Q&A at Analyst's Meeting (Feb.21, 2020)

When speaking primarily about core businesses in regard to the shift to a value-enhancing strategy, you can take it that we are talking about a shift in the international consumer business. We have already been aggressively implementing strategies to increase unit prices in the Japan Food Products and Healthcare businesses. Consequently, the target will be the consumer business, including the international frozen foods business, which the Company has not addressed so far.

As we have pursued deliciousness in this area to date, we have dealt with any increases in the cost of various raw materials by simply increasing prices. However, it is very important to shift to a strategy that consists of enhancing the basic value of products and delivering this value to customers who will give it a positive evaluation and buy products with high unit prices.  

In terms of how we will achieve this, first we need to change our message and marketing strategy on how umami, which will form the base, can successfully promote salt reduction. I think we can achieve it based on umami seasonings (products: AJI-NO-MOTO® and AJI-NO-MOTO® Plus) by changing and adding to our basic marketing strategy without product revisions. Consequently, we will start first with the pursuit of health value in FY2020 and hope to gain a positive response on price increases and value enhancement. Then we will add on to the mainstay flavor seasonings with the launch of salt reduced products in the leading countries and continue our marketing.

Slide 19 shows the structure of price increases. It includes unit price growth through promotion of health value and unit price growth by pursuing deliciousness that responds to diverse lifestyles. Going forward, our approach is to try to achieve unit price growth of 1.3% in FY2022 compared to the current level, combined with unit price growth due to urban-style consumption.

Even if the sales channel structure is based on TT, what I would like to say is that consumers themselves have a big interest in this problem and have been changing. The middle class is already increasing and will continue to grow moderately from now on. Higher income households will also increase in what we have called the emerging countries. These households will grow by 5% per year, forming a significant mass. 

Naturally, this kind of customer will come to buy through TT as well, and I would like to say that our message and marketing strategy for consumers will be about promoting salt reduction with umami seasonings. Of course, we will work on delivering products directly to new channels such as expanding e-commerce and demand from offices in order to achieve growth, but it certainly does not mean that we cannot capture these types of customers through TT.

The figures for each business on slides 36 through 38 do not include business risks, but the margin improvement on slide 18 takes account of Company-wide business risk.

To give you some additional information, the margin improvement of ¥30.0 billion mainly consists of approximately ¥10.0 billion in sales growth and unit price growth (including the increase in the ratio of premium products), approximately ¥10.0 billion in cost reductions, and approximately ¥10.0 billion in profit growth associated with structural reform.

The businesses under assessment include businesses with high ROA but low growth rates and businesses with low ROA but extremely high growth rates. The former will be the target of Phase 2 through the additional ¥50.0 billion in asset reductions. As of FY2022, Company-wide ROIC will be at the 8% level. Once we attempt to raise this to 11–12% and further to over 13%, the criteria will be reset in FY2022. We believe that there are currently some ¥50.0 billion in assets at businesses where aiming even higher is considered a challenge.

 (Q. Can this be understood to mean you will reduce businesses that are asset-heavy as much as possible to accelerate achievement of the business model that truly reduces risks on balance?)

That is correct. However, it will have to be balanced with growth, and the transformation into a business that increases value added structurally rather than through demographic dividends is a big issue for achieving growth, and this will also be a challenge. In the meantime, our approach to businesses of concern with asset reductions worth ¥50.0 billion will be to hold onto them as cash cows and make the decisions in Phase 2.

I appreciate your observations. These are points that we have also discussed. However, if you look at how the ROIC for frozen foods increases on the diagram, it is currently -0% and will be over 1% in FY2022. This will rise rapidly toward FY2025. We believe that after that the pace of increase will be over 8%, and that the business can achieve 11%. However, with regard to the question of why it will take so long, a significant part of asset reduction in the global frozen foods business currently depends on restructuring business in North America. The strategy does not simply envisage a balanced reduction by withdrawing from Mexican and Italian foods categories, but will also simultaneously achieve growth in the Asian foods category. The Asian foods category is growing tremendously and is key to delivering healthy frozen foods, but there isn’t enough production capacity or assets right now. On the other hand, we are in the process of structural reform in order to make the shift. In addition, with significant goodwill on acquisitions, ROIC will inevitably be lower than in other businesses. As there will be no improvement without the growth of acquired businesses, we decided to keep frozen foods as a core business, bearing these circumstances in mind.    

 (Q. Does this mean that asset reduction is focused on North America, and there will be little change from the present situation in the frozen foods business in Japan?)

North America accounts for a large proportion of the overall weighting, which is why I spoke about it. However, in terms of the frozen foods business in Japan, plants in China and Thailand which supply products to Japan are also subject to asset reduction, including their operations.

(Q. I could not understand the connection between the fact that Asian foods category in North America is still growing and lacks capacity, and the fact that asset reduction in unprofitable categories will not proceed quickly. I would like you to explain it in simpler terms.)

There is extreme growth in the existing Asian foods category, and we will proceed with the shift while maintaining stable operations for this category. We think there is a big risk that it will destabilize operations that struggled badly two years ago and things will not go as envisaged if we proceed recklessly. Taking this into account, we decided to take our time.

