Nippon Paint Holdings Co Ltd

TSE:4612

Earnings Call Analysis

Strong Q3 Results; Confident Outlook Despite Macroeconomic Challenges

This quarter's earnings reveal a company that attributes its 10% growth to a diversified portfolio and strategic cost management, which led to a total profit margin improvement. Major strides were made in China, with notable market share increase and revenue growth, underpinned by operational leverage and expansion in untapped Tier 3 to 6 cities. The performance in Europe also painted a positive picture. However, the company remains cautious about economic forecasts, stating that increased material costs (RMCC) and foreign exchange fluctuations remain a concern. For the fourth quarter and into the next fiscal year, the company plans to build on its top and bottom line with a targeted EPS growth through acquisitions, persisting in its strategic vision and capitalizing on its business strength.

Overview and Strategic Focus

Amid a challenging market environment, especially concerning macroeconomic conditions, the company has managed to deliver promising results during the third quarter, showing resilience and adaptability. This performance has been underpinned by effective cost management and strategic price increases across various segments. As the company navigates through volatile raw material costs and shifting market dynamics, it has not resorted to broad price reductions but has instead selectively adjusted pricing where necessary while maintaining a positive revenue mix critical for profitability.

Regional Performance and Growth Prospects

Performance across different regions has varied, with Japan and Turkey providing positive surprise and good contributions to revenue, partly due to price increases and production recovery in specific sectors. The European market is challenging, but the company is seeing an improved market share, and there's a cautious optimism about the France market potentially bottoming out soon. Southeast Asia generally portrays slight upside in profitability, with individual country performance such as in Malaysia being notable, while there have been challenges in countries like Vietnam.

China Market Dynamics and Competitive Positioning

China remains a critical market with dynamic shifts impacting the company's business. There's a strategic shift towards the TUC segment from the TUB segment, which is experiencing a decline. However, the TUC franchise value remains robust due to market growth, despite the economic slowdown. The company has been targeting market share expansion in smaller Tier 3 to 6 cities, an area previously overlooked, but now deemed to have potential to contribute to growth. Nevertheless, caution is exercised due to ongoing economic uncertainties.

Financial Future and Investor Relations

Looking ahead, there is an intention to grow both the top line and bottom line, with aims to elevate earnings per share (EPS) through strategic mergers and acquisitions (M&A). Guidance remains positive, with targets set higher than the current trajectory. The upcoming fourth quarter poses both risks and opportunities, with the company hoping for a JPY 10 billion uptick in performance, thereby overcoming prior year setbacks to end the fiscal year on a stronger note.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you very much for waiting. We will now start Nippon Paint Holdings Company Limited Conference Call on FY 2023 Third Quarter Financial Results. [Operator Instructions] We have Japanese-English simultaneous interpretation.Wakatsuki-san, Tanaka-san, the floor is yours.

[Yuichiro Wakatsuki, executive]

