Q&A at Results Briefing(May26,2020)

Let me comment on the point that FY2020 business profit growth is modest even with the impact of COVID-19 excluded. As noted in the MTP, the period from FY2020 to FY2021 is originally a period for advancing our asset-light model, and we had planned for reductions and withdrawals in non-core businesses that were unprofitable in FY2019. As the General Manager of the AminoScience Division said on IR-Day, held on March 25, the coronavirus appeared at the height of our push, and at present we’ve had to place a freeze on the process for about six months. While not a direct impact from the virus, the reduction in unprofitable businesses was a part of our plans for FY2020 onward; accordingly, elements that we’re now unable to execute have a very large impact.

Looking at conditions in Southeast Asia, we see a positive element in that, for Vietnam in particular, recovery is taking place very quickly and there are zero deaths. I confirmed earlier today that people in Vietnam are now going out; restaurants are opening, too. In other countries, strict urban lockdowns are still in place in the Philippines. While loosening has taken place in Thailand, we consider the degree to which dining out will return as a part of everyday life, and the degree to which tourism in particular will return, as unknowns. Vietnam is a positive point, but I think that elsewhere, the recovery will be quite cautious.

To add a product-specific positive point, menu-specific seasonings are growing considerably in Indonesia and Vietnam, and naturally in Thailand as well. This is a wonderful opportunity to communicate to consumers the convenience and deliciousness of the products. A negative point is that, although gradual loosening is taking place, the Thai economy in particular is highly dependent on foreign tourists. I think that the timing of recovery in Thailand’s tourism will be an issue. While I think it will happen sooner than in other countries, a return to normal conditions will probably require a year. We expect impacts on products for foodservice in particular.

 

We see the delay in price increases as an impact of COVID-19. Our initiatives regarding non-core businesses are at a complete standstill while the contagion physically expands. Accordingly, this area is worked into the FY2020 plan on the assumption that execution is not possible. The MTP calls for execution from FY2020 to FY2021, but unprofitable businesses will remain and will act as weighing factors on the original FY2020 plan due to the delay.

 

We’re not reflecting these in the forecast at present, so I think your concern is appropriate. Raising unit prices essentially consists of two elements. One is changing the product mix using products with high unit prices, such as menu-specific seasonings. The other is incorporating price increases when making health-centered revisions of products. For the former, health consciousness and the expansion of demand for at-home dining are tailwinds for us. For the latter, there is a possibility of launch delays associated with the delays in product revision work, but we intend to execute solidly.

In the fourth quarter of FY2019, the impact of COVID-19 emerged from the latter half of February 2020. Business profit growth slowed a bit. In FY2020, COVID-19 has imposed two points: the imposition of restrictions on economic activity, and the subsequent slowing of economies. Regarding the former point, I’d like to explain the background to the decline in business results, despite the high percentage of our retail products in Southeast Asia. For AJI-NO-MOTO® and flavor seasonings in particular, a large portion of large-volume product usage takes place in market food stalls. So even within products called “retail,” a large portion is used within broadly-defined foodservice. Regarding the latter point, deterioration of the economy will be a major impact. We’re creating a forecast that anticipates a decline in the GDPs of major countries, including ongoing increases in unemployment and decreases in inbound tourism, and so these things are reflected.

(Q: Should we understand that the real composition ratio for restaurant and industrial-use is about 30%?)

We don’t have accurate numbers, but I think it is about 30%. To add to that, as basic seasonings, flavor seasonings, and other products that we sell for restaurant and industrial-use are profitable overseas, any slip here would have a large impact on business results.

(Q: Do you see the same holding for Brazil? The sales decline rate in Brazil is even greater, due to the impact of the exchange rate. Are you forecasting a sales decrease twice that of Asia for the reasons that the real restaurant and industrial-use composition ratio is large and macro risks are present?)

Yes, you could think of it that way.

A U-shaped recovery is the assumption in our scenarios for how the economy overall will return. Within this U-shaped recovery, we think we can gradually recoup demand in our core business of healthcare and in sectors where we’re making health appeals for foods, an area that we’re working to strengthen. In other words, we believe we can make an early exit from a state of being unable to fully roll out strategies because of stay-home requests and other restrictions on activities, and so we’ve expressed the recovery as V-shaped from the standpoint of recovering in FY2021 from the forecast of FY2020 as the bottom.

Among the factors reflected in the FY2020 forecast shown on page 6 of the slides, we think that the decrease in demand from tourists due to travel restrictions between countries and regions will be the longest-lasting. As of May 25, the speed of the return remains very difficult to foresee, and opinions differ greatly. But as I noted earlier, we’re making the assumption that it will take about a year. Accordingly, regarding the weeding out in retail that you’ve mentioned, I think that consolidation will take place in a sense, and the impact from the drop in tourist demand will be covered by growth areas centered on domestic demand.

