Earnings call transcript: Lixil Group Q2 2025 sees EPS beat, stock dips

Lixil Group reported its Q2 2025 earnings with a significant earnings per share (EPS) beat, reporting 14.84 yen compared to the forecasted 10.04 yen. Despite this positive surprise, the company's revenue fell short of expectations, coming in at 371.26 billion yen against a forecast of 383.12 billion yen. The market reacted with a 3.41% decrease in Lixil's stock price during open market trading, closing at 1,727 yen from a previous 1,788 yen.

Key Takeaways

• Lixil Group's EPS exceeded expectations by 47.81%.
• Revenue fell short of projections, missing by 3.1%.
• Stock price declined by 3.41% in response to mixed earnings results.
• Positive performance in renovation sales and operational improvements.
• Discontinuation of ceramic siding business planned by fiscal year-end.

Company Performance

Lixil Group demonstrated mixed results in Q2 2025, with strong EPS performance but disappointing revenue figures. The company saw a positive trend in its core earnings and EBITDA, driven by operational improvements and a focus on high-end product segments. Despite a challenging market environment, particularly in the U.S. and Europe, Lixil managed to increase its gross profit ratio by 1.6 percentage points year-on-year.

Financial Highlights

• Revenue: 735.9 billion yen, a decrease from previous periods.
• Core Earnings: 16.9 billion yen, showing growth.
• Gross Profit Ratio: Increased by 1.6 percentage points YoY.
• Free Cash Flow: Remained positive.

Earnings vs. Forecast

Lixil Group's EPS of 14.84 yen significantly surpassed the forecast of 10.04 yen, marking a 47.81% surprise. However, revenue of 371.26 billion yen fell short of the 383.12 billion yen forecast, a miss of 3.1%. This mixed performance contrasts with previous quarters where the company generally aligned with market expectations.

Market Reaction

Following the earnings announcement, Lixil's stock experienced a 3.41% decline, closing at 1,727 yen. This reaction reflects investor concerns over the revenue miss despite the substantial EPS beat. The stock's performance remains within its 52-week range, with a high of 1,990 yen and a low of 1,533 yen, indicating some resilience amidst broader market volatility.

Outlook & Guidance

Lixil maintains its full-year earnings forecast and announced an interim dividend of 45 yen per share. The company expects to achieve break-even profitability in the U.S. market by Q4 next year, driven by ongoing structural reforms and portfolio optimization efforts.

Executive Commentary

CEO Kinya Seto emphasized the company's strategic shift towards high-end product segments, stating, "We are not going after market share at the lower end. We want to increase the average price." Seto also highlighted the severe challenges in the U.S. housing market, noting, "Frankly speaking, everyone wants to buy a house, but they cannot buy homes."

Risks and Challenges

• U.S. housing market affordability issues may hinder growth.
• European market instability could impact housing policies.
• Discontinuation of the ceramic siding business could lead to short-term costs.
• Economic conditions in China pose challenges despite growth in high-end segments.
• Structural reforms in the U.S. market require careful execution.

Q&A

During the earnings call, analysts inquired about Lixil's strategy for addressing the slowdown in renovation sales and the impact of U.S. market restructuring. The company detailed its approach to price optimization and labor strategy adjustments to navigate these challenges effectively.

Full transcript - Lixil Group (5938) Q2 2026:

Setoguchi, Moderator, IR Office, LIXIL Corporation: 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 of 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. In Q2, we saw a reactionary slowdown. However, the renovation sales of water-related products remained solid. LHD'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 the Middle East and India had seen strong performance.

As for America and China, housing markets remained 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. The resolved interim dividend remains to be JPY 45 per share. Next is business environment outlook for fiscal year 2026. The Japan business. The new housing starts remain sluggish, but renovation sales are driving strong performance. Each business is facing a different situation, but as for LWT in Japan, showroom visitor numbers saw an upward trend in August and September. As for LHD, we have conducted the promotion for products eligible for the window renovation subsidy, and the sales is expected to increase from quarter three onwards.

In the living segment, we are focusing on the higher-end products. 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 have been delays in policy decisions to promote housing construction. I would like to go one by one in terms of the region. First is the U.S. The 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 are slowing down the housing market recovery. We believe that the difficult circumstances will 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.

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 a 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. 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's sanitary ware market remains challenging due to weak economic conditions and intense competition. However, growing products are strong points, and we are focusing on that, and we saw improvement of the sales of the growth product by 25%. This is the performance highlights for the first half. Revenue was JPY 735.9 billion, core earnings JPY 16.9 billion.

There was revenue decrease and core earnings increase. EBITDA and profit have improved as well.

