Nippon Paint Hldgs Co Ltd

Thank you very much for your patience. From here, we would like to start Nippon Paint Hldgs Teleconference for the second quarter of the fiscal year ending December 2026. Prior to the meeting, we would like to have some requests to you. In order to prevent echoing, if you have any telecommunications equipment such as a cell phone nearby, please make sure to turn off the power or keep them far away from the telephone unit. Please be advised that simultaneous translation for Japanese and English is provided for today's conference. Mr. Wakatsuki Tanaka-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 two points on slide number two. First, regarding the revision of a 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 150 yen to 155 yen for the second quarter and 150 to take 60.8 yen for the full year. Chinese yuan from previously 21.5 yen to 23.1 yen for the full year. Second, regarding the definition of adjusted profit, we have slightly changed the treatment of PPA-related expenses. and David Durack, who 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. Phase number three, please let us look at the long-term historical trend of second quarter performance. As we have mentioned before, Thank you very much. Thank you. The second quarter results represent 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 $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 94.9 billion yen, an increase of 30.4%, a significant increase year-on-year. Adjusted operating profit margin was 17.8%, an improvement of 1.5% this point from the previous year. Adjusted EPS was 29.4 yen, up 31.7% year-on-year. The key takeaway here is not, it's just not that we simply increase sales. Even amid the uncertain situation in the Middle East, we achieved a margin improvement by combining revenue growth with better raw material cost ratio and effective cost control. The impact of showing raw material costs linked with our 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 G&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 jobs at the raw material cost increase, and increased sales volume. Japan, Nipsey, other than China, and JTO Pacific also posted revenue and profit growth supported by higher sales volume and product price increases and other factors. As for Nipsey, 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 prioritize 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 five, the revisions to a four-year earnings forecast for FISCO 2026. First regarding revenue, we raised our forecast from the 1.92 trillion yen in February to 2 trillion yen, an improvement of 80 billion yen. This represents an expected year-on-year increase of 12.7%. We have also presented figures for adjusted metrics. We anticipate a full year adjusted operating profit of 316 billion yen, an adjusted operating profit margin of 15.8%, an adjusted EPS of 95.7 yen. These figures represent a projected 13.6% increase in adjusted operating profit and 10% growth in adjusted EPS compared to the previous fiscal year. During my 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 costs, improving product mix, reducing costs, 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 maintained our operating cost forecast at 283 billion yen unchanged. This reflects the fact that the upward revision resulting from foreign exchange rate fluctuations being offset by the one-off expenses such as M&A related costs and business transformation costs for the Dulux Group in Europe. We also project EPS at 81.5 yen, a figure that accounts for the impact of runoff expenses and effective tax breaks. The forecast for annual dividend remains unchanged at 17 yen 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 six and seven. Next, I would like to outline the substance underlying of earlier forecasts. 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 opening profit forecast for Japan Dulux Group and Nipsey business other than China. On the other hand, regarding Nipsey 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 TUV. As for the Americas, due to the persistent economic uncertainty, we maintain the outlook for AOC as the market shows signs of bottoming out, 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 the 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 special factor. China, automotive business is relatively strong, but TUC in the second quarter dropped markedly due to the 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 exploration of good first Next, page 9. I'll explain the outline of results of major segments. The details will be left to take you under a session, so just a brief comment. First, Japan. Revenue, $61.6 billion, up 17.9%. Adjusted operating profit is $8.9 billion, up 65%. For decorative, sales increased and sales brought forward of hydrolability product for architectural and structural products contributed and for industrial automotive sales volume increased contributed. For profit side, increased revenue and improved material cost ratio SG under ratio significantly contributed. Revenue 129.1 billion, up 9.7%, adjusted OP profit, 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 currencies. That said, profit margin is maintained by keeping sales channel discipline, avoiding inventory build-up, and improved cost efficiency. Nipsey except China, revenue 124.9 billion yen, up 26.4%, adjusted operating profit 27.4 billion, up 53.1%, very strong results. Growth was achieved in wide areas including Malaysia, Singapore, Thailand, Turkey, Indonesia, and India. Increased revenue, improved raw material cost ratio, and effort for rationalization led to profit increase. Deluxe Group, First Pacific, revenue 73.7 billion, up 29.2%, adjusted operating profit 10.7 billion yen, up 42.9%. Even under tough market environment, specialty coatings business share increase and small size acquisition and FX big factor contributed. Jurex Group Europe, revenue 50.1 billion yen at 19.9%, adjusted OP profit 5 billion at 9.6%. The France Awards, Scottish year-on-year, South and Central Europe showed some strong other growth. But Europe as a whole is still on the path for