Nippon Paint Holdings Co., Ltd. (4612) Earnings Call Transcript & Summary

Time has come for the Nippon Paint Holdings Medium-Term Strategy Briefing. Thank you very much for your attendance despite your busy schedule today. This briefing will be held online only. Let me introduce the attendee for today's meeting. Yuichiro Wakatsuki, Director, Representative Executive Officer and Co-President. As for today's proceedings, the briefing will be given by Wakatsuki, followed by a Q&A session. The language of the briefing will be both Japanese and English. Simultaneous Japanese-English interpretation will be provided for the presentation and Q&A session. This presentation will be delivered online via Zoom. The Q&A session will be held via Zoom after the presentation. So if you have any questions, please join us on Zoom. Mr. Wakatsuki, please. .

Good afternoon, ladies and gentlemen. I am Wakatsuki, Co-President of NPHD. Thank you very much for taking time out of your busy schedule to join us today. I will now explain Nippon Paint's medium-term strategy and our road map as Asset Assembler. Mass media are all cited to attend this briefing. Thank you very much for your kind attention. First is executive summary. We significantly surpassed the original guidance set out in our previous medium-term plan developed and announced in March 2021, which aimed for sales of JPY 1.1 trillion, operating profit of JPY 140 billion and EPS of JPY 45 in 2023. During the past 3 years, we faced a very difficult external environment, including COVID, which basically continued until late 2022 to early '23, chip shortage in the automotive and many other industrial products, supply chain disruptions, conflict in Ukraine and other regions, soaring raw material prices due to inflation and a property recession in China. Despite these challenges, we were able to achieve strong growth, thanks to the robust market demand from our business characteristics, the strength of our brand with top market shares and the associated price flow-through as well as our strong track record of continuous buildup of high-quality M&A deals. Once again, the source of the strength lies in our Asset Assembler model. We aim to compound low-risk and sustainable EPS by assembling not high profile but solid companies, demand autonomy and accountability from the capable management teams of such excellent companies, which in turn maximizes the potential of these assets. There is no way we as co-presidents know how to sell paints in Australia, China, Turkey and other regions. On the other hand, I believe that we can judge whether the heads of those regions and businesses are quick to react, committed to results and delivering those results in a changing business environment. Wee Siew Kim and I are Board members of NIPSEA and DuluxGroup. In the Japan segment, Wee Siew Kim leads the management meeting of each operating company. I chair the Board of Directors of Dunn-Edwards. This form of governance helps to unlock the potential of each asset. To be honest, I do not think this model should be applied to all companies. But as our business is low risk and has a stable revenue base, I believe it is the most efficient and effective model. In the previous medium-term plan, MSV remained the sole mission. But it was not until 2022 that we started claiming to the Asset Assembler. We have been working on this evolution since April 2021, when Wee Siew Kim and I were appointed co-presidents, including the separation of functional companies in Japan from holding company in 2022. While individual assets will continue to have a 3- to 4-year medium-term plan, we thought presenting a 3-year target number on a consolidated group basis has diminished in significance in order to give a correct understanding of our potential, including the continuation of M&A. I would like to present the growth potential of our current portfolio once again and explain our medium-term strategy to give you a more correct understanding of our thinking. This page shows our company profile as a recap. We are 143 years old and have expanded from 18 countries and regions 10 years ago to 47 today. We continue our 62-year partnership with our current major shareholder Wuthelam. Revenue and market cap have changed dramatically from 10 years ago, which is a phenomenal growth for a Japanese company with a 143-year history. Looking at our history a little more closely, it can be divided into 4 main periods, namely a founding period from 1881, partnerships in Asia from 1962, the consolidation of Asian joint ventures in 2014, which saw sales increase from JPY 250 billion to almost JPY 600 billion, and that was the beginning of the globalization. However, we consider 2018 to be a major inflection point. A shareholder proposal by the Wuthelam Group back then led to a major change in the BOD composition. We set MSV as the sole mission of the management and focused on low-risk, high-profit decorative paint-oriented companies in subsequent M&As. We accelerated our growth while achieving our long-held goal of full integration of the Asian JVs in 2021. The next few pages will hopefully help you understand the essence of Asset Assembler model. So if you could bear with me for a little while. Asset Assembler is about sustainable EPS compounding through organic and inorganic initiatives. There are still many low-risk and good return assets globally, and Japan-based advantage are likely to persist, which include not only low interest rates, but also the consumer trust in Japanese brands. The ability to maximize the potential of assets acquired this way will accelerate organic growth, which in turn will attract new assets, and I believe the upside to shareholder value is infinite through the cycle. Next, let me explain our competitive edge as an Asset Assembler. Low interest rate will be a common advantage for any Japanese company. First of all, we have the power and will to leverage that advantage. On the other hand, while maintaining a small headquarters, we are capable of finding low-risk assets and acquiring them at appropriate valuation and compound numerous assets by attracting talents with autonomy and accountability. A group of such capable talents without the holding company's instructions is eager to leverage the group's resources. Now here is an example, which shows our mindset. A lot of investment banks say that our North American business is weak where it is strategically important, and they bring in various proposals. Indeed, the net worth is small in the huge North American market. But in the market around the West Coast, they have sustainable growth and revenue. So there is actually a little necessity for new acquisitions. Our agenda is not to become #1 in the U.S. or in the global market, but it is to maximize the shareholders' value. Even if North America is an attractive market, we take into account the valuation and risks of acquisition. Otherwise, it would be against the MSV concept. In that regard, current portfolio isn't perfect, but it will not cause business stagnation in certain region or company even if we didn't do anything. Basically, our companies can generate cash in a self-sustaining manner, and we are a group of companies that can make sustainable contribution to EPS. For instance, we decided to repurchase Indian business because it is in the same state. Based on such mindset, in medium term, as shown at the bottom right of Page 10, we guide for 8% to 9% annual growth of consolidated revenue of our existing portfolio and 10% to 12% annual EPS growth. At the same time, as shown in the bottom left, we aim for M&As that can grow EPS safely and sustainably. If low risk and good return, regardless of region, business and size, we will be able to grow EPS and there is no limit. This is not only for the 3 years, but we will improve short-term performance every year and aim to realize MSV in longer term. Now that we have shared our basic mindset, I would like to look at the big picture of how we will actually grow EPS. Page 12 shows the track record of our actual EPS after deducting special factors just for your information. For instance, in 2019, we excluded the impairment loss in the EU and the Marine business, provision in China in 2022 and the impact of IAS29 in Turkey, which will help you look at the strength of our business at cruising speed. On the other hand, from 2021, we acquired 100% of our joint venture, and we issued new shares equivalent to approximately 46% for the business we acquired in Indonesia. Since 2021, dark blue shows 51% of NIPSEA and light blue shows 49% of NIPSEA and the green shows Indonesia, and they are making contribution to EPS, which is more than enough to offset the impact. On Page 13, this is the first time we are presenting our cash generation power in each region. From the operating cash flow after tax, we subtracted the regular CapEx, excluding M&A. In fact, in 2023, we reinforced cash conversion cycle, which is the KPI in many regions, which led to strong cash generation. Going forward, maybe not as much as in 2023, but I think we can maintain this cash generation structure in each asset, excluding M&As. On Page 14, I would like to talk about the operating leverage effects. If we take the Paints business as an example, in the basic model structure, variable costs account for approximately 50% of revenue, although it may differ by regions; and fixed costs, 35%, and that will result in operating margin of 15%. Normally, compared to growth, fixed costs and CapEx don't increase as much. If we grow 8%, operating profit would grow by 16% in this case. However, profit doesn't grow this much in reality because inflation may cause fixed cost to increase as much