Nippon Paint Holdings Co., Ltd. (4612) Q4 FY2025 Earnings Call Transcript & Summary

It is now time to commence the Nippon Paint Holdings Co., Ltd. FY 2025 Q4 Financial Results briefing and medium-term strategy update briefing. Thank you very much for joining us today despite your busy schedules. This briefing will be held online only. Now let me introduce today's attendee. Director, Representative, Executive Officer and Co-President, Yuichiro Wakatsuki. Today's agenda will proceed with an explanation from Wakatsuki, followed by a Q&A session. Please note that simultaneous interpretation in Japanese and English is provided for this briefing. President Wakatsuki, the floor is yours.

Thank you. Hello, everyone. I am Wakatsuki, Co-President of NPHD. Thank you very much for taking the time to join us today despite your busy schedules. I will provide an overview of our FY 2025 Q4 and full year financial results as well as an update on our medium-term strategy. We typically announce our medium-term strategy in April. Last year, there were changes such as the consolidation of AOC. This year, we covered a wide range of topics, including AOC, China, NIPSEA and M&A at our IR Day in November. Our basic policy remains unchanged. So I would like to briefly discuss the additional updates. And after that, I would like to take questions on each topic. Members of the media are also participating today. First, on Page 2, please note that we have made some changes to our disclosure since Q3 of last year. While these changes have been generally well received by investors, we will continue to listen to your constructive feedback and make further improvements as necessary. We have also changed the way we display exchange rates, showing the rates for each quarter instead of cumulative totals. The yen generally weakened year-on-year in Q4, but strengthened slightly for the full year. The assumed yen exchange rate for 2026 is slightly stronger than the actual rate, that JPY 150 to $1, but is expected to be roughly flat year-on-year. Next, Pages 3 and 4 are included from Q3. But first, Page 3 shows the long-term performance trend for Q4. This Q4 was also very strong. And I think you can see at a glance our extremely high growth track record and growth of organically and inorganically. The long-term trends for the full fiscal year are included on Page 4. As I mentioned in the last term, organic profits turned negative temporarily due to COVID-19 in 2020 and rising raw material prices in 2021, but have recovered significantly since 2022, demonstrating the strong resilience of our organic profitability. Next, let me give you an overview of Q4 on Page 5. Both revenue and operating profit were record high with increases in revenue by 14% in real terms, adjusted operating profit by 54% and adjusted EPS by a significant 75%. Operating profit contribution was organic, plus 24% and inorganic plus 30% with margins improving by 4.7 percentage points. By region, AOC remained a high profit contributor. And with the interest rate cuts in the U.S., the market is showing signs of bottoming out. In China, the economic outlook remains tough and we continue to achieve profit growth by focusing on margins. In regions other than NIPSEA China, both volume and prices have improved overall. Page 6 shows FY 2025 results. Revenue increased 11%. Adjusted operating profit increased by 38% and the adjusted OP margin improved by 3.3 percentage points year-on-year to 15.5%. Adjusted EPS also increased 43.3% and EPS of JPY 76.7 on the accounting basis significantly exceeded our April guidance along with operating profit and net profit. Page 7, please. Regarding our FY 2026 guidance, although the economic environment will remain relatively challenging, we expect both revenue and operating profit to reach new record highs. We expect growth in revenue by approximately 8%, adjusted operating profit and net profit by approximately 10% and a modest uptick in adjusted OP margin. EPS on the accounting basis is expected to increase by 11.4% to JPY 85.3 with share buybacks contributing slightly above 1%. Regionally, AOC is expecting a return to low single-digit revenue growth, and TUC in China is also expecting profitable high single-digit growth, as I mentioned in the recent IR Day. In addition, we expect continued strong revenue and profit growth in NIPSEA outside of China. As we announced at the time of AOC acquisition in October 2024, we adopt a progressive dividend policy, so we will prioritize deleveraging in preparation for future additional M&A and expect to increase dividend by JPY 1 backed by our strong performance. Next, Page 8 and 9. These 2 pages show the assumptions for the guidance for each segment. Simply put, revenue growth will continue to be driven by China and NIPSEA, while profitable growth is expected in each region based on our competitive advantages. Page 10, please. As you can see from the heat map, Against the tough market conditions overall, we are firmly aiming for profitable growth. Page 11 is a summary of operating results in major segments. I will leave the details to the Q&A session, but we'll briefly comment on each region. In the Japan segment, tough market conditions and volume were offset by a favorable price mix resulting in a slight increase in revenue and profits increased by approximately 18%, not including gain on the sale of fixed assets, thanks to improved RMCC and SG&A control and margin also improved to 13.1%. NIPSEA China achieved a 30% increase in profits in Q4 despite tough market conditions in all areas, except for the automotive industry. Through strong cost control, we achieved a margin improvement of nearly 5 percentage points even though it was a period of declining demand. While market conditions are expected to remain tough in 2026, as I mentioned at the beginning, we aim to return to growth trajectory based on our competitive strength. NIPSEA, excluding China, continued to see an overall trend of increased revenue and profits with results that more than offset the negative impact of exchange rates. DGL Pacific achieved double-digit increases in both revenue and profits despite a nearly flat market, thanks to continued volume growth, mix benefits, small scale acquisitions and exchange rates, demonstrating continued stable growth. Meanwhile, in Europe, market conditions remained tough in France, Southern Europe was strong and ETICS markets in JUB was weak, resulting in mixed results, but profits increased, thanks to the FX impact. In light of the worsening market conditions in Europe, Cromology