Unnamed Speaker, Presenter, LIXIL Corporation: 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 points year-on-year. This is a point that I wanted to highlight on this page. The 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. Europe and Middle East showing recovery in sales making contribution. LHD, the sales did come down slightly, but price optimization and renovation increases have enabled profit to remain flat. Leaving 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 segment.

Allow me to skip this page. The next page is the situation concerning our balance sheet, consolidated financial position. For total assets, this increased slightly. 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. The final page 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. We consider this to be only temporary. That completes my explanation for today. Thank you.

Setoguchi, Moderator, IR Office, LIXIL Corporation: Fujita-san. Thank you very much, Ms. Fujita. We will move on to Q&A session now. 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. 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 window renovation. From September, we are seeing a very speedy recovery.

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. The structural reform in the bathtub that we have conducted is a significant reform. We will see fruitful results in the second half. We believe the situation has bottomed out in the U.S. market. As for Europe, the color products have seen an increase in the share compared to the first half. The one concern that we have is that, well, we had expected the interest rate will be cut and the policy decisions will be made for the construction area.

We are seeing a delay in the policy decisions made by the government. In the European countries, there is a lot of instability in the government. There are right-wing governments, left-wing governments. Because of this fluctuation, there has been no policy decision being made. However, what we can say is that the demand is high. However, because of the increase in the cost, the supply has been insufficient. The customers in the mass segment to below, they cannot buy the houses. This applies in the U.S. as well. There needs to be some policy decisions made by the government in this area. As for China, we believe that the market will face a difficult situation for quite some time. However, even in that situation, growth 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 the U.S. We want to see a better situation for that. Thank you very much, Mr. Seto. I would now like to receive questions from the participants. If you would like to ask a question, please press the raise hand function at the bottom of the screen. The MC will designate the person to ask the next question. If you're selected, please ask your questions directly by using the Zoom function by unmuting yourself. We want as many people as possible to ask their questions. I would ask that you only ask two questions at a time. We would provide responses on a per-question basis.

If you want to ask further questions, please use the raise your hand function once again. If you press the raise hand button by mistake, you can press the button again to cancel. I would like to go to the first question from Nomura Securities, Fukushima-san. If the confirmation screen pops up, please press participate as a panelist and unmute yourself. The video is optional. Please ask your question. Please unmute yourself, Fukushima-san. This is Fukushima from Nomura Securities. Can you hear me? I have two questions. The first question. For Japan, to begin with, as the CEO has explained, from April to September, 18% decrease in new housing starts. The impact of this, would this be reflected with a delay to yourselves? 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 web page, only 43% of the budget has been consumed thus far. It's quite low. I am somewhat concerned as to whether the budget will be provided for this purpose next year or not. Please comment on that as well. That's the first question. In regards to the new housing starts, there being delay. 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. 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. I don't think you need to be too concerned about this.

The market overall is showing demand decrease, but we feel that we have been able to increase our market share. In terms of window renovation, true, in the first half of this year, it was quite challenging. During the summer, we conducted a campaign targeting the Tokyo metropolitan area in general, particularly for the Tokyo window renovation. In addition to the national program, there is the Tokyo metropolitan government and the 23 wards. They all provided separate subsidies. In Tokyo, you can undertake window renovation at a very low cost. We conducted the campaign, and we have had very strong demand from September to November. We have recovered to a level greater than what we saw last year. What will happen to the national policy? That is not something we can really make comment on.

What we have heard is that the related 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. Whether it be METI or the Ministry of the Environment or the Ministry of Land, Infrastructure, Transport, and Tourism, they all share that view. Government changing their support for window is not something that I'm expecting at this point in time. We now have the new government. We are not able to talk anything specific in this area. Our expectation is for the program to continue. That is our hypothesis. Thank you. I'd like to ask the second question. The sanitary ware business in the US.

Previously, I think you've mentioned that for yourself in the US, what you are selling, the sanitary ware is produced in Mexico. You are competing against China and the Asian companies. It seems that the tariff is going to be applied to China and the Asian companies, but no tariff is applied to Mexico. That would lead to enhancing your competitiveness, leading to a potential increase in the market share. I think that was what you have said previously. Are you really seeing that right now? If you can explain the current situation in that regard. That's my second question. What has happened in practice is that we are expecting tariffs to increase in April. Asia and China, the sanitary ware manufacturers, they actually consume a lot of inventory.

As of September, the rush or the last-minute demand has kind of disappeared. We stopped importing from Asia as well from ourselves. The number supplied is being reduced. We have changed our portfolio to increase pricing on average. That was kind of an initiative that we have implemented. The pricing impact will be shown in November. We will see a lot of these materialize in January. Again, another materialization in April next year. October, January, and April next year. The restructuring of the bathing business that we have done last year will show results because the transition service agreement will disappear at this point in time. We will see these improvements in three stages going forward.