as revenue growth. We may also strategically allocate the excess margin to advertising, promotion incentives and choose to maintain the profit margin. Until we gain dominance, such investments are important. And even after we have gained dominance, we may still need to invest depending on the competitive environment. Given such circumstances in our model, if we quit investing, it is easy to improve the margin. Well, I wouldn't say it is easy, but it is able to improve the margin. But I hope you'll understand that we don't believe that will contribute to longer-term MSV. As an evidence of the safety of our assets, this shows that while individual events can occur in our broad portfolio as a whole, we are steadily generating results. It is an extremely volatile environment. We were forced to revise down our guidance in 2021, mainly due to the sharp rise in raw material prices. And again, in 2022, mainly due to provisions in China and hyperinflationary accounting in Turkey, but basically achieved the original guidance. I think we can also see that we are, in a sense, steadily exceeding our original guidance for 2023 when such unexpected events declined. Now under such circumstances, although EPS is steadily increasing, the stock price is not rising very much, which means that it is difficult to say that the PER is currently maximized. There may be several reasons for this. But in addition to the usual concerns about China risks, I believe that our growth potential, even organic, may be underestimated. Today, we are once again trying to spread the understanding of our thinking, our model and our track record to gain an understanding of the growth potential in our current asset portfolio and our approach to M&A, and then to reassure investors that certainty of EPS compounding from M&A that we will implement in the future, recognizing that it is difficult to include this in the model. We also hope that investors will understand our company's future as EPS compounder, a machine that accumulates EPS through enhanced dialogue and enhanced disclosure materials. I believe that is the best way to achieve this. We would like to continue to actively seek feedback from our investors. One word on the structure to support EPS compounding. When we launched the co-president system in April 2021, many people asked whether the system would really work. But we no longer receive such questions. The close communication between we, who has a rich operational background, and I, who specialize in capital markets and M&A and the common decision-making axis of MSV, coupled with our egoless personalities, have enabled us to take various actions without delay or rather with a considerable sense of speed. I think our strength lies in the fact that we are able to operate based on a common and sole axis of decision-making MSV and maintain very close communication with the major shareholders who are aligned with minority shareholders and the Board of Directors, of which the majority are independent directors. From here, you can see on Page 19, we present our medium-term growth forecast for each of our assets in the sense of where we see the margins heading. In fact, there is no change from what we have been communicating so far. In China, which has been a concern for many of you, we believe there is strong demand, especially for repainting, and that continued growth is possible by leveraging our brand to increase our market share. Page 20, please. Here is our growth forecast relative to the growth forecast for each market. Market forecast on value basis, including volume, for example, in China, where demand is strong in terms of volume, but lower in terms of value. In other words, lower-priced products are growing. Due to the economic environment, we are forecasting 10% to 15% growth in value terms. Of course, I cannot talk about the specific targets on inorganic growth, but let me share with you our line of thinking. Recently, I have often been asked, are you PMI focused and taking some time off from M&A? The answer is no. In fact, there are quite a few deals that we have considered and declined. The advantage of being an Asset Assembler is that as a result of acquiring excellent assets, we avoid standardization and focus on unlocking the potential of the assets. So we're able to continue with the next round of M&A. And in fact, we are still considering them. The chart itself is taken directly from last year's integrated report, so I will not go into details. But in a nutshell, it shows that our M&A model allows for a continuous EPS compounding through valuation and funding mix based on the assumption that target is safe and excellent. I have always said that we prioritize debt financing in our funding. But if we can expect sufficient EPS growth, it is also an option to issue new shares. However, based on current share price or PER level, issuing new shares is becoming as attractive, and we need to pay even more attention to the valuation of target companies. Having said that, I will come back to this point later. But in short term, the leverage level is declining, and we have enough financial strength, including our cash generation. Thus, we will continue to explore M&As, which will contribute to MSV. Now let me discuss sustainability. The principle is that our MSV is based on the assumption that we will be fulfilling our obligation to our stakeholders, including legal, social and ethical obligations. We believe various sustainability initiatives must be linked with MSV and they per se should not become the purpose. In order not to be top heavy, we choose the leaders of the 5 teams from the leaders of our partner companies. We utilize the Asset Assembler platform. And through cross-functional activities, we pursue technology and talents, we fulfill our duties regarding environment and human rights in order to pursue MSV. On Page 25, we introduced examples of our technological innovation strategy. We developed technologies and share know-hows across regions. For instance, we developed EV coating technology. We utilized bio-based resins. We carried out initiatives that will contribute to solving social challenges as well as generating revenue. Page 26 gives examples of our HR strategy. Since we split the domestic business in 2015, we have kept a company of JPY 200 billion in size for the Japanese segment, and we have pursued autonomy of 5 business companies. As a result, accountability of each business has improved, but we have also faced multiple issues such as rigid allocation of human resources and organizational silos. Rather than spending additional cost pointlessly, we have been attempting to realize total optimization by increasing the number of concurrent positions, for example. We have already had a CTO who supervises technological talents in the Japan segment, but we will take a step-by-step approach to shift to unified operation starting from sales, resin development and production. Regarding finance, as you saw, in 2023, our revenue and cash conversion cycle improved, which led to a significant increase of cash generation, resulting in a decline of net debt over EBITDA to 2.2x by the end of 2023. In the past 3 years, cash generation was approximately JPY 370 billion. JPY 120 billion was allocated to CapEx, JPY 80 billion for dividend and JPY 300 billion for M&A. Through funding, net debt has increased, but EBITDA has also increased. So even when considering our business characteristics, we are in the safety zone. The finance strategy will largely remain the same. Our strength is sustainable EPS compounding. We will generate cash, which will be used for M&A to ensure future growth so that we can repay our shareholders. Are we not going to do share buybacks? We do receive this question. It's true that the current share price is not at satisfactory level. But are we going to spend the precious capital to repurchase shares at 21 to 22x PER? Or are we going to aim for acquisitions of more affordable businesses? Because we anticipate sustainable growth in the future, I would say it is out of our consideration as of today. Going forward, we'll always pay attention to the market situation and we will consider various possible options. For each asset level, we have set a precise KPI. However, in our Asset Assembler philosophy, we never ignore the local circumstances to decide 1 single target for the margin or cash conversion cycle. Still, each company will maintain growth and make improvements. That is the mindset of their management. When we are then seen as a group, we would be much stronger than just going after one common target. Last but not least, here is the conclusion. Again, MSV is our sole mission. MSV is maximizing shareholder value. We will leverage the advantage of our platform as an Asset Assembler. We will go after short-term growth, but our policy is to seek long-term maximization of the EPS, and this will remain unchanged. Organically, we will pursue maximization of the potential of our assets. In terms of M&A, we will look at the balance between risks and valuation. Both shall contribute to compounding of EPS, and such track record and fostering of appropriate expectation will help us maximize PER. I believe you now understand why we chose not to announce a 3- or 5-year plan, which is typical for Japanese companies. Our potential is at a different dimension from such framework. At the same time, we believe that we are more than fully aware of the importance of communicating with the market. We will continue to hold this kind of opportunities, and we will be engaged in individual dialogues as well. This concludes my presentation. And now let me take questions. Thank you for your kind attention.

