Q&A at Analyst's Meeting (Feb.21, 2017)

For starters, we are focusing our animal nutrition business on specialty products, which we believe will change the business’ profit structure to one solely dependent on specialty products. Profits from commodity products are not included in our plan.
Next, the FY2019 target includes business profit growth at all segments. At the Japan Food Products segment, we expect frozen foods and coffee products to each account for more than 30% of the growth in segment profit, with another 20% coming from integrated food solutions and about 10% from home use seasonings and processed foods. Our profit forecast for coffee products includes the impact of our acquisition of trademark rights, which eliminates royalty payments. At the International Food Products segment, we forecast seasonings and processed foods will account for more than 70% of profit gains. Frozen foods should account for another 20%, with the rest coming from umami seasonings for processed food manufacturers and sweeteners. Sixty percent of the profit growth in the Life Support segment is expected to come from animal nutrition with the remaining 40% from other products. We expect zero growth in profits on specialty chemicals. Finally, we expect amino acids to account for 40% of profit growth in the Healthcare segment, with the rest coming from other products. 

We are targeting M&A in three business areas: international food products, integrated food solutions, and advanced biopharmaceuticals. To date, expansion of our international food products business has focused on emerging countries, but going forward we need to strengthen our business foundations in Europe. We also need to expand our business portfolio in the Five Stars, through investment in organic growth and some smaller M&A deals. In the integrated food solutions domain, we will consider complementary M&A deals that strengthen our product portfolio. In the advanced biopharmaceuticals area, we will look for investments that enhance our growth potential in medium and large molecule CDMO and in cell culture mediums. 

The main potential upside factor would be the restructuring of the global value chain. In particular, while the plan factors in some costs related to restructuring in Japan, we have not included the positive impact on profits because we think the fruits of our restructuring efforts may not emerge until FY2020 or later. An earlier than expected emergence of the desired effect on profits is therefore a potential upside factor. Forex trends could also have a positive effect, as our plan is based on rather conservative forex assumptions.
The main downside risk would be slowdowns in the economic growth of emerging countries. During the three years of our FY2014-2016 plan, the economies of the Five Stars grew at an average annual pace of 9.3%. If their annual growth rate falls to 7% during the FY2017-2019 plan, it could have a negative impact on business profits of about ¥5.9 billion. However, sales of basic seasonings used on a daily basis generally are not affected by wider economic growth trends. Because these seasonings account for a large share of our food product sales, any negative impact from economic slowdowns is likely to be limited to processed foods and non-alcoholic beverage items. We estimate a potential negative impact of ¥2.5–3.0 billion from those product lines.
Meanwhile, we assume raw material prices will hold at current levels. Of course, we will be monitoring these prices and regularly updating the impact on our plan if required. 

The 40% figure you mention is for sales of all flavor seasonings. Menu-specific seasonings alone do not account for such a large share of overall sales. In recent years, overseas sales of our menu-specific seasonings have expanded at close to a 20% annual clip, and we think sales will continue to expand. This strong growth is due to the ease of preparing each country’s popular dishes using our seasonings and their fantastic taste. We have been expanding sales in Indonesia, Thailand, Vietnam and Brazil, and last year we introduced new menu-specific seasonings in Pakistan, where highly favorable consumer response is driving stable sales growth. 

In North America, Ajinomoto Windsor is still building its business foundation, and we expect it to post steady sales growth from FY2017 onwards. In Europe, annual sales of Gyoza (Chinese dumpling) to Asian-food restaurants have reached about ¥3 billion, and we are now working on getting retailers to carry our high-value-added products that can be sold at higher prices. In emerging countries, GDP is generally not very high and infrastructure still rather underdeveloped. Our sales channel is therefore focused on chainstore food service outlets. In all regions, we plan to expand sales by pursuing strategies in specialty areas. 

We will steadily convert production lines for commodity products to specialty product lines during the next three years. The increase in sales of specialty products during the FY2017–2019 plan is expected to come primarily from sales of AjiPro®-L, and the medium-term plan reflects the risk that expanding sales will take some time. We therefore expect our current efforts to bear fruit and yield rather large results in FY2020. 

We expect the growth drivers to be advanced biopharmaceuticals and amino acids for foods and pharma. In the advanced biopharmaceutical space, our contract manufacturing of pharmaceuticals based on nucleic acid medicine, for which we have some powerful patents, is already a growth driver and the market for this service is expanding. Also, antibody drug conjugates, which we call the ADC business, will not enter the commercial stage until somewhere between the latter half of FY2017 and the end of FY2018, but we are already seeing an increase in customer inquiries. We therefore expect this business to deliver double-digit growth going forward. As for amino acids for foods and pharma, we expect to benefit from expansion of the bio business as we are one of a few companies able to be a one-stop supplier of amino acid materials comprising numerous growth factors, thus ensuring traceability. In addition, we have already used scientific data about amino acid nutrition to develop several branded materials with compounding capabilities. We plan to supply these materials to the food industry using the BtoB sales channel. Accordingly, we look for double-digit profit growth from the healthcare business. 

