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

Ladies and gentlemen, thank you very much for your patience. From here, we would like to start Nippon Paint Holdings Earnings Teleconference for the second quarter of the fiscal year ending December 2026. [Operator Instructions] Please be advised that simultaneous translation for Japanese and English is provided for today's conference. Mr. Wakatsuki-san, please begin.

Thank you very much. Good afternoon, everyone. I am Wakatsuki, Co-President of Nippon Paint Holdings. Thank you very much for joining us today despite your busy schedule. I will now outline the key points of our financial results for the second quarter of fiscal 2026. Please note that members of the media are also joining us today. I'll begin by addressing 2 points on Slide #2. First, regarding the revision of our full year earnings forecast for fiscal 2026. To properly reflect the current market conditions, we have adjusted our exchange rate assumptions shifting towards a weaker yen compared to the initial forecast in February. Specifically, the assumed rate for the U.S. dollar has been revised from previously JPY 150 to JPY 155 for the second quarter and JPY 156.8 for the full year. Chinese yuan from previously JPY 21.5 to JPY 23.1 for the full year. Second, regarding the definition of adjusted profit, we have slightly changed the treatment of PPA-related expenses and retroactively restated the figures from the prior years. We believe this change will allow us to improve the comparability with our global peers and better reflect our underlying business performance. First, number three, Page #3. Please take a look at the long-term historical trend of second quarter performance. As we have mentioned before, we take a dual approach of organic growth and M&A, and we have steadily expanded the revenue, adjusted operating profit and adjusted EPS with this approach. In the second quarter, even amidst uncertain business environment such as the raw material prices caused by the Middle East situation, we have maintained and expanded our profitability through measures like price pass-throughs and cost control. And the second quarter results represents the continuation of this track record. And especially for the second quarter, although there was no incremental contribution from the new M&A activity from the previous fiscal year, we have been able to sustain a strong organic growth in the adjusted operating profit. Next, Page 4. Let's review the financial results for the second quarter. Revenue was JPY 133.4 billion, up 19.4% year-on-year. This growth was driven by increased sales volume and improved product mix as well as the favorable exchange rate. Adjusted operating profit stood at JPY 94.9 billion, an increase of 30.4%, a significant increase year-on-year. Adjusted operating profit margin was 17.8%, an improvement of 1.5 percentage point from the previous year. Adjusted EPS was JPY 29.4, up 31.7% year-on-year. The key takeaway here is not -- is just not that we simply increased sales. Even amid the uncertain situation in the Middle East, we achieved margin improvement by combining revenue growth with better raw material cost ratio and effective cost control. The impact of soaring raw material costs linked with the situation in the Middle East varies by region and business. While we were able to absorb these costs in the second quarter through price pass-throughs and cost reduction initiatives, the impact may become more pronounced in the second half of the year. We are not taking an optimistic view about the situation, and we will manage the operations in each region closely monitoring the pricing, procurement, inventory and SG&A expenses. Regarding the performance by segment, AOC, because the market shows signs of bottoming out, AOC achieved increases in both revenue and profit driven by price hikes and to offset the raw material cost increase and increased sales volume. Japan NIPSEA other than China and DJO Pacific also posted revenue and profit growth, supported by higher sales volume and product price increases and other factors. As for NIPSEA China, the surge in raw material costs exacerbated by the Middle East situation further compounded the effects of the weak real estate market and subdued consumer sentiment. Amid this challenging environment, rather than aggressively pushing for volume expansion, we prioritized sales discipline, cost efficiency and the maintenance of the brand strength, and this approach allows us to secure a profit margin of about 15%. We believe it is crucial to maintain a management approach that safeguards profitability without relying on the assumption of an early recovery in the Chinese market. Next, I will explain on Page 5, the revisions to our full year earnings forecast for fiscal 2026. First, regarding revenue, we raised our forecast from the JPY 1.92 trillion in February to JPY 2 trillion, an improvement of JPY 80 billion. This represents an expected year-on-year increase of 12.7%. We have also presented