Group recorded a goodwill impairment loss of JPY 5.5 billion as a result of an impairment test. In the Americas, the number of automobiles produced across the region decreased. Long-term interest rates have not yet fallen and housing demand generally decreased, resulting in a decrease in revenue and profits for the Americas. AOC continues to maintain very high margins and is making significant contribution to profits. For reference, revenue was down 2% year-on-year and signs of bottoming out are becoming apparent. PPA has been completed. And on unadjusted basis, amortization of intangible assets and inventory step-up expenses, totaling JPY 5.1 billion were recorded. However, depreciation of tangible fixed assets of JPY 2.1 billion was recorded after adjustments. And excluding this, the adjusted OP margin remains at approximately 35%. And next, Page 12, please. There are 3 major topics. First, we held IR Day in November of last year, as already announced. Secondly, we continue receiving very high ratings from the IR and sustainability evaluation organizations. Let me once again express our gratitude to all those involved who have provided us with various constructive feedback. The third point is on Page 13, which we announced yesterday. The share buyback is progressing steadily. While it is certainly unfortunate that our stock price remains low, we view this as a positive opportunity to purchase our shares at a very favorable price. If all goes well, the buyback will mostly be completed by the end of February, which will boost EPS by about 1.2% year-on-year. This concludes the financial results presentation, and I would like to move on to an update on our medium-term strategy. First, Page 3, executive summary. There are no fundamental changes from the policy announced in April 2024 and updated last April. Going forward, I'd like to share only the main points. First, we remain steadfast in our asset assembler strategy as the end of unlimited organic and inorganic growth. Second, as you saw in the FY '25 results, our organic growth capability remains solid, even under a challenging market environment. However, regarding revenue compared with 2024, uncertainty about the outlook ahead has increased. We are taking a slightly more conservative view on growth in China. And in the short term, there will also be dilution of growth due to the addition of the U.S.-centered AOC business onto the portfolio, which is facing somewhat difficult conditions. As a result, we are lowering our previous targets of 8% to 9% revenue growth and 10% to 12% EPS growth and now aim for a mid single digit in revenue and high single-digit growth in EPS. I will touch on this again later. And third, we will continue to pursue inorganic growth through both bolt-on and asset type approaches. Even after the acquisition of AOC, we continue to consider M&A on an ongoing basis. While we have passed on some opportunities due to price mismatches or concerns about the sustainability of the business, we believe there are currently many opportunities for us as a buyer. We have previously said there is no limit, but based on investor feedback that this was too broad and that the statement itself does not resonate with new investors who are not familiar with Nippon Paint. We have decided to present our approach more specifically. In other words, our primary targets will be companies in the chemical domain that operate in solid growth markets, have competitive advantages and whose growth can be enhanced under our group. We will aim for M&A that contributes to EPS from the first year and achieves ROIC exceeding WACC within approximately 3 years. On the other hand, as I mentioned repeatedly, M&A is not an end in itself. So we will pursue it with discipline, including with respect to pricing. Next, Page 4. This is a reprint from our earnings materials. But our revenue CAGR from 2018 to 2025 is 16%, and the CAGR for adjusted EPS is 17.4%. Please note that this EPS growth reflects impact of the share issuance associated with the move to 100% ownership of our Asia joint venture and the acquisition of the Indonesia business in 2021. Once again, I believe this demonstrates our growth capability over the long term through both organic and inorganic initiatives, and we take pride in consistently delivering on what we say we will achieve. Next, Page 5. Here, we are briefly looking back since we announced our policy in April 2024. At that time -- and also in corporate governance code, this reflection has been emphasized. And I would like to make a comparison from back then. At the time, we had not anticipated the acquisition of AOC. And we stated our midterm targets of 8% to 9% annual revenue growth and 10% to 12% EPS growth. Over the past 2 years, we have achieved nearly those levels with organic revenue growth of just under 7% or 6.7% and adjusted EPS growth of just over 10%. Considering how dramatically the political and economic environment has changed since April 2024, I believe this is a very solid performance. In addition, with the contribution from AOC, we ultimately achieved revenue growth of 11%. This excludes the China adjustments. But with adjustments, it will be around 12% and adjusted EPS growth of 22.2% was achieved. Furthermore, compared with 2023, margins and cash generation capability have improved. And also, our business portfolio, as you see on the right-hand side, has become more balanced. Next, Page 6. This is a summary of our organic growth. There are 4 points. First, regarding the market environment. As I have consistently stated, paints and coatings, especially decorative paints have very resilient demand and grow steadily in line with population growth, urbanization and rising economic standards. On the other hand, they are also linked to economic conditions. So given the current market environment, we believe it is necessary to adopt somewhat cautious assumptions. Second, against this backdrop, as mentioned earlier, our performance achieved very strong organic growth, even excluding the impact of AOC. Based on the strong organic growth and cash flow, we continue to have a solid foundation to pursue further growth. And third, under these circumstances, our midterm targets, assuming the current portfolio are mid-single-digit growth in revenue and high single-digit growth in adjusted EPS. However, internally, we are, in fact, aiming for a double-digit growth. And finally, as we also showed at IR Day, both our China business and AOC remain attractive as growth businesses and this is not changed. Page 7. Here, we show the