Hello, everyone. Thank you for waiting. We'd now like to hold the Conference Call for Financial Results of the Second Quarter Fiscal Year ending in December 2024 of Nippon Paint Holdings. Before we begin, we have some requests to the participants. To prevent howling, if you have communication devices such as cell phones or others nearby, please turn the power off or move them away from your telephone set. If we experience bad howling during the conference, we may suspend the proceedings and call upon the person causing that. Your understanding is very much appreciated. Also, simultaneous interpretation in Japanese and English are available for this conference call. Now, I'd like to turn this over to Wakatsuki-san and Tanaka-san.
Thank you. Hello, everyone. I am Wakatsuki, Co-president of NPHD. Thank you very much for taking time out of your busy schedule today to attend the conference call.
I now would like to present the overview of FY 2024 Q2 Financial Results. For your information, as this is the second quarter financial results briefing, we have participants from the media as well. First, page three, today's summary. On IFRS basis, revenue increased to JPY 432.8 billion, up 19.3% year-over-year. Operating profit increased to JPY 51.8 billion, up 6.1% year-over-year, continuing significant growth both in revenue and income. Positive factors revenue are, as shown in the bottom right, paint volume, adjacent business, FX , and new consolidation, while price mix is somewhat negative. On non-GAAP basis, revenue was up 5.4%, operating profit increased by 7.5%. On non-GAAP basis, acquisition of NPT in Italy last year and Alina in Kazakhstan closed this year are not included.
Including these, revenue growth without effects would be about over 8%. NIPSEA's China's decorative business increased 5% in revenue in TUC, despite challenging market environment and TUB's revenue declined by 12%. But adjacent business grew, and as a result, NIPSEA China as a whole increased revenue 5.6%. Operating profit increased 30.2% on non-GAAP basis, with margin improved as well. In the Q1 earnings call, I stated that basically we were on track plus, and this remained the same in the second quarter, and furthermore, with the benefits of effects in the first half as a total, we can say our performance was extremely strong. Please turn to page four. As to revising the full year guidance or not, we kept considering to the very last minute.
But starting the conclusion first, we maintained the initial forecast without revision this time, as the recent exchange rate volatility, well, has been too great. In the first half, we saw steady business growth and solid margin improvement. The yen appreciation was greater than we expected, and we judged it, it's difficult to foresee effects in the second half. Also, the delay in closing the buyback in India announced as of the first quarter, we thought that, would be more than compensated for by the weaker yen. However, now it has become a little more difficult to have visibility to the FX trend. We have taken all of these factors into consideration comprehensively, and our guidance is maintained at this point.
I would also like to add that assumption for this is taking account of absence of revenue of about JPY 30 billion and operating profit, well, about JPY 1.6 billion expected in India at the beginning of the year. I believe you are already well aware that we are not a company in the export industry, but as an aggregation of local production for local consumption businesses. Basically, FX fluctuation gives certain impact to some raw material costs, but just changes in conversion rate, and I think it is better for us to look at trends in local currency terms for actual state of business. Thus, on page five and six, we updated the business growth rates and margin and trend expected in February guidance in local currency only if for full year basis.
As this is the latest forecast, except for Turkey, it looks like there are more slight downward revisions in revenue. However, basically, with the exception of some TUB businesses, basically, there are slight revisions of revenue growth rates, and there are no major changes. For China TUC, growth rate is revised at 10%- 15% from around 15%, while we forecast moderate improvement in margin. As we kept saying from before, we will not pursue an unreasonable share increase only, but aim for both solid growth and revenue at the same time. Page seven. The raw materials market is generally stable. And of course, in Japan, there's some FX impact, the positive for stronger yen and negative for weaker yen. But all in all, including demand and the supply, the things are stable. On page eight, the heat map is as shown on this page.
In the Chinese automotive market, Japanese OEM manufacturers continue to struggle, and we think we have lost the market share slightly versus the market.
...Page nine. I would like to refer to the major segments here and leave the details to the Q&A session. First, in the Japan segment, automobile production continued to decline in the second quarter as well after the decline in the first quarter, and the market conditions remain difficult for both decorative and industrial segments, and we are making up for the decline in volume by raising prices. Marine segment continues to perform well, and in total, both sales and profits are almost flat. I have covered NIPSEA China earlier. Non-GAAP basis margins have improved, even taking into account the additional provisions made last year. So once again, we have achieved a good balance between growth and profitability. NIPSEA, except China, continues to achieve high growth, and margins are high. But the figures are slightly skewed by inflation in Turkey and hyperinflationary accounting.