The execution capabilities for achieving our vision are exactly what is required of management, and we will strengthen our organizational management. We are promoting Company-wide operational reform using digital transformation (DX) to not only strengthen our organization but also to speed things up. In my presentation, I mentioned reforming our organizational management operations to do this and, at the same time, raise employee engagement and have employees make ASV their own initiative in the area of priority KPIs. Making ASV one’s own initiative refers to each and every employee being able to act autonomously. At present, we are, unfortunately, only at 55%, but we will increase it to over 80%. Doing this will lead to increases in effectiveness and speed. We will combine this human resources management with measures to increase motivation. Such a Company-wide review of existing management is one of our measures. Another is the creation of a new business model in Phase 2. This cannot be achieved without digital innovation, and we will work on bringing in a new growth model that differs from our conventional organic growth in food by establishing new businesses in partnership with companies that are pioneers in so-called foodtech. We want to do this with a sense of urgency that will enable us to prepare the groundwork by FY2022 and commercialize these new businesses from FY2023. This is the main point of our big transformation.

First, regarding the scale, the model for success is in Japan. In Japan, reduced salt products only account for around 5% of flavor seasonings, but health campaigns such as the “Iwate Prefecture Model” have been rolled out on a large scale in 39 prefectures. Partly as a result of this, the domestic sales CAGR for seasonings and processed foods has increased around 1.6% in the past three years. I believe that the sales CAGR for the Japanese processed food industry over the same period is a bit better than -1%, so I think this difference is the result of our work.   

(Q. Is it fair to say that the 1.6% sales CAGR is due to products such as reduced salt, and, although it is basically a volume effect, it has also been partly pushed up by the unit price effect over the three years?)

Recently we have been working actively to increase unit prices for Japan Food Products, so I would like you to understand the figures with the unit price effect included.

I think our strategy differs from the Quick Nourishment strategy of global companies in that we have strengths in the three categories of seasonings, processed foods, and frozen foods. Product areas that simply add nourishment are extremely competitive. However, in product areas that meet the need for dietary improvements, seasonings play a role in salt-reduced, sugar-reduced, fat-reduced, and restricted carbohydrate foods as well as plant-based foods, which have grown significantly. So, we have the advantage of addressing health through the seasonings business. Consequently, in changing dietary habits themselves, seasonings will play a role; and Quick Nourishment and healthcare products will play a role for dietary supplements; and frozen foods will play a role with respect to mental and physical health associated with urbanization. I would like you to understand the structure overall as business for restaurant and industrial use being complemented through the Solutions & Ingredients business.  

(Q. Do you mean that your strength is that you can provide health functions in regular food because seasonings have strong health function appeal?)

I think that seasonings are most effective with regard to changing dietary habits themselves. Speaking in extremes, if you make everything at home using ingredients, you use salt and sugar and add soy sauce or a local flavor seasoning, and so on. As a result, all the calories, salt and sugar increase. If you can cook using only flavor seasonings or menu-specific seasonings, or use umami seasoning to halve the amount of salt, this combination allows the reduction of salt and sugar in an entire dish. We think this is the power of seasonings. Consequently, we are hoping to adopt a strategy that communicates this properly.

We plan CAGR of around 4% in Phase 1 and around 5% in Phase 2. At the time of the interim financial results, we set CAGR at 1% assuming no growth in businesses under assessment, and the disparity has arisen because a certain level of growth is seen under this plan.

To give you some additional information, the organic sales growth on slide 7 takes into account downsizing at businesses subject to asset reduction, but does not reflect M&As. We will implement a ¥100.0 billion reduction in assets by FY2022. This is just over 7% of total assets, and around 5% in sales corresponding to these assets will be lost.

(Q. Sales CAGR by region is stated in the slide 41. If we use these figures with the composition ratio to calculate Company-wide sales CAGR, it gives a range from 2.5% to just under 3%. What is the difference between this and the 4% CAGR in the slide 7?)

In the slide 7, the latest results are considered with respect to the FY2019 forecast, but slide 41, the revised forecast for the interim period is listed without change. Please understand it as that difference and the difference from the rounding of decimals.

 

Slide 23 gives the scale of marketing investment, and topline growth by business is also given on slides 36 through 38. Basically, I would like you to combine this information to see the whole picture.

(Q. Do the figures for sales CAGR by business on slides 36 through 38 take account of asset reduction or not?)

The figures do not take account of asset reduction.

(Q. So we can’t simply multiply sales which are the base figures by the sales CAGR.)

Please understand that that is the case.

 

With regard to the Company-wide organic growth rate shown with figures of 2% and 4%, we will sell-off businesses as a result of asset reduction. Therefore, the sales in the year before the base year when a sell-off is implemented will be treated as sales of discontinued operations and will be eliminated. We have made a plan based on 2% growth compared with sales eliminated the previous year. You should note that the sales corresponding to ¥100.0 billion in asset reduction is around 5%. Consequently, although sales corresponding to 5% will decline from FY2019 in FY2020 and FY2021, we plan a structure in which the growth rate excluding the impact in each of these years will be 2% and 4%.  

