Medium-Term Strategy Briefing Q&A Summary

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  • Medium-Term Strategy Briefing Q&A Summary

Questions from Takashi Enomoto, BofA Securities Co., Ltd.

  • A1Although the guidance is established for a three-year milestone up to 2026, we expect to be able to meet similar targets even if the timeframe is slightly longer timeframe.

    We have consistently developed a medium-term plan for each asset level. We anticipate that our current portfolio companies will successfully meet the medium-term growth projections detailed on page 19.

    We can derive the consolidated numerical targets for 2026 by summing the medium-term management plans for each asset. However, please note that we have intentionally chosen not to disclose these figures in this Medium-Term Strategy.

  • A2The consolidated CAGR targets presented on page 10 of the presentation reflect some effects of operating leverage. However, as outlined on page 14, we do not anticipate a dramatic improvement in the short term. Currently, our focus is on growth through the strategic reallocation of margins towards reinvestments aimed at gaining market share and establishing dominance.

  • A3We believe that achieving our long-term goals requires consistently targeting growth that outpaces the market, essentially focusing on expanding our market share. Accordingly, we have set our internal targets higher than those disclosed.

    The nature of our businesses is such that a higher market share facilitates further expansion. Given that many of our assets already hold a strong position in their respective regions, we anticipate sustained growth in market share moving forward.

    On the other hand, in regions like India, we have focused our efforts on two southern states in an attempt to surpass a formidable market leader. However, with competition intensifying, we recognize that the path ahead will be challenging.

    In the U.S., Dunn-Edwards has successfully achieved consistent growth and profitability in a specific region. Outperforming national market leaders is not our objective.

    While our strategies for expanding market share vary across different regions, we are confident that utilizing the diverse brands within our Group will empower our assets to maintain growth.

Questions from Yasuhiro Nakada, JPMorgan Securities Japan Co., Ltd.

  • A1MSV, or Maximization of Shareholder Value, is a function of both EPS and PER. To achieve MSV, both factors must be maximized.

    Our emphasis on expanding EPS arises from the recognition that focusing solely on “corporate value enhancement” might justify suboptimal investment decisions. Merely increasing the size of the company could potentially improve corporate value while undermining shareholder value. Therefore, we consider new share issuances beneficial only when they contribute to an increase in EPS, which in turn supports MSV. Moreover, PER reflects the capital markets’ expectations of this EPS growth. Our strategy to achieve MSV involves enhancing both EPS and PER effectively.

    If our sole focus were on EPS expansion, a viable strategy might involve share buybacks to decrease the total number of shares, thereby increasing the EPS. However, given our dissatisfaction with the current stock price level, while our capital is unlimited, the appeal of issuing new shares at this price is diminished. So, instead of pursuing equity financing, we are opting to maintain a robust cash reserve and utilize debt financing. While share buybacks might offer a short-term boost in EPS, we see greater, more sustainable opportunities for EPS growth through asset acquisitions. Therefore, our strategy to maximize EPS centers on growth-focused investments, such as mergers and acquisitions (M&A).

    Continual share buybacks, funded by our generated cash flows, could potentially enhance our PER. However, we recognize a link between growth potential and PER. Our objective is to demonstrate to the capital markets our capability to consistently increase EPS through strategic asset accumulation as part of our steadfast pursuit of growth. We expect this strategy to ultimately result in a higher PER.

    Although we cannot control the PER, we acknowledge that various factors influence our current stock price level. Feedback from the capital markets has raised concerns about our operations in China, which account for approximately 35% of our total business portfolio. We have consistently communicated the strong growth potential and cash-generating capabilities of our business in China. However, the challenging economic conditions there may be causing some hesitancy among investors, given the significant share of our operations in that market. Additionally, while China’s growth potential was highly valued in 2020-2021, its recent economic issues seem to be adversely affecting investor sentiment.

