Q&A at Results Briefing (May 14, 2018)

I think the issue is that the pace of change has become extremely fast. For example, in the Food Products business as well, the speed of transferring success stories we have created in Japan to developing countries is no longer sufficient to cope with the fast pace of change. Changes in the coffee beverage market in Thailand are occurring at nearly the same time as in developed countries. It’s probably that the shift to away-from-home consumption isn’t progressing at the previous speed.

I think that the most important factor in the ability to respond to such changes is strengthening of human resources. Placing the right people in the right jobs and career development are extremely important considerations in job satisfaction improvement. If we get off to a slow start on this and discrepancies occur, job satisfactionwon’t improve.

Although in a groupwide engagement survey conducted in October 2017 79% of employees responded that they have confidence in the Company’s growth, I think that 79% is an average level compared to the world’s excellent companies, and there is a little difference. Therefore, I think the only solution for increasing employee engagement is to increase employee job satisfaction through career development involving placing the right people in the right jobs.

We have substantially lowered the FY2018 targets for North American frozen foods, Birdy® in Thailand, and coffee in Japan in the FY2017-2019 Medium-Term Management Plan. We ask you to consider this an expression of our intention to reliably achieve the sales targets and to intensively work on this issue. We will reliably achieve the overall business profit target for FY2018 of ¥103.0 billion, including these three underperforming businesses. We want to make FY2018 a year in which we are able to steadily and surely execute the strategy for each business in preparation for FY2019.

We have set FY2018 targets of flat sales YoY in the Thai coffee business and 3% growth in overall sales in Thailand.

Although the monthly figures don’t tell the whole story, whereas April 2017 coffee business sales results were disappointing, partly because of a reaction to measures to strengthen sales in March, sales value and volume alike grew in April 2018. The current outlook for the first quarter is that we expect to maintain volume at the previous year level.

At the same time, conditions in the canned coffee market have been altogether too adverse, and we are seeing favorable growth in existing fields, mainly flavor seasonings and menu-specific seasonings, which attracted no attention at all in FY2017. Therefore, I say here with confidence that we will achieve topline YoY growth of 3% in FY2018 in Thailand, a Five Stars hit market.

The reality is that business conditions in the Thai beverage market as a whole are difficult, due in part to the introduction of an excise tax and sugar tax. However, the single-month results in April were strong, and I think the trend indicates that we are almost certain to achieve the first quarter forecast. Although the excise tax had already been introduced at the time of the FY2017 interim results briefing, since it was immediately after a price increase, we were unable to accurately forecast the impact.

We don’t consider the competitive situation for seasonings. However, I think it was an unprecedented major event that in the first half of FY2017 a local energy drink company released an inexpensive product and captured a certain level of market share and that we lost share. We are not at all contemplating releasing a low-priced product to recover the lost share. We think that it is essential to implement a fundamental product revision and thoroughly follow up at roadside shops, which currently constitute the largest place of purchase.

After the introduction of the excise tax, we took a price increase of from 13 baht to 15 baht per can, and a major global competitor similarly raised its price from 13 baht to 15 baht. The market oligopoly of these two companies remains unchanged, and we expect no dramatic change in the competitive environment.

Also, the profit structure of the local energy drink company is likely rather difficult. Although two price points exist in the market, the pre-increase price of 10 baht and the post-increase price of 12 baht, promotion has been sharply curtailed, and in-store price-cutting competition isn’t as widespread as before.

Yes, that is a correct take on the competitive environment. I think that without question current business conditions are adverse in the Thai canned beverage market overall, not only the canned coffee market.

We see the canned coffee market as flat, not growing. Also, our FY2018 budget does not assume lowering prices to recover the share lost in FY2017. However, we have an extraordinarily high field share at the 400,000 roadside shops in Thailand, and our activities will focus on maintaining our presence among loyal users through all-out utilization of this channel. Users inclined to defect due to price probably defected in FY2017.