The decline in margins is also largely due to Turkey. Excluding Turkey, sales growth of NIPSEA, except China, is around 6%. There is a bit of instability in the political situation and other factors in various regions, but things are generally as expected. That said, the economic conditions in Indonesia, which showed some recovery compared to the first quarter, do not warrant an optimistic view. We plan to implement various recovery measures in the second half of the year. Alina in Kazakhstan also contributes with an operating margin above around 20%. In a sense, things are going very smoothly. Next, in Dulux Group, market conditions are difficult in both the Pacific and Europe. But in the Pacific, sales grew by 4% and margins are almost flat, partly due to the contribution of small acquisitions in the adjacencies business.
Especially in Australia, the market is bottoming out, and in the second half, the core brands in Dulux will be renewed, first time in 10 years. So, for both of them, the growth is possible. In Europe, the sales are unfortunately down due to continued difficult market conditions in France. However, we estimate that market share is rising slightly. And according to the latest report, the market is bottoming out. -5% growth per annum continues for several years. That is quite rare for matured markets. And we will see the recovery going forward, and we are seeing the sign of the recovery. Lastly, in the Americas, sales of automotive products increased by 8.6%, due in part to strong sales to Japanese automakers, while the market production remained almost flat. And sales of decorative products grew.
The interest rates are relatively high, and for the housing market included, markets are difficult, but showing positive growth. As I said in the first quarter, in the North California, a total of 17 new store openings were completed in May on the site where a competitor had left after going bankrupt. Those stores are expected to make a gradual contribution in the future. It should be noted that these stores are neither business takeovers, nor acquisitions, but rather the opening of new Dunn- Edwards stores. Page 10. As a topic, I'd like to touch upon the publication of the integrated report. So basically, it follows the medium-term management policy announced on the fourth of April.
But it also includes more in-depth explanations about thinking on ROIC and other topics, as well as a dialogue between Chairman Goh and Lead Independent Director, Nakamura. So, that it is worth reading, and this year's report was published two months earlier than the one last year. We hope you will take the time to read it. The briefing session will be held on the fifth of September. Thank you for your support. So that concludes my brief presentation. In short, I would say that, yeah, there are no particular surprises. So, that we have done, sound, the growth and the margin in various regions, and the measures are paying off, and the economic conditions are not something that we can be very optimistic, but we are seeing some good signs in some regions.
Original guidance will be achieved, and we'd like to beyond that. And in the third quarter?
... If necessary, we would like to make update. With that, I'd like to entertain your questions. Thank you.
Now we move on to Q&A session. To ask a question, please push asterisk one on your telephone. If you want to cancel the question, push asterisk two, and please wait for the operator to call your name to ask your question. Please push asterisk one to ask a question. Since the time is limited, please ask just one question from one company. We are going to announce the first person to ask the question shortly. Please wait for a while. First of all, we would like to nominate the individual who is going to ask from the Japanese channel, and the first question will be asked by Shintani-san from SMBC Nikko.
This is Shintani from SMBC Nikko Securities.
Hello, Shintani-san. Thank you very much.
Well, about the China TUC, I'd like to ask a question. Well, the TUC and a 15% of, well, the, the percent, well, at the increase. In terms of pricing, you have revised. You have not well revised your pricing, and so is this a correct understanding? And also, in the cities and also while local areas, is there any differences? And also, what is the outlook for the per share increase going forward?
Shintani-san, thank you very much for the question. As you said, well, to be very frank with you, the market environment in China is not really well suited for the price increase. There are two factors, in some discounting, and also there were competitors have well discounted their prices. And so another factor is well related to mix and the economy part.
The economy, so the products are going to grow, so in terms of volume, and then it will % or more, and also the mix will be mildly negative. And so, and, and as for the well, the March to June, and well, major cities, well, we have more businesses, but well March to June, in TUC, well, a little over 20% is accounted for, and that growth is higher. And furthermore, in the second quarter, somewhat noteworthy, other than TUC, TUB businesses and there, and well, approximately 5%-10% of the total, and so 70, 20 and 5-10, TUC, TUB and others. These are the competition ratio, and so this has not changed much, but the others.
And well, the peripheral area enabling well, of the coding and the sales of some raw materials have seen quite a good growth, and so the margins themselves is not that high, but in terms of mix, it would be somewhat negative. However, having said that, well, all in all, TUC as a whole... Sorry, TU as a whole, margin, it has been very healthy, and so in that sense, we have been able to maintain the premium segment business and also to grow. And then while we are also, well, able to increase the revenue at the same time. That's it from me. Thank you.