We will now move on to the Q&A session. I would like to ask you on 3 points. First, we would like to have as many people as possible to ask questions. So we will limit to 1 question per person. If you have additional questions, we will take all the questions first and then nominate you again. Second, due to the simultaneous interpretation setup, please ask your questions in Japanese, if you're listening to the Japanese channel and in English if you're listening to the English channel. The third point is that we will take questions from the Japanese language channel first and then from the English language channel. If you're listening to the Japanese channel and have a question, please select the raise your hand button at the bottom of the Zoom screen. If you're listening to the English channel, please wait a moment before pressing the raise hand button. Please quickly unmute button by yourself when you see the unmute message screen. If you do not see the message screen, please unmute yourself and ask your question. So we will start from the Japanese channel. First question is from BofA Securities, Enomoto-san.

This is Enomoto from BofA Securities. So this is not the medium-term plan, but because you have changed the way you handle this a bit, I'm a bit confused. So let me put things in perspective. First of all, Page 19. You have 2026 target. So are you dividing into 3 years? So revenue growth of 8% to 9%. EPS, 12% to 13%. So these numbers, is this in a 3-year timeframe? My first question is that.

Yes. Thank you very much, Enomoto-san. So this guidance is 3 years onetime line. But even in the longer time span, we think we can continue this trajectory. As I said earlier, in each company, the medium-term plan, MTP is developed. And on that basis, with the current portfolio, we think this guidance is sufficiently achievable. So that is the number that we came up with. On the other hand, the big picture on a consolidated basis, if we add this all up, we can have a few numbers, so we can have a range of numbers. But as we did in 2021, we are not announcing this in one form. So I hope you could understand.

So on that basis, if I could ask you how we should understand the numbers. So revenue, 8% to 9% growth year-on-year. On Page 19, this is linked to the contents on Page 19, am I right? And EPS plus 12% to 13%. So the advertisement incentives, the excess margin will be used for the growth investment. And therefore, EPS 12% to 13%. In other words, OPM will not grow that much. Is your stance reflected in these numbers?

