Q&A at Analyst's Meeting (Sep. 11, 2014)

In 2012 (January to December), the reason was a factory fire that caused a temporary drop in supply capability. In 2013 (January to December), the main reason was the end of transactions with a major food service customer. The operating profit margin for sales to food service customers, which require numerous private label products, is low compared with Windsor's overall operating income, so I believe ending these sales to raise the margin was a positive move. It had a negative impact on net sales, but did not affect operating income.

Windsor's Tai Pei and Ling Ling brands are classified as Asian food, but Ajinomoto views them as Chinese. On the other hand, Ajinomoto's products are Japanese food, and although both companies sell gyoza (pot stickers), they are completely different products. Ajinomoto's gyoza is referred to as Japanese-style. Likewise, yakisoba (chow mein) can also be considered Chinese, but Ajinomoto's yakisoba is Japanese-style. In this way, we will use the Ajinomoto brand when we expand Japanese food. Our brand strategy is to make a clear demarcation in our initiatives. Our view is that Asian food and Japanese food are different. Ramen is also Japanese food.

Ajinomoto's products are clearly differentiated, using the name Tokyo, among other methods. In the United States, the number of people who confuse Japanese and Chinese food is steadily decreasing, so cannibalism is unlikely.

One method of growing our share will be to expand sales of products we make in Portland throughout the United States. This should provide us with substantial back-up. Another will be to apply Ajinomoto's technologies for production, seasoning and improving product quality to existing Windsor products to make them even better. We will be able to expand our share with these measures. We can achieve the top share in fields that are clearly segmented as Japanese and Asian foods. 

The operating profit margin for Ajinomoto's existing frozen food business in North America is around 10%, and I want to raise it higher. In the future, we will aim for an operating profit margin of 10% for our overall operations including Windsor. Currently, Windsor's operating profit margin is at the same level as Ajinomoto's frozen food business in Japan at about half of our target. The reason is clear: Among Windsor's products, the operating profit margin for Asian food is about the same as in Ajinomoto's existing business, but some products have a low profit margin, such as private label products produced exclusively for some specific food service customers. Consequently, we will need to streamline the product portfolio. By doing so, we can improve the profit margin significantly. Another factor is productivity, and there is substantial room to improve efficiency by deploying Ajinomoto's production technologies at Windsor's factories. I know that introducing Ajinomoto's technologies will put Windsor in a better position. With these measures, we expect net sales to decrease slightly in 2015, but after that we plan to gradually improve the operating profit margin to 10%, and we are very likely to reach it.

The decrease in private label products for food service customers in 2015 only relates to the idea of streamlining the product portfolio.
Measures to improve the operating profit margin will start in 2015, so the contribution from the improvement will only affect half of the year. The improvement will be more apparent in 2016.

For Windsor's existing business, we expect net sales to decrease temporarily in 2015, but to grow at an average rate of around 4-5% annually until 2020. For Ajinomoto's existing business, we forecast growth of about 7% each year. Combined, we expect average growth of about 5-6%. We haven't calculated in detail how much synergy will add to this, but with the expansion of sales channels, I think we have to show a synergy effect of 2-3%.
However, Please note that the 7% growth forecast for Ajinomoto's existing business is the minimum, taking into account its past growth rate. Combined with the synergy effect, we forecast further growth in the future.

In principle, Windsor does not disclose its financial information, but it undergoes accounting audits. Moreover, the company has received ratings, and our impression is that a control system was in place from the start, to a certain extent. Of course, we are having accounting, tax, legal and other experts perform due diligence before signing the acquisition agreement, and we are not aware of any major risks. However, Windsor has seven factories throughout the United States and a history of diversification through repeated mergers and acquisitions. As a result, it has a fair amount of intangible assets. Because the acquisition will incur goodwill, we will conduct thorough purchase price allocation through an audit.
Regarding the quality of the work force, Ajinomoto's experts checked on Windsor and found it sound. As far as we can tell, there are no problems with the quality of the work force.

After the closing, we will conduct an audit to determine the market valuation of the intangible assets, the goodwill and their amortization periods, so I can't make any definite comment at this time. We have estimated the impact on results based on certain assumptions, and we think Windsor will make a positive contribution, even taking amortization of goodwill into account. A detailed estimate will be incorporated into our forecast of results for fiscal 2015.

In Ajinomoto's current frozen food business in North America, the proportion is approximately 30% B2B and 70% B2C. For Windsor, B2B and B2C are approximately 50% each.

Our FY2014-2016 Medium-Term Management Plan targets of a total return to shareholders of about 50% and a payout ratio of 30% are not changed by this acquisition. There will also be no change in our basic M&A policy. We will consider acquisitions necessary for our original objective of being a global food company. We are also interested in the field of R&D, including flavor, and we will continue to consider M&A in that field.

We have established a strategy for conducting M&A in order to make our current ideas a reality. We don't just decide on possible acquisitions as they are introduced to us. We don't make hasty decisions; we take a year or more to develop plans and identify target companies. In addition, one lesson we have learned from our purchase of Amoy Foods is that the management team is extremely important. In the case of Althea Technologies, Inc., which Ajinomoto acquired through a stock purchase announced in 2013, we have been involved in management from the start, and things are going very smoothly now because the company has taken on the necessary form. A thorough evaluation of the management system is essential. Secure retention of management is also important. Amoy Foods was under the sole control of its president, who was no longer involved in management after the acquisition. Now, we have been taking a careful look at the management systems of the companies we acquire, which is a major difference from previous acquisitions.