Thank you. Hello, everyone. I am Wakatsuki Co-President of NPHD. Thank you very much for taking time out of your busy schedule to join us today. I would now like to present an overview of the FY 2023 third quarter financial results and the revisions to the full year guidance.First is today's summary. On a Tanshin basis, revenue was JPY 393 billion up 9.8% year-on-year and operating profit was JPY 47.9 billion up 20.5% year-on-year, continuing a significant increase in both revenue and profit.Positive factors for revenue were the volume and price/mix, paints, adjacencies business and new consolidations, while exchange rate was slightly negative year-on-year, partly due to the depreciation of the Turkish lira.In terms of profit, gross profit margin also improved by 2.7 percentage points year-on-year due to the continued easing of the impact of raw material prices and the price flow-through in addition to the effect of higher revenue.OP margin also improved to 12.2% up by 1.1 percentage points year-on-year, including one-off gains. The results continue to be very strong in the difficult macroenvironment, which can be attributed to the company's high market share and brand strength.On a non-GAAP basis, existing business increased revenue by 10.2% and operating profit by 34.1%. As for decorative business in China, TUC revenue grew by 10%, TUB revenue dropped by 17% and overall profit margin in China was 13.2%, up 1.1 percentage points year-on-year. While there were some positive effects such as SG&A cost control, the company showed great strength even in severe demand environment.Next Page 4, please. Following August we revised our full year guidance upward. No change in revenue which is still expected to increase by 10.8% year-on-year. And operating profit guidance is revised upward to JPY 168 billion up by JPY 10 billion, an increase of 50.2% year-on-year.Revenue guidance remained unchanged, but the FX impact and the variance among regions resulted in a level of revenue that is almost in line with our expectations. As for operating profit, please consider that the improvement in business is at the level of JPY 8 billion and FX impact is roughly at the level of JPY 2 billion.With only a few months remaining in FY 2023, I do not expect any major changes in the final numbers this year, but the fourth quarter generally has lower demand, while economic trends, FX and hyperinflation accounting in Turkey are variable factors. At the same time, we will aim to achieve steady profit levels through firm cost control. We also revised our EPS upward and our annual dividend guidance was increased by JPY 1 to JPY 14, an increase of JPY 3 year-on-year.Please skip Page 5 and Page 6 and turn to Page 7. This is an overview of the major segments. I will go into detail as needed in the Q&A session, but we'll briefly comment on each region.So please look at Page 15 detail as you listen to me. As for Japan, the price and volume of automotive and marine continued to improve, while decorative and industrial business are offsetting the volume drop by price increase. Operating profit margin was 9.1%, also a significant improvement compared to 3.8% in the same period last year.In China, we continue to see growth in TUC in all regions, especially in Tier 3 to 6 cities. The mix is deteriorating due to strong growth in economy products. But basically, TUC is a more profitable than TUB and industrial coatings and strong profit is generated, coupled with operating leverage.The level of credit loss provision recognized for FY 2023 is approximately 1.5% of overall China sales. As we answered in the Q&A session for the second quarter results briefing, this is included in both Tanshin and non-GAAP basis.Second quarter provision level was roughly 2% of overall China sales. So the provision is expected to decrease from there and further decline towards fourth quarter to around 1%, which is also an approximate figure and a further decrease in FY 2024.In Asia, except China, both revenue and operating profit continued to grow steadily. In Turkey, the growth on a local currency basis is due to the effect of price increases in response to inflation and profit margin improved significantly year-on-year to around 11% after applying hyperinflationary accounting due in part to an improvement in RMCC ratio. Indonesia continues to see revenue growth of 6.2 percentage points and profit margin of over 30%.In DGL, the main segment Pacific, achieved growth of about 7% due to the penetration of the effect of price hikes, although the volume remained flat due to poor market conditions. In Europe, both Cromology and JUB increased sales by compensating for volume declines through price increases. And in JUB, although ETICS volume declined, total profit margins improved considerably.Starting the third quarter, DuluxGroup will be classified into 2 segments, Pacific and Europe with Cromology, JUB, NPT, which we completed acquisition recently and other European operations being disclosed as one segment in Europe.In the Americas, the AWU strike affected the big 3's production volume and our revenue dependence is not high. So overall, automotive business continues to recover. On the other hand, decorative business continued to be affected by the slowdown in the housing market with volume declines outweighing price increases, resulting in a slight decrease in revenue. However, profit level is almost the same as the previous year.On Page 8, here are the major topics. We have issued our 2023 integrated report at the end of September. As always, we have put so much effort into this year's report, and we consider it as an important tool for our dialogue with the investors, so please take a moment to read it.On Page 9. I would like to provide some additional information on the acquisition of a leading manufacturer of coatings and dry-mix mortars in Kazakhstan, which was announced yesterday morning. We have been in Kazakhstan for some time through Betek Boya in Turkey, but it is basically a distribution company, and we have been exploring the possibility of local operations with the aim of achieving local production for local consumption.The acquisition opportunity has come. And after much deliberation, led by the team at NIPSEA, we have successfully concluded the acquisition agreement. The combination of a very talented team, excellent brand and our group's know-how will make a positive contribution to EPS from the first year.And we are excited about this promising investment as urbanization, including the premiumization of coatings progress. The closing is expected to be in the first half of next year after we will have obtained the antitrust approval.Moving on to Page 10. This is also a supplementary information. As you can see here, Kazakhstan has around 20 million population and the CC market is steadily growing. And we are very happy to welcome the #1 brand company to the Nippon Paint Group. And with NIPSEA and Betek, a winning team of our group in Asia, we will be able to further develop the company's advantages while eliminating unnecessary interference.Finally, I would like to make a supplementary comment on the earnings forecast. Please refer to Page 25. Again, the fourth quarter figures, which are calculated by subtracting the third quarter cumulative results from the new full year forecast are included for your reference only.As I mentioned earlier, the fourth quarter is a time of declining demand and the economic environment is not favorable, but we expect growth of about 10% year-on-year and an OP margin of about 10%, an improvement of 0.9 points from the previous year.The amount of operating profit takes into account approximately JPY 1 billion expenses related to the flooding in DGL, which should be considered as an offset to the insurance income received in the first half. It also takes into account approximately JPY 1 billion or approximately 1% of sales in China related provisions, as well as an inflationary accounting impact in Turkey in the fourth quarter, et cetera.Nonetheless, as I said in the beginning, these are subject to possible change depending on the developments of the market FX and inflationary accounting. We would appreciate your understanding.Once again, the figures for the third quarter as well as the upward revision of the guidance are the fruit of seamless effort made by each region, and they demonstrate the robustness of the group. We continue to be healthily cautious. And while continuously exploring possibilities of M&A, we will strive to accumulate EPS.That concludes my presentation, and I would now like to take your questions. Thank you for your kind attention.