    We have established a consolidated medium-term CAGR target of approximately +8-9% for revenue growth and +10-12% for EPS growth. Our analysis indicates that the analysts covering our company might be slightly undervaluing our growth potential.

    We anticipate a long-term increase in per-capita GDP for countries with substantial populations, including China. This economic growth, combined with the robust demand in the paint market, underscores significant growth opportunities. Considering the strong prospects for an economic recovery, we expect our long-term growth potential to bolster investor confidence, potentially enhancing our PER. Consequently, our goal is to continuously strengthen trust in our management.

    While we can predict EPS growth with considerable certainty, PER reflects the collective outlook of the capital markets. Therefore, we are committed to improving our communication with market participants.

  • A2Although mergers and acquisitions are our primary focus for capital allocation, we remain flexible and attentive to the capital markets. In exceptional circumstances, we might contemplate a share buyback, particularly if the PER approaches ten times. Essentially, we aim to select the most effective use of funds to maximize the EPS, depending on the situation.

Questions from Atsushi Yoshida, Mizuho Securities Co., Ltd.

  • A1While our Asset Assembler model is not ostentatious, we represent a group of stable companies. I believe we are uniquely committed among public companies to maximizing EPS and PER in the medium term, and by extension, MSV. Our challenge has been in fully conveying our appeal, which leads to our key strategies: broadening our investor base, enhancing the liquidity of our stock in the market, and continuously strengthening our track record in mergers and acquisitions.

    We exclusively pursue mergers and acquisitions that offer low risk and attractive returns, after meticulous evaluation. Our approach is highly risk-averse, ensuring that our acquisitions are extremely low risk. There may be a disconnect between how the market perceives us and our conservative management policy, which contrasts with the bold image often associated with M&A activities.

    Therefore, our goal is to consistently enhance our track record in mergers and acquisitions to establish a market reputation as a company that reliably increases EPS through M&A activities. Additionally, we aim to showcase that we can achieve organic EPS growth of +10-12% and have the capacity to further compound EPS through strategic mergers and acquisitions.

    Although we cannot pinpoint the exact reason our stock price has not kept pace with our consistent EPS growth, we believe it may be due to insufficient communication of our management strategies. This is the purpose of today’s investor briefing. We highly value your insights and feedback as investors and are eager to hear your perspectives.

  • A2We are confident that if our EPS continue to grow consistently, our stock price will follow. While we can’t forecast the specific heights our PER might reach, we believe that our stock price will remain stable as long as EPS growth is maintained.

    We take pride in our ability to deliver resilient results, even in the extremely challenging conditions of the past three years. We believe that the capital markets underestimate our collective strengths, including our Co-President structure, majority shareholder, Board of Directors, and our exceptional partner companies.

    Today, I have endeavored to clearly and comprehensively articulate our strengths, aiming to enlighten not only those familiar with our Group but also potential investors who are interested in learning about us.

  • A3As our business portfolio evolves, we anticipate significant changes by 2026 compared to the present landscape. Hence, establishing a precise target for that year might not align well with the flexibility of our Asset Assembler model.

    Optimal margins conducive to revenue growth vary across regions, and amalgamating them into a singular figure oversimplifies the complexity of our operations. We pride ourselves on the diversity and adaptability of our strategies, and imposing uniform targets could impede the organic growth potential inherent in each region.

Questions from Atushi Ikeda, Goldman Sachs Securities Co., Ltd.

  • A1Take the acquisition of DuluxGroup, for example. At the time of our decision to acquire them, DuluxGroup was a publicly traded company. Our primary focus wasn’t to engage in a bidding war with competitors but rather to assess if our offer could provide greater value than what DuluxGroup could achieve independently. Ultimately, the decision rested with DuluxGroup’s management team. While there was potential for competing bids to emerge, fortunately, none did. This serves as an example of our very smooth acquisitions.

    On the other hand, the acquisitions of Betek Boya in Türkiye and Alina in Kazakhstan involved private companies. In these instances, we did face competition. However, we found that our approach of avoiding standardization resonated with individual or family owners.