figures for adjusted metrics. We anticipate the full year adjusted operating profit of JPY 316 billion, an adjusted operating profit margin of 15.8% and adjusted EPS of JPY 95.7. These figures represents a projected 13.6% increase in adjusted operating profit and 10% growth in adjusted EPS compared to the previous fiscal year. Driven by the strong performance in the first and second quarters, alongside the continued effectiveness of price pass-throughs and cost control measures, we expect to achieve record high levels of revenue and profit for the full year. At the same time, as we stated when we announced the first quarter results, we are adopting somewhat cautious assumptions for the second half of the year. China's real estate market is still in the process of recovery and the consumer sentiment is still subdued. Furthermore, we continue to face rising raw material costs driven by the situation in the Middle East and the uncertainty in the United States still continues. Rather than counting on market recovery, we believe by continuing to pass on cost, improving product mix, reducing cost and controlling SG&A, we can absorb these cost increases and maintain the profitability levels for the full year that are in line with our projections. Regarding the reported figures, we maintain our operating profit forecast at JPY 283 billion unchanged. This reflects the fact that the upward revision resulting from foreign exchange rate fluctuations is being offset by the one-off expenses such as M&A-related costs and business transformation costs for the DuluxGroup in Europe. We also project EPS at JPY 81.5, a figure that accounts for the impact of one-off expenses and effective tax rate. The forecast for annual dividend remains unchanged at JPY 17 per share. We intend to continue prioritizing EPS growth from the perspective of MSV while updating the outlook for the first quarter onwards as necessary. Page 6 and 7. Next, I would like to outline the assumptions underlying our full year forecast, reflecting the first half results, which were strong. And despite anticipating some adjustments in the second half of the year, we revised raised our adjusted operating profit forecast for Japan DuluxGroup and NIPSEA business other than China. On the other hand, regarding NIPSEA China, where the real estate market and consumer sentiment remains sluggish, we maintained our forecast for the Automotive segment, but revised our initial forecast for both TUC and TUB. As for the Americas, due to the persistent economic uncertainty, we maintained the outlook for AOC as the market shows signs of bottoming up, but we still take a cautious approach for the Americas. Page 8. Market conditions are expected to be flattish year-on-year in the second half and beyond. Japan in the second quarter due to supply concern because of Middle East situation and brought forward demand, there was a temporarily strong movement mainly for decorative. But for third quarter and beyond, we don't expect such a special factor. China, automotive business is relatively strong, but TUC in the second quarter dropped markedly due to Middle East situation, but we expect market in the third quarter will recover to the first quarter level. The Americas, there's uncertainty in automotive production and housing demand. For AOC, end market demand cannot be said to have strong recovery yet. Meanwhile, the business is becoming solid through price flexibility, continued supply and sales volume improvement. Given such market conditions, this full year forecast this time is not an explanation of good first half results, but rather based on the pursuit of profitable growth with uncertainty factored in. Next, Page 9. I'll explain the outline of results of major segments. The details will be left to Q&A session, so just a brief comment. First, Japan. Revenue, JPY 61.6 billion, up 17.9%. Adjusted operating profit is JPY 8.9 billion, up 65%. For decorative, sales increase and sales brought forward of hydraliability product for architectural and structural products contributed and for industrial automotive, sales volume increase contributed. For profit side, increased revenue and improved material cost ratio, SG&A ratio significantly contributed. NIPSEA China revenue JPY 129.1 billion, up 9.7%. Adjusted OP profit, JPY 18.7 billion, flattish year-on-year. On a yen basis, revenue increased, but TUC saw a 14% decrease in revenue in local currencies due to sluggish real estate market in China and weak consumer sentiment. TUB also decreased its revenue by 9% due to sluggish market in local currency. That said, profitable profit margin is maintained by keeping sales channel discipline, avoiding inventory buildup and improved cost efficiency. NIPSEA, except China, revenue, JPY 124.9 billion, up 26.4%. Adjusted operating profit, JPY 27.4 billion, up 53.1%, very strong results. Growth was achieved in wide areas, including Malaysia, Singapore, Thailand, Tukai, Indonesia and India. Increased revenue, improved raw material cost ratio and