[Operator]

[Operator Instructions] First, from the Japanese channel. First questioner is Goldman Sachs. Ikeda-san?

[Atsushi Ikeda, analyst]

This is Ikeda from Goldman Sachs. My question is on China. You enjoy high profit and the credit loss provision was JPY 2 billion. Third quarter operating profit, I think, is up to 15% now. Do you see profitability -- high profitability was a contributor, and you control the SG&A. That was also a factor.Compared to second quarter and last year, your profitability margin is improving. So, a big business environment and the improvement in the profitability. How did you achieve this Tier 3 TUC, was there a deterioration in mix and the SG&A control. Will this have an impact on the growth of top line next year?

[Yuichiro Wakatsuki, executive]

Thank you, Ikeda-san. So about 1.5 percentage points I mentioned. So it's a little short of JPY 2 billion, but roughly that is about approximately the number. But even then, 1.5% of JPY 135.7 million maybe is slightly lower than what you said. TUC, TUB mix and TUC grew and TUB declined. So this is a factor.And in TUC, roughly speaking, we are including -- seeing volume and price/mix is slightly negative. And therefore -- but we do not disclose TUC profitability, but overall mix, TUC growth, which I've been mentioning in the past, TUC is growing, and we are committed to TUC growth and that is leading to 10% growth and the total profit margin improved.Now the control of SG&A in the second quarter, as you remember, including the provision 9.4%, you said was quite low. And it's 2 percentage points. So if we calculate backwards, it was actually 11.4%. So compared to that, we needed to strengthen our cost control, we thought.So our China team, and I repeat this, but we increased market share. We don't want to enter in the red ocean. We want to increase our market share and revenue on a year-on-year basis and increase our profitability, profit as well. And so in totality, we increased in second quarter.We have a stronger mindset, and I think that third quarter reflected our strong determination. Overall, the current mix in Tier 3 to 6 cities, this was an untapped territory for us. So we had not addressed this area, but now we have a good structure to grow rapidly, and we're growing sales distribution network. So that is why the number is growing and the operating leverage, too.The Tier 0, Tier 1, Tier 2 cities are also growing, but it's more economy than premium. Economy product is growing more, selling more. Given the current economic circumstances the Chinese general public spending is slightly weak. But even then, even if premium does not sell, economy items sell and we sell more than our competitors. And the smaller ones will be shaken out -- smaller competitors. So we are trying to achieve both profit and growth.The economic situation, we cannot be optimistic. But in the fourth quarter, last year fourth quarter was difficult. And therefore, on a year-on-year basis, we want to achieve good performance, and I'm sure our people will do a good job. So, overall macroeconomic circumstances, paint is one of the consumables, and so as you see in the heat map, it is basically flat. In that, we have to increase our market share and profit.And the SG&A control, therefore will not have a big impact next year. That's not kind of brand power we have. So we will do what we need to do and reduce where we don't need to spend SG&A. And in the end, we want to achieve both profitability and growth, and that remains unchanged. Thank you. I hope this answers your question.