So 8% to 9% revenue growth and EPS, 10% to 12% we said, and it's mentioned in the material. So certain level of operating leverage will be enjoyed. . So EPS will grow higher than the revenue growth. But operating leverage, it's not such a dramatic improvement with the full operating leverage in the short term at least. Rather, we are using that for our growth investment. So overall margin will not be a dramatic improvement. We want to focus on continuing growth and gaining dominance.

I understand. So just one little follow-up question. So market share will increase in all regions according to your forecast. Can you really grow in all regions? In the back part of your material, you have the details. Any risks? Too aggressive in some regions or sufficiently achievable in other regions? Because you said all regions, so if you could elaborate on that point.

As a person or company running a business, we always try to grow exceeding the market growth. In other words, market growth -- market share growth. We have to always aim to have higher market share. Otherwise, we cannot enjoy positive results. . Of course, we have some aspirational element here, but our internal aspiration is even higher than this. Our business is such that market share -- the business with high market share will bring in bigger success or victory. So as a result, we have many regions and businesses with high market share. So basically, we think we can continue this trend. On the other hand, in terms of risks in India, for example, as we mentioned in the past, India, there is a huge market share leader, so we have to compete with them. In limited regions, limited areas, for example, market participants is increasing. So the competition is intensifying. So it is not easy. India is one of the countries where it's not easy. Another example is we are not concerned much, but the U.S. Dunn-Edwards. In the region, a sustainable market growth and profitability can be achieved. But Sherwin-Williams, can we continue beating them? Not necessarily. So in that sense, we are thinking that way. So of course, there are differences from region to region. But of course, as Nippon Paint Group, we have Nippon Paint Group and Cromology and Dulux and other group companies. By leveraging the strength of all these group companies, we can grow further. And I'm confident of that.

Next question is from JPMorgan Securities, Nakada-san.

My name is Nakada from JPMorgan Securities. Once again, I would like to ask a question about MSV, which is the result of the EPS and PER. According to your explanation, you said you are going to maximize MSV, but you are not going to do share buybacks, but you are putting more weight on maximizing MSV longer term. So I would like to clarify, where is your focus? And is it that there are 4 major periods in your history? And when we look at the share price history, since 2021, there are largely 3 periods and the market cap grew significantly when you first dealt with Wuthelam, and then that was corrected and it continued to decline until January 2022. And until summer of 2023, it followed the past trend and the share price recovered. But since last summer, the share price started to decline as well as the market cap, but the market is growing. So you are not able to maximize MSV in that regard. These 3 developments, is it only triggered by the acceleration of the market growth? Or is there any other factor? What is your analysis? Especially EPS will grow. But regarding PER, how are you going to make improvements? And are you going to -- will you be maximizing MSV, that's your sole mission. So will you ever consider share buyback? What is your order of priority between those 3?

Thank you for your question. MSV is maximizing shareholder value. So you don't see maximizing MSV. And this consists of shareholders' value. And there is EPS and PER. So we need to maximize EPS, we need to maximize PER, and that will result in MSV. Are you okay with this concept? .

Yes, I apologize.

So MSV is an outcome. And why we talk about EPS is because I often say enhancing corporate value. Such description can justify wrong investments increasing in size while neglecting shareholder value is possible. So when we issue new shares, we need to care about EPS growth. Otherwise, we will not be able to realize MSV. That is why we focus on EPS and PER shows market expectation. So this is a multiplication of the 2 factors. Increasing EPS, when we think about only increasing EPS, decreasing the number of shares is one means, which is equal to doing share buybacks. However, in our perspective, we are not satisfied with the current share price. But as I said earlier, there is infinite potential, but we cannot continue to increase the number of shares infinitely. So we need to secure dry powder. We need to utilize debt financing. And EPS will grow in the short term if we do buybacks. But rather than that, we want to focus on long-term EPS improvement. So that will be done by acquiring assets. That is our mindset. With this concept, we would like to maximize EPS. We will prioritize growth investments to maximize EPS. That is one aspect. And the other aspect is maximizing PER. For example, every year, cash is generated. And if we do buybacks, maybe that will help us improve the PER. However, that is not what we aspire to do. Ceaseless growth is something we would like to pursue. Growth capability correlates with PER. Therefore, we want to accumulate assets in order to continuously improve EPS, and as a result, PER could improve as an outcome. However, PER is, as you are aware, it's not something that I can control. So with 1 factor, as 1 factor, PER may not be sufficient, and there may be many other factors. And as I said earlier in my conversation with the investors in our business portfolio, China accounts for 35%. And this is causing concern for many investors. For a couple of times, I have explained the cash generation and growth potential of China. But still, since we have high exposure, some investors still have concerns. And the economic environment is not necessarily ideal. That is true. In 2020 or 2021, China's growth potential was highly appreciated and there was China premium in our evaluation as well. But as of today, that is in the discounted direction. But inclusive of such backdrop regarding our organic growth potential, at least for now, at least among the analysts who cover us, will they often talk about the timeline up to 2025 and compared to their consensus, 8% to 9% revenue growth and 10% to 12% EPS growth. Compared to what I explained today, analysts are under-evaluating our growth potential, I would say. But I don't expect them to instantly understand and the share price to instantly grow as a result of my explanation today. But I think the important thing is conviction to the philosophy of the management, I think we need to make gradual efforts so that we can gain more confidence. Regarding China, there's 1 billion population. Per capita GDP is $11,000, $10,000 in Turkey. It's $4,000 in Indonesia. It's $40,000 in Japan. It's $80,000 almost in Singapore. And considering the population in China, per capita GDP is expected to increase to a certain extent in longer term. That means our Paints will be able to enjoy strong domestic demand and there is sufficient growth potential. And the economic environment could improve at some point in the future. So I hope you will be able to look at the growth potential in longer term. As a result, the conviction in our growth potential will improve, and that will result in improvement of PER. EPS growth is something that I have visibility to. But regarding PER, this is a consensus of the market participants, I would say. So what we can do is to take more communication with the market. That is on Page 16.