effort for rationalization led to profit increase. DuluxGroup, First Pacific, revenue JPY 73.7 billion, up 29.2%. Adjusted operating profit, JPY 10.7 billion, up 42.9%. Even under tough market environment, Specialty Coatings business share increase and small-sized acquisition and FX, big factor contributed. DuluxGroup Europe revenue JPY 50.1 billion, up 19.9%. Adjusted OP profit, JPY 5 billion, up 9.6%. The France was flattish year-on-year in South and Central Europe showed some strong growth. But Europe as a whole is still on the path for recovery. Next, Americas. revenue JPY 34.9 billion, up 12.2%. Adjusted operating profit, JPY 3.2 billion, up 8.5%. For automotive, share increased through acquisition of new business. For decorative, price hike and FX contributed, but the market conditions remain tough. Lastly, AOC revenue JPY 59.1 billion, up 23%; adjusted OP profit, JPY 21.5 billion, up 26%. Even without plus 12% coming from FX, the performance was very robust. While macro environment remains severe, profit contribution level remains high through pass-through of material cost increase on prices, sales volume increase and sales volume growth in Americas and Europe exceeding that in Asia Pacific, leading to better regional breakdown. AOC, although some retrospective correction due to finalized PPA, profitability and cash creation capability on an adjusted basis remains robust. Page 10, main topics. First, let me explain about purchase back of European automotive coatings business from Wuthelam Group, which we announced today. In August 2021, we announced transfer of European automotive business to Wuthelam Group. And this time, we will purchase it back at about EUR 47 million or about JPY 8.5 billion. The closing is expected in October -- within October 2026. With this deal and with Indian business purchased back in 2024, there will be no Nippon Paint Group business directly held by Wuthelam Group. What is important about this deal is not the formality of buying it back, but we have made a judgment that the purchase at this time is the best from MSV point of view. Under Wuthelam umbrella, reorganization and other rehabilitation measures have progressed and the performance recovered to some extent compared to the time of FT transfer. We judged it to be better to take integrated approach, including capital relationship to accelerate automotive coating business globally. For this deal, we set up a special committee comprising of 3 independent directors to discuss profit and protection of minority shareholders and from MSV perspective. The acquisition price was decided based on equity value calculation by the third party and the BOD Chairman Go has not participated in deliberation and resolution of this deal. In the first year after this deal, its impact for October, December '26 period is expected to be modest from 2027, more recovery is expected. The size of financial impact is limited, but we believe it is a significant step from a strategic point of view. Page 11, other topics. First, about integrated report 2026 issued in June. This year's report was planned, structured and edited based on representative questions from investors to convey more clearly the present position vis-a-vis MSP journey and the points of argument from now on. Each section explains about thinking about these questions and specific initiatives. The report features many interesting content, including a dialogue among Co-President, We, BOD Chair Nakamura and myself. Please read it in your leisure time. On July 23, we announced reorganization of Japan Group, where Nippon Paint SS Chemicals is to be split and integrated into Nippon Paint Automotive Coatings and Nippon Paint Industrial Coatings effective January 1, 2027. And we have published information both internally and externally. We will shift to a system to offer surface treatment product and coatings products, which have been provided from its subsidiary in a more integrated manner. By doing so, we will further strengthen product development and technology service, improving competitiveness and customer satisfaction. Lastly, let me report that we are awarded the distinguished service Encouragement Award at the 42nd Corporate Public Relations Award. The advertising activities we'd like to deepen trust relationship with stakeholders and foster understanding and pride among employees for our company. In the second results, we achieved record high revenue and adjusted operating profit owing to global partner company's continuous effort in wide areas, including material procurement, product supply and customer service. That said, there remains some issues to note such as raw materials, FX and geopolitical risks. Our employees are operating with a sense of alert towards the second half. We are committed to pursue to achieve MSV as said assembler by watching closely those risks and accumulating adjusted profit, EPS and cash. We would like to continue to hold dear constructive engagement with investors. Thank you very much for listening.

