Q&A at Interim Results Briefing Q&A (Nov. 10, 2014)

Given that we want to achieve JPY 100 billion in sales in both domestic and overseas frozen foods in the future, our current classification for presentation probably will not fit the actual circumstances. Accordingly, we are thinking of changing the presentation of results from April 2015 to show total results for frozen foods as well as separate domestic and overseas results.

By the end of June, the pullback following the surge in demand ahead of the increase in the consumption tax rate was over, but sales of consumer goods, including food products, were weak nationwide, except for some parts of the Tokyo metropolitan area. I believe adverse weather conditions during the summer also had a negative effect. This trend is a cause for concern in the operating environment for the second half. However, Cook Do® and other products for which we have invested heavily in marketing have done extremely well. We won't be investing proactively in all products, but because there are products that sell well in the second half, such as HON-DASHI® and soups, we want to invest proactively while looking at effective use of expenses.

Sales are usually higher in the second half than in the first half in most years. As presented in our FY2014-2016 Medium-Term Management Plan, we plan on substantial growth in the Five Stars for products such as AJI-NO-MOTO®, flavor seasonings and instant noodles. We want to invest proactively in marketing while looking at effective use of expenses.

The primary reason the prices of Lysine and Threonine have been rebounding is a substantial reduction in production by Chinese competitors. In particular, the surge in the price of Threonine is mainly because the proportion of market volume supplied by Chinese manufacturers is greater for Threonine than for Lysine. With a substantial decrease in production volume since the summer, the balance of supply and demand has rapidly tightened. As for the outlook, when selling prices rise, each manufacturer will naturally increase production volume. For example, a major Chinese competitor briefly stopped production of Lysine, but has reportedly been operating one of its factories at 50% capacity since the middle of October. Because it is likely that other manufacturers will also raise their capacity utilization, Ajinomoto is not optimistic about the outlook. As for Lysine, there are major competing manufacturers outside China, and we feel that the price will not rise rapidly. The selling price of Threonine is surging but this is unfavorable both for customers and for Ajinomoto. We want to do all we can to be able to supply products at stable selling prices, and we will make decisions while examining conditions carefully.

We are not entirely optimistic about this fiscal year or the next fiscal year. The decline in income from feed-use amino acids had a substantial impact on the decrease in our operating income for the previous fiscal year and the interim period of the current fiscal year. However, Ajinomoto was earliest in predicting the deteriorating earnings structure of the industry, and our competitors were late in realizing it, which has delayed their profitability improvements. We don't know how market conditions will change in the future. Upon seeing growth in profits, competitors will increase their supply volumes. A levelheaded examination is required from the fourth quarter onward. We don't think an abrupt rise in profits from this business is desirable.

The impact on profit will vary according to assumptions for product prices and other factors, but for example, when facing a sudden rise in the market price of Threonine as we are now, we will be able to generate substantial profit by maximizing Threonine production. Up to now, we have worked to minimize fixed manufacturing costs for each individual product, but for the future, creating a system that can respond flexibly to market fluctuations at a minimal investment will be important for reducing volatility. At last we have prospects of achieving such a system, backed by the introduction of new technology. For example, some products generate a large amount of wastewater, and we have prospects of introducing technology that can reduce wastewater with a low investment. We will further improve our technological capabilities.

I will answer from two perspectives. First is its role in the Ajinomoto Group. The Group is pursuing new growth in cutting-edge pharmaceutical and healthcare-related fields, and the business acts as the platform that handles the specialized functions required. In addition, the business is valuable because it has a network of doctors as an outlet for our R&D. Second, its recent results as a pharmaceutical manufacturer have prospects in the field of inflammatory bowel diseases (IBD). Currently, conditions are severe but have been changing little by little. From these perspectives, we are not thinking of selling the pharmaceuticals business. On the other hand, we are still far from being able to establish a growth channel from continuing rollouts of existing products. As a result, we think a step forward through inorganic growth is necessary, and in that regard we mentioned a comprehensive tie-up. However, we have nothing specific to say at the moment.

I can't really be too happy about achieving that target, since the entire Japanese stock market is performing well, not just Ajinomoto. But with the market's faith that Ajinomoto will be able to raise its EPS, PER and ROE in the future, our entire management team is starting to have confidence that achieving the targets of our FY2014-2016 Medium-Term Management Plan one by one will lead to raising our corporate value. Based on the current stock price level, our market capitalization target of JPY 1.5 trillion in fiscal 2020 may not be appropriate. In the next fiscal year and beyond, we may think about updating our market capitalization target while looking at stock price levels of the overall market. However, we will not stop aiming for a high level at all times as long as we have a chance.

