Nippon Paint Holdings Co Ltd

TSE:4612

Q1-2025 Earnings Call

[Operator]

Thank you very much for your patience. From now on, we will begin FY 2025 first quarter financial results presentation of Nippon Paint Holdings. [Operator Instructions] By the way, we are providing a Japanese and English simultaneous translation for this conference call.

Now over to you, Mr. Wakatsuki, as well as Mr. Tanaka, please go ahead.

[Yuichiro Wakatsuki, executive]

Thank you. Hello, everyone. I am Wakatsuki, Co-President of Nippon Paint Holdings. Thank you for taking time out of your busy schedule to join us today. I would like to present an overview of the financial results for the first quarter of fiscal year 2025.

Before going into my presentation, first and foremost, I would like to say that today, we're not revising the guidance we announced in April. In principle, we believe that the original figures announced in February and April are well achievable. However, we assumed exchange rates of JPY 148 to the U.S. dollar and JPY 20.5 to the renminbi as announced in April.

While the yen depreciated slightly against these assumptions in the first quarter, it has been extremely volatile since April. So there is a possibility of a deviation from the April guidance if the exchange rate fluctuates significantly. For your reference, the sensitivity to a JPY 1 fluctuation over a full year and a 10-month period for AOC is shown on the right side of Page 2.

Next, Page 3 is a summary of the first quarter of 2025. As you can see, revenue and operating profit increased 5.6% and 24.7%, respectively, to JPY 405.7 billion and JPY 51.4 billion. Revenue is the highest ever for Q1, and operating profit is a record high for any quarter. New consolidation includes 3 months of India and 1 month of AOC, and margin is also up due to AOC's contribution.

There are 2 things I'd like to draw your attention to here. First, as I mentioned in February, we've changed the Asian model for the trading business in China. So under comparable conditions, against 2024, revenue would increase by 7.6% instead of 5.6% on a Tanshin basis. And on a non-GAAP basis, revenue would increase by 1.6% instead of minus 0.3% under comparable conditions.

Secondly, AOC. AOC's OP margin is 35.6% in Q1, but this figure is before PPA, which means before amortization of intangibles and the one-time inventory step-up. PPA is projected to be completed in the second half of the year. In which case, the amortization expenses will be recorded retroactively in that quarter. And we expect a normalized margin level from the following quarter.

Acquisition-related expenses amounted to approximately JPY 1.1 billion as of Q1, which is an adjustment item in Holdings. On a non-GAAP basis, excluding foreign exchange and new consolidations, revenue increased 1.6% and operating profit grew 7% when compared under the same conditions in China trading. NIPSEA China's decorative business posted a 5% increase for TUC and 10% decrease for TUB. NIPSEA China as a whole posted a 3.8% increase in revenue and 13% increase in operating profit.

Regarding the impact of the tariffs, since our group basically has local production for local consumption, we import and export very limited products to the U.S. and most of our raw materials are procured within the region. Therefore, the short-term direct impact is expected to be minor. However, of course, we need to keep a close eye on the trends of raw material manufacturers and the production trends of industrial customers, including automobiles.

In the medium to long term, as I always say, demand for decorative paints, in particular, is linked to GDP. So while paint consumption can be affected by economic sentiments, we believe at this moment, it is generally within manageable limits. As I mentioned at the beginning, we are not an exporting business, so we have a few problems with forex fluctuations on a local currency basis, which could be affected by U.S. tariffs. But there may be fluctuations due to conversion to yen-based financial results.

Page 4. Although there are variations in raw material trends by region, we do not expect major fluctuations in general. In China, market prices have remained somewhat high, but our RMCC ratio is actually improving.

Page 5. This is a heat map. I'd like to skip Page 5. And Page 6 is a summary of operating results in major segments. We will discuss details during the Q&A session, but let me discuss each segment briefly. First on Japan segment, automotive products revenue increased double-digit due to a rebound in automotive production from last year, and revenue increased 4% due to the expansion of sales of new decorative products and price adjustments in industrial business.

