NIPPON PAINT HOLDINGS CO.,LTD. (4612) Q2 2026 Earnings Call Transcript

Good afternoon, everyone. I am Wakatsuki, co-president of Nippon Paint Holdings. Thank you very much for joining us today, despite your busy schedule. I will now outline the key points of our financial results for the second quarter of fiscal 2026. Please note that members of the media are also joining us today. I'll begin by addressing two points on slide number two. First, regarding the revision of a full-year earnings forecast for fiscal 2026. To properly reflect the current market conditions, we have adjusted our exchange rate assumptions, shifting towards a weaker yen compared to the initial forecast in February. Specifically, the assumed rate for the U.S. dollar has been revised from previously 150 yen to 155 yen for the second quarter and 156, 60.8 yen for the full year. Chinese yuan from previously 21.5 yen to 23.1 yen for the full year. Second, regarding the definition of adjusted profit, we have slightly changed the treatment of PPA-related expenses and retroactively restated the figures from the prior years. We believe this change will allow us to improve the comparability with our global peers and better reflect our underlying business performance. First, number three, page number three, please take a look at the long-term historical trend of second quarter performance. As we have mentioned before, we take a dual approach of organic growth and M&A, and we have strictly expanded the revenue-adjusted operating profit and adjusted EPS with this approach. In the second quarter, even amidst uncertain business environments, such as the raw material prices caused by the Middle East situation, we have maintained and expanded our profitability through measures like price pass-throughs and cost control. And the second quarter results represent the continuation of this track record. And especially for the second quarter, although there was no incremental contribution from the new M&A activity from the previous fiscal year, we have been able to sustain a strong organic growth in the adjusted operating profit. Next, page four. Let's review the financial results for the second quarter. Revenue was $133.4 billion, up 19.4 percent year-on-year. This growth was driven by increased sales volume and improved product mix as well as the favorable exchange rate. Adjusted operating profits stood at 94.9 billion yen. An increase of 30.4 percent, a significant increase year-on-year. Adjusted operating profit margin was 17.8 percent, an improvement of 1.5 percentage point from the previous year. Adjusted EPS was 29.4 yen, up 31.7 percent year-on-year. The key takeaway here is just not that we simply increased sales. Even amid uncertain situation in the Middle East, we achieved a margin improvement by combining revenue growth with better raw material cost ratio and effective cost control. The impact of storing raw material costs linked with the situation in the Middle East varies by region and business. While we were able to absorb these costs in the second quarter through price pass-throughs and cost reduction initiatives, the impact may become more pronounced in the second half of the year. We are not taking an optimistic view about this situation, and we will manage the operations in each region, closely monitoring the pricing, procurement, inventory, and S&G and A expenses. Regarding the performance by segment, AOC, because the market shows signs of bottoming out, AOC achieved increases in both revenue and profit, driven by price hikes and to offset the raw material cost increase and increased sales volume. Japan, NIPC, other than China, and DGL Pacific also posted revenue and profit growth, supported by higher sales volume and product price increases and other factors. As for NIPC China, the surge in raw material costs exacerbated by the Middle East situations further compounded the effects of the weak real estate market and subdued consumer sentiment. Amid this challenging environment, rather than aggressively pushing for volume expansion, we prioritized sales discipline, cost efficiency, and the maintenance of the brand strength, and this approach allows us to secure profit margin of about 15%. We believe it is crucial to maintain a management approach that safeguards profitability without relying on the assumption of an early recovery in the Chinese market. Next, I will explain, on page 5, the revisions to a four-year earnings forecast for fiscal 2026. First, regarding revenue, we raised our forecast from the 1.92 trillion yen in February to 2 trillion yen, an improvement of 80 billion yen. This represents an expected year-on-year increase of 12.7 percent. We have also presented figures for our adjusted metrics. We anticipate the full-year adjusted operating profit of 316 billion yen, an adjusted operating profit margin of 15.8 percent, and adjusted EPS of 95.7 yen. These figures represent a projected 