LIXIL Corporation Q1 FY2027 earnings call

• Q1 Financial Context

• Revenue increased year-over-year but overall earnings declined, driven by elevated LHD aluminum prices and a lower renovation ratio across the business. Higher SGA expenses also reflect foreign exchange impacts.
• The company expressed condolences for victims of the Kumamoto earthquake and committed to supporting affected area reconstruction with employees and business partners.

• Cost Management & Price Revision

• Price revisions to offset higher raw material costs will roll out gradually between July and October 2025, with differing timing across business lines. No full offsetting impact will be realized until the second half of the fiscal year, with full annual benefit expected in FY2027.
• Additional countermeasures to cost inflation from the Middle East situation include pre-planned price provisions, company-wide cost reduction initiatives, and commodity hedging; no current product lead time or delivery supply concerns.

• Operational Rationalization & Efficiency

• The previously announced closure of the Nabari plant by the end of FY2026 is not related to recent Middle East market volatility, and most of its impact will be realized in FY2027; it is not expected to have a material impact on earnings in either fiscal year.
• Key ongoing rationalization priorities include reducing logistics costs amid changing Japanese logistics regulations: the company is consolidating cargo, working with customers to consolidate and front-load order timing, and replacing outsourced back-office work (accounting, general operations) with AI automation. These efforts are being accelerated to offset broad cost increases.

• Domestic Market Dynamics

• Labor shortages in the construction industry led to prioritization of new housing projects over renovation in Q1, which reduced LIXIL's renovation revenue. Substantial new renovation order flow from competitors with supply shortages was partially offset by delivery deferrals and cancellations, as custom products like bathrooms and kitchens cannot be held in distribution inventory. Window renovation demand was also delayed by a government subsidy program transition that finalized new rules only in June 2025.

Consolidated revenue for Q1 FY2026 was 379.2 billion yen. Core operating earnings were 1.7 billion yen, and net profit for the quarter was -3.5 billion yen. The company's equity ratio stood at 33.8%, down from ~35% year-over-year, due to temporary utilization of surplus funds for short-term investments that increased net interest-bearing debt; this is expected to improve in Q2. Free cash flow was negative, driven by a slight working capital increase and the temporary short-term investment of cash reserves, which is also expected to improve in Q2.

• LWT Japan: Core earnings remained flat year-over-year.
• LHD: Core earnings declined year-over-year, driven by soaring raw material (aluminum) costs and a lower renovation business ratio overall.
• Living segment: Core earnings declined year-over-year due to foreign exchange impacts and higher material costs.
• LWT International Business: Revenue grew 16% year-over-year in India, Middle East and Africa, but operating profit fell 1 billion yen year-over-year, with margin dropping from 16.5% to 8.9%. Profitability was heavily impacted by temporary logistics and infrastructure bottlenecks in Gulf Cooperation Council (GCC) countries, where demand is also down significantly. India and Northern Africa saw strong growth, which offset weak GCC results enough to keep overall regional revenue flat, and the company gained market share in the region overall. The Americas continues to operate at a loss, though the size of the loss shrank in Q1; the Americas market has not shown signs of recovery from high mortgage interest rate pressures. Europe is stabilized but has not seen the expected recovery, with performance varying by country.

• Full-year core earnings guidance is maintained at 45 billion yen, with no changes to the full-year revenue forecast or dividend guidance. Management confirms the original full-year plan remains achievable overall.

• Q1 and Q2 will see higher cost increases and lower earnings, with a recovery in profitability expected in the second half of the fiscal year as price revisions take full effect.
• Total expected cost increases from raw material and energy price inflation for the full year is ~30 billion yen, which management expects to fully offset via price revisions and cost reduction initiatives. The full-year revenue forecast is not considered aggressive, and management expects it to be met if projected sales volumes are realized.
• The temporary deterioration in net debt and free cash flow from Q1's short-term investments is expected to reverse and improve in Q2.

• Macroeconomic demand risk: Sustained or further interest rate hikes could increase mortgage costs, dampening consumer purchasing intent and cooling both new housing and renovation demand. • Commodity price risk: While aluminum prices have stabilized recently below the full-year forecast assumption of 3,600 yen, sharp unexpected increases in aluminum or copper prices could create uncompensated cost pressures; aluminum is the largest commodity price exposure for the company. • Regional market risk: Weak demand in the GCC region of the Middle East could deteriorate further, pressuring LWT international profitability. The Americas market continues to face sustained weak demand from high mortgage rates, with no sign of recovery to date. • Market share risk: Uncertainty around competitor price revision timing, particularly TOTO's unannounced housing equipment price increase, could create competitive shifts that impact LIXIL's market position.

Q: How does LIXIL's price revision timing and size compare to peers, and could this lead to market share changes? What is the expected near-term impact of ongoing rationalization efforts this fiscal year? / A: For sash and exterior metal products, peers are implementing price increases at the same timing and with similar margins, so no major competitive gaps are expected. For housing equipment, some manufacturers have already announced revisions while TOTO has not; any timing differences stem from company preparedness and prior price revision history, not intentional competitive positioning, so large market share shifts are not expected. The Nabari plant closure, announced in June 2025 for completion by March 2026, will have most of its impact next fiscal year and is not material to earnings in either year. Ongoing rationalization this year focuses on logistics cost reduction and AI-driven back-office automation, which are being accelerated to offset broad cost increases.

Q: Q1 core earnings progress toward the full-year target is only 3.8%, which is very low. What is the risk of missing the full-year target, and what key factors should investors monitor? What explains the LWT Middle East Africa profitability decline? / A: The low Q1 progress is expected: 30 billion yen in total annual cost increases have already hit the business in Q1 and Q2, while price revisions only roll out between July and October, so the first half will naturally be weaker, with full offset and recovery coming in the second half. Two key risks bear monitoring: higher interest rates cooling housing demand, and sharp unexpected spikes in aluminum prices; aluminum prices have recently stabilized below forecast, so this risk is currently limited. For LWT Middle East Africa, profitability dropped due to temporary port and infrastructure delays in GCC countries, where demand is also down significantly. The company gained market share overall in the region thanks to local production and inventory, and profitability will recover once regional logistics infrastructure normalizes.

Q: What average aluminum price assumption is baked into the full-year forecast, and how much additional supplier price increase request has been included? What is the current business outlook for the Americas and Europe versus three months ago? / A: The full-year aluminum price assumption is 3,200 yen, down from an earlier preliminary 3,600 yen, reflecting excess aluminum supply in Asia that has offset European shortages. The company's price increase was set based on a conservative view of aluminum prices, so the current market situation leaves no major risk of uncompensated costs. For copper, all cost increases are passed through to customers on international markets, so no material impact is expected. The Americas business environment remains weaker than expected with no recovery signs. Europe is stabilized and better than the Americas, but has not seen the projected recovery, with performance varying by country.

Q: When will price revision benefits be fully reflected, and why is the projected full-year impact smaller than implied by the headline 12-13% price increase? / A: Price revisions roll out between August and October, so full impact will not be seen until the end of the current calendar year, with the full annual benefit realized in the next fiscal year. Price increases are not applied across the board to all products due to existing long-term contracts and customer negotiations, so the headline percentage reflects the size of increase for affected products rather than a full company-wide increase.