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

It is now the scheduled time, so we will begin Nippon Paint Holdings medium-term Strategy Update Briefing. Thank you very much for taking time out of your busy schedules to attend today. This information session will be held online only. Let me introduce today's attendee. Yuichiro Wakatsuki, Director, Representative Executive Officer and Co-President. Today, Wakatsuki will first explain followed by a Q&A session. Please note that this briefing has simultaneous interpretation between Japanese and English. President, Wakatsuki, please start.

Thank you very much. Good afternoon, everyone. I am Wakatsuki, Co-President of Nippon Paint Holdings. Thank you very much for taking time out of your busy schedules to join us today. I would now like to provide an update on Nippon Paint's medium-term strategy. Members of the media are also attending this briefing. Thank you very much for your support. First is today's summary, Page 3. There is no change to the medium-term strategy that we explained in April last year. Our belief that the asset assembler model is our strength remains unchanged under MSV, our mission of maximizing shareholder value. This asset assembler model may appear low profile, but by assembling solid companies, we aim to compound low-risk, sustainable EPS. In such excellent companies, we require the autonomy and accountability of excellent management teams, which ultimately brings out the full potential of the assets. Last year, I said that of the 2 pillars of our model, organic and inorganic initiatives, we can compound EPS without limits for inorganic growth regardless of region, business area or size, provided it offers low risk and good returns. But we received many comments saying that it was difficult to have concrete image as we could not disclose specific targets. Then we announced the acquisition of AOC in October last year and closed it last month, which I think helped your understanding. I will elaborate further today. As shown in the upward revision of the guidance announced today, this M&A can contribute to a significant accretion in EPS from year 1 and is in line with our strategy from diverse perspectives. Let me briefly mention synergy here. I have always said that acquisitions that make synergy the goal run the risk of overpricing and that sufficient profitability is important on a stand-alone basis. And this acquisition, AOC acquisition was successful at a valuation that met that threshold. That is not to say we will not pursue synergy. We will, of course, pursue synergy effectively. For example, the purchasing departments are already working together. And I have spoken with the CEO of AOC about doing everything thoroughly wherever they belong, AOC or Nippon Paint Group. In addition, AOC's business system has inspired the management teams of many of our partner companies, and they are all eager to learn from it. Our strength lies in the idea that these movements are not led by the headquarters, but rather that each business company thinks independently. And of course, we will help if the point of contact is unclear. By doing so, we aim to achieve both autonomy and accountability and the motivation and performance of each company will steadily increase. I've already explained a great deal about the organic status and initiatives in February. To repeat, our business is fundamentally linked to the economic growth of each country and region. And in addition to factors such as population growth and per capita GDP growth, we can achieve growth that exceeds GDP by expanding our market share. In that sense, the demand itself, especially decorative business is not cyclical. And coupled with the strength of our brand, which I explained at last year's IR Day, we believe stable growth will continue, and we have made no changes to our basic medium-term growth forecast. Recently, we have been receiving fewer questions on China. And to be honest, the market environment is by no means favorable. However, we continue to deliver profitable growth. And China remains an area in which we will continue to focus on growth. Based on the summary above, we have once again reviewed our asset assembler model on Page 4. We compound sustainable EPS, both organically and inorganically, which are naturally interrelated. In other words, after assets acquired through M&A join the group, we will steadily grow EPS while pursuing synergies through autonomous and decentralized management and collaboration within the group. With the acquisition of AOC, I think we can have a more concrete image of that. But of course, we fully understand that it is essential to produce results in the future. Next, Page 5, please. Here is a summary of our M&A strategy. The acquisition of AOC is exactly in line with the policy we communicated last year in April last year, and we believe that we fully demonstrated our advantages in M&A through this acquisition. As I said at the time of the announcement in October last year, the acquisition of AOC is not the goal, but just the beginning, and we want to continue pursuing acquisitions that have low risk and good returns with agility. The strength of our portfolio is that all companies are basically growing autonomously and are in position to generate cash. So there are no must-do deals without which our business becomes unviable. As a result, while we, of course, want good companies, we are in a position to decide to forgo if they are not profitable. This allows us to avoid to overpay. As for funding, as I will discuss later, we have been able to maintain extremely high cash generation capability even after the AOC acquisition. So we have a reasonable amount of debt capacity. However, if sufficient EPS accretion is ensured, we will also consider equity financing. And in that sense, the fact that this platform allows us to pursue unlimited upside potential is our strength, along with the low-cost funding capability. Next, Page 6, please. The acquisition of AOC will add a new pillar to our portfolio, which will significantly change our consolidated margins, cash flow and profit structure. The contribution in 2025 will be for 10 months. And although AOC's guidance is based on the assumption of an extremely uncertain environment, including tariffs in the U.S., we expect margins to be maintained in sales revenue to decline slightly in volume. We have been checking monthly performance since the announcement. And even in a tough environment, the contribution margin has been firmly maintained and expanded. In the medium to long term, there is no change in our view that sufficient growth is expected due to lower interest rates and economic recovery in the U.S. and improved margins in Europe. When we announced this acquisition last year, I talked about their excellent business system, high profitability backed by small CapEx burden and cash flow generating capability as the strength of AOC. I said that the reason their CapEx burden is low is because they operate using a process similar to paint manufacturing using reactors and the facility can be used for a long time if it is maintained well. To give you a better image, please look at the video on AOC plant in Tennessee. [Presentation]

