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2022 ReportLIXIL GROUP ANNUAL REPORT 2019 CONTENTS ABOUT LIXIL GROUP CR STRATEGY AND RESULTS 02 04 LIXIL Group’s Businesses Stages of LIXIL Group’s Evolution LIXIL GROUP’S VALUE CREATION 06 CEO Message 10 12 14 Value Creation Process LIXIL’s Business Landscape Financial & Non-Financial Highlights BUSINESS STRATEGY AND RESULTS 16 CFO Message 18 Review and Analysis of Operating Results and Financial Position 24 Review of Operations 26 28 30 LIXIL Water Technology (LWT) LIXIL Housing Technology (LHT) LIXIL Building Technology (LBT) 32 Distribution & Retail Business (D&R) 33 Housing & Services Business (H&S) 34 Corporate Responsibility Chairperson Message 35 Corporate Responsibility Strategy 36 LIXIL’s Material Issues 38 Global Sanitation & Hygiene 40 Water Conservation & Environmental Sustainability 42 Diversity & Inclusion CORPORATE GOVERNANCE 44 Board of Directors of LIXIL Group Corporation 46 Executive Officers of LIXIL Group Corporation 48 Messages from the Chairperson of the Board and Committee Chairpersons 50 Corporate Governance at the LIXIL Group 52 Activities of the Board of Directors and Board Committees 53 Board of Directors’ Effectiveness Evaluation 54 Corporate Officer Compensation 56 Procedures and Policies Regarding the Nomination of Director Candidates, the Removal of Directors, and the Appointment and the Removal of Executive Officers 57 Internal Control Systems CORPORATE INFORMATION / DATA 60 Consolidated 10-Year Summary 62 Principal Group Companies 64 Basic Policy for Investor Relations 65 Shareholder Information 66 Corporate Data Before Reading this Report In this report, we have sought to share LIXIL’s value creation story with our readers by organizing the information into six sections. Each section includes key pages that explain the main story and supplementary pages that supply background information for the main story pages. Orange pages: these make up the report’s main content and framework Gray pages: these supply background information and supporting details Making Better Homes a Reality for Everyone Every person on the planet dreams of a better home. LIXIL makes that possible with pioneering water and housing products. Born in 2011 through a merger of five of Japan’s most successful building materials and housing companies, we draw on our Japanese heritage to create world-leading technology and innovate to make high-quality products that transform homes. Today, we are a global enterprise with approximately 75,000 employees in more than 150 countries worldwide, having expanded internationally by acquiring some of the most trusted names in our industry, including GROHE and American Standard. But the LIXIL difference is not what we do or where we do it, it is how we do it. We combine meaningful design, an entrepreneurial spirit, a dedication to improving accessibility for all, and responsible business growth to make things that matter – to people, to communities, and to the world we live in. At LIXIL, we are proud that our products touch the lives of more than a billion people every day, but believe we have the potential to still do so much more. Editorial Policy This annual report aims to enhance communication with the Company’s stakeholders, especially investors, by presenting its initiatives to achieve long-term, sustainable growth. In editing, we focused on key content and aimed for an easy-to- understand structure. Information not included in this annual report, such as detailed non-financial information, the Group profile, detailed financial information, and the latest news, is available on our corporate website. Note: Due to the LIXIL Group’s decision to divest Permasteelisa in August 2017, the Company previously classified the operations of Permasteelisa as discontinued operations. However, during the fiscal year ended March 2019 (FYE2019), LIXIL Group was unable to secure the necessary approval to sell Permasteelisa as is. Therefore, Permasteelisa’s profit and loss have been restated as profit and loss from continuing operations. Business results for FYE2017 and FYE2018 shown in LIXIL Group’s Annual Report 2018 have been retroactively restated. 01 ABOUT LIXIL GROUP LIXIL Group’s Businesses (Fiscal Year Ended March 31, 2019) Enhancing how people live through our five businesses H&S 3.1% D&R 9.5% LBT 13.7% Revenue ¥ 1,832.6 billion LWT LHT LB T D& R H& S LIXIL Water Technology LIXIL Housing Technology LIXIL Building Technology Distribution & Retail Business Housing & Services Business LWT makes attractive and purposefully designed products for bathrooms and kitchens through powerful global brands such as INAX, GROHE, and American Standard, as well as product brands such as RICHELLE and SPAGE. LHT’s brands such as TOSTEM, INTERIO, EXSIOR, SUPER WALL, and Kawashima Selkon Textiles produce a range of housing- related products, from window sashes to entrance doors, exterior building materials, interior furnishing materials, and fabrics, helping to make better homes a reality. LBT manufactures products and offers services to support the construction of buildings that are environmentally conscious and which provide better spaces to live, work, study, and play. D&R provides consumers with a unique array of housing and lifestyle-related products, materials, and services through its Super VIVA Home and VIVA Home stores in Japan. H&S offers comprehensive housing and lifestyle support to customers in Japan throughout all stages of their lives. Revenue ¥833.1 billion Core earnings ¥60.2 billion Revenue ¥540.8 billion Core earnings ¥20.7 billion Revenue ¥256.0 billion Core earnings - ¥38.1 billion Revenue ¥176.4 billion Core earnings ¥7.8 billion Revenue ¥57.9 billion Core earnings ¥3.5 billion Principal products and services Principal products and services Principal products and services Principal products and services Principal products and services Plumbing fixtures Sanitaryware, shower toilets, water faucets, washstands, bathtubs, prefabricated bathrooms, showerheads, washstand fixtures, washstand cabinet units, kitchen systems, etc. Metal building materials Housing window sashes, entrance doors, shutters, gates, carports, banisters, high railings, tide barriers, insulated smoke screens, etc. LHT 29.0% LWT 44.7% Tile building materials Tiles for houses and buildings, interior decorative tiles, etc. Wooden interior furnishing materials Window frames, wooden furnishing materials, interior decorative materials, etc. Other building materials Siding, stone materials, roofing materials, etc. Interior fabrics Curtains, etc. Other Solar power systems, etc. Metal building materials Curtain walls, building window sashes, store facades, etc. Home centers Household products, DIY products, building materials, etc. Comprehensive building material stores Building materials, tools, hardware, etc. (Divested in June 2019) Housing solution businesses Development of homebuilding franchise chains, construction on order, ground inspections and improvements, etc. Real estate Land, building, and real estate management services, support for development of real estate franchises, etc. Assisted living retirement home business Assisted living retirement homes, etc. (Divested in September 2019) Financial services business Housing loans, etc. Major brands Major brands Major brands Major brands Major brands 02 03 ABOUT LIXIL GROUP Stages of LIXIL Group’s Evolution Continually strengthening LIXIL in order to create superior products and services that improve the comfort and lifestyles of people around the world FYE2012–2013 FYE2014–2016 FYE2017– Creating LIXIL through the merger of five companies LIXIL was born out of the merger of Tostem, INAX, Shin Nikkei, SUNWAVE, and Toyo Exterior in 2011. Through its integration, the Company generated synergies between its businesses to establish a powerful foundation for sustainable growth, opening the way to delivering a comprehensive lineup of products that cover all aspects of living spaces. The brand name LIXIL is derived from the combination of “LI” from two words that closely represent our business: “LIVING” and “LIFE.” In 2011, LIXIL adopted the corporate governance structure, a “Company with Nominating Committee, etc.”, as outlined in Japanese Corporation Law. Under this governance system, the Company clearly separates the conduct of management from the surveillance of management with the objectives of creating a system where executive officers can make management decisions quickly and decisively while aiming to secure management transparency. Net sales (JGAAP) / Revenue (IFRS) (Years ended March 31) (¥ billion) Establishing the foundation for business expansion and global growth From 2011, LIXIL’s business rapidly globalized through a series of acquisitions and investments, including the integration of some of the most iconic and leading names in our industry, such as GROHE, American Standard, and Permasteelisa. FYE2016 ¥598.6 billion (IFRS) FYE2013 ¥205.1 billion (JGAAP) 32% 14% Overseas revenue ratio reached 32% 1,890.5 1,628.7 1,705.4 Simplifying the balance sheet, improving the organizational structure, and strengthening profitability In becoming one of the most comprehensive companies in the industry, LIXIL developed a top-heavy organization with areas of overlapping authority and a broad business portfolio. To achieve further growth, the Company began delayering its organizational structure to accelerate decision-making and improve efficiency, enabling it to become leaner, simpler, and faster. LIXIL also began to review its portfolio in order to strengthen its balance sheet, focusing on businesses that have synergistic relationships with its core business and high potential profitability, in turn enabling it to prioritize its investments in high growth areas. LIXIL will now continue to build on its competitive advantage through differentiated products, services, and business models, setting the Company on the path to higher profitability and sustainable growth. 1,786.4 1,829.3 1,832.6 Growth in the future As the world’s population and the middle income segment grow, the demand for housing and water technology products and services will continue to expand. LIXIL will harness its strengths to become a truly differentiated and unique housing and water technology company with the world’s most respected and powerful brands. It will become an organization that can adapt and innovate faster, providing differentiated products and services that will enable it to capture revenue growth in the future. 1,436.4 1,291.4 2012 2013 2014 2015 2016 2017 2018 2019 JGAAP IFRS Japan Overseas 05 2,000 1,500 1,000 500 04 LIXIL GROUP’S VALUE CREATION CEO Message Creating Stakeholder Value as One LIXIL 06 Kinya Seto Director, Representative Executive Officer, President and CEO I would like to first sincerely thank you for your support this year. I am humbled by your many voices, which helped determine the outcome of this year’s Annual General Meeting of Shareholders (AGM). I believe this is a rare watershed moment for LIXIL, marking who we really are and what we stand for. Doing the Right Thing On November 1, 2018, I was replaced as CEO. But there were governance-related concerns surrounding the change in leadership, including the undue influence of a founding family member over the Board of Directors and Nomination Committee. The unfortunate reality is that founding families and past leaders can still hold back the growth of some older and larger companies in Japan. I do not believe this is right, though, which is why I chose to seek re-election in the hopes of correcting governance at LIXIL and ensuring the company is working in the best interests of all of its stakeholders. A number of stakeholders held similar concerns. Some of our institutional investors who are not activists became more vocal, asking the company to improve its governance and accountability. Senior managers and employees also spoke up for what they believed in despite the risk of doing so. I would like to express my appreciation for their support. Without it, we would not be able to address this issue today and strengthen governance at LIXIL. Unfortunately, I recognize that the eight-month period leading up to the AGM impacted many of our internal and external stakeholders. I would like to take this time to also apologize to you for the concern and confusion caused. I believe, though, that we will emerge stronger because of this. We live in a world where the expectations of what a company should be are much higher than ever before. The importance of ESG (Environment, Social, and Governance) for stakeholders continues to rise, and good corporate governance is a key component of ensuring the sustainability of a company. I am committed to ensuring that, as a company, doing the right thing becomes part of the foundation that LIXIL stands on. I am eager to now renew our pursuit of the future we promised you not so long ago: a truly differentiated LIXIL that we can all be proud of. Introducing the New Management System The outcome of the AGM is a new Board of Directors that offers a heightened supervisory function, and a new Board of Executive Officers that will enhance the efficiency of business execution. In total, shareholders elected 14 directors. However, 11 directors, including myself, only secured between 50–60% of votes. I believe this reflects shareholders’ demand for greater supervision and stronger governance in the company following recent events. The new Board of Directors has made a strong commitment to work together as one team to achieve this greater supervision and stronger governance. Now consisting of nine outside directors and five internal directors, the new Board offers a broad range of supervisory skillsets. This Board structure will enable LIXIL to strengthen its governance and build on strategic continuity in order to enhance the corporate value of the company. We also welcome a new Board of Executive Officers, which is responsible for business execution and has the authority to decide on matters delegated by the Board of Directors. While in the past it mostly consisted of functional leaders, for the first time, I am pleased to say that we now have representation from the commercial businesses – both domestic and international – on this Board. This includes Bijoy Mohan, CEO of LIXIL International, who oversees LIXIL Water Technology (LWT) and LIXIL Housing Technology’s (LHT) overseas businesses; Satoshi Yoshida, CEO of LHT Japan; Hiroyuki Oonishi, CEO of LWT Japan; and Kazuhiko Ootsubo, who leads sales and management of domestic subsidiaries in Japan. Their presence will ensure that decisions are closely aligned with the business on the ground, enabling us to execute our business strategy more efficiently and in line with our overall Group strategy. Addressing our Medium-Term Plan The management team is now in the process of reviewing LIXIL’s medium-term strategy. In April 2018, we initiated the “Medium-Term Plan (MTP): Toward Sustainable Growth.” Under the MTP, LIXIL will become a truly differentiated maker of pioneering water and housing products with the world’s 07 LIXIL GROUP’S VALUE CREATION CEO Message most respected and powerful brands. It will be an organization that can innovate faster and provide differentiated products and services to become more profitable and financially robust in the medium term. I believe the fundamentals of this strategy still remain on track and we do not expect to change the direction significantly. Following developments over the past year, however, we have to re-evaluate internal and external conditions in order to determine our short- term priorities. Reviewing the Business Portfolio There is a high degree of management complexity that accompanies LIXIL, which was formed through the integration of five companies in Japan and further overseas acquisitions. To improve management efficiency, simplifying the organization and improving the balance sheet are vital to creating a leaner and more operationally efficient company. We have now begun to review specific assets in our business portfolio and their relationship to our core business, as well as their potential profitability. This will enable us to prioritize investment in potentially high growth areas and move toward the potential divestment of non-core or unprofitable businesses. Cleaning up the balance sheet is essential to improving management resources and the management efficiency of the company. Addressing the Window Sash Business in Japan In the short term, we also have to address the high cost and volatility of our window sash business in Japan in order to become more competitive and re-invest management resources in high growth areas. Due to high fixed costs, LIXIL’s window sash business is vulnerable to external factors, including the number of new housing starts, rapid changes to the business environment, and fluctuations in raw material costs. We have to accelerate initiatives to create a more resilient business, such as improving the production and space efficiency of factories, and accelerating the development and launch cycle of differentiated products. Specifically, this includes reducing the number of stock keeping units (SKUs), standardizing parts, and unifying our core product platforms, which will then enable the generalization of production lines. In turn, this will enable us to respond to demand more flexibly and adapt to changes faster. While progress has been made in this area in the last year, we need to accelerate initiatives to cope with the unique challenges of the market, particularly in production. It is important that we transform this business into one that employees are confident in and proud of. Becoming the World’s No. 1 Bathroom Solutions Provider Yet, while we have to address structural issues in Japan such as our window sash business, Japan offers LIXIL a great opportunity for global growth. Amid Japan’s shrinking and aging population, high-quality differentiated products and services are key. This makes Japan a powerful contributor to our international business, too, as an innovator of differentiated products and technologies that can be exported to the world. Globally, LIXIL is now in a unique place. The world’s population is growing, especially the middle-income segment. While doing business overseas increases our exposure to greater political, economic, and social risk, it is where we will find future growth. There is growing demand for water technology products – from the most luxurious to the most basic. Today, through our powerful portfolio of brands, which includes names such as GROHE, American Standard, and INAX, we are meeting the different lifestyle preferences and tastes of our consumers. As the next step toward becoming the world’s leading bathroom solutions provider, we recently appointed Bijoy Mohan as the CEO of LIXIL International. LIXIL International is not a new organization structure, but it will serve as a position from where Bijoy can oversee LIXIL’s LWT and LHT overseas businesses. LIXIL will continue to manage its businesses by region, chiefly through the regions of Asia Pacific, EMENA, the Americas, and South Africa. LIXIL International, however, will enable us to deploy and focus resources at both the Group and regional level in order to execute our strategies. It will also enable us to accelerate synergies in R&D, marketing, and innovation to drive a more focused approach to enhancing growth. A Company We Are Proud of LIXIL CORE (Corporate Philosophy) To achieve all of this, we must do so as One LIXIL. On the day after the AGM, I held two town hall meetings in Tokyo at 8:30 am and 4:00 pm, which were live-streamed across our internal social media platform so everyone could participate. During these sessions I was asked, “Who do you think a company really belongs to?” A company is owned by its shareholders. But it is the employees who create value for those shareholders, who provide for customers, and who carry out the strategy that management sets out. They are responsible for improving the company, and they are responsible for contributing to the societies we work in. At LIXIL, there are approximately 75,000 employees, and I believe it is important that they are proud of who we are. Delivering corporate value is a high priority, but we will do so as a company that inspires pride. We will deliver on performance, but we will be employee- oriented. I believe this is the foundation to achieving One LIXIL – and the path to achieving sustainable growth. The Group’s superior products and services contribute to improving people’s comfort and lifestyles. LIXIL Behaviors The three LIXIL Behaviors provide a unified way of working for all LIXIL employees, helping to make LIXIL a purpose-driven, entrepreneurial company for sustainable growth. 