Thank you. Just a follow-up question. So the volume and the CCM and also the, for the, well, the decorative and others, do you think that, well, the same trend is going to continue, from the second quarter and beyond?
To be very candid with you, others, we are somewhat opportunistic, and so the supply and demand situation in market will drive at the performance. So TUC, of course, TUB included, and these are just with higher margin businesses, and so we are to focus on them. However, in terms of the markets, almost zero growth is expected, and so this, well, 5% growth is, well, quite, well, the noteworthy and 10%-15%. So, in the second half, we hope that they will do better.
If I dare to say one more thing, the first quarter of the previous year, it was really well good, and then the second quarter, the 15% for TUC, and so, in the second quarter, where the demand is higher, and I think, well, it is, well, 5%. And third quarter and fourth quarter, we would like to keep monitoring and keep our eyes on how things would develop going forward.
Thank you very much.
Thank you.
Next question, Enomoto-san from the Bank of America Securities. Here is Enomoto.
Thank you.
Enomoto-san, hello? I still did a corporate plan, so the numbers remain intact. In the first half and the second half, about a JPY 5 billion decrease in profit is expected. I think usually second half has better results, and you have not revised it this time. Between first half and the second half, what will be the decrease in profit? FX impact is quite big. The JPY 142 per dollar. So it's very difficult situation to come up with guidance and also the Indian business, in the absence of it.
Probably September end, we thought we could make it, but the digitalization of the stock share and also the elections in June. It's not that the business itself is having some problems, but even on the three-month window, we can't just make any forecast. JPY 151 against... Well, it's not really the dollar/yen, but also the renminbi is a big factor. So, but we are not talking about any expected decrease in profit. What is the seasonality between first half and the second half? Last year, second half was better. Are there any trends at the first half and the second half in terms of profit? The second half is slightly better.
Understood.
That's what I thought, because I felt a little bit uncomfortable with the, the guidance for the second half. In the first half, dollar/yen basis, JPY 151 , right? Or JPY 154, rather. JPY 1.6 trillion. And it went to JPY 142 temporarily, and we did not know what we should do with this volatility in the effects. So on a full year basis, minus the first half, we are not doing that kind of calculation. That will be misleading. So the actual picture of the business itself is not bad, and the year-on-year basis. Growth is page six and page seven, I think, or page five or page six. You can refer to those pages. The growth is positive on a full year basis, basically.
So in the second half, almost in no areas we would say negative growth, but it's our guidance, our forecast. Have any impression on potential negative growth. Now it's clear. Please put yourself in my shoes. The stock goes up and then goes down on the next day, and also there's an FX impact. We are not exporting company, but we have certain sensitivity to FX.
So looking at the peers and the examples, I don't think it is the timing to change the forecast. JPY 145-JPY 146 level stability. Where do we have FX sensitivity? And please look at our sensitivity as well. But basically, in the second half, we expect a very good level.
Between the first half and the second half, with the constant currency, second half will be more positive than the first half.
That's very clear. Thank you. But I have been struggling with the situation. I understand. Thank you.
The next question, Nishiyama-san from Citigroup, please. Nishiyama from Citigroup Securities.
Well, thank you for the opportunity.
Hello, Nishiyama-san. Thank you very much for covering our company.
Thank you.
And page five and page six, and about the full year guidance in terms of the revenue, and then, well, on the slide, well, a decrease. But with the profit-wise, well, you are to maintain or will have some upside, and it's the profitability, but compared to the, well, the earlier forecast, I think, well, of course, this differs from, well, each individual, our business segment. But if you could tell us why you are forecasting in this way?
Thank you for the question. Basically speaking, well, raw materials are the, well, relatively big factors, and, they are-
... Raw materials are stable or our RMCC, well, has come down, and so that is to cut some impact. And also depending on the region, well, for example, in China, it's not that we are going into, well, put it into our pocket, and so, so it is that we have to, well, deal with them with the, well, mix related measures, but we do have somewhat increase in volume, and so we are seeing some certain, sort of results. So in total, China, compared to the, well, previous forecast, I think it will do better. That is the kind of the impression we have.
And as for the other regions, well, somewhat, well, the dubious or, they have some doubts with Turkey, and it's depending on the central bank, well, policy, interest rate could be, well, 50%, and so there has been a big change. And so to really, well, fight against inflation, and then there would be, well, a less of the mobility in terms of, the products and others, and the fixed costs will go higher. And then, and also, the hyperinflationary accounting would be applied, and so that. It would, well, will put us more in a challenging environment, particularly in the fifth quarter. And, well, I AS 29, and so the application of that would not be that bad, but that could be one of the unfortunate factors for our business.