The operation staff who did the plant tour as part of the due diligence confirmed that it is extremely organized and efficient, and the scheme is quite similar to paint plants. I hope this video serves as a reference for you. Please turn to Page 7. This slide is a summary of organic results. And from Page 8 onwards, I will update on individual markets. The summary was mentioned at the beginning. And basically, although there have been some ups and downs, we have achieved steady and stable growth and believe that it is quite possible in the future. I would like to explain the contents of Pages 8 and 9, if there are questions later. Next, Page 10, please. The description of China basically remains unchanged from our past messages. I think that there is still room for growth in decorative paints compared to developed countries and that it is one of the few growth markets in the maturing world and has ample potential going forward with regards to automotive paints. Page 11. As the asset assembler model takes shape, we are updating our guidance for FY 2025. For existing businesses, excluding AOC, there are no changes on a local currency basis, but the yen has strengthened slightly compared to February. So we have made downward revisions based on the exchange rate assumptions shown in the lower right corner. However, given the 10-month contribution from AOC and a transfer of fixed assets at the Shinagawa office, overall, we have made a significant upward revision for operating income. If I were to give you a verbal overview of the changes in EPS, the original guidance was JPY 57.1 EPS. The impact of the stronger yen was approximately minus JPY 2.7. The contribution of AOC for 10 months was approximately JPY 12.5 positive. And the sale of fixed assets in Shinagawa was approximately JPY 1.9 positive. So the new guidance is approximately JPY 69 in total. There are 2 points to note regarding AOC's EPS contribution of JPY 12.5. The first point is that the contribution of AOC is assuming a certain PPA purchase price allocation estimation following the due diligence at the time of acquisition, taking into account the amortization of intangible assets. But the actual PPA will begin after the closing and will be finalized in the second half of the year. So there is a possibility that it will change slightly. Secondly, this figure takes into account the one-off acquisition costs for FY 2025. Specifically, it includes, for example, advisory fees, insurance costs and estimated step-up costs for inventory due to PPA, all onetime costs. Again, the step-up costs for inventory are just estimates, and the final figure will be determined in the second half of the year. Roughly just over JPY 3 billion after tax or about JPY 1.3 in EPS has been subtracted. Therefore, AOC's regular contribution based on 2025 forecast will be JPY 12.5 plus JPY 1.3 equals JPY 13.8 for 10 months or about JPY 16.5 per year based on this calculation for 10 months. This is, of course, the figure after interest payments associated with the acquisition. The said figures are rough estimates and AOC's performance this year will fluctuate depending on the results of the PPA and the interest rate level. But we have provided the supplementary explanation in the hope that you will recognize the significance of its contribution. Page 12. This is an update on cash flow. As I mentioned last year, in 2023, we strengthened our collection efforts, particularly in China, resulting in a very strong cash flow. Although it has declined slightly since then, I think we have continued to demonstrate strong cash generation in 2024. As a result, leverage at the end of 2024 was less than 2x net debt to EBITDA. And although we only took into account the acquisition of AOC at the end of 2025, even so, it was still at a level of just over 3x, which is a safe enough margin. And in addition, AOC's ability to generate cash is extremely strong. So I think it will be possible to reduce it to just over 2x again by the end of 2026 if there are no other acquisitions. So as I mentioned earlier, we will be able to continue pursuing M&A opportunities. Our approach to share buybacks is the same as last year, which is that we are not satisfied with the current share price level, but we plan to use our valuable capital for M&As with future potential of generating revenue. And we are not considering share buybacks at this time with a view to building up sustainable EPS in the longer run. Having said that, we will keep our stance that we will be always watching the market and keeping all options open for the future. Page 13. Some investors have pointed out that they do understand what we're saying, but it's no good if the share price doesn't go up, which is reasonable. We continue to strongly feel that we want to reward the shareholders who have invested in us because they empathize with our policies and how to close the valuation gap is our ongoing challenge. On this page, I am discussing the 3 points once again. The first is that we are committed to EPS based on our mission of MSV and that we are a company that is an EPS compounding machine, whether organic or inorganic, and that we would like you to recognize this along with our track record. Second is our management style free of ego. This is not just about me where we should came personally, but it is a management style that does not allow anything that doesn't go along with our mission. And I think that this is something that people can have more confidence in. I know that this is a bit of a self praise, but I think that our management, which purely pursues MSV and is carried out by both the executive and the Board of Directors working together is something that is hard to find elsewhere. Thirdly, at our core is the idea of achieving a solid balance between growth and safety. In addition to the proven resilience of our base business, which has survived the pandemic and severe inflation, if we can leverage our strength and carry out safe M&As, which is a term that includes the safety of the target business, the soundness of the valuation, ability to trigger autonomous growth after acquisition and sound balance sheet management. And if we get to repeat such M&As that can make everyone feel a little more secure, I think we will naturally be able to share our growth image. At the strategy session held with all the directors following the previous general meeting of shareholders, I shared a spreadsheet with everyone. This spreadsheet is extremely simple, but it is a single sheet that summarizes our road map for the next 10 years. And in particular, it is something that I and Wee Siew Kim have shared from time to time since our joint appointment as Co-President and Goh Hup Jin's appointment as chairperson in 2021, and it has been updated since then. This spreadsheet explains how we can simulate based on many variables such as organic net income, acquisition price, acquisition multiple, interest rate level, growth rate of the acquisition target, cash conversion, resulting consolidated net debt to EBITDA, debt to equity ratio, amount of new shares issued in case of equity financing and PER of our company's shares. And that this is a road map on how to safely and continuously implement M&A and maximize shareholder value. Although I will refrain from giving specific numbers, if we think about it more simply, we can recognize a considerable upside. Even though it is conditional that we carry out the right M&A with a sound sense of caution at a sound multiple, it is achievable. And we have discussed this point with all the directors and have reached an agreement on the feasibility. However, to avoid miscommunication, I emphasize that M&A is a means, not an end in itself. Each target company has its own unique risks and opportunities. So we will not blindly pursue M&A at random. We will carefully assess each case before proceeding. These are shown in a little more detail with the chart on Page 14. Each bar and line has no particular meaning. So this is not for you to approximate what is the numbers shown by bars and lines. But instead, the top row shows the image of continuous growth through organic and M&A activities and the bottom row shows the elements that contribute to improving PER. We're not trying to step into an unprecedented level of PER, but our focus is rather how quickly we can return to the previously achieved level. Finally, a summary. Our company's sole mission is MSV. And we will continue to pursue the maximization of long-term EPS as well as short-term EPS by leveraging the superiority of our asset assembler platform. MSV is a concept that seeks to maximize the remaining shareholder value after fulfilling our limited responsibilities to our shareholders, which should be the one and only mission for a public company. It is the management's mission to strive for unlimited, but safe growth. In organic growth, we will pursue maximizing the potential of our assets and in M&A, we will carefully assess the balance between risk and valuation, both of which will contribute to compounding EPS. We will keep aiming to maximize PER by building on our track record and creating the wide expectations for the future. We will continue to communicate with the market and produce results. So we look forward to your continued support. This concludes my presentation. And I would now like to take questions from the audience. Thank you for your kind attention.

