-
What are the reasons behind Ajinomoto’s plans to substantially increase capital expenditures in the Domestic Food Products and Overseas Food Products segments in fiscal 2014? Also, why have you been unable to reduce persistently high levels of investment in the Bioscience Products and Fine Chemicals segment?
In Bioscience Products and Fine Chemicals, while maintaining capital expenditures at the same amount, we will make a major shift in the deployment of investment from the commodity field to specialty fields. In Domestic Food Products, main capital expenditures will include investment in rationalization for structural reform of our frozen foods plant in Japan and investment to expand the production line for Gyoza, which is selling strongly. In Overseas Food Products, main capital expenditures will include investments to introduce technology for fermentation using fewer resources in order to lower costs and to increase production of strong-selling flavor seasonings.
-
ROE for fiscal 2014 is forecast to be 7.1%, unchanged from fiscal 2013. What does this indicate about Ajinomoto’s management?
The ROE target of 7.1% was calculated from the fiscal 2014 target for net income and balance sheet figures. However, we aim to achieve ROE of 9.0% in fiscal 2016.
-
The market spot price for Lysine continued to fall in the fourth quarter of fiscal 2013, but Ajinomoto was able to secure operating income of JPY 200 million for the full fiscal year. Was that because you estimated conservatively although you could still make a profit even at a spot price for Lysine of, say, USD 1.30/kg? Or was it because your cost reductions had a greater effect than you anticipated?
Market conditions were extremely severe for Lysine in the fourth quarter of fiscal 2013, with weakening prices due in part to the start of production by a competitor in North America. On the other hand, sales and income for AjiPro®-L, a specialty product, were higher than we anticipated. Similarly, in addition to expanding sales of Valine and other products and carrying out our price strategy, we generated income, including from reduction of costs and expenses, and as result we narrowly stayed in the black.
-
What proportion of operating income in the feed-use amino acids business originated from specialty products in fiscal 2013?
Because commodity products faced extremely challenging conditions in fiscal 2013, the ratio of specialty products is not particularly meaningful, and so we have not disclosed it. We look at that ratio as one indicator for creating a structure that is not affected by market changes for commodity products such as Lysine and Threonine, rather than for the purpose of comparison with fiscal 2013. The specialty classification only just started since the FY2014-2016 Medium-Term Management Plan, and we plan to come up with a method of presenting it. (Q: Is it correct to assume that operating income originating from specialty products exceeded your assumptions in the previous fiscal year?) A: Yes.
-
What is the likelihood of expanding the share of Ajinomoto Build-up Film (ABF) for tablet and smartphone applications, and how positive has response to the product been?
There are two points where Ajinomoto has secured an advantage and the response has been good. First, as prices for these electronic devices continue to decline and performance continues to rise, there will be demand for higher-performance materials, so needs will rise for ABF, which offers high performance for its price. Second is that Ajinomoto has been focusing on joint development with users, which is a prerequisite to adoption, and is carrying out initiatives with various customers.
-
Can you give details on the JPY 2.2 billion positive effect of structural reforms in the operating income forecast for Pharmaceuticals in fiscal 2014?
JPY 0.8 billion will come from reduction of fixed expenses at plants. Of the remaining JPY 1.4 billion, about 70% will come from structural reform of R&D and the rest from structural reform of sales and marketing, among other factors.
-
Why have companywide expenses for fiscal 2014 increased to the level of fiscal 2012? Will they continue to increase from fiscal 2015 onward?
Under the FY2014-2016 Medium-Term Management Plan, we are prioritizing investing R&D expenses in medium-to-long-term companywide strategic themes, but will not be increasing the overall amount. We shifted some research expenses that have previously been borne by individual divisions to companywide expenses. This shift accounts for more than 60% of the increase in companywide expenses. Another factor is the increase in retirement benefit expenses. With the revision of the pension system about 10 years ago, as the amount of retirement benefit expenses decreased, the actuarial difference was treated as a gain. This gain has been amortized for a 10-year period from the year following that in which it was recognized. The effect of the end of this amortization period appeared in fiscal 2013. We do not expect any major change in the future.
-
Regarding the outlook for the selling price of feed-use Lysine from fiscal 2015 onward, it seems that the price will bottom out in fiscal 2014 and shift to an upward trend. However, with the news that a competitor is increasing production by 100,000 tons, will the increase in price continue in fiscal 2015 and thereafter?
We are aware of the information about the competitor’s production increase. Currently, all of our competitors are adjusting their production because management based solely on a strategy of emphasizing supply capacity is not sustainable, making it necessary to determine whether supply capacity is competitive or not. Demand is forecast to continue increasing, and we believe that there will be companies that plan to expand production capacity or newly enter the market, but prices will be controlled by the balance of supply and demand. Because the current price is at a historically low level, we believe there will be a correction, but we do not have an optimistic outlook for a constant increase. We will continue our structural reforms to build a competitive structure that generates profit in any operating environment.
-
How reliable is your assumption that the feed-use Lysine market will recover in the middle of fiscal 2014? How much will market inventory decrease? Given your assumption that Ajinomoto’s sales volume will be flat, how much supply volume do you foresee from other companies? How does the current level of inventory compare with the ratio of inventory to sales when the CIF price was USD 1.30/kg?
