Q&A at Interim Results Briefing (Nov. 9, 2017)

The first-half YoY growth rate for sales on the local currency base in countries other than Thailand was 4% in Brazil, 8% in Indonesia, 7% in Vietnam, 6% in the Philippines, and 26% in the Rising Stars. Also, the full-year YoY sales growth rate forecasts are 7% for Brazil, 10% for Indonesia, 10% for Vietnam, 9% for the Philippines, and 28% for the Rising Stars, including the new consolidation of Örgen, so we are looking at sales growth for international seasonings and processed foods overall to end on a level just short of 10% YoY growth. Although we are hoping to stick to the aforementioned targets for countries other than Thailand as much as possible, consumption in Thailand has been declining, and I think that we will need to review our strategy going forward because demand for consumer goods is expected to be flat for some time in the future.

For example, we increased the sales price for the Thai beverage Birdy® on November 1 because the excise tax was introduced in September, but we expect sales volume to be flat YoY, and as we have also secured funds for fighting, the increase in sales price is not a directly positive factor for business profit.

In each individual country, sales are progressing largely according to plan, on a local currency base. Although Brazil is in the midst of a recession, Sazon® flavor seasoning, our mainstay product, recorded double-digit growth in the first half, and it is continuing to lead overall sales performance. There was also double-digit growth in sales of menu-specific seasonings in Indonesia in the first half, and sales there remain strong. In Vietnam in the first half, sales of seasonings remained robust and sales of beverages recorded double-digit growth. Also, sales of Ajinomoto Pancake Mix Powder, a new product, grew significantly and have continued to increase since then. We are aiming to end on a level just short of 10% YoY growth on a local currency base, as other countries offset the shortfall from the initial plan in Thailand. The weakening yen in the forex rates is also helping, and I believe it is possible to achieve the initial sales forecast on a yen base.
(Q: If sales in the second half remain at a pace that enables the initial plan to be achieved, would it be safe to assume that this momentum will continue into FY2018 and beyond? Also, what are your thoughts on the rate of organic growth?)
Basically, it is important to appropriately develop products that match the particular country. It is also vital to introduce Ajinomoto technology and knowledge at companies we acquire and accelerate sales growth. We want to achieve a good balance between organic growth and growth through investment. Under the FY2017–2019 Medium-Term Management Plan (FY17–19 MTP), we set target values in order to achieve profit growth in parallel with sales, with a CAGR target of 11% (includes excise tax) for international consumer foods. However, growth in Thailand is currently low at 1% YoY in the basic seasonings market and -1% YoY in the instant noodles market, so I think that we will have to review the 6% CAGR target (includes excise tax) for Thailand. All the same, even though sales have slowed somewhat, Thailand is a key country, so we want to do whatever it takes to achieve the initial business profit target.

There is not an extreme increase in the YoY growth rate for sales in the second half compared with the first half. Sales growth is currently going according to the plan for the second half. However, differences are appearing between the volume and monetary base in the YoY growth rates in countries where we increased AJI-NO-MOTO® prices, such as Vietnam, Malaysia and others.

 

From now, we will be preparing the estimates for the next fiscal year, so I cannot make any definitive comments at present. If I were to mention the issues for the next fiscal year, I would raise the following two factors. The first factor is that Ajinomoto Windsor (AWI) will be starting up an appetizer plant this fiscal year and a Mexican foods plant next fiscal year, and the question is how quickly it will be able to move to stable production. The other factor is that at the moment the new product, Thai Milk Tea, of the Thai beverage Birdy® is selling well so we expect sales to recover in the second half. But I think we will need to keep a careful eye on whether that continues next fiscal year and afterwards, including on competitors.

We are currently in the process of developing the plan and would like to refrain from any specific comments.

(Q: The shift from commodities to specialties could produce excess capacity, so is it safe to assume that the impact will take the form of an extraordinary loss?)

Around JPY 4.0 billion is factored into the FY17–19 MTP as conversion funds for the specialty shift, but there will not be an extraordinary loss in the current fiscal year. There could be an extraordinary loss next fiscal year or later in connection with OEM subcontracting to Meihua.

We have been selling a third-generation product with a higher effective lysine content since August 2016, and I believe it is significant that we can now sell to dairy farmers without being affected much by the price of blood meal, which is the competing product.

Our processed foods have local core areas, such as powdered drinks and instant noodles, which are being marketed in several countries. The fact is we have competitors in each region. To strengthen processed foods, seasonings technology that makes them taste great is essential. We will use integrated food solutions technology for processed foods and win with cost competitive products that have a high gross profit margin, and increase our market share. We are not going to expand our processed foods portfolio excessively. We won’t give up.