We will now move on to the Q&A session. [Operator Instructions] So the first question is BofA Securities. And Enomoto-san, please.

This is Enomoto from BofA Securities. So I want to jump to the appendix, Appendix Page 5 shows the market share. This is the summary of 2024. So my question is, it seems like the share increase had stopped in 2024. So Malaysia and other countries are on the rise, but main markets like China, Turkey, Indonesia and other countries, the market share up, increase seems to have stopped in 2024. Why is that? You've been increasing your market share consistently, and that has been your strategy. But looking at 2024 alone, I feel a bit strange about the numbers. So what happened? What are behind the numbers? And from 2025 and onward, can you again start picking up on the market share increase?

Thank you Enomoto-san for your question. Regarding market share, there are 2 points I want to share with you. First, of course, our management direction is that we increase market share, but we will not increase market share by recklessly sacrificing the profitability. And I've said that from the past. So profitable market share increase needs to be the case. We will not just jump into Red Ocean or create Red Ocean ourselves. That is not what we want to do. So in countries like China, the market share is actually higher than it seems here, but there is a lack of data. So on that basis, we are taking a conservative view. In totality, comprehensively, we want to achieve profitable market share increase. So we don't want to push ourselves too much especially where we are dominant to increase market share further, may have some negative impact on the profit. So we want to hit the right balance. Now on an individual basis, there is variability. There are differences. I will not go one by one. But in China, for example, TUB 9%. Maybe it is slightly lower. That is my true feeling. So intentionally, including credit problems, we are not pushing ourselves to go after the lower profitability areas. And here, it says flat, but there are some strategic actions, intentional actions being taken here. On the other hand, TUC, by area, there are differences in Tier 0, our share is high, but Tier 3 to 6, we need further growth. So in total, I think this is the right level, appropriate level. So it's not so much this market share. It's rather the business growth, revenue growth on a year-on-year basis. I think that will give you a better, more accurate picture. So the revenue in terms of absolute amount is growing. And in the areas, market share is not declining -- barely declining. So we are at least maintaining the market share in all markets or increasing our market share. So this -- I do not think is of concern to you. Thank you. I hope this answered your question.

Just 1 follow-up question. So it's not that your strategy has changed. So you're more profit focused. It's not that you are focusing on profit more than market share.

Well, as I've said from the past, it's both. So if we just capture market share and our profitability drops, the local team bonus, they will not receive their bonus or they will receive less bonus. So our KPIs: market share increase and profit increase. When the market is strong, when the market sentiment is good, the market share may take some priority and it will ensure sufficient profit. But if that is not the case, we will not push ourselves too much like discount our prices. There was no impact of price discount in Q3 last year in China. So in that case, we want to focus more on profitability. So this agility needs to be ensured in the front line and work with that. So that is the autonomous and decentralized management. The key to this management. So it's not that we are just going to focus on profitability. It's not that we're instructing to solely focus on profit. We try to identify what the right thing is in the long term by country and based on our position in each time point. Thank you.

Next question is from Goldman Sachs, Ikeda-san.

I am Ikeda from Goldman Sachs Securities. Congratulations on closing the deal with AOC.

Ikeda-san, thank you.

Regarding AOC, I have some basic questions. First of all, the top line, it was described in the material that from 2022 to 2024, the market continues to decline. And AOC's revenue was starting from [ $18 ] in 2022, moving to [ $13.55 ] and then it is dropping by 5% this fiscal year. Infrastructure, housing, auto, they are heavily impacted by interest rate changes. And today, it was announced about the new tariffs. So given the recent circumstances, what are your expectations for these aspects? And in terms of OP margin, I think it used to be 33% to 34%, but you have declined to 30.7%. So when the top line continues to decline going forward, is there any risk for the profit to decline as well. And also, as you explained earlier, regarding the synergy with AOC, what is your particular expectation? Is it raw materials formulation? I believe there is going to be a considerable synergy impact, but what is your biggest expectation?

