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

Thank you very much for waiting. We would now like to start Nippon Paint Holdings conference call on FY 2025 Q3 financial results. We have some housekeeping announcements before we start. [Operator Instructions] This conference call has Japanese-English simultaneous interpretation. Wakatsuki-san, Tanaka-san, over to you.

Thank you very much. Good afternoon, ladies and gentlemen. I am Wakatsuki, Co-President of Nippon Paint Holdings. Thank you very much for taking the time to join us today despite your busy schedules. I would now like to explain the outline of our FY 2025 Q3 financial results. First, please turn to Page 2. Let me briefly explain the changes we've made to our disclosure starting this quarter. Regarding the background, as you know, I have held numerous meetings with investors and received various feedback directly and indirectly. And many investors, especially overseas institutional investors comparing us to peers, said that while many overseas issuers publish adjusted figures, excluding various adjustment items for comparison, Nippon Paint's detailed disclosures are good, but often difficult to grasp at a glance. Some feedback also noted that the sheer volume of figures made it difficult to convey even very strong earnings results at first glance. In response to these comments and with the primary goal of ensuring a correct understanding of our capabilities and proper peer comparison with our overseas competitors, we have now decided to proactively disclose adjusted profits. This is outlined in the upper section of the summary on Page 2. We also decided to change the terminology for growth rates and similar figures to align with industry standards like LSD, MSD and high -- HSD, low, mid- and high single digits and separate them into price mix and volume components in our disclosure. We will continue to disclose information under this policy for the time being, and we'll continue to listen to your constructive feedback to make further upgrades as necessary. Thank you for your continued support. Next, Pages 3 and 4 are new additions. To help you understand our track record correctly through the long-term trends in our P&L, Page 3 shows the historical trend of Q3 revenue, adjusted operating profit and adjusted EPS since the adoption of IFRS in 2018 and the change to a Board composition with MSD as its mission. Page 4 shows the trend in profit contributions from organic and inorganic growth. We believe this clearly demonstrates our strong growth track record and growth both organically and inorganically at a glance. We also plan to continue disclosing this information going forward. Particularly on Page 4, while organic profit declined temporarily in 2021 due to COVID-19 and rising raw material costs, it recovered significantly in 2022, minus 34.7% to 83.9%. This clearly demonstrates the robust resilience of our earnings power. Next, Page 5, please, Q3 overview. Both revenue and operating profit continued to set new records with revenue increasing by 19% non-GAAP basis. China trading accounting change is included, and adjusted operating profit and EPS both growing by over 40%. Regarding FX rates, the yen has strengthened overall compared to last year. For example, yen strengthened to JPY 147.8 against the U.S. dollar this year, from JPY 151.6 in Q3 FY 2024. JPY 20.5 against Chinese yuan this year versus JPY 21.1 last year. And JPY 94.5 against the Australian dollar this year versus JPY 100.5 last year. Despite these factors, we achieved substantial growth in both revenue and profit. Operating profit saw a solid contribution from organic growth, plus 8.7% and inorganic growth, 33.8%, with margins improving by approximately 3 percentage points. Regionally, AOC continues to contribute strongly to earnings. The U.S. market is showing signs of bottoming out with declining interest rates, which is a positive development. In China, we achieved profit growth by avoiding aggressive sales expansion and firmly securing margins despite the persisting challenging business environment. In NIPSEA, except China, both volume and price/mix improved overall. Next, Page 6, please. The outlook for FY 2025 remains unchanged, with revenue expected to reach a new record high. Regarding Q4, while demand is slowing in many regions, organic growth is still positive, but our currency FX outlook anticipates a stronger yen year-on-year. If the current weak yen persists, there could be some upside potential. But for the full year, it falls slightly short of our guidance of [indiscernible]. Operating profit, on the other hand, is expected to largely achieve the guidance on the pre-adjusted basis of JPY 244 billion. Page 7. No specific comments on the heat map. Overall market conditions were flat in Q3, except for slightly favorable conditions in China's automotive sector, where we gained market share. The AOC segment shows some signs of bottoming out. So we anticipate nearly flat market conditions for Q4. Next, turning to Page 8. Here, we outlined the situation of our major segments. Although I will leave the details for the Q&A, let me briefly comment on each region. First, for the Japan segment, basically, market conditions and volume remain challenging, but we are offsetting this with a favorable price mix, and we're achieving profit growth. Regarding NIPSEA China, TUC's revenue is up by 1% despite challenging market conditions, and we secured sufficient profits. In TUC specifically, it experienced the situation of volume down by LSD, and price and mix up by LSD. Automotive sales grew by 7.9%, driven by increased production volumes and strong sales to Chinese manufacturers. The adjusted operating margin rose by 2.3 percentage points year-on-year, compensating for the revenue decline with margin expansion securing profit growth. NIPSEA, except China, had growth in revenue and profit. Indonesia saw volume growth by mid-single digit, though currency had a negative impact. Turkey achieved double-digit growth in both volume and price. This adjustment attempts to incorporate the impact of applying IAS 29, the super-inflationary accounting -- hyperinflationary accounting. In DGL Pacific, revenue increased despite largely flat market conditions, driven by continued volume and mix improvements [indiscernible] for the impact of yen appreciation. Meanwhile, in Europe, while the French market remained challenging, revenue grew, thanks to contributions from Southern Europe and JUB's business expansion. The stronger euro also provided a positive currency effect. [Audio Gap] thorough deliberation at the September Board meeting in its strategic session. Inclusive of the change in the disclosure method, we intend to continue constructive dialogue with all market participants going forward, and we appreciate your continued support. Secondly, following the completion of the Tokyo Innovation Center in Shinagawa, we conducted a tour for investors. This included presentations from the CTO of Japan and NIPSEA, along with a Q&A session. And we were pleased to welcome participation from many investors and analysts. We'd like to express our sincere gratitude once again to all who attended. Thirdly, turning to Page 10. This is the third major topic. We plan to hold an IR Day on November 26. This time, the event will feature a presentation from AOC. So it has been scheduled for the morning in Japan. Both co-presidents will also be speaking. So we are looking forward to seeing you there. This concludes my brief presentation. And now I take questions from the audience. Thank you for your kind attention.