Profit also increased due to higher revenue and product mix improvement as well as various cost reduction measures. On NIPSEA, China macro economy continues to be challenging, but TUC volume increased across all regions, so it was favorable. Automotive product sales increased as well due to increase of auto production volume, and we were able to expand our sales to Chinese OEMs. Overall, pricing, product mix and RMCC ratio improved. And even excluding the impact of trading revenue booking, there was some margin improvement. And as I had stated before, we achieved a profitable growth.

Next, NIPSEA, except China, has some variations apart from Turkey, but it was favorable, including Indonesia. As for Turkey, because of the reaction from the campaign of the Q4 of last year and due to inflation, interest rates had been raised, as I had said before. This worsened the market situation. So on a non-GAAP basis, there was a negative growth, but due to the reduction of RMCC ratio, so even after the application of IAS 29, double-digit operation margin was achieved. So we, in a way, secured good profit rather than having anxieties or concerns.

Now, DGL Pacific, amid the flat market condition and perhaps somewhat weakish, saw sales increase due to price adjustments and mix improvement, and SG&A was reduced, resulting in the improvement of operating margin. So profit increased 14% on a non-GAAP basis.

On the other hand, Europe continues to see, the French market being softer market, negative growth of almost 5% and profit dropped, but the Q1 is a slow quarter, just like the Q4, so we have hopes for the second quarter and onwards.

In Americas, despite the challenging market conditions, we were able to increase the share slightly, and it was almost flat.

As for the decorative, the weather was poor in March, but revenue increased due to the price adjustments and expansion of stores in Northern California.

Finally, AOC, which contributed only 1 month, and since PPA had not been finalized, it is not reflected. As I stated earlier, looking at the market condition, expected interest rate cost did not materialize in the U.S., and the demand was slightly down, but extremely high margin was maintained and outlook of sufficient profit contribution is unchanged.

Also, we see a potential of synergies, mainly in the area of procurement for both AOC and Nippon Paint Group and the progress has been good to reap low-hanging fruits.

Page 7. There are 2 major topics. The first topic has already been announced, but we received Grand Prize in the NIKKEI Integrated Report Award, higher ranking award than the Grand Prize G award we had received last year. If you read the integrated report, you will see that the management, ourselves and outside directors are working with each other to convey our story. So please have a look at this by all means.

MSV is very simple and a powerful mission. So as we publish the integrated report every year, the novelty may wear off at some point, but we would like to make an improvement and strengthen our engagement with all of you, shareholders. Therefore, your feedback will be highly appreciated.

Another key topic is the appointment of our new outside director at the March AGM. Andrew Larke has been an outside director of DGL from the times when it was listed and even after the acquisition, he has been responsible for the governance of DGL together with myself, Wee, Siew Kim and Goh, Hup Jin. He strongly relates the mission of MSV, and he kindly agreed to be a director of the holding company as well.

6 out of 9 directors continue to be outside directors and 4 out of 9 non-Japanese. With this diverse composition, we will make efforts to protect minority shareholders and realize MSV.

That's all for my presentation. I look forward to your questions. Thank you for your kind attention.

[Takashi Enomoto, analyst]

Now we would like to move on to Q&A session. [Operator Instructions]. The operator is going to call out your name when we are ready to take your question. [Operator Instructions]. Now, thank you for your patience until we introduce the first person.

[Operator]

[Operator Instructions] The first question is from BofA Securities, Enomoto-san.

[Takashi Enomoto, analyst]

This is Enomoto from BofA Securities. I have a question regarding China. So there are 2 actually. TUC is up by 5%. Q1 last year, it was plus 15%. So if you compare the 2, 5% is maybe satisfactory, but I'd like you to give us some more color on the current situation. And the RMCC ratio is improving according to your explanation. But how much have you decreased your pricing? Has it been known? Or has it been putting the importance on market share?

[Yuichiro Wakatsuki, executive]

Thank you for your questions. So to your first question, last year, we grew by 15%. That was pretty strong. And this year, we were able to grow by 5% from Tier 0 to Tier 3 and 6 cities, so we've been able to grow in volume. And this is a very encouraging result for us. The entire market situation is not very strong. So given such situation, I believe this result is satisfactory.

And related to your second question regarding pricings, we have been very careful in deciding our pricing policy. The RMCC ratio has decreased. However, we are not going after market share by simply reducing prices, but rather, we would like to grow in areas where we do not have to give discounts.