[Operator Instructions] This is a question from the Japanese channel. We'd like to take the question from the Japanese channel. The first question is from Goldman Sachs. Ikeda-san.

This is Ikeda from Goldman Sachs Securities. Congratulations on your very good results. The full year adjusted OP. Compared to the February forecast, you have decided to keep it unchanged. By region, I think there may be different colors. In Japan and other than -- NIPSEA other than China, they have achieved upside, but NIPSEA China, I think, has been revised downwards. MFC AOC remains unchanged according to my understanding. To the extent possible, with the raw material prices going up, can you give us some color regarding the pricing trends and also the volume? Have they changed compared to initial forecast? And also for China, the raw material costs -- raw material, I think, is easy to procure, I think, and the there might be room for you to reduce prices, but the prices and also the volume are coming down according in China, the consumption mindset given the situation in the Middle East, such as what is the situation regarding the coating or painting business in these markets? If you can comment on that?

Thank you very much, Ikeda-san, for the question. Regarding your first question, to avoid any misunderstanding, OP, adjusted operating profit, as of February, we did not give the detailed number, the concrete number because AOP, adjusted AOP was revised upwards effectively. On a reported basis, the operating profit remains unchanged because in the adjustment items, there are one-off expenses. So in the new forecast, these things offset the favorable impact of the foreign exchange. So therefore, JPY 283 billion remains unchanged. Roughly, my gut feeling says that the February AOP was about JPY 300 billion or so. I think that was the ballpark figure that we had anticipated. So in that regard, there was basically an upward trend. So this is the strength of our underlying performance. Now the AOP margin as of the first half was 15.8%. And then in the second half, because there are some uncertainties, to what extent do we factor in such uncertainty was the question. As of this point, these are -- the numbers that we present is the must achieve number. And so roughly speaking, the second quarter in many regards, the price pass-throughs, we were able to achieve this quite swiftly. And because the traits of a company, we have agility. So we were able to agilely pass on the prices. But the raw materials prices are coming up, and there's a timing difference of about 6 to 3 months. So the inventory benefits are still manifesting themselves. So towards the second half of the year, the downward pressure on the margin will have to be -- we have to anticipate that. So as it turns out, on a full year basis, 15.8%, I think, is something that we are well positioned to achieve. As far as revenue is concerned, the demand recovery is not something that we anticipate. That's what I explained in the heat map. So we would like to fulfill our responsibility to supply and also improve the market share and thereby secure margin through -- by working on cost control. So that's the basic approach that we would like to take. Secondly, regarding the China market, to be honest with you, in the second quarter, on a local currency basis, TUC was quite difficult, quite tough. First and foremost, as Ikeda-san mentioned, the real estate market in China, we are seeing signs of bottoming out already in China. However, the bread and butter TUC business, this relates to consumer goods, slow-moving consumer goods. those repainting demand, this is quite affected by the consumer sentiment quite significantly. So overall, when we look at many different statistics, rather than spending, people are now focused on savings. People are quite cautious right now, and they're not spending money as much as before. So eventually, I think people will start repainting their homes or whatever. But at this point of time, the situation remains very tough. If I may add one more comment. In light of the situation, we -- including relationship with the distributors, we are not going to push our sales towards them. We would like to make sure that keep quite closely monitor the market inventory so that we'll make sure that we can sell well. And for that purpose, we are conducting many different promotions in the third quarter. Third quarter is a very important quarter. So some investments are anticipated in the third quarter. So the margin will come down slightly in the third quarter according to our current anticipation. As I mentioned during the first quarter results presentation, that basically price pass on will be done on many different fronts, and we have been able to do this to some extent. And although the sentiment is not really favorable, if we raise the prices recklessly, that could have a negative impact. So therefore, we would like to keep a margin discipline and the mid-teen level, 15% or so level of margin is something that we would like to achieve. This is something that we aim for, for the full year. That is the current situation. That's all for now.

So some peers are lowering their prices. But is there any movement on the side of price discipline? In large cities, for example, investment in the AI, are there any different colors in different regions?

In short, it's not that the market has a very rigorous price discipline. We are always in the red ocean. But our positioning is not to be involved in price competition, and we continue to sell at reasonable prices, especially during the past several years, that's the discipline that we have been using. Actually, in the second quarter, from 0 to 2 are the main markets. And 2 to 3 to 6, it is not a big difference. So all in all, the situation is tough. So for us, high single-digit minus for volume, mid- to high single digit. As to price, it's not lowering prices. It is a mix of activities. So in some cases, the economic product sales taking enough margin with the current price level. But in our view, from region to region, there's not much difference. all the regions are in difficulties.

Next, Enomoto-san from BofA Securities.

Here is Enomoto from BofA Securities. Separately from the other results, the acquisition offer for the decorative side Akzo model, there was a merger, the proposal. I understand that, that deal is gone. Am I right? And also about the background, Akzo model, I think you made the proposal for acquisition many times. So what is so attractive about European Coatings business? So I think you have been involved in the various M&A activities. What is the background for those activities? And also M&A cost, I think, is included and this particular deal is also included?

Enomoto-san, as to M&A, I do not make any comment on M&A. Whether it is done or not, included. There's no comment to make here other than that we have already publicized. As to M&A cost, although we are very serious associated with Akzo. The cost is included, reflected. I push myself to say the comment. The M&A will not be our goal. So it should be at the right value, right asset, low-risk asset. If there is any opportunity there to buy such an asset, we will pursue such opportunity. That's it. And of course, there's a counterparty. Sometimes the deal will go through, sometimes it won't. So that stance remains unchanged. But sometimes the deal is publicized before the deal is done. So that is associated with the difficulties, but within our expectation.

Next, SMBC Nikko, Shintani-san.

This is Shintani from Nikko Securities SMBC. Now regarding AOC, the sales, I'm looking at Page 25, 12% on the -- plus 12% on an FIC basis. So that's a 2% double-digit increase. So can you talk about the demand situation? 3 months ago, by and large, you said there are no many differences, but there was a slight recovery and also infrastructure was taking a lead. So can you talk about the second quarter performance and towards the second half, what's your projection? Maybe there might not be so many changes. But if you can give some color on that point.