08 09 LIXIL GROUP’S VALUE CREATION Value Creation Process Underpinned by strong corporate governance, LIXIL’s business model will drive it toward long-term sustainable growth and value creation for all of its stakeholders LIXIL’s Capital INPUT Employees Approximately 75,000 people working around the world Brands Portfolio of 17 industry-leading product brands and 6 retail and housing services brands Intellectual Property ¥28.4 billion invested in R&D Financial Capital ¥533.7 billion in capital and ¥726.0 billion in interest-bearing debt Natural Capital 22.2 million GJ of energy used and 16.7 million m3 of water intake Manufacturing Assets Capital investment of ¥67.6 billion Social Engagement Over ¥1.1 billion in social investments and community contributions How LIXIL Creates Value The Value LIXIL Creates LIXIL CORE (Corporate Philosophy) The Group's superior products and services contribute to improving people's comfort and lifestyles. Medium-Term Plan – Establish a purpose-driven, entrepreneurial company for sustainable growth – Develop attractive and differentiated products – Achieve competitive costing – Strategic marketing to drive growth LIXIL Behaviors – Do the Right Thing – Work with Respect – Experiment and Learn Corporate Responsibility (CR) Strategy Global Sanitation & Hygiene Promote and enable access to safe and hygienic sanitation Water Conservation & Environmental Sustainability Conserve water, energy, and other natural resources utilized by LIXIL products and services Diversity & Inclusion Embrace the diversity of people in society and within LIXIL OUTPUT Employees 55% “strongly agree” or “agree” that they are proud to be part of LIXIL; the top two responses out of six in an employee survey*1 Brands LIXIL products are used by a billion people every day Intellectual Property Approximately 1,100 utility and design patent applications generated and filed worldwide every year Financial Capital Core earnings ratio of 0.7% and ROE of -9.1% in FYE2019 Natural Capital Reduced carbon intensity per economic output*2 by 4.5% (Carbon intensity: 1,488 kg-CO2 / ¥1 million) Manufacturing Assets 103 factories globally Social Engagement Over 115 projects related to the three strategic pillars of the Company’s CR strategy *1 Result from 2017. This survey is conducted every two years. *2 Carbon intensity per economic output = CO2 emissions (kg-CO2) / total economic output (¥1 million) 10 11 LIXIL GROUP’S VALUE CREATION LIXIL’s Business Landscape The World that Shapes Us 2 Japan’s Silvering Population Japan’s population of about 127 million people is expected to decrease by 12% by 2040*4. By then, 35% of the population will be over 65 years old*4, resulting in a smaller workforce and potentially heavier tax burden. But Japan’s demographic transition also ushers in new, lucrative opportunities. Japan is a testament to how far living standards have improved through critical technologies. In this market, companies that offer differentiated and consumer-centric products and services will emerge as its leaders. Opportunity Lead transition from new housing market to home renovation, a potential ¥7.4 trillion market by 2030*5 Develop advanced technologies that can one day be exported to mature markets Risk New housing starts are forecast to decline by one-third by 2030*5 Manpower is forecast to shrink by as much as 13 million people by 2040*6 *4 Ministry of Internal Affairs and Communications, September 2018 *5 Nomura Research Institute, June 2019 *6 Ministry of Health, Labour and Welfare, January 2019 4 The Digital Lifestyle In a world being programed by Millennials and Gen-Zers, digitization envelops us. From IoT solutions through to AI, big data analysis, and blockchain, new technologies are constantly transforming how we live, work, learn, and play. Opportunities appear limitless and, day by day, more and more people are coming online. In 2018 alone, over 365 million new users connected to the internet, bringing the total to approximately 4.4 billion people*8. This is a world where change is constant, and for companies, where adaptability determines survivability. 6 A Company’s Social Purpose A company’s social purpose is how it makes a positive difference to the world around it – and it matters to all kinds of stakeholders*10. For increasingly ESG-focused investors, it has become an important indicator of a company’s sustainability. For the increasingly Millennial workforce, it is a source of pride and a reason to believe in a company. And for the communities it benefits, it is life-changing. This is the power of the shared value created by a company’s social purpose, which is truly a competitive differentiator for companies that live by it. Opportunity Opportunity Gain new consumer insight and drive discovery and development Establish high levels of stakeholder engagement, loyalty, and trust of consumer-centric products and business models by authentically contributing to social issues Risk Risk Non-traditional and disruptive competitors increasingly entering Lack of social purpose could impair business by weakening and changing the market support of stakeholders, including employees *8 We Are Social and Hootsuite, January 2019 *10 EY Beacon Institute, April 2018 1 The Rising Global Middle Class About 3.8 billion people*1 make up the growing middle class today – and they are driving global economic demand. But where the middle class was once the hallmark of mature markets such as the US, Europe, and Japan, middle-class numbers are now on the rise in developing markets. By 2040, 40% of global consumption will be driven by Asia*2, especially China and India*3. It is here, among the new entrants into the middle class, that spending growth is set to take off. Opportunity 3 The New Consumer As the middle class grows, the lifestyle preferences and tastes of consumers are broadening, made even more diverse by the distinctive cultural preferences of each market. But the “hollowing out” of the middle class in traditional mature markets is influencing spending habits, too, especially as the net worth of younger generations there decreases*7. This, coupled with the rise of peer-to- peer networks, means the consumer now has the motivation and the choice to be more selective and educated about products. 5 The Effects of Climate Change From extreme weather events to rising temperatures and changing rainfall patterns, the risk of climate change to economies and individuals alike is real. The Paris Agreement aims to keep the increase in temperature to below 2°C above pre-industrial levels, but concerted efforts to rein it in are looking increasingly unconcerted. For the world’s 215 biggest companies alone, climate change risks could cost as much as US$1 trillion in five years*9. Addressing climate change is key to a company’s sustainability and competitive advantage. 7 The Work Environment Technology has enabled employees to connect anytime and anywhere, adding new dimensions of flexibility and diversity to work. Working spaces are being redesigned, too, in bids to attract talent and unlock new productivity. But the employment landscape is shifting altogether, with workers around the world becoming increasingly independent and companies looking for a more agile, contingent workforce*11. This is the gig economy and it is growing. A human resources system that can keep up with changing work- style trends will be key to securing the best talent. Capture growing global demand for new and differentiated water Opportunity Opportunity Opportunity and housing products Risk Increased exposure to rising geopolitical, economic, and social tensions around the world *1 Brookings Institution and World Data Lab, September 2018 *2 McKinsey, July 2019 *3 World Data Lab, November 2018 Differentiate through design, technology, quality, and brands Increase demand for products with energy- and Hire a greater caliber of engaged, diverse, and productive people Risk Mass production of limited items, which is better suited to fast-growing markets, increases risk of being caught in the commodity trap *7 Deloitte, May 2019 water-saving functions Risk Heightened risk of regulation affecting supply chain and reputational risk Higher operational risk in regions of energy and water stress *9 CDP, June 2019 Risk Hiring and retaining talented employees may become difficult *11 BCG, January 2019 12 13 LIXIL GROUP’S VALUE CREATION Financial & Non-Financial Highlights LIXIL Group Corporation and Consolidated Subsidiaries (Years ended March 31) Revenue Overseas Japan (¥ billion) 2,000 1,500 1,000 500 0 Core earnings / Core earnings ratio Net interest-bearing debt / Net debt-to-equity ratio Core earnings (left) Core earnings ratio (right) Net interest-bearing debt (left) Net debt-to-equity ratio (right) Equity attributable to owners of the parent / Ratio of equity attributable to owners of the parent Equity attributable to owners of the parent (left) Ratio of equity attributable to owners of the parent (right) 1,832.6 557.0 1,275.6 (¥ billion) 100 80 60 40 20 0 (%) 5.0 4.0 3.0 2.0 1.0 0.0 0.7 12.8 (¥ billion) 1,000 800 600 400 200 0 109.5 584.5 (%) 150.0 120.0 90.0 60.0 30.0 0.0 (¥ billion) 800 600 400 200 0 533.7 25.9 (%) 40.0 30.0 20.0 10.0 0.0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 SG&A expenses / SG&A ratio SG&A expenses (left) SG&A ratio (right) Earnings (loss) per share (EPS) / Dividends per share / Dividend payout ratio EPS (left) Dividends per share (left) Payout ratio (right) Relative reduction in CO2 emissions due to Group products and services (Compared to FYE2016) (¥ billion) 600 500 400 300 200 100 0 519.8 28.4 (%) 60.0 50.0 40.0 30.0 20.0 10.0 0.0 56.7 (¥) 200 150 100 50 0 -50 -100 -150 (%) 80.0 60.0 40.0 20.0 0.0 -20.0 -40.0 -60.0 34.4 70 -180 (Times) 1.4 1.2 1.0 0.8 0.6 1.21 CO2 emissions from Group activities (Scope 1 and 2) Scope 2 Scope 1 (Thousand t-CO2) 1,500 1,200 900 600 300 0 1,185 616 569 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2016 2017 2018 2019 2017 2018 2019 * CO2 emissions reduction: the reduction possible when customers use LIXIL’s environmentally friendly products and services (in comparison to the reduction due to previous versions of those products) Profit (loss) for the year attributable to owners of the parent / ROE Total assets / ROA Profit (loss) for the year attributable to owners of the parent (left) ROE (right) Total assets (left) ROA (right) Ratio of women among recent graduate recruits (university undergraduate and graduate students) (LIXIL Corporation, Japan) Cumulative number of participants in the Talent Acceleration Program (TAP) for next-generation leaders (LIXIL Corporation, Japan) (%) 10.0 5.0 0.0 -5.0 -9.1 -52.2 -10.0 (¥ billion) 2,400 1,200 0 2,059.5 -2.5 (%) 4.0 2.0 0.0 -2.0 -4.0 33.2 (%) 40.0 30.0 20.0 10.0 0.0 1,195 (People) 1,500 1,200 900 600 300 0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2017 2018 2019 2017 2018 2019 (¥ billion) 60 30 0 –30 –60 14 15 BUSINESS STRATEGY AND RESULTS CFO Message Sachio Matsumoto Representative Executive Officer and Executive Vice President, Finance, Treasury, M&A, and Legal, Chief Financial Officer and Chief Legal Officer Strengthening Cash Flow and Profitability to Improve Corporate Value and Ensure Stable Shareholder Returns Overview of FYE2019 Consolidated revenue for the fiscal year ended March 31, 2019 (FYE2019), increased by 0.2% year on year. This increase can be attributed to factors such as the stabilization of market and sales conditions in Japan from October 2018. Core earnings, however, were down by 83.2% year on year. There are several reasons for this significant decline. In Japan, we encountered operational challenges after making organizational changes and implementing a new trading framework at the same time. Moreover, Japan experienced a series of natural disasters, which reduced our profitability in the first half of the fiscal year. A large, one-off loss was also incurred in relation to the operations of Italian subsidiary Permasteelisa. Specific to Permasteelisa, in August 2017, LIXIL decided to sell all of the company’s shares to a Chinese company. However, the sale did not go through after a key US regulatory authority announced it would not approve the sale in October 2018. At the time, there were concerns that Permasteelisa’s business, centered on its North American operations, would deteriorate rapidly due to rising costs related to human resources and raw materials. Therefore, an immediate and thorough examination of all of its ongoing projects was carried out. Subsequently, we recorded a one-off ¥41.5 billion loss related to Permasteelisa in FYE2019 to account for higher construction costs required to complete projects, bad debt, and similar items. Profit for the year attributable to owners of the parent resulted in a loss of ¥52.2 billion, down ¥106.8 billion year on year. Various reasons contributed to this decline. Profit before tax decreased by ¥83.1 billion, which was due to the absence of a ¥23.6 billion gain on sales of affiliates and investment property recorded in the previous year, a ¥24.8 billion impairment loss attributed to reputational and intangible asset losses related to Permasteelisa’s situation, and the decrease in core earnings. On top of this, we recorded an increase in income tax expenses owing to the reduction of deferred tax assets recorded at the time of the decision to sell Permasteelisa. Focus on Recovering Profitability in FYE2020 I regret LIXIL was unable to meet the expectations of our shareholders and investors, ending FYE2019 with significantly lower core earnings and a net loss. With the exception of Permasteelisa, however, business rebounded in the second half of FYE2019, especially in Japan after the operational challenges we encountered and the effects of natural disasters stabilized in the first half. This rebound was the result of various initiatives progressing according to plan, such as meeting the demands of both new housing and home renovation projects. Meanwhile, in our overseas businesses, our endeavor to provide a full lineup of bathroom and kitchen products is progressing smoothly, while other than Permasteelisa, we made progress in reviewing our cost structures to improve profitability. As a result of these factors, combined with our solid business foundation, I believe our future looks bright. At the same time, we have already identified the reasons for the losses at Permasteelisa – the main cause of our large drop in profit in FYE2019 – and are making progress in our recovery plan. Thus, while aiming to return Permasteelisa to profitability, we will continue advancing our core measures, targeting medium- and long-term sustainable growth that fully utilizes our Group potential. Preventative Measures Against Inappropriate Actions by Subsidiaries In FYE2019, inappropriate actions at four subsidiaries – including the changing of project completion dates to prematurely account for revenue – were reported via our concern-raising system. Not only were there internal compliance issues at one of these companies, but its third- quarter consolidated results were also delayed by one month because of doubts over accuracy, which caused considerable concern among shareholders and investors. In response to these issues, after much deliberation among our executive officers and internal audit division, we are taking concrete steps to thoroughly strengthen compliance. Specifically, we reviewed the trustworthiness of subsidiary executives, reflected compliance items in the selection and assessment processes of subsidiary executives, and set up an education program for subsidiary CEOs. In addition, various highly effective measures are being implemented to ensure even stronger compliance and to prevent such incidents from occurring again. These include structural and communications measures, such as setting up a meeting platform for subsidiary CEOs, establishing communication channels between subsidiary CEOs and Group senior management, and strengthening the effectiveness of compliance committees. They also include financial measures such as reviewing accounting processes, and auditing measures such as reviewing auditing systems and improving auditing practices. Strengthening the Balance Sheet to Support Sustainable Growth A strong balance sheet is vital for supporting continued investments that sustain medium- and long-term growth, improve corporate value, and provide reliable returns to shareholders. For these reasons, it goes without saying that we need to improve our financial stability and capital efficiency. I believe these are the most important challenges we face. LIXIL’s equity ratio (ratio of equity attributable to owners of the parent) in FYE2019 was 25.9% as a result of large losses and the sale of Permasteelisa not being approved. This was 3.4 percentage points worse than the previous fiscal year and 4.1 percentage points below 30%, which is our indicator of financial soundness. Moreover, our net debt to EBITDA ratio worsened by 3.3 times year on year. It is under these circumstances that we, the new management team, are faced with the urgent tasks of continuing to focus our business portfolio from a new perspective, re-evaluating the balance sheet while increasing cash flow to ensure funds for investments in growth areas, and clarifying priorities for investment. Thus, in FYE2019, in addition to continuing efforts to improve our cash conversion cycle (CCC), which began in FYE2014, we have established and started implementing a set of guidelines across the group. With a focus on capital costs, this will enable each department to make investments efficiently. We are now reflecting this in our businesses through various initiatives. For example, this includes using return on invested capital (ROIC) as an internal management indicator to assess the degree of improvement in investment efficiency; entrenching these efforts by regularly holding meetings and discussions between the various departments; and striving to improve profitability by trying to increase the efficiency of investments and returns. Results of FYE2018 and FYE2019 (IFRS) Revenue Excluding Permasteelisa Permasteelisa Core earnings* Excluding Permasteelisa Permasteelisa Profit (loss) for the year attributable to owners of the parent Excluding Permasteelisa Permasteelisa FYE2018 results 1,829.3 1,664.8 164.5 76.0 75.3 0.7 54.6 66.4 -11.8 Expected 1,845.0 1,679.5 165.5 45.0 54.0 -9.0 1.5 25.0 -23.5 FYE2019 results Actual 1,832.6 1,689.4 143.2 12.8 54.3 -41.5 -52.2 25.3 -77.5 YoY 0.2% 1.5% -13.0% -83.2% -27.8% — — -61.9% — (¥ billion) Vs. expected -0.7% 0.6% -13.5% -71.6% 0.6% — — 1.2% — *Core earnings is revenue minus costs, such as of production, sales, management, and administration. 16 17 BUSINESS STRATEGY AND RESULTS Review and Analysis of Operating Results and Financial Position Status of Operating Results Revenue in FYE2019 LIXIL Group generated ¥1,832.6 billion in revenue in FYE2019, up by 0.2% year on year. In the Japan market, revenue increased for all domestic businesses except LIXIL Water Technology (LWT), which maintained the same level of revenue as the previous fiscal year (FYE2018). LIXIL Housing Technology (LHT) in particular recorded strong sales during the second half of the fiscal year, leading the year-on-year growth in revenue in the Japan market. In overseas markets, revenue for LWT increased in the Asia Pacific region, especially the China market. The Europe, Middle East and Africa (EMEA) region also recorded steady sales. On the other hand, the Americas region maintained the same level of revenue as in FYE2018, while Permasteelisa S.p.A. (Permasteelisa) continued to proceed with selective order intake as part of its recovery strategy. As a result, total revenue from overseas markets decreased year on year. FYE2019 revenue by segment for the domestic and overseas businesses First half FYE2019 626.1 208.0 251.5 52.6 87.8 26.2 277.2 194.0 5.6 77.7 -15.1 888.2 Increase / decrease -2.3 0.2 -6.5 1.4 0.3 2.3 0.9 5.5 -1.7 -2.9 -0.8 -2.2 FYE2018 660.5 227.8 262.9 55.5 86.0 28.4 295.1 203.8 7.1 84.2 -16.7 938.9 Second half FYE2019 686.3 227.3 278.6 60.2 88.5 31.7 274.6 203.9 5.2 65.5 -16.5 944.4 Increase / decrease 25.8 -0.5 15.7 4.8 2.5 3.3 -20.5 0 -1.9 -18.6 0.2 5.5 FYE2018 1,289.0 435.6 520.8 106.7 173.5 52.3 571.4 392.3 14.4 164.8 -31.1 1,829.3 Full year FYE2019 1,312.4 435.3 530.0 112.8 176.4 57.9 551.8 397.8 10.8 143.2 -31.6 1,832.6 FYE2018 628.4 207.8 257.9 51.2 87.5 23.9 276.3 188.5 7.3 80.6 -14.4 890.4 Japan LWT LHT LBT D&R* H&S* Overseas LWT LHT LBT Adjustment Total (¥ billion) Increase / decrease 23.5 -0.3 9.2 6.1 2.9 5.6 -19.6 5.5 -3.6 -21.6 -0.6 3.3 *D&R: Distribution & Retail Business, H&S: Housing & Services Business Core Earnings in FYE2019 LIXIL Group generated core earnings of ¥12.8 billion in FYE2019, down 83.2% year on year. In the Japan market, core earnings decreased in the first half of the fiscal year. This was primarily due to the cost increase associated with the introduction of the new trading framework and due to the impact of natural disasters. However, in the second half of the fiscal year, core earnings were positively affected by a recovery in demand and by controlling selling, general and administrative (SG&A) expenses. As a result, core earnings for the three domestic businesses, namely LWT, LHT, and LIXIL Building Technology (LBT), improved significantly compared with the first half of the fiscal year. With regard to the overseas businesses, however, LIXIL Group recorded a significant drop in core earnings mainly due to the provision for losses related to construction costs at Permasteelisa, in addition to an increase in personnel and material costs. FYE2019 core earnings by segment for domestic and overseas businesses First half FYE2019 22.3 10.4 5.1 0.8 4.7 1.4 10.2 15.2 -0.5 -4.5 -18.8 13.8 Increase / decrease -19.3 -6.5 -11.6 -1.7 0.1 0.3 -8.0 -3.0 -0.8 -4.2 0.4 -26.9 FYE2018 34.3 16.7 11.6 2.3 2.3 1.5 21.2 22.0 -1.1 0.2 -20.2 35.3 Second half FYE2019 42.9 18.8 16.2 3.0 3.0 2.1 -21.4 15.9 -0.1 -37.2 -22.5 -1.0 Increase / decrease 8.6 2.1 4.6 0.6 0.7 0.6 -42.6 -6.2 1.0 -37.4 -2.3 -36.3 FYE2018 76.0 33.6 28.3 4.7 6.9 2.5 39.4 40.3 -0.8 -0.1 -39.3 76.0 Full year FYE2019 65.2 29.2 21.3 3.6 7.8 3.5 -11.2 31.1 -0.6 -41.7 -41.2 12.8 FYE2018 41.7 16.9 16.7 2.5 4.6 1.1 18.2 18.2 0.3 -0.3 -19.2 40.7 Japan LWT LHT LBT D&R* H&S* Overseas LWT LHT LBT Adjustment Total (¥ billion) Increase / decrease -10.7 -4.4 -7.0 -1.1 0.8 0.9 -50.6 -9.2 0.2 -41.6 -1.9 -63.2 *D&R: Distribution & Retail Business, H&S: Housing & Services Business 18 incurred in FYE2020, primarily from initiatives to recover the profitability of Permasteelisa. Within this context, the Group projects increases both in revenue and in profit in FYE2020. The foreign exchange rate assumptions used to forecast FYE2020 . However, for the forecast on a results are ¥115/US$ and ¥133/ consolidated basis, the fluctuation of the euro between the planning and announcement of our forecast (which was approximately ¥123/ on May 13, 2019) was taken into consideration as a risk factor. As a result, the impact on the profit and loss incurred from the difference between the two rates, namely ¥133/ “Consolidation adjustments and other.” , was added to and ¥123/ Profit (Loss) Attributable to Owners of the Parent in FYE2019 LIXIL Group recorded a net loss of ¥52.2 billion, down ¥106.8 billion year on year. Profit before tax dropped by ¥83.1 billion mainly due to the absence of a ¥23.6 billion gain on sales of affiliates and investment property recorded in FYE2018, a ¥24.8 billion impairment loss on goodwill and intangible assets related to Permasteelisa, in addition to the decrease in core earnings. Moreover, a ¥13.5 billion reversal of deferred tax assets recorded on the decision to divest Permasteelisa resulted in an increase in income tax expenses. Forecast of Operating Results for FYE2020 During the fiscal year ending March 31, 2020 (FYE2020), uncertainty in the business environment surrounding LIXIL Group is forecast to continue. While the Japanese economy is expected to continue its slow recovery trend, in addition to the anticipated long-term downward trend in the number of new housing starts, the consumption tax increase planned in October 2019 is a potential concern as it could negatively affect demand. Meanwhile, geopolitical developments overseas, such as the US-China trade conflict and the Brexit issue, are expected to cause instability in the global market. LIXIL Group also anticipates structural reform expenses to be FYE2020 forecast Revenue Core earnings Operating profit Profit (loss) before tax Income tax expenses Profit (loss) attributable to non-controlling interests Profit (loss) attributable to owners of the parent EBITDA* Basic