In other words, the market share has not increased right now, but you're expecting the share to increase going forward. You're going to see that increases even with the price increase. Essentially, the economics will also improve. We are not expecting market share to increase because in regards to those with a low profitability towards the lower end, we are not going to continue with those. In the US overall, when the China Asian product comes in, the retail sales for lower-end product, when you look at the market overall, the market share with the lower-end product kind of increased. If Asians are not providing the lower-end product, and for us not coming up with too much product there, we want to change the market structure in the US overall to that, which is a little bit more higher end.

We are not going to go for market share at the lower end. Volume-wise, what we brought from Asia, we do have some portion of that. We will be reducing those. The market share for the market overall is not going to increase necessarily. We want to increase the average price. That is what we want to target. Understood. By the way, what is the level of price increase? Do you have any quantitative benefit of that? Sorry. We have a number of customers in the distribution. We have a confidentiality agreement with them, so I am unable to speak about those numbers. There are different timings for that to be implemented. If I mention these numbers, then from the customer's perspective, they understand what we are doing. Please allow me not to refer to that. Different perspective.

That is already reflected in the guidance. It is included in the forecast, but April to September. If we look at the balances, the first versus second half of the year, there is a larger weighting towards the second half of the year. ありがとうございます。 Understood. Thank you very much. Thank you very much, Fukushima-san. The next question from Goldman Sachs. Okada-san. Please click on the Participate as Panelist button. Please unmute yourself. You would be able to put your video on if you would like. This is Okada from Goldman Sachs. Thank you for taking my question. I have two questions. My first question is 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%. There is an increase. Compared to competitors, I think that this ratio of increase is higher.

Have you been able to gain market share? Or are the competitors doing something to counter that? 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. We decided to increase the price first. This kind of message, not to compete, to get to the lowering of the prices. Lowering of the price will be digging the grave for all the players in the industry. The industrial understanding of that is improving. There are some companies who would still try to capture the customers by price. I would not be naming them. There are several companies like that. They would decrease the price once their market share would even slightly go down. This is not a game that we are playing on our own.

It's very difficult to navigate through this industry. LIXIL has differentiated products. LIXIL has digital services inclusive of the retail industry. We have been received well by the construction companies as well as the builders. We believe that we can increase our market share through those initiatives. Thank you very much for your response. My second question. I would like to know your prospect for the US 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. I was wondering if those things would negatively impact you. 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 a 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. Two weeks ago, the same conference occurred, and the builders had expected that next year will be an even worse year. 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 massive low-end customers have not been able to buy the houses, and there has not been any housing starts for the rental housing as well. The U.S. is facing a very critical situation. There are 1 million homeless people in Japan. There are only 1,000 homeless people.

The significance of the homeless problem is very big in the U.S. The loan, the mortgage rate is not coming down so much. Also, the timber, the aluminum, steel, all of them are seeing an increase in the price because of the tariffs. The affordability of the housing is significantly coming down. Five to six years ago, the housing average price was about three times more than the average income. Now it is five times the average income to buy a house. Frankly speaking, everyone wants to buy a house, but they cannot buy homes. 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.

This problem is happening in Europe as well. The interest rate cuts have been happening in Europe already. In Europe, there is also inflation. Another issue about building a house is that there are many policies related to environmental friendliness, and it is 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 parties which are going against the ruling parties. It is very difficult to implement policies. What we see in the U.S. and Europe is that there is a lot of demand, but supply is small. Even if there is supply, the price tends to be very high.

The actual supply in the market has been very difficult. The situation in the US is more severe in the US than Europe. There has not been a policy solution for this. This is related to Fukushima-san's question earlier. 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 a very good portfolio position. Compared to us or Kohler, I think they are having a very stable business. What LIXIL has to do in the US market is to pursue improvement of the portfolio position rather than increasing the market share. Thank you very much for your response. Thank you very much, Okada-san. I would like to proceed to the next question from S&P Securities, Kawashima-san.

Once the confirmation screen pops up, please press Participate as a panelist. Please unmute yourself to turn on the audio, and the video is optional. Please ask your question, Kawashima-san. This is Kawashima from S&P Securities. Thank you very much for the explanation. I have two questions. First question is simple. The ceramic siding, the additional cost was something that you have mentioned. Could you explain the details of that? I think this was booked as other expenses, but is there something that will have an impact on the core earnings? 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. LWT and Living, that was not the case on this occasion, it seems.

