Q&A at Analyst's Meeting (Mar. 2, 2015)

The reason operating income was low in fiscal 2011 was a surge in the price of coffee beans, which returned to normal levels from fiscal 2012. We will redo the forecast of operating results for the next three years based on AGF's medium-term management plan for fiscal 2015 to 2017, adding in the synergy effect from becoming a wholly owned subsidiary of Ajinomoto Co. Operating income for fiscal 2014 after payment of commissions to Ajinomoto Co. is likely to be approximately JPY 4.0 billion. Ajinomoto Co. and AGF are both in the process of preparing their forecasts of results for fiscal 2015. The price of coffee beans rose last year and has just stabilized. To mitigate the impact of fluctuations in the price of coffee beans, we are conducting various measures to lower the ratio of coffee bean use. For example, because 3 in 1 stick-type products contain dairy creamer and sugar, although the volume of coffee beans used increases when sales rise, the ratio of use decreases. Based on such factors, we can plan on an increase in income in fiscal 2015. Moreover, we intend to draw up a plan for fiscal 2020 targeting a 40 or 50 percent increase in net sales compared with the current level of around JPY 100 billion.

Even with this acquisition, there will be no change in the shareholder returns policy in the FY2014-2016 Medium-Term Management Plan of an average total return of 50% during the 3-year period and a payout ratio of 30% each year.

Our fiscal year ends on March 31, so it is not over yet, but some growth in sales is likely. That amount includes some intentional cutbacks in sales. We have reduced the proportion of sales of unprofitable liquid coffee, but overall we will probably make our target.

We did not incorporate any effects from synergy in the stock acquisition price, so we will be examining that fully. Rather than top-line synergy, I think the first synergy to materialize will be the ability to strengthen product appeal. Ajinomoto Co. has “kokumi” substances for a rich, full-bodied taste that we discovered in-house, developed the manufacturing technology for, and are rolling out worldwide. Among their various effects, they particularly enhance the umami component of milk, fats and oils, and we have already started using them in Birdy® 3 in 1 in Thailand. Through these and other methods, we will generate synergy to raise product quality with Ajinomoto's aroma, umami and kokumi technologies. AGF has also developed manufacturing technology to raise the quality of coffee beans, and we expect synergy from using this technology in Ajinomoto products. We are also considering other measures.

At some point in the future, we may have the option to acquire trademark rights and stop paying royalties to Mondelēz. Factoring in the additional synergy effect in that event, the operating profit margin may not reach 10%, but it will likely be fairly close.

A team of experts at Ajinomoto Co. is currently considering this issue, so I am unable to provide figures at this time. I can only tell you that such figures have not been incorporated in this stock acquisition. Our FY2014-2016 Medium-Term Management Plan designates sales of powdered beverages in the “Five Stars” countries as a category of substantial growth. We expect AGF to contribute in this category.

AGF pays royalties to Mondelēz. That will continue under the contract. If we have the option of acquiring the trademark rights, these payments would cease. In addition, AGF is revising its product portfolio. Bottled liquid coffee accounts for a large portion of AGF's net sales. Sales are high but discounts are also high, making this an unprofitable category. Changing these conditions will raise the operating profit margin. Recently AGF has been developing new technologies for more efficient use of coffee beans, which is likely to be factor that will raise both the gross profit margin and the operating profit margin.

The reason AGF will continue to pay royalties to Mondelēz is because the trademark rights will be assumed by a joint venture owned 49% by Mondelēz and 51% by D.E. Master Blenders 1753 B.V. AGF will pay royalties to Mondelēz for technologies and trademarks, and a commission to Ajinomoto Co. for management guidance.

We are carrying out various measures for restaurant and institutional-use sales to ensure that we achieve the necessary operating profit margin.

Continuing stable growth in Japan is essential. Admittedly, profit levels change as a result of the coffee bean market, but AGF's earnings structure has stabilized overall since the launch of stick-type coffee products in 2002. Competition is intense in the instant coffee market, but AGF is predominant in the stick-type coffee market. AGF has a considerable lead in dealing with the shift to individual servings, an industry sector where growth is forecast. AGF holds the top share in the retail coffee market, including gifts, on a value basis. We want to achieve stable growth centered on stick-type products, a category where we expect future growth.