I do not have accurate data on market inventory, but in our interim presentation in November 2013 we mentioned the abnormal condition of approximately one half-year’s worth of inventory in the Chinese market.
Subsequently, some companies announced production adjustments around December. Production adjustments by competitors in China reduced the inventory level in the Chinese market to about two months’ worth. There was also news that competitors in North America adjusted production as well. With global Lysine demand at about 2.2 million to 2.3 million tons, or about 180,000 to 190,000 tons per month on average, we are looking at a trend toward decrease in market inventory with adjustments of about 15% of supply capacity, or 20,000 to 30,000 tons. There are likely to be companies that increase supply volume as the price rises, so we will decide on the appropriate time and amount of price increases with a close eye on conditions. -
In fiscal 2014, the forecast payout ratio is below 30% and ROE is forecast to be flat. How should we react to these targets? Is it fair to assume you will be making large-scale investments?
At present, we are forecasting a dividend of JPY 20 per share, but we will consider what is appropriate while looking at the profit we generate.
(Q: Is your policy for fiscal 2014 to make investments for growth even if it means lowering your ROE target?) A: We think of investments for growth at all times. In particular, we would like to be able to make the necessary investments under the FY2014-2016 Medium-Term Management Plan. Since the payout ratio varies with the level of income, we aim to achieve our target by steadily generating profit. -
I would like to reconfirm the significance of your joint venture with Toyo Suisan Kaisha, Ltd. What do you find appealing about the company?
Ajinomoto operates an instant noodle business, so it already has some noodle manufacturing technologies. However, we find particular appeal in the technological development capabilities Toyo Suisan Kaisha, Ltd. has accumulated over many years, as well as the technological strengths and superior knowledge that have allowed it to succeed in the intensely competitive environments of Japan and North America. In India and Nigeria, where we will begin operations, competitors who arrived ahead of us already have a predominant market share, so we decided we need a strong partner to enter these markets.
(Q: How will you secure market share in these markets, where strong competitors are already established?) A: We expect Toyo Suisan Kaisha Ltd. to have technologies for production at a cost lower than our assumptions. However, no matter how low the cost of production, it is meaningless if our products cannot be differentiated from existing products. We have only just begun studying with Toyo Suisan Kaisha Ltd. how we will differentiate our products and how we will develop products with greater value. -
Operating income from overseas consumer foods increased JPY 2.6 billion in fiscal 2013 excluding the effect of currency translation, but the forecast for fiscal 2014 is approximately JPY 5.0 billion, despite the somewhat negative effect of currency translation. What are the reasons behind your forecast for such a substantial increase in income in fiscal 2014?
In fiscal 2014, we expect organic growth, with hardly any positive effect of currency translation. In fiscal 2013, the launch of a new plant for MSG in Thailand was delayed, making it difficult to generate the income we had assumed. However, from April 2014, income has recovered substantially, mainly for AJI-NO-MOTO®, as inventories have declined compared with the previous year. In beverages, which struggled in fiscal 2013, we will work for growth with proactive investment in advertising and a new, differentiated product for Birdy®. We expect a substantial recovery in fiscal 2014 in Thailand, which is a pillar of income. In other countries, mainly the Five Stars, we will achieve double-digit growth in core products such as AJI-NO-MOTO®, flavor seasonings, menu seasonings, beverages and instant noodles. In addition, results also picked up in Africa in the second half of fiscal 2013, and we will continue this trend in fiscal 2014.
(Q: Does the pickup in Africa include MSG prices, which have been an issue until now?) A: In fiscal 2013, MSG struggled. Sales did not go as planned, but picked up from the second half. We expect sales to continue growing in fiscal 2014. -
Lysine inventory levels may have been adjusted in China, but North America will probably experience a major change in conditions from fiscal 2013 to fiscal 2014. Will the gap between supply and demand in North America begin to close in fiscal 2014?
We are not worried about the Lysine market in North America. The market will definitely recover. The issue is timing. Since Ajinomoto built its first plant in North America in 1986, other companies have entered the market. Currently, four companies have plants in North America. Naturally, each company has invested to seek profit, so we doubt they want prices to remain at the current level. Since the competition takes place in the same country, with the same basic factors such as exchange rates and raw material prices, the decisive factor will be technological capability. If so, we believe Ajinomoto is in a superior position, with an advantage in terms of costs. Historically, price competition and a drop in the market price directly follow the entry of a new competitor into the market, but it always recovers. We are not in the least pessimistic.
-
I would like to ask about the long-term potential of frozen foods. Am I correct in thinking that the increases in sales and income and the rise in marketing expenses will be mainly in Japan?
We forecast an increase in sales of JPY 8.6 billion from fiscal 2013 to fiscal 2014, and about JPY 4.0 billion of that is expected to come from overseas. Of the JPY 1.1 billion increase in operating income, JPY 0.5 billion is expected to come from overseas. The operating profit margin overseas is two to three times that of Japan, so increasing the overseas ratio is important for the soundness of the frozen foods business as a whole. The markets of North America and Europe are fairly mature. Ajinomoto has continued to expand the scale of its business for 14 years since its entry into the North American market and 10 years since its entry into the European market. We believe there is still ample room for promoting specialty products, and we plan to increase overseas sales from their current level of more than JPY 13.0 billion to around JPY 30.0 billion between fiscal 2016 and fiscal 2020.