Well, to grow EPS in short term, doing share buyback is not really an essential countermeasure, I agree. And I really appreciate the Asset Assembler model. And if this is not valuated properly, I think it is important to be flexible to share buyback, for example, when the share price is low. If you can be more flexible, I think the market will look at you in a different way. So I hope to continue to engage with you in discussions in the future.

Thank you for your feedback. So earlier, I talked about how we would allocate capital. M&A is something we have been considering in many different opportunities. So in the future, we will always pay attention to the market situation and will consider any potential or possible options. For example, this may sound extreme, but if our share price or PER is at 10x, we will purchase. I'm not going to mention the name, but our growth potential on the one side and maximizing EPS, on the other hand, to which should we allocate our capital. That's something we should say never say never. And as you pointed out, I think it is true about the flexibility. Thank you very much.

Next question is from Mizuho Securities, Yoshida-san.

This is Yoshida from Mizuho Securities. Thank you for explaining your management policy. So I have a question on Page 16, the maximization of PER. So in short, the reason PER is not rising is China [ risk ] and the underestimation of the potential growth. So to raise PER, what are you doing? What actions are you taking? And what plan do you have? What do you think you need to do going forward? Nippon Paint, to show this as an attractive share, what are you focusing on?

Thank you, Yoshida-san, for the question. I think it's fully attractive. But the key is communicating. We're failing to communicate the appeal of our share. Asset Assembler is not high profile. It's a low key rather, but a solid aggregation of solid companies. So as the market sentiment, semiconductor is active. And I think that's great. But in the medium to long term, EPS, PER, and we are committed to MSV. I don't think there are so many companies that are fully committed like us. And so our reach to investors and the market liquidity, in many ways, we need to make improvements little by little. And the key is to accumulate our track record, M&A. Maybe the former investment banker, [indiscernible], is doing aggressive M&A. Maybe some are viewing us like that. And on a private basis, some say, Wakatsuki-san, you're aggressive on taking more and more risks, right? But that's not the case. We are extremely sensitive to risks. We're handling risks very cautiously. So the M&A that we do are low risk. So it's not flashy. It's not high profile. But we want to do this in a solid fashion. And this understanding, M&A tends to be high profile, and there's a gap between that and our corporate philosophy. So we need to continue building a successful M&As, so that investors will understand that it leads to continuous growth of EPS. It's not just 10% to 12%. We can grow with more M&As. So we want to show our track record and win the understanding so that we can gain more support. And on top of that, if China economy recovers, it will be even better. So we want to show the steps we are taking on the areas we cannot control. So that is shown on Page 16. There's no clear cut answer to this. And I also wonder why our share price is not going up when our performance is so good. But it's probably our way we communicate, how we communicate our management policy. So that is what we're doing today, trying to explain how we are sensitive to these factors. Maybe we are not communicating well. So that is why we're having this dialogue today. And we look forward to your insight, your feedback going forward. Thank you very much.

So you will show your track record, that will be the key?

Yes. In one word, yes. Because if EPS rises, PER, I don't know how far it will go, but it will at least not decline. And if it looks certain, now there are many uncertainties. But what I want to say today is in the past 3 years, we have been in a volatile environment. But we have delivered pretty good results. And this is not just to help me as an individual co-president system and our large shareholder and Board members and our great capable partner companies. So the strength of the entire group is still underestimated. As you know, if you see new Nippon Paint, we are explaining in the way that, that is clear to anyone, all audience. It is difficult to understand. Really? Why? What part do you not understand well? It's not difficult at all.

Understood. One point, if I may, so attractive stock. On Page 19 of the material, you talked about the growth potential, growth forecast by asset. OPM 2026, you saw the arrows. If you announce or share this much forecast, can you show the OPM target? Can you show 2026 OP margin quantitatively?

Well, by then, our portfolio will change. So we can say, based on our current portfolio, you can calculate, but we don't think that number is meaningful. As we said a few times, on a consolidated basis, we may have certain percentage, but that contradicts with the Asset Assembler model. In some regions, we may have 15% or maybe 12%. But if we set 15%, the growth may stop there. And so we do not want to do that, and that is our strength. So we should not just give 1 number for 2026 OPM. It's just an accumulation of our calculation. Of course, I have all the numbers at hand. But saying that will contradict with the message I'm trying to come across today. And so we want you to digest our thinking today. Yes, if there is a clear market number, then maybe it will be easier for you to have higher share price. But thank you very much.

Next question is from Goldman Sachs Securities, Ikeda-san.

I'm Ikeda of Goldman Sachs Securities. So once again, regarding the Asset Assembler model, I would like to ask a question. So in the paints industry, compared to the past, recently, we don't see any large M&As. Dulux, Cromology, JUB and Kazakhstan, you've been acquiring these attractive assets at appropriate valuation. And compared to the competitors' deals, your M&As is something that I highly appreciate. And I also suppose that there were competitions in some cases, but what is the background of your successful M&A? Of course, it would differ by deals. But from the acquired companies, I think your evaluation is improving even further and creating a virtuous cycle. And will the future M&As be for decorative paints? And in order to create synergy impacts, I think you would need to [ de-lodge ] your M&As. But do you have any policies regarding that? Can you please organize your thoughts?