Pricing, RMCC ratio, decreased price and mix, these factors are making positive contributions so far. We used to grow in volume, but negative in price and mix, but now volume and pricing are both grown. And as I have been saying repetitively, we are not blindedly going after market share or margin. We are going after both, and we are trying to strike the best balance. I have been saying that we pursue growth with margin. We cannot sacrifice margin just for the sake of volume growth that has been pursued locally. That's it.

[Takashi Enomoto, analyst]

I have a follow-up question. What about the competitive environment? Has it been easier? Has there been any changes in the market situation?

[Yuichiro Wakatsuki, executive]

Well, we continue to have a very moderate market condition. It is not very strong. 25% is the total market share and high single digit for the second and the third players. So we're not the dominant player, but we are at a high position, and we have yet to secure a higher market share. With the local players and the Western players, we are not necessarily having very intensive competition.

We do see some growth among local players. Last year, some analyst was saying that they are growing share by 20%, 30% or 40%, but that is not the case. So to be honest, the market environment is not necessarily favorable, but repainting demand continues to be steady. So we try to continue to leverage our brand strength. And we believe we have been able to grow market share to a satisfactory extent. I don't want to say that we have an easy competitive landscape. It is tough. In the local market, they have been very vigilant about the situation. But if you look at the results, we have been able to leverage our strength.

[Operator]

Next question is by SMBC Nikko Securities, Shintani-san.

[Yasuhiro Shintani, analyst]

This is Shintani of SMBC Nikko Securities. I have a question about AOC. So January through March, it is just 1 month, and the progress has been good. And Wakatsuki-san, what is your impression? And also last year compared with the initial plan EBITDA, I believe that a stronger result is continuing. So I think that trend is still maintained. Is that the case?

And also, what is the demand situation of the market? And also about the outlook of prospects, flat or 5% reduction in sales against last year is what you are envisaging. So at this point in time, what is the current progress? And what will be the future trends? And is this high margin only temporary?

[Yuichiro Wakatsuki, executive]

Well, you asked many questions. So first on AOC. I'd like to give some general comment. Back in April, we shared our outlook and things haven't changed much since that time because in principle, they have a local production and local consumption. There are some Canadian factory operations as well. But overall, export, import, they are not dependent on such an export or import. So the outlook of this because of tariff situation is not affected to a great deal.

Having said that, interest rate hikes were mentioned, but if there are interest rate cuts, then it will invoke demand is very positive. But as you know, in the U.S., interest rate cuts are not exactly happening. So inflation numbers and so on can be interpreted in various ways.

But more than the expectation, I believe that the progress has been somewhat slow. So against this backdrop, the demand itself is somewhat weak, so 0% to minus 5% without losing share, proportionate portion. Because the recovery has been delayed, our outlook is the same in regards to the margin as well.

In October last year, as I have been saying, this kind of a business and systems based upon that with a high level of granularity, there are areas where we can get margin -- where we cannot get margin and we have all sorts of scenarios. And in the first quarter as well, it's not that things change, all of a sudden 35% before PPM, as I mentioned earlier. This is a level, as I mentioned before. And in some cases, there could be some room for improvement, as I stated before, but the economy is not very favorable.

So do we -- are we going to see a major progress here? Well, I'm not overly optimistic about this. And that's not what I have been saying, but the flip side of that is that some of you are concerned about this situation and perhaps this too good a margin is not sustainable. So people are saying these unfounded things. So we just have to deliver actual results. At this point in time, our future outlook is that we should be able to maintain this level of margin.

[Yasuhiro Shintani, analyst]

I have a follow-up question, please. So this year, as you said earlier, interest rate cuts are not really happening and demand situation is not very positive. So the market is quite tough. In the painter business, for example, you've been expanding shares, making efforts when the market recovers so that you can enjoy bigger fruits. And for AOC as well, with existing customers, are you trying to increase the presence, explore new customers or improving profitability in Europe? With your own efforts, are you making any preparations for the future? Do you have any strategy that you are implementing or executing?