results over the past 2 years compared with our forecast at the time in 2024 for each region as well as the outlook we have just explained. For Japan, the profit margin was 9.6% in 2023 and has risen to 10.7% in 2025 after adjustments. So margins have improved largely in line with our guidance. For China, as mentioned repeatedly, the market environment has been challenging. And we prioritized margins. As a result, performance reflects that approach with somewhat lower revenue, but a significant improvement in margin. Profit CAGR was at 5.9%, which is somewhat below expectation. However, this was offset by NIPSEA except China. As for DGL, performance is in line with guidance, but the recovery of the market environment in Europe, particularly in France will be the key factor going forward. Page 8. As for China, myself and Co-President, Wee Siew Kim already explained this at IR Day, so I will not repeat the details. However, based on the premise that the market will remain soft, we will pursue growth more aggressively and aim for a high single-digit growth for TUC in 2026. That said, as shown on the previous page, we believe mid-single-digit growth is a realistic figure over the medium term. And of course, we will continue to make further efforts locally to exceed that level. And as I have said before, China is a very dynamic market. And we believe that only our company has the capabilities to leverage brand strength, scale, digitalization, advancement of IT systems and development of new models in Tier 3 to 6 cities. When the market eventually recovers, which we are not assuming at this point, we believe we will be the company best positioned to benefit most significantly. Next, Page 9. On inorganic growth and M&A. Regarding the M&A market environment, given macroeconomic uncertainty and the overall decline in valuation multiples, we believe this is a good opportunity for buyers. In fact, my impression is that discussions have become more active. Against this backdrop, in terms of our track record, not only has AOC made a contribution, but the companies we acquired to date have also steadily grown and improved returns, as shown on the following pages. Our strength in low-cost funding continues to be an advantage. Of course, as interest rates rise, our sensitivity to risk also increases. So there are some aspects that make us a bit more cautious. However, at current cost levels, at the current interest rate levels, we still believe there are many acquisition opportunities that can be pursued without compromising the company's financial stability. As mentioned at the beginning, our acquisition criteria and targets remain unchanged. Based on investor feedback, I would like to clarify that I am not denying the importance of ROIC. In fact, particularly as our valuation has declined, our focus on ROIC has increased significantly. And our acquisition standards have become stricter accordingly. However, if we focus solely on ROIC, it could hinder our growth aspirations. So we believe it is important to strike the right balance. Next is Page 10. This is also an update of the EPS compounding track record we have shown previously including the latest figure. Since I received questions from time to time, to avoid any misunderstanding, let me repeat that in 2021, we increased the number of shares by 46% due to the move to 100% ownership of our Asia joint venture and the acquisition of the Indonesia business. So the bottom, the dark blue, as a result, on an EPS basis, the existing business may appear to have temporarily declined. However, in reality, this reflects addition of the corresponding acquired businesses. And overall, EPS has, in fact, increased. Page 11. This is also an update of the ROIC for each asset that we presented at IR Day with addition of 2025. We show figures both including and excluding goodwill and intangible assets. And please take note of the following 3 points. First, ROIC for each asset has been steadily improving after the acquisitions. This can be seen as evidence that in addition to selecting high-quality targets, our model based on autonomy and accountability is working effectively. I would also add that synergies are actually materializing in both tangible and intangible ways. And second, with acquisitions, we pay consideration that includes goodwill and intangible assets. So we cannot completely exclude them. Even so, if you look on the right-hand side, I believe you can understand that the acquisitions target highly asset-light and highly profitable companies. And third, we are often benchmarked against peers using simple company-wide ROIC comparisons. However, companies that actively pursue M&A like ourselves and those that do not have very different asset compositions and their growth capabilities also differ. Some investors who look closely at the details try to make adjustments in various ways. But as I mentioned earlier, focusing solely on ROIC can obscure these differences. So again, I would like to remind you of this point. And for Page 14, this is also a repeat from IR Day. Based on strong capital generated through organic EPS growth, we aim to achieve compelling growth by reinvesting that capital into M&A that firmly contributes to MSV. What is important is for investors to recognize the reliability of our growth strategy from both the organic and inorganic perspectives. We will continue to steadily build our track record going forward. Page 15. With respect to financial discipline, we will continue to balance sound financial management with growth, targeting net debt-to-EBITDA ratio below 4x and a D/E ratio below 1x. At the end of last year, net debt to EBITDA stood at 2.9x, even after executing a certain level of share buybacks, which exceeded our expectation. Based on this, we anticipate reducing it by approximately another 0.5x this year. As we mentioned at IR Day and again today, we are already advancing preparations for our next M&A opportunity. And with our current financial position, we believe we have ample capacity to proceed with the next step. Again, Page 16, our continued commitment to MSV remains unchanged. I believe there are very few companies that stayed so clear and consistently that MSV is their core mission. We, the management as well as the Board take pride in the fact that this philosophy is deeply embedded in everything we do. And based on it, we intend to continue delivering solid results. This concludes my presentation on the earnings results and the update to our midterm management policy. Thank you very much for your attention.

