Nippon Paint : Investor Briefing on Acquisition of Cromology Q&A Summary 140KB

Investor Briefing Webinar on the Acquisition of Cromology Holding SAS

Q&A Summary October 20, 2021

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

Q1 First of all, congratulations for the M&A. Just one question from me. This company has a significant revenue from France. As we see, in the EU, France is a very competitive market and we will get the Western and European major players. This company seems to be focusing on Eastern Europe. Given that, why are you targeting this company which is focusing on France? Why are you targeting this company at this moment in time, although the Cromology is targeting France? Thank you very much. That is my question.

A1 (Houlihan) Thank you very much for your question. If I come back to the core of DuluxGroup's capabilities, we are very strong in what we will call the common capabilities that underpin Western markets. By the term "Western markets," I am describing the fact that in contrast to Asia, we run our own trade stores. In Asia, most paint is sold through an independent dealer. In Western markets, most "do it yourself" paint, which obviously there is relatively little of in many Asian countries, is sold in Western markets through Big Box retailers and independent hardware retailers, so the capabilities to be strong in terms of channels of distribution are defined by Western markets in that context, and ultimately that is led by the consumer - the fact that there is an element of "do it yourself" consumers and "do it for me" consumers. So, when we think about our focus on Cromology and the European platform, and where Cromology itself is focused, it has been through those common capabilities, and ultimately those capabilities are consistent throughout those other countries I mentioned, which is not to say that in conjunction with Cromology, we cannot look to expand further into Eastern Europe, particularly if there were some markets of good opportunity, but it is really through that lens as to how Cromology has continued to operate and what has brought both of us together in terms of today's acquisition.

Q2	Using this as kind of a foothold, including Eastern Europe, in Europe as a
	whole, you are planning to really expand it. So, for the expansion, this is really
	the first step. Am I correct in assuming that?
A2	(Houlihan) The first focus will obviously be Western Europe in terms of where
	Cromology is today and what we can do to help Cromology lift its opportunities
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to another level. So, if I think about Cromology in its largest market of France, as I mentioned earlier, their decorative market is a 1.6 billion-euro market, and while Cromology is number two in that market, it only has approximately 14% market share. So, over time, we think there is significant opportunity to grow market share - again, not just helping Cromology step up its strong position in trade, but equally they will teach us in Dulux Australia things about how we can improve our business here.

But we believe through helping Cromology step up opportunities in retail channels, we think that will help market share, and ultimately what we have found in Dulux Australia is if you can get that market share growth and you can hold your financial discipline, you get great leverage through to the bottom line. Then, beyond decorative paint - and I am talking France here as well - again, there are opportunities to move into adjacent products like sealants, adhesives and fillers in the way we have done with our Selleys business here in Australia.

Within France, there may well be other M&A opportunities that present themselves over time. Who knows? But that is not the immediate focus of our acquisition today and what we think we can do in the first instance. Then, beyond France, you have got the other countries where Cromology is already strong as a top-three player. Again, that same formula for growth presents itself as an interesting opportunity - build on trade, step up retail, expand the product portfolio, bring strong financial discipline to bear, and bring the leverage of the group to bear.

Then, ultimately as we continue to grow, we will present adjacent opportunities organically. It could be through marrying up with a certain customer in a country that has got distribution presence in another country, or ultimately it might present itself through bolt-on M&A or so on. So, we will look at the broader Europe lens, but we are very much anchoring our thinking from Cromology and then what we can do leveraging beyond that, and if we can find over time the right partner companies to complement that even further.

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

Q1 My question is with regard to the figures. I would like to ask about a couple of the figures in relation to the backdrop. With regard to the target company, pre-

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IFRS-16 was explained. When we look at Cromology's disclosed paper, whether IFRS-16 is in or not, there is a big impact. Specifically, there is an EBITDA change of 64 million going to 97 million with IFRS-16. I wonder why. Probably, this is because of a lease factor. After consolidating to your company, the EBITDA appearance may become bigger. Is my understanding right? I would like to ask for the explanation on that point.

Also, when we look at the disclosed material, specifically about the operating income, it is an OP margin of 9%, but in 2020, the actual base is a little weaker than 8%. It also looks like the performance is recovering, so maybe it is 9% today. Is my understanding correct?

I am sorry for asking you many questions. Also, it seems like the difference between net profit is very big, and when we look inside, there is much financial cost. I assume that with the acquisition, there may be a lower interest burden. Can I expect that as a synergy as well? I would like to ask for elaboration about the impact on P&L. I am sorry about my many questions which is to do with accounting.