I’d like to first comment on our thinking in placing importance on e-commerce. A lot of companies are able to put up e-commerce shops, but the question we should consider is how we can add service for our consumers and foodservice users. As an example, we have the AJINOMOTO PARK site on our website. During the periods of recovery with the virus and after the virus, we’ll provide customers with easily understood information, from where we can direct them to the shopping site. Rather than simply selling products, I believe it’s important that we develop services not offered by competitors, such as delivering products together with fresh foods in collaboration with partners. I think that we can establish a presence in this market not through how much product we can sell but by offering information and lifestyle support to consumers and users.

Overseas direct sales offer a great advantage in that we’re able to provide information directly to consumers and to shopkeepers. It’s important that our salespersons provide helpful information so that consumers feel they can learn a lot by purchasing the products at stores. By thoroughly communicating information ahead of competitors and enhancing our presence, the trust that customers have in stores even under this environment should actually work to our benefit, we think.

 

I believe that we have to freeze this for at least six months. Markets are effectively stalled. However, with regard to animal nutrition, I think that the business environment does not consist entirely of negatives as we head into the period of recovery after coronavirus. In other words, from the perspective of the global supply chain, I think there will be a certain degree of return swing. With regard to frozen foods, North America and Asia are the primary targets. However, as the area is essentially a growth industry and as our focus is on reorganization of assets associated with a shift in categories, there is little need for worry.

We haven’t necessarily been able to draw out specifically what partners have in mind. However, as the disorder causes customers to change their thinking concerning supply chains, we believe that changes in the environment caused by COVID-19 will not necessarily all be negative. Please take this discussion as a general one.

Regarding the forecast for the animal nutrition business in FY2020, it has pluses and minuses woven into it. Currently, first, there is the problem of African swine fever, and that is mostly having a negative impact on prices. However, looking at the past two to three months, the flow of products from China has been impacted and changes in prices are being seen. Because of this, we believe the FY20 profit margin will be higher than in FY19.

(Q: Are we to understand that the increased profit is forecast for the animal nutrition business in FY2020?)

Yes.

Regarding the forecast for umami seasonings for processed food manufacturers, there are two factors. One is nucleotide seasonings. Supply and demand was tight worldwide in FY2019, and prices rose. Currently, prices are gradually dropping in the international market so I think this will have an impact on profit throughout FY2020. The other factor is that the Company is using its technology and reducing costs overall for umami seasonings so this part can be maintained. Rather, I think we’d like to the cost reductions to go in the direction of expanding.

(Q: Are umami seasonings for processed food manufacturers included in the sub-segment of Sauces and Seasonings in the new segment of Seasonings and Foods?)

In the new segments, they are included in Solutions & Ingredients.

(Q: Are we to understand that the FY2020 business profit forecast for Solutions and Ingredients is -¥0.9 billion YoY?)

Yes.

 

In Thailand from April to around the middle of May, our mainstay product AJI-NO-MOTO® and flavor seasoning products declined by about 20%. Our Birdy® canned coffee, too, has declined by about 10% due to the halt of travel within the country.

(Q: You make the assumption that sales will decline considerably in Asia. Should we understand that you view the trend for April and May in Thailand as continuing for a year?)

We see a significant impact occurring in the first quarter, but we’ve set an assumption of gradual recovery heading into March 2021. However, as inbound tourism demand is significant for Thailand, we are not planning for a 100% return by March 2021.

(Q: The year-on-year rate of sales decline and negative impacts will be improved slightly, but will sales decline cumulatively for the year?)

We have such an expectation for Thailand.

(Q: Business results for Vietnam in FY2019 were poor, but we’ve heard that results for FY2020 will be good. What is your sense of the level of “good”?)

Business results were poor in April 2019, but were nearly the same as in April 2020. The numbers for May 2020 have not yet been finalized, but are trending upward from the previous year. I believe that this is due to economic activity having returned nearly to normal, with lockdowns in Vietnam lifted in April.

(Q: To see the results of low-salt initiatives and communications, should we look at organic growth in ASEAN from here on out?)

Yes.

Regarding whether we can make use of the restaurant-use line to create home-use products in North America, I’d like you to understand that it would be extremely difficult. This is because, with some exceptions, the products differ.

Regarding the deployment of production staff and operators, to the extent possible we are shifting weight from restaurant-use to home-use to increase production of the latter. However, amid the growth of home-use demand, our risk scenarios assume the coming of a second wave of contagion in North America, and issues in production capacity are unavoidable. As we move ahead with structural reforms, we’re making preparations to strengthen production, especially in Asian foods. However, the reality is that the start will take place from the fourth quarter of FY2020, and we cannot immediately accommodate increased production.

The personal-size coffee area is very robust now in Japan because of working at home and staying at home. While there will be some fluctuations, we expect this trend to continue through the year, and foresee positive business results for Ajinomoto AGF, Inc. in our outlook.

 

With the impact from COVID-19 excluded, we believe that Seasonings and Foods will see growth of about 6%. Growth will be 0% for Frozen Foods, as there are some areas of declining sales due to progress in structural reform, particularly in North America. For Healthcare and Others, we expect a very high growth of 10%. The plan calls for growth mainly in Amino Acids and Specialty Chemicals.