    For instance, we extended financial assistance to Betek Boya, enabling them to entirely repay their high-interest borrowings, some exceeding 20% annually. Additionally, we offer the option to license the Nippon Paint brand to companies joining our Group upon their request. This approach allows us to provide tailored and flexible support that caters to the specific needs of each acquired company, fostering their continued growth while preserving their unique legacies. We believe these factors not only contribute to the successful execution of our acquisitions but also facilitate smooth post-merger integration processes at the companies we acquire.

    Moreover, our status as a Japanese company affords us specific advantages in M&A transactions. In addition to the previously mentioned advantage of low interest rates, our track record demonstrates that our Japanese heritage plays a crucial role in building trust and confidence in our commitments.

    Moving forward, our primary focus lies in striking a balance between risk and return rather than imposing limitations on our acquisition targets based on geographical location, size, or industry sector. While we maintain interest in decorative paints, we’re also actively seeking compelling opportunities in other sectors such as industrial coatings and adjacencies areas, provided their valuations are attractive. We can confidently assert that our acquisition targets are essentially boundless, contingent upon thorough assessments to determine if these companies can effectively leverage our Asset Assembler platform, including evaluating the capabilities of their management teams. While the decorative paints sector presents relatively lower risk and strong cash generation, we won’t confine ourselves solely to this arena but will instead remain open to exploring M&A prospects across diverse sectors.

  • A2I would like to refrain from commenting on individual cases.

    In the U.S. market, our presence currently amounts to a 2.5% share. However, this market landscape is defined by a handful of dominant players alongside numerous smaller local paint manufacturers, predominantly private entities. The paint industry in this market operates on a localized production model catering to local demand, characterized by relatively modest capital expenditure needs, fostering sustainable business operations.

    Conversely, a paint manufacturer in Northern California recently suspended operations due to asbestos litigation. Dunn-Edwards, which operates in a nearby market, is poised to expand by acquiring stores, talent, and market share. This strategy allows Dunn-Edwards to grow organically within the US market, where significant opportunities exist. Therefore, it’s clear that Dunn-Edwards has not faced ongoing drops in profitability or market share. On the contrary, they have successfully maintained revenue and profit growth in their West Coast-centered market.

    In this context, there is no pressing need to engage in merger and acquisition activities in the U.S., an approach that is consistent with our strategy to pursue MSV.

Questions from Shigeki Okazaki, Nomura Securities Co., Ltd.

  • A1No discussions of this nature have taken place. Although we recognize the concerns from the capital markets, our business portfolio naturally includes some uncertainties. Notably, our operations in China contribute substantially to our EPS. As we have mentioned before, we are not under any pressure to increase our investments in China. This division is self-sustaining, able to independently produce cash flows and yield satisfactory dividends, as well as reinvest in its operations. Consequently, there is no pressing need for us to contemplate divestment.

    While divestment might enhance our PER in the short term, our strategic goal is to promote growth in China and other regions, while pursuing mergers and acquisitions.

    We are unlikely to engage in mergers and acquisitions in China. As we expand our business through M&A in other regions, the relative share of our operations in China may decrease. Nevertheless, there is no strong incentive to deliberately scale down our presence in China. Although reducing our operations there might temporarily improve our PER, our primary focus is on long-term MSV and maximizing EPS. Therefore, we are not contemplating a reduction in our China operations.

  • A2Wuthelam Group is not used for off-balance sheet transactions. Should we transfer our China operations to Wuthelam Group, the cost to repurchase them would likely be higher than the initial sale price, resulting in a financial loss for us. In contrast, our India operations which were running at a loss; this sale increased our EPS and provided necessary funds, making it a financially sound decision. However, our China operations are currently profitable and generate substantial cash flow. Selling them now would likely mean a lower valuation, and repurchasing them after the Chinese market recovers would be at a higher valuation. Given these considerations, I do not view this as a viable course of action.

