Q&A at First Quarter Results Briefing (Teleconference) (July. 30, 2020)

In countries such as Indonesia and Brazil, the tendency to cook at home was high to start with, but this was markedly increased by the impact of COVID-19. Looking at individual products, in Indonesia AJI-NO-MOTO(R) was only at about 90% of the level of the previous year, but there has been high growth in flavor seasonings and menu-specific seasonings, with sales in Indonesia overall up 10% year-on-year. On the other hand, going forward, it is expected the negative economic impact will increase, and the effects of greater cost consciousness, higher unemployment, and lower incomes will become apparent. In addition, the spread of the infection to rural areas and the implementation of community-by-community lockdowns are gradually causing an increase in the number of regions where traditional trade (TT) channel sales activities are restricted. While modern trade (MT) is increasing, sales in rural Indonesia are mainly in the TT channel, so we have to consider such impacts carefully. Similarly, in Brazil, although sales of flavor seasonings exceeded the previous year on a local currency base, due in part to the effect of last year’s price increases, sales were lower than the previous year on a volume base. Given these circumstances, we believe we have to be conservative.

The initiatives to improve logistics that we have implemented since last year have progressed steadily, including introducing the use of railways in some areas. Although we have somehow managed to maintain production even with the COVID-19 situation, the fact is that production is approaching capacity, and inventory has actually fallen considerably. In the U.S., we have also been receiving inquiries because of the impact of suspension of production at other companies due to the spread of COVID-19 infections. Partly because of this, there has been considerable progress in new customer penetration, and the repeat customer rate is also increasing in this environment. Therefore, we hope to firmly capture this trend.

Upon confirmation, we found out that the government’s request was mainly for distributors, and we did not receive any requests and we have not reduced prices. However, the Emergency Decree was extended until the end of July. Restaurants are open, but there are restrictions on entry (restricted to 50% of seating capacity). Although there is a gradual recovery, the situation remains challenging, including a decline of approximately 10% year-on-year in sales of flavor seasonings on a volume base.

The factors for increase in profit of ¥4.0 billion include ¥0.8 billion from Specialty Chemicals and ¥1.7 billion from Amino Acids. For Specialty Chemicals, the Q1 increase in profit was factored in, but we have assumed the inability to supply China-related customers due to the impact of U.S.–China trade friction as a risk from Q2 onward. For Amino Acids, repeated efforts to increase unit prices have led to improvements with tightening supply and demand amid higher demand for use in infusions.
(Q: You said that the breakdown of the ¥4.0 billion is ¥0.8 billion for Specialty Chemicals and ¥1.7 billion for Amino Acids. What is the other ¥1.5 billion?)
It includes shared expenses and other factors.
(Q: I think the amount of the full-year improvement in business profit only reflects the Q1 results. Is that correct?)
There are various factors, but we have not included the ones that are high risk and uncertain. In Q2 and Q4, we assume that Seasonings and Foods together with Amino Acids are -¥1.0 billion in each of these two quarters. For Amino Acids, we have considered the impact of full-scale delays in customers’ development in the Bio-Pharma Services business in Q2 onward. For Seasonings and Foods, there will be expenses. Market research expenses and digital advertising have both increased due to the impact of COVID-19, and the Q1 trends will not necessarily continue. We will control expenses firmly while monitoring the sales situation.

Negotiations with some partners are temporarily on hold due to the impact of COVID-19. We should be able to resume if the situation changes. The project is not completely at a halt. We are hoping to organize the information properly and inform you in the interim period results, but the policy of implementing asset reduction by FY2022 has not changed.
(Q: We heard that being asset heavy is a bottleneck for negotiations. Are initiatives to reduce assets yourself also on hold?)
Only the areas that need to be negotiated with partners are on hold. Initiatives in the Frozen Foods business in the U.S. are progressing steadily.

Selling, general and administrative expenses have fallen approximately ¥5.0 billion. I would like you to consider that around half of that is so-called marketing expenses. Much of it is for Sauces and Seasonings and Quick Nourishment in Japan and overseas. The remainder is logistics expenses, royalties and so forth.
(Q: Should we consider that ¥2.5 billion out of the ¥6.2 billion increase in profit is the decrease in marketing expenses and that this is a temporary factor?)
Yes. Some of the amount is also due to an improvement in the gross profit margin. In particular, there has been a considerable decrease in discounting for seasonings, and I believe the impact from this was around a billion yen.  
(Q: Should we consider that this impact will dissipate from Q2 onward?)
We take our declining market share as a crisis and we need to take firm measures to address it. 
(Q: Looking at page 5 of the presentation materials, the impact of COVID-19 decreased sales by just under ¥20.0 billion and increased business profit by around ¥4.0 billion in Q1, which is close to what you are saying now. In that case, does this mean that sales will decrease, but profit will increase even if there is a second wave?)
If there is a second wave, I do not believe that the same situation will continue as in Q1. Looking at consumer trends, cost consciousness is increasing, and our market share is falling. I believe we need to counter this.
(Q: Do you mean that you will increase expenses when there is a second wave because you controlled expenses to a considerable degree in Q1 and lost market share as a result?)
Yes.

Sales in Amino Acids in Q1 were different from the initial forecast, being around ¥2.7 billion higher than expected. In particular, customer development delays in the Bio-Pharma Services business were not reflected in Q1, but we think the effect of these delays will be apparent from Q2 onward.
Also, we raised prices for amino acids for pharmaceuticals and foods. This will not last indefinitely, and we see some risk here.

We have not factored any impact from COVID-19 that exceeds expectations into the revised forecast. I think there is some downside risk. Under conditions in which each country is prioritizing economic activity, there is potential for significant negatives due to greater than expected deterioration in the economy, GDP growth, unemployment, incomes and other factors. On the other hand, the upside factors are unpredictable. What I can say is that both the Food Products Division and the AminoScience Division are making an effort. In our scenario planning meetings, held every other week, we share COVID-19 updates from each country as well as changes in the market environment and consumers, and discussion is led by the heads of our regional headquarters. We have come up with several ideas, so we want to implement them soon.
With regard to the forecast of ¥90.0 billion in business profit, we do not consider it as a bottom because there are also negative factors. However, we have repeatedly been unable to achieve forecasts in the past few years, and we definitely want to achieve it. However, it is not a conservative forecast. For example, when infections occur in a plant, the entire plant may be shut down depending on the country. We have not factored such events into the forecast.

I cannot discuss the figures in detail, but we are planning for the sales growth rate to increase by a few percent each quarter. However, as the plan also assumes GDP will decrease by about 5% in the countries that are our main markets, ultimately, we expect sales will not exceed the previous year.