Q&A at Interim Results Briefing (Teleconference) (Nov. 4, 2020)

Before, I told you at the briefing in May that the structural reforms in animal nutrition would be frozen for 6 to 12 months in light of the impact from COVID-19. However, at present, negotiations have already been resumed. The reasons why we revised the structural reform expenses are mainly related to the animal nutrition business. 

Under the current new normal (changes in behavior patterns and consumption structure), we are aware that the pace of expansion for our home-use products has risen remarkably. On the other hand, we have assumed that it is likely to take a considerable time for foodservice-use products to return to FY2019 levels. Consequently, particularly when looking at countries overseas, volume has not yet returned to 100% of the previous year, partly because AJI-NO-MOTO® is used for foodservice-use products. However, there has been extremely high growth for flavor seasonings in each country (excluding Thailand which has a high percentage of foodservice use). In addition, in the area of menu-specific seasonings, products such as fried chicken seasonings and liquid seasonings in Indonesia and the Philippines, and mayonnaise in Vietnam, have all experienced high growth of double digits or more. We are seizing on this as an opportunity to develop them into leading products and intend to promote sales strongly in the second half of the fiscal year as well.

In terms of the impression, as you said in your question, the lockdowns were lifted in individual countries and foodservice reopened in Q2. As a result, distribution inventory, which had previously been zero, increased all at once, so we need to make conservative estimates of future demand for restaurant and industrial-use products. On the other hand, I think the sales growth in menu-specific seasonings is connected to the increase in opportunities for cooking at home, so we will make efforts so that we can firmly sustain the current pace of expansion.

In Q1, the concentration of sales on leading products contributed to increasing the profit margin. The fact that there was little discounting also had a positive effect. The reason why we concentrated sales on leading products was because of requests from consumers and distributors. On the other hand, under the COVID-19 environment, it was also necessary for us to take measures at factories to reduce the number of people, so full production was difficult, and we focused on maintaining stable production by restricting production items as much as possible. In Q2, competition went back to normal, and discounting returned to being broadly in line with the previous year. Also, advertising spending, which was only for some leading products in Q1, reverted to being broadly in line with the previous year. On the other hand, as there were still some restrictions, including store activities, sales promotion expenses did not progress. We plan to use selling, general and administrative expenses in the second half because there are some products that have not recovered market share even now that Q2 FY2020 is over, and we believe that investment is needed for the leading products that will underpin organic growth in the next fiscal year onward. 

With regard to the overseas business, we have not incorporated geopolitical risk into the forecasts. However, we did take it into account and were a little cautious in planning the figures. We believe that overseas Sauce and Seasonings overall will return to being broadly in line with the previous year in the second half, excluding the impact of exchange rates. Although we have not disclosed any figures for individual countries, the Thai economy is rather depressed. We believe the outlook is negative, reflecting the economic depression as well as the fact that foodservice has not completely recovered yet, although I think the current political instability does affect the outlook as well. On the other hand, there is major growth in Indonesia, the Philippines, and Brazil, where there are many opportunities for cooking at home in the first place, because we have been seizing opportunities. 

 

(Q: You said that the second half will be in line with the previous year, excluding the effect of exchange rates. What about the first half? Could you explain the outlook for the year as well?)  

 

Sales in the first half increased in the low single digits on a local currency basis. The increase in sales in Q2 was in the high single digits. For the full-year, we expect sales to increase in the low single digits. In Q2, inventory increased for foodservice, but we believe there is not that much actual strength yet.  

 

(Q: Overall, sales are up a few percent in the first half and in line with the previous year in the second half. Are we to understand that your assumptions are cautious considering the impact of COVID-19 and the sense of economic slowdown?)  

 

Yes.
 

Looking at Q2, S&I sales fell ¥3.0 billion. About half of that is restaurant and industrial-use seasonings in Japan, and the rest is umami seasonings for packaged food products manufacturers. The decrease is mainly due to the negative impact of exchange rates and decline in sales volume and unit prices for nucleotides. Business profit declined ¥1.7 billion for S&I overall, and I hope you can understand that approximately half of this is restaurant and industrial-use seasonings in Japan, and the rest is umami seasonings for packaged food products manufacturers. The mix will change a little in the second half, and most of the forecast of a ¥1.8 billion decline in profit will be due to umami seasonings for packaged food products manufacturers. We assume that profit for restaurant and industrial-use seasonings in Japan will recover.   

 

(Q: I think that conditions in Japan were most challenging in Q1, so why did profit for restaurant and industrial-use seasonings in Japan decline so much in Q2?)

 

The extent of decline in sales was smaller in Q2 than in Q1. Business profit also recovered a little, particularly related to foodservice-use products. On the other hand, the extent of decline in sales was greater in Q2 than in Q1 for umami seasonings for packaged food products manufacturers, and business profit also turned to decline. This is due to nucleotides and the impact of currency translation, so we believe that this tone will continue in the second half. 
 

This fiscal year in particular, it has been difficult to make performance forecasts, with various variables making the economic impact hard to predict. Although it seems at first glance that conditions are challenging for foodservice-use products while home-use products are performing well, there are also some potential hidden risks. For example, the unemployment rate could increase further due to the economic downturn and consumption could decline due to cuts in assistance payments and other factors giving rise to economizing on expenses related to food. We do not necessarily factor in the maximum risk in terms of numbers, but we do have to consider the situation cautiously in our performance forecasts. 

 

(Q: Have you approached the second half forecasts as cautiously?)

 

We prepared the revised forecasts based on the conditions we can estimate, but there are some areas we approached cautiously because there could be events that will manifest in the second half. 

 

(Q: I do not think that you will use up all your marketing budget. What do you think?)

 

Under the COVID-19 environment, we are struggling with how to use the marketing budget for each country. We are gradually being able to engage in the store activities that were impossible in the first half, and I want you to understand that we will control marketing expenses while monitoring the position of net sales and gross profit. Specifically, for example, Aji-ngon® in Vietnam underwent the first product revision in five years in June, and it has made a positive start, but might lose market share to competitors as it did last year unless we invest in marketing. Sarsaya®, a liquid seasoning in the Philippines, has experienced at least double-digit growth compared with last year, but is a product with many competitors so marketing activities are needed to increase market share. In Brazil, we implemented price increases for AJI-NO-MOTO® and Sazon® during the COVID-19 pandemic, which required investment in marketing, including advertising. In Japan, we launched a product revision for HON-DASHI®, marking its 50th anniversary this year, and we want to put more effort into it, taking advantage of the increased opportunities for cooking at home.  
 

 It has been negative for sales because overall sales of restaurant and industrial-use products have declined. In Q1 and Q2, we produced results to some extent for home-use products without using budget. However, we do not think this can be sustained. There are also some individual products that have lost market share to competitors.

 

(Q: Has the market share of overseas consumer products increased in the Five Stars?)

 

At present, we are mostly maintaining market share. Market share for some flavor seasonings in Vietnam fell in FY2019, but we have basically maintained or slightly increased our share. For example, AJI-NO-MOTO® took the top market share in Indonesia a few years ago and has been gradually improving. However, depending on the sales promotions of competitors, some of our products temporarily lose and regain market share, but we think we are maintaining our market share over the long term.