We see the sales increase in the animal nutrition business as nearly double-digit. Excluding this and looking at amino acids and bio-pharma service as examples, the growth would just fall under +10%.

Seen overall, the animal nutrition business makes contributions in terms of profit, as does specialties, but the sales composition ratio is about 5%. There is a possibility that it will disappear from the consolidated business as we execute asset reduction, but for now it is frozen. Accordingly, please understand that this factor is not worked into the current forecast.

(Q: Does this mean that, excluding the animal nutrition business, Group-wide sales for both FY2019 and FY2020 will be flat?)

No. The answer is +5%.

As page 6 of the slides shows, amid unclear impacts that we have not been able to reflect in forecasts, it is extremely difficult to foresee the degree to which deflationary pressures will strengthen.

Within this, we think that some weeding out will occur, especially in the foodservice industry. Looking toward the period of recovery after coronavirus, we expect that from the stage of co-existence with the virus we’ll have to raise unit prices per person due to the need for social distancing. In that sense, I think a tug of war will occur between consumers tightening their purse strings as a deflationary mindset takes hold, and a foodservice industry that cannot remain in business without raising prices. From the standpoint of how we can survive this, we believe that we will have to act with thoroughness, while capturing information from the field and leaving judgments to those in the field.

However, we believe there is a trend by which products on the health axis, menu-specific seasonings, and so on will grow, and we will promote a shift to premium through the product mix. From here on out, I want to make this area clear every quarter.

(Q: Are you saying that there are currently no measures seen for increasing share in the existing mainstream product price ranges?)

There are things that will eventually lead to increased share in mainstream products, but as there are also factors that will lean toward discounting if we pursue this too far, we want to exercise careful judgment here.

I know this is creating concern. Our business in Africa is a joint venture with Promasidor Holdings Ltd. In the past, we’ve recorded two major impairment losses.

With regard to the trademark rights of Promasidor, we have already begun writing off the amount since the previous impairment loss. We will naturally need to closely watch profitability and other factors, but I think that the risk is, essentially, decreasing.

I believe there are concerns over risks in other areas, and one that we have to look at carefully is the bio-pharma service business in North America. Development by customers has been delayed somewhat by COVID-19, causing delays in shipments. I believe we will have to watch whether this sort of situation will have an impact on profit in the long term. Other than that, there are no major risks that we are aware of at present.

Regarding the impact of COVID-19 on the FY2020 forecast, we are looking at impact in terms of sales and cost of sales. Accordingly, we have yet to make adjustments to selling expenses and overhead due to the impact. As we make updates to the impact of COVID-19 every quarter, I want to properly fit these somewhere into the structure so we can provide explanation.

(Q: Regarding results in the fourth quarter, cost control does not appear to be having an effect at all. Could you add information about the status of your initiatives, including whether you will be able to strengthen control under a new structure even amid this disorder?)

Drastic changes in the environment occurred in the fourth quarter. As we took steps toward providing solutions for food and health issues as set forth in the new MTP, we originally began moving under a plan to push the accelerator from the fourth quarter and carry out marketing investments. Suddenly placing brakes on this is very difficult. Advertisements have already been prepared and the expenses for these have been incurred in advance; we view this as the appearance of a gap.

Regarding FY2020, I think that the factors you’ve noted are present. We want to properly address these. There are areas where we’re achieving efficient ways of working under this environment, and I think that effects of cost savings will become evident.

This is a difficult thing to express, but I think that, in a sense, the current environment is also a major opportunity to achieve our vision. In place of our conducting food education on our own to enhance literacy, I think that the impact of the virus will raise the world’s awareness of the negative impact of poor nutrition on health. I think we’re now in a market environment where we can use this as a springboard and build on it. Please forgive me if that comes across as indiscreet wording.

A major element of achieving structural reforms in the FY2020 to 2022 MTP is eliminating negative impacts with the reforms. Although we now face a freeze of six months to a year, we’ve by no means given up, and we’re committed to achieving our targets.

From the standpoint of transformation, I think that we also have a chance to make a leap forward in DX (digital transformation) under this environment. I want to solidly advance productivity improvements and cost reductions associated with this. Accordingly, we’ll move forward without changing our FY2022 targets.

While I stated that the recovery will be V-shaped, to be honest, there are areas that make it difficult to foresee whether we can, in FY2021, really recoup the approximately -¥23 billion impact expected from COVID-19 in FY2020, and build on that moving into FY2022. However, we believe there is a chance of doing so, and we’ll make a solid stepping stone for moving ahead.

(Q: Assuming that business profit in FY2020 will be about ¥80 billion, do you see business profits of about ¥90 billion to ¥100 billion in FY2021 and ¥110 billion to ¥120 billion in FY2022 as possible?)

I think that this does not include the factor of unprofitable businesses disappearing because of asset reduction, so please take insight from that.