I believe you had 3 questions actually. It is okay. Thank you. So to your first question about the sales trend, so like you pointed out, well, to be honest, the impact from the tariff, as I spoke about this week is too volatile at this moment. We have to say that it is unclear. The tariff itself -- well, we basically have a local production for local demand type of model in the U.S. and elsewhere. So when products are imported, they will be imposed tariff and it will be passed through. But that is not the only impact, there could be a negative impact on the economy itself triggered by this tariff change because our performance is somewhat linked to GDP if this kind of policy that affects GDP continues, perhaps we need to anticipate a negative impact. But as of today, we are not expecting any serious long-standing negative impact. However, the situation is changing day by day. So we are assuming a regular condition to certain extent. And in our AOC business, infrastructure, transportation, they are in these sectors, but they are the most sensitive to interest rate. The interest rate has not gone down compared to our expectation. Rather, it is much higher than our expectation a few years ago, resulting in investments. But in medium to longer term, in areas like infrastructures, they will need to make investments because there is long-term demand. However, in terms of the timing of recovery, I have to say that it's been delayed overall. So in this fiscal year, we have a negative expectation for the volume. But having said that, what is great about this company is that contribution margin can be improved continuously even in this kind of situation. In last October, I explained about business systems. It is systematic. And it allows cost innovation, leanness and price increase. They have the 4 quadrants. And by pursuing them, they are able to continue to improve their contribution margin. So the total amount of profit may slightly decline at times, but it will -- it is expected to remain flat in general. And to your third question -- excuse me, to your second question about profitability. In PPA, ITA, intangible asset amortization was not taken into account in our previous guidance. And this time, it is included. So the OP margin before amortization continues to be the same. EPS is our focus. That means intangible asset amortization, even noncash items need to be taken into account to think about long-term impact on the bottom line. We are doing such calculation simulation internally. So the numbers are seemingly different, but the trend continues to be the same. And to your third question about the synergy, I think in procurement, we can expect the biggest synergy the one that is most noticeable. We've already started some actions. We do share some materials, raw materials. And more than that, we have many common vendors. So on a real-time basis, we hope to share data to produce better results. As far as I know, AOC is more advanced in this area. And if this spreads out to the rest of the group, maybe it could have an even larger synergy impact. But as I said earlier, quantifying the synergy impact is not what we will try to do first. This is going to be an upside that may become visible. And only then I intend to share that with you all, but that is not the purpose of this M&A. I hope you will understand. And in other areas, their resins, is it usable in any other areas? Maybe the short-term answer is no. Mass production for cost reduction is not their business model, but they're customizing depending on customer needs. They have unique formulation. In our group, if that style can penetrate quickly, the answer may be no. However, in terms of building customer relationships and building differentiation factors, these are a part of their business model. In the paints and coatings industry, this is an industry with a long history but I believe we need to learn a lot from them to introduce those elements into our business system. And each operating company is going to introduce and decide to adopt. So the headquarters is not really given instructions. But on the ground level, they have been taking various measures already. So I believe we can look forward to certain upside. I hope I answered your 3 questions.

Just 1 follow-up. After the completion of the deal, you revisited the estimation. And what has changed positively or what has changed negatively?

At this point, it's been 1 month since completion of the deal. And since October, I have been speaking about this almost on a monthly basis. And we have been having very close communication. And the reality has been somewhat in line with our expectation, their CEO and CFO, the management members are very willing to communicate with us closely. And this is a private equity sale. So upon completion, there was a risk of outflow of human resources. But as of today, we have been able to retain key personnel. But rather Nippon Paint Holdings is going to be a long-term owner. So they are looking forward to building added value under its initiative. And what has been less than our expectations? Well, there were 2 things. One is a stronger yen. It has had a negative impact on yen-based transactions. It is currently JPY 148. And if there is no further fluctuation, it will be okay. But as I said earlier, tariff related situation is unforeseeable. I don't want to say that it is out of our expectation, but I think we share this impression that we are surprised by how much they are imposing. So it has been somewhat different from our expectation, to be honest. But the U.S. is a vast market. And when we think about the footprint required there as well as demand for mid- to long-term infrastructure investments, I think we need to deal with short-term ups and downs, and we continue to have anticipation for their revenue-generating capabilities.

Next, Citigroup Securities, Nishiyama-san.

This is Nishiyama from Citigroup Securities. So I want to ask you questions on how you use cost. The market is not favorable in all the markets and fixed and variable costs are now being controlled in a restrictive manner. More specifically, which cost items are you controlling? From second half last year, especially in China, the cost control has been done more rigorously. Looking at Q4, the profitability fell short of your expectation. So will you control your cost more or not? And as Enomoto-san said at the beginning, with the cost control, will this undermine the source of future profitability growth? If you could give us more color.

