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2020.02.14

Summary of Press Conference on Consolidated Financial Results for Fiscal Year Ended December 2019

February 14, 2020
Nippon Paint Holdings Co., Ltd.
Public Relations

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Summary of Press Conference on Consolidated Financial Results for Fiscal Year Ended December 2019

[Outline of Press Conference]
Date: February 13, 2020; 15:40 to 16:20
Venue: A conference room in Osaka City
Attendees: Masaaki Tanaka, Chairman, President & CEO Yuichiro Wakatsuki, Senior Managing Corporate Officer and CFO

[Explanation by Masaaki Tanaka, Chairman, President & CEO]

1. Financial results of Nippon Paint Holdings Group

Please let me briefly explain our group’s financial results for the fiscal year ended December 2019. In short, we achieved an increase in both revenue and operating profits on an Adjusted basis (Non-GAAP). On a Reported (tanshin) basis, we achieved revenue of 692.0 billion yen, operating profit of 78.1 billion yen, profit before tax of 79.5 billion yen, and profit attributable to owners of parent of 36.7 billion yen. We saw revenue increase by 10.3% year-on-year, which includes DuluxGroup and Betek Boya, both acquired in 2019, while decorative coatings business in China continued to show strong growth. Meanwhile, on an adjusted basis, i.e., excluding special factors such as the contribution of two newly consolidated subsidiaries, expenses related to M&A, impairment losses and the impact of foreign exchange rate fluctuations, revenue grew by 3.0% or 18.6 billion yen year-on-year. Secondly, although we improved the RMC ratio (the percentage of raw material expenses to revenue) thanks to our efforts to reduce the procurement costs of raw materials, operating profit decreased by 9.8% year-on-year on a Reported (tanshin) basis as we posted an impairment loss of 11.3 billion yen for the automotive coatings business in Europe and India which we have already announced. Meanwhile, operating profit rose by 4.8% or 3.7 billion yen year-on-year, on an Adjusted basis.

2. Financial results by region

Looking at financial results by region, in the Japan segment, revenue stood at 182.6 billion yen, almost unchanged from the previous year. Decorative coatings for retail customers showed good growth and industrial coatings business also due to rise in demand associated with reconstruction from natural disasters in 2019. Operating profit declined by 21.0% year-on-year to 23.4 billion yen (excluding 13.6 billion yen of dividends received from our overseas group companies) due to the posting of 2.2 billion yen for M&A related expenses and a rise in SG&A expenses. Meanwhile, operating profit totaled 24.4 billion yen, down 10.7% from the previous year on an Adjusted basis.

In the Asia segment, sales of automotive coatings were affected by a fall in the number of automobiles manufactured, mainly in China, India and Thailand. However, revenue grew by 1.0% year-on-year to 359.2 billion yen, since sales continued to increase in the B to B and DIY segments, mainly in the decorative paints business in China, where we maintain top market share. Meanwhile, on an Adjusted basis, revenue increased by 5.3% from the previous year to 374.4 billion yen. Operating profit decreased by 3.1% year-on-year to 50.8 billion yen, since we posted an impairment loss in India, despite the contribution from a rise in sales of decorative paints, mainly in China, and improvement of the RMC ratio. However, on an Adjusted basis (excluding impairment loss, etc.), operating profit grew by a significant 16.3% year-on-year to 52.7 billion yen.

In the Americas segment which includes the U.S., Mexico and Brazil, revenue decreased by 0.8% year-on-year to 74.6 billion yen. This was attributable to sales in automotive coatings being affected by a decline in automobile production and the impact of foreign exchange rate fluctuations, although expansion in sales of high-value-added products and increase in the number of stores contributed to sales growth in the decorative paints business. Revenue rose by 0.3% year-on-year to 75.4 billion yen on an Adjusted basis. Operating profit increased by 0.4% year-on-year to 5.0 billion yen due to the improvement in the product mix in the decorative paints business.

In the Other segment (mainly consists of Europe), revenue grew by 101.5% year-on-year to 28.0 billion yen. This was due to consolidation of the acquired Betek Boya contributing to sales growth by 15.1 billion yen, whereas sales of automotive coatings were affected by a decline in the number of automobiles produced in Europe and the impact of foreign exchange rate fluctuations. Due to sluggish automobile production in Europe and the recording of 7.8 billion yen in impairment loss, we posted operating loss of 7.0 billion yen.