[Atsushi Ikeda, analyst]

If possible, so second quarter to second quarter, raw material, RMCC and the unit price trend, I understand. So on a Y-o-Y -- year-on-year basis, it's quite decline. So you reduced prices and promoted and expanded sales? And is this running a whole running course -- running its course or...

[Yuichiro Wakatsuki, executive]

Thank you for the question. Price cut is-- in some mid-zone parts, we are cutting our prices. We're not reducing prices for the premium. Premium is selling well. So RMCC is slightly positive -- positive factor for us. And so Tier 3 to 6 cities, the mix, some new ones are added, so it's difficult to generalize.But in the economy zone, we're not doing a big discount to stimulate the demand. We are doing this at the right level, appropriate level. And on the other hand, RMCC, aluminum price increase is settling, and so we're enjoying that. And that is the background to our improved margin. There is seasonality.Our third quarter is a big quarter, September. And March is the biggest month in China, but September and July are also big months. So on a quarter-on-quarter basis, we should not look at our performance on a Q-on-Q basis. It has to be year-on-year basis. Y-o-Y trajectory is what I want you to look at because that is more in line with our real business trend.

[Operator]

Next question is BofA Securities, Enomoto-san.

[Takashi Enomoto, analyst]

This is Enomoto speaking from BofA Securities. JPY 10 billion upward revision, out of which JPY 8 billion is coming from business improvement. I would like to ask about the breakdown. So I'm on Page 26 now of the material. And in the earlier slides, Japan, Turkey and China, you mentioned the names of the 3 regions, but the breakdown of JPY 8 billion is not shown. Where are the regions and what are the main factors?Well, it does say that RMCC is improving, but at the same time, top line is also performing well, especially in Japan and Turkey. So I am not really sure if RMCC is the only element. So JPY 8 billion upside, can you please tell us the breakdown between the regions as well as other factors other than RMCC?

[Yuichiro Wakatsuki, executive]