And also, PT NIPSEA in Indonesia, slightly below is what being measured, because, well, the revenue is somewhat weak and soft, and the sort of the equity mix at stake is, well, smaller, and so that is the reason why the fixed cost is, well, higher. And also the margin, 32.9% of the previous year, and in contrast to that, it would, well, go over 30% for sure. So the trajectory-wise, it is going to be more difficult. And growth, well, the prospect of volume, it would slow down, and so we would see a somewhat, well, well, lower performance compared to the, well, original forecast and the cost control.
Somehow to manage the recovery in volume and in total, almost in line with the initial guidance we have provided at the beginning of this year.
Thank you very much for your detailed explanation. Thank you. That's it from me. Thank you.
Next question. Ikeda-san from Goldman Sachs.
Here is Ikeda of Goldman Sachs.
Thank you.
Ikeda-san, hello.
I have a question about NIPSEA, China. Your competitors in the second quarter, the market went down, like, by 20%. That's what your peers said. And some of the peers are running in the red. What is your understanding of the future market conditions? And also, you are raising the prices in China, and you will not go for too aggressively for the market share. And so the margin of 18% is going to be the bottom? Could you please talk about the competitive scenario in China?
Thank you. To be honest, regardless of the trend among the peers, whether are we going to see industrial restructuring or not? Among some smaller players.
Without using any capital, though we can have some OEMs into our group, that is our basic strategy. So at least, probably we will not go to buy some businesses. I don't know about the other companies like Akzo. They are buying, they're showing there, those entities are struggling in China. They cannot win over Nippon Paint. So it's a positive story for us.
So the question is, whether are we going to use capital to buy some businesses?
That will be the discussion on the different, the league. To be honest, that is unlikely. As to price increases, I don't know what your the information source is, Ikeda-san, but in the premium area, the discount is kind of contained. But for example, the 2, 12% is not a magic number. The margin is much higher for TUC.
It is not our style to dictate which percentage should be applied. At other companies cases, there was a case like that, it dictated to 15%. But, in that case, if you can go for at a 17%, that is possible, then why not 17% instead of 15%? Let's say, in other business exist, but the, at the TUC, Eric Chung, the, who is, the covering the whole Chinese business, for them, the growth is a must, making money is a must. So the revenue, earnings, and the growth should be achieved, the together, and that will, maximize, the, the corporate value.
If the market is not so dynamic, then rather than applying a discount policy, though we would like to focus more on the profitability, but that doesn't mean that we have given up the growth opportunities. So it's a question of how to strike a balance, and that is being worked on by the Japanese team. So it's not that you are actually raising prices in the market. Let me repeat, we are doing that, we are thinking to decrease the range of discount, but not really raising the prices. The environment where you can raise prices is like the price of raw materials is going up so rapidly. But that's not the case. The consumer sentiment is tough. So the needs for paint as a must item are very strong.
So rather than having too much discount, we have been keeping this mindset that we would do business. Well, the CEO of your competitor company said that you are raising rates, so... Well, if the peers also raise rates, that would be a good sign. They said, well, in China, those people are actually giving a discount, saying that the other companies are raising rates, so you need to be cautious.
Thank you. The next question, Yoshida-san from Mizuho Securities, please.
Yoshida from Mizuho Securities. Well, thank you.
Yoshida-san, hello.
Well, for the Direct Group, I have some questions, and lately, the profitability is not that growing. And Wakatsuki-san has already explained, in terms of market, well, environment, it is quite challenging. And towards the second half, the core brand will be renewed, well, for the first time in 10 years. Inclusive of that, how are you going to rebuild or to put it back on the growth trajectory? Can you do that? Or in these four regions, Europe and other regions might differ, but, do you think that you'll be able to put this business back on to the growth for trajectory?
And so we will, if there are differences, please describe how you're going to deal with that in Europe as well as in the Pacific.
Australia and Europe, they are quite different.
In Europe, the market, well, it is really just growing at 0%, and then you have the inflation, 5%, and then the 2% was share gain. And so when it was listed, it was really 5% for growth. And then you are really going to go through a series of smaller acquisitions, and then they are achieving 8% or so. But, it should look at the market, and so if the market is not that good, in case of the COVID-19 pandemic, and, well, the, there was a big boom, in the retail of our channel, of the business in Australia. However, in Europe, 4%. In the second half, in total, 5%-10% is what we are really forecasting.