Our technologies provide excellence in three areas: cost competitiveness, the ability to produce good products, and quality control. This has enabled us to expand annual sales of locally produced frozen desserts to restaurant chains in China to ¥500 million. We also have achieved a significant scale in sales of Gyoza in Thailand. 

We have reached the conclusion that brand value is a more appropriate indicator of our ability to sustain financial and non-financial activities than is market capitalization. Our USD650 million brand value in FY2015 as measured by Interbrand is a one-digit difference from the brand value of leading food companies. Companies with large profits do not necessarily have high brand value. Companies seeking to enhance brand value through specialty products tend to get higher evaluations of their brand value. In addition to our academic appeals to the usefulness of UMAMI, we plan to strengthen our investment in corporate brand value, which we expect will be a large part of the estimated ¥6.7 billion increase in expenses during our FY2017–2019 plan. We think that investment should increase our brand value by 2.3 times. However, this will not translate directly into higher sales and profits. 

First of all, we will not completely cease the production of commodity products. We will sharply reduce in-house production by making greater use of outsourcing. We will keep enough of the freed-up capacity to produce specialty products. In short, we will leave in place the foundations for our shift into specialty products. Regarding your second point, as shown in the value creation stories on page 6 of the presentation materials, our advanced bioscience and fine chemical technologies contribute to the competitiveness of our MSG and nucleotides, and these technologies are the result of our basic research in amino science. We cannot cut off our core competencies. We will therefore retain our human resources and intellectual property.
(Follow-up question: Can we assume that you will keep your accumulated knowledge and advanced technologies in-house even if you outsource production?) Yes, if intellectual property is the result of our own R&D, it will be kept in-house.
Domestic structural reform is a theme from the perspective of sustainability even after FY2020. That is why we are making investments. In addition, we have not yet been able to run simulations for the staff reductions and efficiencies that will be realized through ICT / digital transformation. We will be examining those issues as we go. The employment situation in Japan remains problematic and efficiency improvements will probably come after FY2020. Globally, we have factored in the impact of cost reductions achieved by using resource-saving fermentation technologies plus alpha. 

Animal nutrition profits have been volatile owing to ups and downs in both sales volume and sales prices. If we greatly cut in-house production, we won’t be able to maintain past supply volumes. We will therefore need to rely on OEM production. In-house production requires a certain level of production volume, which in turn generates a fixed cost burden. OEM production, however, does away with that and makes it easier to control volume. Going forward, we still expect to be affected by swings in market prices, but business profits will not get eaten up by fixed costs, resulting in losses. Lysine, threonine and tryptophan have all become commodity products. We see a risk of valine also becoming commoditized by around FY2020 and therefore are not setting our valine price at a high level. Other specialty businesses tend to realize parallel topline and profit growth. We have also factored in the cost of converting production facilities to specialty products.
The plan to double specialty business profits assumes sales of specialty products other than valine.
(Follow-up question: So, the risk of commoditization increases over time, and you intend to stay in the business despite volatile sales and neutral profits. If a product is commoditized by competition in the future, will you switch to a portfolio that reduces volatility?) One of the themes for FY2020 and beyond mentioned in the FY2017–2019 plan is using ICT to shift into a diagnosis-based solutions business. Moving into highly functional premix products will not be enough. Our transition to specialty products must also focus on solutions business for dairy cows and pigs. Once we solidify the foundations of our specialty business, we will be able to decide whether or not commodity products are necessary. 

During the FY2014–2016 medium-term plan, operating cash flow will total about ¥330 billion, excluding extraordinary factors such as the sale of Nissin-Ajinomoto Alimentos in Brazil. In the upcoming three-year plan for FY2017–2019, we expect that figure will increase by about ¥20 billion. The small increase in operating cash flow is due to restructuring costs, which are posted below business profit.
(Follow-up question: You mean included in extraordinary losses?) We plan for topline growth so we also have factored in an increase in working capital. Current results show it to be growing. As was the case with our FY2014–2016 plan, there is room for improvement as we have made conservative estimates of working capital.
(Follow-up question: So, can we understand that the restructuring costs are being included in the item called extraordinary losses under JGAAP?) There are actually two elements here. The first is as you have pointed out. We have factored in the risk of ¥4 billion charges against both our animal nutrition business and domestic production facilities. Assuming both actually occur, the maximum charge will be about ¥8 billion. Where we include this cost will be determined if and when it becomes necessary. The second element is inventories. We assume these will remain at current levels, but once again our assumptions leave room for improvement. 