Thank you for your question. I, unfortunately, cannot disclose the details. However, we have considered various scenarios and we have decided to make JPY 10 billion revision and JPY 2 billion is coming from FX. Now of course, there is a positive impact. But on the other hand, we haven't revised the top line. So that means there were negative factors, but there are ups and downs. And the total number is a pretty fairly large JPY 450 billion. And it is something that we can absorb within the size of revenue.And in terms of regions, this is different from our expectation in August guidance. Compared to the August guidance, the second half maybe weak or conservative, we have been suggested by different people. But as of August in the second quarter, when we had the other half of the year remaining. Well, that accounts for a lot actually, and we have to consider various scenarios. So it's not that our expectation was very different from our expectation, but each region made so much effort to perform well.And Japan and Turkey were mentioned in your question. And it's true that in Japan, in terms of revenue, it includes marine products and automotive products. That production recovery have been anticipated to a certain extent, coupled with a price increase. With customers understanding and agreement, we were able to increase the price. These are the positive factors to the revenue.And in terms of profit level improvement, I think these have been the contributors. And as it was mentioned earlier, decorative and industrial, it is difficult volume-wise. But because of the price hike, the total revenue has been maintained, and the RMCC has been maintained. Well, we cannot be optimistic. However, we do have a slight positive factors, including those.In terms of Turkey, it has high volatility. Therefore, we need to anticipate a certain buffer. We have 1 quarter left in the third quarter. And in the third quarter, well, in terms of operating profit basis, I think the situation has started to calm down, but FX, interest rate, these are uncertain situations that we cannot really have full visibility to.And with regards to China, to be honest with you, as I've been saying many times, the economic environment is not necessarily good. In the third quarter, we were still able to produce this level of margin and this revenue growth. And this has given us a better confidence level, even though we're still in a difficult situation.Again, fourth quarter is a quarter where we have the smallest demand. So rather than focusing on quarter-on-quarter, I suggest that we should focus on year-on-year performance and we have better visibility that we can outperform last year's results.And it is within the range of our expectations, but we are performing well in Europe as well. We have a certain price hike as well as the improvement of the market share. The market, overall, is struggling in terms of volume, but especially Cromology, France, maybe the situation is going to bottom out soon and this has not been taken into account to a larger extent. But compared to our expectation, we can anticipate a slight upside.So we have a performance up to the third quarter. So we are revisiting our plan. And if we are too conservative, that will not be liked by the investors. So we agreed on the numbers that we disclosed today. Did I answer your question? Well, I cannot disclose any more details.

[Takashi Enomoto, analyst]

Well, Southeast Asia, it is also mentioned as slightly above in terms of profitability. Can you please give me some more color on that?

[Yuichiro Wakatsuki, executive]

Especially Malaysia is good and Indonesia is steady in a sense. Singapore is not bad. Vietnam is not good, but it only accounts for a small proportion. So I cannot give you one single color. It is marbled, I would say. But overall, well, for this fiscal year, we believe we have slight upside.

[Operator]

Next question is from Mizuho Securities, Yoshida-san.

[Atsushi Yoshida, analyst]

Mizuho Securities, Yoshida. So I have a question on raw material, RMCC impact. So the raw material market, in fourth quarter naphtha price will be JPY 70,000. So from July, September, it will be up by JPY 5,000 to JPY 10,000. So for this high raw material price, will you smoothly pass-through to your product price? And after the New Year, next year, the impact of the raw material, how do you see it? Will you continue your price pass-through or the margin will decline? Margin decline is unavoidable. So the RRMC and the product price spread is my question.

[Yuichiro Wakatsuki, executive]

Thank you for your questions. So naphtha price, it's a yen basis. So when yen is weak, it's negative on us. But on a global basis, our current raw material price trend is not so difficult. It is improving, easing. So overall, especially in the fourth quarter, our raw material cost, RMCC will be flat. Of course, there are differences from region to region, but it will not be overly positive or negative.And overall, sarcastically, China demand is weak, and is now settled. Globally this will have an impact. China's market situation will surely have an impact globally. And we have big coatings capability and as a result, we have the capability to gain the best price globally. And this will be effective.So the spread we hope will -- in Japan, we will increase prices, but the spread as a result, we want to increase spread and also have the right balance with the market share. We need the right balance. But we do not think it will change that dramatically, except for some seasonal fluctuation.

[Atsushi Yoshida, analyst]

From April, June to July, September, the raw material price declined. Is there a user's request to lower your prices? Are there a request?