Even though the GDP growth rate of individual countries may slow, Ajinomoto Co. sells basic seasonings. So far, we have grown due to rising consumer incomes and the increase in the middle income consumer segment. Population growth in Thailand stopped in 2015. With a slowdown in population growth in emerging countries other than Thailand expected from 2025 onwards, there is still room for growth. We are thinking of measures in the event that population growth starts to slow down, and our growth rate goes down to single figures. Although I did not explain it today, one of these measures is the restructuring of production in Japan. We are planning JPY 15.0 billion under the FY17–19 MTP and JPY 25.0 billion under the next MTP in capital investments to make our seasonings and processed foods production facilities the most productive in the world with labor-saving and automation. We will concentrate technology in Japan and utilize it in the Five Stars with returns on investment through improvement in the gross profit margin. I hope you appreciate that it is a connected strategy. With regard to stabilization in earnings, the Advanced Biopharmaceutical business in Healthcare is the next growth area, and we are currently making forward-looking investments. Some of these will contribute to profit in the final fiscal year of the FY17–19 MTP, and there will be full-scale contribution from 2025. The main thing amid stabilization in earnings is to firmly establish a highly profitable production base for the seasonings business, just as in Japan. This is a scenario for stable, sustainable growth.

In terms of growth in frozen foods, apart from Ajinomoto Windsor, I’d like to mention LABEYRIE TRAITEUR SURGELÉS S.A.S. (LTS) of Europe. We not only want to expand the frozen foods that we sell in Japan, but also desserts, a category of LTS, and which is also strong in Japan. The frozen foods area is one of our growth drivers. Ajinomoto Windsor is our first step in the process of structuring the portfolio to increase profitability while continuing to grow in size and, although at the moment there are some minor production issues, there is certain to be growth going forward. In Europe, we can create a business platform for frozen foods of approximately JPY 10.0 billion through the LTS acquisition. We are currently preparing plans for how much we can aim for in sales in FY2018 based on this. At present, we have sales of JPY 200.0 billion in domestic and overseas frozen foods. Our target under the FY17–19 MTP is JPY 250.0 billion. I think that our progress toward achieving the target is in line with the plan at present.

In international consumer foods, we are pursuing sales and business profit growth in parallel. Therefore, I think that your observation is close to what is happening. International consumer foods are a growth indicator. We have shared this information with investors and analysts through sales. In fact, if the gross profit margin improves, there are also increases in costs, so we would like to consider what kind of representations we can use for sharing in the future. It has become difficult for Thailand to achieve the CRGR+6% target stated in the FY17–19 MTP, so we would like to adjust it.

I think the question is about Birdy® in Thailand. I have the impression that this is the first time competitive products have emerged from local manufacturers. In seasonings, there has been competition with global manufacturers as well as local manufacturers for some time, but global manufacturers have had the advantage on quality and distribution capabilities. There is no change here. However, local manufacturers launched menu-specific seasonings ahead of global manufacturers. Ajinomoto Co. has a history of repeatedly developing products by looking at the menus of each country and seeing what flavors can be put together to match the preferences of people in each country, and using the deliciousness analysis technology at the research centers in Kawasaki to find out and what kind of tastes are preferred. As a result, we have the top or close to top market share. The competitor in canned coffee that you point out is an energy drink company. It has challenged the global manufacturers with a product that is THB 3 less expensive, at THB 10. We will compete with our product and distribution capabilities rather than pointlessly struggling with them over the low-price territory. Birdy® Thai Milk Tea, launched in August, is a product targeting a new consumer segment (young women) and has been well received. We will also continue to compete resolutely with new forces that have emerged or will likely emerge going forward.

We have learned a lot from the Post Merger Integration (PMI) following the acquisition of Windsor. Windsor was not originally profitable but was rather a company with problems. However, it had a high market share in the Asian foods category of frozen foods, which was a growth area, and we acquired it in recognition of that. We replaced the CEO immediately after the M&A and employed a CEO who shares our basic approach, such as the Ajinomoto Group Philosophy, Ajinomoto Group Creating Shared Value (ASV), and growth based on specialties, and who would disseminate our approach to employees through strong leadership. I think this was the right decision. We are currently examining the consolidation of Windsor’s nine plants to some extent, as we had been considering since the M&A study stage. This is a reduction in production volume while maintaining a certain level of sales, and is very difficult to manage. In order to achieve the restructuring, we are replacing the general manager class of human resources, such as plant managers and others. Next, we are making preparations for the smooth start of the new appetizer plant in Missouri and the new Mexican foods production system we will implement next fiscal year. We are executing these management reforms precisely. I think there have been some comments that the initiatives are slow, but it is also the first time we have been involved in the management of a major company in the U.S., and I have realized that it is different from management in Asia, where Ajinomoto Co. has expanded its business up until now.