In addition, businesses with sales corresponding to this 5% barely contribute to business profit. For example, commodities in the animal nutrition business is a business in the red. You should note that there will either be no impact at all on business profit due to a decline in sales resulting from asset reduction or that it will have a positive effect.

The 1.3% unit price growth is basically primarily for consumer foods. As part of this, the biggest driver will be international consumer food products. Although we envisage a certain level of unit price growth even for other Japan food, it is international consumer food products that will be central to unit price growth.

As for the ¥10.0 billion from unit price growth out of the ¥30.0 billion margin improvement, we plan that the ¥10.0 billion will be a combination of several factors such as sales growth and unit price growth (including an increase in the composition ratio for premium products) in areas including seasonings and frozen foods in Japan and overseas, which will steadily contribute to the numbers.

It has been mentioned that the businesses with growth issues on slide 33, parts of Japanese Seasonings, International Processed food, and Drinks, are, should be determined quickly. This does not mean, however, that the total will be ¥50.0 billion, but rather that there is the possibility of an additional ¥50.0 billion in asset reductions in these areas. However, we considered these areas as businesses under assessment and not as non-core businesses because of the possibility of upgrading them to core businesses as a result of the review of marketing and product strategy from the perspective of solving food and health issues. We review and adjust business assessment as part of the annual management cycle.

We will review them as part of the management cycle. Basically, the management cycle considers a three-year period. However, because we check on performance disparities yearly, quarterly, and monthly, there is a system for speeding up decisions if there is no possibility of improvement.

No. The figures for each of the three segments include the impacts of asset reduction.

Each of the three-year targets for ROIC are as shown on slide 17. At present, we have not disclosed the level and timing of ROIC for each business aimed at Company-wide ROIC of over 13% in FY2030.

(Q. There was a discussion of the frozen foods business as being able to meet the needs of urban consumption, but I think that the business has relatively poor ROIC compared with other businesses and a comparatively high cost burden from a Company-wide perspective. What should we consider as the role that the frozen foods business will play in the medium-to-long term?)

At present, there are issues, and we are part of the way through structural reform. We have seen good prospects on that, so the business can recover to 5% ROIC in FY2025. At that point, we envisage asset reduction and growth with ROIC being raised further to 8–11%, so we positioned it as a core business.

Slide 5 covers organizational management reform. Under the MTP, the Board of Directors is completely committed to leading the vision and the transformation aimed at achieving the vision, including asset reduction. In light of this, the President and executive officers produced the plan. In this sense, regardless of plans for my successors, the correct perception should be that the Board of Directors produced the plan as part of a commitment to the shareholders. Of course, as the CEO, I intend to do my best to see the plan through to completion, but appointments are entrusted to the Nominating Advisory Committee. I would like you to note that leadership changes in accordance with the decisions of the committee.

As shown on slide 40, we think that structural reform expenses should peak in FY2020–2021 and decline in FY2022 and after. However, there is a bit of a range in terms of the amount. In particular, we expect the scale of the expenses to fluctuate in FY2021 depending on the circumstances of the projects we try to implement. There is a possibility that business profit growth will stagnate temporarily, but I would like you to note that profit attributable to owners of the parent company will increase gradually. 

(Are we to understand that most of the structural reform expenses will affect operating profit?) 

Yes. While some will affect business profit, a large percentage will affect operating profit.

With regard to the P/L base, we plan to disclose the results for FY2019 and the forecasts for FY2020 at the announcement of financial results in May, so I cannot tell you the details at the current point in time. The level of business profit which you asked about is the level that we originally set out to achieve in FY2019, so it will definitely be one of the benchmarks. Consequently, the plan is three years behind schedule. 

Also, we set a target to “become a global top 10 class food company” under the FY2017–2019 Medium-Term Management Plan. This time, we prepared the plan based on the reflection that we have expanded the business to date with little emphasis on the ROIC, or asset efficiency, perspective. As the 8% target ROIC for FY2022 has still not reached the top 10 class level, we excluded “become a global top 10 class food company” from the targets this time.

I cannot respond on the figures at the current point in time. However, I hope you will note that we announced this MTP with financial results updated as of January 31.

(Q. Since the third quarter financial results, the stock market has had a mindset that business profit of ¥88.0 billion can be achieved with room to spare as the FY2019 final results, but do you think it’s better to keep expectations low?)

I hope you will note that since the situation changed considerably between when we announced the results forecasts in the interim period and the end of January, we took the latest information as the base point and produced the pathway to FY2022 and FY2025 based on that.

 (Q. Unit prices for international consumer food products have increased in a range of around 2%. Given this, isn’t the ¥10.0 billion from unit price growth out of the ¥30.0 billion margin improvement up until FY2022 likely to be low? What factors, if any, including unit price growth, would cause business profit to increase by FY2022? Alternatively, is there any downside risk?)

It does not mean that we will have any leeway for the targets we have set, but we certainly intend to achieve them.