5938.T

• Condolence and Support for Kumamoto Earthquake

  • The company expressed condolences to victims of the Kumamoto earthquake, and committed to working with employees and business partners to support reconstruction of affected areas.

• Q1 Overall Performance Drivers

  • Q1 delivered higher revenue but lower earnings year-over-year, driven by elevated aluminum prices and an overall decline in renovation volume.
  • To address near-term supply concerns in Q1, the company prioritized new housing production, which led to the lower renovation volume. Renovation activity was also negatively impacted by delays in the release of government subsidy details.
  • SG&A increased year-over-year, primarily due to foreign exchange impacts.
  • The consolidated equity ratio declined to 33.8% from ~35% last year, a temporary change driven by the deployment of surplus funds to short-term investments that increased net interest-bearing debt temporarily; this is expected to correct in Q2.
  • Free cash flow was negative in Q1 due to a slight working capital increase and the temporary short-term investment of cash reserves; this is also expected to improve in Q2.

• Cost and Commodity Countermeasures

  • The company has implemented price revisions, cross-company cost reduction programs, and hedging to offset ongoing cost inflation from raw material and supply chain volatility.
  • Additional price revisions are scheduled to roll out between July and October 2026, staggered by business segment, to pass through higher costs of petroleum-based materials, aluminum, and copper.
  • Rationalization efforts focus on reducing logistics costs (via cargo consolidation and adjusted order timing, aligned with new domestic logistics regulations) and replacing outsourced back-office work (accounting, general operations) with AI to cut costs without headcount reductions. These efforts have been frontloaded to offset raw material price increases.
  • The previously announced closure of the Nobori plant by March 2027 was planned long-term and is not related to recent Middle East market volatility; it will not have a material impact on earnings in this or next fiscal year.

• Full-year core earnings guidance is maintained at 45 billion yen, with no change to the full-year dividend forecast.
• Cost headwinds will be concentrated in Q1 and Q2, as price revisions will gradually take effect starting in Q3, creating an expected uneven earnings split between the first half (lower earnings) and second half (earnings recovery). Management still expects the original full-year plan to be achieved.
• The full-year aluminum price assumption is maintained at 3,200 yen per unit, down from an earlier peak forecast of 3,600 yen, aligned with recent market price declines driven by excess supply in Asia and production resumption in major producing regions.
• The full benefit of calendar 2026 price revisions will be mostly realized in the next fiscal year, rather than the current fiscal year, due to staggered implementation and existing long-term customer contracts.

Consolidated Q1 revenue was 379.2 billion yen, with core earnings of 1.7 billion yen and a net loss of 3.5 billion yen for the quarter:

1. LWT (Japan and International): Core earnings remained flat year-over-year.
2. LHT: Core earnings declined, driven by soaring raw material (aluminum) costs. LHT accounts for the majority of the segment-level profit decline.
3. Living: Core earnings declined, due to negative foreign exchange impacts and higher raw material costs.

• Elevated raw material cost risk: While aluminum prices have stabilized recently, unexpected sharp swings in aluminum and copper prices could create unplanned cost pressure; aluminum is the biggest commodity price concern for the company.
• Macroeconomic housing demand risk: Rising interest rates could increase mortgage costs, dampening consumer purchase intent for new housing and cooling overall market demand. New housing costs are already expected to rise further, requiring ongoing close monitoring of demand trends.
• Regional market risk: Demand in Gulf Cooperation Council (GCC) Middle East markets has declined significantly, leading to lower-than-expected profitability in Q1 due to logistics and infrastructure bottlenecks; further deterioration in the region could weigh on international LWT results.
• Americas market risk: The Americas market continues to underperform expectations with no visible recovery, and high mortgage rates create ongoing pressure. While operational restructuring has reduced headcount by 10% to create a leaner cost base, weak demand could delay the planned return to break-even/positive profitability.
• Europe market risk: Performance varies by country, is better than the Americas but has not seen the expected recovery, and remains dependent on an improvement in the Ukraine war situation.
• Demand volatility risk: Pre-price-increase demand surges and subsequent post-revision pullbacks could create near-term volume volatility, though management expects this to even out over a 2-3 month window.

Q: Daisuke Fukushima (Nomura Securities) asked how LIXIL's upcoming price revisions compare to peers in timing and scope, and whether the differing timing could impact market share, plus how much rationalization will contribute this fiscal year and beyond. / A: Management stated that for metal products, most peers are implementing price revisions at the same timing and for the same margin as LIXIL, with no major lags for sash and exterior products. For housing equipment, some peers (including Toto) have not yet announced increases, but competition is not the main driver of differing timing, which instead stems from differing company preparedness and prior revision timelines. For rationalization, the planned Nobori plant closure has no material impact this or next fiscal year; the main near-term rationalization efforts are logistics cost reduction and AI-driven back-office cost cutting, which have been frontloaded this fiscal year to offset raw material increases. (432 characters)

Q: Sachiko Okada (Goldman Sachs) asked why IMEA (India, Middle East, Africa) LWT profitability declined sharply in Q1 despite 16% year-over-year revenue growth, and what the outlook is for the region. / A: Management explained that profitability fell primarily due to significant demand declines in GCC Gulf markets, while India, North Africa, and Algeria grew strongly. Even though overall regional revenue was flat (LIXIL gained market share to offset volume declines in the Gulf), unexpected logistics and infrastructure delays (including long port wait times for cargo) pushed costs up sharply, hitting margins. Management remains positive on the long-term region, noting that market share gains will drive profitability once Gulf infrastructure normalizes, and strong local production positions will help offset weaker Gulf performance. (467 characters)

Q: Hiroki Kawashima (SMBC Nikko Securities) asked why the Japanese renovation market was weak in Q1, and whether the weakness was structural or temporary. / A: Management stated that temporary factors are the main driver: builders and home builders are prioritizing new housing due to ongoing labor and supply shortages, so renovation projects have been delayed. While LIXIL received far more orders than usual for bathroom, kitchen, and toilet products as other suppliers could not meet demand, many of these orders were either deferred or canceled because customers could not schedule construction, so the additional orders did not translate to revenue. Window renovation was also delayed by the rollout of a new government subsidy system, which was only finalized in June, creating a temporary slowdown in Q1. (448 characters)

Q: Ryou Yagi (Morgan Stanley MUFG) asked about the outlook for return to profitability in the Americas segment, which still reported losses in Q1. / A: Management confirmed that the Americas market still sees weak demand, but structural changes have put the region on track to reach break-even by the end of the current fiscal year. LIXIL has already reduced headcount by ~10% to create a leaner cost structure that can hit break-even even at current low demand levels. The main remaining step is a shift to a more profitable product mix, which will take effect starting in September ahead of the year-end peak demand season, driving profitability improvement in the second half. (351 characters)