Okay. Regarding AOC, the overall picture is that I think excluding currency basis, double-digit growth in revenues of JPY 800 million or so was already achieved. So that is the resilience of the AOC. So that made a strong contribution to this resilience of AOC. So that's another thing that I would like to comment here once again. And regarding the second quarter, the Middle East, not only the Middle East, but depending on the market, the onetime demand is also there. So it's good that they have been able to capture those demand, but this double-digit revenue growth, whether that is going to be sustained or not, it's too early for us to determine that at this point of time. So the full year outlook remains to be very subdued or conservative. So please be advised of that. Regarding the segment, the construction market overall remains weak. That remains unchanged. But infrastructure is so good. So that's the difference of the color. And that remains really unchanged from the first quarter. The AOC strength is that they have a broad range of customer base and they'd be able to offer a value-add service to these different customers. So in that regard, they have a very sustainable revenue stream. And with the pent-up demand, depending on the pent-up demand manifesting very gradually, at least as we have mentioned before, we are seeing signs of bottoming out, and that will continue to be the case going forward. For the second quarter, I think the local people said that it's too well that my peers said so. So maybe too good is also the manifestation of their underlying performance, but I think the situation is like that. So please be advised.

So if that is the case, then in terms of level, the level is so okay. As for the second half of the year, what is the margin you're expecting? The cost increase is going to kick in from other reasons. But what about the AOC? Can we have the same outlook for AOC as well? And also for Europe, the business systems penetration is something that you've been working on. So can you talk about how the progress of that effort?

Well, first of all, in association with the Middle East situation, the impact from Middle East is the least pronounced in the United States. The logistic expenses, including these and also it's on the inflationary trend in terms of cost. So we cannot be too optimistic. However, towards the second half of the year, we are not expecting a significant impact from that element. Demand, I think, is a bigger impact towards the second half of the year. As for Europe, to some extent, the Middle East impact may become stronger in Europe compared to the Americas, but I think the bulk is much higher with the Americas in terms of the business composition. So the business system as well, we are making steadfast progress. So in that regard, on a net-net basis, in totality, margin remains to be robust, I believe. However, at the risk of repeating myself, AOC in the case of AOC, the price changes is done dynamically. So it's not a simple margin. We are rather focused on the contribution margin and volume. So the contribution margin per unit, this is something that we keep an eye on. And if you multiply that with the volume, the total -- what comes in as a total profit. So these are the things like the big -- it will not result in a big erroneous number. But if you just look at that, I think you may misunderstand the underlying performance and capability of AOC.

[indiscernible] Newspaper, Takahashi-san, please.

Here is Takahashi of Nikkei. Can you hear me?

Yes, I can.

I have one question. Page 5, the revision of the forecast. If it is already explained, maybe I would like to have some clarification. So revenue and adjusted operating profit, it's all revised up. As to net profit it is -- because of the temporarily the cost, it is revised down, it is one-off the expense. What is it?

As you can find here, M&A-related cost or the Dulux Europe, the business -- the transformation cost, especially the latter accounts for a big part. On a total basis, JPY 12 billion to JPY 13 billion or so, that is for the business transformation cost. The DuluxGroup Europe, it's mainly France, the business transformation there. That 3 things roughly, headquarters cost containment and the closing of one factory. And distribution stores are reviewed -- are being reviewed. In France, for many years, the market recovery has been expected, but it seems that the market is not recovering. With that assumption, we need to be more the profitable. And for that, we are making some transformation and the cost is associated with the transformation. Just for information for this one-off expenses, at the AOP level, this is not included in the adjusted operating profit. So at the operating level, the profitability does not factor in such one-off expenses. So please be advised of that just for the sake of confirmation. I mentioned this.

The next question is from UBS Securities, Omura-san.

This is Omura from UBS Securities. I have a question relating to the overall picture. This earnings results, you achieved a good profit level. And I think the business environment is significantly changing. In 2022, when the Ukraine war started, erupted, I think your situation deteriorated quite significantly. Compared to that time frame, I think the naphtha prices changed this time around quite significantly. So when the environment changes significantly, you've been able to achieve this good results. What are the factors that allowed you to deliver these very favorable results? Maybe there are some unique elements to you and maybe there might be some changes in the environment. So if you can you give us the big factors that allowed you to deliver good results?

What did you say? What industry do you say, the...

you say what industry the automotive industry, for example, if they change their pace of price increases, is there anything that was noteworthy?

When you say -- is this -- are you talking about B2B business?

'm talking about your -- the industry that you are facing or interfacing.

Interfacing industries. Okay. You're talking about our customers?