Nippon Paint : FY2021 4Q Financial Results Conference Call Q&A Summary 189KB

FY2021 4Q Financial Results Conference Call Q&A Summary

(February 14, 2022)

• Questions by Takashi Enomoto, BofA Securities Japan Co., Ltd.

Q1 You forecast 10-15% revenue growth for FY2022 in the Chinese business (cf. page 34 of the presentation). Which do you expect to be a bigger contributing factor, price increases or volume growth? Please give us the breakdown and your progress with selling price increases in the 4Q of FY2021.

A1 The revenue growth in the 4Q of FY2021 was more attributable to volume growth than price increases. We will take actions to increase our market share further. As shown on page 30 of the presentation, our FY2022 forecast is positive growth in the DIY market and somewhat sluggish growth in the Project market. Based on this assumption, we expect to achieve 10-15% revenue growth in both markets by acquiring market shares and increasing selling prices. We cannot give you a specific breakdown of contributions between price increases and volume growth because other factors such as product mix come into play. Roughly speaking, however, volume growth will contribute more to revenue growth than price increases do.

Q2 Just to confirm, you expect your market share in the Project segment to increase because you assume 10-15% revenue growth even though you expect the Project market to soften a bit in FY2022. Is my understanding correct?

A2 We expect growth in the Project market to slow down, mainly in the new construction market. However, as we explained in the NIPSEA Business briefing in September 2021, our market share is around 9% and we have the potential to gain market share in FY2022.

The Project market is in a challenging environment, not just for us but also for competitors. Our plan is to increase revenue by 10-15% while keeping a good balance between our operating profit margin and revenue growth, rather than simply pursuing market share gains.

• Questions by Atsushi Ikeda, Goldman Sachs Japan Co., Ltd.

Q1 Regarding the operating profit margin in the China business, please give us information about changes in the raw materials cost contribution (RMCC) ratio and expenses including advertising expenses in the 3Q and 4Q of FY2021. With

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raw material prices remaining high, what actions such as selling price increases are you taking to maintain the operating profit margin.

A1 We do not disclose the RMCC ratio for individual segments. What I can say is that the overall RMCC in our Group deteriorated in the 3Q and 4Q of FY2021 compared to the levels in the 1Q and 2Q of FY2021. The Chinese business accounts for a large percentage of our Group's operations, and the cost of raw materials is a major factor that affects our consolidated gross profit. Our 4Q operating profit margin slightly improved from the 3Q, and this is applicable to the Chinese business. We believe this margin improvement was attributable to selling price increases and business mix changes between the DIY and the Project businesses.

Q2 The crude oil price has continued to rise and raw material prices remain high in China in the 1Q of FY2022. Please share with us your progress with implementing additional selling price increases to respond to the current market environment and the outlook for the RMCC ratio.

A2 We assume that raw material prices will continue to increase, rather than remaining at the current high levels, in the 1H of FY2022. Based on our assumptions, our operating profit margin will start improving in the 2Q as a result of selling price increases and the reduction of SG&A and other expenses that will more than offset the impact of the higher cost of raw materials.

Demand is seasonally weak in January and February due to the impact of the Chinese New Year, coupled with the impact of the Beijing Winter Olympics this year. In addition, demand is difficult to forecast for March when we normally see the highest demand. Our assumptions for the 1Q of FY2022 are that the operating profit margin will be lower and the RMCC ratio will be higher than we would like them to be. We are aggressively pursuing selling price increases as much as possible assuming that the selling price increases will start getting accepted in the 2Q.

Q3 Both the DIY and the Project market environments are becoming challenging. Can we assume that your plan is to maintain an operating profit margin of slightly below 10%, which is the level you achieved in FY2021, by raising selling prices?

A3 We are not fixated too much on maintaining a certain level of the operating profit margin. In the meantime, DIY revenue accounts for more than 50% of

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decorative coatings revenue, and demand in the new construction market, as well as the renovation market, is very strong. So, we plan to achieve a solid operating profit by implementing selling price increases.

In the Project market, competition is intense and our peers are also unable to earn profits easily in the current market environment. We plan to improve our operating profit margin by strategically raising selling prices while maintaining a good relationship with customers.

We cannot disclose our operating profit margin target. Just so you know, we don't think our operating profit margin in the 3Q and 4Q of FY2021 were at appropriate levels.

• Questions by Tomotaro Sano, JP Morgan Securities Co., Ltd.

Q1 Regarding profitability by segment, I understood that the Japan segment is going to see a decline in profitability due to reallocation of head office expenses, while in other segments profitability will start improving gradually in the 2Q as a result of progress with implementing selling price increases. Do you expect differences in the operating profit margin improvement and in the speed of the recovery from segment to segment?