Thank you. How should I say -- we are always reviewing and revisiting this. So it's not that in China, we had a lax management. We have been pursuing profitability with a good balance with profitability and growth. But as I've mentioned over and over, we do not want margin to be the end goal. So global 15%, if we say 15%. 15% is achievable if you try to do it. But as you rightly said, it impairs the future growth, then maybe 12% is okay. We want to hit the right balance. That is the key. But to be honest with you, I'm not giving instructions do this,, do that. Each region, the leaders we select are making judgments and Wee Siew Kim may say, is that really the case? We always check and confirm every month to ensure the growth and the profit margin until now. So cost items on the P&L. We're saying this is high on a cumulative basis, why? So we have such discussion and labor cost, personnel cost, is this the right breakdown? We ask business unit. Are there anything we can standardize between these 2 business units? We are trying to challenge them. That is the role of Wee Siew Kim. So it's not that we do something because it's this year or something just for last year. It's not like that. This is our DNA. It's ingrained in our DNA, and that is our strength. So as Enomoto-san said we should not make the increase in the market share, the end goal. We want profitable market share increase to achieve both goals. But with sales promotion, maybe sales promotion will bring up the market share. But if that does not bring the desirable profitability, then that is the status of the market, so we will stop doing it. That is the kind of judgment call we make. There are trials and errors. We accept trials and errors. We have the cushion, the buffer. So we leverage that. Our competitors have single-digit -- low single-digit margin. We try -- we are securing double-digit margin. So I think we have latitude in many ways. And lastly, as I mentioned many times, the brand capability, brand power will not weaken overnight. But in some regions, we need to continuously invest in our brand as a certain proportion of revenue. So we think like that in some regions and in some regions, we think it's okay to drop. So it depends on the market share of -- and the nature of the respective markets. [indiscernible] has 50% market share, but we should not weaken our efforts and continue investment. We have a strong belief, so that is one way of doing it. And there are different areas in NIPSEA, in other areas, there are more flexibility. So I don't know if I answered your question straightforwardly, but it's not an easy, simple equation or formula. We're trying to do the right thing. So I hope you could take a look at our results.

Understood. Thank you very much for the detailed explanation.

Next question is from the Nomura Securities Okazaki san.

This is Okazaki from Nomura Securities.

Okazaki san, it's been a while. I am good.

Well, it's been a while. So I'm sorry if I'm asking very basic questions. But just for clarification about AOC. In October, at the time of the announcement, JPY 200 billion was the revenue for 2024 and JPY 70 billion was the OP estimation. And have I -- maybe I have missed the update. But if there were any updates, please let me know. And in the new fiscal year, for 12 months, in terms of sales, you have -- is forecasted at a slight decline compared to the JPY 200 billion. Is my understanding correct? And excluding organic and excluding PPA, you said that the margin is almost the same. So in 2024 and '25, if the sales is flat and OP is flat? Or is it going to be a slight decline? Can I clarify if my understanding is correct. And on Page 22 of the material, I see the future strategy of AOC areas that will grow in the future. And when I look at these in the 4-year tenure of President Trump, these may be difficult to grow. If the interest rate goes down, it will be positive, but EV wind turbines, maybe these -- for these sectors, the President Trump's policies are not going to be the tailwind. And I am imagining that it will be difficult for them to grow in terms of profit. So if there are any counterarguments, please let me know.

Thank you. First of all, for FY 2024, I believe it went down from the October announcement. I think it went down from the October announcement. And in FY '25 from 0% to minus 5% is the expected range. So in terms of pricing, it's improving. But in terms of volume, it is going down in the overall market. But in terms of contribution margin, against a given volume, it is expected to grow, resulting in flat performance. So EBIT margin is expected to go up slightly. If the sales is coming down slightly in terms of margin percentage, it would be up slightly to result in flat performance. But overall, we are expecting a flat performance. And in the appendix, we are explaining the midterm forecast for AOC. As a market, we are expecting around 5% or a volume-based 3% change in mid- to long term. When the rebound is going to occur, especially in the U.S. many chemical producers are paying attention to this timing when it is going to happen. Compared to our expectation, everything has been delayed. And because of the tariff policies of Mr. Trump, there is more risk of than becoming the headwind instead of tailwind. And demand for infrastructure development in mid- to long term, we still have conviction for such demand. Warren Buffett often says never bet against America. The strength of the American market, I believe they do have resilience. But when that is going to occur? Different economists have different expectations, and we're hoping for a quick rebound, but we will be able to generate rich cash and make profit contribution, and we're not worried about what they can bring about.

Next, Mizuho Securities, Yoshida-san.

Yoshida is my name from Mizuho Securities. I have a question on organic business in China. Since last year, in China, the government has been purchasing the real estate and the regulation -- relaxing of the regulation of the housing purchase and towards the end of last year, it's starting to show results. The newly built housing prices is on the rise in the January-March quarter. China is changing from the initial forecast? Or is it changing? Or is it still difficult? So TUC, TUB status in the recent 3 months, please and the tariff impact. The impact may not be large in China domestically, but which points regarding tariff do we need to be wary of?

Thank you, Yoshida-san. The January-March quarter. We have a good grasp of the status, but I would like to refrain from explaining this now. After the numbers come out in May, I want to go into more detail. But the underlying assumption is that we're not optimistic. We think it's a difficult environment. So on that basis, as I said many times, our business model is strong. So I think we are running a reasonably strong business throughout the year, not just January-March quarter, throughout the year. So that boils down to our brand strength and the untapped Tier 3 to 6 cities. We are gaining traction in these smaller sized cities. So I think we have quite a confidence level. This presentation and in appendix, we look at our peers too, and Board members ask us, if it's okay for competitors watch this. Wee Siew Kim said, it is our brand. They cannot mimic us easily. So it's okay if the competitors look at us, look at this data. That's the confidence we have, but the economic situation, economy is not that strong. We cannot be overly optimistic. So macro status and our status need to be viewed separately. And so that is where we stand. And the other is tariff. This is not just about China. How the tariff impacts us? And I think this is a negotiation card. And how they will compromise what do they need to achieve to compromise? We don't know. Our business is based on local production, local consumption. So the import raw material cost rises and pricing pass-through needs to be done. Yes, that is the case. But the bigger factor is the economy itself. If there is a negative impact on the GDP growth, then even if the paint is the export products, there will be an impact on the consumer goods. And of course, automobile because of the decline in export, it will be good for the domestic production, but our Japanese companies, business, it will have a negative impact -- suffer a negative impact. So we need to watch closely. I can only say we watch closely because the announcement was just today. But one is that we don't know if the GDP or economic growth declines, it will be a negative impact. On the other hand, our model -- business model, we have a certain level of resiliency. We always have the steadiness. So we will probably not face some extraordinary circumstances, and that is our strength of our business.