Thank you, Ikeda-san. Just as you said, the situation differs by deals. So for example, in the case of Dulux, this is a listed company. So it was not really about the competition, but we had to show if we can pay more than the price that they will be able to achieve by themselves. And that was what we had to focus on in negotiating with the management. And because this is a public company, there could be late competitors. But as a result, there were no competitors and this M&A was successful. On the other hand, in case of the private company acquisition, this is something we have more competitive advantage. For example, in Turkey, Betek Boya and recently, Alina in Kazakhstan, and there are a couple more deals I can talk about. But there were competitors in these deals, but our approach was targeting the owner of the business or the family owners. And we were seen as an attractive buyer from their point of view. That is because we don't standardize. That means in case of Betek Boya, over 20% interest rate was paid. So that could be wiped out. . And if you look at it from the other perspective, Betek Boya didn't -- was using us as one of the brands. And there was a local domestic demand for Nippon Paints, so they were flexible in inviting us. And by working with us, they were able to protect their heritage and grow even further. That was seen attractive from the owners. It's not that we are being able to acquire at much less price compared to competitors, but we make sure that we don't overpay and we make sure that it is in a quantitatively acceptable zone. And it's important that the owners of the business thinks that they want Nippon Paint to acquire their business. So after becoming part of our group, the post-merger integration has been smooth because they thought so. And when we think about Nippon Paint, being a Japanese company is one of the advantage. It's not just about the low interest rate, but there is a high confidence in the global market for Japanese companies. Maybe this is my personal view. But when we look at the result, we can see that the global market is thinking that Japanese companies keep their promise. I don't say every Japanese company is like that, but I think such confidence is a great advantage for us. And going forward, as I said earlier, regardless of region, business and size, we will be looking at risks and returns. We are going to strike a balance there. Decorative paints, is that going to be the main focus? That was your question. But for example, Alina or the business in India, these are the businesses that we acquired at reasonable valuation for decorative paints. And if it is not an attractive valuation, we may decide to walk away. And if it is for industrial coatings, if the valuation is appropriate and if it is an attractive opportunity, we will consider. And for paints, adjacencies, materials, we will focus on stability and safe assets with history because there are many of such assets in the market. And as an Asset Assembler, we would be able demonstrate our fullest capability if we could work with such companies. And we will also look at the quality of the management of those companies. So I said there is no limit. With a broad perspective, we will be exploring such opportunities. Decorative paints is having a strong cash generation. It's more safe. That is true. So we will look at such area, but we are not bound to that area.

One follow-up question. Regarding the U.S. decorative paints, you said that there is less necessity for acquisitions. But recently in the U.S., a major paints manufacturer announced a restructuring of their decorative paints business. And from my point of view, as someone from outside, it looks like a precious opportunity, but you said that you will be striking a balance. So will you be considering, but with the view on balance?

Well, I have to reserve my comment on individual deal. What I wanted to say earlier is, well, 2.5% is the market share we have in the North America. And investment banks say that you only have 2.5% shares and you will be in trouble. But that's not true. We have Sherwin-Williams in the U.S., who is the largest manufacturer; and there's Masco, who has the Behr brand. There are such strong brands and also, there are local brands by private companies. There are hundreds of players in the industry. In the paints business, it is the characteristics that it tends to be local and has light CapEx. But there is sufficient sustainability. And in fact, this is a public information. But in North America, in the Northern California, there is Kevin Moore, the company stopped their operation. And this is in the adjacencies market from our viewpoint. So taking their share or stores and human resources, taking such resources, that is something anyone else is doing, but this is something we could do. But this company, based on liability in the aspects of litigation, they were put into such situation. So this is irregular situation. Well, in this huge North American market, I think we will be able to survive only with Dunn-Edwards. So I would say it's wrong for investment banks to say that we need to do M&A. But if the company continues to lose against Sherwin-Williams and continue to lose market share, then we would consider if this is the right track. But that is not the case, at least for now. In our outlook, we will be, and we have been able to maintain the market share. So there is no necessity for new acquisitions. That is linked to the concept of MSV.

Next is Nomura Securities, Okazaki-san.

This is Okazaki from Nomura Securities. So your EPS forecast, I thought the sell side, a low sell-side number is probably a reason for a sluggish share price.

No, I didn't say that.

So maybe we need to reflect on ourselves for that. But on the other hand, PER is declining. In January, I talked about this with Wakatsuki-san. And including what you said earlier, probably hasn't changed much. But China is disliked. You have China operation, and this release date. I visited the U.S. I hear lots of voices on that. So maybe the economy will turn upward someday. But the politics and economy, there are many unforeseeable factors. So will you revisit your portfolio from your historical and shareholder structure? It may be difficult. But are you discussing this internally? Possibly revisiting your portfolio?

So to detach China, you mean?

Yes, that option. If you have such option or not.

Not at all. I understand what you're saying. China market share. So bring capital to Japan, and then that will be -- that will make Japan more crowded. And then they look at Japan. And what Japan paint, Nippon Paint is interesting. It's China again. In our portfolio, this is something we have to accept. But in our EPS composition, China accounts for a big portion. So as I have said many times, it's not that we have to add more and more investment in China. China has self-sustaining cash, and it can pay dividend on a standalone basis. So there is no reason to detach China. So if we detach, maybe PER will rise in the short term. Maybe that is a remote possibility, but that is not what we're trying to do. We want to grow China and grow other regions, too, and continue our M&A activities. And probably, we will not do M&A in China. That's less likely. So with M&A, China proportion may decline, but that will be because our overall pie will be bigger. So maybe China proportion may become smaller in our overall pie. But no reason to shrink China for the short-term PER improvement. Maybe that is one option, but we are looking at long-term MSV and maximization of EPS. And so from that perspective, that is not a possibility. That is not an option.