We will now move on to the Q&A session.

We have 3 points I'd like to ask you. First, to provide as much opportunity to many investors, we'd like to limit the number of questions to 1 per person. [Operator Instructions] First question is Goldman Sachs Securities, Ikeda-san.

This is Ikeda from Goldman Sachs. First, you are exceeding the business plan and you're exceeding the consensus on the guidance for this fiscal year. Congratulations for the very robust performance. First question. Q4, China business. The market environment is difficult, and TUC sales volume is upper single-digit and 5% decline overall, but the profit margin is improving quite significantly. Sales price is unchanged. And so the margin improved. And this trend will continue this year? The raw material cost due to -- may rise due to the competition, but China's business environment and this year's forecast, please?

Thank you, Ikeda-san, for the question. For Q4, unfortunately, TUC was minus 5%. So we are not in a full recovery trajectory yet. Q4, as you know, is a slow season. So we will do the realigning and recover and collect the receivables. We think we are running a healthy business. And there is no excessive inventory in the market, and we are recovering the accounts receivable. We felt the risk in the account receivable collection, but now our healthy management is bearing fruit. And as you rightly said, raw material benefit is being enjoyed the premium products sold well, but the economy products were a bit difficult. The market overall is minus 5%. So we are in line with the market trend. In one word, this is -- although we're in a slow season, the demand was rather weak. And in Q4, that was also the case. As I mentioned earlier, in FY '26, we are not assuming a radical improvement in the market, but still aiming for high single-digit growth. So we will pursue the premium strategy. And as we've mentioned earlier, the Tier 3 to 6 cities, our experience in these 3 to 6 cities can be exerted Direct2Front, D2F, as I mentioned on Page 9. I mentioned this on IR Day. We are doing this before other competitors, and we are well established in terms of system. So we think this will come to fruition. Last week, I met my Asian team, China team are very much motivated for sales increase. They are saying we will alleviate your -- the burden on your shoulders. Our China management team have high credibility, high trust, and they're saying it boils down to profit. We have to raise profit. Like Wee Siew Kim said, high single digits, will be secured in TUC as well. But at the same time, for margin, raw material is basically flat. Our assumption is flat. So there is some risk. It can go up or down. Of course, the downside of the slow economy is sales, but the benefit is raw material cost decline. So we think these 2 factors will offset each other, and we can secure margin. So for profitable growth as Wee Siew Kim and China management team have committed, so we will secure the profitable growth. So to repeat myself, the market, we're not assuming a turnaround in the market, but we want to achieve this target. So that is the basis of our guidance.

One follow-up question. as of Q2 and Q3, you mentioned the credit control. You will have more disciplined credit control. The inventory level sell-in and sell-through are well balanced now?

Thank you for the question. In Q4, this is the collection of receivables. So do you see our collection is progressing steadily. So this is the sound management. And we are not pushing to the stock. So yes, as you rightly said, it is well balanced. Yes. I hope this answers your question.

If time permits, you can ask a follow-up questions later. Next, from SMBC Nikko Securities, Shintani-san.

Can you hear me?

Shintani, your audio is a bit low. So if you could speak into the microphone, that would be great.

Can you hear me.

Well, it's still very low, but...

This is Shintani from SMBC Nikko. I have a question regarding AOC for the 4Q, a 2% decrease in revenue. So compared to the third quarter, given the challenging market conditions, that's understandable. And for the next fiscal year, you're looking at increase by low single digit. And the interest rate cuts considered, and I think you are more targeting towards the second half. So how do you view the recovery curve for this business? And also during the IR Day, you talked about how the market conditions are now close to the bottom. And for the -- in terms of segments, infrastructure may be recovering first. So just to -- if you could give some color and share your views on how this business will fare.

Yes, Shintani-san, thank you very much. As you rightly said, AOC -- with regards to AOC, the market conditions are bottoming out. But whether we will have a V-shaped recovery, I think this is where we need to be somewhat cautious, including the housing segment, the pent-up demand has accumulated to a certain degree. However, the U.S. environment per se, in terms of the housing segment, for example, the mortgage rate is not low. Even with the policy rates coming down, the long-term interest rates are not at low levels for personal consumption, housing turnover will not proceed as expected. So given these understandings for us, as you said, we are looking at various segments, including infrastructure, we believe there are still rooms for growth. And Europe, we are not expecting significant recovery from Europe either. So of course, we were always pursuing further business growth. Given the worsening economic conditions, so there may be a margin deterioration that we must accept. So in many ways, we should not be optimistic, we should follow a solid operation of the business. But the key points to bear in mind are for this year, single digit in the medium term, mid-single digits, that's the level of recovery that we are targeting. So a rather moderate recovery starting from the second half of the next year on to the year after that. I think that's where we are expecting and how we will leverage the strengths and competitive advantage of the company is something that we need to consider.

Understood. And for Europe, you think there's still room for recovery in the European region this year compared to last year, we can expect some recovery from that region as well?

Yes. Well, honestly speaking, the economic recovery in Europe versus economic recovery in the U.S., which is bigger, of course, varying views, but myself and the local management share the same view that the U.S. economic recovery may be faster. So it's not that we are betting on Europe. Europe will steadily try to improve and recover the business and to gain more share, but the main market will be the U.S.

Next, BofA Securities, Enomoto-san.

BofA Securities, Enomoto speaking. NIPSEA outside China, excluding China, Q4. Why is it so good? If you could elaborate. In the material, it says Indonesia is improving significantly. Other than that, doesn't seem like others are improving that much, but NIPSEA excluding China, is showing a radical improvement. And so why is Indonesia so strong? And in other areas, I think there are big improvements. Which areas were strong.

Thank you for the question. First of all, NIPSEA China is diverse. So it's not one answer fits all. So first of all, starting from Indonesia. Q3 -- Q4 or Q1 is the demand season. Q4, we had a strong campaign. And as you can see in the volume, double-digit growth. It's not low double digit. So it's a high growth, and we're impacted by FX. So at a glance, on Page 22, you see plus 9.4%. FX is minus 6%. So on a local currency basis, it was very strong. Margin is -- remains high. So this is decorative and industrial, although the volume is small, overall was strong. And Betek Boya FX was a negative impact. But actually, the profit is positive. As you see in Q4, the adjusted operating profit margin, 23.4% -- 23.4%. So it is a high profit contribution. Q4 volumes struggled somewhat. But with the price increase, we are doing well. And others, overall, it's not just one factor. There are multiple positive factors. In some regions, there were temporary adjustments. And they were -- these were small adjustments. So that is an upward factor. So Singapore, Malaysia, Thailand were all generally strong.

Just a follow-up question. In the new year, what is the new year forecast. Is Southeast Asia negative margin, I think, is your forecast and Turkey is a big deterioration in margin. Other than NIPSEA China, are there -- what's the background to your weak forecast.

FY '25 was strong. That's one thing. So we are a bit conservative we cannot help but doing that. For Turkey, this indication is misleading. Due to inflation, they overperform compared to initial forecast. So when we build up our guidance, this is the assumption. In reality, our profit margin is 17.1% in Turkey. So even a few percentage point lower, it will still be 15%. So overall, as I said earlier, China will grow, but NIPSEA is always -- growth is a factor, the focus. We don't have any particular concerns anywhere.

