Nippon Paint Holdings Co Ltd

TSE:4612

Earnings Call Transcript 2024-Q1

[Operator]

Thank you very much for waiting. We would now like to start the on Nippon Paint Holdings Co. Limited FY 2024 Q1 Financial Results Conference Call. We have some housekeeping announcement before we start. To prevent the interference, please switch off your smartphone and other communication device nearby or place them away from you. Thank you very much. If we hear strong interference during the call, we may temporarily suspend the proceeding and ask you to fix. This conference call has Japanese-English simultaneous interpretation. So Yuichiro Watasuki please start.

[Yuichiro Wakatsuki, executive]

Thank you very much. Hello, everyone. I am Yuichiro Wakatasuki co-President of NPHD. Thank you very much for taking time on very busy schedule. And at late hours for participants in Japan and Asia to join us today. I would now like to present an overview of FY 2024 Q1 financial results. First, Page 3, please. Today's summary. On Tanshin basis, revenue was JPY 384.3 billion, up by 16.4% year-on-year, and operating profit was JPY 42.7 billion, up by 22.2% year-on-year, continuing a significant increase in revenue and profit. Positive factors in revenue were paint volumes, price/mix, adjacencies business, FX impact, and new consolidation, as shown in the bottom right. On a non-GAAP basis, revenue increased by 10.6%, and operating profit increased by 15.9%. In NIPSEA China, for decorative business, TUC revenue increased by 15% and TUB decreased by 15%. NIPSEA China as a whole continued to perform well with revenue up 12.2% on a non-GAAP basis and operating profit up by 11.6%, partly due to strong growth in automotive business. These exceed the 7% to 7.5% revenue growth and 7.5% to 8% operating profit growth, excluding M&A and FX in Kazakhstan and India shown in the guidance at the beginning of the year or the 8% to 9% revenue growth and 10% to 12% EPS growth in the medium term, including Kazakhstan and India presented in the medium-term strategy. Also more positive than our initial forecast. But we are not revising our guidance yet as we are only 3 months into the year. That said, we are basically on track plus alpha, even discounting the delay in the closing schedule in India, the buyback of 2 India businesses, which I will explain later. Next, Page 4. We cannot be optimistic about raw material market trends. But as prices vary across regions on raw materials, we do not expect any significant change in the RMCC ratio as a whole. However, there is also the impact of the weak yen in Japan, for example. And we think the different regions and businesses are responding in different ways. Page 5, please. Not much change in the heat map either, but the Japanese automotive market is dark blue with production down by 12% year-on-year in Q1 while NIPSEA China TUV market is also dark blue as the property market remains soft. Other markets are basically flat to slightly soft, and we will continue to strive to increase our market share. Page 6, please. Page 6 shows some summary of the operating results in major segments. I will briefly comment on each area and go into detail in the Q&A session. In Japan segment, the impact of the decline in auto production in automotive applications, in particular, and the continuing soft market conditions in both decorative and industrial segments were offset by price increases to compensate for the volume decline. Revenue for marine applications remained strong, resulting in a slight decline in total revenue, but operating profit increased by 40.7% year-on-year. NIPSEA China is growing, as I mentioned earlier, TUC is strong, TUB is weak, and industrial application is doing reasonably well with no change in margin from the previous year. Basically, TUC maintained its margins. TUB margin declined due to lower revenue and Industrial Applications margin increased. In TUC, we continue to see growth in all regions with higher growth in Tier 3 to 6 cities. NIPSEA except China continues to achieve high growth rate and margin. This includes Turkey whose revenue grew by 100% on a non-GAAP basis with constant currency. And when you exclude Turkey, the revenue growth rate of NIPSEA except China is approximately 5%. Indonesia slowed down due to Ramadhan being earlier than usual, but other markets are moderately strong in the first quarter. Also Kazakhstan Alina, which was consolidated in January also has a good start. In DuluxGroup, both Pacific and York are, to be honest, in difficult market conditions. However, Pacific has contribution from a small acquisition in the adjacencies area, resulting in a 5.3% revenue growth, and there is no need to worry about the margin. Europe continues to face challenging market conditions, especially in France, resulting in revenue decline. But we estimate that our market share is slightly improving. Italy's NPT, which we acquired last year, has been making great contribution. And we believe that Europe as a whole will perform robustly in longer term. In Americas, while automotive has flattish market production volume, Japanese automakers were strong and revenue grew by 12.5% in total. Decorative has had a somewhat difficult market condition, but rainfall improved slightly. We're adding new stores following the bankruptcy of a competitor in Northern California, which requires some upfront cost, but we anticipate contribution from this initiative. Once again, we shouldn't judge things based on quarterly results, including the seasonality. But overall, we have strong results. And in weaker regions, leaders are already implementing corrective measures. We are also willing to revisit the guidance at an appropriate timing and only if necessary. Major topics, Page 7. Today, we changed the closing schedule of the buyback of 2 Indian businesses from first half 2024 to by the end of 2024. There are no particular issues with closing, but progress is slow affected by the general election, which is held until June. Regulatory approval has not been provided as scheduled. In the February guidance, the total revenue of the 2 companies for 2023 was approximately JPY 44 billion, NPI growing up 10% to 15% and NPA for automotive growing at 0% to 5%. The guidance included 6 months earnings with a flat margin of 4.5% for NPI and 6.4% for NPA. We expect flat margin from 2023. Even if this contribution doesn't happen within this year, it only accounts for 2% of the consolidated revenue forecast of JPY 1.6 trillion and a little less for margins, resulting in very limited impact on this year's consolidated performance. Also, we have been awarded the grand price G of the Nikkei Integrated Report Award for our last year's integrated report. This is an announcement that we are making this time. And if you haven't taken a look at it, please kindly visit the website. Last but not least, I would like to thank you for your feedback following the midterm management policy briefing session held on April 4th. The first quarter results that I have shared with you today is on the same track as our past explanation. We will continue to achieve what we said we would achieve, which is proven by our organic growth that I just shared with you. Then what about the other pillar of the growth, which is M&A. We are continuing to study multiple opportunities in various sizes, and we still look for something that can contribute to MSB. This is all I can say for now. But I'm sometimes asked, are you suspending M&A. So let me clearly state that, unfortunately, that is not the case. This concludes my brief presentation, and I would like to open it up for questions. Thank you for your kind attention.