[Operator Instructions] First, from the Japanese channel. First questioner is Goldman Sachs Securities, Ikeda-san.

Ikeda from Goldman Sachs. So overall, the environment remains challenging in Q3, but operating profit progress is strong. So overall, I think you are seeing a good progress. By region, are there variabilities, differences? And the focus in the market, the TUC in China dropped in Q2. But in Q3, it has turned around and now picking up in Q3. Premium products are strong. So in the challenging China environment, what is working well? Is there a sign of improvement in the sentiment locally? So if you could particularly focus on the recovery in China, please?

Thank you very much. So overall, in China -- I will answer those two points. Overall, this is my honest feeling, the market is not good by any means. So as a macro economy, including the U.S., the interest rate decline is finally coming within sight, but we cannot expect a V-shaped recovery. Under such circumstances, in each region, we are trying to secure margin and market share. And in Australia, we are growing despite the tough environment in terms of volume and value. Of course, there are differences among markets. In Australia, with the declining interest rate, the market may turn around and start picking up. But we cannot be optimistic. In Turkey, in Q3, we had a large campaign. And as I mentioned in the past, Nippon Paint, we have a strong capital -- Nippon Paint as a background. And so the sales promotion campaign is going well. Volume, of course, price in Q3, outperformed our expectation. So overall, FX, yen is a bit strong. So even including that, as you rightly said, we think we performed fairly well. Next, on China. So how we look at 1% is one thing, but the market, Q2 was minus 5% to minus 10% -- it was minus 11%. So we could not be proud of that. But as I mentioned back then, we tightened our credit control and also made our inventory management more stringent. So in addition to the market environment, we tried to ensure our discipline. How about Q3? We continue our tight credit control. As I've mentioned in the past, we -- the practice is to have everything paid by the end of the year by the distributors. And so we are stopping the sales if need be in some cases. So we are vigilant and being cautious here. So there are some impacts on Q3, but the market is basically flat. So we're not winning big, but of course, we're not losing either, and premium is going very well. Price is generally declining, but the mix is improving. So margin is improving as well. So this is where we are. So from various perspectives, 1%. In the current market environment, we are achieving market with the healthy business management. We're not pushing ourselves too much and achieving this result. And so we're securing profit. So of course, from my standpoint, I never get satisfied, but I think we took the right steps. So I think I answered your questions.

So premium market is now being launched? Or the urban demand due to the tariff sectors had some purchase restraint is now coming back? Or are your products particularly doing well? What are the factors?

To be honest with you, the market is -- in Tier 0, 1, 2 and 3 to 6, the market is not good. So it's not that the urban areas are recovering. It's more our promotion bearing results, including some price reduction is being accepted well. And premium is selling well. And the premium has higher margin. And therefore, we are securing margin profit well. The recovery of the market itself is not obvious. We cannot see a clear recovery in the market yet. Of course, we look at our competitors' numbers. But in our competition, the base is different. We have larger scale. And so the view that we have of our market from our standpoint is that the market is difficult. And so we're taking steps accordingly.

The next question is from SMBC Nikko Securities. Shintani-san, please go ahead with your question.