The factors were the rebound to the last minute demand or the expense timing of SG&A. The renovation increase rate was slower in the second quarter versus the first quarter. Was the first quarter too good as a result? Was it more the competitive landscape that has had an impact, or are there other factors where we are seeing some slowdown in the second quarter? If we look at the situation on a Q&Q basis, could you give some explanation of how that had occurred? The fact that if we had continued with the ceramic business more, LHD would have achieved stronger growth in the second quarter. It is not what will have an impact on the core earnings rather than the other expenses. If we were to discontinue the business, of course, the orders will come down.

The business will become more difficult. It may be difficult to secure the fixed cost. If it is inventory, long-tail inventory, of course, if we expect to be able to sell that in the future, then it is the inventory. If we are going to discontinue the business, we may have to dispose of those inventory, write them off. More difficult. Of course, capacity utilization rate will come down as a consequence too. There is a responsibility to supply. We need to continue for a certain period. It is quite a tough environment under which we need to conduct our business. Also, from the customer's perspective, there could be a complaint if we do not address this immediately. Inclusive of those in the second quarter for quite a large portion, inclusive of what could occur in the future.

Maybe we did not have to actually take so much into consideration now, but we have actually expensed some quite excessively. We did see quite a significant drop in terms of our core earnings. We want to discontinue the ceramics business by the end of this fiscal year. We have actually taken quite a foresighted view in the second quarter as well. This is Kawai from IR Department. Please allow me to respond to your second question. As Kawashima-san has explained, in comparison to the first quarter and the second quarter, LWT, Living, both segments, the new housing, there was a rebound, a decline in the second quarter vis-à-vis the first quarter because of the last-minute demand there. In terms of renovation growth rate, if we make the Q&Q comparison, the second quarter was slightly slower than the first quarter.

As a consequence, the business, the core earnings did come down slightly. In terms of living, we saw a strong performance for the kitchen in the first quarter, particularly the high-durability product. There was a slight slowness in the second quarter vis-à-vis the first quarter. The first point, ceramic siding, is there anything that you can share quantitatively? That renovation growth has slowed down somewhat. Are you saying the level in the second quarter is a more normalized level, or does this mean that the first quarter was too good? Roughly about JPY 2 billion. More than expected overall in terms of ceramics in the second quarter. This was as a result of quite a bold response that we have implemented. Comparing first and second quarters, the last-minute demand in April was, of course, quite notable.

Of course, it is quite a sizable business that ends up reducing the cost. SG&A ends up being lower as well. If you say that the first quarter was too good, then I certainly cannot negate that. Thank you. Thank you. Thank you very much, Mr. Kawashima. We would like to take as many questions as possible. We would like to ask you to pose two questions per time. I would like to ask Mochizuki-san from CLSA to ask their question. Please click on Participate as panelist. Your question, please. This is Mochizuki from CLSA. I have two questions. The first question is more of a macro question. On 27th of October, the corporate tax expenses, you said, would be decreased. Because of the corporate tax rate change in Germany, there will be a decrease of tax expenses by JPY 12 billion.

There was no revision in the plan, so I don't think that you had reflected it. 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. You didn't know much about how the cost would be going forward. I would like to know how the impact of the JPY 12 billion decrease in the tax cost would be. Also, in the second half, you would be improving the business in the U.S., for example. When do you think that the U.S. will turn profitable? I understand that the red ink will be decreased, but when will the situation turn around to be on 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. There are some deferred tax assets that we have to think about, which fluctuate year by year. It is 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 the prospect, 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, we have conducted a recalculation of the other costs, etc. In each entity, there has been some tax movements. We need to review overall of the tax payment structure. That is why we had not conducted the revision in the plan at this point in time. In that sense, we are lagging behind. 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. If it looks like there has been a significant change because of that, it would not be convenient for the investors. We want to have more predictability in the cost.

We have started the project on that. To your question about the profitability in the U.S. market, in October, we made price optimization. In January, there will be some improvement due to the structural reform. There will be a structural reform to occur next April. The timing of turning to profitability, we believe that it would be somewhere around quarter four of next year. That's our hope. 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. January or February, and the number of days in January will be small, so probably sometime in February. Thank you very much. Thank you, Mr. Mochizuki. The next question is Teruoka-san from Daiwa Securities. Once the confirmation screen pops up, please press Participate as a panelist.

Please unmute yourself. The video is optional. This is Teruoka from Daiwa Securities. Thank you very much for the explanation. I have two questions. First is in regards to price increase in the 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 share of the GROHE product, I understand that you import in some, which is taxed with tariff. In terms of price increase, 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 or the competitors? Because of the price increase, as to whether there will be a negative impact on the quantity. Your thinking in this regard, please.