Next question is from SMBC Nikko Securities, Shintani-san.

This is Shintani from SMBC Nikko Securities. I would like to ask more about AOC. From your point of view, what is the -- its inherent competitiveness. In terms of EBIT margin, compared to the Paints and Coatings business, it is obviously high. But compared to other peers, I think it has maintained a higher level of margin and what is in the background? Is it the product mix because they have more -- higher profitability product? Or is it because of the business system, customer base. From your viewpoint, if there is anything that you're aware of, I hope you can share that with us.

Thank you for the question. Well, the CEO of AOC -- well, I have talked to him, and he said that I shouldn't give too much information because competitors will be watching this -- listening to this. In China, we say that we refrain from disclosing margin there because competitors can listen to that information as well. So I have to be somewhat vague in speaking about them. When I think about their competitiveness, their strength, Originally, the margin in this industry is around 15% to 20%. And AOC before Joe Sally joined was at industrial average. So it is not that this company has inherent competitiveness or outstanding technology. But they do have geographical advantage resulting in stronger relationships with customers. And as consolidation proceeds, they have been able to improve their margin. And today, AOC has outstanding margin compared to the peers based on the announcement in October. And that is coming from the business systems. As I said, there are 4 quadrants: sales and cost, innovation, new product development, lean operation. The final piece -- lean operation is something that paints and coatings companies are striving for inclusive of the video that I showed you earlier. I think you noticed that their factories don't look so different from anything else, but they are focusing on lean operation, eliminating waste and unnecessary human resources. In their relationships with customers, I think the existence of formulator is having the biggest impact. They have competitiveness in the formulation itself. I don't want to make any miscommunication, but in the decorative sector, we don't have to share a formulation with customers, but in industrial or automotive sectors, formulation is shared quite openly, including the 4M change, they need to obtain approval from the customer, and they have very strict and high quality requirements. On the other hand, AOC's customers, it's not that they have low level of quality standards. But in pursuing performance, they are not sharing the formulation per se. That means they have more freedom in their operation. And they have strived to pursue such lean operation. And I think that has resulted in this difference in the margin. That is our perception. They are ensuring convenience for customers and unsaturated polyester customer proportion is not necessarily large. That is also true for paints and coatings company. But they are ensuring lean operation and convenience for customers, and they also have very strong relationships with customers resulting in having sticky customers and demand for products. That is something we need to learn from them, and I believe this is a wonderful management style. For example, there are 100 competitors, maybe this has never happened because of the consolidation they were able to build entry barriers. In the U.S., if you try to build a new chemical plant, it is going to be a very tough work. This factory -- their factories from 1961, they have been maintaining it well. And also for paints and coatings, this is true, but it has the same meaning for their business as well. They have first-mover advantage. And they have entry barriers. And I don't want you to take me wrong, but I don't want you to have an impression about AOC that they are being very greedy in pursuing profits, but that is not the case. The management has a strong focus on ensuring convenience for customers and lean operation at the same time.

I have 1 follow-up question. You talked about their formulation being a positive element for their margin. And I think that is coming from cost reduction and also price pass-through. And you've been saying that you do have room for improvement going forward. So can you please talk about the progress so far? And what is the expected curve? Will you be able to improve margin as manufacturers?

Once again, customization. We are not producing general purpose products. That means we have our uniqueness and we're not disclosing our formulation. It is difficult for customers to bring it to somewhere else, and that is creating this barrier. On top of that, in Europe, we are planning to penetrate this model further. And we have made progress. But in Europe, more customers are using general-purpose products as of today. And cost sensitivity may be stricter compared to the U.S., for example. But at the same time, it is true that it is improving. So I am confident that we can make further progress in the future. But if we can grow as much as the U.S., that is what we need to wait and see. But even without it, we have sufficient profitability. So we will focus on maintaining and improving the profitability with the management of AOC, we are aligned in this part.

Thank you for the details. I look forward to further contribution. Thank you.

Next question is JPMorgan Securities. Nakada-san.

This is JPMorgan Securities, Nakada speaking. So in the material page 13 and 14 valuation is where I want to ask my questions. So maybe I should ask this question after looking at your share price tomorrow and next week. But with the upward revision, if the share price does not go up, then the valuation may come down again. PER may come down. So we've been taking various measures to increase our EPS. The valuation in the long run, paint was viewed as other costs and became paint and coatings and Sherwin -- like Sherwin in the U.S. is had higher multiple like as consumables. And with the acquisition of AOC, what kind of valuation do you anticipate? I think you've had discussions on that. On the other hand, China discount and China proportion declines. So on Page 13 and 14, you talked about the points that you want to address and appeal to the shareholders. You will continue that and wait for the stock market to understand your point or flatly put Nippon Paint. How do you want Nippon Paint to be evaluated? How do you think you should be evaluated? Now it is not well evaluated enough. So how do you think market should view you and the communication with the investors. If the communication goes well or not, results in the share price. So do you think you want to be close to the paint level? Or to the AOC level, I think it's case by case, but with your future strategy, please share with us your view on the valuation.

