the revision in the plan at this point in time. So in that sense, we are lagging behind. But DTA and DTL, these are not impacting the cash. We have been paying taxes each year. And this will be about the adjustment on the balance sheet. And if it looks like there has been a significant change because of that, it would not be convenient for the investors. So we want to be -- we want to have more predictability in the cost, and we have started the project on that.

And to your question about the profitability in the U.S. market. In October, we made price optimization. And in January, there will be some improvement due to the structural reform, and there will be a structural reform to occur in next April. And the timing of turning to profitability, we believe that it would be somewhere around quarter 4 of next year. That's our hope. So the structural reform results as well as the price optimization, if we are able to see the results, we would be seeing something in January or February. So January or February, and the number of days in January will be small, so probably sometime in February.

So the next question is Teraoka-san from Daiwa Securities.

This is Teraoka from Daiwa Securities. I have 2 questions. First is in regards to price increase in U.S. I wanted to understand your thinking there. In terms of the sanitary ware, it is produced in Mexico, so no tariff. But the grower product, I understand that you're importing some which is taxed with tariff. So in terms of price increase, so the tariff portion, inclusive of sanitary ware overall, you're going to pass that on. Is that the kind of thinking that you have adopted? Or is it that you're looking at the price increase of the competitors? And because of the price increase as to whether there will be negative impact on the quantity. So your thinking in this regard, please?

Of course, increase in cost will be reflected in price increase. But apart from that, the biggest factor for us to see price improve is changing the portfolio. In other words, low-income product to high price range product -- sorry, from low-priced product to high price, we are making that shift. Why can we do that? Because low prices product from China and Asia, if they don't come in, then the distribution channel will have to change the type of product that they sell. So specifically speaking, from our perspective, entry class product, we have a certain product called cadet. And we also have a champion product, which is a relatively higher price. And so cadet reduced and champion volume is increased. So that's kind of offer that we have come up with. And so the distribution has essentially accepted that.

And for us to do this, to begin with what we've done in Asia. So that's maximum of 9.7 million pieces per year. But based on the production capacity in Mexico right now, we can supply more than 8 million pieces. So rather than increasing the volume, but we are making improvement in portfolio, that would lead to enhancing the profitability on per piece basis. So that's a retail example. But for trade as well, so providing premium toilets. And so about 1 million is called -- the units is called the commercial grade, but we're also trying to change that pricing format as well. And for commercial grade, we are increasing prices as well. And so overall, in terms of pricing increase, so it's not the case that we're going to increase prices significantly as of October. So the portfolio changing will start from January and so for October and January.

And also what I mentioned before, as of April, there were Asian product that came in last minute, and they are now disappearing as inventory. So in April, new addition is something that we can expect to see.

And the second question, so color product selling well in Europe right now. So is it what the competitors are not offering? And if they're not offering those products right now, is there a risk of the competitors also coming up with similar product? And to what extent can you continue the share -- market share gains with the color product, your thoughts in this, please?

Well, no, but there are companies who do color product in the color product area, the competitors, and they're also succeeding. And there are products that we are succeeding with and there are products we are not really succeeding with in terms of color product as well. So we need to ascertain what are the and the product. But the right image is that the color product supply capacity. So we are more than 3x the level that we were at around this time last year. But still, we haven't sufficient the supply yet. We have also outsourced some. So we are actually addressing this gradually.

So what is the bottleneck right now is not the demand. It's the supply that is a bottleneck right now. So there is still room for increasing color product, but it does involve facilities as well. So at the next timing, maybe April next year, it's going to be difficult for us to increase the volume all at once until April last year. So in order to meet the supply, the delivery line, then we have narrowed down on the product supply. And so when the supply increases and the increase in the SKUs and whether we will see similar type of growth or not, this is something that we need to try to identify.

And as to whether this is only one time, it's difficult to really ascertain. But from the customers' expectations that was us, not the same type of product, but high-end product with greater design. If we consider that there is that type of expectation from the customers, then this certainly is going to be an area where that we need to increase going forward. And also another positive thing. And so we're quite strong in middle and near East and India. They like color in those regions, particularly certain colors that they tend to really like. And so there, we have been able to more or less dominate that part of the market.

We would like to move on to the next question from Morgan Stanley, MUFG.

My name is Yagi from Morgan Stanley, MUFG Securities. I would like to ask 2 questions. I would like to talk about core earnings about Europe. How you see the future core earnings in Europe. If we compare first quarter and second quarter, second quarter has seen a deterioration in the core earnings. I would like to know why that was? So after second quarter, considering the seasonality, I think that last year, there was an improvement. And I was wondering if the same thing happened with this year -- will happen with this year with the improvement of the color products.

So the color products had increase in supply from April. And because of this, there was a huge chunk of improvement. But there was a limitation in the capacity. And the color products had improved. But in the past 6 months, the supply had not increased so much, and we were selecting the higher-end products to sell to our customers. One of the things about cost that we are worried about is that there are increase in the cost. So we need to conduct price optimization flexibly. So that's one concern.

As Mr. Fujita has explained, inventory is being accumulated because there are various types of product because of the difference in the colors. And this adds to the cost. So we need to be very careful in managing it.

My second question is related to the U.S. market. In the first quarter, what you have said in the presentation is that the -- in the first quarter, there was bottoming out. And you are saying that you bottomed out because you are seeing some light at the end of the tunnel after conducting the structural reform. So I would like to know what you meant by the bottoming out in the first quarter.

In the first quarter, we had seen the bottom to be lower than that we had thought. And because of the system issues, we were not able to make shipment as much as we wanted. In the first quarter also, there has been some competition with the overseas competitors' products. We had made a decision to decrease the supply on our side. 9.7 million is our shipment capacity, but we discontinued the Asia and China markets. And so we had reduced the capacity to 8.2 million, and there was an impact from that. And we changed the portfolio there, and I think we can change for the better because of this.

I have said that we have bottomed out in the first quarter, and I would like to explain the reason why I say that. The structural reforms results will be seen starting from November as well as in January and the bath business structural reform in terms of the labor as well as the distribution structure, we have sorted those things out as well and the structural reform impact will be seen in -- from October, January and April. And we would see the portfolio impact as well as the price optimization impact in January, and there would be no product coming in from Asia. So we believe that we can further improve the profitability.

Teraoka-san asked this earlier. Well, he asked whether we will be breaking even in January or February. But our original plan was the April at the latest to break even. But if we look at the situation now, because we have bottomed out at the lower point, maybe we would be able to get there around January to February.

Next question is from Mizuho Securities, Nakagawa-san.

This is Nakagawa from Mizuho Securities. I have one question for Living and also the water-related business in Japan. And based on the material, so August and September, the showroom visitors have increased. That's what you have explained. So what is the type of product that you're seeing stronger demand? If you could just give some commentary on that, please?

Well, until July, the visitors were decreasing, but we started to see increases in visitors from August and September. And the visitors are increasing both for the new houses as well. And no particular product, but timing-wise, in April and September, and I mentioned this earlier, we actually done the energy conservation, the campaign for windows. And so we did actually see increases in the window related. But apart from that, not any specific products showing any strong growth.

We have been able to respond to all of the questions that has been brought so far. It seems that there are no other questions. So we would like to conclude the Q&A session here. We would like to now conclude the first half financial results briefing for the fiscal year ending March 31, 2026, of LIXIL Corporation.

Thank you very much for your attendance.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]