Q&A at Results Briefing Q&A (May 12, 2015)

When we were formulating our FY2014-2016 Medium-Term Management Plan, we considered including ROIC, but decided not to adopt it because of the problem of how to allocate capital and liabilities among the various businesses.

We intend to have various discussions incorporating the points you have made when we formulate our next medium-term management plan that will begin in fiscal 2017. Roughly speaking, the investment is small in international consumer foods but the profits are large, so ROIC should be high. The same is true of the electronic materials business in AminoScience. Generally, you can assume that there is a link between operating profit margin and ROIC levels.

Ajinomoto Co. does not currently use ROIC. We use ROA by business to measure capital efficiency, and from fiscal 2015 we may also calculate ROE by business. These measures reflect suggestions from institutional investors and others outside the Company when we were formulating the FY2014-2016 Medium-Term Management Plan, but for now, we think an ROE target is preferable as a key performance indicator (KPI). We will consider which metrics are appropriate for KPI while accepting suggestions from outside the Company.

We have formulated two medium-term management plans during my tenure. In them, we raised the objective of changing to a company that aims for stable profit growth. I thought that if we reinforced our business structure and focused on specialty, ROE, the operating profit margin and other KPI would naturally improve. As a result, we have made substantial improvements, including in EPS and market capitalization, so I would say that has gone well. However, we are only halfway to achieving our vision for fiscal 2020. There is still much to do, but we will deal with that through our reorganization into Consumer Foods and AminoScience.

As for progress being rough and slower than expected, nothing in particular comes to mind. I would have liked to achieve everything faster than we did, but nothing was too difficult to handle.

As for gaps from market expectations, I think there was a large gap at the start, before we formulated the FY2011-2013 Medium-Term Management Plan. We have changed our corporate structure so that it generates profit, but structural reinforcement takes time and requires a medium-term perspective. As a result, we changed in a way that you could see the transformation each year. In that sense, I think we adopted the same viewpoint as investors. Consequently, I don't have any sense of a gap from market expectations at present, and we intend to keep up a dialogue with market participants and to incorporate their suggestions in our management. In any event, I am grateful for the various ideas from many people that we were able to use to set targets for the FY2011-2013 Medium-Term Management Plan. 

For Ajinomoto Co., coffee and powdered drinks are businesses with a local core that originated in Thailand. On the other hand, for AGF they are businesses that have used the world-class research and technology of our former partner, the world's number-two company in the field, as well as AGF's own unique purchasing power. We expect to be able to transfer the coffee-related technologies to Ajinomoto Co. and use them there. Currently, AGF uses about ten times as many coffee beans as Ajinomoto Co., so in that sense I think various measures are possible at both companies. We want to work to change our coffee and powdered drinks businesses from a local core to a global core through our operations outside Japan.

At the time of the acquisition, the operating profit margin of Ajinomoto Co.'s frozen foods business in North America was in the double digits. Windsor's operating profit margin was about the same as that of our frozen foods business in Japan, and I said we were aiming for a combined double-digit operating profit margin for both companies. After obtaining all the information during post-merger integration (PMI) following the closing, we found that we may not reach our initial plan of 10%, but I am confident that we will come close.

(Q: Why did you think after going through PMI that you may not be able to reach a 10% operating profit margin?) Because of some slight delays from the initial plan. For example, initially we had planned to close one plant during fiscal 2014. However, preparing a business plan and product strategy during PMI led to a complete rethinking of our use of plants. 

In fiscal 2014, results for AjiPro ®-L and Valine exceeded our plan. For Valine, we had assumed a certain drop in the selling price due to the entry of a new competitor, but in fact we were able to maintain the selling price and a market share of nearly 100% in the first half. In the second half, our share decreased only slightly. For fiscal 2015, we forecast the entry of competitors and a drop in the selling price, so in light of those risks we kept our assumptions rather strict. We will work to compensate for these factors by expanding the market. As for AjiPro ®-L, we will be working to sell the amount of our increased production, and we expect marketing expenses for introducing the product in new regions other than North America.

We plan on a sales growth rate of 10% or higher, which is not very different from the growth rate in fiscal 2014. Menu-specific seasonings are still small in scale but are growing, and in fiscal 2015 we will proactively launch new products, which will require SG&A expenses, so income won't grow substantially. In addition, there will be increases in staff to strengthen regional divisions and increases in companywide expenses, so the growth rate will be somewhat lower.

The Indonesian economy has grown by about 5% for two years or so. Competition is intense, but Ajinomoto Co. improved profitability as it has grown by using a powerful sales network and conducting successful measures such as an overhaul of Masako and proactive communication. Sales of various types of seasonings are also increasing, and we are on a vigorous growth track.

We wanted to raise the net income (profit attributable to owners of the parent) forecast for fiscal 2015 a little more, but we are aiming for a higher growth rate for net income in fiscal 2016 than we have had until now. Including our control of capital, I think we are on our way to achieving our target.