[Operator]

[Operator Instructions] First question is BofA Securities. Enomoto, please go ahead.

[Takashi Enomoto, analyst]

I always ask similar questions, but I have a question on China. So from the outside view, the data, the housing sales is declining and existing preowned housing sales down, but DUP a 15% increase in revenue. I do not fully understand. So what's going on? So more than 15% growth, I think it's a very strong growth in the Tier 3 to 6 cities. So if you could elaborate on this, please?

[Yuichiro Wakatsuki, executive]

As I said many times in the past, our TUC business, the new building, it's not dependent on new business or the rebuilding. If it's there, it's better, but it's not including sensitivity, it is similar to consumer goods. And so weak economy is negative, but for the interior repainting, there's still ample market for us. And so as I said many times over, our market share is around 25%, which means on a single year basis we have 75% more. And so it's not going to go down to 0 all of a sudden. We have that much market share. We can do this because we have brand well established. It's a brand business. It may not be readily understandable for you, but this is a brand business and that is bearing fruit. So in Tier 3 to 6 cities in the past, we had not focused much compared to the Tier 0, 1, 2, the portion is still small, but the market is large, and this is a white space for us. So we want to maintain our brand and also change the package and offer the affordable version, and we are getting share from our competitors by doing so. Our competitors are also focusing on Tier 3 cities or no, they are retreating from Tier 3 to 6 cities or are deciding to join hands with us when they address the Tier 3 to 6 markets. So we will leverage that capacity and increase our revenue. So that is how we are maintaining a margin and grow and establish our business there. So in one word, as I said in February, you may not have believed me, but it's true, our China team is strong and competitive. I think it really boils down to that. In the Board meeting today, we had a question. Tier 3 to 6 city business is growing, but Tier 0, 1, 2 are also growing. So our bread and butter, our core is there. And our premium brand, and maybe our affordable version may sell more. We may lower the price in some products. We're leading this movement, but still our business strength is underlined by the strong brand is being leveraged. So no change from the response I've been giving you. It's nothing more, nothing less than that. Of course, we need to remember that on site, we use creativity and ingenuity. Many things are being tried and DX is being used and we also send our people over, the painter over with just one phone call, we offer that kind of service. And that is also supporting our brand. So it's not that we have a magic formula. This is the strength of our business that we've cultivated over the years. It's a brand-based business. I want you to understand that.