A question from Participant A

  • A1The appendix of the presentation details the market share transition by asset. For example, NIPSEA China holds a 25% market share in the TUC segment, positioning it as the market leader based on our estimation. We assess that competitors ranked second and third hold market shares in the high single digits. Therefore, we haven’t attained dominance in this market yet.

    DuluxGroup has secured a commanding position in the market, capturing a 50% share based on sales volume. As the company primarily deals in premium products, it is likely that their market share in terms of value is even higher. We anticipate DuluxGroup’s revenue to grow by 5% through a combination of 2-3% volume growth in a largely stabilized market and a 2-3% rise in sales from price increases, with inflation expected to be around 2%. Despite a potential 2-3% rise in fixed costs, we expect DuluxGroup’s revenue could increase by +6-7% due to the benefits of operating leverage.

    Dunn-Edwards may not be the market leader, but we are committed to pursuing growth through strategic investments. In Indonesia, we hold a 19% market share, positioning us as a close contender for the top spot alongside a formidable local competitor. Given the highly competitive nature of our rival, we identify a substantial opportunity for growth by aiming to capture a significant portion of the remaining 60% market share.

    Given this context, it may not be feasible to anticipate substantial margin improvements from the operating leverage effect over the next three years. Nonetheless, as outlined earlier, we are aiming for a consolidated compound annual growth rate (CAGR) of +8-9% in revenue and +10-12% in earnings per share (EPS), which suggests that the operating leverage is functioning effectively. Despite these positive indicators, we believe that now is not the opportune moment to further amplify the leverage effect.

Questions from Shunta Omura, UBS Securities Co., Ltd.

  • A1I would like to refrain from commenting on individual cases.

    Various types of mergers and acquisitions exist. For example, the strategy varies depending on whether it’s a bolt-on acquisition, meant to enhance existing businesses, or an acquisition aimed at establishing a new presence. In the context of bolt-on acquisitions, a pivotal consideration is whether our partner company in that region is interested in the target company. Kazakhstan represented a new region for us, but the acquisition of Alina aligns with the bolt-on acquisition model. Following the inclusion of Betek Boya in Türkiye into our Group, they expressed an interest in pursuing opportunities in Kazakhstan. Over a span of four years, they established a sales company and deepened their understanding of the local market. Throughout this timeframe, we realized that while Kazakhstan presents promising opportunities in the paint and dry-mortar sectors, the market’s emphasis on local production for local consumption posed logistical challenges for exporting from Türkiye. The dilemma boiled down to whether to establish local production or await an opportunity to acquire a local company. We conducted a comprehensive assessment, considering various factors such as the competitive landscape, valuation, business stability, and the quality of the management team. Crucially, the proactive approach and determination of both the Turkish and NIPSEA teams were pivotal. They were dedicated to achieving positive outcomes, even if it required incorporating the success of this acquisition into their incentives.

    Conversely, in regions where we lack nearby operations, we perceive a heightened risk when contemplating the acquisition of a relatively small or mediocre-sized company. This risk is particularly pronounced when management heavily depends on one or two individuals, and there’s no overarching corporate structure. The further the target region is, the stronger our apprehension towards the deal. If this concern is mitigated, we also evaluate whether the target company has a robust management team, including potential leaders from the next generation.

    Given these criteria, we’ve identified several companies that don’t align with our standards. These include instances where we’ve proposed a final price but opted not to proceed, as well as cases where we determined early on that it would be challenging to pursue further. Our commitment lies in acquiring quality assets at fair prices, which often leads to instances where a potential target fails to meet our criteria or is priced too high based on our assessment. Conversely, there are potential targets under consideration that exhibit promising potential, and we’re currently deliberating on the best approach to finalize these prospective deals.

  • A2There’s been little change from the previous status quo. We remain consistently occupied with scrutinizing potential deals.

Questions from Ryokichi Kondo, CoatingMedia Co., Ltd.