AGF's operating income for fiscal 2014 reached a record high of JPY 4.8 billion, or JPY 6.3 billion if you add the commissions to Ajinomoto Co. As a result of two years of structural reinforcement since I took office as president of AGF, the company now has a structure that can stably generate this level of profit. On the other hand, the profit level is inevitably affected by the market price of coffee beans. With the impact of the rise in coffee bean prices last year, we made revisions to almost all our home-use products in February 2015. We can't disclose our operating income forecast for fiscal 2015, but we want to establish these revised products to cover the impact as much as possible.

In our M&A, we are targeting global growth and contribution to our technologies. The acquisition of Windsor increases our presence in the developed countries of North America with the intention of building our brand and a sales foundation. We made AGF a wholly owned subsidiary for global growth, considering Japan as a part of the global market. Regional coverage is still insufficient. In particular, we are still weak in Europe. We have established a production base in Poland that may achieve sales of around JPY 4-5 billion in the future, but it is currently only at half that level. Growth in Europe has been rapid over the past few years, but compared with other regions, the scale of sales is off by a power of ten. The issue is how to increase in size. It is the same outside the developed countries. There is still plenty to do in each region. The domain of seasonings that Ajinomoto Co. handles is still narrow, and we want to broaden it. On the technological side, we have reached a considerable level and can do many things that other companies cannot, such as producing natural seasonings that are not considered food additives. We use these original technologies in food products in Japan and internationally, but there is still much we want to do in this field.

We have given much thought to the size of the companies we are targeting for M&A, but we want to be more aggressive in our consideration. The operating profit margins of Windsor and AGF are currently lower than the average for the Ajinomoto Group, but we will improve them. We are reinforcing our business structure using the channels we have obtained with an image for 2020, so these two companies will probably start making a notable contribution to profit around then. Windsor in particular has the potential to post growth in a J-curve. To establish a more ideal structure for AGF, we are considering obtaining trademark royalty rights in the future, but that is a matter for discussion with another party, so there is nothing specific I can say. We have an image that both companies will reach operating profit margins at the level we are aiming for by 2020. 

Sales volume of specialty products increased more than 40% year on year in fiscal 2014, and we are aiming for nearly the same level of growth in fiscal 2015 and thereafter. We intend to launch more new products over the medium-term, and future sales volume will change depending on the timing of the launches.

Net sales will be affected by the selling price and sales volume of Valine, which has a relatively high unit price. The growth rate of net sales is likely to be slightly lower than the growth rate of sales volume. 

Ajinomoto Co. is participating in the Japan Pavilion at Expo Milano 2015, and we have been in consultation with others who are presenting exhibits on scientific and cultural background of umami and dashi soup stock. Ajinomoto Co.'s Food Culture Center will exhibit colored woodblock prints depicting various foods and recreate the menus depicted in those prints.

The Ministry of Agriculture, Forestry and Fisheries has planned a "Japan Day" on July 11, and Ajinomoto Co. will hold a symposium and exhibit during the week or so around that date. We have invited renowned chefs from Italy and the United Kingdom who will introduce dishes made with umami and dashi so we can convey our message on reducing sodium and promoting satiety together with the latest research from the United States and Europe.

Umami was the starting point for Ajinomoto Co.'s founding, and dashi is also a cornerstone of our business, so as a companywide issue we have been conducting activities to clear up misunderstandings among opponents of MSG for some time. These activities have begun to show results lately, and we will use Expo Milano as an opportunity to communicate the useful information that backs up our activities. Japanese food is currently popular worldwide, so we will base our appeal on the umami, dashi and MSG that are its building blocks. It may take some time before this leads directly to product sales, but we expect a ripple effect from raising the value of gyoza and other Japanese dishes. 

Companywide expenses also increased year on year in fiscal 2014. In fiscal 2015 as well, nearly half of the increase is expected to consist of higher expenditures for companywide research themes. Also, personnel expenses have increased as we raised base pay for two years in a row. These are the two largest factors.

As for support in fiscal 2015, growth areas will be the Japan and International Food Products businesses. In particular, Japan Food Products aims to achieve the plan by fully compensating for the impact of the pullback in the first half of fiscal 2014 from the last-minute demand ahead of the consumption tax rate increase. For restaurant and institutional use products, which achieved stable growth in fiscal 2014, we expect continued growth, especially for functional products.

International Food Products aims for sales growth on par with fiscal 2014.

In fiscal 2014, the growth rate for gross profit was higher than for net sales, but we were able to improve the operating profit margin by keeping the increase in SG&A expenses below the growth rate of gross profit. We will manage profit in that way this year, too.

Another point is stabilizing the animal nutrition business. The other businesses in AminoScience are small in scale but are growing steadily. Put together, their growth is significant. Pharmaceutical custom manufacturing grew substantially in fiscal 2014, and if we can maintain that growth in fiscal 2015, I believe we will be able to achieve our targets.

The conceivable risks are foreign currency translation and raw material and fuel prices. They have been stable and favorable for the past year or so, but we need to maintain a vigilant outlook.