earnings per share (EPS) (yen) FYE2019 1,832.6 12.8 -15.0 -18.0 -31.3 -2.9 -52.2 81.3 -179.98 Full year (¥ billion) FYE2020 (forecast) 1,850.0 47.0 38.0 44.0 -26.4 -2.6 15.0 150.4 51.71 Increase / decrease 17.4 34.2 53.0 62.0 4.9 0.3 67.2 69.1 231.69 YoY 0.9% 267.2% — — — — — 85.0% — * The impact of approximately ¥34.0 billion from the adoption of revised IFRS 16 “Leases” effective from April 2019 is included. Revenue / Core earnings (¥ billion) EBITDA (¥ billion) 2,500 2,000 1,500 1,000 500 0 Revenue Core earnings Revenue Core Earnings 100 200 88.3 1,786.4 76.0 1,832.6 1,850.0 1,829.3 1,829.3 47.0 12.8 80 60 40 20 0 150 149.0 140.7 140.7 150.4 81.3 100 50 0 2017/3 2018/3 2019/3 2020/3 (forecast) 2017/3 2018/3 2019/3 2020/3 (forecast) 19 BUSINESS STRATEGY AND RESULTS Review and Analysis of Operating Results and Financial Position Financial Position as of March 31, 2019 Cash Flows in FYE2019 In accordance with the decision in FYE2018 to divest Permasteelisa, the assets and liabilities related to Permasteelisa and its subsidiaries were recorded as assets held for sale and liabilities directly associated with the assets held for sale, respectively. During FYE2019, however, it became clear that the shares of Permasteelisa could not be transferred. Therefore, this classification was discontinued, and Permasteelisa and its subsidiaries’ assets and liabilities were reclassified to their original accounts in the FYE2019 consolidated statement of financial position. The figures for year-on-year fluctuation of assets and liabilities shown below are actual fluctuations that exclude the impact of the following reclassifications: the assets and liabilities of Permasteelisa to their original accounts in September 2018, and those of one consolidated subsidiary held for sale during FYE2019. Consolidated financial position (¥ billion) ［A］ ［B］ Increase / decrease March 2018 March 2019 Cash and cash equivalents Trade and other receivables Inventories Assets held for sale Others Total assets Trade and other payables Interest-bearing debt Liabilities directly associated with the assets held for sale Others Total liabilities Treasury shares Others Total equity Equity ratio (%) Net assets per share (yen) Number of shares (in thousands) Net interest-bearing debt 138.8 343.3 217.9 180.2 1,227.0 2,107.1 339.0 687.9 127.5 303.2 1,457.6 -49.0 698.6 649.6 29.3% 2,128.77 289,790 549.2 141.4 401.7 234.6 11.4 1,270.4 2,059.5 392.4 726.0 5.0 369.0 1,492.4 -48.9 616.1 567.2 25.9% 1,839.59 290,095 584.5 Assets held for sale and liabilities directly associated with the assets held for sale Discontinued operations 5.1 59.2 5.0 -181.0 111.7 — 38.3 23.3 -137.8 76.2 — — — — Others -1.7 -4.1 -1.1 11.3 -4.5 — -2.0 0 5.0 -2.9 — — — — Others (actual increase / decrease) -0.8 3.2 12.8 0.9 -63.7 [B]-[A] Total increase / decrease 2.7 58.4 16.7 -168.8 43.5 -47.6 17.1 14.8 10.4 -7.5 34.8 0.1 -82.5 -82.4 -47.6 53.4 38.0 -122.4 65.8 34.8 0.1 -82.5 -82.4 -3.4pp -289.18 305 35.4 Assets Total assets as of March 31, 2019, stood at ¥2,059.5 billion, down by ¥47.6 billion year on year, as a result of decreases in current assets of ¥21.0 billion and non-current assets of ¥26.6 billion. Major increasing factors included a ¥12.8 billion year-on-year increase in inventories. Major decreasing factors included the application of impairment accounting to goodwill and other intangible assets related to Permasteelisa (a ¥24.8 billion impact on the consolidated statement of financial position), and the effect of foreign exchange translation. Liabilities Total liabilities as of March 31, 2019, amounted to ¥1,492.4 billion, up by ¥34.8 billion year on year, reflecting a ¥114.5 billion increase in current liabilities and a ¥79.7 billion decrease in non-current liabilities. Major increasing factors included year-on-year increases of ¥17.1 billion and ¥14.8 billion in trade and other payables and interest-bearing debt, respectively. Equity Total equity as of March 31, 2019, stood at ¥567.2 billion (including ¥533.7 billion of equity attributable to owners of the parent), down by ¥83.2 billion year on year. Major decreasing factors included lower retained earnings due to a ¥52.2 billion loss for the year attributable to owners of the parent, ¥20.3 billion in dividends paid, and a ¥11.9 billion other comprehensive loss posted mainly due to the remeasurements of defined benefit pension plans and the fair value gain and loss on financial assets. The ratio of equity attributable to owners of the parent (equity ratio) was 25.9%, and the equity per share attributable to owners of the parent (net assets per share, BPS) was ¥1,839.59. Cash and cash equivalents as of March 31, 2019, amounted to ¥141.4 billion, up by ¥2.7 billion year on year, including the effects of exchange rate changes. Cash Flows from Operating Activities Net cash provided by operating activities for FYE2019 amounted to ¥69.4 billion, down by ¥47.0 billion year on year. This decrease was attributable mainly to the fluctuations of working capital, including trade and other receivables, in addition to a significant decline in profit before tax. Cash Flows from Investing Activities Net cash used for investing activities was ¥72.3 billion, a decrease of ¥19.7 billion year on year. This decrease was largely due to a decrease in proceeds from sale of subsidiaries and disposal of investment properties of ¥15.6 billion. Cash Flows from Financing Activities Net cash generated by financing activities was ¥1.6 billion, up by ¥45.4 billion year on year. While dividends paid (including those paid to non-controlling interests) increased by ¥3.9 billion, the proceeds from interest-bearing debt surpassed its repayment by ¥27.5 billion. The net proceeds from interest-bearing debt was recorded as a result of financing by short- and long-term interest- bearing debt to cover the decrease in operating cash flows during FYE2019. Cash flow status and cash balance FYE2018 FYE2019 Profit before tax from continuing operations Loss before tax from discontinued operations Profit before tax Depreciation and amortization Income taxes paid Working capital Loss recognized on the measurement of the disposal group held for sale to fair value / Profit recognized on the remeasurement Others Net cash flows from operating activities Net cash flows from investing activities (of which purchase of property, plant and equipment and intangible assets) Free cash flows Net cash flows from financing activities Cash and cash equivalents (balance at the fiscal year-end) 90.0 -24.9 65.1 64.7 -31.9 -0.6 21.9 -2.8 116.4 -52.6 -70.0 63.8 -43.8 … 138.8 -18.0 — -18.0 68.5 -29.3 -6.1 -2.0 56.4 69.4 -72.3 -67.6 -3.0 1.6 … 141.4 (¥ billion) Increase / decrease -108.0 24.9 *1 -83.1 3.8 2.5 -5.5 -23.9 *1 59.2 *2 -47.0 -19.7 2.3 -66.7 45.4 … 2.7 *1 “Loss before tax from discontinued operations” is offset by “Loss recognized on the measurement of the disposal group held for sale to fair value / Profit recognized on the remeasurement.” *2 “Others” in FYE2019 operating cash flows mainly consists of an impairment loss of ¥30.2 billion and the impact of foreign exchange translation. 20 21 Capital expenditures Depreciation R&D expenses LWT BUSINESS STRATEGY AND RESULTS Review and Analysis of Operating Results and Financial Position Forecast for FYE2020 Capital expenditures, depreciation, and R&D expenses (¥ billion) For FYE2020, the Group projects capital expenditure of ¥85.0 billion, up by 25.7% year on year, and depreciation of ¥103.1 billion, up by 50.5% year on year. The increase in capital expenditure is mainly due to ¥11.5 billion in construction costs for a new headquarters building. The increase in depreciation is attributable to a revision in accounting standards for leases, which had an impact of ¥33.0 billion, and a ¥2.0 billion increase in the depreciation of IT systems. As for R&D expenses, the Group projects ¥29.0 billion in FYE2020, maintaining the average yearly level of approximately 1.6% of revenue. 120 90 60 30 0 FYE2018 FYE2019 FYE2020 (forecast) New HQ building +¥11.5 billion 85.0 103.1 Impact of accounting standard revision +¥33.0 billion 70.0 67.6 68.5 64.7 27.9 28.4 29.0 Impact of the Adoption of Revised Accounting Standard for Leases IFRS 16 “Leases” has been revised and was adopted in April 2019. Under the revised standard, lease contracts that had been accounted for as operating leases should be recorded as assets and liabilities, and the asset portions should be depreciated. In regards to the liability portion, each lease payment should be divided into the payments of the principle of liability and its interest. Major financial indicators of FYE2020, projected as of March 31, 2019, are as shown in the table on the right although actual results could be different due to changes in assumptions and conditions. Total assets ¥121.0 billion increase Interest-bearing debt ¥121.5 billion increase EBITDA Core earnings SG&A expenses SG&A expenses Profit before tax Finance costs ¥34.0 billion increase ¥1.0 billion increase Rent expenses: ¥34.0 billion decrease Depreciation: ¥33.0 billion increase ¥0.5 billion decrease Interest expenses: ¥1.5 billion increase Cash flows from operating activities Cash flows from financing activities ¥32.5 billion increase ¥32.5 billion decrease Note: Figures are estimated approximate amount as of march 31, 2019. Forecast for FYE2020 by Segment LIXIL Water Technology (LWT) LWT is expected to post ¥860.0 billion in revenue, up by 3% year on year, and ¥64.8 billion in core earnings, up by 8% year on year, in FYE2020. Regarding the Japan market, the effect of the consumption tax increase planned for October 2019 is anticipated in the form of preemptive demand in the first half of FYE2020 and a reactionary fall in demand in the second half. With forecasts of the number of new housing starts and demand for renovation taken into account, LWT projects to post the same level of full-year revenue in FYE2020 as FYE2019. Overseas, the global economy continues to experience destabilizing factors such as the US-China trade conflict. Nevertheless, LWT projects increases in both revenue and core earnings in overseas markets, supported by the effects of price revisions, sales promotion of synergistic products, and continuous improvements in cost of sales and SG&A expenses. LIXIL Housing Technology (LHT) LHT is expected to post ¥535.0 billion in revenue, down by 1% year 22 on year, and ¥25.9 billion in core earnings, up by 25% year on year, in FYE2020. Regarding the Japan market, as with LWT, the effect of the consumption tax increase planned for October 2019 is anticipated in the form of preemptive demand in the first half of FYE2020 and a reactionary fall in demand in the second half. In total, LHT expects to post the same level of full-year revenue in FYE2020 as FYE2019. LHT also anticipates an improvement in core earnings buoyed by product price revisions in and after the second half of FYE2019, as well as by the price decline of aluminum, a major raw material of LHT’s products. LIXIL Building Technology (LBT) LBT is expected to post ¥263.0 billion in revenue, up by 3% year on year, and a ¥9.7 billion loss in core earnings, up by ¥28.4 billion year on year, in FYE2020. The improvement in core earnings is largely due to the absence of construction costs and allowance for doubtful accounts additionally recognized in FYE2019 as a result of a close examination of Permasteelisa’s orders received. Distribution and Retail Business (D&R) D&R is expected to post ¥188.0 billion in revenue, up by 7% year on year, and ¥6.2 billion in core earnings, down by 20% year on year, in FYE2020. The decrease in core earnings is mainly attributable to the acceleration of new store openings. Housing and Services Business (H&S) H&S is expected to post ¥57.0 billion in revenue, down by 1% year on year, and ¥3.3 billion in core earnings, down by 4% year on year, in FYE2020. These declines are primarily due to the absence of real estate properties sold in FYE2019. The forecast for the FYE2020 performance of the LIXIL Group by segment is as follows: FYE2019 result FYE2020 forecast Japan Overseas Total YoY (%) Japan Overseas Total YoY (%) (¥ billion) 397.8 31.1 7.8% 10.8 -0.6 — 143.2 -41.7 — 435.3 29.2 6.7% 530.0 21.3 4.0% 112.8 3.6 3.2% 176.4 7.8 4.4% 57.9 3.5 6.0% 833.1 60.2 7.2% 540.8 20.7 3.8% 256.0 -38.1 — 176.4 7.8 4.4% 57.9 3.5 6.0% -31.6 -41.2 1,312.4 65.2 5.0% 551.8 -11.2 — 1,832.6 12.8 0.7% 0.6% -18.4% -1.7pp 1.0% -24.7% -1.3pp -5.7% — — 1.6% 11.7% +0.4pp 10.6% 36.1% +1.1pp — — 0.2% -83.2% -3.5pp 425.0 41.1 9.7% 7.0 -1.0 — 147.0 -12.0 — 435.0 23.7 5.4% 528.0 26.9 5.1% 116.0 2.3 2.0% 188.0 6.2 3.3% 57.0 3.3 5.8% 860.0 64.8 7.5% 535.0 25.9 4.8% 263.0 -9.7 — 188.0 6.2 3.3% 57.0 3.3 5.8% -53.0 -43.5 1,324.0 62.4 4.7% 579.0 28.1 4.9% 1,850.0 47.0 2.5% 3.2% 7.5% +0.3pp -1.1% 25.2% +1.0pp 2.7% -74.6% +11.2pp 6.6% -19.7% -1.1pp -1.4% -4.5% -0.2pp — — 0.9% 267.2% +1.8pp Revenue Core earnings CE margin Revenue LHT Core earnings CE margin Revenue LBT Core earnings CE margin Revenue D&R Core earnings CE margin Revenue H&S Core earnings Consolidation adjustments and other CE margin Revenue Core earnings Revenue LIXIL Group Core earnings CE margin Financial Policy The Group’s dividend policy is to maintain a dividend payout ratio of at least 30% on a consolidated basis. Setting investment efficiency and safety indices as Key Goal Indicators (KGIs), the Group is aiming to improve both investment profitability and financial strength, and endeavoring to enhance corporate value as well as provide stable returns to shareholders. LIXIL Group plans to issue dividends in FYE2020 of ¥70.0 per share, which is the same as in FYE2019. Dividends per share / Dividend payout ratio / Dividend payout ratio after adjustment for amortization of goodwill (¥) Dividends per share Dividend payout ratio Dividend payout ratio after adjustment for amortization of goodwill 100 75 50 25 0 136% 70 70 65 55 76% 61% 60 60 60 80% 53% 41% 34% 2014/3 2015/3 2016/3 2017/3 2018/3 2019/3 2020/3 (forecast) 23 BUSINESS STRATEGY AND RESULTS Review of Operations (Fiscal Year Ended March 31, 2019) LWT LHT LBT D& R H& S LIXIL Water Technology LIXIL Housing Technology LIXIL Building Technology Distribution & Retail Business Housing & Services Business Global Manufacturing and Sales Sites Revenue Revenue Revenue Revenue Revenue Number of factories ¥ 833.1 billion 44.7% ¥ 540.8 billion 29.0% ¥ 256.0 billion 13.7% ¥ 176.4 billion 9.5% ¥ 57.9 billion 3.1% ¥60.2 billion Core earnings ¥20.7 billion Core earnings – ¥38.1 billion 32,868 people Employees 18,820 people Employees 7,461 people Core earnings Employees ¥7.8 billion Core earnings 1,357 people Employees ¥3.5 billion 1,374 people 103 sites Japan 43 Overseas 60 Americas Europe Africa Asia Pacific Japan LWT LHT LBT 11 ̶ 2 4 ̶ 5 4 ̶ ̶ 22 8 4 20 23* ̶ * Seven of the LHT factories also manufacture commodities for LBT. ¥19.7 billion ¥36.9 billion R&D CAPEX ¥7.3 billion ¥20.0 billion R&D CAPEX ¥1.5 billion ¥3.7 billion CAPEX ¥11.2 billion CAPEX ¥1.1 billion Number of showrooms Core earnings Employees R&D CAPEX Direct customers Dealers Sales agencies Building materials wholesalers Homebuilders Competitors YKK AP Sankyo Tateyama House manufacturers Construction companies Architectural firms Developers Direct customers Construction companies Architectural firms Competitors YKK AP Yuanda Local companies Direct customers Direct customers Housing franchise business: Homebuilding franchise members Housing site ground inspection business: Construction companies and real estate transaction agents Real estate brokerage franchise business: General consumers General consumers Construction professionals Competitors DCM Japan Holdings Cainz Komeri Kohnan Shoji Direct customers Dealers Sales agencies Construction companies Architectural firms Developers Wholesalers Building material trading companies Volume retailers General consumers Competitors Kohler Roca Hansgrohe Masco (Delta) Fortune Brands (Moen) Geberit TOTO Takara Standard Cleanup Panasonic 24 127 sites Japan 103 Overseas 24 Americas Europe Asia Pacific Japan 1 9 14 103 Domestic home reform shops and reform network members 12,354 stores Domestic home center stores (D&R) Domestic homebuilding franchise members (H&S) 96 stores 194 stores 25 BUSINESS STRATEGY AND RESULTS Review of Operations by Segment LIXIL Water Technology (LWT) Market Conditions The global plumbing fixtures and fittings market is worth ¥5 trillion today and forecast to keep growing. Overseas, European and North American markets have been buoyant recently against a backdrop of monetary easing, while the world’s growing population, which is expected to reach 8.5 billion people in 2030, is driving new growth. In particular, the growing middle class in China and increasing need for energy and water conservation technology in Europe are among trends expected to increase demand for water technology products in the future. In Japan, the number of new housing starts has been decreasing over the long term. However, the renovation market, while small, shows potential for significant growth. Considering both new housing starts and the renovation market, demand for plumbing fixtures and fittings in Japan is expected to remain stable in the medium term. Key Strengths Among LIXIL Water Technology’s (LWT) core strengths is its portfolio of powerful, industry-leading brands which include GROHE, American Standard, INAX, and SATO. LWT’s brands are highly recognized, culturally relevant and distinctive, and leaders of the water technology and sanitaryware markets. Combined, these brands cover all bathroom product categories and all market segments, from the luxurious to the basic ends of the spectrum, while catering to different lifestyle preferences and local tastes. Leveraging this unique strength, LWT is now developing its business in emerging markets in particular, where the middle class is expected to grow. It is also honing its competitive edge by enhancing cross- regional and cross-brand synergies, which combined with improved production efficiency, will enable LWT to GROHE Bathroom Collections Full bathroom solution SWOT analysis Strengths Highly regarded brands across all regions A product portfolio spanning all market segments, from the luxurious to the basic ends of the spectrum Sales network in more than 150 countries Global supply chain network Opportunities Higher demand from population growth and increasing income levels around the world Development of differentiated products for the global market by transferring and consolidating technology and design within LWT, based on development of product platforms using Japanese technology Increasing demand for products catering to increased environmental and health awareness Growing renovation market in Japan Weaknesses Threats Downward pricing pressure Business structure not fit for future growth Underinvesting in marketing and brand management respond more flexibly to global demand. In this context, the core growth driver will be transferring advanced technology developed in Japan to overseas markets, and creating attractive products that harness designs representative of each brand and local tastes. Key Highlights for FYE2019 In April, LIXIL’s Japan business changed its organization structure to integrate product development, production, and sales functions. This will enable it to accelerate its business cycle and more effectively reflect market needs. The Japan business also introduced a new trading framework, a mechanism to clarify pricing structures and definitions of roles between LIXIL and its business partners, which helps to specify the responsibilities of each business, enhance information sharing, and improve overall operational efficiency. Sales of products that have resulted from synergies within LIXIL Group, consisting mostly of products that use technology developed in Japan but with regionally customized designs, and new businesses accounted for 74% of LWT’s overseas sales growth. LWT opened new flagship showrooms in major cities in China and Vietnam to capture strong demand in economically developing markets in Asia. In order to strengthen consumer-centric product development, LIXIL opened a new R&D hub in Shanghai. This R&D hub will deal with all of LIXIL’s bathroom and kitchen brands present in Asia. Disruption of sales channel due to changes in distribution model Decreasing new housing starts in Japan Increase in labor cost and material prices Shortage of skilled labor Economic deterioration Rapid commoditization due to new business models Rise of highly cost-competitive manufacturers from developing countries LWT introduced business models such as “digital water management,” which has enabled tie-ups with multiple insurance companies in Europe, establishing a new growth market. Key Initiatives in FYE2020 Accelerate product development process for synergized products and launch in markets outside Japan Foster cross-regional collaboration by empowering each region with access to LIXIL’s combined tangible and intangible resources in order to improve capital investment efficiency and strengthen cost competitiveness Transform business structure in Japan market to suit its mature economy, strengthening cost competitiveness Revenue (¥ billion) 1,000 (¥ billion) 1,000 Japan Japan Overseas Overseas 827.9 827.9 833.1 833.1 860.0 860.0 800 800 600 600 400 400 200 200 Japan Japan Overseas Overseas 64.8 64.8 60.2 60.2 Core earnings (¥ billion) 100 (¥ billion) 100 80 80 73.8 73.8 60 60 40 40 20 20 0 0 2018/3 2018/3 2019/3 2019/3 2020/3 (Forecast) 2020/3 (Forecast) 0 0 2018/3 2018/3 2019/3 2019/3 2020/3 (Forecast) 2020/3 (Forecast) 26 27 BUSINESS STRATEGY AND RESULTS Review of Operations by Segment LIXIL Housing Technology (LHT) SWOT analysis Strengths Opportunities Top market share in residential window sashes and exterior products in Japan Extensive nationwide sales and distribution network in Japan Technologies and production facilities in Japan and Asian countries covering a wide spectrum of capabilities, from aluminum smelting and casting to manufacturing end products Wide range of products and product categories enabling coordination for the entire home Increasing need for highly functional products due to increasing awareness of environmental and health factors among consumers in Japan Growing demand for new products and services suitable for Japan’s aging society Increasing need for differentiated products due to population growth and rising income levels in Asian markets Expansion of renovation market in Japan Weaknesses Threats Difficulty in developing differentiated products Commoditization of products Profit and loss structure vulnerable to change in external factors such as material price / demand fluctuations Decreasing new housing starts in Japan Increase in labor cost and material