13.6% increase in adjusted operating profit and 10% growth in adjusted EPS compared to the previous fiscal year. Driven by the strong performance in the first and second quarters, alongside the continued effectiveness of price pass-throughs and cost control measures, we expect to achieve record high levels of revenue and profit for the full year. At the same time. As we stated when we announced the first quarter results, we are adopting somewhat cautious assumptions for the second half of the year. China's real estate market is still in the process of recovery, and the consumer sentiment is still subdued. Furthermore, we continue to face rising raw material costs driven by the situation in the Middle East, and the uncertainty in the United States still continues. Rather than counting on market recovery, we believe by continuing to pass on costs, improving product mix, reducing costs, and controlling SG&A, we can absorb these cost increases and maintain the profitability levels for the full year that are in line with our projections. Regarding the reported figures, we maintain our operating profit forecast at 283 billion yen unchanged. This reflects the fact that the upward revision resulting from foreign exchange rate fluctuations is being offset by the one-off expenses such as M&A-related costs and business transformation costs for the Dulux Group in Europe. We also project EPS at 81.5 yen, a figure that accounts for the impact of one-off expenses and effective tax rates. The forecast for annual dividend remains unchanged at 17 yen per share. We intend to continue prioritizing EPS growth from the perspective of MSV while updating the outlook for the fourth quarter onwards as necessary. Page. Six and seven. Next, I would like to outline assumptions underlying our forecast. Reflecting the first half results, which were strong, and despite the anticipating some adjustments in the second half of the year, we revised our adjusted opening profit forecast for Japan Dulux Group and Nipsey business other than China. On the other hand, regarding Nipsey China, where the real estate market and consumer sentiment remains sluggish, we maintained our forecast for the automotive segment, but revised our initial forecast for both TUC and TUV. As for the Americas, due to the persistent economic uncertainty, we maintain the outlook for AOC as the market shows signs of bottoming up, but we still take a cautious approach for the Americas.

Page 8. Market conditions are expected to be flattish year-on-year in the second half and beyond. For Japan, in the second quarter, due to supply concern because of Middle East's situation and brought forward demand, there was a temporarily strong movement, mainly for decorative. But for third quarter and beyond, we don't expect such a special factor. China, automotive business is relatively strong. But TUC, in the second quarter, dropped markedly due to Middle East's situation. But we expect market in the third quarter will recover to the first quarter level. The Americas. There's uncertainty in automotive production and housing demand. For AOC, end market demand cannot be said to have strong recovery yet. Meanwhile, the business is becoming solid through price flexibility, continued supply and sales volume improvement. Given such market conditions, this full-year forecast this time is not an exploration of good first-half results, but rather based on the pursuit of profitable growth with uncertainty factored in. Next, page 9. I'll explain the outline of results of major segments. The details will be left to Q&A session, so just brief comment. First, Japan. Revenue, $61.6 billion, up 17.9%. Adjusted operating profit is $8.9 billion, up 65%. For decorative, sales increase and sales brought forward of high durability product for architectural and structural products contributed and for industrial automotive sales volume increase contributed. For profit side, increased revenue and improved material cost ratio SG under ratio significantly contributed. Nipsey China, revenue $129.1 billion, up 9.7 percent. Adjusted OOP profit, $18.7 billion, flattish year-on-year. On a yen basis, revenue increased, but TUV saw 14 percent decrease in revenue in local currencies due to sluggish real estate market in China and weak consumer sentiment. TUV also decreased its revenue by 9 percent due to sluggish market in local currency. That said, profit margin is maintained by keeping sales channel discipline, avoiding inventory buildup, and improved cost efficiency. Nipsey, except China. Revenue, 124.9 billion yen, up 26.4%. Adjusted operating profit, 27.4 billion, up 53.1%. Very strong results. Growth was achieved in wide areas, including Malaysia, Singapore, Thailand, Turkai, Indonesia, and India. Increased revenue, improved raw material cost ratio, and effort for rationalization led to profit increase. Durax Group, First Pacific, revenue $73.7 billion, up 29.2%. Adjusted