[Yuichiro Wakatsuki, executive]

As I said back in October, it's not that we are happy or satisfied with the current margin level as is. One point is that, as you mentioned towards the end of your remarks, in Europe, our market share is not particularly high. And also among the competition, we have some -- there are some imported decorative products and so on. So we are trying to stay away from decorative products. We are trying to have more customized products. And as a result, we are trying to realize higher value added for our customers. That is our thinking.

So in the U.S., the share is high, and going forward, there could be a margin recovery because of the operating leverage. And in case of Europe, we can have a more customized products to push up the margin with a new business model. So this is something we can expect for the future. And perhaps expecting is too much to say. But even without that, the margin level is quite high.

Do we not have any upside? That's not the case. So I have listed some examples. So by when, what is the percentage point we should achieve? That is not something -- or this is the same as China. For margin itself is not the ultimate end or goal. We have to achieve a growth with margin. How should we achieve this is the question. Sometimes we may pursue volume. And at the same time, there are some unprofitable parts of the business, and we may pass such a business on to other companies.

So with the limited resources, we try to leverage them to the fullest by taking various measures. Local teams are thinking of such a strategy. And also when the recovery indeed happens, we should be able to benefit from such a recovery.

The important point is that even with a poor market condition, even if the market condition is mediocre, our business results are somewhat good. I believe that it is attractiveness of our business, so we are making investment in areas other than paint as well. So our fundamental strengths of our business is something that we have identified to deliver results. And of course, we will keep making utmost efforts to this end.

[Operator]

The next question is from Citigroup Securities, Nishiyama-san.

[Yuta Nishiyama, analyst]

This is Nishiyama from Citigroup Securities. About NIPSEA, except China, I'd like to ask some questions. So you showed us the full-year guidance at the beginning of the year. And compared to that, the level of margin is maintained at a relatively high level even in the difficult business situation. But it is not the case for revenue growth. So how has the progress been? And do you think this high margin level is sustainable?

[Yuichiro Wakatsuki, executive]

Thank you, Nishiyama-san. First of all, this is just our first quarter, so it is too early for us to panic, especially in this segment, NIPSEA, except China, Betek Boya accounts for a larger proportion than before. As I mentioned earlier, in the beginning of the year, we were assuming 5% to 10% growth, and first quarter is seemingly down from that level. It is coming from the interest rate and the market environment. And we must admit that we are facing difficulties, and we need to pay close attention.

Other than that, including Indonesia, we have around 5% in Indonesia. This is reasonable. And to be more specific, Thai Automobile, is it going to be steady, will it may be impacted by the tariff situation. But in other areas, in the decorative area, we believe we do have a stable outlook.

In terms of profit margin, regarding Turkey, for this fiscal year, we were assuming a lower margin on a year-on-year basis. I'm looking at February numbers. So 17.2% was the number last year. So we are slightly below that. But considering that this is an impact only in Turkey, we believe we do not have to be deeply concerned.

Well, we have 9 months left. Of course, we cannot be optimistic. Some things are unforeseeable. Political instability may exist in places like Indonesia, for example. But I believe our business has resilience to such situations, but I think it is too optimistic to say that every part of the business is steady, but at the same time, I honestly don't think that we have to be pessimistic as of today.

[Yuta Nishiyama, analyst]

I apologize for asking this question just by looking at the Q1 numbers. I understand that there will be fluctuations. But against the annual plan, you believe it is achievable. Is my understanding correct?

[Yuichiro Wakatsuki, executive]

Yes. That's what I explained at the beginning. Again, conversion into yen-based financial results, that is not controllable, but on a local currency basis, in February, we guided based on the local currency basis. So I believe we are within the manageable limits. Nishiyama-san, did you get my response?

[Yuta Nishiyama, analyst]

I am sorry. I think I was disconnected.

[Yuichiro Wakatsuki, executive]

Did I answer your questions? Then let's go to the next.

[Operator]

The next question is by Yoshida-san of Mizuho Securities.

[Atsushi Yoshida, analyst]

On Japan, I have a question. The OP during the first quarter, OP margin, was 9.1%. So last year was 8%. So there has been a significant increase. So at the beginning of the year in regards to the profitability throughout the year, 9.6%, which is about the same level as last year. That is your outlook. But looking at the Q1 results only, so maybe my comment is not justified or wrong, but overall, last year's margin will be surpassed it seems. Is this the case? And in the first quarter against the last year, what is the reason why margin has increased? Could you please share the background to this?

