Q&A at Results Briefing (May 14, 2019)

From the top, we have seasonings and Asian frozen foods. QN stands for quick nourishment, and this is an area in which we are trying to direct the food and beverage field toward a health orientation. Representative products in this area are Knorr® soups and powdered drinks. Integrated Food Solutions is the ingredients for processed foods business and is primarily a so-called B2B business. The representative businesses in the Healthcare area are pharmaceutical manufacturing (CDMO), amino acids for pharmaceuticals and foods, and cell culture media. The Life Support area primarily incorporates electronic materials.

The top three areas are B2C businesses, and, as I described earlier, major changes in the environment are occurring, such as an increase in small mass market demand and the emergence of e-commerce. All of the bottom three areas are B2B businesses. These are basically downstream-type, and these are changing to a business model where it is important how we connect with customers. This means solving issues directly with customers at the point closest to customer issues, in other words, directly with customers, rather than wholesale businesses, and developing products and solutions specifically in partnership with customers. Consequently, I think the bottom three areas are business fields that can be bundled as customer innovation services. If we do a good job, double-digit growth as in the current healthcare and electronic materials businesses is possible. However, the Integrated Food Solutions area is not complete yet, so it has not grown as much.

The major changes in consumer behavior are macro changes that have also affected B2B business. On the issue of how we will assimilate these, the top three areas will actively work on small mass markets and bring about change. However, as small mass markets alone are not at all lucrative, I think the point is to continue doing it efficiently under the umbrella of a strong brand to make it into a multi-billion yen business. For the bottom three areas, the point is to build firm relationships with customers and create a structure that can accommodate the themes I described earlier. As extremely advanced technical capabilities that other companies do not have are required to achieve this, we established these as our core businesses.

Hopefully, we can manage CAGR of 4% to 4% plus alpha, and for these six business fields a top line of at least 5%. We expect Healthcare and electronic materials, which are performing well, to lead for the time being with 10% growth. As for food products, some core areas are growing and some are dragging performance down and contracting. If we exclude contracting sectors, international seasonings and processed foods are achieving 8% growth, and we think that even Japan Food Products will be able to manage 3% growth. Consequently, we hope to make 4% plus alpha growth definitely happen by focusing on these fields. I would like to clarify the growth rates for individual businesses in the course of creating the next Medium-Term Management Plan.

Frozen foods, which had a very difficult time in FY2018, is a typical case. For example, in North America, there was double-digit growth only for Asian foods, and apart from that kept us back, and some areas even had negative growth. Frozen foods in Japan also experienced close to double-digit growth for core Chinese food items such as Gyoza and Shumai and for items in which we have secured technological superiority. Although the fact that this was a little lower than our expectations is an issue, there was growth. However, the areas of fried rice and fried chicken recorded significant negative growth, which was a body blow that hurt. While restaurant and industrial-use products grew, the burden of fixed costs had an overall impact, pushing profit down significantly.

 

This is because up until now, we have been trying to expand overall and, while we said we were concentrating on core categories, there were not really any non-core fields or fields to reduce, and this assumed that assets were untouched. From now on, we will reduce assets in non-core categories and concentrate on assets in core categories. We need to increase production in the core Asian food and dessert categories, so we will make capital investments. However, not increasing assets overall means that we will reduce other assets, so we will be changing our efficiency while doing this. The asset-light model during the FY14-16 Medium-Term Management Plan applied to exiting commoditized bulk product businesses. We will also do this in food products. By doing this, we will focus both on countries where growth is greater and on sectors with higher profitability. Overall, I want you to be aware that the point of change in our approach is a shift to 4% + alpha CAGR rather than double-digit growth.

Yes.It means that not all food products are Specialty products.

I want you to be aware that the core businesses earn most of the profit.

(Q: Does this mean that the proportion is 60 for sales and practically 100 for business profit?)

It is not as much as 100. Businesses on page 19 of the materials with re-built growth strategies are low-growth market sectors, but high ROA and contribute to profit. On the other hand, businesses considered for efficiency have high growth rates, but some of them are making a loss with the impact of factors such as upfront investment. We want to have a hard look at each of them to increase the proportion of core businesses.

(Q: Is the perception that there is no profit in non-core areas correct?)

It is not the case that there is no profit, but it is low.

That is how we want to proceed, but I want you to wait until we release the FY20–F22 Medium-Term Business Plan.