In the new Oceania segment that we newly added this fiscal year, revenue and operating profit (four-month figures) stood at 47.6 billion yen and 5.9 billion yen, respectively, due to the contribution of the acquired DuluxGroup.

3. Dividend payment

We plan to pay 23 yen per share as a year-end dividend as planned on condition of approval at the Ordinary General Meeting of Shareholders scheduled in late March 2020. This translates into an annual dividend of 45 yen per share.

4. Our responses to the new type of coronavirus and impact on our financial results

I would like to explain to you how we have been responding to the outbreak of the new type of coronavirus that has been spreading mainly in China. As we have already announced in our press release, we established a Coronavirus Emergency Headquarters on January 28, 2020 to collect information, establish and verify a business continuity plan (BCP) among other things. The Coronavirus Emergency Headquarters held another meeting today. Ensuring safety and health of our group employees is our highest priority, and we have been monitoring the health condition of each and every employee in China (around 9,000 employees) every day. At present, none of our group employees who work in China has been found to be infected with the coronavirus.

We have determined to give full support to our local subsidiaries in China. We will not only send relief supplies to China but also donate a total of four million RMB (around 64 million yen) to China. Nippon Paint China, our local subsidiary in China, donated two million RMB (around 32 million yen) to the Red Cross in Xianning, Hubei Province on January 30, 2020. Furthermore,our Board of Directors have resolved today (on February 13) that Nippon Paint Holdings Co., Ltd. will donate a total of two million RMB (around 32 million yen): one million RMB to the Red Cross Society of China and one million RMB to the Shanghai Red Cross Society. Our overseas group companies including Turkey and India have also shipped a lot of relief supplies, such as masks, to our local subsidiaries in China. The entire group is committed to supporting our local subsidiaries in China, implementing a campaign: “Zhongguo Jiayou!” in Chinese or “Hang in there, China!”

To comply with the guidance of the Chinese government, our Chinese subsidiaries had extended the Spring Festival break to February 9, 2020. Excluding plants in Hubei Province, our local subsidiaries in China have resumed operation on February 10, 2020. Regarding the procurement of raw materials, there is possibility that the delivery of some imported goods will be delayed. However, as we are examining the use of alternatives, we consider the impact of delayed delivery on our business within China and abroad is limited.

The number of people infected with the new coronavirus exceeded 60,000 as of February 13, 2020. As the infection has been spreading mainly in China, it is difficult to estimate the timing of the coronavirus outbreak end. We view that our financial results for the first quarter of fiscal 2020 will be inevitably affected by the spread of the virus. asu such, we will withhold the announcement of our consolidated financial results forecast for the year ending December 31, 2020 until the time we would be able to reasonably calculate the impact on our financials.

I hope the coronavirus outbreak will soon be under control. Meanwhile, I am confident that we have strong capability to bring our businesses, including decorative coatings, back on a recovery path within a short time frame. I would like to give you some examples. All our plants except three resumed operation on February 10, 2020. In addition, 60% of our employees in China, including telecommuters, have returned to work. Following the request by the Chinese government, we have made sure that every plant in China has their employees wear a mask, keep an inventory of masks and installs antiseptic solutions. We cannot deliver the antiseptic solutions to China from Japan since they are categorized as hazardous items. Our solvent plant in China has started making antiseptic solutions by themselves. At the moment, our plants in China, excluding those that suspend operation, operate at around 30% to 40% of capacity, but this is sufficient enough to meet current customers’ demand. We have been monitoring preparations in our plants in China every day so that we can bring them back into full operation at any time when necessary. We will focus all our energies on supporting operation of our plants in China to ensure that they can resume full production.