[Yuichiro Wakatsuki, executive]

Well, globally, of course, we receive requests and for industrial business, especially. In decorative, not much -- the request doesn't come in frequently, does not come in frequently. But industrial business, we have to always compete and also vis-a-vis our clients. But the raw material price is not declining consistently. There are domestic customers and overseas customers. There are various dynamics that come into play.So I would not say we are free from such requests, but we make effort to have their understanding and increase our prices if necessary. So it's not more or less than that. Honestly speaking, price cut is not -- price increase is not easy. And we've gone through a lot of effort to increase our prices. Thanks to our franchise capability, you may think price increase is easy, but it's not. So please understand.

[Operator]

Next question is from CLSA Securities, [ Cho-san ] Zhang.

[Unknown Analyst]

This is [ Cho ] speaking from CLSA Securities. First of all, I would like to ask about China situation around TUB and TUC. Of course, profit improvement has been achieved, and that's good. But compared to the previous guidance, I believe it is revised downward. For example, in the September quarter, the demand situation is improving. I would like to clarify that. And in the December quarter, do you see signs of improvement.And regarding next fiscal year, I think new housing construction has started to weaken since 2 years ago. So the TUB and TUC growth next year may be affected, so that is something I would like to clarify with you.

[Yuichiro Wakatsuki, executive]

Thank you, Cho-san. I think on Page 26, you're referring to Page 26 for China, overall 5% to 10%, that remains unchanged. But in TUC, 20% to 25% range has been changed to 20% and TUB is flattish, but now it is a minus 15% or so. I think these are the numbers you're referring to in your question.And as you pointed out, again, the economic situation is not good. So our paint as consumables are affected. When we only look at TUC, 19% in first quarter, 15% in the second quarter and 10% in third quarter, these are the growth rate. And compared to the previous year it is growing year-on-year, but it is slowing down to a certain extent. But still, it is growing. So I think we are still doing a good job whereas the market is flattish. Therefore, the ability to grow or our franchise value are not deteriorating. But we are affected by the macroeconomic situation. So we cannot be optimistic. We have to stay cautious in that regard.And TUC mix increases consequently because of the underperformance in TUB, and the margin is on an upward trend. About 3 years ago, TUB's project grew and the mix deteriorated continuously. And what is happening right now is the opposite of that. The mix of TUC and TUB is moving in a positive direction and margin improvement is happening as a result. And it is also impacting the operating leverage.And it is not something that necessarily as grows proportionately with the revenue in a certain size. We have to win against the competitors, and we have to have better efficiency in the operation.And regarding next fiscal year, what is going to be the situation? Well this is something we are going to update you in next February. Cho-san also mentioned the housing construction and TUC or TUB repainting opportunities. Well, in the integrated report, we have described the relationship there. Especially in Tier 0, 1 and 2, we have repainting, recoating opportunities and such era is going to arrive soon. So there is a fundamental strong demand because there are a huge number of laws in China.However, we have to face a difficult situation considering the market condition compared to the previous time when the number of projects was growing drastically. Well, in TUB, it accounts for 70% now and we believe there is room for growth. So repainting opportunities in TUB, when it progresses, well, the TUB market share is high single digit. And of course, if the profitability is too low, it's not attractive for us, but we will be able to pursue further upside even in the existing market. That is my personal view. But regarding next year's guidance, we would like to give you an update in February. That's all, thank you.

[Unknown Analyst]

I have my second question. So there was an upward revision in the dividend. What is the policy behind that? So you have a structure difficult to do a buyback. So regarding the dividend, what is going to be the level going forward. And the dividend upward revision, well, I think next year, you will be announcing the new midterm plan.So towards the next midterm management plan, what will be your targets? Well, I'm sure you are not able to talk about many of these things. But you mentioned the repainting opportunities in China, but if there's anything that you can share with us, I would appreciate it.