[Takashi Enomoto, analyst]

So you're growing more than the market. I understand that. But if you could tell me how I should look at this Page 5. So business environment heat map, TUC, the market is flat, I think, is that correct, and you are growing at 15%. So you are outperforming the market by 15%. Is that correct?

[Yuichiro Wakatsuki, executive]

Roughly speaking, that is the image. Yes, the market, the green is plus/minus lower single digit. It's not 0, but it is a low single digit. We have bigger volume. We're growing and the price mix in TUC is slightly negative. So that structure remains unchanged. So for sure, we are gaining share.

[Operator]

Next question is from SMBC Nikko Securities' Yasuhiro Shintani.

[Yasuhiro Shintani, analyst]

I have a question on TUB. At this time, revenue is declining by 15% year-on-year. And last year, we had a positive growth, but I believe this is a somewhat large decline. Can you please specify what is the business condition in TUB business, customer reactions and also about that allowance, I don't think you have any, but if you do, please elaborate on that.

[Yuichiro Wakatsuki, executive]

So regarding the bad debt allowance, the provision in terms of comparison against last year, this has come down substantially, and this is not a number that we need to disclose. Therefore, as we have been saying, collection is something that we have been focusing on in TUB business. In TUC, we have a custom that we collect at the end of the year. Therefore, provision is primarily for the TUB business, but this has come down to a very small amount and going forward. Of course, we don't deny the possibility of increase, but we will be very cautious in controlling the amount. And based on that understanding, in TUV, when we look at the overall volume, we have more new builds. So newbuilds decline can lead to revenue decline. So it is shown in dark blue. But our impression is 10% to 15%, and our actual is 15%. So I don't think that we have dropped our market share. But overall, it has been somewhat challenging. And we have been working on the diversification. But in the first quarter, there was Chinese New Year and there was a slow month, I would say. So just by looking at the first quarter, we cannot judge the longer-term trend. Overall, well, from before, I've been saying TUC7, TUB2 and others. One, this has been the ratio that I have been using. TUC has been growing dramatically, but we have been more cautious and conservative in TUC. So maybe the ratio will move to something like 75, 15, 10, and we are not going to be actively increasing TUB, but we need to secure a certain level of margin in our business and thus, this is not something that we will be growing dramatically. And our initial guidance was 0% to 5%, and that remains unchanged as of today. So again, we don't have to be pessimistic just by looking at the first quarter results. But as I've been saying, our current strength is TUC, our focus remains unchanged, but we will be growing TUB as well wherever we can secure good margin. But first quarter results just happened to be this way.

[Operator]

Next question is from Goldman Sachs Securities. Ikeda, please.

[Atsushi Ikeda, analyst]

So overall, your financial results are strong. One shortfall you said you are confirming Dulux Indonesia against plan in place that were good, like Turkey, Japan, China. So by region, it's just Q1 and there's seasonality, but how are you trending and progressing against plan? And what are the countermeasures you are thinking of where you see shortfall?

[Yuichiro Wakatsuki, executive]

I will not be too detailed. So just roughly, as you rightly said, Indonesia, Dulux are still not enough. Dulux, as I said earlier, it's not just Europe but also in the main country, the main paint market is difficult. It's not that we are losing market share, but supported by the small-scale M&A, it seems positive. But in total, including profitability, we are not satisfied. The full year plan will be achieved. We are committed. So we are confirming the progress. And same for Europe. Europe is more difficult in France. France market for 2 consecutive years, the negative is quite large, about minus 6% or 7% in the market. So we are doing reasonably well, but we want to achieve higher numbers. So we're taking cost measures and the profit measures Dulux Australia had always delivered the plan. They have good track record and so our confidence has not changed.

[Atsushi Ikeda, analyst]

PT NIPSEA, Indonesia. In Q1, what I was told was that Indonesia presidential election had a big impact. And the other is the holidays were front loaded. The first quarter, March, before the holidays, there was a quite a big slowdown, and it has always been the case historically. So can we recover in second quarter?

[Yuichiro Wakatsuki, executive]

It is difficult, but as you can see in the research, Avian is a local competitor. They are growing positively. So compared to them, of course, on-site locally, there are various kind of competition. And so we should not just look at 1 quarter. We've been beating our competitors all along. So we will not engage in at least price competition. We will do the right thing to do what we need to do. So we have the strategy based on the long-term plan. But overall, they're not strong business rather stood out overall. And so we are working with the local management to take countermeasures. So that is the rough image. Others are all strong. And so there are some variabilities but the ones that I mentioned are 3 regions.