Thank you. Next, Citigroup Securities, Nishiyama-san.

This is Nishiyama of Citigroup Securities. For your plan for the new year, on Page 10, I'm looking at the heat map and also Pages 8 and 9. When I compare these pages, NIPSEA, Dulux, these will be the central businesses that will perform better than the market conditions. Is it coming from share gains or pricing policy. If it's from share gains, I think the situation varies between regions. But including promotional costs, I think you've had a stricter cost control, including promotional costs. So I understand you place emphasis on EPS over market share. But can you share your thoughts on this?

Thank you. As I said at the beginning, with respect to the market conditions, we try not to be optimistic, we try to assume a more conservative view on the market. With that, by regions, of course, the situation varies. For example, I think the easiest is the Dulux specific. For a long time, the market remains flat, but we have achieved a growth of around 5% continuously. And if you look in the appendix in the midterm plan, the market share is close to 50%, and it remains flat. But in terms of value amount, I think our share is higher. Of course, having such high shares will not always contribute positively. So that is why I have shared a rather more conservative view. The same for other regions. In relation to the market data, we tend to have a more modest view of our market share. But if you look more closely, we are mostly exceeding the market in most regions. For example, in Indonesia by slightly the market share is growing by 19% to 20% -- 19% to 20%. So by region, as I already mentioned during the organic growth section, we may sometimes temporarily focus on expanding the margin. But in the medium term, revenue and share gains are what we emphasize at Nippon Paint Holdings. So that stance remains unchanged. And in that sense, including Japan, even in markets that remain stagnant, we continue to pursue positive growth. And on top of the profits, as you mentioned, if volume is struggling, then we need to make pricing adjustments. If it's a value-added product that customers demand, then pricing should be accepted. So we will pursue such a possibility. And lastly, I would also want to mention about the cost structure that it is being reviewed constantly. In order to improve productivity for Japan as a whole, what's often being said is how to utilize and make use of AI, that's very much been talked about. When it comes to paints and coatings. This is a rather traditional business, and that is all the more reason why we need to apply AI improve productivity and to achieve growth while controlling the headcount. So in that sense, we are advanced in the industry when it comes to this kind of AI technology-related initiatives, the operating leverage will come in and we believe that we will be able to achieve profitable growth. That's all for me.

I have a follow-up question. With respect to the market share, how you are using the promotional costs compared to the previous year for the new year, are you going to increase promotional costs? Or are you going to control and reduce the cost in that sense?

For this, again, different regions have different situations. Indonesia, where we expect growth, we hope to increase and also Betek as well, we will invest in marketing as well. For China, surprisingly, even when we say promotion, it's not just advertisement, it also includes incentives from discounts. And they are not really succeeding as I shared last year or 2 years ago, in some regions where this kind of initiative isn't successful, we wouldn't want to waste funding on promotions that would not bear fruit. So situations vary from region to region. Dulux, we've always spent promotional costs, and we will continue to do so, but we will always review whether that's optimal. Of course, right now, they are producing good results. But always, we are considering the latest market condition and to make adjustments accordingly. So as of now, whether increasing promotions or decreasing promotions, that is not finalized. We would like to proceed with agility and reflect our views of the market conditions to reflect the reality. That's how we operate.

Next, UBS Securities, Omura-san.

UBS Securities, Omura speaking here. I have a question on your China business and forecast, a follow-up on China. Earlier, you talked about the China team, Asia team last week. You said China team this year will work very hard. They showed a commitment you said. More specifically, what is the change in the strategy this year from last year or 2 years ago? This year, are you changing something in particular?

Thank you, Omura-san. That was just an example earlier. They say they work their very best every year. So it's not that this year will be all that different, but the Asia group management meeting, which we hold every year, China team came to me and they said we will do our very best. They came all the way to say that word to me. It was impressive. It left an impression on me. But way back on last year with a relationship to our competitors, we had TUC 25% market share in the second and third companies, we are 3 or 4x different, bigger than the second and third player. So we have the scale and brand. We have the advantage. That remains unchanged. But in small areas, we were looking for -- compared to last year, we're trying to deep dive and see that we are really advantageous. And as Wee Siew Kim said, picture print. Compared to the conventional emulsion print, it is growing. So local companies are now working very hard. And it's not that we are not focusing on that, but we do not have sufficient traction, not necessarily. So what can we do? We're thinking again. And as we say, it's our policy, so I cannot elaborate too much, but we want to take steps, take the strategy and tactics to win in this competition. And so we discussed that. That is one example. One more point, as I alluded to earlier, Tier 3 to 6 cities, we are a latecomer in 3 to 6 cities. So overall, our bread and butter is Tier 0 to 2, 80% is 0 to 2 cities and 3 to 6 cities is only 20%. So we have more room to grow. We have the asset-light strategy and other CCM installment, those are also bearing fruit. But I think we can do more. So the distribution advantage and Direct2Front, the order from the sales office can be delivered to the site directly. These cannot be imitated by the latecomers, but they will catch up eventually. So how can we maintain our advantage. We're working, discussing every day and executing this every day in China. And as I said earlier, AI is most advanced in China. AI utilization. So efficiency and sales growth. In our group, China has scale. And I think it's a team that can crystallize this the most. So Wee Siew Kim is saying high single digit. He's committing to high single digit. So it's not just pie in the sky. I think we can achieve this for real.

Additional question. Do you have a plan of increasing the sales headcount, sales team changes from last year. Are you changing your sales structure or increasing the sales head count or anything in your [indiscernible] CapEx numbers, NIPSEA overall comparing last year and the year before that overall is down by JPY 16 billion or JPY 17 billion. So you're not in a capital-intensive industry. So this may not be a big important factor, but capital expenditure and the expansion of sales personnel, any changes in that area from last year to this year?