[Yuichiro Wakatsuki, executive]

Thank you, Cho-san. So payout ratio has been targeted at 30% and EPS is better, so we have revised it to JPY 14. If it is JPY 15, it will be above 30%. So we did go through some consideration here. But in terms of capital usage, we'd like to ensure the total payout ratio, total return, and we will continue to pursue M&A.In India and Kazakhstan, we have announced a couple of opportunities to use the capital. So the basic total payout ratio will be 30%, and we may be increasing that accordingly. And we believe EPS growth or MSV, are going to be our management mission. PER and EPS must be maximized. So when EPS grows 30% level, it will be the basis of the dividend growth that is -- that can be expected, and there is no change in our policy. That's all.

[Unknown Analyst]

One more thing. Next fiscal year, well, you will be announcing the new midterm management plan. But from next fiscal year, so you mentioned the business in India and in the Central Asia, what will be the main drivers of profit growth from next fiscal year? Is there anything that you can share with us?

[Yuichiro Wakatsuki, executive]

Well, I cannot share with you the guidance for the next year. About 10% growth -- approximately 10% growth, this is almost organic. On top of that, we will be having better operating leverage. So we will be able to grow profit faster than the revenue.On top of that, we would have those M&A opportunities. Therefore, from next year onward, EPS, it is JPY 48.97 this year in the guidance, but we will be targeting at something higher. In midterm management plan or in any of our business plan that is something we would definitely target at.So as of today, we are not seeing any drivers -- negative drivers for our revenue. We will be growing the top line as well as the bottom line and through M&A, we will be growing the EPS. That is the basic strategy for next fiscal year. And there is no change. That is all I can share with you at this moment.

[Operator]

Next, Nomura Securities, Okazaki-san.

[Shigeki Okazaki, analyst]

This is Okazaki from Nomura Securities. Congratulations.

[Yuichiro Wakatsuki, executive]

Finally, someone is saying congratulations to me.

[Shigeki Okazaki, analyst]

Yes. That's the only contribution I can make for you. Listening to you, compared to 3 months ago, your tone on China, you seem more reassured compared to 3 months ago. What's the difference in your China business? Do you see any changes?

[Yuichiro Wakatsuki, executive]

Well, to be honest with you, the market condition, macroeconomic views continues to be difficult. So that part does not change. It remains the same. Last time, it was 6 months ago and so, of course, the local site said they will do their best and TUC will grow. We were committed to grow. But there were some cautiousness in our financial results in the market and myself too, there was some cautiousness. Compared to that, despite this difficult situation, we were able to have a good third quarter financial results. We grew our numbers and improved our margin. So I think there was some positive surprise.But as [ Cho-san ] said earlier, it's not that our strategy on China is changing. As I said at the outset we are not trying to dive into a red ocean. We are committed to grow year-on-year and grow our market share. And so margin and bottom line profit, we say that, that is our KPI. We've repeatedly said that. And China is a dynamic market.So 3 years ago, we tried to grow through project, and now we are trying to grow through TUC. But TUC still a blue ocean, small and medium-sized, midsized players are still in a difficult condition. And so we need to take this opportunity to grow now and also grow our profitability. So I have stayed [ unwavered ] on that. And as a result, now the numbers are coming out.Second quarter, including the credit loss provision, it was 11.4% to 11.5%. I did not disclose the provisions, so it was 9.5%. And this may have caused some worries in the market. But now we are trying to improve our disclosure and the actual results are also showing. So maybe the tone of our voice may be brighter -- slightly brighter.

[Shigeki Okazaki, analyst]

So additionally, SKSHU TUC increase in revenue, I think you were lagging behind. But in July, September quarter, you outperformed them. So if you could share with us some factors that led to this outperformance. It may be difficult for you to talk about that, but anything?

[Yuichiro Wakatsuki, executive]

Okazaki-san, to be honest with you, so SKSHU disclosure -- is different from our TUC. So it's not an apple-to-apple comparison. So the feeling that we have locally is that they are a harsh competitor, strong competitor. And it's not that we are overwhelming them or being overwhelmed. We are trying to focus on gaining market share. But the base number, TUC or DIY has higher numbers base numbers. And so maybe there's a difference in how the numbers appear.And furthermore, in premium, our main competitors are Akzo. So in the economy products and the Tier 3 to 6 cities competition and the metropolitan large cities competition is different. But like you see in the heat map, we are increasing our share in the flat market. This is only our estimate, but that is how we see it.