5. Shift to a company with a ‘three committees’ corporate governance structure

As announced on September 20, 2019, we will shift our corporate governance structure to a company structure with three committees, subject to approval at the 195th Ordinary General Meeting of Shareholders to be held on March 26, 2020. After the completion of the shift to a company with three committees, the Board of the Directors will supervise management through activities of three committees: the Nomination, Remuneration and Audit Committees, while executive officers who are elected by the Board of the Directors will execute their duties after receiving delegation of authority from the Board of the Directors. The shift will not only enable executive officers to execute business management based on accelerated decision-making, but also allow the Board of Directors to monitor executive officers’ business management from both proactive and defensive sides by fully understanding their strategy. After approval at the Ordinary General Meeting of Shareholders, the Board of Directors will be comprised of nine directors, six, or two-thirds, of which are independent directors. As stated in Corporate Governance Code, we will establish an independent and objective Board of Directors. We announced the composition of the three committees on January 24, 2020. I myself, Chairman of the Board, Representative Director of the Board, President & CEO, will attend none of the Nomination, Remuneration, and Audit Committees as a committee member. Although I will be present at the meeting of the committees for explanation at their request, I will not have voting rights as a committee member. This is based on our belief that maintaining the independence of the Board of Directors is very important from the viewpoint of protecting the interests of the minority shareholders. We would like to establish such corporate governance structure and promote further reform where necessary.

[Summary of Q&A session]

Q1The Company withholds the announcement of its consolidated financial results forecast for the year ending December 31, 2020 due to the spread of the coronavirus infection. Has the Company ever withheld the announcement of the forecast before?
A1Tanaka: Yes. We withheld the announcement in 2011 after the Great East Japan Earthquake. We are now in a state of emergency caused by the new type of coronavirus. At the moment, there are a lot of uncertain factors. Therefore, we have decided to postpone the announcement of our consolidated financial results forecast for the year ending December 31, 2020 since we judged we would only be able to provide an accurate and precise explanation after the situation becomes clearer. This complies with the guidance of the Tokyo Stock Exchange.
Q2The Ministry of Foreign Affairs of Japan is recommending Japanese residents in China to consider withdrawing. Would you please explain to us the Company’s situation?
A2Tanaka: At present (as of February 13), eight Japanese staff members reside in China. In principle, we instruct all of them to do their work at home and return to Japan if they have any concerns, and are also monitoring their situation every day. Following the guidelines of the Ministry of Foreign Affairs of Japan, we are determined to do everything we can do to ensure our staff members’ safety and health.
Q3As the number of automobiles produced globally has decreased, I assume that the company has also suffered from a decrease in production volume. How does the Company view the impact on its financial results?
A3Tanaka: We consider that global automobile production will face a tough situation for a while. We will be inevitably affected by it. Before the outbreak of the new coronavirus cases in China, Japanese automobile makers actively expanded their production and increased their market share in China. We also enjoyed the benefits from such expansion. Meanwhile, approximately 30% of our automotive divisions’ sales in China are from local Chinese automotive manufacturing companies. There is concern that if automobile production declines further, our financial results will deteriorate.
Q4Considering the worst-case scenario, has the Company already examined the possibility of shifting production from plants that have suspended operation in China to other plants?
A4Tanaka: We have not examined it at the moment. Around 50 of our plants, excluding three, have already begun operating in a limited range. We will examine how we will operate existing plants by checking customers’ schedules for resuming operation.
Q5Nobody can predict when the impact of the coronavirus outbreak will wane. Will the Company examine the next countermeasure if the current situation continues over several months?
A5Tanaka: The situation changes every day. We have been monitoring the daily situation and examining the necessary countermeasures. In the decorative paints business in China, our major customers are construction companies. Most of them resumed operation on February 10, 2020. Thus, we are trying to find some way to deliver paints to those construction companies or their construction sites. As I have already mentioned, our plants are operating at around 30% to 40% of capacity. According to the announcements by the Japanese automobile manufacturers, the timing to restart their plants in China differs from company to company. However, most of their local Chinese counterparts have already restarted operation. Their capacity utilization differs between companies. However, we have the impression that Chinese car makers have been working hard to bring production back to full capacity within two to three weeks.
Q6Nissan Motor announced that it will suspend operations at its Kyushu plant. Does the Company expect this suspension to affect its business?
A6Tanaka: Although Nissan Motor is one of our most important customers, we have not received any special notices regarding their Kyushu plant. However, we are ready to give full support to them, if necessary.
Q7The Company has suspended operation of three plants in China. Will you please give us detailed information on the three plants, including locations (and whether in Hubei Province), main production items, main customers, and production capacity, if possible, including the percentage of the three plants’ capacity of the total capacity of China and the entire Nippon Paint Group.
A7Tanaka: Two of the three plants that have stopped operation are located in Hubei Province and the remaining one is in Hebei Province. I am afraid that I cannot give you the percentage of the three plants’ capacity of the total capacity, because I do not have data at the moment. One of the plants in Hubei Province produces automotive coatings and supplies them to Japanese companies. As most of our plants that make decorative paints have begun production, we do not think that any serious problems will occur for the moment.
Q8Can I assume that the suspension of operation at the plants in Hubei Province that produce automotive coatings will not cause any interruption of supply to Japanese automobile manufactures because the Company will supply customers with products from other plants?
A8Tanaka: We have been preparing our production so that we can supply products to customers in a timely manner. Most Japanese automobile manufacturers plan to restart production on February 17, 2020. Therefore, we will do what we can to supply our customers with our products.
Q9I am afraid that my question is not related to the Company’s financial results, please tell us the current R&D status and its policy.
A9Tanaka: We have about 3,000 employees in Japan, 1,000 of which are engineers. In short, one in every three employees in Japan is an engineer. How the Company could support the development of each and every engineers is one of the key themes for management. We have also begun deliberations on how we should create a workplace environment where the engineers can play an active part. We have analyzed the strengths and weaknesses of 1,000 engineers and their position in the future. We have also discussed how we should support engineers. We will seek various opportunities to promote open innovation, including contacts and collaborations with outside organizations such as research institutes and universities. Jujiro Moteki, Founder of the Company, established the Company with the desire to identify social issues and think how to solve them with paint technology. In other words, we are a technology-focused company. We have grown by manufacturing and marketing products based on engineers’ ideas. As I believe that seeds for our Company’s future should be created in the field of technology, I strongly hope our engineers will work harder and with eagerness something like, “We will win the next Nobel Prize.”
Q10Can I assume that there is the possibility that the Company will resume operation of its plants in Wuhan?
A10Tanaka: For instance, in our automotive coatings business, we work closely with automobile companies’ production divisions. Thus, when an automobile production plant begins operation, we must also be ready to supply products to the plant. We will decide when to restart operation of our plants in Wuhan following the guidance of the local government.
Q11When does the Company plan to have its plants back working at full capacity?
A11Tanaka: To tell you the truth, our plants have already begun preparing to operate at full capacity. About 9,000 of our Chinese employees show a very positive attitude to bringing the plants back into full operation again. I feel that they are very strong and reliable fellow workers. None of them have been found to be infected with the new coronavirus. They have been working hard in every way to bring the plants back to their original status within around two weeks. Of course, we expect this suspension of operation to have some degree of impact on our financial results in the first quarter of fiscal 2020. They told us that once the plants begin operating at full capacity, they will make up for what has been lost.