Knowing the strength of regional characteristics for food products and beverages, Ajinomoto Co. develops and sells products rooted in the tastes of each country. Products that are accepted locally, such as Birdy® in Thailand, can succeed overwhelmingly in competition. We conduct business with the same approach for powdered beverages such as Birdy® 3 in 1. I believe we can create a strong lineup from these product lines using AGF's technologies and Ajinomoto Co.'s aroma and taste technologies. This will in turn strengthen the overall profit structure. We are already conducting similar measures in the field of seasonings and succeeding in competition, among other results. We will give overwhelming strength to each product, one by one. I can't give specifics, but we are able to localize the products we sell in Japan for each country overseas. Moreover, using the same technologies overseas that we use in Japan will give us a stronger product lineup. Specifically, we develop kokumi substances, which are specialty ingredients we do not sell to external customers, using them for the sole purpose of increasing the added value of Ajinomoto Co. products. We will also use AGF's original technologies in Ajinomoto Co. products.
(Q: What technologies does AGF have for powdered beverages unrelated to coffee?) AGF has technologies for making the products it already sells in the tea and cocoa categories.

Just looking at the coffee market, there are numerous fields, including restaurant and institutional-use and convenience store at-the-counter fresh-brewed coffee. In the retail market, there is the traditional field of coffee in a jar. These fields are the markets Ajinomoto Co. is targeting, and we aim to replace products in these markets with stick-type products. We have no figures on how much of the existing markets we can capture, but we can aim for a sizeable share, based on the structural changes in the Japanese food products industry.

As for the difficulty of visualizing synergies between Ajinomoto Co. businesses and AGF, there's not much difference from the manufacturing technology for soup, in the sense of putting powder in packets. The two companies will likely be able to generate synergies in technology.

(Q: What is the current size of the retail coffee market?) The market for instant coffee in jars is estimated to be about JPY 100 billion. The overall coffee market is about JPY 500 billion, and the composition of the market is changing.

(Q: Does the overall coffee market of JPY 500 billion include canned coffee?) No. It consists of instant coffee including stick-type, chilled cup-type, gift sets and drip packs. It is a highly subdivided market. You should picture products other than traditional instant coffee in a jar.

(Q: What proportion of AGF's net sales of JPY 144.8 billion is accounted for by stick-type products?) We do not disclose a breakdown of net sales by product type.

(Q: Is it correct to assume that latent demand is in the order of several hundred million yen in the markets Ajinomoto Co. is targeting?) Yes. However, there are other markets as well, such as restaurant and institutional-use, so the total is not easy to calculate.

(Q: Will Ajinomoto Co. be able to capture this large-scale demand with its original technologies such as kokumi substances?)Yes. However, I think it is not just the kokumi technology, but also the new stick-type format itself that will capture demand.

With consumer needs for convenient and easy-to-use individual servings, sales of instant products have been growing in the green tea market year by year. The traditional method of making green tea requires disposing of the tea leaves, which is troublesome, and consumer needs have been moving toward greater convenience. The basic idea is that this segmentation of needs happens in markets for coffee and other beverages. For example, AGF holds the number-two share in the cocoa market. Rather than making it the old-fashioned way in a pot, easy-to-prepare powder has led to expansion of sales. Soup is also traditionally made in a pot for multiple servings, but now individual-serving cup soups are the mainstream.

(Q: What companies are your competitors for stick-type products?) There are companies that are our direct competitors for stick-type products, and there are also many competitors in the fields where we will expand by replacing other products with stick-type products. 

Considering the results of fiscal 2013 , from fiscal 2015 we expect an increase of JPY 3.2 billion in operating income, which will also increase net income. However, because half of AGF'S net income was previously consolidated as income from an equity-method investment, you should picture a net increase of half of AGF's net income from fiscal 2015.

We expect goodwill and intangible assets of around JPY 36 billion. We have not determined the amortization period. We will be conducting an examination to divide up goodwill and intangible assets.
(Q: Although you have not determined the amount of goodwill or its amortization period, will there be a positive effect on fiscal 2015 operating income, even taking amortization of goodwill into account?) Yes.

We do not disclose net sales by product. We will consider how to present this information in a more helpful format in the future.

We do not disclose sales by country, but they are growing year by year.
(Q: Is it correct to assume that Thailand accounts for nearly 90%?) No, not that much.