[Yuichiro Wakatsuki, executive]

Well, Nishiyama-san asked a similar question. So I'm not saying that you shouldn't just look at the Q1 results and ask your questions. That's not the case, but by just looking at the Q1 results, it is difficult for us to have an outlook for the full year. So that is the reason behind my comment. And, of course, your job is to make analysis by looking at each quarterly results, so I'm not criticizing or anything. So I apologize that I didn't fully explain myself earlier.

And on that basis, the Japanese segment, as I have stated before, our original potential, it is not 10%. It can be higher than 10%. We can aim higher. So we have such aspirations. As I have stated earlier, the separation has benefited us. And also, there have been some disadvantages as well. For example, overlapped businesses and so on and can be sorted out more, and we can reallocate the resources. It is still possible.

As such, 8% or 9% plus has been achieved. And are we not too happy? No, that's not the case. We still have a room for growth. So we are continuing our effort here. As such, if I try to respond to your question, with this result, last year the 9%-plus margin, is it certain that we are going to surpass this? Nothing is certain.

Having said that, of course, double digit is what we will be trying to achieve. This is only natural. And against this backdrop, there could be some more room for improvement, and we are seeking that. And also going back to the original point, the first quarter results, we saw some volume recovery. That is because in the previous year's Q1, there were some abnormal numbers in the automotive. That background has to be noted.

And going forward, there could be a tariff impact on Japanese vehicle manufacturers. What will be the impact on Japan's automotive and manufacturers, we cannot have certainties around that. But on a full-year basis, our plan is, of course, that we want to achieve it.

And in regards to decoratives, the product mix, there is a new product called [indiscernible]. These are new products. And these are highly value-added products or premium products, if you like. So expanding the sales of these products will, in terms of the margin mix, be positive.

And last year, we did some price hikes as well. So in that sense, this kind of situation is not temporary. This is said to continue. And of course, there are some assumptions that we are working with. But on our side, in Japan, as well, it is quite possible for us to achieve the guidance.

[Atsushi Yoshida, analyst]

At the moment, is there any change happening?

[Yuichiro Wakatsuki, executive]

Well, at this point in time, do we see any changes to the production plans? Well, that's not the case. But when it comes to this kind of a topic, it is really about the tariff negotiations between Japan and the United States. So I cannot say anything too currently. But at this point in time, it's not the case that we have seen some major changes to the plans for production.

[Operator]

The next question is from CLSA Securities, [ Cho-san ].

[Unknown Analyst]

This is Zhang-san from CLSA Securities. I have a question regarding the status of AOC. This is just for clarification, but it is consolidated for 3 months only. And in North America, there is a spring demand. Has that been confirmed in March? And has there been any last-minute demand regarding the tariffs? If possible, can you please give us some color on the recent situation? When you say spring demand, are you talking about seasonality-related demand?

[Yuichiro Wakatsuki, executive]

In the construction business in North America, starting from around March, it is generally said that demand starts to pick up for decorative business. But if you don't have any of that kind, fine as well. In AOC, I think it is on Page 22, information regarding seasonality, but including March, Q1 is not a very strong demand season. Of course, it is difficult to generalize. But in March, we do not see -- we did not see any specific seasonal demand or last-minute demand before tariffs.

On a monthly basis, the margin trajectory has been tracked. As I said earlier, that is with a high level of granularity from the second half of last year, including the times when they were not within our group, we have not seen any spikes or steep declines. It rarely happens in AOC. So I don't think you need to take those into account.

And last-minute demand related to tariffs, that is not something we have seen either. But as you said, it is just for 1 month. So we are not intending to say that we don't have any problems because it's only been a month, but the past months have been in line with what we have been saying.

[Operator]

The next question is by Goldman Sachs, Ikeda-san.

[Atsushi Ikeda, analyst]

Ikeda of Goldman Sachs. So at the company's financial result briefing, I was attending. So -- I only joined halfway through. So NIPSEA China's margin improvement, trading business model wasn't changed and so on, but absolute amount of profit expanded to a great deal. Could you please talk about the background to this, especially in China?