(Q: Since it is currently in the midst of management reform, can we assume that the new Mexican foods plant planned for next fiscal year also involves some risk?)

In terms of whether we will need conservative expectations, we are currently at the stage of considering the estimates for the next fiscal year, but today I would like to tell you that we may have such a risk.

I am aware of two major factors related to the recent loss of orders for Italian foods. The policy on Italian products, which have never been a strong brand, was decided when we initially acquired AWI. I believe that strengthening Asian foods, appetizers, and Mexican foods is the right direction, but we misread the sense of speed in product portfolio restructuring. We achieved mutual understanding with the senior management of AWI, but communication on the ground level for each of the themes of plant restructuring and product portfolio restructuring did not keep up. As a result, this seems to have led to the recent higher-than-expected order losses. Taking the recent problems into account, we have implemented management reforms and strengthened the sharing of information with the ground level. I think that in the future we will eliminate order losses that are significantly higher than expectations.

The biggest factor in the decline in revenue for Japan Food Products in the first half was the impact from the sale of the shares of GABAN Co., Ltd. Apart from this, there was also the effect of a shrinking market for instant coffee and bottled coffee and the associated intensification in competition. These negative impacts were cancelled out with the effect of increased sales of soup to achieve profit growth for the first half despite the decline in revenue. We also strengthened our sales activities, rolling out the concept of Kachi-Meshi®, previously developed for athletes, to ordinary consumers to enable all consumers to have nutritionally balanced meals based on the ASV approach. For example, we disseminated information on Ajinomoto products, linked to information about nutritional balance, to people raising children, students taking exams, students working hard in club activities, and others. These efforts have been steadily producing results. On the other hand, I am also aware of products with problems. Also, although we actively launched new products in frozen foods during the first half, I don’t think there were enough new products in the seasonings and processed foods area. Ajinomoto Co. is a manufacturer, so we will launch new products and continue getting assessments from consumers.

In the first quarter, sales declined, impacted by the change in supply for counter coffee at a major convenience store from Ajinomoto Co. as a single source to purchasing from two companies. The second quarter is the period when sales of liquid coffee traditionally increase but, in addition to unseasonable summer weather, there was a more than double-digit contraction in the market, greatly exceeding industry forecasts. Also, the instant coffee market, which is the biggest, has been shrinking at a pace of about 2% over the past few years, but it has shrunk about 5% this year, contracting over 10% depending on the month. In other words, the place where coffee is consumed has shifted from in the home to outside the home. Eighty percent of Ajinomoto Co.’s sales are for the household market, and we have been impacted greatly by this change in the market environment. We forecasted this market trend, and have strengthened efforts aimed at the out of home market, including changes to our organizational structure, and have achieved double-digit growth. However, this was not enough to make up for the total as the scale is small, and this led to the decline in sales in the first half.

Looking at the short term, I think that the contribution to both sales and business profit will begin in FY2018. We cannot determine the specific amount, partly because there are some M&As yet to close, but we would like to get them to be able to contribute a few billion yen to business profit in FY2018.

The net debt-equity ratio for the FY2017 interim period is 32.2%, and projects we have invested in up to September of the current fiscal year are included. Ajinomoto Co.’s typical net debt-equity ratio is around 50%, and I think we can invest up to another one hundred and several ten billion yen to get to that level.

However, the time could come when we have to exceed the 50% net debt-equity ratio in the process of developing Integrated Foods Solutions, the expanding into areas neighboring our base regions in Europe, and the expanding our global roll out of frozen foods that are mentioned in the FY17-19 MTP. When that happens, we intend to carry out these investments while keeping you well informed. The areas in which we will have M&As are International Food Products and Advanced Biopharmaceuticals.

The most important thing is to continue resolving the issues in Thailand firmly, as I already explained. On the other hand, Thailand functions as a regional headquarters for the ASEAN region, which includes Myanmar and Cambodia, and the South Asia region, which includes India and Pakistan. As management, I want to lead the expansion into neighboring areas with Thailand as a base to further strengthen our foundations for growth.

At the regional headquarters, there is an M&A planning team, which covers ASEAN, particularly Thailand, and even the South Asia region. At present, no target companies have been found in Thailand, but the team’s considerations include neighboring countries, from the perspective of strengthening the regional base.

(We were not able to correct the results for Cambrooke at the briefing session. The corrections are as follows.

December 31, 2016: Sales JPY 1,454 million; Operating loss: JPY 409 million)

Over the past few years, Cambrooke has been improved in terms of both growth and profit, and profitability is imminent. It also operates not only in the U.S., but has expanded actively overseas into parts of Europe and Australia. We acquired it in the belief that synergies could be achieved with the addition of knowledge and technology from Ajinomoto Co., giving it medium- to long-term growth potential. The future is bright.