Few years ago, for your India business, in your relation with Wuthelam, you sold and then bought back. Is that kind of thinking in Nippon Paint, NIPSEA Group or Wuthelam. I think that is the strength that you can do that. What about that kind of action?

Well, Wuthelam, well, we did not do that to take it off balance sheet. So when we bought back, it has to be more expensive, right? Now it will be a loss on sales if we sell now. India was loss-making. So selling the loss-making entity means EPS will increase, so a capital increase. So it made all the sense for us. It is profitable and cash generating, selling at low valuation and then share buyback in China will be for higher valuation. So maybe we should discuss this offline. Not type of discussion we should have in a big group, but it is not realistic. .

I understand your way of thinking on PER. I understand that, that is not the case. Yes. Thank you for the idea. So U.S. investors hear them, too. So I hope you could continue providing us with information. Thank you for your valuable input.

Now we have a comment asking a question. Now let me read it out loud. This is a question regarding the operating leverage. Until gaining dominance, you said you need to make reinvestments. But in each region, what is the progress you're making in terms of gaining dominance?

Thank you for the question. Who is asking this question? Well, please look at the appendix. There is a market share trend for each asset. And if you look at this in, for example, China, TUC, it's 25%. From our viewpoint, this is a top share, and second and third is high single digit. And this is not a dominance yet. Dominance is 40% or 50% or 60%. Singapore is where we have gained dominance because it's 75%. Malaysia is growing market share. It is in the middle of its journey, but we can become even more dominant. There is still room. So we haven't completed our journey. Dulux is 50%. This is dominant, I would say. Our products are premium, and this is on volume basis. So in terms of absolute amount, I think we have even higher market share in DuluxGroup. And probably in Dulux, this is one model that we use. But 2% inflation, using that as a basis, revenue is 2% to 3%, growth with price increase, and volume increase is flattish as a result of 5% revenue growth. If that can be achieved, fixed cost is 2% to 3% increase. So operating leverage will improve, and 6% to 7% or 8% growth can be achieved. That is the sense of level that we have. And we do not have dominance with Dunn-Edwards, but we will continue making investments here. In Indonesia, we currently have 19% market share. And when we look at the local players, we are at the same level as them. So we still don't have the dominance, and we have very strong peers in the local market. So in total, we may account for 40%. Then we can go after the remaining 60%. That means there is still room left for growth. So in the timeline of about 3 years, we should look at the market -- margin improvement with operating leverage is not the story we clearly see in the market. But as I said in the beginning, 8% to 9% revenue growth, if that is achieved, and the bottom line is 10% to 12%, that means we do have a decent leverage, but it is not the timing to improve that leverage.

We still have questions in Japanese. But for now, we would like to turn to the English channel. [Operator Instructions] We do not see questions from the English channel. So let us continue with questions on the Japanese channel. [Operator Instructions] UBS Securities, Omura-san.

Omura from UBS Securities. So your Asset Assembler model. Thank you for explaining this again. I have a better understanding now. In addition, for your PMI, thank you for sharing us with your view, which is not different from the past. I have a better understanding on that, too. I have a question on the current M&A market. So you studied multiple deals, but it did not materialize, you said. So in what way did it fail to meet your criteria? Countries or regions that you want to do M&A and the size were bigger, was acquired the other day. Was that part of your study, too?

Thank you very much. I cannot talk about individual deals, so I will refrain from that. But M&A has various patterns. So business characteristics, region will be studied. There's bolt-on acquisition and the pure acquisition. In case of bolt-on M&A, whether the partner company in that region is interested or not, Alina in Kazakhstan, it is a new region, but was bolt-on in nature. Betek Boya in Turkey was acquired by us. And after they joined our group, they wanted to develop the frontier of Kazakhstan. So Kazakhstan market, they've been deepening their understanding on the Kazakhstan market and paint and mortar. Maybe if we think of the local production, local consumption and logistics, it needs to be produced locally or wait for a company to be up for sale. So in M&A, there are competitors. And then valuation and the business stability and the management capability, all these factors need to come into play. So our Turkey team and NIPSEA team, they needed to feel comfortable. And we're confident that it will work, and to do this by incorporating it into their incentive. So that was the key. On the other hand, there are some unrelated areas. Well, small may have various definition. If it's a half-hearted size, and if it's dependent on 1 or 2 top management and if there's no local company, our group company to manage that, then it can be a big risk. So the farther the region, the more resistant we are for such companies. And we have to make -- confirm the management bench of the next level down from the current top management. And then we may say this is not proper for us. Multiple M&A deals were like that. There were some where the acquisition price came out or some that broke before that decided to forgo such deals. As I said earlier, we are picky acquirer. From investment banks, I think we are a difficult company to deal with. We want good companies for a lower price. We are thorough with that, and we say this does not meet our criteria. That is too pricey. But we study multiple deals. And sometimes, we identify good ones that meet our criteria. So while we're continuing this process, M&A, I cannot talk about more specifics. So I hope you understand.

If possible, the existing M&A market, the deal size or the number of deals, the ones that are coming up as potential companies, is the trend up or down. What is the current M&A market like?

Well, no change. We're constantly busy.

Next question is from CoatingMedia, [ Kondo-san ].