In terms of the 100.0 billion yen for the reduction of assets, I cannot tell you the percentage, but quite a large amount will be through resource allocation. In terms of reduction of business assets, we have been making accurate calculations for the reorganization of global frozen foods, and we have also included businesses other than frozen foods, but I cannot tell you the details. The percentage of core businesses on an asset base is practically the same percentage as on the sales base (around 60%).

(Q: Was the coffee business at Ajinomoto AGF, Inc. included?)

With regards to AGF, we have decided to shrink liquid coffee, but asset-light does not enter into this. It is one of the businesses being assessed. In other words, it is one of the areas where we are considering whether there is anything we can use.

(Q: Does this mean that it is still at the stage of consideration?)

Yes, because assets will not be reduced that much even if we get rid of only liquid coffee. Deciding how to cut it out is extremely difficult due to vertical integration, and it is taking a bit of time to consider it.

A small negative amount due to the asset-light model was included in the 10.8 billion yen increase in business profit in the FY2019 forecast, and international seasonings is the biggest point in achieving this profit growth. Just over 80% of international seasonings and processed foods is in the Five Stars. The FY2018 results for the Five Stars are the figures following multiple rounds of price increases. Each company worked to increase prices as a top priority in response to cost increases of 8.0 billion yen at the beginning of FY2018, primarily for fermentation raw materials. Unlike other products, AJI-NO-MOTO® is directly affected by cost increases for raw materials, and not much can be done about it other than raising prices. Consequently, a number of price increases were implemented in FY2018, and this was a factor in the slowdown in sales volume. We forecast raw material cost increases of 3.6 billion yen in FY2019, primarily for secondary raw materials, and the fight-back methods against 8.0 billion yen in pressure and 3.6 billion yen in pressure are completely different. Consequently, I think that we can get good profit growth due to quality enhancement for international seasonings in particular in FY2019. With regard to Japan Food Products, we disposed of inventory related to new frozen foods and coffee products in FY2018, but as this factor will be absent in FY2019, I believe that 10.8 billion yen in profit growth is quite a solid forecast.

With regards to how much commitment there is, the management team is obviously committed. This commitment is being moved down into each organization that will actually carry out the reforms. A considerable commitment has penetrated the frozen foods business, for example, which has realized reform. For the next Medium-Term Management Plan, we will create a structure that will be accepted in other businesses as well, with frozen foods as the litmus test. Accordingly, I would like you to wait until the announcement of the next Medium-Term Business Plan for the concrete plans for these other businesses.

However, from the perspective of commitment, I spoke about “changes in the macro environment” earlier, and with regard to how those are impacting employees’ our work, I think that we definitely have a shared commitment to the fact that we cannot strike back with superficial measures. In that respect, I want an acceptance that we are approaching the issue by asking if we have any other choice. I believe that the Ajinomoto Group will fail if it cannot accept this, so I want to continue with that commitment.

This is a discussion about how much confidence we should have in International Food Products. Basically, the area that is growing in International Food Products is menu-specific seasonings. On the other hand, among seasonings, there is no doubt that the growth rate has slowed for AJI-NO-MOTO®, the staple seasoning, and flavor seasonings. Therefore, up to now we have taken measures that have relied on significant price increases, and at present sales growth is stopped at 5%, and profit growth at around 8%. These figures are not our original expectations, and we believe it is not enough for FY2019, even including this price increase factor. Accordingly, we must grow menu-specific seasonings more. Under the strategy for international seasonings that I explained in my presentation, we had total Japan and overseas menu-specific seasoning sales of approximately 70.0 billion yen. Sales of umami seasonings was mostly overseas. Total Japan and overseas sales of flavor seasonings was 120.0 billion yen. These are the core businesses within the core of our food products business. Sales for menu-specific seasonings was 70.0 billion yen, with only 30%, or 21.0 billion yen, from overseas, so the majority was in Japan. That is why Japan seasonings and processed food business grew slightly last year, with household-use holding on. On the other hand, the overseas ratio is still only 30%. At present, sales are growing 16% on a local currency basis, and we want to accelerate this growth. The growth in sales in Japan, which account for 70% of sales, is around 3–4%, and if we are trying to achieve sales of 100.0 billion yen, then growth of 16% in overseas sales, which account for 30% of sales, is not enough. Accordingly, rather than 5% sales growth and 8% profit growth, I would like you to be aware that it is important at the moment to increase profit growth a bit more by continuing to focus on growing areas.

Unlike the countries where global competitors have rolled out flavor seasonings, the countries in which AJI-NO-MOTO® and the local flavor seasonings have been rolled out are basically smaller areas. We are the top brand in four countries out of the Five Stars. We still have a margin where we can go up a bit more by revising our products and strengthening marketing. Accordingly, I think that the markets will rise or stagnate depending on our making investments in this sector aimed at leading the market.