First of all, regarding CapEx, our business is asset light business. In other words, we're not in the business where we cannot maintain the competitive edge without CapEx. So for unnecessary CapEx, we will stop, suspend or postpone. We call this CapEx prudence. We have a very tight disciplined control. In this year, we will do that. Again, overall, so the CapEx will be 3% -- within 3% of revenue. In Decorative, we think we can achieve 2%, within 2% of revenue, it's well achievable. So we are deliberately conducting this tight control. Now on the sales personnel, I will not go into too much detail, but our China business has huge divisions, TUC, TUV and IU. So cross-functionally, we can utilize each other's asset and distribution channels. We're trying to explore more opportunities. So without changing -- increasing the sales personnel, we want to be more productive. So more business per person. Until now, we try to consolidate the back office. But now we think we can do that in the front office as well. So on that basis, we will focus on becoming more efficient, and we're taking measures to do that. So a simple head count increase will not apply in China.

Next, Tysan, [ free writer ].

This is Okazaki of Nomura Securities. Sorry. Is it my turn? Can I ask a question?

I think we are waiting for Tysan to ask questions first. Okazaki, if you can wait a moment. Tysan, can you hear me? Perhaps you are unmuted. My apologies. I forgot I wrongly called out the name Okazaki-san. My apologies, it's Okazaki-san of Nomura Securities. So it wasn't Tysan, it was Okazaki-san, my apologies. Sorry, Okazaki-san, please go ahead.

This was covered in the previous questions. But regarding the raw materials and fuel, of course, it's difficult to predict. But between January, March, April, June period, just to give rough estimates for Japan, China, Indonesia, Australia, for these markets, how are the prices trending. Looking from outside, it doesn't seem so much increases have been had. But to the extent possible, how are the raw materials and fuel prices trending in these markets.

Yes. Thank you. Well, roughly speaking, we expect the prices to remain flat. Honestly speaking, if there is any upward pressure for raw materials in Japan, there certainly is, but we are implementing cost reductions and through productivity improvement, we believe such increase will be absorbed for raw materials. And the same can be said for the other regions. So if there is a significant rise in the raw material prices, and of course, this will impact our earnings plan. But as of today, we are not anticipating -- we are not expecting such significant increases. There are variations from region to region, but I will not go into that. So for the term that just ended, October, December, comparing January to April, we should not expect such a difference. Yes, that should be the assumption.

And there's one more thing I want to confirm on Page 20 in NIPSEA China towards top right, FX impact plus 4%. On Page 20, I'm looking at Page 20, top right. FX, plus 4%. So the operating profit margin improvement compared to the same period last year. In the fourth quarter that you just reported, you had a 4% improvement.

Well, FX mainly affects the revenue. So in that sense, profits are also impacted to some extent. But basically, this is an impact on the revenue. If you go to Page 2, we try to make it more comprehensible. So in the fourth quarter, renminbi in 2024, it was 21.3 and fourth quarter in 2025, it was JPY 22.1. So in terms of exchange conversion, this is only in yen, so it worked positively.

Next, Toyokezai, Yamada-san, please.

Toyokezai Yamada speaking. So similar question. Your performance is solid. And your year-end result seems in line and under the difficult environment, I think you're in good shape. In the IR, you're focusing -- continue focusing on IR, we feel that very much. but your share price doesn't change. The market is rising. So before -- compared to the past, you are now -- it seems like you're left behind in terms of share price. And there's nothing you can do, you are doing MSV, pursuing the maximization of shareholder value, highest priority there. And so I understand that you are frustrated at this moment, but I'm sorry for the long introduction. So you are doing so much, but in market -- you cannot do anything about the market, but what will you change going forward? Or what will you keep unchanged. For example, share buyback, you were rather backward looking. But given the environment a while ago, you decided to do this, repurchase your shares. And including a revision of your medium-term strategy, what do you think you need to change? It's not clear on what you plan to change. So if you could elaborate, including capital policy and in sales and marketing, business operation, I think you're doing sufficiently, but that is not satisfactory. So if you have anything in mind, please?

Thank you, Yamada-san, for a very straightforward point. Yes, we're pursuing MSV, but the share price is not rising. I've said this a few times ago in the past. And on Board, we're discussing this a few times. First of all, we need to build our track record and have this track record believable by you. Until now the way it appears, it's presented to you from Q3 last year. We split the organic and inorganic and showing the long-term trend. And it's difficult to compare with our overseas peers. And so we are adjusting that as well to make it comparable. So it's not large changes. We're trying to listen to the voices from the market and be flexible in changing ourselves. As you mentioned, share buyback. As you just said, we want to use money for M&A. We think it's the right way of using money and share buyback. It seems like it will be a diminishing equilibrium. So it's not the main point, main focus. In October last year, it's not part of the shareholder return. We use capital in M&A and without premium, our share price is so low. And so we listened to the investors voice from the market and we thought that makes sense. And as we have cash, we were generating cash. We thought that this is a viable option. And we propose that to the Board. And it's unfortunate that market did not react, but share can be bought for JPY 1,000 and the people may look back and say, this was very right choice. It was good. So our underlying strategy, for example, the medium-term strategy and EPS, JPY 100, JPY 200, JPY 300. We say we will bring it up to that level in the long term by running the company in a sound manner. At one point market will think about us sooner or later, we think. And this is a reflection I'm reflecting on myself. And I said this in the IR Day last year. ROIC. Until now, I was rather backward looking on ROIC, but in year 2020 and 2021 PER 50x and then if you calculate backwards, the -- it's 2% shareholder cost. And if debt cost is 0%, then ROIC, WACC, theoretical weighted average cost is there, but we're focusing on EPS. So especially from 2024 onwards, we right sized, we revised ourselves. So for M&A, we will continue studying it, but with more discipline. And this shows our flexibility and our strong commitment to MSV. So we tried to show that in today's presentation more. So the basic strategy remains unchanged. Of course, the yen interest rate, if yen interest rate is 5%, we may change a little. But with the current interest rate level, we can still have ample value creation. So without daily trade, a day-to-day trade, the long-term investors see value in us and are investing in us. And so we should not just say long term. We need to bear results in the short term, too. So in Q4, we exceeded -- far exceeded the market consensus. And for the full year, too, and the 2026 guidance, we had a consensus and guidance is something that we think is sufficiently achievable. So if this penetrate and if the credibility to our management rises, then I think it will start showing changes. Maybe this is not so different from what I've been saying, but we're revising the details or fine-tuning. And from the investors' viewpoint, agility, I think we are evaluated more as a company that has the agility. So if you could give us a little more time, I'd appreciate it.