In addition to the strong motivation of our employees, we have the capacity to give adequate financial support to our subsidiaries in China under these circumstances if necessary. To resume business according to its BCP, it is important for a company to have the ability to prepare everything by itself and to have enough cash to restart operations. As we have sufficient resources, our Chinese employees can start to make preparations without worrying. I think that they are wonderful coworkers.
Q12The Company explained that the impact will be limited, but it cannot make reasonable calculation for the forecast of its financial results. Will you please explain to us why?
A12Tanaka: First of all, there is a relatively limited impact from other factors outside China. So far, we have not experienced any supply problems, such as suspension of production due to a bottleneck in the supply of raw materials. We consider the impact will be limited since we have judged that we will be able to continue operation satisfactorily using alternatives. On the other hand, our plants have been operating at 30% to 40% capacity (as of February 13). Logistics problems have prevented them from operating at full capacity. As there remains the possibility that further spread of the coronavirus infection may force us to suspend operations again, we must carefully monitor the situation. Such events will directly affect our revenue, because nearly 40% of our sales come from China. As there are large uncertain factors, we have concluded that we cannot calculate a reliable forecast of revenue and operating profit. Thus, we have decided to withhold the announcement. About 50 of our plants in China, except three, actually resumed operation on February 10, 2020. Without doubt, we expect our financial results to be affected, especially in the first quarter of fiscal 2020. Although we have prepared several scenarios for our financial results depending on the timing of the end of the coronavirus outbreak, we have judged that any announcement of forecasted results under these circumstances will mislead investors. We will release a forecast of our financial results as soon as the new coronavirus outbreak is under control and uncertainty over our business is removed.
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