As you have pointed out, the profit margin on processed foods is lower than the more than 15% margin for our seasonings. We therefore need to create a better balance. However, considering the growth in the foods market and continuing urbanization of overseas markets, we need to expand our product portfolio now. For example, frozen foods represent a growth segment in the North American market, and if we can capture the No.1 spot in the Asian ethnic foods category we should be able achieve a profit margin of about 10%. While not as large as the margin for seasonings, that margin would not have a dilutive effect on the business’ overall margin. However, profit margins will be lower for the second and third place. We are therefore now working to strengthen our business structure to ensure that we become a dominant No.1 player in the Asian ethnic food category in the North American frozen food market. We also still see growth potential for menu-specific seasonings and will be making an effort to achieve topline growth. 

Our global production network consists of four large production facilities, against which we have already posted considerable impairment losses in the past. I would like you to consider that ¥4 billion as the cost of converting production to specialty products during our FY2017-2019 medium-term plan. I apologize for speaking in general terms, but a more specific comment could lead to assumptions about areas under consideration, which could have an impact on our business. We appreciate your understanding on this point. 

Since acquiring 33.3% equity stake in South Africa’s Promasidor Holdings in the fall of 2016, we have been pursuing new business developments. Also, in FY2017 we will be adding two Turkish companies to our consolidated accounts—Kukre, which was previously a 50% equity-method affiliate, and Orgen. These additions will result in differences in the basis of our FY2016 and FY2019 consolidated accounts, which will lead to a net increase in profits. We also expect profitability improvements at our North American frozen food business to support profit growth. We expect the profit growth rate at Rising Stars to be quite large during FY2017-2019, however their absolute contribution to profits will still be small. Nonetheless, we think the plan’s goals are well within reach.
I would like to add that in Turkey we plan to merge the newly acquired Orgen with Kukre. In Nigeria, where we have struggled for the past couple years due to changes in the business environment, we have at last found an exit. We plan to merge our Nigerian subsidiaries into Promasidor Holdings within the next year. We expect these two changes will help expand profits from the Rising Stars. 

The most important point in the FY2017-2019 plan is the establishment of ASV (Ajinomoto Group Creating Shared Value) as a core philosophy that clearly sets forth the direction to be followed by the Ajinomoto Group going forward. Our business is supported by the two core pillars of foods and amino science. We are engaged in a number of businesses within those two broad domains, and we have given careful thought to how we can best pursue our goals in each business. ASV is a centripetal force that brings together our views on how we can contribute to society through our business activities. This concept was previously lacking from our business plans. Clarifying the social issues we will work toward resolving through ASV has enabled us to set goals for raising our corporate brand value.
Previously, many of the Ajinomoto Group’s 33,000 some employees have made major contributions in nonfinancial areas, but their efforts were channeled in a different direction from their fellow employees who contributed to the achievement of the financial targets in our businesses. It is important to clearly show that all the activities of our company are connected to the realization of our ASV value creation stories and not simply to the accumulation of a range of businesses. These valuation creation stories are a means for sharing our vision with outside stakeholders as well as with our all employees. The growth of our employees is essential to the growth of our company. I therefore hope that creating a common image of work at a Global Top 10 class food company will raise the motivation of our employees and set into motion a positive cycle. With an awareness of the relation between our financial and nonfinancial goals, Group employees will conduct their business activities in a manner that seeks to achieve a balance between the two. This is the first time we have clearly indicated such a policy. In addition, we have newly established raising corporate brand value as a key performance indicator, but we will not be able to achieve our goal by raising brand value in Japan alone. We have to aim for raising our corporate value on a global basis, but that goal presents a considerable challenge for today’s Ajinomoto.
We must strive toward that goal by bringing together the power of the 33,000 employees of the Ajinomoto Group with the unified consciousness provided by the ASV value creation stories. 

Interbrand has not disclosed the details of its calculation of brand value, but we do know the main points that it considers. The first is financial performance. The second is brand strength, or the degree to which consumers, business people, and stakeholders recognize and have a favorable opinion of the brand. The last one is the role of the brand in raising the company’s financial performance. Interbrand’s scoring system also includes several factors within each of these three topline components. For example, market capitalization is probably one of the financial performance indicators but market cap alone will not boost brand value. Consumers and business people must also have a high evaluation of the brand. From that perspective, we still have much upside potential. Until now, our brand appeal has been limited to our products. If we also make a greater effort to inform the public about the value of our company, including our ESG activities, we should be able to raise our corporate brand value. I think our amino science business in particular has huge potential for contributing to higher brand value. 

The global corporations with high brand value evaluations are hardly all BtoC-centric businesses. Many companies focused on BtoB business have high valuations.