Toto, Japan's No.1 toilet maker, expects to meet its earnings forecasts despite the yen's recent surge by capitalizing on an earlier-than-expected demand recovery in China and cost cuts, its president said on Monday.

Toto President Kunio Harimoto also said the company may buy a toilet manufacturer in France, Germany, Italy or Britain to help it achieve a speedy expansion in Europe, where it launched a full-fledged marketing push earlier this year.

The dollar/yen rate at current levels would slice about 400 million yen ($4.6 million) off our recurring profit, but I believe we can digest that impact and meet our downgraded forecasts, as fundamentals have stabilized somewhat, he told Reuters in an interview.

Blaming poor demand in and outside Japan, Toto in September slashed its earnings forecasts for the year to March 2010 and now projects a net loss for the second straight year.

Toto, which also makes sinks and kitchen fixtures, said in July it aimed to expand its overseas operations so that they account for about 30 percent of its overall revenues by 2017.

In April-September, however, Toto's overseas revenue ratio retreated to 13 percent from 14 percent in the same period a year ago, hampered by a strong yen and poor U.S. demand.

Demand in China, one of our main earnings contributors along with the United States, has begun recovering earlier than expected and is now on par with the year-ago level, while weakness in U.S. demand remains our biggest concern, Harimoto said.

He said U.S. demand for toilets, which is linked closely to demand for homes and home renovation work, is likely to take another year to recover.

In Japan, which accounts for the vast majority of Toto's revenue, demand linked to home renovations has begun showing signs of a turnaround and is looks like getting back to year-ago levels in about two months, Harimoto said.

The company's European business is still nascent and does not require a local factory, but Toto will consider buying a manufacturer to meet likely future demand, he said.

We will eventually need localized production. It would take two years to build a factory on our own and get it in use. When thinking of speed, we would rather like to look for a deal to take in a local producer with high standards and quality, he said.

TECHNOLOGY

Toto is credited with inventing washlet toilets that combine toilets with electronically controlled bidets and blow-drying devices as well as seat warming equipment and air purifiers.

Washlets debuted in Japan in 1980, and now nearly seven out of 10 toilets in the country are washlets or electronically controlled toilets made by other manufacturers, according to government data.

It also makes relatively water-efficient models.

Once the economy recovers, I believe there are unlimited business opportunities for us in offshore markets. Stricter water saving regulations worldwide are creating a following wind for us in competition in the United States and other countries, he said.

In the shrinking U.S. market, where Toto aims to replace U.S. rival Kohler as the No.1 player by 2017, Toto's high-end market share is inching up to an all-time high 28 percent this year from 27 percent last year, according to Toto.

In Europe where regulations, culture and infrastructure conditions vary from country to country, Toto may face some difficulty in introducing electronically controlled washlets.

In Europe, our challenge is how to market a new toilet culture rather than a toilet itself. Our focus is to introduce a kind of Japanese technology. France, with its curiosity, has shown especially strong interest in the washlet, Harimoto said.

Toto has also made progress in building a marketing network in Germany but is lagging behind its own schedule in Italy, Harimoto said.

He did not specify Toto's sales in each of the European countries.

Shares of Toto rose 3.4 percent to 463 yen, outperforming the Nikkei stock average, which gained 2.8 percent.

(Reporting by Yumiko Nishitani and Yoshifumi Takemoto)

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