A1 We don't see any particular difference in profitability trends among segments. We plan to stop the decline in the operating profit margin caused by the increases in raw material prices and logistics expenses in every operating region by raising selling prices and reducing SG&A and other expenses. The operating profit margin in the Japan segment also is projected to improve under the same conditions as in the previous year, excluding the effect of the reallocation of head office expenses.

The speed of the acceptance of selling price increases is different from segment to segment. For instance, selling price increases are accepted rapidly in the decorative paints segment, while they are slow to be accepted in the industrial coatings segment due to the B-to-B nature of this business. Overall, however, we see no difference in profitability trends from region to region.

Q2 Can we assume that the operating profit margin is currently at the lowest level and going to start improving because the margin decline caused by the increases in raw material prices was slightly smaller in the 4Q of FY2022 compared to the 3Q and selling price increases have been accepted

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	to some extent?
A2	There is a possibility that changes in profitability may vary slightly from our
	forecast, but we established the FY2022 forecast based on the positive sign that
	we managed to achieve a certain level of operating profit margin in the 4Q,
	which is not the peak demand period.

• Questions by Atsushi Yoshida, Mizuho Securities Co., Ltd.

Q1 Your automotive coatings revenue and the decorative paints revenue in the Japan segment increased from the 3Q to the 4Q of FY2021, but your operating profit margin did not improve much. What are the reasons behind this? Is it attributable to the continuing impact of higher prices of raw materials or the impact of higher fixed costs? I would also like to know if your FY2022 forecast includes an improvement in the operating profit margin in the Japan segment excluding the effect of the reallocation of head office expenses.

A1 Our FY2022 forecast assumes an improvement in the operating profit margin in the Japan segment, excluding the effect of the reallocation of head office expenses, driven by revenue growth and fixed cost savings. I will touch on this subject again at the conference call for the 1Q of FY2022 after we finalize the reallocation of head office expenses and realign our reporting segments.

The reason our FY2021 4Q operating profit margin in the Japan segment did not improve over the 3Q is that automotive coatings revenue did not increase as much as we had expected. In addition to the prolonged production adjustments at automakers, the higher cost of raw materials impacted our profitability. The Japan segment is mainly B-to-B, including in the decorative paints business. As a result, this segment is slightly more difficult than other regions in terms of the frequency and ease of selling price increases. We are trying to get our customers to accept selling price increases, but these increases are slow to be reflected to our profitability partly because the deflationary environment persisted for a long time. With the prices of raw materials continuing to rise, the reality is that our expenses are increasing faster than our profitability, partially owing to the nature of our business in Japan.

Q2 Can we assume that the operating profit margin in the Japan segment will improve in the 1Q of FY2022 as in other regions?

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A2	We assume that's the case under the same conditions. However, if head office
	expenses are reallocated to the Japan segment in the 1Q of FY2022, the
	operating profit margin in the Japan segment may appear to decline in
	disclosure documents. We will use a disclosure format which continues to allow
	YoY comparisons.

• Questions by Tomomi Fujita, Morgan Stanley MUFG Securities Co., Ltd.

Q1 I have questions about the change in the operating profit from the 3Q to 4Q in the Chinese business. The 4Q operating profit margin improved over the 3Q. However, you recorded a net total of -2.5 billion yen in provisions and subsidies in the 3Q and a net total of 1.3 billion yen in provisions and subsidies in the 4Q. If we reverse these amounts, the 4Q operating profit margin would be lower at 8.2% compared to the 3Q operating profit margin at 9%. Is this largely due to the higher cost of raw materials? Or, are these the normal operating profit margin levels including seasonal factors? You recorded an additional provision in the 4Q. Do you expect to record a provision in FY2022?

A1 The seasonality has a considerable impact. Looking at demand in the 4Q, October was relatively strong and November and December were soft. We have a similar seasonality every year, and demand is relatively weak in the 4Q toward the year end. On the other hand, demand is very strong in the 3Q because this quarter includes September, which has the second highest demand after March. Although your calculation may tell you that our operating profit margin in the 4Q declined slightly from the 3Q, things are going as we expected. We worked out the FY2022 forecast with a sense of improvement overall in the operating profit margin.

Q2 Regarding your assumptions for the FY2022 forecast, can we expect an improvement in the operating profit margin, in particular in the 2H, although we cannot expect a significant improvement in the operating profit margin in the 1Q given the ongoing increases in raw material prices?

A2 The FY2022 forecast assumes that the operating profit will start improving moderately in the 2Q. We expect the operating profit margin will improve gradually in the 1H due to an increased acceptance of selling price increases and other actions, although we anticipate a continuation of the increases in raw material prices.

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