Moreover, I think that there are product quality-related issues and fundamental improvement is necessary. I believe that widening the quality difference between ourselves and competitors, which has narrowed, is important for further satisfying loyal users and winning back lost users and want to say here that we will achieve this without fail in FY2019.

We are planning for no growth from canned coffee in Thailand on a value basis in FY2018. However, we will engage in joint purchasing of coffee beans together with Ajinomoto AGF, Inc. (AGF) and pursue cost reduction. Although we won’t be able to achieve double-digit profit growth as in the past, since there will be no topline growth, we will strive for improvement.

We have budgeted for FY2018 with a plan to increase sales of seasonings and processed foods other than canned coffee by 3%. With regard to the canned coffee business, we ask you to accept that FY2018 is a year for solidifying our position and that we will compete all out in FY2019.

Looking at the RTD (ready to drink) market as a whole, we must be fully committed to the away-from-home market. We are now building the away-from-home business together with AGF with respect to both development and sales expertise.

We ask you to accept that we may be unable to regain lost territory in the canned coffee business in FY2018. The overall economic situation in Thailand isn’t good, and, after all, some consumers prefer inexpensive products. However, there are also many loyal users. We will engage in activities to create demand from those users in FY2018 and have planned for sales to remain flat. Please understand that our ability to mount a challenge in the market will depend on how much we can improve product quality and what sort of foundation for the away-from-home business we are able to create in one year.

Although the FY2018 plan for North American frozen foods is for results above the FY2017 level, the figure will be far below the FY2016 and FY2015 results. We plan to achieve a V-shaped recovery in FY2019 and at the very least want to return to our former record high. With regard to the Japanese coffee market as well, we have great strength in the personal coffee market, consider the FY2018 growth target insufficient, and are in the process of solidifying our business foundation. A V-shaped recovery in Thailand will be added to this.

he FY2019 profit increase of 13.0 billion yen is based on the assumption that we will be able to resolve these issues.

In FY2017 we bolstered our products, were able to shift to specialty products, and achieved our target of double-digit growth from Asian food products. Although we had been told that frozen foods won’t grow in North America, I think that this enabled us to demonstrate that there is an opportunity for us if we implement fundamental product improvements and once again come up with ideas for deliciousness. Therefore, I’m confident that shifting to specialty products will pay off.

Regrettably, however, in FY2017 appetizers and Mexican food were affected by supply instability, and we were unable to begin shifting to specialty products in these categories. Undertaking fundamental product improvement creates production challenges, and it is difficult to implement product improvements together with production site restructuring.

We have planned for 11% sales growth in FY2018 and plan to grow the topline by shifting to specialty products. We must first implement a shift to specialty products in North America, since this will raise customer expectations for our frozen foods. Although profit won’t increase in FY2018 because of solidification of the business foundation, we will restructure production. Then, the plan is to make it possible to also correspondingly improve the profit margin in FY2019.

Let me first explain our assumptions. A review of FY2017 indicates that the sales contribution from Asian food products was some 44% and sales grew by double digits year on year. Sales of appetizers and Mexican food products were flat, and sales of Italian food products declined. Breaking the sales down by retail and foodservice, the sales contribution from retail was 65% and sales grew 5%. We faced cost difficulties, partly because of production problems at our plants, but more importantly because of the impact of raw materials and fuel prices and transport distance regulations.

As part of the total sales increase target of 11% for FY2018, we will aim for an increase of about 15% from Asian food products. Since we were unable to supply appetizers and Mexican food products in FY2017 even though demand clearly exists, we think we can expect growth of nearly 10% provided production stabilizes in May and beyond.

With regard to cost, we will undertake production stabilization at the Joplin and San Diego Plants. I think we must consider what to do about passing on raw materials and fuel price increases in product prices.

With regard to the coffee business, the plan is for AGF to take the lead in resolving issues in Japan and for AGF to also actively allocate more human resources to its Thai subsidiary than before, particularly in FY2018, and cooperate in reinforcing a fundamental solution in Thailand.