[Yuichiro Wakatsuki, executive]

There is some very strong demand for paint, and also, TUC 8%, TUB 9% growth has been observed by your competition, and they are turning a profit or positive results for the first time in a while. So TUB, TUC price hikes have been made by yourselves as well. So I believe the price hikes are not fully reflected, but the raw material cost is somewhat stabilized and the demand has been restored and the price adjustments have been implemented. So I believe our profitability or margin has been picking up.

[Atsushi Ikeda, analyst]

Could you please give us some background to this, please?

[Yuichiro Wakatsuki, executive]

Yes, Ikeda-san, what you just said was a very good summary actually. So the market situation is not extremely positive, but March is a month for TUC for 1 month, a single month, it is a sizable month, I would say. So as I said at the outset, across all the regions, it's not like volume is also growing. And product -- and price mix, as well, there has been some improvement. Price adjustments have been made, and we didn't cut the prices either. And against this backdrop, our raw material cost has come down to some extent. So the market condition has not dropped, but our raw material cost has come down. So this is impacting us.

So as I have said earlier, if I could repeat myself, it's not that we are just seeking a margin or share. We are not focusing on one of them. So in this context, we are trying to achieve growth with margin. As a result of our balanced approach, both revenue and margin expanded and also the actual amount of profit went up.

But in regards to TUB, this is tough. So TUB, as I have said earlier, we are being very selective and unprofitable businesses. If you want to continue them, we have to have a very good justification. So we are being very selective. So against this backdrop, this 10% negative, there is some seasonality as well. Turning a positive result could be difficult, but the TUC is rising.

[Atsushi Ikeda, analyst]

So TUC, TUB mix, do you see growing? Is that going to have a positive impact on us?

[Yuichiro Wakatsuki, executive]

So the market condition, is it extremely favorable? That's not the case. The demand is somewhat solid. It's not like we are extremely pleased about the favorable market condition, we have to stay cautious. Comparatively speaking, rather than decorative, the replacement is better because of the stocks is related to economy. And from April because of the U.S., China situation, the consumption sentiments are solid. And currently crude oil has come down to a great deal. So I believe that derivatives price will come down going forward.

[Atsushi Ikeda, analyst]

So what are the future trends that you are foreseeing looking at the Q1 and Q2 results?

[Yuichiro Wakatsuki, executive]

So I believe it's better for you to wait to see the results of the Q2. The consumer sentiment since Liberation Day of April have not been going up, so I think it's down.

[Atsushi Ikeda, analyst]

So because of the agreement at this time around, how will the consumer sentiment come back? That's the question.

[Yuichiro Wakatsuki, executive]

So I believe it is a little premature to discuss the overall direction because we don't have sufficient data. Well, it's not a positive. And as you rightly pointed out, the economy is not too good. If that's the case, raw material tends to come down, which is benefiting. But at the same time, there could be some other benefits as well. And also exports to the United States is not very high from China. But because of that, our domestic demand has to be captured because China is a domestic consumption-oriented country.

Stimulus package fiscal measures are not exactly in the background. And because of the tariff impact, there could be a negative impact on the consumer sentiments, and also, there could be measures to invoke domestic demand. And I believe that they will be offsetting with one another. So because of that, we shouldn't be swayed too much about this. So I think we have to make an overall effort on a full-year basis. That's my honest impression.

And also, Ikeda-san, another point that I wanted to mention was that 8% or 9%. I believe that [indiscernible] is what you wanted to refer to, so somewhat different situation is happening. I don't have hard data to back this up, but it's not that we are behind a shoe. That's not a case at all. So that is one point I wanted to stress because we grew 5%. So this is not exactly an apple-to-apple comparison.

I believe that we have to acquire some more -- you have to look at more data in the industry or market. And against this backdrop, I believe that they have grown somewhat, but their growth is only 1 digit, but our level is very high, especially compared with the third and fourth quarters, we have been able to see some good recovery. So I believe that is our strength.

[Operator]

Next question is from Nomura Securities, Okazaki-san.