I'm [ Kondo ] of CoatingMedia. Regarding the Japan business, I have a question. Earlier, you talked about the CTO earning sales of resin development and production. You said that you will shift into unified operation. So will it be better to do drastic restructuring? Or in mid- to long term, do you have an ideal state that you aim to realize?

Thank you for the question, Kondo-san. In reality, consolidating into one company. Well, there are opinions that, that will be better. But myself and Wee Siew Kim, our thoughts as of today that that's too early. We may do it in the future, but it's too early now. As I said earlier, Nippon Paint, starting from one company, we split the domestic business. And we may still have a mindset that even if we aren't profitable, someone else will be profitable in the group, and that's fine. Well, if we have a strict managerial accounting, it would work. But with the current structure, we would like to have better visibility and each leader should commit strongly to the numbers. And that is the benefit of the current structure and that's something I would prefer to continue to have. And before becoming one again, we have the organizational silos. And it's not that the businesses were having very close relationships in the past, but we have the organizational silos. And when you have concurrent positions, you are forced to overcome such barriers. Our people are hard working, and they are good outperforming in such environments. Without such mindset pointlessly, even if we return to one single structure, I and Wee Siew Kim think that we will face even more risks. We have to make more improvements, and we need to overcome such barriers. And leaders, senior leaders, first need to have such awareness, CCO, Commercial Officer or the technological heads, these senior leaders need to have such mindset, and that will be cascaded down to the employees. That's our idea. So we don't think that it's a good idea to take a drastic step. And regarding the future, we haven't made any decision. That's all I have to share with you today. But One Nippon Paint, we as One Nippon Paint, we aggregate our know-hows and technologies. And we need to leverage that further, not only in Japan, but in NIPSEA and overseas, including Dulux, we have to aggregate their know-hows as well. There are many things that we can leverage in our group. I am hoping that everyone is gradually understanding this idea. So we're not trying to restructure our business before that idea is penetrated.

So you haven't made any decision, go or no go, but is that idea a common understanding internally? What is that idea you are talking about, that you will eventually become One Nippon Paint?

Well, I didn't say that we will move on to one organization. One Nippon Paint is something we've been saying. And creating CCO -- CTO is one of the measures to become One Nippon Paint. And that's also true for the automotive business head. That is something we've been saying repeatedly. And from their viewpoint, it means that they will be under more responsibility. That means they need to work on successor planning. .

So they are working very hard and benefits in terms of numbers will be continued, as you said?

Yes. Short-term numerical targets are important, but ignoring long-term sustainability is not something we will do. We would not, for example, do cost-cutting, ignoring the long-term growth. So sustainability in longer term is important that we need to make investments for that. We are building the technological institute in Shinagawa now; so we will make necessary investments. And if there are unnecessary meetings and allocation of human resources, we will eliminate that.

Next question is [ Kavan ] Nippon Kogyo, Mr. Ozawa.

One question about CapEx. So sustainability is required. So R&D costs and overall CapEx is also being required. So compared to the past 3 years, if you look at the next 3 years, what will be the size of CapEx? Will it increase or decrease?

Thank you for the question. Globally speaking, it will remain flat. There may be ups and downs by region. But so Tokyo, Japan, we have the technology, lab, and now there's some upgrade in some of the facilities. So there may be some increase in Japan. But roughly speaking, our paint industry. This is about 3% of our revenue. Revenue will increase. So the absolute amount of investment may increase, but the proportion to sales may not necessarily rise. So in Japan, the obsolete facilities need to be upgraded. So we will not try to be cost efficient and not make some elaborate facility and office focus on sustainability. I hope this answers your question.

So you said variability among regions. So regions with -- or segments with large CapEx, could you name some of them?

Well, I cannot be too specific. But roughly speaking, decorative can be lower in the world. More than 60% is for decorative. So regions with decorative business can be lower on CapEx. But Australia, Dulux. It's low, CapEx is low, but some factories are upgrading themselves and building new buildings. SAF adhesive plant is now old. And so we need to renovate and upgrade or newly build. And this time, we decided to newly build the building, so the CapEx may temporarily rise. On the other hand, Japan is probably on the higher side. We are using our facilities with good care. But still, we need to upgrade some. So we will do the necessary upgrade CapEx. So maybe B2B, necessity there may be a bit high.

And now we have a question in the comment. I would like to read it out loud. Your MSV is not understood by the market. If so, you can think about delisting through MBO to pursue maximization of corporate value. Have you ever discussed that at the Board?

No. I'm not sure who asked this question, but thank you anyway. So among ourselves, corporate value maximization is not something we would like to pursue. But our top priority -- well, actually, this is the lowest priority. And our top priority is maximizing shareholder value. That is our sole mission. Regarding MBO, we are not considering this idea at all. Realizing MSV in longer term is our mission. It's not about short-term performance. There are 2 aspects. One is, as I said earlier, capital. Maybe not at the current share price level, but we would have an option of M&A going after capital. And the other is a major shareholder. So I don't want you to misunderstand, but this is a family asset. So within the family, they need to secure liquidity. And the requirement is that the company is listed. So MBO is not something that we are to consider. That is all.

It is time, so we will close the Q&A session now. In closing, Wakatsuki-san, please give us some closing remarks. I'm sorry, we exceeded the time.

Thank you very much for your time again. And now that we put things in perspective, I, myself, is extremely excited on the size of the potentiality we have. And if this was shared with you today, it will be my biggest pleasure. And I hope this will help the understanding from the market and will in turn increase -- lead to the increase in maximization of PER. We want to continue this kind of dialogue with you and seek your input so that we can pursue MSV further. Thank you very much.

With that, we will close the briefing today. Thank you very much for your attendance. [Statements in English on this transcript were spoken by an interpreter present on the live call.]