Of course, increasing cost will be reflected in price increase. Apart from that, a biggest factor for us to see price improve is changing the portfolio. In other words, low-income owner product to high-price range product. Sorry, from a low-priced product to a high-priced product, we are making that shift. Why can we do that? Because low-priced products from China and Asia, if they do not come in, then the distribution channel will have to change that type of product that they sell. Specifically speaking from our perspective, entry-class product, we have a certain product called Kadet, and we also have a Champion product, which is a relatively higher price. Kadet reduced, and Champion volume is increased. That is the kind of offer that we have come up with. The distribution has essentially accepted that.

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

For October and January, and also what I mentioned before, as of April, there were Asian products that came in last minute, and they are now disappearing as inventory. In April, new additions is something that we can expect to see. Thank you. The second question, color products selling well in Europe right now. Is it what the competitors are not offering? If they're not offering those products right now, is there a risk of the competitors also coming up with similar products? To what extent can you continue the market share gains with the color product? Your thoughts on this, please. No, there are companies who do color product in the color product area, the competitors, and they're also succeeding.

There are products we are succeeding with, and there are products we are not really succeeding with in terms of color product as well. We need to ascertain what are the popular end products. The rubbing image is that the color product supply capacity is more than three times the level that we were at around this time last year. Still, we have not sufficiently supplied yet. We have also outsourced some. We are actually addressing this gradually. What is the bottleneck right now? It is not the demand. It is the supply that is the bottleneck right now. There is still room for increasing color product, but it does involve facilities as well. At the next timing, maybe April next year, it is going to be difficult for us to increase the volume all at once until April last year.

In order to meet the supply, the delivery deadline, we have narrowed down on the product or supply. When the supply increases and the increase in the SKUs, whether we will see similar type of growth or not, this is something that we need to try to identify. As to whether this is only one time, it is difficult to really ascertain. From the customers' expectations towards 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 that we need to increase going forward. Also, another positive thing, we are quite strong in the 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. Thank you very much. ありがとうございます。 Thank you, Mr. Teruoka. We would like to move on to the next question from Morgan Stanley MUFG. Mr. Yagi, please. Thank you very much for your presentation. My name is Yagi from Morgan Stanley MUFG Securities. I would like to ask two 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 core earnings. I would like to know why that was. After second quarter, considering the seasonality, I think that last year there was improvement, and I was wondering if the same thing will happen with this year with the improvement of the color products.

The color products had increased in supply from April, and because of this, there was a huge chunk of improvement. However, there was a limitation in the capacity, and the color products had improved, but in the past six 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 increases in the cost, so we need to conduct price optimization flexibly. That is one concern. As Ms. Fujita has explained, inventory is being accumulated because there are various types of products because of the difference in the colors, and this adds to the cost. We need to be very careful in managing it. Thank you very much. My second question is related to the U.S. market.

In the first quarter, what you have said in the presentation is that in the first quarter, there was bottoming out. You are saying that you bottomed out because you are seeing some light at the end of the tunnel after conducting the structural reform. 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 what we had thought. 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. JPY 9.7 million is our shipment capacity, but we discontinued the Asia and China markets.

We had reduced the capacity to 8.2 million, and there was an impact from that. 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. The business structural reform in terms of the labor as well as the distribution structure, we have sorted those things out as well. The structural reform impact will be seen from October, January, and April. We would see the portfolio impact as well as the price optimization impact in January. There would be no products coming in from Asia. We believe that we can further improve the profitability.

Teruoka-san asked this earlier. He asked whether we will be breaking even in January or February. Our original plan was April at the latest to break even. 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. Thank you very much for your response. Thank you very much, Yagi-san. についての質問。 Next question is from Mizuho Securities. Nakagawa-san, please. Once the confirmation screen pops up, please press Participate as a panelist. Next. Please unmute yourself to enable audio. Video is optional. Please go ahead. This is Nakagawa from Mizuho Securities. I have one question. For living and also the water-related business in Japan. Based on the material, August and September, the showroom visitors have increased. That's what you have explained.

What is the type of product that you're seeing stronger demand? If you could just give some commentary on that, please. Until July, the visitors were decreasing, but we started to see increases in visitors from August and September. The visitors are increasing both for the new houses as well. No particular product, but timing-wise, in April and September, and I mentioned this earlier, we actually did the energy conservation campaign for windows. We did actually see increases in window-related. Apart from that, not any specific products showing any strong growth. Understood. Thank you. なかがわさま。 Thank you very much, Mr. Nakagawa. 私たちは We have been able to respond to all of the questions that have 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.

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