Capacity utilization and yield at Windsor's factories are significantly below Ajinomoto's, and we will work on improving them as a short-term initiative. Then, with Windsor's seven factories and Ajinomoto's one factory, we will have a total of eight factories, and we will work urgently to reallocate production based on improving the product portfolio. Regarding synergy in sales, Ajinomoto is weak in B2B, so how we configure sales will be important. In distributing products nationwide from these eight factories, the deciding factor will be how large we can make the Japanese food category within Asian/Ethnic food. Also, although it won't have a major impact, the integration of the general and administrative expenses of Ajinomoto North America and Windsor is not reflected in the current targets for fiscal 2016, but it is likely to have a positive effect in the future.

Our aim for an operating profit margin of around 10% is not for fiscal 2020, but at an earlier stage.

The B2B business also generates operating income. Moreover, Windsor's current operating profit margin for Asian food is high even compared with the rest of the B2C business. Figuring out how to reconcile these two elements, plus Ajinomoto's operating margin for Japanese food, is likely to take until fiscal 2015. In the United States, the B2B market and the Asian food market within the B2C category are growing. Under these circumstances, how we will change these three product portfolios is a crucial point.

B2B is not one single product group. There are Windsor brand B2B products and private label B2B products exclusively for single customers. We will end sales of some private label B2B products for which profitability is comparatively low. We are not thinking of ending all B2B sales.

That information cannot be disclosed. Ajinomoto's understanding is that most North American frozen food companies have an operating profit margin of 10% or more. With the consolidation of the frozen food business that is in progress, the operating profit margin is rising, including in Europe. However, it is about two-thirds that of shelf stable products. You could say that frozen food products overall have a low margin.

The first reason is that the unit price of Ajinomoto's Japanese-style gyoza in North America is nearly 1.2 times that of competing products, and the unit price is nearly 1.8 times at supermarkets in North America catering to Japanese customers. The second is that Ajinomoto's frozen food business has a history of developing relationships with each of its customers from scratch, and the high sales per customer result in a high operating profit margin. How we roll out this framework at Windsor will determine whether we achieve an operating profit margin of 10% on net sales of approximately ¥90 billion in fiscal 2016.

It is true that we are promoting a shift to retail in the umami seasonings for processed food manufacturers business. However, how we can contribute to deliciousness in the recipes and other areas of Windsor products worth some ¥70 billion is yet to be considered, so we have not made a provisional estimate of the proportion of retail in umami seasonings at this time.

Almost none.

Frozen food in North America is an approximately ¥4 trillion market. Frozen food consumption there is an order of magnitude greater than in Japan. Purchasing habits are generally different, with Americans shopping once every two or three days. There is no comparison in consumers' acceptance of frozen food. On the other hand, Internet shopping is on the rise, but I don't believe the change has been that rapid for food shopping. The Japanese and Asian foods that Ajinomoto handles are in a sense specialty products that can be sold at a higher price. Highly receptive consumers are taking the lead in purchasing. Ajinomoto's products are healthy and high quality, but unfortunately the North American frozen food market itself is not considered to be particularly high quality. However, Ajinomoto is at the stage of creating a category of delicious, high-quality Asian and Japanese foods and has reached sales of approximately ¥13.5 billion. This category is different from Internet shopping, and sales should grow in the future.

Windsor's Mexican products have a high operating profit margin, second to their Asian food, but we are not satisfied with that level. We will improve the products by introducing Ajinomoto's production technology. We also want Ajinomoto to grow in the Mexican food market, which is about ¥150 billion and still growing.

Currently, Ajinomoto's frozen food business in Europe mainly handles gyoza imported from Thailand, and we have just started OEM production of gyoza in Poland, so we are on the lookout for opportunities. We would like to build an operating structure that lets us conduct mainstream sales, so we are recruiting the top-level personnel we need, among other measures. We are thinking about how to sell to supermarkets in the retail sector in the future.

We plan to gradually generate synergy in production from the initial fiscal year. As for synergy in Japanese food sales, Ajinomoto's Portland factory is currently operating at full capacity, so we won't be able to start nationwide sales right away. Assuming preparations take around a year to 18 months, synergy will probably start in fiscal 2016 or thereafter.

We would be satisfied with an operating profit margin of around 10%, and we plan to aim for that, although it may be one or two points lower depending on how long it takes to generate a synergy effect.

There will be no change in our policy on shareholder returns, which targets a payout ratio of 30% and a total return to shareholders of about 50%, as stated in our FY2014-2016 Medium-Term Management Plan. We will look at factors such as fiscal 2014 results in deciding on a share repurchase.

First we will look at our fiscal 2014 results, then we will consider it. With targets of a payout ratio of 30% and a total return to shareholders of about 50%, that leaves around 20% in share repurchases, but we never claimed that we would conduct repurchases each year. Rather, those are targets for the three-year period. Consequently, we will decide after taking fiscal 2014 results into consideration.

Asian food accounts for approximately 30% of Windsor's sales, and B2C accounts for about half of that at 15%. Italian and Mexican foods account for about 70%. Sales of Asian food have grown approximately 5% over the past three to five years, while Mexican food has increased slightly and Italian food has decreased somewhat.