[Shigeki Okazaki, analyst]

This is Okazaki from Nomura Securities. I have a somewhat similar question based on quarterly results, I'm afraid. But I'd like to make some clarifications about the situation in China. The TUC market, comparing the December quarter and the March quarter, the sentiment has somewhat improved, not due to your self-help efforts, but due to the overall development of the market. Is my understanding correct? And repainting demand is improving because of some stimulant measures for domestic demand?

[Yuichiro Wakatsuki, executive]

Well, Okazaki-san, I am not sure if what we're doing is correct. But our interpretation locally is that the market is not necessarily improving, but it is flat. On the heat map, it is normally in the green color showing flat performance. So the market is not necessarily improving, but 0% to 5% is the range, and we have 5% with flat market share.

The market share virtually may be improving, but it is not good enough for us to put an arrow that shows improvement. When we look at the general economic situation, it could have declined because we have negative demand trend for new constructions. But this repainting area market is not showing any sexy growth, but we have been seeing a steady development for the past couple of quarters. That is our impression. So maybe I'm not giving you a response that you were looking for, but it's not that the government is stimulating internal domestic demand and the demand is improving dramatically.

[Shigeki Okazaki, analyst]

No, I am -- I was not expecting for you to say that the demand is improving dramatically. But do you have an impression that it is slightly improving? Or is it truly flat?

[Yuichiro Wakatsuki, executive]

When we look at figures internally, I'm looking at the data right now, but the market is showing a slight improvement or maybe 1 point. So it's very slight. I wonder if we can call this an improvement.

[Shigeki Okazaki, analyst]

So is it difficult for you to state any hypothesis because you don't know if it is truly improving?

[Yuichiro Wakatsuki, executive]

Well, our share is 25% to 26%. And the second and the third players have high single-digit market shares. And the 3 of us together would account for just over 40%. So it's not that there isn't any market. There are walls to paint every year. So it's just a matter of how to capture those opportunities, and in Tier 3 to 6 cities, triggered by an improvement in the economy, we could see shift from more economy products to something like LiBang. That's the story. So it's not a matter of the pie.

[Shigeki Okazaki, analyst]

Well, if I were to restate my question, in the December quarter, I think volume was negative in Tier 0 and 1 cities. But this time, you have a positive revenue trend, and it seems to me like a big change, maybe partly due to what you achieved previous year, but that was behind my question.

[Yuichiro Wakatsuki, executive]

From my viewpoint, I don't think this is a big change.

[Shigeki Okazaki, analyst]

That's fine.

[Yuichiro Wakatsuki, executive]

If we only have a business in China, my answer will be different.

[Operator]

[Operator Instructions] CLSA, [ Cho-san ].

[Unknown Analyst]

This is my second time to ask a question, CLSA, [ Cho ], once again. So this is about the overall company. $60 is the crude price today. So it was the second half of the year. The current guidance is that raw material cost is reflected towards the second half of the year, there will be a benefit from lower raw material price. So is there anything you can explain about this?

[Yuichiro Wakatsuki, executive]

Thank you very much. So earlier, I said that if we just look at China, because of the business sentiment, not all the ingredients, raw materials come from crude oil. So our current assumption is that it will be somewhat stable and really drop even more. If this is the case, then in the short term, of course, there will be a benefit for us.

Having said that, the background is that the business sentiment are worsening. And as a result of that, we may have to cut our prices. If that's the case in the long term, can we receive extra margin on a continuous basis? Apart from some regions, this is not very realistic. This is not very likely. So there could be an upside for sure. But at the same time, can we really assume that this will materialize because there will be downside risks as well given the uncertain business sentiment? Downsize could materialize as well.

So looking at the overall situation, it's not -- we shouldn't change that at this point in time. And as I've said after the second quarter is over and then when we only have 6 months left and also when the third quarter is over and when there is only 1 quarter remaining, I believe we can sharpen our focus. We will have some more clarity then. So my short answer is that there could be an upside, but at the same time, we cannot count on that too much. We are not overly optimistic.

[Unknown Analyst]

In general, so China tends to be fast. In about 3 months, they can benefit already. On the other hand, advanced countries tend to take 6 to 9 months to benefit.

[Yuichiro Wakatsuki, executive]

It depends on the region. It is a variation. And depending on the customer, it is different. So industry customers, B2B customers tend to take longer, but AOC and others tend to be much faster, it is quicker. So it is not possible for us to generalize the situation.