  • A1Some voices within our company suggest that reconsolidating into a single entity might be beneficial. However, both Co-President Wee and I believe that such a step is premature at this moment, and we have not decided whether to pursue this path in the future. The paint business remains fundamentally profitable, and the strategy of “bunshaka”—splitting the company according to business lines—has proven advantageous by increasing transparency in accountability and bolstering the commitment of each partner company’s leader to their specific numerical targets. We intend to preserve these benefits.

    Within our existing organizational framework, I believe it is crucial to actively work towards breaking down organizational barriers and silos. As we promote the concurrent assignment of roles, it becomes essential to dismantle these obstacles. When we establish the necessary mechanisms and environments, they prove to be effective. Co-President Wee and I are jointly concerned about the risks associated with hastily reintegrating the Japan segment into a single entity without first establishing this mindset firmly within the organization. Doing so prematurely could lead to numerous complications.

    There are areas within the Japan Group that need enhancement. To tackle this, we are initially focusing on motivating our leaders, including the CCO and the head of the resin center, to break down organizational barriers and silos. We recognize that if leaders are unable to overcome these silos, it is unrealistic to expect their teams to do so. Consequently, we have concluded that implementing changes incrementally, rather than all at once, is often more effective.

    As for the potential consolidation into a single company in the future, no decisions have been made yet.

  • A2I have not made any explicit statements suggesting that we will consolidate the organization into a single company. However, we are moving towards unifying our operations under the internal slogan “One NIPPE”. Initiatives like the establishment of the CCO, the resin center, and the concurrent roles of the head of the resin center as President of our automotive business, all support this unification effort. We frequently emphasize “One NIPPE” across the organization. As their responsibilities widen, our leaders are increasingly motivated to develop more successors.

  • A3That’s correct. While we do consider short-term numerical targets, our focus isn’t limited to cost-cutting at the expense of long-term sustainability. Consequently, we will make the necessary investments to ensure the long-term viability of our business entities. Additionally, our policy actively aims to reduce unnecessary meetings and personnel assignments.

Questions from Naoki Ozawa, Chemical Daily Co., Ltd.

  • A1Although there are regional differences, capital expenditures have remained relatively stable globally. Focused primarily on the paint and coatings industry, our capital expenditures currently represent about 3% of revenue. As we anticipate continued revenue growth, the absolute value of capital expenditures is expected to rise modestly. Nevertheless, we do not foresee any substantial changes in this percentage going forward.

    In Japan Group, capital expenditures may see a slight uptick due to the construction of the Research Institute and the upgrading of aging facilities. However, our strategy is to keep these investments at a practical level rather than committing to overly large expenditures, thereby ensuring sustainability.

  • A2I cannot pinpoint a specific region, but generally, the decorative paints sector demands lower capital expenditures. Considering that over 60% of our Group’s revenue is derived from this sector, areas focused primarily on decorative paints tend to have reduced capital investments. While Australia’s DuluxGroup usually experiences lower capital expenditures, some of its Sealants, Adhesives, and Fillers (SAF) facilities are becoming outdated. Consequently, after evaluating the costs of maintenance versus renewal, we have opted to build new factories, which will temporarily raise our capital expenditures.

    Japan Group is another region where capital expenditures are comparatively high. We plan to make prudent use of our existing facilities while implementing necessary upgrades.

    Additionally, we find that the investment needs tend to be slightly greater in the B2B sector.

A question from Participant B

  • A1Our company is singularly focused on Maximization of Shareholder Value, which places shareholders at the bottom of the stakeholder priorities, as our sole mission, rather than pursuing overall corporate value maximization.

    That being said, while a Management Buyout (MBO) has never been on our agenda, we are committed to MSV with a long-term outlook. This commitment is twofold: firstly, we view equity financing as a crucial strategy for future mergers and acquisitions, though we will not pursue this at the current stock price. Secondly, our majority shareholder, Wuthelam Group, which is both an asset management and a family-owned company, underscores the importance of maintaining our company’s market listing to ensure liquidity.

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