That is an insightful question. In the Board meeting, we always talk and discuss that point. To be honest with you, I always talk about the maximization of PER is my mission. But it's not that we manipulate and I'm not asking you to come up with a extraordinary multiple. We want you to look at us and evaluate us. First, the track record AOC is one beginning I said. So going forward, we want to accumulate the safe, stable deals one after another in a way that does not impair our corporate value. So the key is how we can get that conviction. And if this gives you reassurance -- if the investors believe that we are truly trying to maximize the shareholder value. It's not Wakatsuki bet or Wee Siew Kim bet. We are not charismatic figures or anything. So want the platform itself to be viewed as a good platform. And combining that with the low-cost funding in Japan, the company can be viewed as leveraging these factors well. We often say in here, if it's just a low interest rate, then it's the same situation for other Japanese companies, but we have to have the strong intention to utilize that the management and the Board and willing to take healthy risks or encourage risk taking. The Board that encourages healthy risk taking. We say -- many say, but in many cases, we're not used to it. So -- but we say we walk the talk. So it's not about chemicals or paint or coating as EPS pounder -- EPS compounding machine, we want to reward the shareholders -- return to the shareholders. That's what the trajectory we're trying to pursue. That is the foundation. So for a lack of a better word, I meet investors who have a favorable view on the paint companies. And I say thank you very much. But like Sherwin-Williams, cash -- there is the great real estate in the U.S., which generates cash and also borrow money when they need to acquire companies. But for other -- otherwise, cash will be used for shareholder return. I think that is a great way of managing our company, but we are not like that. So if the investors want buyback in the paint company, that's not us because we are compound EPS through M&A and through organic measures. So if you can identify with that is our message. And if you can identify with us if that is one way of thinking, then investors, this may align with the investor strategy, it may not, but I'm not trying to push anything to you. But on the other hand, we want to stay unwavered, stay firm, not just me who was unwavered, but the entire Board. We have more than half outside directors in our board. So we want to be aligned and agree on the MSV that we are pursuing. And along with our track record, we are trying to pursue this and have a convincing M&A going forward. Through these measures, this EPS compounders will be more persuasive and trustworthy. I want the share price to go up tomorrow, and I think it will. But it's not about such short-term measures. We want to present this and not tell a lie, deliver the promise and prove through track record and align ourselves and what we say and what we do. I may not have answered your question. But that is the kind of discussion we have.

The external environment and stock market is difficult today, but this is -- it's -- this is when you need to combine inorganic and organic measures to increase your profit, and that can be done with the strength of your platform. So I have high expectations. Thank you very much.

Next question is from CLSA Securities [ Chow-san ]

This is Chow from CLSA Securities. I would like to ask about Indonesia and Turkey. Previously, well, there have been a lot of political instabilities. And in terms of your demand, has there been any impact And what about the currency depreciation, has there been any impact?

Just like you said, in Turkey and Indonesia, we do have political instability, and we have been discussing the situation. But our answer so far is that we are not sure. There are 2 aspects. For example, Indonesian lira (sic) [ rupiah ] may depreciate. And against yen, Indonesia contribution will decline as a result. That itself is going to be a negative impact like a stronger yen. In local production, local consumption model, in that model, how much impact would we have. We had Ramadan in March in Indonesia. And also because of that, we are still not sure. In the first quarter results, we are hoping that we can show you some sort of direction. But I can say that we're not in a situation where we need to be panicked. In Turkey, likewise, if the protest comes under control, we don't have to be worried too much. But in these emerging countries, we do have such geopolitical risks and we cannot be optimistic. We have a currency translation issue. IAS 29 inflationary accounting issue is also there in Turkey. And we have to anticipate the impact on the economy. And if there are protests resulting in weaker consumption, of course, we will be impacted. So we need to continue to pay careful attention. In terms of future demand, our strength is that our business does not have to worry about demand diminishing going forward. There would be ups and downs in the short term, but we are not concerned about longer term. Today, we are focusing on mid- to long-term strategy. So I can say that we are not concerned about mid-to-long-term impact. Thank you.

We're receiving more questions on the Japanese channel, but we will switch to the English channel for now. English listeners, if you have any questions, please press the raise hand button. Please wait for a moment till we appoint the questioner. We do not see any questions. So we will again receive questions from the Japanese channel. So next, UBS Securities, Omura-san.

UBS Securities, Omura is my name. So you said that the tariff impact is unforeseeable, but in November, since Trump won in November, how have you been preparing for this situation? Anything you could share with us, for example, inventory reduction or cost reduction any strategy or initiatives? And if the economy falls into recession, how do you think about your focus on the EPS? If the market falls into recession, the purchase price and the M&A price will naturally come down. So how -- do you think that's an opportunity? Please share with us your view. Thank you very much.