And this is really, well, outstanding, and 5%-10%, and then-
... 5% would be just, well, good, and then 10% really good. And so the confidence level, and I have talked with William. Well, it is not going to rebuild, but what they have been doing will further be refined. And, well, they have the Ocean brand, and so it was already launched, and the renewal thereof and how to promote. And was, well, probably in terms of the achievement of the budget and achieving 5%-10%, and I just ask him if there is any concern, and then, well, almost no concerns, and then the 95% probability of achieving that.
And so we hope that the cost could be reduced a little more, in terms of the operating level, but by making investment in marketing, and then they are really going in to really have the better, let's say, the premiumness. And so compared to the other regions, well, RM CC ratio is low, and so there are, well, quite a large amount of the SG&A cost ratio. But if they are able to really, well, implement all this, and then the 8% growth, and then the, well, revenue. And so I think for the Australia, it's not that they are going to really make a turnaround or rebuilding of that, but they are really going to do more.
Then Europe, in contrast to that, as I said, the market in France, and it turned out to be, well, more difficult than what we have expected, and Dulux is in retail or in the trade channel. And they do have the network of their own retail outlets or through distributors. And then the 75% is accounted for, and 25% is, well, the, retail and, well, the big box. And, and so negative growth has not been experienced many times, and, and not just limited to Dulux, but in the mature market. And of course, well, the war in Ukraine and, well, European, economy has worsened, and this, negative, well, -5%, it's not going to be, well, continued forever.
And so I think at one point in time, it will go back to some flat growth, and then so baseline will come back first. And on top of that, we are to really increase our share in the French business and to raise it to a little higher level. And so with all these projects and also the efficiency improvement and also the appealing brand and the... explore the more of the channels, and then it may take, well, more time, but the cash is being generated. And so it's not that we need to really, well, inject the additional, so the fund or money, but in terms of some supply chain, and Australian teams are really providing support.
In this fiscal year, we would have the better visibility of the improving of the capability and efficiency, and so for our information. With respect to the Australia campaign, is there going to be a big cost to be incurred?
Within the sort of the scope of the risk, and then so they are defined as the sort of marketing company. And so, the assumption is that always the marketing costs would be incurred, but it's not that, well, there would be a very huge marketing cost incurred. And also in terms of the comparison to the previous year, and, well, the insurance sort of your income from the flood. And so there was this for a one-time factor enjoyed for last year, and so there is going to be absence of that.
So it's not that, we are seeing some weird, I said, negative factors coming into play.
Thank you very much indeed.
Thank you.
Next question, Tso Fan from CLSA Securities.
Hello, here is Tso with CLSA Securities.
Tso-san, hello. I have a question about Japan segment. The business environment, the automotive production decreased in April through June, and also new housing starts were not so big. Still, the profit in the second quarter and the margin were quite robust. Could you please talk about why? Could you please talk about the background? Thank you.
Thank you. As you said, on the revenue side, the environment is not good. Like case of Japan, the raw material cost is on the rise, and the personnel cost is on the rise, so it's inflationary stage. So we are raising prices with the understanding of the customers. At the same time, we are controlling costs.
As we said before, the Japan segment, because of the spin-off, depending on the other companies, that there are some differences and the duplications, and we have been reviewing such situations over the past several years, and we have materialized to some effect impacts. Our aspiration is quite high, much higher. Each company is doing a lot of efforts. Our partner, Kim San, Wee Siew Kim-s an, that is encouraging our people. As to marine application, the market is good. This segment has overseas business, namely FX benefit gains. China or Singapore, their profitability is getting better, contributing to the overall, the profit, although the absolute amount is not so big. Compared to several years, we are seeing improvements.
Thank you.
The impact coming from decreased automobile production for April through June is reflected in the second quarter, and it is not to be predicted in the third quarter. Am I right? For the third quarter, heat map basis, the Japanese automobile production is expected to be flat. So hopefully, not much impact. But different things could happen. So it's, at the moment, it's difficult to make any specific comments.
Thank you.
Thank you.
Next, Fujiu San from Nikkei Newspaper, please.
Fujiu from Nikkei. Well, thank you very much.
Hello.
Well, thank you. I have one question. Really, well, we have the volatility in FX and also the stock prices have been fluctuating very violently. And so, well, M&A, well, the strategy, and where, where, from where you are really going to do the financing, if you could, well, elaborate on this please?