prices Decrease in housing-related spending due to stagnant income levels in Japan TOSTEM LW Market Conditions Key Highlights for FYE2019 In Japan, the number of new housing starts has been decreasing over the long term as a result of the country’s aging and shrinking population. However, the size of the housing components market is expected to remain the same in the medium term. In addition to government initiatives aimed at stabilizing demand around the consumption tax hike scheduled for October 2019, measures are also being taken by housing material manufacturers to stimulate demand for home renovation. Overseas, we anticipate demand for housing products to grow in the Asia region, which enjoys more stable and positive economic growth, an increasing population, and rising income levels. Key Strengths The core commercial strengths of LIXIL Housing Technology (LHT) are its wide variety of products, the ability to coordinate these products, its high market share in each product category, and its robust nationwide sales network. Leveraging these well- established strengths, LHT provides differentiated and high value-added products. It is now strengthening its competitiveness by innovating new designs and technologies, enhancing efficiencies in product development and manufacturing processes, and establishing business alliances with other companies. In April, LIXIL’s Japan business changed its organization structure to integrate product development, production, and sales functions. The Japan business also introduced a new trading framework, a mechanism to clarify pricing structures and definitions of roles between LIXIL and its business partners, which helps to specify the responsibilities of each business, enhance information sharing, and improve overall operational efficiency. In production, LHT proceeded to reduce stock keeping units (SKUs), standardize parts, and unify core product platforms, further enabling the generalization of production lines. In terms of sales, LHT accelerated preparations to launch high value-added products as part of its medium- to long-term strategy. In FYE2019, LHT launched TOSTEM LW, a new design concept where the window’s frame cannot be seen from inside the house. In addition, we formed a business alliance with SKY-FRAME AG (Switzerland), the world’s leading brand of luxury windows. LHT launched TOSTEM GRANTS, an innovatively designed, high-performance window in Southeast Asia. In terms of new businesses, we established a joint venture with a subsidiary of TEPCO to offer solar power systems with little upfront financial burden for consumers, leading to a reduction in their monthly electricity bills. In addition, LHT launched Life Assist, a combination of IoT housing products and services. This enables building components such as doors as well as electrical appliances to be operated with smart speakers and smartphone apps. Key Initiatives in FYE2020 Transform business structure in Japan to suit its mature economy, enabling it to be more resistant to changes in the external business environment Reduce SKUs, adopt platform approach for new product development, and optimize production lines to improve capital investment efficiency and strengthen cost competitiveness Optimize supply chains to strengthen cost competitiveness Develop new markets, businesses, and products for the renovation market and highly affluent consumers inside and outside of Japan LIXIL Carport SC Revenue (¥ billion) (¥ billion) 1,000 1,000 Japan Japan Overseas Overseas 535.2 535.2 540.8 540.8 535.0 535.0 800 800 600 600 400 400 200 200 0 0 Core earnings (¥ billion) (¥ billion) 40 40 Japan Japan Overseas Overseas 30 30 27.5 27.5 25.9 25.9 20.7 20.7 20 20 10 10 0 0 -10 -10 2018/3 2018/3 2019/3 2019/3 2020/3 2020/3 (Forecast) (Forecast) 2018/3 2018/3 2019/3 2019/3 2020/3 2020/3 (Forecast) (Forecast) 28 29 BUSINESS STRATEGY AND RESULTS Review of Operations by Segment LIXIL Building Technology (LBT) Market Conditions Market conditions for building construction in Japan are expected to remain stable in the medium term, even after the Tokyo 2020 Olympic & Paralympic Games. This is due to regional revitalization initiatives led by the Government of Japan, the renewal of metropolitan areas and train stations, and the upcoming World Expo to be held in Osaka in 2025. In addition, products that satisfy the criteria for Net Zero Energy Buildings (ZEB)* will provide new added value for energy conservation and climate change mitigation going forward. Overseas, the increase in urban populations and greater demand for energy conservation are driving growth. The value of the global curtain wall market, estimated at 18.4 billion in 2017, is projected to grow to 28 billion by 2021. The majority of this growth is anticipated to come from the APAC region, which currently represents 39% of the market, followed by North America with 28%, Europe with 24%, and the rest of the world representing 9%. *A building that aims to generate the energy it consumes Key Strengths LIXIL Building Technology Japan (LBT-J) has the largest market share in high-rise building curtain walls, and high market share in window sashes for low-rise stores, condominiums, and buildings with environmental considerations. As a worldwide leader of curtain wall solutions, recognized for some of the most iconic buildings in the world, Permasteelisa Group brings its extensive know- how, expertise, and unique engineering capabilities to all projects, in particular when dealing with special features buildings. By working closely with architects and designers from the earliest planning phase and leveraging a rigorous quality control system, Permasteelisa provides design and construction solutions to match the special requirements of each project. Key Highlights for FYE2019 In August 2017, LIXIL Group decided to transfer all shares of Permasteelisa, which comprises LBT’s overseas business, to a Chinese company that was deemed to have high affinity with Permasteelisa. However, in October 2018, the Committee on Foreign Tokyo Midtown Hibiya SWOT analysis Strengths Technical competences and know-how Global presence and organization Strong relationships with customers backed by historical performance Flexible on-site response, engineering skills, and technology Cost competitiveness realized by leveraging overseas factories Opportunities Increasing need for high insulation and earthquake-resistant products in Japan Government initiatives for revitalization of local areas in Japan Intercompany collaboration for better performance Weaknesses Threats Lower production efficiency due to build-to-order manufacturing Difficulty differentiating popular building products from competitors in Japan Overseas projects typically have a 3- to 5-year construction period, making them vulnerable to changing economic conditions and property- related developments, and are therefore challenging to manage Increase in labor cost and material prices Labor shortage in the construction industry Financial stability of upstream and downstream business partners overseas Economic slowdown due to trade conflicts or political changes (e.g. Brexit) Investment in the United States (CFIUS) notified us that we are unable to secure approval on the transfer of shares. As a result, we were unable to sell the company. For Permasteelisa, the profitability of projects centered on its North American business has been deteriorating. Subsequently, all of Permasteelisa’s projects were reviewed in detail to determine estimated total construction costs. Reviewing this estimate, LIXIL Group recorded allowance for losses, etc., expected to occur in the future. Based on the review process, we developed and are now executing a plan to recover the profitability of Permasteelisa’s business. In Japan, we developed and launched new window sashes for buildings such as PRO-SE BFG, which has been certified as fire-resistant equipment. LBT strengthened sales activities for PRESEA-H, an environmentally friendly window sash for ZEB. Key Initiatives in FYE2020 Focus on improving cash flows and profitability by steadily executing plan to recover the profitability of Permasteelisa Expand lineup of high-performance window frames with environmentally friendly functions Strengthen production controls for larger projects to stabilize daily production level Enhance productivity through automation and consolidation of production lines in factories Japan Japan Overseas Overseas Core earnings (¥ billion) (¥ billion) 50.0 50.0 Japan Japan Overseas Overseas Revenue (¥ billion) (¥ billion) 500 500 400 400 300 300 271.5 271.5 256.0 256.0 263.0 263.0 200 200 100 100 0 0 2018/3 2018/3 2019/3 2019/3 2020/3 2020/3 (Forecast) (Forecast) 37.5 37.5 25.0 25.0 12.5 12.5 0 0 -12.5 -12.5 -25.0 -25.0 -37.5 -37.5 -50.0 -50.0 (+4.7) (+4.7) (+3.6) (+3.6) (+2.3) (+2.3) (-0.1) (-0.1) (-12.0) (-12.0) (-41.7) (-41.7) 2018/3 2018/3 2019/3 2019/3 2020/3 2020/3 (Forecast) (Forecast) 30 31 BUSINESS STRATEGY AND RESULTS Review of Operations by Segment Distribution & Retail Business (D&R) The first SUPER VIVA HOME in Fukuoka opened in November 2018 (Okagaki town) GL HOME WoodsHill Housing & Services Business (H&S) SWOT analysis Strengths High ratio of revenue from renovation- related goods High ratio of revenue from large metropolitan areas where population is concentrated and customers can be expected Business development leveraging synergies with renovation business and developer business Opportunities Decrease in local distributors of building materials Increase in installers with multiple trade skills for renovation work Growing market for distribution and renovation services for existing housing stock in Japan Weaknesses Threats Longer time for hiring and training people compared to time required to open stores Decrease in customers due to shrinking population in Japan Changes in consumers’ purchasing behavior due to rise of e-commerce Revenue (¥ billion) (¥ billion) 250 250 Core earnings (¥ billion) (¥ billion) 10 10 173.5 173.5 176.4 176.4 188.0 188.0 7.8 7.8 6.9 6.9 6.2 6.2 8 8 6 6 4 4 2 2 0 0 2018/3 2018/3 2019/3 2019/3 2020/3 2020/3 (Forecast) (Forecast) 2018/3 2018/3 2019/3 2019/3 2020/3 2020/3 (Forecast) (Forecast) 200 200 150 150 100 100 50 50 0 0 32 Key Strengths The Distribution & Retail Business (D&R) is unique within the LIXIL Group; it is the only business with general consumers as its core customer base. Catering to their needs, D&R offers a wide array of housing- and lifestyle-related products and materials, as well as construction and other services, through its home center business, LIXIL VIVA Corporation. In recent years, the number of specialized local distributors and small wholesalers has continued to decrease due to business succession challenges, etc. In parallel, the number of workers skilled in multiple trades is increasing, especially in renovation work. Under these changing circumstances, the core strengths of D&R lies in offering a wide range of goods at its large stores, including materials and equipment for renovation work, enabling professionals to procure all the necessary materials in one place. Key Highlights for FYE2019 Since LIXIL VIVA Corporation’s initial public offering in April 2017, it has accelerated opening new stores. D&R newly opened seven stores, achieving its FYE2019 target. D&R now operates 96 stores as of March 31, 2019. Revenue from sales of goods for renovation reached 39.6%, which was an improvement of 1.8 percentage points from the previous year. D&R aims to increase this ratio to 50% in the medium to long term as the renovation market in Japan grows. Key Initiatives in FYE2020 Continue to drive initiatives aimed at increasing the ratio of renovation goods to 50% in the medium to long term Accelerate opening of new stores to gain professional customers in new regional areas (target of seven new stores in a year) SWOT analysis Strengths Complementary synergies with other businesses in the LIXIL Group Nationwide franchise network for housing and real estate in Japan Opportunities Increasing need for management support and support services due to labor shortage in the housing industry Growing market for house distribution and renovation services for existing housing stock in Japan Weaknesses Threats High ratio of revenue for new housing- related services Decreasing new housing starts in Japan Revenue (¥ billion) (¥ billion) 100 100 80 80 60 60 40 40 20 20 0 0 57.9 57.9 57.0 57.0 52.3 52.3 Core earnings (¥ billion) (¥ billion) 5 5 2.5 2.5 4 4 3 3 2 2 1 1 0 0 2018/3 2018/3 2019/3 2019/3 2020/3 2020/3 (Forecast) (Forecast) 2018/3 2018/3 2019/3 2019/3 2020/3 2020/3 (Forecast) (Forecast) 3.5 3.5 3.3 3.3 Key Initiatives in FYE2020 Key Strengths The Housing & Service Business (H&S) offers a wide variety of services that complement the LIXIL Group’s core product businesses, including the development of franchise chains for homebuilders and real estate businesses, ground inspection and improvement services, financial services, business management support services, etc. By collaborating with other businesses in the LIXIL Group, H&S enables the LIXIL Group to provide its consumers with added value throughout every stage of their lives. Key Highlights for FYE2019 H&S drove initiatives to expand its existing businesses and new businesses (such as in the secondhand and renovation market) in response to the decreasing number of new housing starts over the medium and long term in Japan. As a result, the revenue composition for businesses not related to new housing starts reached 38.7% in FYE2019, which was an improvement of 4.0 percentage points from the previous year. Continue to drive initiatives to expand its businesses in new fields (such as the secondhand and renovation markets) in order to achieve the medium-term target of 50% revenue composition from existing housing- related business Due to the growing labor shortage in the housing industry, strengthen synergies with manufacturing businesses in the Group, especially in order to expand support businesses, while enhancing cross-selling to enrich proposals for customers 33 CR STRATEGY AND RESULTS Corporate Responsibility Chairperson Message Corporate Responsibility Strategy Bangladesh, providing us with the confidence that social enterprises can be viable and self-sustaining. We also entered into a new partnership with UNICEF called “Make a Splash! Toilets for All,” aiming to transform the lives of children around the world by providing them with access to basic sanitation services. On top of this, we launched a new partnership with the Bill & Melinda Gates Foundation to pilot a new technology in two markets that could become the world’s first “reinvented toilet” for household use. As for Water Conservation & Environmental Sustainability, we made progress in our contribution to the environment by switching to 100% renewable energy in our showroom in Kyoto and at INAX MUSEUMS, the first step in our journey to achieve zero CO2 emissions from the use of electricity. In our TOSTEM plant in Thailand, we also succeeded in eliminating landfill waste by collaborating with local industrial waste disposal operators. On the topic of Diversity & Inclusion, FYE2019 marked the launch of a fully remodeled universal kitchen system in Japan called Well Life, designed for people in wheelchairs and those who prefer to sit when cooking. LIXIL’s Universal Design concept is a core part of our diversity agenda, and we continue to focus on making things that matter to the people who use our products, while promoting it through our advocacy initiatives. I am pleased to report that the consistent progress we have made over the last three years to deliver on our new CR strategy is gaining global recognition. LIXIL won “Innovation of the Year” at the Ethical Corporation’s Responsible Business Awards for our innovative SATO line of products and sanitation initiatives. Similarly, our work to provide innovative, safe, and affordable access to sanitation to communities around the world was recognized at the second Japan SDGs Awards, where LIXIL was awarded the Deputy-Chief’s Award from the Minister of Foreign Affairs. Furthermore, we earned a place in CDP’s prestigious Water Security A List, reflecting our leadership in sustainable water management. We also continued to be listed on the Dow Jones Sustainability Asia Pacific Index, FTSE4Good Index, and MSCI Japan Empowering Women Select Index. Alongside this recognition, how LIXIL makes a difference to people around the world continues to be a source of growing pride among our employees. We are pleased to see this pride propel our colleagues’ desire to participate however they can, demonstrated by close to one thousand employees signing up for the “Team Splash!” initiative, which invites employees to make donations to the “Make a Splash! Toilets for All” partnership. Also accelerating in momentum is LIXIL Community Day, inaugurated in FYE2018, which doubled participation in FYE2019 to 6,900 employees across 23 countries. This underscores the strong purpose-driven culture we are building at LIXIL. Looking ahead, LIXIL has declared its support for the Task Force on Climate-related Financial Disclosures. We are also in the process of updating LIXIL’s environmental vision to contribute to a sustainable global environment in the long term. We look forward to sharing in the coming months how we plan to further our commitments to help protect our planet and contribute to society, including strengthening our disclosure of climate-related financial information as well as our broader efforts to deliver on our CR commitments. Jin Song Montesano Executive Officer and Senior Managing Director, Public Affairs, Investor Relations, External Affairs, Corporate Responsibility, and Human Resources, Chief Public Affairs Officer, and Chief People Officer Progressively Achieving the Goals of LIXIL’s CR Strategy LIXIL’s higher purpose as a company is to make better homes a reality for everyone, everywhere, and Corporate Responsibility (CR) is at the core of this endeavor. We are delighted to report that we have continued to reach new heights through our CR activities in FYE2019, making progress in all three strategic pillars as well as enhancing global recognition of our initiatives. With regard to improving Global Sanitation & Hygiene, we were excited to see that our SATO social business turned profitable in LIXIL is committed to improving the quality of people’s lives around the world and to pursuing the growth of its businesses through responsible and sustainable innovations. Leading with three strategic pillars Global Sanitation & Hygiene Water Conservation & Environmental Sustainability Diversity & Inclusion “100 Million People” “Net Zero” “Inclusive for All” By 2020, improve the livelihood of 100 million people through sanitation and hygiene solutions By 2030, achieve a net zero balance between LIXIL’s environmental footprint and the positive environmental contributions created through its products and services By 2020, establish the culture of diversity and inclusion within our organization and with all employees By 2030, ensure all products and services* are based on LIXIL’s Universal Design concept *Scope: Products and services in Japan (as of August 2019) Our strategy stands upon a foundational commitment to ethical business practices Governance Fair Business Practices Human Rights Labor Practices Quality and Satisfaction Supply Chain Stakeholder Engagement Our Approach to CR In order to realize LIXIL CORE (“The Group’s superior products and services contribute to improving people’s comfort and lifestyles”), we recognize the need to pursue sustainable innovation, achieve profit growth that contributes to the quality of people’s lives, and meet the evolving expectations of our stakeholders. In markets around the world, Environmental, Social and Governance (ESG) investing is becoming more mainstream, as is the understanding that ESG factors impact corporate value in the medium and long term. For companies, it is essential that corporate strategies are connected to environmental and social initiatives. Within this context, LIXIL aims to meet its social responsibilities and increase the trust of its stakeholders. We conduct CR activities based on 16 identified material issues (see pages 36-37) to build the foundations of sustainable corporate growth. Governance, Fair Business Practices, Human Rights, Labor Practices, Quality and Satisfaction, Supply Chain, and Stakeholder Engagement form the foundations of our CR activities. Tackling these material issues helps us to meet our social responsibility, build credibility with stakeholders, and strengthen the LIXIL brand. At the same time, addressing these material issues contributes to risk management by helping to reduce reputational risk. We consider three social material issues as our highest priorities and will invest our core Group strengths to help solve these challenges. We call these our three strategic pillars: Global Sanitation & Hygiene; Water Conservation & Environmental Sustainability; and Diversity & Inclusion. We believe these three fields offer the greatest opportunities for long-term growth, and will form the foundation for sustainable growth. 