Omura-san, so we've not taken any Mr. President Trump countermeasures like the Japanese government. But when the tariff goes up, like now, the raw material -- we increase the inventory in each region slightly, including the U.S., but in our model it's very view that we export and sell. So the impact on the raw material -- local impact is hard to foresee. In the U.S., a vendor applied regardless of product, said one day -- informed us that they will apply an across-the-board price increase. And 1 or 2 days later, they said they will take it back. So things change every day. That is what we hear from our U.S. members. So we have to watch closely. And paint, we will prepare for when we have to do the pricing pass-through. But if it's not necessary, of course, we won't. And paint in the U.S., if there is a big volume of import, it doesn't mean that the domestic demand will suddenly go up. There are other players. And so the competitive landscape is not that different. So we use similar raw materials. So it's not that all of a sudden, the competitive landscape changes and our business changes fundamentally, that is unlikely. But as you said, Turkey and Indonesia. In Indonesia, their export to the U.S. may be suppressed. So this may lead to the share price decline in Indonesia. So in one word, it's cost control. We will avoid excessive or unnecessary costs and pursue lean operation. And achieve the initial budget. So we need to focus on that. And as I alluded to earlier, Asia, this is the DNA of NIPSEA and AOC has the strong mentality of that [indiscernible] and Japan, too. So we're not thinking of an Ultra C and extraordinary super measure. We just do what we always keep in mind, what we always embrace at heart. Now is this an opportunity for M&A? It depends on the business. So it means suppress the risk and take the opportunity. So if it's a business where the tariff impact is large, we will think twice. But we hesitate, but U.S. It's not out of control. It's not that we will not look at U.S. at all. U.S. has a medium- to long-term resilience. So we have to continue watching it. And rather, as Omura-san said, it may be an opportunity. So we want to be vigilant. There's no golden rule. We need to look at one -- each one carefully and not buy something at the appropriate price. And not set the purchase or the acquisition as the end goal. I hope you could trust our management. Thank you very much.

So 1 point on inventory. So in this phase, you have been increasing inventory. Is that right? With higher uncertainty, I thought you would naturally reduce inventory, but are you increasing inventory? Not product, but the raw material inventory, raw material inventory.

I'm not looking at each and every region to the greatest detail, but we're doing that in some parts of the U.S. because it will be hit hard directly by the tariff. But the product inventory is not increasing. So product inventory is not on the rise. We do not need much working capital. So that in itself will not impact our profitability much. And we will not have increase in working capital that will negatively impact our cash flow.

Next question is from Citigroup Securities, Nishiyama-san.

This is Nishiyama of Citigroup Securities. This is my second round. So I apologize for asking a general question at the end of the call. But when I was reading Page 8 and 9, I wanted to ask about the progress against your midterm goals. So I believe that your goals are not necessarily bound to 3-year time frame, but you did explain that 3 years is a period that you do have in your mind. So since you have updated your guidance, can you please clarify what is going well, what is not and what assets need minor adjustments. Indian market assumption has changed and I can see some changes in the commentary for Turkey. So I hope you can comment on those as well.

Well, as I said in the beginning, medium to long-term organic growth has not changed so much. In China, maybe you think we were seeing 15%. Last year, TUC was 6%. So it's been more moderate. But the market's potential and the fact that we can take market share and achieve profitable growth. Based on such assumptions, people in the local team believes that they can achieve this level. It is not that I am saying that we can do this one-sidedly, but they are discussing with Wee Siew Kim to come up with these numbers. Generally speaking, including what has been -- what has changed yesterday and today, the impact that this new tariff can bring about to the global economy. It is likely to have more negative implications rather than the positive ones. At least in the short term, we will be affected in 2 or 3 years. We may have tough times, but even given such circumstances, we continue to strive for growth in different regions, the CEOs of partner companies in different regions are saying that this is our mission to accomplish growth. We have such talent. So we don't want to talk about having a weaker reality than we have thought. But based on the firm assumptions, we do have a vision for what we can achieve, and that is reflected in this guidance. And as for India, including new entries, we do have a tough situation for the decorative sector, and we do have a tough situation for the overall market. Two years ago, I think it was in summer of 2022 that we repurchased the entity. And compared to when we made that announcement, I think the market situation has worsened. In Turkey, as I've been saying, this is a tricky market. They have -- they used to have hyperinflationary environment with low interest rate, but now it is less inflationary with higher interest rate resulting in a flat economy, including stock-up used to exist, but it is now plateauing. That is the current phase. We were expecting such phase will occur at some time in the future. But instead, we will no longer have to apply hyperinflationary accounting in the future. But including the ongoing protests, it continues to be a tricky market rather than a stable market, and it is difficult to foresee. Other than that, there are no major changes, but in DGL Pacific, we don't have any issues. But in Europe, in France, in particular, the market recovery we're maintaining flat performance this year, will hopefully help us realize performance recovery going forward. But the Russia and Ukraine war, is it going to be resolved soon. Depending on that progress, I think we could be affected. This is not only true for this industry, but we continue to have a lack of transparency. But that said, we want to achieve both growth and profit. That is the summary for our organic growth. Regarding this chart, I have a specific question. From this year in China, you have changed the transaction method resulting in higher profitability. But according to this table, you continue to have the same profit forecast of Tier 3 to 6 cities by having their growth. Is it resulting in lower profitability because of the mix? Or is the growth very small that you don't have to change the arrow direction. Well, we -- yes, we did change the direction. But in medium term, we do not have -- we do not foresee any impact that we have to change the direction of the arrow. In such a tough environment, we will go after margin and the profit if we can achieve a certain revenue rather than going after higher operating margin, we would also like to make investments. So this shows different meanings compared to short-term forecast.

It is time, so we will close the Q&A session. Lastly, President Wakatsuki, please.

Well, thank you very much for staying with us for a long time, and thank you for all the questions. As I mentioned over and over, the communication with the market and to communicate our story to when your understanding is important, so we should not be self-complacent and of course, be unwavered where we should stand strong. I will take -- continue taking the lead and listen to your voices and continue delivering on the promise, deliver the results. So with that, I ask you for your continuous support. Thank you very much again for today.

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