Q&A at Interim Results Briefing (Nov. 6, 2020)

First, the three parts of asset reduction (animal nutrition business (commodities), some parts of the MSG business, and some parts of frozen foods business) are proceeding according to plan. We resumed negotiations for sell-off and tie-up of some parts of the animal nutrition business (commodities). We have already implemented initiatives for frozen foods in North America and will make an investment by the end of Q4, so it is in line with plans. Negotiations in the animal nutrition business (commodities) were temporarily at a halt, but we are now resuming negotiations and want to achieve the asset reduction as soon as possible. We have resumed negotiations on part of the MSG business. We are planning to achieve the asset reduction in Phase 1 (structural reform) of the MTP which runs up until FY2022.On the question of the expenses that will be incurred when asset reduction of the remaining approximately ¥50.0 billion occurs, we have not looked at it specifically yet. However, we believe that the level of expenses arising this year is necessary. We will look into it and notify you again.

 

(Q: In the animal nutrition business (commodities), you said that the European negotiations have resumed in line with plans. Are we to understand there are good prospects for the majority of the reform you were trying to achieve under the MTP in the animal nutrition business in Europe as well? Also, I think that you have already reduced production sites and recorded impairment in other areas. Under the overall plan, if asset reduction progresses in Europe, to what extent should we assume asset reduction will progress for the animal nutrition business (commodities))?

 

In North America, we are currently investigating specifically how we will change the business structure with a goal of FY2021. We expect this will incur structural reform expenses. Consequently, I would like you to note that we factored in a certain amount of structural reform expenses for Europe and North America this time.

 

(Q: Is it correct to think that there is still scope for reform of former sites in the animal nutrition business (commodities) in Thailand and Brazil going forward?)

 

Structural reform has already been implemented in Thailand and Brazil.

At present, we are not considering acquiring sales channels through a major M&A. However, in the D2C channel, and existing channels, too, venture companies are emerging that are expert at delivering directly to consumers. In terms of cost-effectiveness, there are also venture companies that can analyze opportunities and threats with a high level of transparency. We are considering working closely with such companies. In terms of the impact on the top line as channel shift is occurring, it is uncertain whether we can adapt to all channels. We plan to increase the companies we work with to capture demand. There are some companies with very high growth potential, and there is no denying that we will form capital tie-ups with such companies in the future.

 

(Q: Are we to understand that you will consider working with venture companies in the sale of new high value-added products and the provision of services, and promote streamlining of operations through DX for very general-use products?)

 

Our channel strategy obviously includes such approaches. Consumers are also becoming more stressed as cooking at home increases or use of prepared meals at home increases. People who have been cooking at home in the past are no longer satisfied with the meals they can prepare. In addition, some of the people who have started cooking do not know what to prepare. I think that the meal information we have put efforts into is now very valuable. A menu can also be given entertainment features that create enjoyment at the dining table. We can also include increases in nutritional value. In our marketing, we will continue adding user experience to menu information. We will implement the necessary DX to achieve this, and we want to collaborate with both start-ups and venture companies. We want to expand channels for existing business and create opportunities for use by combining our existing products with that information.

While the foodservice channel has been facing very challenging conditions due to the COVID-19 pandemic, we captured at-home dining demand, enabling us to grow AJI-NO-MOTO®, low volume flavor seasonings, and menu-specific seasonings. Our evaluation is that the marketing strategy driven by home-use products overall performed very strongly based on the direct sales system in Southeast Asia.

First, I will give you an answer about how we will recover from the falling market share in Japan. We lost market share because we held off on advertising to prioritize stable supply in response to the special demand for home-use products that arose in the first half. Also, we did not take part in strategies involving extreme price competition through discount sales at supermarkets and other outlets. Unfortunately, we lost market share as a result. To address this, it is important to conduct basic activities, such as reiterating the quality and convenience of our products and ways to enjoy them in at-home dining, combined with strategies at stores. We believe sales promotion expenses are necessary to support these activities. Next, I will give you an answer about investment in advertising. We believe investment in advertising, which was not implemented in the first half, is necessary to maintain and enhance existing brands. What is even more important is implementing initiatives for FY2021 onward that target solutions for food and health issues, which we have expressed in our vision, and preparing a new product group to realize our vision. When introducing new products, it is necessary to properly communicate product content and value to customers, and we will also make the necessary investment in advertising in this area.

 

(Q: In Q1, you lost market share as a result of not engaging in discount sales and concentrating on regular products to avoid shortages, and in Q2 you planned to increase sales promotion expenses to make up for that. As it turned out, sales promotion expense account was not used that much in Q2, but to what extent were you able to recover market share? Also, are we to understand that restoring the number of discount sales to the original level will lead to a further increase in market share?)