I'm not the investor side, on a different standpoint. And so I'm not saying that is bad. You are doing what you need to do and you are upholding MSV. And so it seems like you are struggling because of that. But the goodwill and the intangibles are increasing, it's weighing heavy on you. And at the current moment, it's not a problem, but that -- it could be one concern. But -- so for good or for bad, you are unwavering, you have a solid basic stance. So I just want to wish for the best for you.

Thank you.

Toyokezai interview, I said I will not buy convenience stores, and that was not taken well by the investors. So I said, I have no intention. I said clearly, I have no intention. I said back then that I have no intention, but it sounded like I will buy if it makes sense. So once again, I want you to rest assured, the M&A that we are aiming for is not there. So thank you very much. So we're making little adjustments like that. Convenience store, of course, yes, I know that you have no intention of buying a convenience store, but it's just wording in the context, it's so difficult to communicate. We'll do our best. We'll do better on our side as well. Thank you. Thank you so much. Yes, investor side misunderstanding should not be led. If you know my character, you know how I say things and some like me for that, but those who are not so familiar with Nippon Paint may take it differently. So I have to say things carefully. I'm adjusting myself, too. Thank you very much.

We have this session planned until 5:30. So if you have any questions, please go ahead. Next is Kubota from Nikkei Shimbun Inc. Can you hear me?

Yes, Kubota-san, I can hear you. Regarding interest rates, as was briefly mentioned in the presentation earlier, I would like to further seek clarification. So as we move towards a world with positive interest rates, how will this affect the portfolio, fundraising, M&A strategies? Does it change the size and industry of target companies? Would there be any impact. That's what I would like to understand.

Thank you for the question. In the midterm policy, if you refer to Page 14, bottom left, currently, we are looking at 1.2% before tax for the interest rates, it will be within 1.0% post tax, we are not particularly concerned. But if you look closely, the ratio of variable interest rates, and we are looking at average maturity of less than 5 years, and we are increasing the ratio of variable interest rates. So the policy rate affects more on the short-term side and of course, the market due to Prime Minister Takaichi's policies, there may be some concerns voiced by the market, and this could lead to increased long-term interest rate. But through the asset assembler strategy, we are mostly raising funds through debt and this will not be affected too much. So in terms of the portfolio, as you mentioned, we further look to debt mostly from the bank borrowings. And currently, we don't have any corporate bonds, but of course, we will consider that as an option. So within the debt space, we will raise funds. For equity, it's not that we are denying the possibility of issuance but we try not to issue stocks in such a low valuation environment. So that policy remains changed. And as for the future, what if the interest rate reaches 5% or even 3%. Of course, our risk sensitivity will be higher accordingly. Just because it's at 1%, it doesn't mean we can acquire and purchase everything and anything. So our perception of risk needs to be further advanced. Otherwise, we would not be able to achieve the ultimate MSV. So our basic strategy remains unchanged and also it would not affect the scale or the size that we are targeting, but we are cautious when it comes to rising interest rates. I would like to reiterate we continue to pursue M&As with organic business growth, so we are generating cash. So I think it's meaningful that we spend cash and allocate it towards M&A.

Thank you. Next, CLSA Securities. Zhang.

One question. This year, in the new year, in AOC, U.S. interest rate cut and AI investment, the demand -- can demand be stimulated. And in China, from around January, the real estate property, the tightening has been relaxed. And so there was a policy that was announced. So we think the channel will turn upward as well. But looking at the new year, what is your impression? China real estate and AOC, which do you think has more room for growth? So if you could ask that one question.

To be honest with you, China real estate policy change or the economic stimulus measures, we don't know how much impact it will have on the paint demand. This has been discussed much. But as far as the current assumption goes, it is still difficult. And if it has some positive impact, it will be an upside. That is our view. Now like AOC, the interest rate cut, the FRB, the Fed chair will change. We don't know what will happen. And the long-term interest rate trend, no one knows what will happen. AI investment, not much, but the -- in the construction market, the housing and infrastructure, with the lower interest rate, we can expect an upside. So unfortunately, we're depending on other risk factors, but we want to achieve this with our own efforts without the tailwind of the external factors. So when the market recovers, we will enjoy the upside, we will be the beneficiary of that. So that is our line of thinking. So I can't say which one or the other.

One follow-up question. AOC margin in Q1, Q2, Q3 last year, it was 35% or so. And in the next year, new year, is it slightly lower than 35% or roughly 35%. Your volume is up, but margin doesn't seem to be rising much. So if you could elaborate, please.

AOC, as I've been saying, the contribution margin, the price up and down is done with the raw material cost increase. So the volume of the -- not that different, but the fixed cost is low. So the operating leverage being high is not in line with the reality. And so the added value and the raw material cost level will determine the margin. So we think it will be flat or slight decline and achieve profitable growth on that basis.