[Atsushi Ikeda, analyst]

So overall, your profitability is slightly better than your original projection of flat?

[Yuichiro Wakatsuki, executive]

Yes. It's not bad. We're never satisfied, but we always look for higher. As we say, we always have higher target internally. And so guidance is a commitment. And so we're thinking of how to achieve that. On the other hand, it is a very unforeseeable world. World is uncertain. So looking at the raw material and others, we need to have high antenna and be sensitive and deliver our goals. That is the only way we can maneuver our way through. So just because we had some strong Q1 does not mean we can be related and be satisfied. We will continue working hard in the following quarters, no more, no less than that. That is my true feeling for now.

[Operator]

Next question is from Mizuho Securities, Shane. This is Yoshida of Mizuho Securities, Yoshida-san.

[Atsushi Yoshida, analyst]

I have a question on how to think about raw materials. In the material, it says the situation around raw material will continue to be challenging in the second quarter. And I believe there will be fluctuations between quarters, especially Japan, China and others from the first to second quarter. Are there any areas or regions where we need to be careful about raw material cost increase or regions that have no problem because they're offsetting with price increase. If there are such differences between regions, please elaborate on that point.

[Yuichiro Wakatsuki, executive]

Yes, Yoshida-san. So I used to Japan as an example earlier. That is because it is obvious, we have very weak yen and as an import-dependent country, we do have various pressures. And obviously, price increase and measures against cost inflation need to be implemented. This is the case in any country. But if raw material cost comes down, our peers will bring down the price. And we may be able to maintain the price if we have good brand establishment in some ranges. But for example, in China, our economic condition is challenging. So if we stick to the current pricing, we may be beat by the competitors. And so we do have such local competition. And I cannot really generalize the situation. So for example, oil, titanium, they may have different characteristics. When we look at the global trend, the RMCC ratio is not expected to significantly deteriorate or improve on a consolidated basis. Given such circumstances, there may be fluctuations. But as you looked in the results of the first quarter, gross margin is improving by 0.5 or 1 point on a year-on-year basis. And we are not really expecting the gross margin to significantly improve or deteriorate either. And I would have to go into more details to explain more. And we're not planning to disclose such details. So I hope you can be satisfied with this answer.

[Atsushi Yoshida, analyst]

So overall, we don't have to be too concerned about the raw material cost in the second quarter?

[Yuichiro Wakatsuki, executive]

Well, of course, we do have to be concerned. But in terms of numbers, we are not seeing any imminent signs of deterioration. And price passer is something that we have worked on in the past, and there will always be fluctuations in this business. But our strength is that we have kept certain margin, excluding inflation and large provisions. We have been able to deliver a certain stable margin. We have such confidence. So I hope this will suffice

[Operator]

Next question is from CLSA Securities, Zhang-san.

[Nicholas Zhang, analyst]

My question is, sorry to be repetitive, but TUB and TUC situation in China once again. Of course, January to March quarter was strong, especially TUC. So for the Tier 1 TUC will it deteriorate or weaken towards Q2? In January, March quarter, there were large construction and you had some price competition and peers recovered. From Q2 onward, the inventory replacement will be on, and there may be another round of competition. So if you could comment on that, the peer had JPY 10 billion level credit loss, and you did not have that in Q1. And so you provision the credit loss looking at the margin.

[Yuichiro Wakatsuki, executive]