34 35 CR STRATEGY AND RESULTS LIXIL’s Material Issues For further details regarding the Group’s material issues, and CR activities and outcomes, please refer to the Sustainability section of our corporate website. https://www.lixil.com/en/sustainability/ CR Management Process and Materiality Selection Process Management needs to show leadership and collaborate with our core technology units to swiftly and appropriately tackle material issues. That is why the Corporate Responsibility Committee, which takes the lead in CR initiatives, is made up of officers from each functional division at LIXIL Group’s head office and representatives from each technology business unit. The results of CR Committee discussions are, as necessary, approved by the LIXIL Group’s Board of Directors and Executive Officers Committee. The initiatives, once adopted, are then implemented by each functional division at the direction of the officer responsible for each initiative. The materiality selection process, as per the diagram on the right, enabled us to identify the material issues that matter the most to our stakeholders and our Group. Selection process of material issue Selection Assessment Validation and approval Social issues were selected by considering global trends, issues particular to LIXIL Group’s industrial fields, and the expectations of LIXIL’s stakeholders – such as NGOs, business partners, clients, shareholders, and suppliers. The level of impact of each selected issue was assessed by considering both the Group’s medium- to long-term business opportunities and the viewpoints of our stakeholders. The validity of selected material issues were confirmed by officers in relevant business functions, and the CR Committee approved the final list of material issues. LIXIL Group’s material issues Action plan and progress for each material issue Material issues Target FYE2021 targets FYE2019 progress Corporate governance Establish governance structure that meets global standards Reorganize and implement the Group’s governance rules and procedures, and clarify rules, approval processes, etc. Promoted policies to strengthen governance and compliance at Group companies (executive officer-related policies, training of Presidents, etc.) based on the findings of a third-party investigation into incidents at Group companies Governance Compliance Develop a comprehensive and effective compliance system across the Group Group-wide ratio of basic training and acknowledgment of Group Code of Conduct completed: 100% Establish a system to operate and improve compliance structure, and ensure appropriate allocation and effective use of resources Utilize the same whistle-blowing system in Japan and overseas, and publicize important compliance indicators such as the number and summary of reported concerns Ratio of basic training completion and Code of Conduct acknowledgement across the Group: 96.1% (96% Japan, 96.3% overseas) Target was unachieved due to variations in completion of training by region and rank. Training to be continued in FYE2020 Awareness of the whistle-blowing systems in Japan: 63.3%; education and awareness-raising activities are ongoing Regional compliance events were held from October to November; educational and awareness-raising activities were implemented On track Needs attention Progress Risk management Establish and operate a Group-wide enterprise risk management system Adoption rate of crisis management system in Group companies: 100% Adoption rate of crisis management system in Group companies: 100% Achieved timely escalation to Group HQ for crisis events that occurred outside of Japan; created a handbook to disseminate initial response and escalation rules for work sites Fair Business Practices Anti-corruption Develop an effective anti-corruption system across the Group Human Rights Human rights due diligence Appropriately manage human rights considerations that fall within the scope of the Group’s operational influence across the entire value chain Adoption rate of global policies in Group companies: 100% Completion ratio of compliance-related education and training across the Group: 100% Establish a plan to implement human rights due diligence in Japan and expand it globally Diversity and equal opportunity Secure highly competent people by respecting diversity across the Group Ratio of women among recent graduate recruits (LIXIL Corporation, Japan): 30% or greater Number of female participants in stage 3 of the Talent Acceleration Program (TAP) for next-generation leaders (LIXIL Corporation, Japan): 20% or greater Labor Practices Occupational health and safety Establish the foundation of an Environment, Health and Safety (EHS) management system across the Group Operational coverage of the Environment, Health and Safety (EHS) management system across the Group: 100% Working environment Build a worker-friendly environment for all employees Ratio of employees who rate their work-life balance as favorable in the Group-wide employee awareness survey: 46% (10% increase from the previous survey) Talent development Promote more employee-driven human resource developments to encourage a bottom-up corporate culture Cumulative total number of participants in the Talent Acceleration Program (TAP) for next-generation leaders: 1,300 (LIXIL Corporation, Japan) Coverage ratio of the basic training program for third-year employees: 100% (LIXIL Corporation, Japan) Quality and Satisfaction Environment Product safety Eliminate product accidents The number of serious product accidents in the entire Group: 0 Climate change mitigation and response Water conservation Promote efficient use of energy in business activities and the provision of products and services that contribute to climate change initiatives Promote efficient use of water in business activities and the provision of products and services that contribute to water conservation Expand CO2 emissions reduction attributable to Group products and services by 1.36 times compared to FYE2016 Reduce CO2 emissions from Group activities by 8% compared to FYE2016 Reduce CO2 emissions intensity for LIXIL transportation by 5% compared to FYE2016 Adoption rate of global policies at Group companies: 100% (adoption rate at each company is unconfirmed) Completion ratio of compliance-related education and training across the Group: target unachieved (varies by region and policy) Compliance violations: 0 Reconsidered the Human Rights Due Diligence Task Force’s global development plan; starting from next fiscal year, gradually expand from Japan to overseas regions Ratio of female university undergraduate and graduate students recruited: 33.2% Ratio of female managers: 5.72% Implementing measures to increase the number of prospective female managers (register 30% or more general employees with upper level qualifications to the manager candidate training plan and other plans) Female participation rate in stage 3 of the Talent Acceleration Program (TAP) for next-generation leaders: 29.2% Coverage of occupational health and safety performance data (based on number of employees): 100% Regular internal audits of the occupational health and safety management system and its operational status at each business Employee awareness survey only completed by some LIXIL businesses (such as LTW EMENA and Housing and Services in Japan) in FYE2018. No questions on this topic in EMENA’s FYE2018 survey N / A Participants in the Talent Acceleration Program (TAP) for next-generation leaders: 117; cumulative participants: 1,195 (LIXIL Corporation, Japan) Coverage ratio of the basic training program for third-year employees: 100% First-year follow-up training: 218 Second-year communications training: 183 Third-year communications training: 139 Serious product accidents across the Group: 8 Product accident meetings were held for serious product accidents. The necessity of countermeasures was decided on a case-by-case basis Implemented product improvements and raised awareness of correct product use CO2 reduction of all LIXIL products and services: 1.21 times FYE2016 (61,577 million tons) CO2 emissions Group-wide: 3.2% increase compared to FYE2016 (4.5% reduction of carbon intensity per economic output) CO2 emission intensity of transportation of LIXIL products in Japan: 1.1% improvement compared to FYE2016 Improved water-use efficiency at key water-risk management sites Promoted initiative aimed at reducing water use, reducing wastewater, and expanding water reuse at six key bases Sustainable use of resources Promote the sustainable use of raw materials from procurement to disposal Recycling rate of waste products from LIXIL facilities: 95% (Japan, Europe), 66% (Asia), 40% (North America) Waste product recycling rate: 95% (Japan, Europe), 62% (Asia), 34% (North America) Supply Chain Supply chain management Identify suppliers’ CR risks and establish mechanisms to respond accordingly Increase the coverage (based on purchase price) of the Group-wide supplier CR survey to 90% in Japan, 60% overseas; and the compliance rate to 90% Coverage rate (based on purchase price) of Group-wide supplier survey: 90% (483 highest purchasing suppliers). Average compliance rate 93.5% (Japan) Improvement rate after a follow-up visit to low-performing suppliers was 100% Stakeholder Engagement 36 Contribute to global sanitation and hygiene Help improve global sanitation and hygiene through our business Cumulative beneficiaries: 100 million Cumulative shipments of more than 2.5 million units of SATO toilets (12.5 million cumulative beneficiaries). In the past year, shipped SATO toilets to 10 new countries, increasing the total to more than 25 countries R&D to solve social problems Help solve the issues experienced by the elderly and people with disabilities through our products Research surveys via digital and other means: 10 Research surveys via digital and other means: 5 Academic presentations on elderly people’s bathing accidents (presented in conjunction with a university at the Japanese Society of Biometeorology conference and at other events) Verification of overnight observations at elderly facilities using sensors in collaboration with Z-Works Accelerator Programs from January 2019 37 CR STRATEGY AND RESULTS Global Sanitation & Hygiene Connection to UN Sustainable Development Goals Global Sanitation & Hygiene Critical Social Issues LIXIL’s Response An estimated 2 billion people around the world do not have access to basic sanitation. Poor hygiene and sanitation puts lives at risk, and every day an estimated 800 children under the age of five die from diarrheal diseases caused by lack of clean water and unsanitary living conditions. The lack of toilets at school can be a barrier for girls continuing with their schooling after reaching puberty, and open defecation can expose them to serious threats such as violence or harassment. In total, global economic losses caused by poor sanitation are estimated to have reached US$223 billion in 2015*1. The second target of UN Sustainable Development Goal 6 aims to solve this global challenge: “By 2030, achieve access to adequate and equitable sanitation and hygiene for all, and end open defecation, paying special attention to the needs of women and girls and those in vulnerable situations.” Overcoming the global sanitation challenge, however, will require the collaboration of a range of stakeholders from various sectors such as governments, NGOs, and private companies. LIXIL has pledged to improve the livelihood of 100 million people through sanitation and hygiene solutions by FYE2021. To reach this goal, LIXIL will continue to roll out its SATO Toilet Systems in developing countries, while conducting further research and development in its Micro Flush Toilet System, which saves water in urban environments, and the Portable Toilet System, which can efficiently and hygienically facilitate the collection and treatment of human waste in informal urban settlements. In July 2018, LIXIL and UNICEF also formed an innovative global partnership called “Make a Splash! Toilets for All.” This partnership aims to utilize our combined expertise in developing sanitation markets globally. LIXIL is developing and marketing products to tackle the global sanitation challenge, while UNICEF is working to expand demand for toilets in target countries by raising awareness and leading publicity activities. Additionally, LIXIL formed a partnership with the Bill & Melinda Gates Foundation in November 2018, aiming to develop a “reinvented toilet” that does not require connection to sewers or water lines. Achievements and Challenges The global sanitation challenge will require a multi- stakeholder approach to solve. That is why LIXIL has been working together with numerous specialist organizations, NGOs, and business partners to make the most of our various strengths. The SATO business is based on a grassroots social enterprise concept. Its products are being produced in six Asian and African countries, and approximately 2.5 million have been delivered to more than 25 countries so far. This equates to improving the sanitation and hygiene of approximately 12.5 million people*2. For the first time, the SATO business also became profitable in Bangladesh in FYE2019. SATO Toilet Systems are designed to be affordable and, therefore, require a certain volume of sales to break even. The SATO business turned profitable in Bangladesh in FYE2019 because of growing local awareness of sanitation issues and toilet solutions. This was due to the support of the Bangladesh Rural Advancement Committee (BRAC), an international development organization, and a campaign by the government of Bangladesh to end open defecation. Moreover, a partnership with local plastic manufacturing industry leader, RFL, enabled the business to reach the volume necessary to become profitable. We believe this demonstration that the SATO business can be financially viable and sustainable is immensely significant. Additionally, LIXIL is now improving sanitation and hygiene through its “Make a Splash! Toilets for All” initiative in cooperation with the governments of Ethiopia, Kenya, Tanzania, and local partners. SATO, our first commercial solution for base-of- pyramid consumers, took several years to establish itself in local communities, including raising awareness about sanitation and hygiene. LIXIL values the social impact that SATO has had as much as it does profitability and sales volume. In addition, SATO and our partnership with UNICEF have also served as a source of pride and motivation for LIXIL employees. LIXIL believes expanding the reach of SATO, particularly in India and Africa, is the most significant of its initiatives to overcome global sanitation challenges. This makes it vital to accurately understand local challenges, develop local solutions, and build a business model to effectively deliver those solutions. Countries using SATO Toilet Systems FYE2021 targets Beneficiaries: 100 million SATO in more than 25 countries Cumulative total of SATO units produced: approximately 2.5 million Number of people whose sanitary environment has been improved*2: approximately 12.5 million *1 Source: “The True Cost of Poor Sanitation,” published in 2016, is the result of collaborative research by international NGO WaterAid, Oxford Economics and LIXIL. *2 This is calculated by assuming that there is an average of five users for every SATO unit produced (as of March 2019). 38 39 CR STRATEGY AND RESULTS Water Conservation & Environmental Sustainability Connection to UN Sustainable Development Goals Water Conservation & Environmental Sustainability Critical Social Issues LIXIL’s Response With the world experiencing more frequent and intense extreme weather conditions and natural disasters, the Paris Agreement, a global climate change framework, and the Sustainable Development Goals (SDGs), a universal call to action to solve global social and environmental issues, were adopted in 2015. Under the Paris Agreement, countries have come together in a movement aimed at achieving a carbon-neutral future by reaching a balance between anthropogenic emissions and the absorption of greenhouse gases in the second half of the twenty-first century. Instances of drought and water stress related to climate change are also increasing. By 2050, approximately 4 billion people (about 40% of the world’s population) are expected to live in areas of water stress, facing potentially disrupted access to water. In addition, ensuring the sustainable use of natural resources, such as metals, wood, rubber, and raw materials for ceramics, is another major challenge for future generations. LIXIL has identified opportunities and risks associated with climate change and is promoting an environmental strategy in line with its business strategy. LIXIL’s Environmental Vision 2030, which was announced in FYE2017, aims to ensure that by 2030, the positive environmental contribution of its products and services will surpass the environmental footprint from its entire business process, thus achieving a Net Zero environmental footprint. Moreover, under this vision we have identified three core environmental challenges to tackle: climate change mitigation and response, water conservation, and sustainable use of resources. We have developed mid- term targets and action plans within our global environment management system to address these and mitigate the environmental impacts of our entire value chain. With the 2017 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), established by the Financial Stability Board (FSB), there is more demand for corporations to disclose climate change- related information. At LIXIL, we will continue to leverage opportunities to improve sustainability and increase corporate value by communicating with stakeholders and through environment-related disclosures. 40 Achievements and Challenges Regarding climate change mitigation and adaptation, we are promoting the building of environmentally friendly homes by developing and providing products and services that contribute to reduced greenhouse gas emissions and energy usage in homes and buildings. Many LIXIL products and services have received awards, such as the highest Japanese insulation standard, House of the Year in Energy 2018, for our high-thermal-insulation panels, Super Wall Dual. Other awards include the Environment and Equipment Design Award for our automated heating faucet, and the Grand Prize for Excellence in Energy Efficiency and Conservation for LIXIL TEPCO Smart Partners’ net-zero energy housing solution. Moreover, we have started an initiative to power LIXIL facilities with 100% renewable energy. In February 2019, the LIXIL showroom in Kyoto was the first location to achieve this, followed by the INAX MUSEUMS in June 2019. We will continue to roll out this initiative. Regarding water conservation, LIXIL has established various targets and advanced initiatives. This includes increasing the reuse of water and reducing the volume of water intake and wastewater in production bases deemed high risk in our water-risk evaluations and analyses. Regarding the sustainable use of resources, we are promoting the reuse of resources throughout the entire lifecycle of our products, including procurement, production, use, and disposal. LIXIL Housing Technology’s TOSTEM Thailand has been awarded the 3Rs Award and the Zero Landfill Waste Achievement Award from the Ministry of Industry in Thailand for eliminating all landfill waste. It achieved this by collaborating with local industrial waste disposal operators. Changes to the global environment have a massive impact on peoples’ homes and lifestyles. As a comprehensive living and housing solutions company, LIXIL aims to achieve a balance between global environmental sustainability and business growth by working to provide solutions that are healthy, comfortable, and environmentally conscious. We are also striving to reduce the environmental footprint of our business activities. FYE2021 targets Contribute to realizing a sustainable society through innovative products and services, and improving environmental efficiencies of all operational processes. Climate Change Mitigation and Adaptation / Water Conservation / Sustainable Use of Resources Expand CO2 emissions reduction attributable to Group products and services by 1.36 times compared to FYE2016 *Includes data on water resource protection (indirect CO2 emissions reductions relating to water use) Reduce CO2 emissions from Group activities by 8% compared to FYE2016 Reduce distribution-linked CO2 emissions by 5% compared to FYE2016 Complete water-risk evaluation across all production sites, determine and implement KPI and targets for high-priority sites Recycling rate of waste products from LIXIL facilities: 95% (Japan, Europe), 66% (Asia), 40% (North America) CO2 emissions from Group activities (Scope 1 and 2) Japan & Europe (Thousand t-CO2) 1,500 Scope 1 Scope 2 (Million m3) 30 Japan & Europe Water intake volume Water discharge volume Water intake / Water discharge Waste recycling rate* 1,200 1,179 1,201 1,185 610 618 616 569 583 569 900 600 300 0 25 20 15 10 5 0 18.06 18.03 16.79 16.86 16.68 13.91 Japan & Europe Rest of Asia North America 94 94 63 25 61 19 95 62 34 (%) 100 80 60 40 20 0 2017/3 2018/3 2019/3 2017/3 2018/3 2019/3 2017/3 2018/3 2019/3 * The recycling rate of waste resulting from all production and sales processes 41 CR STRATEGY AND RESULTS Diversity & Inclusion Connection to UN Sustainable Development Goals Achievements and Challenges The new Resilience Toilet can be used normally even during and after a natural disaster, regardless of age and gender, and including by those who may require special care. Under normal circumstances, each flush uses five liters of water. In the event of a disaster, it can be switched to a mode that maintains all of its functionality but only uses one liter of water to flush. The Resilience Toilet is a product designed for convenience, cleanliness, and safety. We are promoting its adoption at disaster evacuation centers, such as schools and gymnasiums, and at disaster coordination centers, such as municipal buildings. We will continue to develop new products and services that meet the diverse needs of our end users. The level of diversity and inclusion that LIXIL aims for must take into account the cultural and social norms of each region. We believe the benefits of diversity can be maximized by leveraging a variety of characteristics. We will continue our diversity efforts in each region, will consider cross-regional initiatives relating to human resource development and deployment, and endeavor to make diversity and inclusion a core part of LIXIL’s culture. LIXIL Diversity & Inclusion Declaration four focus areas Gender & Age We will drive business performance by embracing diversity and ensuring that all employees have equal opportunities to be recruited, developed, advanced, and retained globally, regardless of gender or age. Disability We will raise awareness, provide education and resources, and proactively create a culture that embraces, enables, values, and maximizes the contributions of persons with disabilities. Family & Life We will support employees through various life stages and events, thereby allowing them to contribute to business success while also fulfilling personal and family priorities and obligations. Culture & Identity We will foster mutual understanding, respect, and communication in order to fully embrace the diversity in race, religion, culture, gender identity, and sexual orientation of everyone at LIXIL. LIXIL’s Response FYE2021 targets Diversity & Inclusion Critical Social Issues With major demographical changes predicted over the next several decades, understanding and embracing diversity is crucial. By 2050, more than one in every five people around the world is projected to be over the age of 60, with many people living either alone or with their spouse only. Approximately 15% of the world’s population today live with some degree of disability, and this rate is increasing every year. Designing products, buildings, and living spaces that can be used by as many people as possible, including the elderly and people with disabilities, is vital. LIXIL can improve peoples’ lives through its products and services, while promoting the active participation of women in the workplace in support of