 

Although market share was recovering in Q2, there is a recognition that it did not recover sufficiently, due in part to the impact of competitors’ pricing strategies. In the second half, we will launch products for autumn and winter with the same product names. This does not mean that we will specially increase the number of discount sales, but we are aware that we will be left behind by the market if we do not implement strategies that strengthen our presence.

Cost consciousness is beginning to appear, and slightly extravagant consumption is clearly visible. The slide mentioned slightly extravagant consumption for the middle-to-high income bracket, but we do not have a quantitative understanding of how much people in various income brackets are saving money and accessing luxuries. However, what we are definitely seeing as a trend, in seasonings for example, is an increase in the number of people who are very eager to expand menu variety. In the past, older people were the main consumers, but young people have shifted to a preference for home-made food. Our characteristic is that we have extensive product lines ranging from basic seasonings and flavor seasonings through to menu-specific seasonings, which count as slightly extravagant. I would like you to note that a feature of our marketing is that we can come up with both inexpensive and slightly extravagant menus by expanding the variety of menus using basic seasonings and flavor seasonings. Lastly, on the question of whether the slightly extravagant consumption for the middle-to-high income bracket will impact food in FY2021 onward, I think it will depend on how much the coming economic downturn affects income or disposable income. We are not optimistic about this, but our current thinking is that we want to seize opportunities while assessing conditions in a timely manner.

In my presentation, I introduced cases from Malaysia and Vietnam. These cases include ecosystems based on collaborations with governments and health ministries as well as local universities, NGOs, and media that provide the lead in nutrition. This is the same scheme as the health and nutrition initiatives we have implemented in Japan. As you say, it is difficult for us to have an impact by ourselves, so creating this kind of ecosystem is extremely important, and I hope you will understand that we are proceeding with it steadily. Also, in terms of public relations, we will disseminate information at events such as UN forums and Japan’s Nutrition for Growth Summit, which are exactly the right places to meet with government and NGO representatives, and people who execute policy. Accordingly, this means that taking the initiative in these kind of events makes it easier to create ecosystems.

Over the past six months, the task force has prepared an ROIC tree to show what contributions each department can make to improving company-wide ROIC. During Q2, we shared it with people at a total of 16 companies, which include 15 J-SOX companies in addition to Ajinomoto Co., Inc. In the second half of FY2020, we will proceed with verification at Ajinomoto Frozen Foods Co., Inc. It will be difficult to apply it to all of the consolidated subsidiaries, but I think the previously mentioned 16 companies, which account for 85% of sales, should be able to start operation at the same time from FY2021. As for ROIC of 8%, we believe we should be able to achieve it by implementing the basic strategies of the MTP, including the asset reduction strategy, as shown on slide 27. The biggest issue of course is the top-line growth rate. At present, concerns have arisen due to COVID-19, and the growth rate is still falling a bit short in Q2. However, we did not change the target of 8% in the recent revised forecasts because we believed it had returned to the baseline to some extent.

 

(Q: Are we to understand that 8% was in view to some extent at the end of the first half of FY2020?)

 

We have not reached the point at which we need to lower the 8% target.

The positive factors for international seasonings were significant growth in low- and medium-volume products, primarily those for home use, which are high unit price products, and the high growth rate for menu-specific seasonings. This also includes affiliates that implemented price increases due to the impact of exchange rates. As for frozen foods in North America, under our structural reform efforts, we have intentionally shifted strategy to Asian category products and to those Mexican products with high unit prices. The above factors, when combined, resulted in an approximate 3% growth rate in unit prices for international consumer products.

 

(Q: The target growth rate for FY2022 is 2.5% and around 3% after that. Can we consider the current situation sustainable?)

 

As lifestyles based on at-home dining are becoming widespread, menu proposals using our seasonings and ready-to-eat frozen food are gaining a certain popularity. Is this the peak? I don’t think so, because while there are some consumers who still want to increase their menu variety, there are some consumers that think cooking is a major burden. I think we still have margin for growth in these areas. We want to continue improving the baseline and unit prices by capturing this.

 

(Q: How many products do you have in the pipeline for menu-specific seasonings? Going forward, I think developing menus to match consumer needs will be the driver. Is it correct to assume that you have an adequate product pipeline?)

 

I want you to understand that we have many. For example, there are 37 SKUs for CookDo® (Japanese, Western, and Chinese) in Japan. I think that generally around 10 of these SKUs are frequently purchased. However, we have rolled out long tail products, which are separated properly based on the characteristics of the channel and the area. We have a development site in Kawasaki, and we collaborate with overseas product development. However, the configuration of channels overseas is quite different from that in Japan, and it is not just about increasing the number of menus in traditional trade. Efficiency deteriorates without control, so I hope you will understand that we launch products while considering the balance.