However, although the coffee market as a whole will grow globally, considerable price erosion is occurring in the in-home segment. Although we intend to move ahead together with local subsidiaries in the in-home market in countries where we can counteract this trend and countries where value-added products have market potential, more importantly, we foresee medium-term growth in away-from-home demand in China and Southeast Asia and will experiment with ways of opening up these markets.

Looking at the beverage business as a whole, our powdered green tea and flavored teas have strengths, including AGF’s flavoring technologies. We think there is a business opportunity for 3 in 1 and 2 in 1 premix products in this market sector in countries where Ajinomoto does business, and we plan to launch such products as the occasion calls for, including in FY2018. To cite one example, we implemented a quality revision to 3 in 1 products launched in Vietnam in April of FY2018 under the Birdy® brand and strengthened the product lineup by adapting them to local preferences under the Blendy® brand.

Instant noodles and 3 in 1 powdered drinks account for a majority of processed food sales in Thailand.

Sales of powdered drinks in Thailand are slightly up year on year. Exports to Myanmar suffered as the kyat continued to weaken in FY2017, making our products less competitive against local products. This resulted in a year-on-year decrease in overall sales in Thailand.

The market for instant noodles contracted slightly year on year, and sales declined somewhat due to a decision not to counteract promotions in sales competition. At the same time, cup-type noodles are a growth product in the instant noodles category. Sales of cup-type noodles are steadily growing thanks to quality enhancement and greater exposure at convenience stores. However, the increase has failed to compensate for a decline in sales of bag-type noodles.

Going forward, in addition to increasing share in the cup-type noodles market, we will also begin to develop an export business from Thailand to elsewhere in the ASEAN region in early FY2018. We are already exporting to Europe and China and will expand exports to Indonesia and Cambodia. Although the export business remains small, we will strengthen efforts to increase the number of regions where we offer not only instant noodles, but other processed foods.

With regard to the impact of fermentation raw materials and fuels, although we revised the forecast after the first half of FY2017 and anticipated a positive contribution of about 1.5 billion yen, it turned out that the impact was a negative 3.5 billion yen. Market prices of grains, which are key raw materials, vary substantially depending on the season. The harvest season for Thai tapioca is around November. Whereas we expected the market price to decline from the third quarter into the fourth quarter following the harvest season, as it has in the past, the price didn’t fall. Our inability to forecast this was a major issue, and we were unable to cope with this difference in FY2017.

We have included consideration of price increases in several countries in light of this situation among 5.7 billion yen in cost reduction and other countermeasures in FY2018. Also, the risk that the current high price may continue until the November 2018 harvest period is the difference between 8.2 billion yen and 5.7 billion yen. Regrettably, we are unable to make up that difference at this time. Please consider this to be the difference.

Also, since we consider seasonings to be Ajinomoto’s main area of business, we think it will be possible to achieve our target by passing on cost increases in product prices and cutting costs. Our earnings forecast is 103.0 billion yen, and we will do our utmost to as far as possible bridge the gap between 8.2 billion yen and 5.7 billion yen, for which we are currently unable to compensate, by monitoring the market environment and deciding whether to implement additional price increases or other measures.

In FY2017, Japan home use products and restaurant and industrial-use business prepared take-out foods performed well, and the sales results were in line with the forecast. The reasons for the 2.6 billion yen discrepancy between the business profit forecast and results, despite the strong sales, was the inability to achieve our forecasts for the coffee business and frozen foods as well as the impact of the bakery business in Japan. We mainly supply frozen bread dough, and the issue arose because of a change in the procurement policy of a major customer.

Another factor affecting the FY2017 results was the impact of the contribution from GABAN, whose shares we sold during FY2016. Since GABAN is a company whose main business is restaurant and industrial-use products, this is a short-term factor affecting the business results.