[Operator]

The next question is from SMBC Nikko Securities, Shintani-san.

[Yasuhiro Shintani, analyst]

This is my second round. This is Shintani from SMBC Nikko. I have a question regarding DuluxGroup. So DuluxGroup Europe, you have a difficult business environment, and there is an organic revenue decline, but from June quarter, your peers are projecting an improvement, and the basis is going to be lower. So can you please talk about the possibility of starting to improve your revenue? And for DGL Pacific you worked on brand revamp last year. So can you please talk about your progress so far?

[Yuichiro Wakatsuki, executive]

Yes. As I said earlier, Q1 and Q4 are cold times, and we have -- tend to have lower demand. And throughout the year, Q2 and Q3 have higher demand. So I believe there is going to be an improving trend. But on a year-on-year basis, if you ask if it's going to improve, for example, in France, we are hoping for flat results. We did have a significant decline, and we we're thinking we don't want to see any further decline even though we did in the first quarter, but that means at the same time there should be accumulated demand to happen going forward.

So in longer term, we believe that there is going to be a timing when we start to see improvement, but we are not thinking that's going to happen in the June quarter. If the market recovers, we do have a good market share. So we would be able to recover in volume to a certain extent.

Internally, we have been working on various projects for profitability improvement. But as a basic assumption, we need market recovery to happen. So I don't want to say we are dependent on market recovery, but we want to make sure that we can return to profitability, and we need to keep a close eye on the situation.

In Pacific, we are not concerned at all. The market is almost flat, as I said earlier, and it's always been flat. So we have been able to increase pricing in a sound manner. You talked about how we revamped our brands last year. We have been promoting more premium products, which will help us improve our profitability. So probably, we would have the least uncertainty for delivery in DuluxGroup Pacific, and it has always been that way.

[Operator]

Next question is by Nomura Securities, Okazaki-san.

[Shigeki Okazaki, analyst]

My second time to ask questions. So in the first half of the discussions, I wasn't here. So as you can see on the right-hand side on Page 4, depending on the supply here, you need to strengthen prices. What do you mean? Specifically, what are the products and regions? So it says that it is domestic. Could you give me some more color here?

[Yuichiro Wakatsuki, executive]

Well, this is a very general comment. Overall, from last year, there has been an inflation trend, and the suppliers are demanding a price hike. But on our side, we'd like to control and minimize them at the end as much as possible. But partly, alternative products may not be available, we may not have alternative suppliers, and in such cases, we have to accept the price hikes from the suppliers.

And in case of Japan, some commodity products are not supplied by some suppliers anymore, which is a problem for us. So we are negotiating with them. It's not something that started now or recently, but as I said earlier, overall, the raw material cost, including the crude have somewhat stabilized.

Looking at the situation with more granularity, if you look closely, there are some more nuances and color here. It doesn't really lead to any general insight. It's just explanation of some realities that are happening. So overall, crude and plastic or resin have come down, and it is impacting us. That is the majority of the impact. And also the economy is not so good and demand -- supply/demand situation. It was clear.

So currently, raw material is not going up. Overall, I believe it will be flat or it may even come down as was discussed with [ Cho-san ] earlier. So there could be an upside in terms of material cost. That is our kind assessment. Thank you very much.

[Operator]

Now it is time to close the Q&A session. Wakatsuki-san, can we have your closing remarks?

[Yuichiro Wakatsuki, executive]

Yes. Thank you for joining us once again. Q1 showed a very strong financial results. Basically, we do see a lot of uncertainties in the world, but given such circumstances, we have a very resilient business and profitability structure. And in terms of raw materials, there are many developments. If it goes up, we may increase our pricing. And if it goes down, we won't have to give discounts to be profitable. So through the pandemic, I think we have improved our resilience. And by adding AOC, I believe we even have a stronger structure. This year, we are committed to delivery. So I hope you will look forward to our Q2 results as well. Thank you.

[Operator]

With this, we would like to conclude the earnings call for the first quarter of fiscal year ending in December (sic) [ March ] 2025. Thank you very much for taking time out of your busy schedules for joining us today. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]