Thank you. We are still accepting questions from the Japanese line, but we will switch to the English channel. [Operator Instructions] It seems there are no more questions on the English channel, so we will go back to the Japanese channel and receive questions from the Japanese channel listeners. [Operator Instructions] Daiwa Securities, Umebayashi-san.

This is Umebayashi of Daiwa Securities. This is my first time asking a question. With respect to your strategy in China, I would like to ask a question. The other day, during the IR day. You talked about targeting regional cities and when doing so rather than executing CapEx on your own, you would look to form partnerships with the local companies and to make use of their assets for expanding in those regional cities. So this strategy has been implemented since before. But over the past 1 to 2 years, you said that perhaps you've been able to identify who are the good partners and who are not. And you also mentioned that you now have insight, the future where you are working together with those good partners. So going forward, can we expect better results in terms of your performance, your results through the partnership with the local companies in those regional cities in China compared to last year.

Well, I don't talk too much about unfavorable partners. But for us, as I mentioned before, CapEx prudence is important to us. So when it comes to CapEx, we need to control when necessary. And as a result, the strategy per se resulted in an elimination of 1 competitor. And of course, we can make use of their assets, their capacity and for them as well by making Nippon Paint products their utilization rate improves and this results in a win-win relationship. So each individual partnership scheme is small, but particularly from March to June period now -- Tier 3 to 6 cities. Through this scheme, we are able to cover those cities where we alone cannot. So this contributes positively. And if we can achieve growth in those cities, then this partnership will be successful. But if it remains stagnant, if the utilization rates at our partner companies do not improve by much, then it would not have a significant results. The partnership itself may be working. But the sales strategies as a premise to that or the texture paint strengthening that we've been talking about or the Direct2Front. In other words, the distributors themselves are making the deliveries rather making deliveries from the factories is something we are promoting. And as a result, we can increase the user base. And of course, it is for reflect positively on the satellite cities. So in simple terms, so far, so good. Things are moving positively, but I think we can expect this to flourish more once we reach a certain level of volume from these cities and partners.

I have a follow-up question. So this kind of partnership strategy, do you see the need to implement this kind of strategy in regions outside China? Or do you see benefits of doing so in other regions?

Thank you for the question. Needless to say, this model has been studied by respective partner companies. And if there is a need if it makes sense in other regions, of course, we will implement it. If there are smaller competitors willing to join Nippon Paint, then that should be considered. Luckily or unlikely for us in China because the market condition is quite worsened, I think that proved to be an incentive for these companies to join hands perhaps in other regions when things are faring better, they don't see the need. So we are not saying that we will not implement or we will implement with absolute certainty, we will review each situation individually. Wee Siew Kim has a keen sorry -- NIPSEA has a keen eye in determining these situations and assessing the individual circumstances.

Next, Citigroup Securities, Nishiyama-san.

So my second time, Nishiyama from Citi. So medium-term growth is now a bit more conservative, you revised it down. The current market is a bit sluggish, but your medium-term forecast was revised. If you could give us some more color to that. Why did you do that? By region, if you made bigger changes by region, I would like to know those areas. If my numbers are not wrong, China is revised down. So your medium-term view on China, maybe it's difficult to have an optimistic view on China? Or if you could elaborate, please.

As I alluded to earlier and as you rightly mentioned, China is expected to grow by around 10%. So mid-single digit is revised down to mid-single digit, this year is high single digit. So it seems like it will just continue declining. I don't want this to be misunderstood. But in the medium term, the soft market now is used as the basis as the assumption. And if it recovers, it will be an upside for us. So we want to take a conservative look for now. China is a big portion of our business. So 8% to 9% overall growth, it will impact the overall growth of 8% to 9%. And in 2024, AOC was not part of our business. In profit, it is making significant contribution. But as Zhang said earlier, from the current economic situation, it's difficult to say it will grow at high single digit. It's difficult to have that kind of assumption, so mid-single digit. So including that, because of the dilution, it will be down from 7%, 8%, 9% to mid-single digit. But 10% to 12% EPS is now high single digit. But we want 10% bottom line growth. So that is our aim. But the background is very simple. So if you could understand like that.

Next, Okazaki-san of Nomura Securities.

This is Okazaki of Nomura Securities. Regarding AOC, it has been mentioned several times. July, September, I think on a local currency basis, revenue decreased by 9%, but October, December, it was down by 2%. So the decrease has been smaller. And 1/3 of the sales comes from infrastructure. This covers pipelines, renewable energy, alternative energies and bridges. So the decrease has been smaller. So during the IR Day, there were some comments saying that it was difficult to understand what is happening on the ground. So what is happening? And where we could expect growth in the coming year.

Right. I cannot divulge into much details, but continuing from before, we will continue to say that we are bottoming out. But there are competitors, and this information in itself is sensitive for us. So we hear numerous comments, but in principle, we say that overall, it is true that infrastructure may go ahead of others, but overall, we are seeing signs of bottoming out. But at the same time, we are not expecting a V-shaped recovery with that assumption. We presented a rather conservative guidance. That's all I can say.

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

Thank you very much for staying with us for a long time. So this time, we did the financial results briefing and the full year briefing and the medium to long term strategy. I think you were able to understand our strength and our track record. We want you to take a look at the track record. So we're trying to improve our disclosure in many ways. As I mentioned earlier, MSV is the basic strategy. And so this is unwavering. But strategy-wise, we're making -- constantly improving and adjusting our strategy by listening to the voices of the market so that we can get the conviction by the investors. We will continue making our very best effort. So I ask you for your constructive feedback as always. Thank you very much.

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