My name is Shintani. I have a question about AOC. So in Q3 and Q4, what is the situation going to be? And what's the outlook for the next fiscal year? So you mentioned the interest rate decline in the U.S., but it remains high, and I assume that you've been in a difficult market condition. But can you give us some more color on that? So I think there is going to be more demand for pent-up. So how are you expecting such opportunity for the next fiscal year? And if that materializes, when we think about AOC's products, what is going to be the timeline for them to make tangible contribution?

So once again, the American market condition is not necessarily strong. So the volume is down by mid-single digit. On a year-on-year basis, it is negative. However, as you can see, we have been able to secure sufficient margin. In that sense, we can say that this is a resilient business and also they are being able to differentiate themselves in the market. It continues to be that way. And in terms of concerns, as you said, the interest rate decline. As the authority, we believe that some people say they are being more cautious than it was expected. So unless we see a clear trend of interest rate decline, I believe it does not become a strong tailwind. But as the overall trend, we need to address inflation. And also, there is the revitalization of economy. And when that materializes, we will be able to see more pent-up demand. And I believe it is too early to talk about the next fiscal year. In February, of course, we are hoping to give a guidance. But in terms of its long-term trend in the U.S., infrastructure-related spending is necessary. It continues to be important for our business. And the U.S. economy continues to be somewhat strong. And in the longer run, as announced in last October, we believe that we'll be able to grow in high single digit. But if you ask if that will be realized in FY '26, our answer is that we do not have that visibility at the moment. So I'd like to reserve any further comments as of today. But in terms of infrastructure and housing-related demands, we have broad applications, and that is the strength of AOC. So we believe there is room left for further development. And in Europe, the market condition is also not good. They have much more exposure to the U.S., but penetration of their business system in Europe, if that makes progress next fiscal year, as we've been saying, we believe that there is room for further growth there. That's all.

As a follow-up, so of course, you don't have a crystal ball for the market condition next year, but you said that you are being able to keep the margin as well as the market share. So given the difficult market conditions, what is it about AOC that the market is appreciating so much? It sounded like they're gaining share. So what is the situation? And about the expected margin improvement in Europe, do you have any expectation or visibility into that?

On the second point, well, we don't necessarily say that they're gaining share, but they are keeping the share. The market is down. So we are down as well, and we're not losing the share. I believe that is the correct way to interpret the current situation. And just like in China, by doing sales expansion, sacrificing profits going after share, that is not the best solution in the current situation. And the AOC's strength is in -- it's a custom product. So they are offering added value. And it's important that they are capable of developing products that can gain understanding from the customers from the development phase. And they have a large proportion of custom products as introduced. So this is difficult to be lost, but we also cannot say that it won't be lost. We want to avoid making any confusion in the field. But in many different ways, I believe they are being able to offer added value in the non-general purpose or decorative areas. And regarding Europe, so they have 70% exposure to the U.S., and they have slightly higher margin in the U.S. as well. So this business system needs to be better penetrated. But this business system is all about custom-made products, not general purpose. That needs to be further promoted and penetrated. New product development is one measure. They will be taking a multifaceted approach. The CEO is also saying that there is room for improvement in Europe, also because of the characteristics of the market. So we have to wait for further developments. And everyone asks when it will happen, and we just need to ask you to wait. If we have any updates, we will share them with you.

Understood. That was very clear.

Just one more thing regarding AOC. So it's good that they have high margin. But as I said earlier, the sales and EBITDA -- well, the unit price fluctuates pretty rapidly. So we are not only looking at margin as an indicator. But of course, if it's higher, it's better. So in next year, we will be able to do a better year-on-year comparison.

Next is BofA Securities. Enomoto-san, please.

This is Enomoto-san from BofA Securities. So the share repurchase is my question. If I understand correctly, you have always said you will not do share buyback. But this time, you changed that. What led to this change? Change of your feeling or policy? And how did you come up with this size, the amount? And the most important point is about the retirement -- the cancellation of the repurchased stock -- treasury stock.