So your first question was TUC future outlook. Our full year TUC, 15% and TUB 0% to 5% for the full year forecast. So this part remains unchanged. So of course, it can improve or deteriorate from that, but Q1 was in line with the plan. So like I said, in a past questions, it is consumables. Our product is consumption goods and so it is difficult to foresee, but there is market for sure. As I've said over and over. So it's not that paint is not selling, paint is selling. What is selling? Our share is 25% based on that. So we do not buy or sell our products, but there's market. And as I said at the outset, we are trying to gain market share in TUC, that is our strategy. So that remains unchanged. Of course, there are other factors that come into play, so we may see upside or downside. TUB is more difficult. It's 0% to 5%, and it is impacted by the market trend, market conditions. So we need to diversify ourselves to make up for that but we will not sell where we cannot expect margin, and we will not gain credit for no reason and sell for credit risk. We will not do that. So we will be cautious. And as a result, it will be 0% to 5%, and it can be upside or downside there, too. Now our peers, our competitors, we're not really interested there. Maybe peer have the credit loss provision, and we do not. On our balance sheet, we have had quite a sizable credit loss provision, and we are consulting with our accountants and making sure that our provision is sufficient. And from one period onward large players in 2022, there was a large credit loss provision in last year for debt collection risk, we take some legal proceedings. So credit loss aggressive may not be the right word. We are appropriately provisioning for credit loss. It's not a shortage so we do provision for credit loss and for high-risk counterpart. We do cash on delivery, like I've been explaining all along. And as a result, if the counterpart is, we will work with a company that will do credit, then we will say, okay, all right, please go ahead. So for credit loss, credit loss is not a big concern for us going forward. Of course, government-affiliated developers, we continue our business there. So of course, the risk is not 0, but I think we have good provision for those large major parts. So I think I answered your questions.

[Operator]

Next question is from Nomura Securities, Okazaki-san.

[Shigeki Okazaki, analyst]

In the previous meeting, I said you should withdraw from China, but I apologize for saying that. And maybe you think this is too persistent, but I need you to help me better understand. So in 2023, basically, TUC's revenue slowed down and this time, it is improving. And I ask this question knowing that it will be difficult to answer, but market trend changes and has there been any changes to market trends and your strategy? Well, I think you talked about leveraging the OEM. Do you see any impact in the previous quarter to this quarter? Has there been any changes to the market? Well, I need to explain to investors. So are there any supporting materials?

[Yuichiro Wakatsuki, executive]

Well, what I just said is something that is unchanged since last year when Shiyoki explained. And I can say that our initiatives have proven to be effective, and we do feel that there are less competitors in Tier 3 to 6 CDs especially. But in Tier 0, we have Afonovel the premium main competitor. And I think they are struggling, working hard. AxoGelux was our teacher before, but the position has been turned upside down. It is now a national brand and our strength has been able to leverage that fact. In the difficult economic conditions so far, this has proven to be true. And slowness in growth cannot be judged based on single quarter result. As I said earlier, well, last year, we had slowness in certain quarters, but it improved towards the end of the year, and there are seasonalities as well. So as an overall trend, we have 15% guidance. And last year, it was 13% as a result. We achieved that. So this is not a poor number, I would say. But I understand that you need to focus on quarterly results. But what we want to say is that this is not an issue from a longer term. And last but not least, if I dare to say, the economic sentiment is not something that we should be optimistic about. But we do see shifts of bottoming out. For example, in Shanghai, in such main cities, we do see such signs, but this is not my job, to be honest, it is your job to forecast from a macroeconomic point of view. But as someone in the field, I do have a feeling that things are starting to bottom out. And as I said earlier, we are having less competitors and we are doing better than our existing competitors, resulting in a good strong performance. But in the second quarter, if the result is single digit, maybe people will say that we were wrong. But what we're selling is consumables. So as I said, we do have more ambitious internal targets even under such challenging conditions. And whether we can deliver that is something we need to demonstrate.

[Shigeki Okazaki, analyst]

So in this January to March quarter, well, I think you talked about increasing inventory level, but has there been any special extraordinary factors?

[Yuichiro Wakatsuki, executive]

No. There are no such factors. In January, compared to usual years, it was better. But perhaps this means there was less inventory in the market. And I listened to various explanation. But because we do consumables business, we can never fully understand what is going on. We just look at the results and say we did good or bad, but we didn't force anything. So we can only share with you the outcome of what we worked on. And once again, in the field, they are working hard and they're doing their best with various measures and I think they are bearing furred in some areas. So it is not that we are easily achieving 15%. And I have to think about how to maintain this level.

[Operator]

[Operator Instructions] We do not see other questions, so we will close the Q&A session.

[Yuichiro Wakatsuki, executive]

So once again, thank you very much for attending at this late hour. You have you may see that we are a company has many changes. But on the cruise level, there may not be many questions. And so we will always try to exceed our guidance and continue making efforts to do so. So I ask you for your continued support. Thank you very much again.

[Operator]

With that, we will close Nippon Paint Holdings conference call for FY 2024 Q1 financial results. Thank you very much for taking time out of your busy schedule to attend. Please disconnect yourselves.