The FY2019 sales forecast forms a launch pad for the next Medium-Term Management Plan. At the moment, the sales growth rate only shows the year-on-year growth rate for the final year of the plan (FY2022). We will implement the asset-light model, so there will understandably be times when the rate is depressed for a while. Therefore, sales will not increase 4% every year. There may be a year when sales are lower than the previous year. We want to concentrate things as much as possible. There are some businesses with clear issues, like frozen foods, but there is also the issue of what to do about the beverages businesses. We would like to proceed while adjusting when we act, but we have not yet created a specific plan. We decided that the 100.0 billion yen asset reduction based on total assets is the minimum required, but we are not necessarily putting conditions on everything. We have everything listed and targeted, but there are both things that we have conditions on and things that we will put conditions on going forward, and we are thinking about combining them.

With regard to competitiveness in international seasonings, in the market, rather than the competition with the big global brands, it is small players that are damaging the major brands.

This is particularly pronounced in developed countries. Ajinomoto Co. must also become such a player. Even in emerging countries, a similar situation looks to be arising from the perspective of urban demand. I think that we have to adopt tactics that are different from those we used in the past. With regard to the growth strategy across FY2019 and FY2020, there are no changes to the basic structure of broadening the area of umami seasonings, enhancing the basic quality of flavor seasonings, and growing menu-specific seasonings. However, we cannot expect any further growth unless we take on other plus-alpha challenges. For example, I stated earlier that 16% growth on a local currency basis for menu-specific seasonings is not enough, but we have not found a way to increase it yet. I think that one suggestion could be to capture the shift from the small mass market to the middle mass market. We will continue to focus on it.

We included approximately 2.0 billion yen in asset-light expenses for FY2019 in business profit. If we accurately calculate and determine the impact of this, it would probably be a level that must be published for each company, depending on the amounts. Therefore, the amount is included in group shared costs. I also stated that approximately 7.0 billion yen in costs will arise in profit attributable to owners of the parent company, and we have factored this into the earnings forecast as well. Consequently, in the disclosure materials it is difficult to see in which businesses we will work on the asset-light model. When we determine and publish the costs, we will factor them into businesses. With regard to our perception of future business profit, we want to address it as cautiously as possible, since motivation can fall due to the shrinking of the organization and so forth. However, I want to address this in a concentrated manner, and not do it bit by bit. Therefore, we expect that the FY2020 results will decline temporarily. We are currently investigating whether we can implement this approach solidly. It may take some time in countries with complex tax systems or in countries where such efforts are not readily permitted. As much as possible, we would like to keep the decline in results to FY2020, but it may carry over to the FY2021 in some cases.

(Q: What level of business profit do you want to be absolutely sure to maintain?)

Business profit will be largely flat for the three years of FY2017, FY2018, and FY2019. One way or another, we would like to make this the lower limit. However, in connection to the asset-light model and so forth, we want to investigate whether we will be good business profit in comparison with the 4% year-on-year growth in sales in FY2022.

(Q: Do you foresee that business profit may fall to approximately 80.0 billion yen?)

We do not foresee that.

We examined them very carefully for FY2019 and have worked them into our plan.

We took into consideration that personal liquid coffee would shrink and that we would stop selling Starbucks Corporation products, formulated a FY2019 plan, and used this as the starting point and formulated a plan for the next five years. Ajinomoto AGF, Inc. approved that plan, and we did an impairment test using an outside third party organization. The result was that current value has room with respect to goodwill value, and didn’t approach impairment loss. In our discussion of asset light going forward, if it comes to exiting or reducing part of Ajinomoto AGF, Inc.’s business, there is the possibility of needing to impair, including accelerated depreciation, but in our current plan, we are assuming that impairment loss will not be necessary.

(Q: Can we assume that FY2019 is the bottom of the coffee businesses results?)

The largest factor for the reduced profit plan in FY2019 is that the commissioned business for some products will end starting in the fall of 2019. We will have FY2019 as the bottom, and from FY2020 we want to grow the business, including our mainstay stick products.

There might be misunderstandings because on page 19 of the materials only large business units such as seasonings and Life Support (electronic materials) are listed. However, we are also thinking about units smaller than the listed business units when it comes to where to focus the core businesses.