operating profit, $10.7 billion, up 42.9%. Even under tough market environment, specialty coatings business share increase and small-sized acquisition and effects, big factor, contributed. Group Europe, revenue of 50.1 billion yen, up 19.9 percent, adjusted OP profit, 5 billion, up 9.6 percent. The France was flatish year-on-year in South and Central Europe, showed some strong growth. But Europe as a whole is still on the path for recovery. Next, Americas, revenue 34.9 billion yen, up 12.2%, adjusted operating profit 3.2 billion yen, up 8.5%. For automotive, share increased through acquisition of new business. For decorative, price hike and effects contributed, but the market conditions remain tough. Lastly, AOC revenue, 59.1 billion, up 23%. Adjusted OB profit, 21.5 billion, up 26%. Even without plus 2% coming from FX, the performance was very robust. While macroenvironment remains severe, profit contribution level remains high through a pass-through of material cost increase on prices, sales volume increase, and the sales volume growth in America and Europe, exceeding that in Asia. Pacific, leading to a better regional breakdown, AOC, although some retrospective correction due to finalized PPA, profitability and cash creation capability on an adjusted basis remains robust. Page 10, main topics. First, let me explain about purchase back of European automotive recordings business from UTRAM Group, which we announced today. In August 2021, we announced transfer of European automotive business to UTRAM Group, and this time we will purchase it back at about 47 million euro, or about 8.5 billion yen. The closing is expected within October 2026. With this deal, and with Indian business purchased back in 2024, there will be no Nippon Paint Group business directly held by Uthram Group. What is important about this deal is not the formality of buying it back, but we have made a judgment that the purchase at this time is the best from MSV point of view. Under UTHRAM umbrella, the organization and other rehabilitation measures progressed and the performance recovered to some extent compared to the time of equity transfer. We judged it to be better to take integrated approach, including capital relationship, to accelerate automotive coding business globally. For this deal, we've set up a special committee comprising of three independent directors to discuss... Profit and protection of minority shareholders and from MSB perspective, the acquisition price was decided based on equity value calculation by the third party, and the BOD chairman Goh has not participated in deliberation and resolution of this deal. In the first year after this deal, its impact for October-December 26th period is expected to be modest. From 2027, more recovery is expected. The size of financial impact is limited, but we believe it is a significant step from a strategic point of view. Page 11, other topics. First, about Integrated Report 2026 issued in June. This year's report was planned, structured, and edited based on representative questions from investors to convey more clearly the present position vis-à-vis MSB journey and the points of argument from now on. Each section explains about thinking about these questions and specific initiatives. The report features many interesting content, including a dialogue among co-president Wee, BOD Chair Nakamura, and myself. Please read it in your leisure time. On July 23rd, we announced reorganization of Japan Group, where Nippon Paint's first chemicals is to be split and integrated into Nippon Paint automotive coatings and Nippon Paint industrial coatings, effective January 1st, 2027. And we have publicized information both internally and externally. We will ship to a system to offer surface treatment products and coatings products, which have been provided from each subsidiary in a more integrated manner. By doing so, we will further strengthen product development and technology service, improving competitiveness and customer satisfaction. Lastly, let me report that we are awarded the Distinguished Service Encouragement Award At the 42nd Corporate Public Relations Awards, the advertising activities would like to deepen trust relationships with stakeholders and foster understanding and pride among employees for our company. In the second result, we achieved record high revenue and adjusted operating profit owing to global partner companies' continuous effort in wide areas, including material procurement, product supply, and customer service. That said, there remain some issues to note, such as raw materials, effects, and geopolitical risks that our employees are operating with sense of alert toward the second half. We are committed to pursue to achieve MSB as asset assembler by watching closely those risks and accumulating adjusted profit, EPS, and cash. We would like to continue to hold dear constructive engagement with investors. Thank you very much for listening.