Valine has made a big contribution to results. Sales volume has nearly doubled year on year. Even though a new competitor has entered the market, it hasn't been a full-fledged entry and its scale is still small, so the price remains stable. The sales volume of AjiPro®-L is still low, so it will make a full-fledged contribution after construction for a capacity expansion is completed. Sales volume of AminoGut®, which promotes piglet growth, is increasing stably. In addition, we are conducting initiatives with individual customers to sell specially designed Lysine for fisheries and a new amino acid for broilers. However, these are similar to private label products, so we don't disclose detailed information on each product. We aim to expand specialty products through an accumulation of measures such as these.

Valine. The sales volume has been high and it has exceeded our initial plan. Construction for capacity expansion for AjiPro®-L will be completed in December, so its current contribution to results is not substantial.

Undoubtedly, the growth rate for operating income is lower than the growth rate for net sales in our plan for the second half. Unlike the first half, sharp increases in costs are forecast in some countries, including electricity in Brazil and packaging, ammonia and other raw materials in Indonesia. Our plan incorporates various factors, but we won't let the increase in marketing expenses exceed the growth rate for gross profit. I would say that it's a fairly reliable plan. Since we have been expanding the areas where we do business over the past two years, mainly in emerging countries, we are making a proactive investment in marketing for new product launches and market penetration. In Thailand, where the growth rate was weak in the first half, we plan to invest aggressively to bring it closer to our target. Because our plan is reliable, we want to try to exceed our target.

That is because the production process for Lysine is different from other amino acids (Threonine, Tryptophan, Valine), and there is not much equipment in common between them. However, increasing the scope of reconfigurable operation for Lysine is an issue for future consideration.

Severe conditions continued in the second quarter, with a Lysine price of USD 1.40/kg. As a result, products other than Lysine, such as Threonine, Tryptophan and specialty products, made a major contribution to achieving profitability. We have forecast that we will achieve our full-year operating income target of JPY 4.0 billion, and that specialty products will account for 40% or more of that amount. As for cost reductions, we steadily carried out measures including introducing technology for fermentation using fewer resources. Our efforts were supported by stable raw material prices and favorable foreign exchange conditions led to cost reductions on a U.S. dollar basis. We reduced the break-even point for Lysine considerably beyond our plan.

We reduced the break-even point for Lysine considerably beyond our plan. It was due to a combination of cost reductions from introduction of new technology, stable prices for raw materials and fuel, and exchange rates. Ajinomoto was able to use this combination of factors to improve profitability through its own efforts.

Growth in countries other than Thailand was as expected, but the growth rate for sales in Thailand in the first half of the fiscal year was about 2-3%, and operating income was a little higher. Market conditions are weak in Thailand, and the markets for beverages and instant noodles, which are major fields for Ajinomoto, shrank year on year. Thailand's economic growth rate was about +0.4% from April to June, and that was the extent of our growth as well. The forecast for the year has been revised downward to between 1.5% and 2%. In the previous fiscal year, the Ayutthaya Factory had just started operation and was having a hard time achieving maximum production from the start, but it has come to contribute substantially to operating income as the on-site level of experience has risen and production has stabilized. In addition, introduction of new technology at another core factory is contributing to income, as productivity improvement at factories contributes significantly to income. Moreover, growth of flavor seasonings, which are a pillar of income, has outpaced the growth rate of the Thai market, and that strength is not temporary.

The tax rate for the interim period was approximately 21%, which was lower than approximately 24.7% for the previous fiscal year. Looking at operating income by region, during the interim period there was a decrease in income from Japan, Europe and the United States, where tax rates are comparatively high, while ASEAN, where tax rates are relatively low, accounted for approximately 52% of income. The corporate tax rate was approximately 22% in Vietnam and approximately 25% in the Philippines and Malaysia. The tax rate in Thailand was approximately 20%, but Ajinomoto received a special rate of about half of that as an incentive for investment. In the second half, with a rebound in income from feed-use amino acids and growth in sales of seasonings and processed foods in Japan, income from developed countries, where the tax rate is comparatively high, will increase and ASEAN will account for around 35% of income. As a result, we forecast a tax rate in line with our plan.

It depends on the breakdown of income by geographic region. If the proportion of income from ASEAN countries increases, the tax rate will decrease accordingly.