[Shigeki Okazaki, analyst]

And just briefly, so you said that you were able to gain business in the Tier 3 to 6 cities?

[Yuichiro Wakatsuki, executive]

Sorry?

[Shigeki Okazaki, analyst]

Tier 3 to 6 cities?

[Yuichiro Wakatsuki, executive]

We were not focusing on them 2 years ago. We were more focusing on Tier 0, 1 and 2. That was our main battlefield. But now we think there is ample opportunity in Tier 3 to 6. And in terms of mobilizing our sales force. In the past, we did not think it makes sense in those other cities, but now we think it makes sense.So from last year, I started talking about Tier 3 to 6 cities, because the project is now becoming visible. But in overall, Tier 3 to 6 account for 20% of TUC. So of course, the Tier 0, 1, 2 are the main. So what I mean by new is new in the past few years.

[Shigeki Okazaki, analyst]

And my last question. TUC -- so your revenue is growing by 20%. Q1 is 19%, 15% and 10% in Q2, Q3, respectively. So Q4, will it grow by 30% because volume is small or? A year ago, only 4% growth because of lockdown on a year-on-year basis. But even then, it seems strong. So any probable estimate?

[Yuichiro Wakatsuki, executive]

Yes. We're having the exact same discussion. Fourth quarter, as you rightly said, last year dropped. Decorative was negative. And on a local currency basis, we have hardly ever had a negative or decline on a year-on-year basis. And so we want to expect for a rebound and dealers are doing their last minute, last effort to build up the numbers, so we might expect on them. It is a challenging target, I know. But taking all this into account, we want to increase JPY 10 billion up. So please take a look at our fourth quarter. Please look forward.

[Operator]

Next, we would like to take questions from the English line. [Operator Instructions] It seems now there are no questions from the English line. We would like to once again take questions from the Japanese line. [Operator Instructions]Mizuho Securities, Yoshida-san, please go ahead.

[Atsushi Yoshida, analyst]

This is Yoshida speaking from Mizuho Securities. There is one thing I would like to clarify on P&L financial expenses. In the third quarter, it is JPY 6.1 billion. It has been around JPY 3 billion, but it has increased by almost double. What has been the driver? And moving forward, is this something that will continue on a quarterly basis, JPY 6 billion? Well, would you like to clarify if there is an impact from the interest rate hike?

[Yuichiro Wakatsuki, executive]

Yoshida-san, please give us a moment. Yoshida-san, thank you for waiting. This is a hyperinflationary accounting in Turkey. It has an impact on the bottom line. This is an impact from the foreign exchange. From the fourth quarter onwards, you asked if this JPY 6 billion level will continue. Well, we will never know unless we close that quarter. But we are not expecting this to be something constant.

[Operator]

We do not see any other questions, so we will close this Q&A session. So Wakatsuki-san, please?

[Yuichiro Wakatsuki, executive]

Thank you very much. So once again, the third quarter numbers were good. And in many sense, our business strength is reassuring, and I'm more confident about the strength of our business now.From fourth quarter onwards, the economy is still unforeseeable. But despite that, we will leverage on the business, the fundamental business strength and the fundamental demand and the brand and the talent, the human resource. We believe this is our strength, and so we will leverage that and continue listening to your insight and move forward.After this, we will have small meetings. And in many other occasions, we want to listen to our investors' voices and have active IR activity. So I ask you for your support. Thank you very much. That's all for me.

[Operator]

With that, we will close Nippon Paint Holdings FY 2023 third quarter financial results conference call.Thank you very much again for your attendance despite your busy schedule. Please discontinue your phone call.[Statements in English on this transcript were spoken by an interpreter present on the live call.]