SDG 5, helping to create a society in which everyone can succeed. LIXIL is investing in developing its Universal Design (UD) solutions, aiming to help anyone and everyone to live comfortably. To further promote our activities, we launched the UD Committee led by senior managers in FYE2018. Moreover, we are holding workshops with a diverse group of participants from all areas of the Group, including design, R&D, marketing, and corporate communications. In these workshops, we focused our UD concept on four themes: easy to understand; easy to use; safety for peace of mind; and designs that people love. Based on these concepts, LIXIL is developing products and services from a wide variety of perspectives so that everyone, from young to old, can live comfortable and fulfilling lives. In FYE2018, we established our LIXIL Diversity & Inclusion Declaration (see page to the right), which states, “We leverage our differences to create new energy and engagement in the workplace generated by open and honest dialogue across our organization. These efforts will enable our employees to build an entrepreneurial mindset that will drive growth and sustainable innovation.” In addition, LIXIL has set four focus areas to uphold its Diversity & Inclusion Declaration, and each country and region is promoting initiatives to address and improve the focus areas that are the most relevant to them. 42 Build a strong corporation and workplace where all employees can achieve their full potential. Working Environment Diversity and Equal Opportunity Occupational Health and Safety Human Resource Development Increase favorable response rate by 10% in the work-life balance category of the Group-wide employee engagement survey* compared to the previous survey *The survey is carried out once every two years. The previous survey was conducted in 2017 and the next survey will be in 2019. Establish a culture of diversity and inclusion within our organization and among all employees Achieve 100% operational coverage of Group-wide EHS management system Provide common learning opportunities for 800 next-generation leaders across the Group Aim to expand the number of employees participating in the Talent Acceleration Program (TAP) for next-generation leaders to 1,300 cumulatively (in Japan) Ratio of women among recent graduate recruits (university undergraduate and graduate students) (LIXIL Corporation, Japan) Cumulative number of participants in the Talent Acceleration Program (TAP) for next-generation leaders (LIXIL Corporation, Japan) Female participation ratio in leadership training (LIXIL Corporation, Japan) Target Progress 30.8 30 31.5 30 33.2 30 (%) 100 80 60 40 20 0 (Persons) 1,500 1,200 900 600 300 0 Target Progress (%) 100 Target Progress 1,300 1,195 1,078 963 80 60 40 20 0 37.5 29.2 20 20 20.8 20 2017/3 2018/3 2019/3 2017/3 2018/3 2019/3 2018/3 2021/3 2019/3 2017/3 2018/3 2019/3 Change in the participation ratio since FYE2018 in Stage 3 of the Talent Acceleration Program (TAP) for next-generation leaders 43 CORPORATE GOVERNANCE Board of Directors of LIXIL Group Corporation As of June 25, 2019 Profiles of LIXIL Group Board & Executive Officers are available on our corporate website. https://www.lixil.com/en/about/governance/board/ Kazuhiko Ootsubo Director, Representative Executive Officer and Executive Vice President Representative Director, President and CEO, and LIXIL Japan Company CEO of LIXIL Corporation Ryuichi Kawamoto Director, Member of Audit Committee Masatoshi Matsuzaki Outside Director, Chairperson of the Board, Member of Nomination Committee Director and Chairman of the Board of Directors of Konica Minolta, Inc. (incumbent) Kinya Seto Director, Representative Executive Officer, President and CEO Representative Director, Chairman, and Chairperson of the Board of LIXIL Corporation Satoshi Yoshida Director, Executive Officer and Senior Managing Director Director, Senior Managing Director of LIXIL Corporation Keiichiro Ina Director, Member of Nomination Committee Tamio Uchibori Outside Director, Member of Audit Committee Licensed tax accountant Director and Senior Managing Executive Officer of MinebeaMitsumi Inc. (former) Haruo Kawahara Outside Director, Member of Nomination Committee, Member of Compensation Committee Chair, Representative Director of the Board and Executive Officer CEO of JVC KENWOOD Corporation (former) Teruo Suzuki Outside Director, Member of Audit Committee Certified public accountant Deputy Chair of KPMG AZSA LLC (former) Daisuke Hamaguchi Outside Director, Chairperson of Compensation Committee, Member of Audit Committee Management Execution Director and Chief Investment Officer, Pension Fund Association (former) Kaoru Onimaru Outside Director, Member of Nomination Committee Justice of the Supreme Court of Japan (former) Kurt M. Campbell Outside Director Assistant Secretary of State for East Asian and Pacific Affairs, US Department of State (former) Yuji Nishiura Outside Director, Chairperson of the Nomination Committee, Member of Compensation Committee Chair and CEO, Sumitomo Mitsui Trust Club Co., Ltd. (former) Zenji Miura Outside Director, Chairperson of Audit Committee, Member of Compensation Committee Representative Director, President and CEO of Ricoh Co., Ltd. (former) 44 45 CORPORATE GOVERNANCE Executive Officers of LIXIL Group Corporation As of July 22, 2019 Profiles of LIXIL Group Board & Executive Officers are available on our corporate website. https://www.lixil.com/en/about/governance/board/ Kinya Seto Director, Representative Executive Officer, President and CEO Ryo Nihei Executive Officer and Senior Managing Director, Technology, Chief Technology Officer Kazuhiko Ootsubo Director, Representative Executive Officer and Executive Vice President, Sales and management of domestic subsidiaries Sachio Matsumoto Representative Executive Officer and Executive Vice President, Finance, Treasury, and M&A, and Legal, Chief Financial Officer and Chief Legal Officer Jin Song Montesano Executive Officer and Senior Managing Director, Public Affairs, Investor Relations, External Affairs, Corporate Responsibility, and Human Resources, Chief Public Affairs Officer, and Chief People Officer Bijoy Mohan Executive Officer and Senior Managing Director, CEO of LIXIL International Yugo Kanazawa Executive Officer and Senior Managing Director, Marketing, Digital, and IT, Chief Digital Officer, and Chief Information Officer Hiroyuki Oonishi Executive Officer and Senior Managing Director, LWT Japan Satoshi Yoshida Director, Executive Officer and Senior Managing Director, LHT Japan 46 47 CORPORATE GOVERNANCE Messages from the Chairperson of the Board and Committee Chairpersons executives must be sufficiently accountable and transparent so that outside directors who are not directly engaged in the business can grasp the situation accurately and make rational decisions. On the other hand, as a supervisory function, the Board of Directors needs to consciously maintain an appropriate distance from the executive side. The phrase “nose in and fingers out” expresses the proper stance of the Board. We should maintain an interest in daily operations in order to understand the current situation. However, we must keep our distance so as not to step into the executive’s role and slow down the speed of business. Outside directors are expected to provide oversight, maximizing their objective perspective and unique position as outsiders. The outside directors appointed as a result of the recent Annual General Meeting of Shareholders bring a wealth of experience, ranging from experts in accounting and law to those who have managed corporations as CEOs. Thus, the Board is diverse in terms of skills and backgrounds. As the Chairperson of the Board, I intend to ensure that the Board effectively fulfills its function by maximizing on the skills and experiences of its outside directors and by facilitating active discussions. As of now, my understanding of LIXIL Group is that it needs to improve its balance sheet and simplify its organization structure, which are both consequences of previous M&A. Therefore, the Board needs to pay attention to the situation of overseas subsidiaries. On the other hand, I believe that the market share and the strength of its brands both in Japan and overseas are LIXIL Group’s assets. I also think that the Group has the ability to create innovative products, which is essential for enhancing the profitability of the business. As the Chairperson of the Board, I shall make every endeavor this year to manage Board meetings and help LIXIL Group maximize its potential in order to achieve sustainable growth. Chairperson of the Board Masatoshi Matsuzaki What is the purpose of corporate governance? I believe it is to ensure sustainable growth and achieve higher medium- and long-term corporate value. Accordingly, the essential role of the Board is to listen to the CEO and other executive officers on how to sustainably increase corporate value, discuss and approve the long-term vision and medium-term plan, and monitor the implementation of these. The fundamental principle of governance is to also prevent the concentration of power in specific individuals. In this regard, LIXIL Group has adopted the appropriate governance model, a “Company with Nominating Committee, etc.” This structure requires the separation of management execution by executive officers and the supervisory function by the Board of Directors, which includes outside directors. In order for this model to work effectively, however, Composition of the Board of Directors (As of June 25, 2019) Directors / Executive officers 3 11 Directors who are concurrently serving as executive officers Directors who are not executive officers Internal directors / Outside directors 5 9 Internal directors Outside directors Gender diversity Male Female Nationality Japanese Other 48 13 13 Kinya Seto Kazuhiko Ootsubo Satoshi Yoshida Ryuichi Kawamoto Keiichiro Ina Masatoshi Matsuzaki Tamio Uchibori Kaoru Onimaru Haruo Kawahara Kurt M. Campbell Teruo Suzuki Yuji Nishiura Daisuke Hamaguchi Zenji Miura 1 1 Independent Directors Nomination Committee Audit Committee Compensation Committee Chairperson Chairperson Chairperson The management turmoil that began last October originated from the Nomination Committee. The function of the Nomination Committee will, therefore, be one of the critical points of discussion on LIXIL’s governance reform going forward, and I am acutely aware of the level of our responsibility. We will reexamine the root cause of the problem and how it should be addressed from a new viewpoint. In doing so, we aim to establish a system that eliminates arbitrary decisions and leads to logical, objective, and impartial conclusions, regardless of who the CEO or the members of the Nomination Committee are. Regarding the scope of the Nomination Committee, in addition to the nomination of director candidates and removal of directors as specified under Japanese Corporation Law, we plan to broaden our view in order to contribute to the sustainable development of the LIXIL Group, including considering medium- to long- term succession planning. When approaching each issue, our basic stance will be to create an organization that makes the most of diversity of thought, while securing the utmost transparency. The Nomination Committee will proceed with the reform of governance with strong determination. Utilizing and learning from recent issues, we hope to reach, as quickly as possible, a level at which our stakeholders consider the Group’s corporate governance to be advanced. I believe that the single most important quality required in any corporation is integrity. The role of the Audit Committee is to examine and develop functioning internal structures, in which management and all employees are on the same page, driving the business forward with integrity in order to achieve sustainable growth. The five appointed members of the Audit Committee bring a wealth of experience in different fields, including accounting, M&A, and supply chain management. Maximizing our combined knowledge and expertise, we will engage in a thorough review of the Company. Through internal audits and other measures, we intend to build a solid understanding of the audited areas in order to prevent fraud and put in place a system that enables us to make improvements as necessary. In doing so, we hope to contribute to building a structure that is more rewarding for hard-working employees, making it easier to work and making results more visible. When reforming governance, it is also necessary to reflect on past problems, analyze the factors involved, and develop internal processes and systems to ensure that the same issues never occur again. I will engage in my role as the Chairperson of the Audit Committee with a firm sense of mission over the course of this year, to enable LIXIL Group to leverage its potential and grow into a highly regarded company that Japan can take pride in. The Compensation Committee’s role in enhancing corporate value is to contribute to achieving the Company’s business objectives. It does so by aligning the Company’s compensation system with its business strategy. LIXIL Group is now moving away from the direction of its previous strategy, which focused on expanding in size, to restarting its efforts to achieve its new business strategy. The mission of the Compensation Committee is, therefore, to change the compensation system so it matches the new strategy. LIXIL Group’s current compensation system can be appraised as advanced in form. The Company proactively adopted a performance- based structure and introduced stock-based compensation at an early stage. However, many detailed improvements can still be made. Embracing the spirit that the strategy is in the details, I hope to start making changes swiftly. In doing so, I would particularly like to ensure open communication. In an organization that has adopted a “Company with Nominating Committee, etc.” governance model, the Compensation Committee has significant authority. However, rather than taking that for granted, we will collaborate closely with the Board of Directors, which is responsible for making decisions on essential business strategies, the Nomination Committee, which is involved in the nomination of the management team, and the executive management team, which executes the business strategy. It is my firm belief that such collaboration is critical in order to make the most of the compensation system. 49 Chairperson of the Nomination Committee Yuji Nishiura Chairperson of the Audit Committee Zenji Miura Chairperson of the Compensation Committee Daisuke Hamaguchi CORPORATE GOVERNANCE Corporate Governance at the LIXIL Group LIXIL Group Corporation (the “Company”) has adopted the governance model of a “Company with Nominating Committee, etc.” as specified under Japanese Corporation Law. Under this governance system, the Company clearly separates management execution from management supervision, aiming to establish a system where executive officers can make management decisions quickly and decisively while securing management transparency. In addition, as a pure holding company, the Company has formed the following meetings and committees to strengthen governance over Group companies: Internal Audit Committee, Compliance Committee, Risk Management Meetings, M&A Committee, Investment Review Committee, and Corporate Responsibility Committee. These meetings and committees discuss corporate strategy, consider medium- to long-term policies, deliberate investments, and work to accelerate decision-making while enhancing the effectiveness of governance. Governance Structure (As of June 21, 2019) LIXIL Group Corporation Chairman of the Board Appointment and Dismissal General Meeting of Shareholders Appointment and Dismissal Board of Directors (Internal and Outside) Appointment and Dismissal Nomination of Director Candidates Nomination Committee Compensation Committee (Outside directors form the majority) n o i s i v r e p u S n o i t u c e x E s s e n i s u B . c t e , e e t t i m m o C g n i t a n i m o N h t i w y n a p m o C y r o s i v r e p u S d n a t i d u A h t i w y n a p m o C y n a p m o C h t i w y n a p m o C , e e t t i m m o C s r e h t o d n a , s r o t i d u A Board of Directors (Decision-making and supervision) Report Audit Committee Appointment and Dismissal Report Compliance audit Validation audit Compliance audit Validation audit Audit Representative Executive Officers and Executive Officers (Decide on matters delegated by the Board of Directors and execute business) Executive Officers Meetings and Various Committees Internal Audit Committee, Compliance Committee, Risk Management Meetings, M&A Committee, Investment Review Committee, and Corporate Responsibility Committee Operating Companies Management Supervision General Meeting of Shareholders Audit and Supervisory Committee / Company Auditors Audit Board of Directors Management Meeting Divisions Note: This structure applies only to operating companies (LIXIL Corporation and other subsidiaries) in Japan. Group Governance System The Company, while respecting the independence of each Group company (including LIXIL Corporation) regarding its business management, receives periodic reports on the status of its businesses and provides approval for important matters. In addition, the Audit Committee periodically receives audit reports from the Company’s accounting auditors and the Company’s internal audit divisions, while regularly convening the Group’s Board of Auditors with the auditors of each Group company to ensure Group-wide cooperation. Governance of LIXIL Group Corporation, LIXIL Corporation, and Significant Operating Companies (As of June 21, 2019) LIXIL Group Corporation Board of Directors Nomination Committee Compensation Committee Audit Committee Appointment and dismissal Supervision Compliance audit Validation audit Compliance audit Validation audit s r e c i f f O e v i t u c e x E LIXIL Corporation Management Supervision Board of Directors Compliance audit Validation audit s r o t i d u A y n a p m o C Management Supervision Management Supervision LIXIL Group Corporation’s significant subsidiaries LIXIL Corporation’s significant subsidiaries GROHE Group ASD Holding Corp. (ASB) LIXIL INTERNATIONAL Pte. Ltd. LIXIL VIVA CORPORATION LIXIL Living Solution Corporation Kawashima Selkon Textiles Co., Ltd. Asahi Tostem Exterior Building Materials Co., Ltd. Others Directors and Corporate Officers of LIXIL Group Corporation and LIXIL Corporation (As of August 26, 2019) LIXIL Group Corporation Board of Directors Kinya Seto Kazuhiko Ootsubo Satoshi Yoshida Ryuichi Kawamoto Keiichiro Ina Masatoshi Matsuzaki Executive Officers Kinya Seto Kazuhiko Ootsubo Sachio Matsumoto Jin Song Montesano Ryo Nihei Yugo Kanazawa LIXIL Corporation Board of Directors Kinya Seto Kazuhiko Ootsubo Sachio Matsumoto Jin Song Montesano Ryo Nihei Yugo Kanazawa Tamio Uchibori Appointment Bijoy Mohan Kaoru Onimaru Haruo Kawahara Kurt M. Campbell and removal Satoshi Yoshida Hiroyuki Oonishi Management Supervision Satoshi Yoshida Compliance audit Hiroyuki Oonishi Tokunori Nozawa Yuji Tobita Validation audit Company Auditors Yuji Tsuboi Tamio Uchibori Teruo Suzuki Appoint- ment ) s n o i s i v i d t i d u a l a n r e t n i d n a e e t t i m m o C t i d u A l a n r e t n I e h t h t i w e t a r o b a l l o c ( s r o t i d u A l a i c n a n i F For further details regarding the Company's corporate governance system, internal control systems, and other related matters, please refer to our corporate website. https://www.lixil.com/en/about/governance/ 50 Appointment and removal / Determination of compensation Directors and Executive Officers of LIXIL Group Corporation who are concurrently serving as Directors of LIXIL Corporation Internal Directors who are not Executive Officers Outside Directors 51 Teruo SuzukiYuji NishiuraDaisuke HamaguchiZenji Miura CORPORATE GOVERNANCE Activities of the Board of Directors and Board Committees Board of Directors’ Effectiveness Evaluation Number of Meetings Held During FYE2019 Board of Directors 16 Made decisions on matters specified by law, basic management policies, and important management matters, while monitoring the conduct of duties of directors and executive officers Nomination Committee 14 Made decisions on the content of proposals to be submitted to the General Meeting of Shareholders regarding the election and dismissal of directors. Reported its opinion to the Board of Directors when requested, such as on the appointment, election, removal, and dismissal of candidates for executive officer and Representative Executive Officer (CEO), and on the appointment and removal of the members and chairpersons of each committee, etc. Compensation Committee 12 Discussed and made decisions regarding the compensation of individual directors and executive officers Audit Committee 18 In addition to auditing the conduct of duties by directors and executive officers, discussed and made decisions on auditing policy, auditing plans, and the content of proposals to be submitted to the General Meeting of Shareholders regarding the selection and dismissal of financial auditors Executive Officers Meeting 22 As the decision-making body responsible for the execution of business activities in accordance with the basic policies approved by the Board of Directors, this committee decided on important matters relating to the execution of business in the Company and the Group as a whole Internal Audit Committee 4 Undertook inspections and checks of legal compliance and appropriateness of corporate activity and of management conformity, not only within legal requirements, but also in view of standards determined by the Company Compliance Committee 4 Provided guidance for the structuring and operational management of compliance systems in Group companies and monitored status of compliance with laws and regulations Risk Management Meeting Corporate Responsibility Committee 4 3 In addition to holding risk management meetings in the Company, also held risk management meetings in Group companies mainly in Japan, and confirmed the status of risk management Selected and reviewed material issues for the overall Group, formulated the targets as well as the initiatives of the CR strategy, and provided oversight and guidance for the implementation of priority themes and activities M&A Committee* 19 Deliberated and made decisions on matters relating to M&A (including divestment of business) conducted by the Company and its subsidiaries, within the authority delegated by the executive officers Investment Review Committee* 27 Deliberated and made decisions on material investments (excluding those relating to M&A), financing, and matters relating to the establishment, reorganization, and