A1 (Wakatsuki) First, about the impact of IFRS-16. As you rightly expected, it is to do with the lease accounting. Actually, IFRS-16 is the close figure to what we usually use as EBITDA, so after IFRS-16 is right, then the EBITDA figure will become bigger. So, to avoid misleading from that, we did decide to share the information with the pre-IFRS-16. That is for the first question.

Secondly, with regard to Wendel, in Wendel's disclosure, the "last 12 months" figure EBITDA is disclosed in pre-IFRS-16. In our case, we gave a forecast for 2021. Well, this year is almost done, so with that as an assumption, we gave the EBITDA a figure with the pre-IFRS-16. As explained in the presentation, in the past several years, a new management team joined to the company and the marginal profit is in a very dramatically improving trend. This trend is continuing. For us, as a result of due diligence and this information from the target company, 80 million is our assumption. So, they are clearly in an improving trend.

In terms of the net profit, I think you are referring to the figure disclosed by Wendel. Of course, how they see the inclusive tax aspect and how the structure is done. Our case is unique from that. Actually, the tax will be deducted from ordinary or normal operating income in our view, and for now, we are still under calculation and disclosure will be done after closing, and the amortization cost or depreciation cost will be also factored in before the disclosure. Even after

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	that, basically EPS will be positive. That can be expected with confidence.
	That is my answer.
Q2	You answered most of my questions, but the net profit numbers, within Wendel,
	there are many transactions, so rather than looking at this as a reference,
	perhaps once it becomes part of your group, from operating income, then
	financial cost and other expenses are subtracted, so the gap will become
	narrower. Am I correct in assuming that?
A2	(Wakatsuki) You are correct. Also, it is a detailed matter. There are some
	deferred tax assets, so how to calculate them is one thing, but in principle, as
	you have just said, yes, you are right.

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

Q1 I have a question about performance. On page six, your EBITDA forecast, for FY2021, it is 80 million euros. I have a question. When I look at the disclosed information by Wendel, the first-half EBITDA is disclosed. It is 56.9 million euros, so after a second-half subtraction, it is 23.1 million euros. So, the first half to the second half, it is like a significant decrease of profit. What is the background? If it is possible, I think it is probably the higher prices of the raw materials, so what about the capability to pass on those price increases to buyers or customers of Cromology? If you could address that, it would be very helpful.

A1 (Houlihan) If I could comment on the aspect of the question about raw materials, Cromology has done a very good job at managing their margins and managing their increased raw materials that all of us are having to deal with. What has been really important to that, again, is the fact that the bulk of the business is done through trade owned-stores, so you can set your pricing in your own store network yourself. You do not need to work through an intermediary, so you have instant control over what you choose to do in the competitive landscape, and when married together with what Cromology has been doing with their financial discipline, the way they have been managing price to the premium nature of their products, and their sales and marketing activities, etc. around that, it has put them in a really good position to be able to manage their gross margins, and ultimately that is what is continuing to underpin what they have been able to do at their operating margin level.

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(Wakatsuki) Enomoto-san, you asked about the first half of 56.9 million and the difference of 23.1 million. That was your question. I would like to verify because I am sorry, I cannot answer to you right away. If I can get the answer, I will respond to you within this meeting if possible.

• Questions by Yoshihiro Azuma, Jeffries (Japan) Limited

Q1 In the past six or seven years, what was the CAGR of Cromology?

A1 (Houlihan) Over the last number of years, Cromology's revenue the last few years has been somewhat flat. It has been growing modestly, but the main thing that has driven up the margins in Cromology's business has been managing the gross margins, and then through inefficiency in productivity, managing the fixed cost base to improve the margins.

In the first half of 2020, Cromology's revenue was significantly affected with a big decline because of COVID-19 restrictions and stores were shut, but then their stores reopened in the second half of 2020 and that delivered a very strong result. Then, the revenue this year is now back on track with a consistent performance with positive growth momentum in the top line. But to your broader question, it really was in the first instance, managing the gross margins and the fixed cost leverage to get the operating margin overall in the right shape to go forward.

Q2 I would like to confirm the market share of Cromology

A2 (Houlihan) The current market share of Cromology in France is 14% of a 1.6 billion-euro market. The top three players make up close to half of the market, but it is fragmented and it has got scope for growth.

Q3 Regarding DuluxGroup's market share, you mentioned a market share of 33% to 50%. That is when to when? The market share is 50% now. The 33% is when?

A3 (Houlihan) Dulux Australia had 33% market share in 2005. In 2010, it had 40%. These days, it has 50%. So, it is growing about one point of share a year by pulling those levers I spoke about earlier.

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