With regard to the bakery business, we are using the surplus production capacity that resulted from the major customer’s procurement policy change to expand the business to other customers. It’s correct to assume that we are in the process of recovering the lost business. You can safely assume that restaurant and industrial-use seasonings and processed foods will deliver solid performance in FY2018.

I think we will be able to steadily achieve topline growth. The steep rise in the price of tapioca, which is ongoing, has a broad impact on profit at our ASEAN region subsidiaries in Thailand, Indonesia, and Vietnam. Consequently, with respect to the earnings forecast for FY2018, although there are prospects for recovering 5.7 billion yen through cost reduction and other measures, we ask you to understand that at this time we are unable to close the gap between 5.7 billion and the 8.2 billion impact of higher raw materials prices.

However, we suppose that a one-time factor is substantially contributing to this price spike. For this reason, we are considering a strategy while guessing how far we should go in countering soaring raw materials prices. To give an extreme example, if it seemed that the current market price of tapioca would continue, it would be better to completely switch to sugar. However, since it’s necessary to secure a stable supply of raw materials into the future without being swayed by such temporary considerations, we are currently assessing the situation. For the present, we have decided to lower the profit target.

I agree with you about the pace of the business environment. Specifically, people’s lives are becoming more urban, and ways of purchasing and consuming have changed substantially in the direction of away-from-home consumption and online buying. AGF has made strengthening of e-commerce one of its strategies, and we are experimenting with e-commerce in other businesses as well. We are utilizing e-commerce in Indonesia and Thailand, for example, as well as in Japan, and have begun an e-commerce trial in the Five Stars. We will look at the results of this trial and confirm what course of action to emphasize.

Broadly speaking, there are three courses of action. The first is to do business independently, similar to our direct marketing in Japan. The second is to utilize an already existing platform, and the third is to join forces with a start-up company and develop an e-commerce framework together. At this time, we do business independently only in Japan. We have begun doing business in the Five Stars to explore the potential of the other two courses of action. With regard to cross-border e-commerce, we have begun selling seasonings and processed foods to China from Japan.

Since continuation of the current price will result in an enormous cost increase, we would respond by raising prices or switching raw materials. As for the reason for the price increase, extremely low prices continued until a sharp increase occurred in the second half of FY2017. I think that the low prices forced tapioca farm households in Thailand to reduce the cultivated land area and adjust production. However, since continuation of this adjustment would force the farm households to give up farming, I don’t think it will come to that.

We broadly divide seasonings into three categories. The first is umami seasonings, the second is flavor seasonings, and the third is menu-specific seasonings. However, we haven’t adopted the same business approach for these categories worldwide. The competitive environment and home-use situation for each category differ substantially depending on the food cultures of individual countries. For this reason, in calculating the size of the global seasonings market and share, it’s necessary to recognize that there are geographical areas where the categories are historically strong or weak.

Only Asian people use umami seasonings at home, and the market itself is limited mostly to Asia, South America, and parts of Africa. The Ajinomoto brand has captured an overwhelmingly high share in these markets. Although substantial growth can’t be expected, we think we can expect growth of about 4%.

With regard to the second category, flavor seasonings, again our main markets are Southeast Asia, Japan, and South America. Regrettably, huge global manufacturers have dominant market share in Europe and North America, and it would be difficult for us to enter these markets at this point. Basically, we are the overwhelming leader in the markets where we do business, with share exceeding 50%, and we think we are contributing to market expansion.

In the third category, menu-specific seasonings, sales exceed 20.0 billion yen, and we have continued to achieve double-digit growth for the past few years. Although we think the growth rate will gradually decrease, we believe we can reliably continue to achieve double-digit growth. Suitable menu items vary from country to country, and we are creating flavors suited to the preferences of people in Japan, Thailand, Brazil, Indonesia, and Vietnam by making use of our unique technology (P-MAP) in Japan. As a result, we have captured the top share in this category, and I think we are regarded as No. 1 in flavor and quality.