restructuring of subsidiaries (conducted by the Company and its subsidiaries) within the authority delegated by the executive officers * From April 1, 2018, the Investment Strategy Committee, Investment and Loan Council, New Business Council, and Business Divestment Council have been reorganized into the M&A Committee and the Investment Review Committee in order to enhance the effectiveness of corporate governance. Attendance at Meetings of the Board of Directors and Committees in FYE2019 Name Board of Directors Nomination Committee Compensation Committee Audit Committee Yoichiro Ushioda Hirokazu Yamanashi Kinya Seto Yoshizumi Kanamori Yoshinobu Kikuchi Keiichiro Ina Haruo Shirai Ryuichi Kawamoto Tsutomu Kawaguchi Main Kohda Barbara Judge Hiroto Yoshimura 100% 100% 100% 100% 100% 100% 100%*3 100%*3 100% 100% 100% 100% 100%*1 100%*1 — — 100%*2 — — — 100%*2 100%*3 100%*3 100% — 100%*1 — — 100% 100%*1 — — — 100% 100% — — — — 100%*4 — — 100%*3 — 100% — — 100% *1 Attendance from April 1, 2018 to October 31, 2018 *2 Attendance from November 1, 2018 to March 31, 2019 *3 Attendance from June 21, 2018 to March 31, 2019 *4 Attendance from April 1, 2018 to June 21, 2018 52 In order to implement and maintain the corporate governance systems needed to support sustainable growth and creation of medium- and long-term corporate value by the LIXIL Group as a whole, the Company analyzes and evaluates the effectiveness of the Board of Directors and attaches great importance to efforts to strengthen and improve the Board’s effectiveness. One aspect of the measures taken in this regard is the implementation of an annual self-evaluation of the Board’s effectiveness, which is conducted by every member of the Board. Effectiveness Evaluation Process Summary of the Evaluation Results The Board of Directors, composed of the directors appointed at the Annual General Meeting of Shareholders held in June 2018, implemented an evaluation of the effectiveness of the Board of Directors and of each Board Committee using the following process, with the Chairman of the Board playing a central role. Starting from January 2019, questionnaire surveys were administered to each of the 12 members of the Board regarding the composition, operation, agendas, supporting systems of the Board, and director training. All Board members subsequently discussed the analysis and evaluation of the collected results at a Board meeting held in March 2019. In light of the results from the questionnaire mentioned above, the Company has worked to improve the supervisory function of the Board of Directors by implementing measures such as (1) sharing of results and opinions on the composition of the Board of Directors to the Nomination Committee; (2) provision of an agenda sheet to predetermine annual schedule and agenda of the Board of Directors; (3) revision of reporting format from executive officers and others for the purpose of effective discussions at Board of Directors’ meetings. Measures to Be Implemented Based on the Evaluation Results In order to implement and maintain the corporate governance systems needed to support the sustainable growth and the creation of medium- and long-term corporate value of the LIXIL Group as a whole, measures will be taken on an ongoing basis to enhance the function of the Board of Directors. This is based on the most recent Board effectiveness evaluation results and of the diverse range of views put forward by individual directors during the related processes. Status of items to be evaluated based on the results of the questionnaire conducted January 2019 Items to be evaluated Status of improvement Role and operation of the Nomination Committee in the process of electing the CEO In February 2019, the Company revisited its Corporate Governance Guidelines and rules for the Nomination Committee to clarify both its role and authority. Composition of the Board of Directors System that enables the Board of Directors to discuss matters more efficiently At the 77th Annual General Meeting of Shareholders, the percentage of outside director candidates was increased and several individuals with global management experience in manufacturing were selected as outside director candidates. The annual schedule and agenda were clarified, rules relating to the distribution of materials to the Board of Directors as well as preparation of materials to enhance the understanding of directors were established, and a forum was established for the discussion of important issues from a long- term perspective. The Company has implemented each principle of the Corporate Governance Code. For details, please refer to the Corporate Governance Report. https://www.lixil.com/en/investor/library/governance_guidelines.html 53 CORPORATE GOVERNANCE Corporate Officer Compensation Basic Policy Regarding Compensation Compensation Scheme Compensation for FYE2019 The Company’s policy on the compensation plan for corporate officers is to implement a fair compensation structure that will motivate each corporate officer to execute his or her duties in order to meet shareholders’ expectations and fulfill the Company’s management policy. The compensation scheme is separate for directors, who are responsible for supervising the Company’s management, and executive officers, who are responsible for the execution of business. When a director serves as an executive officer, the compensation scheme of an executive officer shall be applied in principle. Performance-related compensation in order to provide effective incentives designed to optimize short-, medium-, and long-term business results and corporate value. Attract and retain the best global talent necessary to maintain sustainable growth. Fair and reasonable decision-making process with regard to compensation that will provide accountability to shareholders, employees, and all stakeholders. Conduct comparative evaluation with domestic and foreign companies in order to ensure transparency and objectivity. Individual compensation shall be determined in accordance with role and responsibility, performance contribution, and company performance. Decision Process The Company shall structure the Compensation Committee with the chairperson and the majority of the members being independent outside directors, so it will be able to effectively fulfill the role and duties required by law. The Compensation Committee decides basic policy regarding the compensation of directors and executive officers, the compensation scheme (including KPIs), guidelines for compensation levels, and various kinds of compensation based on these. The details of the deliberated content and the resolutions of those matters made by the Compensation Committee are reported at the meeting of Board of Directors, which is held immediately after. Compensation Structure and Component Types of compensation Fixed-amount compensation (base pay) Weight (median)* Directors Executive officers Compensation component 71% 68% Examined and determined by role using data from outside compensation consultant. Performance-based compensation — 15% Determined based on the Company’s financial results and individual performance on an annual basis. The target payment amount shall be set at a fixed percentage of the base pay. The amount paid shall fluctuate within a range from 0 to 200%. Stock-based compensation 29% 17% Restricted stock shall be awarded to incentivize directors and executive officers to share corporate value with shareholders and to provide greater incentive to contribute to enhancing the Company’s stock price and sustainable growth of corporate value. A fixed percentage of the base pay shall be issued as restricted stock. Half of the shares with restrictions on transfer allocated to the recipients of allocation will be subject to a transfer restricted period of three years. The other half shall be subject to a transfer restricted period of 30 years (or the period until completion of term). Other compensation schemes may be applied after individual deliberation. * These percentages are the median for each corporate officer title. Performance-based compensation is calculated based on the KPI achievement at 100%, and stock-based compensation is calculated based on the allocation amount. Fixed-amount compensation (base pay): In view of the management responsibility of directors and executive officers due to the sluggish business results for the fiscal year ended March 31, 2019, reduction measures from November 2018 to June 2019 were implemented. The reduction rate applies from 5% to 20% depending on the job title. Stock-based compensation: The Board of Directors resolved to issue common shares on June 25, 2018, and allotment was implemented on July 17, 2018. The allocation for the next fiscal year will not be granted as it did not meet the required conditions (profit attributable to owners of the parent is positive and core earnings margin is 2% or higher). Performance-based compensation: In the fiscal year ended March 31, 2019, no performance-based compensation was applied because the conditions for the payment (profit for the year attributable to owners of the parent is positive and core earnings margin exceeds 2%) were not met. Company performance (70%): Revenue 25%, core earnings 30%, profit for the year attributable to owners of the parent 15% Individual achievement (30%): The achievement rate shall be decided after the Compensation Committee reviews the individual evaluation proposed by the CEO Stock options: Stock options are not granted in the fiscal year ended March 2019. However, expenses associated with those granted in the past were recorded. Others: An officer with foreign nationality had additional benefits such as living assistance and medical insurance support. Total Amount of Compensation by Corporate Officer Title, by Type of Compensation, and Number of Officers Receiving Corporate officer title Directors (excluding outside directors) Executive officers Outside directors Total Total compensation (¥ million) 216 1,186 90 1,492 Total compensation by type (¥ million) Base pay Performance- based Restricted stock Stock options Others Number of corporate officers eligible for compensation 160 717 70 947 — 36 — 36 56 355 20 431 — 34 — 34 — 44 — 44 6 14 5 25 The total compensation shown above, which are amount calculated under JGAAP, consists of both the compensation paid by the Company and the compensation paid by the Company’s subsidiaries. Guidelines Including: Deferred STI, Clawback (Refund of Compensation) Clauses, and Extension of Rights Not established in the fiscal year ended March 31, 2019. Compensation Scheme Applying ESG Performance as the Direct Metric Not established in the fiscal year ended March 31, 2019. However, in regard to performance-based compensation for executive officers, we have set Company-wide management targets based on a sustainable business strategy as KPIs for Company performance. In terms of individual performance, we evaluate contribution to enhance sustainable improvement of performance and corporate value. 54 55 CORPORATE GOVERNANCE Procedures and Policies Regarding the Nomination of Director Candidates, the Removal of Directors, and the Appointment and the Removal of Executive Officers As a “Company with Nominating Committee, etc.”, in deciding upon the candidates for director seats, the Nomination Committee will apply the Company’s own criteria, specified in Article 23 of the LIXIL Group Corporate Governance Guidelines (the “Guidelines”), while considering not only the individual qualities of director candidates but also the appropriate composition of the Board of Directors. Criteria regarding the appointment, election, removal, and dismissal of executive officers and the Representative Executive Officer (CEO) are set forth in Article 24 of the Guidelines. When independent outside director candidates are decided, the Company’s own independence criteria will be used, as set forth in Article 28 of the Guidelines. The LIXIL Group Corporate Governance Guidelines are available on our corporate website. https://www.lixil.com/en/about/governance/policies.html Appointment and Removal Process for Directors and Executive Officers Criteria for the nomination of director candidates Criteria for the appointment of executive officers (1) Director candidates must be of outstanding character, and have high ethical (1) Executive officers must be of outstanding character, and have high standards (2) Director candidates must have attributes to adequately conduct his or her duty of care as a prudent manager, have a sense of loyalty in executing his or her duties, and contribute to the Company’s sustainable growth and improvement of corporate value in the medium to long term (3) Taking into consideration circumstances such as the status of the candidate’s other concurrent positions, the candidate must be able to dedicate the time and effort required in order to appropriately carry out his or her duties (4) Outside director candidates must have considerable insight and extensive experience in areas such as business, finance, financial accounting, and law, and have attributes to supervise management’s execution of duties from an independent objective standpoint, in addition to satisfying the Company’s independent criteria (5) One-third or more of the number of director candidates must be composed of independent outside directors ethical standards (2) Executive officers must have a deep understanding of the Group’s business and the capacity to appropriately carry out management of the Group as an executive officer (3) Taking into consideration circumstances such as the status of the candidate’s other concurrent positions, the candidate must be able to dedicate the time and effort required in order to appropriately carry out his or her duties Criteria for the election of the Representative Executive Officer (CEO) Must fulfill the criteria for the executive officers, display strong leadership skills, and be able to exert authority over the executive officers Nomination of director candidates Nomination Committee Based on the criteria for the nomination of directors, the Nomination Committee will nominate the candidate directors and decide the content of a proposal to a shareholders meeting Board of Directors Receive report from the Nomination Committee and resolve the convocation of the General Meeting of Shareholders Resolve at the General Meeting of Shareholders Removal of directors Nomination Committee Based on the criteria for the removal of directors, the Committee will discuss the removal of the director and decide the content of a proposal to a shareholders meeting Board of Directors Receive report from the Nomination Committee and resolve the convocation of the General Meeting of Shareholders Resolve at the General Meeting of Shareholders Appointment, election, removal, and dismissal of executive officers and the Representative Executive Officer (CEO) Board of Directors The Board of Directors will request an opinion to the Nomination Committee Nomination Committee Based on the criteria for the appointment / removal of the executive officers as well as the criteria for the election of the Representative Executive Officer (CEO), the Nomination Committee will report its opinion to the Board Board of Directors Resolve the appointment, election, removal, and dismissal of an executive officer or the Representative Executive Officer (CEO) Internal Control Systems Risk Management Internal Control Systems LIXIL Group builds, operates, and evaluates internal control systems to ensure the reliability of operations as well as the accuracy and appropriateness of financial reporting in order to increase corporate value. In addition, we are strengthening our Group-wide operational management system with risk- consciousness and building a system that complies with laws and regulations as a Group that emphasizes compliance management. LIXIL Group Enterprise Risk Management (ERM) LIXIL Group ensures the continuity and stable development of its business through the implementation and operation of ERM for the entire Group. Risks related to crises that require immediate response when they occur are controlled through crisis management as part of ERM. Risk Management (RM) Risks to the Group’s Medium-Term Plan are identified and assessed, then prioritized as material risks for focused management. A risk owner is assigned to each risk and is responsible for responding to and reporting on the assigned risks. LIXIL Group aims to take both a top-down and bottom-up approach in risk management in order to respond to various risks. While the HQ management is actively involved in managing Group-wide material risks, efficient coordination with regional / local operations is sought by placing risk managers at major overseas regions. LIXIL Group is working to foster a corporate culture of Group ERM that enables executive officers and employees to have a consistent mindset in managing risks with the understanding of the business characteristics of each region. Crisis Management (CM) In order to prepare for crises, a crisis management framework has been established for the entire LIXIL Group. The Crisis Management Basic Policy has been created to stipulate such matters as basic principles, definitions, and structures related to crisis management, and has been thoroughly implemented in the Group companies. A Group-wide response framework has been clarified and a crisis management handbook has been created and distributed so that when an incident may possibly develop into a crisis, damages and losses will be minimized through prompt initial response, timely escalation and sharing of information among relevant departments for management decision-making, and proper external disclosure done consistently and sincerely. Understanding the importance of cybersecurity, LIXIL Group has established and operates the LIXIL Computer Security Incident Response Team (LIXIL-CSIRT) to minimize impact from cyberattacks. We constantly monitor computers and networks to detect problems at an early stage and analyze the impact and cause of the problems in order to respond quickly. Information concerning “Business Risks” is available on our corporate website. https://www.lixil.com/en/investor/strategy/risks.html Risk Management Initiatives (Years ended March 31) RM CM Risk management for each business unit Appointed risk managers in major overseas regions to strengthen collaboration Implemented Group ERM to initiate top-down approach Reviewed the Plan-Do-Check- Act (PDCA) cycle for FYE2019 Identified material risks for FYE2020 at the Executive Officers Meeting 2017 2018 2019 Established a global crisis management framework Established and started operating LIXIL-CSIRT Developed and rolled out crisis management handbook Efforts to optimize Business Continuity Plan (BCP) in Japan 56 57 CORPORATE GOVERNANCE Internal Control Systems Compliance LIXIL Group Code of Conduct LIXIL established the LIXIL Group Code of Conduct as a set of rules to be adhered to by all LIXIL Group officers and employees worldwide with the aim of undertaking business activities appropriately and with a shared sense of values and ethics across the entire Group. The Code of Conduct has been translated and is available in 18 languages. The Company introduced a system whereby every year all Group company officers and employees are required to participate in training on the Code of Conduct and acknowledge they will comply with its terms. To integrate and clarify in detail the Code of Conduct across the Group, as of December 2018, LIXIL established Global Policies for 10 high-priority areas, including Anti-Corruption, Fair Competition, and Protection of Personal Information. These policies are translated into major languages. LIXIL implemented education and training programs for officers and employees to facilitate their understanding of the policies. For further details regarding the Code of Conduct, please refer to our corporate website. https://www.lixil.com/en/about/governance/pdf/LIXIL_CoC_en.pdf Corporate Culture Company management is working to raise compliance awareness and embed it in the Group culture by discussing compliance issues, making use of opportunities provided by “all-employee” meetings and site visits, and by using communication tools within the Group. We also hold educational events such as quizzes and contests in Japan and overseas every year so that all LIXIL Group employees can voluntarily increase their compliance awareness in a fun setting. Compliance Committees In addition to the compliance committees of the Group and subsidiaries in Japan, LIXIL has established compliance committees in each technology business unit. This is to strengthen compliance measures globally and to improve the reporting system of business units to the Group Compliance Committee. The Group is implementing new initiatives to further enhance its compliance activities, such as having each compliance committee conduct compliance assessments as part of a regular review of the compliance system. Education and Training Programs LIXIL holds education and training programs for new employees, new managers, and executives to develop its compliance culture. LIXIL is also implementing education and training programs on the Global Policies for all officers and employees. The Company will continue to further develop the education and training programs by planning suitable programs that utilize e-learning and face-to- face training and are based on the risks of the business and business areas. In addition, the Group publishes newsletters both in Japan and overseas, and has been striving to increase and cultivate employees’ knowledge and awareness of compliance. Concern-Raising System LIXIL has established an internal concern-raising system with the aim of gathering information on compliance breaches, taking measures to prevent fraudulent and unlawful behavior, and responding quickly where action is required. The Company has also been striving to construct a standardized global process for LIXIL. The Company introduced a 24-hour, multilingual concern-raising system “Speak Up!” to Japan in 2017, which had been already introduced for all subsidiaries overseas in 2016. In January 2019, the former internal reporting system was dissolved and its function was merged with that of the “Speak Up!” system, which completed the creation of a global management structure for compliance concerns and related matters. Compliance Initiatives (Years ended March 31) Established Chief Compliance Officer Established the Code of Conduct and a process to ensure employees’ commitment Conducted a compliance review Held Group-wide compliance events Introduced “Speak Up!” in Japan Introduced risk countermeasures in subsidiaries in Japan Strengthened compliance