As for animal nutrition, we have been proceeding with switching businesses that had become commoditized to Specialty businesses centered on a mix of amino acids since the previous Medium-Term Management Plan. For FY2018, even with the re-revised forecast, we barely made it, but were able to get close to 2.0 billion yen in business profit. This is a result of our reducing commodities, switching to OEM, reducing volatility, growing Specialty, and making profit pretty much as planned. Our restructuring is proceeding steadily. In other words, there are areas that have already been made non-core businesses and asset light is proceeding, and there are areas where, at the present time, efficiency is still low and we are in the consideration stage. This is the current animal nutrition business. We would like you to think that we are moving to put Specialty neatly into the core businesses.

Now, with regard to management decisions being late. The Management Foundation Advisory Panel decided to start asset light management, and recognized that it was extremely important to have the entire company work on digital transformation. They are also pursuing proposals regarding the screening of businesses. We are planning to have a new director system from July, where Etsuhiro Takato will oversee the Management Foundation Advisory Panel from a non-executive director position. Of course, this will be connected to the Board of Directors so the outside directors will have good “visibility.” In form, too, we are changing to a governance system that will not allow delay.

While we haven’t been devoid of data-driven marketing up to now, as digital transformation proceeds, particularly around mall-type EC, we have gotten to see that the grouping of the consumer is becoming very subdivided. Also, from last year large convenience store chains have turned the rudder of their marketing largely to digital marketing, and we are participating in a platform to share information with our corporate customers. With this, we have gotten a much better image of consumers and consumption than we had before.

In order to deal with this within the Company, we made a new organization in April of last year, and became able to integrate marketing information concerning B2C. People from Ajinomoto Co.’s EC, marketing, and Ajinomoto AGF, Inc. are included, so it is run by a mixed team. This organization is brushing up mall-type cross-border EC and the currently existing digital platforms, so we are seeing great opportunities. The largest issue is how to connect small mass market to middle mass markets. We manufacturers must be strong from the viewpoint of manufacturing, and if we don’t make it into a middle mass market, we can’t survive. Currently, we are spreading out small mass market via currently existing channels as a trial. The next stage is to work at turning it into a middle mass market through EC. To do this, cross-border EC is necessary. This is what we decided.

We plan to establish a site on JD.com in May, and will probably expand it as we head into fall. We will not only use EC in Japan, we will effectively use this channel and have marketing that brings in the model of developed East-Asian countries, and move to flexible product development for this.

(Q: On cross-border EC sites, are your company’s products well-known? Will you continue to proceed with this?)

Our site on JD.com is in a good location. If we were to compare it to a department store, it would be on the first floor. Our best-known product is amino VITAL®. We are starting here, and will proceed with how to develop it into a product suitable for cross-border EC with China, but will start with sports nutrition.

Regarding North American frozen foods, business profit has finally recovered to a level where it is a bit below the previous year. However, the top line grew close to 10% so there is a difference between the sales growth rate and the profit growth rate. To fill in this difference, we will concentrate on the Asian food category along with asset light. We are aiming for a business where if sales grow 10%, profit grows by 10% or more. Because of this, we are still only halfway to what we are aiming for. With regard to logistics, we have finally been able to catch up with the two times that logistics costs have skyrocketed, by raising prices. However, logistics efficiency was bad from the start and is stuck at a high level. Simplification is an issue. We have yet to bring structural reform to logistics.

With regard to frozen foods in Japan, we believe we can probably cover a major portion of production fixed costs by focusing on Gyoza and expanding the line-up of fried rice products. We will work on increasing sales based on this in FY2019. And with regard to fried chicken, it definitely is a core business, but the quality difference with competitors’ products is getting quite small and it is close to being a red ocean. However, we have decided on our path and will proceed along it. If we don’t continue to grow as we have, we will need to lighten assets and make management decisions.

In FY2018, we had an impairment loss of 3.2 billion yen related to Promasidor Holdings Ltd. trademarks. As you say, considering that point, profit grew only 1% overall and international foods were also about that level. However, other than those, we are forecasting an effect of about 2.0 billion yen in costs from asset light, which will hit business profit. Also, shared costs overall are not increasing, but shared costs that are tied to each business division are rising, so if we consider this, we have organic sales growth of about 3% and actual profit growth of 3%.

(Q: If you take only international seasonings and processed foods, the plan is for FY2019 to have profit growth of 4.1 billion yen, and excluding FY2018’s impairment loss, a plan of 0.9 yen billion profit growth. Compared to a forecast of 9.6 billion yen sales growth, there is profit growth of only 0.9 billion yen. Is there something in the background here?)

I think it would be easiest to understand if you understand it as FY2018 fourth quarter ending much higher than forecast and the starting line having changed a little bit.