We have been increasing our global share of dry savories by about 1% per year for the past few years. It should be noted, however, that this is our share of umami seasonings and flavor seasonings and doesn’t include menu-specific seasonings. Local competitors and major global companies compete in this market, and our share is currently growing by 1% per year. If we can achieve our current targets, I think we’ll be able to grow our share by about 1% in FY2018 as well. Although major global companies sell their products in more countries worldwide, since our share is higher in the countries where we do business, this growth rate is achievable.

To be sure, it will be no simple matter for AGF to achieve 5% sales growth in FY2018. AGF lost about 7.0 billion yen in sales in FY2017, mostly sales of home-use instant coffee, liquid coffee, and gift products, all of which are home-use products. On the other hand, 47% of the Japanese coffee market consists of away-from-home consumption, and it is the away-from-home sector that is currently growing. Given that the sales composition ratio of restaurant and industrial-use coffee is only 25%, it isn’t an easy target to achieve. Although until 5 years ago the sales composition ratio of products for away-from-home consumption was no more than 10%, it has reached 25% because of the addition of counter coffee at a major convenience store chain. Since our sales to the away-from-home market are steadily growing in step with the market and sales, mainly of coffee for use in offices and tea dispensers, have grown by double digits for the past two years, I think we can continue to achieve growth in FY2018. However, in the short term we must revive declining sales of home-use coffee.

Although the instant coffee market has contracted by 1%-2% each year for the past five years, it rapidly shrank by 7%-8% in FY2017. Since the results for April 2018 suggest the situation hasn’t changed, it’s probably safe to assume that this trend will continue. Viewed in this light, it will be difficult to recover lost ground here, and it’s probably realistic to aim for sales growth at about the level of market growth. With regard to liquid coffee, it’s a market in which price competition is fierce, and Ajinomoto, mindful of the profit margin, has not lowered prices. Basically, we have no intention of changing this policy in the future. In those circumstances, we have strengthened the product lineup. In February 2018 we increased the number of black coffee items, and the new items sold at a very brisk pace in March and April. We think we’ll be able to exceed prior-year sales of liquid coffee by a certain percentage.

In the gift business as well, we’ll attempt to recover lost ground by strengthening the product lineup to meet year-end gift selling season and full-year gift demand. Also, we’ll concentrate efforts companywide on stick-type coffee, which is necessary for our growth strategy. Although for the past five years or so we have not adopted a price strategy in the interest of structural reinforcement, the market is contracting, and there is price competition in hotly contested categories. In FY2018, we’re unlikely to reach 5% growth unless we adopt an appropriate price strategy in addition to the emphasis placed on value heretofore. We want to achieve 5% growth while flexibly implementing the above strategy.

From the perspective of business profit, it’s undeniable that profit for FY2017 and FY2018 is somewhat behind the targets in the FY2017-2019 Medium-Term Management Plan.

From the perspective of cash flow, however, operating cash flow is at the target level, due in part to cash conversion cycle improvement in addition to business profit improvement, and we will aim to achieve our targets in FY2018 and beyond. At the same time, as announced in the Medium-Term Management Plan, we are considering the acquisition of shares from non-controlling interests in Five Stars as a measure to improve profit. Non-controlling interests have held shares in the company since it was founded, partly for historical reasons. However, there has been generational change, and from Ajinomoto’s perspective, for reasons of economic rationality we are acquiring shares to the extent that we can obtain the understanding of non-controlling interests to as far as possible link the business results to the consolidated results of the Ajinomoto Group. We want to somehow begin implementing repurchases in FY2019. Although I can’t state a repurchase amount, the repurchase will cover major Asian subsidiaries that are not wholly owned by the company. However, since it would be impossible to acquire all of the shares at once, we will repurchase shares in stages.

Through such initiatives in areas other than business growth, we aim to reach an ROE level exceeding 10% at an early date.