education and implemented e-learning Internal Audit How LIXIL Group Sees Internal Audit The LIXIL Group’s internal audit, including assessment of internal controls, contributes to the accomplishment of the Group’s objectives by evaluating and improving the effectiveness of risk management, controls, and governance processes while considering integrity and efficiency of the organization as a whole. This is in line with the definition of internal audit (i.e., independent, objective assurance and consulting activity designed to add value and improve an organization’s operations) from the Institute of Internal Auditors, an international, professional association. Network-Type Organization The internal audit division has been organized as a network structure that spans LIXIL and its domestic and overseas subsidiaries. It aims to achieve comprehensive and efficient internal audits and internal control assessments, and to drive synergies through collaborative work across LIXIL, as well as adding further value through independent assurance and high impact consulting. The Quality Assurance (QA), J-SOX (Financial Instruments and Exchange Law), and IT divisions have been established to function as global axes within the Corporate Audit Group (CAG). The QA division shall work across a wide spectrum to improve the quality of work done by the CAG. This includes, but is not limited to, global risk mapping, harmonization of audit methodologies, education and training, and secretariat work for the Internal Audit Committee. The J-SOX axis will serve as a Center of Excellence, leading J-SOX work conducted by other parts of the CAG. The IT division, in addition to IT audits, helps strengthen governance and compliance by increasing the effectiveness and efficiency of internal audits and the internal control system through the use of IT and by performing insightful audits through effective data analyses. These axes will be overlaid with audit teams from each region, such Internal Audit Initiatives (Years ended March 31) Bankruptcy of Chinese subsidiary as Japan, Asia, Europe, and North America. These teams will focus on assurance, consulting, and J-SOX work in their respective areas. Through close collaboration among the audit units and the cross-functional divisions, such as QA, J-SOX, and IT, we will promote the optimization of the CAG as a whole, as well as more comprehensive management, governance, and overall improvement. Since the Group’s audit and assessment levels have been enhanced, the Global Corporate Audit Staff (GCAS), which held advanced audit and consulting functions, has been transferred to an internal consulting department in order to enhance project management operations. Corporate Audit Group QA J-SOX IT ) S A C L ( l s o r t n o C l a n r e t n I l a b o G l s n o i t a z n a g r o i l o r t n o c / t i d u a l a n r e t n I t i d u A l a n r e t n I c i t s e m o D i e d w d l r o w s e i r a d s b u s i i t n a c fi n g s i i t a Note: 60 members throughout the Group as of the end of March 2019 Internal Audit Committee The Company has set up a voluntary Internal Audit Committee. Periodic meetings between the Corporate Audit Group Officer and the executive officers, who are members of the committee, allow them to make decisions in a timely fashion by sharing and discussing the results and progress of the Group’s internal audits, internal control assessments, risk management, governance, and improvements thereof. Inappropriate activities by subsidiaries in Japan 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Established a Group Compliance Policy and Group Compliance Guidelines Introduced “Speak Up!” in overseas subsidiaries Strengthened cooperation with the audit divisions CAG Launch of the CAG, LCAS, and GCAS Increased global talent Strengthened audit reporting lines for domestic and overseas subsidiaries Reorganization of CAG into a network-based organization Standardization of internal audit evaluations Transfer of GCAS to internal control Expanded the scope of domestic subsidiaries for internal audit 58 Enhancement of internal audit functions 59 CORPORATE INFORMATION / DATA Consolidated 10-Year Summary LIXIL Group Corporation and Consolidated Subsidiaries Years ended March 31 Results of Operations Net sales (JGAAP) / Revenue (IFRS) Operating income (JGAAP) / Core earnings (IFRS) Operating income ratio (JGAAP) / Core earnings ratio (IFRS) Operating profit (loss) (IFRS) Profit (loss) for the year attributable to owners of the parent*1 Research and development expenses Capital expenditures Depreciation and amortization EBITDA*2 Cash Flows Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Cash and cash equivalents, end of year Financial Position Total assets Total equity Net interest-bearing debt Per Share Data Earnings (loss) per share*1 (EPS) JGAAP IFRS (Millions of yen) 2010 2011 2012 2013 2014 2015 2016 2015 2016 2017 2018*5 2019 ¥ 982,607 ¥1,214,939 ¥1,291,396 ¥1,436,395 ¥1,628,658 ¥1,673,406 ¥1,845,117 ¥1,705,427 ¥1,890,450 ¥1,786,447 ¥1,829,344 ¥1,832,608 25,984 2.6% (5,332) 14,756 30,844 32,916 60,485 68,074 (27,334) (27,825) 89,302 40,409 3.3% 15,780 13,688 45,779 36,289 80,106 48,680 (13,543) (41,687) 92,329 17,915 1.4% 1,868 15,350 52,107 39,370 59,887 33,979 (142,067) 138,348 127,351 50,485 3.5% 21,347 14,025 73,795 44,736 100,627 28,432 (12,397) (31,753) 114,662 69,080 4.2% 20,952 17,380 64,321 49,168 51,674 3.1% 22,013 18,199 62,622 50,724 124,822 108,887 83,533 (218,333) 153,144 139,039 138,931 (129,228) 10,010 160,378 56,259 3.0% (18,664) — 76,403 60,451 128,692 137,012 16,547 (171,758) 138,801 51,722 3.0% 48,041 30,864 18,211 61,454 50,404 102,126 98,563 (119,041) 46,618 147,708 70,069 3.7% 39,011 (25,605) 25,523 72,083 62,205 132,274 121,085 19,122 (154,403) 129,646 88,312 4.9% 67,535 42,503 26,362 68,215 60,701 76,046 4.2% 59,107 54,581 27,875 69,953 64,661 149,013 140,707 132,531 (58,052) (79,899) 121,563 116,362 (52,606) (43,843) 138,751 12,798 0.7% (15,029) (52,193) 28,443 67,639 68,502 81,300 69,351 (72,328) 1,579 141,421 1,033,504 1,166,834 1,481,063 1,465,689 1,786,294 1,875,249 2,060,873 1,915,427 2,130,120 2,042,165 2,107,131 2,059,544 516,322 158,980 536,408 175,487 538,776 266,771 566,312 307,089 601,795 463,479 613,651 418,720 637,517 528,386 590,855 559,971 537,308 697,413 559,431 638,345 649,573 549,159 567,167 584,537 ¥ (19.12) ¥ 55.50 ¥ 6.49 ¥ 73.42 ¥ 72.06 ¥ 75.46 ¥ (65.11) ¥ 105.80 ¥ (89.33) ¥ 148.01 ¥ 189.13 ¥ (179.98) Equity attributable to owners of the parent per share (BPS) 1,842.78 1,850.34 1,817.34 1,930.02 2,041.34 2,104.27 1,894.55 2,038.56 1,828.84 1,902.18 2,128.77 1,839.59 Dividends per share Key Ratios EBITDA ratio*2 ROE ROA Total assets turnover (times) Equity ratio (JGAAP) / Ratio of equity attributable to owners of the parent (IFRS) Dividend payout ratio Net debt-to-equity ratio*3 Number of employees*4 Stock Indicators Stock price (closing), end of year (yen) Market capitalization (millions of yen) Price earnings ratio (times) Price book-value ratio (times) 40 40 40 40 6.2% (1.0) (0.5) 0.9 49.7 — 30.9 6.6% 3.0 1.4 1.0 45.2 72.1 33.3 35,976 41,090 4.6% 0.4 0.1 1.0 35.7 616.3 50.5 48,163 7.0% 3.9 1.4 1.0 38.3 54.5 54.7 45,602 55 7.7% 3.6 1.3 0.9 33.2 76.3 78.1 60 6.5% 3.7 1.2 0.9 32.1 79.5 69.5 51,419 52,427 60 7.0% (3.3) (0.9) 0.9 26.4 — 97.2 — 60 6.0% 5.3 1.7 0.9 30.5 56.7 95.9 — 60 7.0% (4.6) (1.3) 0.9 24.6 — 132.9 60,677 60 8.3% 7.9 2.0 0.9 26.8 40.5 116.6 59,248 65 70 7.7% 9.4 2.6 0.9 29.3 34.4 89.0 61,140 4.4% (9.1) (2.5) 0.9 25.9 — 109.5 62,940 ¥ 1,903 ¥ 2,160 ¥ 1,733 ¥ 1,858 ¥ 2,846 ¥ 2,847 ¥ 2,295 ¥ 2,847 ¥ 2,295 ¥ 2,825 ¥ 2,376 ¥ 1,478 595,742 676,197 542,523 540,221 827,426 891,265 718,459 891,265 718,459 884,378 743,817 463,086 (99.5) 1.03 38.9 1.17 267.0 0.95 25.3 0.96 39.5 1.39 37.7 1.35 — 1.21 26.9 1.40 — 1.25 19.1 1.49 12.6 1.12 (8.2) 0.80 *1 Figures are after amortization of goodwill (JGAAP). *2 EBITDA is calculated under JGAAP as operating income + depreciation and amortization + goodwill amortization and under IFRS as core earnings + depreciation and amortization. *3 The net debt-to-equity ratio is calculated as net interest-bearing debt / total equity based on the fiscal year-end. *4 The number of employees from FYE2016 is on an IFRS basis, the definition of which differs from the number under JGAAP. *5 Due to the LIXIL Group’s decision to divest Permasteelisa in August 2017, the Company previously classified the operations of Permasteelisa as discontinued operations. However, during the fiscal year ended March 2019 (FYE2019), LIXIL Group was unable to secure the necessary approval to sell Permasteelisa as is. Therefore, Permasteelisa’s profit and loss have been restated as profit and loss from continuing operations. Note: Under JGAAP, figures of less than ¥1 million are truncated, while under IFRS, figures of less than ¥1 million are rounded. Recent M&As (Figures as of the acquisition) July 2009 American Standard Asia Pacific April 2010 Shin Nikkei Company, Ltd. April 2010 SUNWAVE CORPORATION August 2011 Kawashima Selkon Textiles Co., Ltd. ¥23.5 billion Sales ¥110.0 billion Sales ¥85.0 billion Sales Sales Acquisition cost Equity owned ¥17.6 billion Acquisition cost ¥0.7 million Acquisition cost 100% Equity owned 100% Equity owned Goodwill Intellectual property ¥2.1 billion (net) ¥3.5 billion Goodwill ¥5.4 billion Goodwill ¥13.7 billion 80%*6 ¥6.1 billion (negative) Acquisition cost Equity owned Goodwill ¥34.3 billion*7 ¥2.2 billion and share exchange 100% ¥1.7 billion 60 *6 100% in March 2013 *7 Excludes interior fabric business for vehicles which the Company separated from the main business December 2011 Permasteelisa S.p.A. Sales Acquisition cost Equity owned Goodwill Intangible assets August 2013 ASD Holding Corp. (ASB) January 2014 GROHE Group S.à r.l. October 2014 GROHE DAWN WaterTech Holdings Pty Ltd. ¥116.0 billion Sales ¥82.0 billion Sales ¥157.5 billion Sales ¥60.8 billion Acquisition cost ¥30.5 million Acquisition cost ¥80.1 billion Acquisition cost 100% Equity owned 100% Equity owned 44%*8 Equity owned ¥34.3 billion ¥35.0 billion Goodwill Intangible assets ¥14.7 billion ¥21.7 billion Goodwill Intangible assets ¥157.3 billion ¥209.3 billion Goodwill Intangible assets *8 100% in September 2016 *9 100% in December 2017 ¥12.9 billion ¥8.6 billion 51%*9 ¥1.2 billion ¥7.8 billion 61 CORPORATE INFORMATION / DATA Principal Group Companies As of March 31, 2019 Consolidated Subsidiaries Name LIXIL Corporation LIXIL Total Service Corporation Dinaone Corporation TM.S Corporation GROHE Group S.à r.l. Location Koto-ku, Tokyo Koto-ku, Tokyo Tokoname, Aichi Chiyoda-ku, Tokyo Luxembourg 58 affiliate companies of GROHE Group S.à r.l. — Paid-in capital (¥ million) Equity owned by the holding company (%) 34,600 100 90 60 C thousand 57,143 — ASD Holding Corp. New Jersey, USA US$ thousand 412,956 9 affiliate companies of ASD Holding Corp. — A-S CHINA PLUMBING PRODUCTS Ltd. LIXIL Vietnam Corporation LIXIL Building Materials Manufacturing (Suzhou) Corporation LIXIL Sanitary Fitting Manufacturing (Suzhou) Corporation Cayman Islands Hanoi, Vietnam Suzhou, Jiangsu, China Suzhou, Jiangsu, China — US$ thousand 24,907 VND million 743,386 4,000 1,730 Taiwan Inax Corporation Taipei, Taiwan NT$ thousand 282,677 LIXIL India Sanitaryware Private Limited Andhra Pradesh, India INR thousand 40,384 LIXIL Total Hanbai Corporation Koto-ku, Tokyo Kawashima Selkon Textiles Co., Ltd. Sakyo-ku, Kyoto, Kyoto G TERIOR Corporation Setagaya-ku, Tokyo Asahi Tostem Exterior Building Materials Co., Ltd. Koto-ku, Tokyo LIXIL SUZUKI SHUTTER CORPORATION LIXIL Toyo Sash Shoji Co., Ltd. Sonitech Corporation Kuwata Co., Ltd. Oita Tostem Co., Ltd. Nishi Kyushu Tostem Co., Ltd. LIXIL TEPCO Smart Partners Inc. LIXIL INTERNATIONAL Pte. Ltd. Toshima-ku, Tokyo Chiyoda-ku, Tokyo Shinjuku-ku, Tokyo Suma-ku, Kobe, Hyogo Oita, Oita Saga, Saga Koto-ku, Tokyo Singapore 75 9,382 316 2,000 1,989 100 66 30 50 30 450 30,565 TOSTEM THAI Co., Ltd. Pathum Thani, Thailand Baht million 2,767 LIXIL Manufacturing (Dalian) Corporation Dalian, Liaoning, China US$ thousand 43,500 LIXIL GLOBAL MANUFACTURING VIETNAM Co., Ltd. Dong Nai, Vietnam US$ thousand 40,700 LG-TOSTEM BM Co., Ltd.*1 Seoul, Korea Won million 15,355 PT. LIXIL ALUMINIUM INDONESIA Cileungsi, Indonesia IDR million 173,617 Name LIXIL WINDOW SYSTEMS PRIVATE LIMITED LIXIL Renewal Corporation Permasteelisa S.p.A. Location Haryana, India Koto-ku, Tokyo Veneto, Italy 36 affiliate companies of Permasteelisa S.p.A. — LIXIL VIVA CORPORATION*2 Urawa-ku, Saitama, Saitama LIXIL Living Solution Corporation LIXIL Housing Research Institute, Ltd. Koto-ku, Tokyo Koto-ku, Tokyo JAPAN HOME SHIELD CORPORATION Sumida-ku, Tokyo LIXIL REALTY, Corp. GHS Corporation JHS Engineering Corporation LIXIL Home Finance Corporation Chuo-ku, Tokyo Koto-ku, Tokyo Sumida-ku, Tokyo Chiyoda-ku, Tokyo LIXIL Group Finance Corporation Koto-ku, Tokyo Paid-in capital (¥ million) Equity owned by the holding company (%) Business segment INR thousand 727,818 100 C thousand 6,900 — 24,596 450 1,250 205 160 100 20 500 3,475 100 100 100 — 53 100 100 100 100 100 100 100 100 LHT LBT LBT LBT D&R H&S H&S H&S H&S H&S H&S H&S (Financing services for Group companies) 56 other companies Equity-Method Affiliates Name Location Sanyo Homes Corporation*2 Ken Depot Corporation*3 62 other companies Nishi-ku, Osaka, Osaka Chiyoda-ku, Tokyo Paid-in capital (¥ million) Equity owned by the holding company (%) 5,945 100 24 34 Business segment H&S D&R *1 The holding of shares of this company is 50%, but it is treated as a subsidiary because it is effectively controlled by the Group. *2 The company submits securities reports. *3 As of June 3, 2019, Ken Depot Corporation ceased to be an equity-method affiliate due to transfer of all of the Ken Depot shares held. Business segment LWT, LHT, LBT, H&S LWT LWT LWT LWT LWT LWT LWT LWT LWT LWT LWT LWT LWT LHT LHT LHT LHT LHT LHT LHT LHT LHT LHT LHT LHT LHT LHT LHT LHT LHT 100 100 100 100 100 — 100 — 100 100 100 100 72 97 100 100 100 80 100 100 100 100 100 100 60 100 100 100 100 50 75 62 63 CORPORATE INFORMATION / DATA Basic Policy for Investor Relations LIXIL Group Corporation’s investor relations (IR) activities facilitate communication with capital markets in Japan and overseas and thereby help enhance corporate value. Accordingly, the Company’s IR activities convey messages from senior management to markets while providing senior management with feedback from markets in an unflagging effort to boost corporate value. The Company discloses important information that affects investment judgments, such as decisions, events, or information regarding accounts settlement, based on the timely disclosure rules enacted by the Tokyo Stock Exchange. It is also the Company’s policy to disclose information that does not fall under the timely disclosure rules as proactively and fairly as possible, in order to better meet investors’ needs. Investor relations https://www.lixil.com/en/investor/ Activities for the Fiscal Year Ended March 31, 2019 Annual General Meeting of Shareholders (held on June 25, 2019) Shareholder attendance: 629 people Percentage of voting rights exercised: 81.6% Communicated management message to the market (for institutional investors and analysts) Earnings briefing sessions–four times (every quarter) Individual meetings–359 times Small meetings in Japan–three times New product exhibition events–two times Participated in investor conferences– two times in Japan and two times overseas Provided feedback from the market to the Company Reported IR activities at meetings of the Board of Directors–done regularly, in addition to four times per year after the earnings briefing sessions Exchanged opinions on the business condition and market outlook with business divisions–done regularly Shared information with the management via e-mail –done regularly External Recognition (from April 1, 2018 to July 31, 2019) Companies with Greatest Improvement in IR and Companies with Best Continual Efforts in IR Recognized among the “Companies with Greatest Improvement in IR” and “Companies with Best Continual Efforts in IR” as part of the Japan Investor Relations Association 25th Anniversary Commemorative Award selections (November 2018) MSCI Japan Empowering Women Index Selected for three consecutive years as a constituent of the MSCI Japan Empowering Women Index (WIN), created by MSCI Inc. (June 2019) Internet IR Commendation Award Received “Internet IR Commendation Award 2018” from Daiwa Investor Relations Co., Ltd. for seven consecutive years (November 2018) FTSE4Good Index Series FTSE Blossom Japan Index Selected for three consecutive years as a constituent of the FTSE4Good Index Series and FTSE Blossom Japan Index, created by FTSE Russell (June 2019) S&P Japan 500 ESG Selected as a component of the S&P Japan 500 ESG, created by S&P Dow Jones Indices (June 2019) Gomez IR Site Ranking 2018 Awarded silver prize in the overall IR site ranking and first place in the “Metal Products” industry category from Morningstar Japan K.K. (December 2018) Nadeshiko Brand Selected as a component of the Nadeshiko Brand initiative, jointly conducted by the Ministry of Economy, Trade and Industry and the Tokyo Stock Exchange (March 2019) DJSI Asia Pacific Index Selected for two consecutive years as a component of the Dow Jones Sustainability Indices (DJSI Asia Pacific Index), created by S&P Dow Jones Indices and RobecoSAM (September 2018) S&P/JPX Carbon Efficient Index Selected as a component of the S&P/JPX Carbon Efficient Index, created by S&P Dow Jones Indices (September 2018) Water Security A List 2018 Earned place in CDP’s prestigious Water Security A List (January 2019) DISCLAIMER The inclusion of LIXIL Group Corporation in any MSCI index, and the use of MSCI logos, trademarks, service marks, or index names herein, does not constitute a sponsorship, endorsement or promotion of LIXIL Group Corporation by MSCI or any of its affiliates. The MSCI indexes are the exclusive property of MSCI. MSCI and the MSCI index names and logos are trademarks or service marks of MSCI or its affiliates. Shareholder Information As of March 31, 2019 Number of shares and shareholders Major shareholders (thousand shares) Number of shares authorized 1,300,000,000 Number of shares outstanding (excluding treasury stock of 23,223,744 shares) Number of shareholders 290,095,415 60,532 Distribution of ownership among shareholders (thousand shares) E D TOTAL 313,319 thousand shares C A B Financial institutions Domestic companies Foreign investors Individuals and others 96,629 23,866 108,101 61,497 Treasury stock 23,223 A B C D E Total 313,319 Name of shareholder Number of shares held Ratio of shareholdings The Master Trust Bank of Japan, Ltd. (Trust Account) 16,704*1 5.76% Japan Trustee Services Bank, Ltd. (Trust Account) 13,541*1 4.67% State Street Bank Client Omnibus OM04 (Standing Proxy: The Hongkong and Shanghai Banking Corporation Limited Tokyo Branch) The Nomura Trust & Banking Co., Ltd. (Trust Account) 10,970 3.78% 8,896*1 3.07% LIXIL Employee Stock Ownership 7,102 2.45% Daiichi Life Insurance Company, Limited (Standing proxy: Trust & Custody Services Bank, Ltd.) 6,561 2.26% BNYMSANV AS AGENT/CLIENTS LUX UCITS NON TREATY 1 (Standing proxy: MUFG Bank, Ltd.) 5,743 1.98% Japan Trustee Services Bank, Ltd. (Trust Account 5) 5,725*1 1.97% NORTHERN TRUST CO. (AVFC) SUB A/C NON TREATY (Standing Proxy: The Hong Kong and Shanghai Banking Corporation Limited Tokyo Branch) 5,589 1.93% Monthly stock price range (Tokyo Stock Exchange) Japan Trustee Services Bank, Ltd. (Trust Account 9) 4,769*1 1.64% For the years ended March 31 2015 2016 2017 2018 2019 High*2 (¥) 2,973 2,959 2,999 3,255 2,639 Low*2 (¥) 2,063 2,233 1,593 2,285 1,270 *2 High and low share prices are from the First Section of the Tokyo Stock Exchange. Notes: 1. In addition to the above, LIXIL Group Corporation holds 23,223 thousand shares of treasury stock. Shareholding calculations exclude treasury stock. 2. *1 indicates a trust service arrangement. Stock price (¥) LIXIL stock price Nikkei Average (right) 3,500 3,000 2,500 2,000 1,500 1,000 500 0 30,000 25,000 20,000 15,000 10,000 5,000 0 April 2014 April 2015 April 2016 April 2017 April 2018 March 2019 Stock trading volume (thousand shares) 60,000 50,000 40,000 30,000 20,000 10,000 0 April 2014 April 2015 April 2016 April 2017 April 2018 March 2019 64 65 CORPORATE INFORMATION / DATA Corporate Data As of March 31, 2019 Company Name LIXIL Group Corporation (JS Group Corporation renamed LIXIL Group Corporation on July 1, 2012) Established September 19, 1949 Registered Office 2-1-1 Ojima, Koto-ku, Tokyo 136-8535, Japan Headquarters 36F, Kasumigaseki Building, 3-2-5 Kasumigaseki, Chiyoda-ku, Tokyo 100-6036, Japan Paid-In Capital ¥68,417 million Fiscal Year Closing March 31 Employees 56 (Consolidated employees: 62,940) Accounting Auditors Deloitte Touche Tohmatsu LLC Overview of Major Businesses The Company controls and manages domestic and Businesses overseas companies that operate housing-related businesses and urban environment-related businesses through acquisition or holding of stocks. Securities Traded (Common stock) Tokyo Stock Exchange Nagoya Stock Exchange Transfer Agent and Special Management of Accounts Mitsubishi UFJ Trust and Banking Corporation Annual General Meeting of Shareholders Normally held in June in Tokyo, Japan Cautionary Statement with Respect to Forward-Looking Statements Statements made in this annual report with respect to plans, strategies, and future performances that are not historical facts are forward-looking statements. LIXIL Group Corporation cautions that a number of factors could cause actual results to differ materially from those discussed in the forward-looking statements. 66 LIXIL Group Online Information CORPORATE WEBSITE In addition to the Group profile, CR activities, and the latest news, our corporate website also contains sections covering recent business initiatives within the Group and insights from the Company’s CEO. https://www.lixil.com FINANCIAL INFORMATION Our IR website offers enriched content for shareholders and other investors, including information regarding financial results, audio streaming of results briefings, and market data. https://www.lixil.com/en/investor NON-FINANCIAL INFORMATION Our sustainability website introduces our CR commitment to and activities for enhancing living spaces through innovative responsible engagements and initiatives around the world. https://www.lixil.com/en/sustainability ANNUAL REPORT PDF versions of the annual reports are available on our corporate website. https://www.lixil.com/en/investor/library/ annual_reports.html TSE Securities Code: 5938 LIXIL Group Corporation https://www.lixil.com *XY5600 * *XY5700 * XY5700 01 2019.09.24発行 Printed in Japan
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