I never said I will never do it. I said, M&A rather than buyback, and this policy remains unchanged. So value creation through M&A is our long-term strategy, the core of our long-term strategy, Asset Assembler strategy. This model remains unchanged. But because the share price is so low, one investor said, "If you are an ex-banker, why is this high-performing good company is on sale for -- without premium? Don't you want to buy it?" And I thought, yes, I do. So it is like a pure financial investment. It's a pure financial decision. Given our future EPS growth, if we can buy this current PER, I would like to go ahead and do it. So that is the reason. The trigger is a low share price, and the earnings is solid. But unfortunately, it deteriorated temporarily. And so as the usage of cash, we thought this is a viable option. Now the size of our share buyback. Our leverage is quite at a level, and so the Japanese financial institutions trust our safe, trusting financial management and lending us at a low rate. So it is not a big policy change. As a financial decision and along with the deleveraging efforts and for future M&A potential, we thought that this JPY 30 billion hits the right balance. There is no deep science behind this. Why not JPY 35 billion, not JPY 40 billion, but JPY 30 billion? Because we thought of this and the future opportunity and with the size that has a certain level of impact, and that is why we came to this decision. And next, the cancellation, retirement on purchase. We do not plan to retire our treasury shares because -- I've said this a few times, I do not deny equity finance. So if EPS, it rises sufficiently, if there is an M&A that raises the EPS and ensures leverage stability, we may use our share for that purpose. So if we cancel our shares, the share issuance and the release of the share, there is no difference in the procedure, but the license is different, registration license. Until we decide that we do not do equity finance, we will keep on -- hold on to it. So this is the difference of around hundreds of millions of yen, the license tax.

So no change in your dividend policy and share swap, is what you are trying to mean?

It's not just share exchange -- share swap, new share issuance. There is a capital increase. From common sense, mostly cash, debt and some equity is our model. So share exchange, to do this equity versus equity, our PER, if it's 50x, I do it. But otherwise, it doesn't make much sense. So of course, it will be a mixture. So it's not limited to share exchange. Rather, some other means is more appropriate, we think.

And dividend policy?

Yes, dividend. No change in dividend policy. Basically, we raised our dividend a little by little every year. So payout ratio is our policy. We will hit the right balance between M&A, deleveraging and the next M&A to create our value. This value creation is better than the short-term dividend. So this is consistent with what I've always said. And so nothing changes with the share buyback this time.

Next question is from Mizuho Securities from Yoshida-san.

This is Yoshida from Mizuho Securities. So I'd like to ask about the situation in Q3 and Q4. So you haven't changed the JPY 244 billion OP outlook for the full year, that means there will be a decline by about JPY 13 billion. And according to your presentation, you said that you're confident in achieving this full year target of JPY 240 billion. So from Q3 to Q4, what is the Q-on-Q negative factor? Is that China as always? And I think there is PPA of AOC. So from Q3 to Q4, how should we think about the change in the level?

Yes, Yoshida-san, as I've been saying, I hope that you don't look at our business on quarter-on-quarter business. So on a year-on-year basis, it is positive, as you can see on Page 6 on the right side. And as you pointed out, the adjusted -- no, in terms of OP before adjustment, there is PPA cost, which is temporary. And also, there is inventory step-up in AOC, which amounts to JPY 9 billion approximately. But these are not fixed. So we are not sure yet, but we haven't changed these assumptions so far. And other than that, in Q4, on the contrary, so we will no longer have adjusted OP. But there is a sale of the land in Shinagawa, which is going to be a positive factor at around JPY 7 billion. Other than that, in last year, for the 2 months of Q4, we included India. Up to Q3, India was not included. But in Q4, we will have 2 months' worth of the India business, and we will have full contribution from AOC. Because of all these factors, so JPY 46.5 billion is the previous year's OP, and we are expecting to go up by 20%. And so there is a strong increase year-on-year, and the margin is also slightly above as suggested, even when accounting -- taking into account all these fluctuating factors. And on the right side, I hope you can also pay attention to these assumptions that we are assuming strong yen. In last year's Q4, it was moderately strong, and the exchange rate today is almost in line with the last year's. So we can expect a slight uplift. There are negative and positive factors, but in Q4, in general, we are confident that we can grow.

So in your speech earlier, so regarding AOC, I think you suggested that you're expecting steady growth. But are you excluding seasonality factors?

No, well...

So Q4 will have steady growth. Are you saying that it will be flat year-on-year?

Well, I didn't say that exactly. I'm just saying that there is a sign of steady growth. The situation is different from sales and volume. In terms of volume, it seems that we are bottoming out. But in December, to be honest, it is not a strong demand month, and we have Thanksgiving in the U.S. in November. So there will be ups and downs to a certain extent. So we're not being too optimistic. But we believe that we are seeing signs of bottoming out from the downward trend that we've been seeing, and that is a discussion happening in the AOC Board. That's what I shared.

Understood.

Yoshida-san, again, please don't analyze the business on a quarter-on-quarter basis, please.

I understand.

And just to be sure, I'd like to say something to Enomoto-san. It's not that we want to issue shares, and we are not going to do that if the current situation continues, but -- I'm repeating myself. But in the future, when the share price becomes more decent, and if we believe that we'll be able to achieve sufficient EPS after issuing shares by doing debt financing in some M&A opportunity, we may choose to do that. So if you ask us if we are not going to cancel the shares, I believe I had to answer it that way so that we can save the necessary expense for that licensing. That's it.

Next, Citigroup Securities, Nishiyama-san.