Organic growth in core businesses, including the foods business, has improved, but the negative factor in the FY2020 forecast is the impact of umami seasonings for processed food manufacturers. The big impact on the top line company-wide is the fact that the recovery for restaurant and industrial-use products is yet to completely appear. I think the important thing is how much we can reduce the impact from the decline in sales of restaurant and industrial-use products by making up for it with new channels or dining opportunities, including home-use products. Consequently, we will look for new channels rather than regaining lost channels and opportunities for restaurant and industrial-use products. While concentrating on this, we will not miss opportunities for home-use products, or we will increase opportunities for those products. There is quite a bit of pressure because we have to do these two things, but if we can, it should be possible to fully restore the top line.

The European operation is exclusively for the animal nutrition business. In the case of the U.S., there are operations involved in a number of amino acids. Another difference is that we can capture a wide range of customer needs even if we switch production items. The strategies are different because in this area, shrinking the commodities in animal nutrition and switching to other amino acids and value-added products is acceptable in the market. Also, with regard to the question of whether commoditized feed-use amino acids such as lysine will disappear, they will become considerably smaller in volume. I would like you to note that, for example, amino acids with new technology such as AjiPro®-L will remain as specialty feed-use amino acids as part of Ajinomoto Health & Nutrition North America, Inc. (providing food-use amino acid formulations to users of packaged food products and developing seasonings for foodservice). We want to adjust products we sell in bulk.

 

(Q: Are we to understand that in the U.S. some of the upstream processes for bulk products connected with specialty products such as AjiPro®-L will remain, while capacity for bulk products on the scale of several tens of thousands of tons will largely be eliminated?)

 

That is the correct understanding.

In the forecasts for the second half of FY2020, which are based on the first half of FY2020, in local currencies, we expect that YoY growth in Indonesia will be up between 10% to 13%, up between 5% to 10% in Vietnam with similar figures in the Philippines, and double-digit growth in Brazil. In yen, there will be an impact from exchange rates, but we expect that most of these figures will be achieved based on home-use products. We believe there is a high probability we will maintain the baseline for growth in home-use products. We want to achieve further growth through the introduction of new products and aggressive communication activities.

 

(Q: The second half will slow down compared to the first half, but is it correct that the continuation of fairly strong conditions is assumed not only for home-use products but for these countries as a whole?)

 

Yes.

 

(Q: I would like to ask you for a bit more background on this.)

 

The mood in the countries I mentioned is one of refraining from dining out. Some countries, such as Indonesia, always had a high proportion of at-home dining, but have refrained from dining out even more, so I think that is the place with the biggest growth.

 

(Q: Is a high percentage of home-use products a positive for you?)

 

I hope that is the way you will understand it. On the other hand, growth in places such as Thailand where the foodservice percentage was high, was unfortunately lower than the previous year. If you look at these kinds of figures, you should be able to see that growth in home-use products is robust.

 

(Q: This year, growth in home-use products has been positive for the profit margin. Is it correct to assume that margins will fall when foodservice recovers next year?)

 

I think that will be the case if foodservice increases and at-home dining decreases. We hope to stop it from showing up in the figures in an extreme way by introducing new value-added products.

I think that is certainly the case with the forecast for the FY2020 shared companywide expenses expected to be ¥36.7 billion as shown on page 13, which is almost the same as the results in FY2019. The materials show investment for growth, such as DX, of ¥3.7 billion, and other existing expenses of ¥3.7 billion are expected to be reduced in FY2020. As one of the drivers for this, the joint venture with Accenture commenced in April 2020 with the aim of upgrading and streamlining operations by externalizing corporate services functions to create a shared services center (SSC). The ¥3.7 billion reduction is divided between existing self-help efforts and the creation of the SSC. Going forward, we are aiming to accelerate streamlining a bit for creation of the SSC. We have set task force investment, such as DX, at ¥10.0 billion over three years, some of which will appear as shared companywide expenses. Excluding that factor, we ultimately plan to reach 2.5% of sales in FY2022.

 

(Q: Are we to understand that total shared companywide expenses will be ¥36.7 billion, which is hardly changed from FY2019? Also, does the 2.5% of sales in FY2022 indicate existing expenses only?)

 

The forecast for FY2020 is the figure we are trying to achieve, after including investment such as DX. The plan for FY2022 is to try to achieve the 2.5% range, excluding investment such as DX.

In FY2020, I think with the recent revision of the performance forecast we have come closer to the baseline amount of business profit in the MTP, which did not anticipate COVID-19, although the reality is that we are still several billions of yen behind. Sales for the Seasonings and Foods, and Healthcare and Others businesses, and the Frozen Food business’ Asian category products, all of which form the profit base, are very strong, so we hope to build on these trends. The issue is uncertainty about factors arising in the future. While I cannot touch on FY2021 in detail, factors such as future economic impacts, particularly related to incomes, unemployment rates, and events such as riots and unrest associated with social instability in individual countries are still uncertain. We have increased the number of opportunities for dialogue in each quarter and hope to continue this in Q3. As part of that, I hope to be able to share our future response with you.