Nippon Paint Hldgs Co Ltd

It is now time to commence the Nippon Pate Holdings Company Limited FY2025 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 Yuichi 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 Moa Katsuki, 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 Nipsey 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 two 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, about 150 to a dollar. 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 organically and inorganically. The long-term trends for the full fiscal year are included on page four. 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 five 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 percent and inorganic plus 30 percent 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 Nipsey, China, both volume and price mix 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 76.7 yen on the accounting basis significantly exceeded our April guidance, along with operating profit and net profit. Page 7, please. Regarding our FY2026 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 85.3 yen, 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 Nipsey 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 one yen, backed by our strong performance. Next, page 8 and 9. These two pages show the assumptions for the guidance for each segment. Simply put, revenue growth will continue to be driven by China and Nipsey, 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 will 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%. Nipsey 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. Nipsey, 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, mixed 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 ethics market in Yube was weak, resulting in mixed results, but revenue and profits increased thanks to the FX impact. In light of the worsening market conditions in Europe, Chromology Group recorded a goodwill impairment loss of 5.5 billion yen 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 an unadjusted basis, amortization of intangible assets and inventory step-up expenses totaling 5.1 billion yen were recorded. However, depreciation of tangible fixed assets of 2.1 billion yen was recorded after adjustments. And excluding this, the adjusted OP margin remains at approximately 35%. Next, page 12, please. There are three 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 three, 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 fy25 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 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... 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 three 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 four. 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 the 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 five. 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 mid-term targets of 8% to 9% annual revenue growth and 10% to 12% EPS growth. Over the past two 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 a 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, our 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 six. This is a summary of our business portfolio. There are four 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 has 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 mid-term 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 has not changed. Page 7. Here, we show the results over the past two 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 adjustment, so margins have improved largely in line with our guidance. For China, as mentioned repeatedly, the market environment has been challenging and we prioritize margins. As a result, performance reflects that approach with somewhat lower revenue but a significant improvement in margin. Profit Kegar was at 5.9%, which is somewhat below expectations. However, this was offset by Nipsey, 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 Rishu 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 have 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 rates, 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 receive 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 acquisition of the Indonesia business. result on an EPS basis, the existing business may appear to have temporarily declined. However, in reality, this reflects the 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 three 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 our acquisitions target highly asset-light and highly profitable companies. 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'd 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 four times and a DE ratio below one times. at the end of last year, net debt to EBITDA stood at 2.9 times even after executing a certain level of share buybacks, which exceeded our expectation. Based on this, we anticipate reducing it by approximately another 0.5 times 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 state so clearly 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 mid-term management policy. Thank you very much for your attention.

We will now move on to the Q&A session. We have three 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 one per person. If you have additional questions, please wait until all the questioners have asked their questions second point due to the simultaneous interpretation setup please use the language that you are using so please ask question in Japanese if you're using Japanese channel and English question if you're listening to English third point The questions from the English channel will be taken after the questions on the Japanese channel. Please use the raise hand button at the bottom of the screen if you have questions on the Japanese channel. Please wait if you're on the English channel for a moment. We will appoint you one by one. So if you see the unmute message, please unmute yourself and ask your question. If you do not see the message, please unmute yourself. Please wait until we appoint the first questioner. First question is Goldman Sachs Security's Ikeda-san. Please unmute and ask your question. This is Ikeda from Goldman Sachs. Thank you very much. Hello, Ikeda-san. First, You are exceeding the business plan, and you're exceeding the consensus on the guidance for this fiscal year. Thank you very much, and 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 thank you get a son for the question for q4 unfortunately TUC was minus five percent so we are not in a full recovery trajectory yet q4 as you know is a slow season so we will do the rear lining and recover and collect of the receivables we think we are running a healthy business and there is no excessive inventory in the market and we are recovering of 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, 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 mentioned earlier the tier three to six cities Our experience in these three to six cities can be exerted direct to front, D to F, 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 Weishu Kim said, high single digit 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 of the downside of the slow economy is sales but the benefit is raw material costs decline so we think these two factors will offset each other and we can secure margin so for profitable growth as we should him and China management team have committed so we will secure the profitable growth so we're 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 thank you thank you 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. 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. Thank you very much. Thank you so much.