recovery. Next, Americas. Revenue 34.9 billion yen up 12.2%, adjusted operating profit 3.2 billion yen 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, ALC, revenue 59.1 billion, up 23%, adjusted OB profit, 21.5 billion yen, up 26%. Even without plus 2% coming from FX, the performance was very robust. While macroenvironment remains severe, profit contribution level remains high through pass-through of material cost increase on prices, sales volume increase, and sales volume growth in America and Europe exceeding that in Asia Pacific, leading to better regional breakdown. AOC, although some retrospective correction due to finalized PDA, profitability and cash creation capability on adjusted basis remains robust. Stage 10, main topics. First, let me explain about purchase back of European automotive coatings business from Utram Group, which we announced today. In August 2021, we announced transfer of European automotive business to Utram Group, and this time we will purchase it back at about 47 million euro, or about 8.5 billion yen. 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 Ultram Group. What is important about this deal is not the formality of buying it back, but that we have made a judgment that the purchase at this time is the best from MSV point of view. and Uthram Umbrella. Reorganization and other rehabilitation measures have progressed and the performance recovered to some extent compared to the time of FKT 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 three independent directors to discuss Profit and Protection of Minority Shareholders and from MSB perspective. The acquisition price was decided based on equity value calculation by the third party and the EOD Chairman Goh has not participated in deliberation and resolution of this deal. In the first year after this deal, its impact for October-December 26 period 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 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-presenter Wee, BOD Chair Nakamura, and myself. Please read it in your leisure time. On July 23rd, we announced reorganization of Japan Group, where Nippon Paint Surf Chemicals is to be split and integrated into Nippon Paint Automotive Coatings and Nippon Paint Industrial Coatings, effective January 1st, 2027. And we have published information both internally and externally. will shift to a system to offer surface treatment product and coatings products which have been provided from each 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 Awards. 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 result, we achieved record high revenue and adjusted operating profit owing to global partner companies' continuous effort in wide areas including material procurement, product supply, and customer service. That said, There remain some issues to note, such as raw materials, effects, and geopolitical risks. Our employees are operating with a sense of alert toward the second half. We are committed to pursue to achieve MSP as set out by watching closely those risks and accumulating adjusted profit, EDS, and cash. We would like to continue to hold dear constructive engagement with investors. Thank you very much for listening.

Now we'd like to move on to the Q&A session. If you have any questions, please press the star key followed by 1 if you have any questions. If you want to cancel your question, press a star followed by 2. The next questioner will be appointed by the operator. Please. Press star followed by one if you have a question. In this time we would like to limit the number of questions to one question for one questioner. We appreciate your understanding. Now the first question. Please give us a moment before we take the first question. This is a question from the Japanese channel. We'd like to take a question from the Japanese channel. The first question is from Goldman Sachs. Hikeda-san, please begin your question. This is Hikeda from Goldman Sachs Securities. Congratulations on your very good results. Thank you, Mr. Hikeda. Thank you very much for your comment. Okay, thank you very much for giving me the opportunity. 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, NIPC other than China, they have achieved upside, but NIPC China, I think, has been revised downwards. MFC, ALC 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 as they have engaged compared to initial forecast? And also for China, the raw material costs, raw material I think is easy to procure, I think, and 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, 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 the 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, the These things offset the favorable impact of the foreign exchange, so therefore 283 billion remains unchanged. Roughly, my gut feeling says that the February AOP was about 300 billion yen 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 at 15.8%. And then in the second half, because there are some assumptions, to what extent do we factor in such uncertainty was the question. As of this point, the numbers that we present is the must-achieve number. So roughly speaking, the second quarter In many regards, the price pass-throughs, we were able to achieve this quite swiftly. And because of 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 is a timing difference of about six to three 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 four 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 a margin 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 warming up already in China. However, the bread and butter TUC business, this relates to consumer goods, slow-moving consumer goods. Those repainting the 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 this situation, including the relationship with the distributors, We are not going to push our sales towards them. We would like to make sure that we 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 As I mentioned during the first quarter results presentation, that basically, past price, past loan 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 rate 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.