Q&A at Results Briefing Q&A (May 12, 2016)

One example of our measures to accelerate the growth of our international seasonings and processed foods business is the establishment of a joint venture with the Lakson Group in Pakistan in fiscal 2016. To date, Ajinomoto Co. has begun by building a sales network on its own for AJI-NO-MOTO®, then gradually expanding the scale of its business, but that method takes about15 years to become profitable on a single-fiscal year basis. To accelerate growth while expanding from Pakistan into adjacent regions, we will employ a strategy that differs from our conventional organic growth strategy. Instead of selling AJI-NO-MOTO®, we will use the sales channels of the Lakson Group to sell flavor seasonings and other halal-certified products that are established in the region, which we will manufacture at PT Ajinomoto Indonesia.

The rate of organic growth you are talking about will not be enough to make our target. Accordingly, for our next stage of growth we are simultaneously investing to expand our portfolio, mainly in the Five Stars countries that are major money-makers for us. For example, we have made capital investments in flavor seasonings and frozen bread in Indonesia. We intend to pick up the pace so that these investments pay off by 2020.

Equity in earnings of affiliates increases or decreases as a result of decisions made from the standpoint of groupwide strategy, such as making Ajinomoto General Foods, Inc. a wholly owned subsidiary or the sale of Ajinomoto Co.’s equity in NISSIN-AJINOMOTO ALIMENTOS LTDA.

Profit attributable to non-controlling interests originates from our need for local partners to conduct business smoothly in emerging countries. We will need to consider and decide on a strategy for increasing profit attributable to owners of parent. 

As for our plans for fiscal 2017 and thereafter, we are currently formulating our FY2017-2019 Medium-Term Management Plan, which we expect to announce in February 2017. Specific figures will be available then.
(Question: Can we assume that as a result of your investments in fiscal 2016, income growth in fiscal 2017 and thereafter will be greater than it is now?) Yes. 

In Ajinomoto Co.’s food products business, we are targeting a gross profit ratio of 45% for household-use products and 35% for restaurant and institutional-use products. The difference is due to the different selling expenses involved, but our targeted operating profit ratio for both is a minimum of 15%. Because B2B2C products are specialty products for which there is not much competition, profit margins are high. Sales are still small in scale, but recently the growth rate has been 20-30% each year, and we expect sales to reach a relatively high level by 2020.
(Question: Is the operating profit margin close to that for consumer products?) Yes. 

Before our acquisition of the former Windsor Quality Holdings, LP (“Windsor”), when Ajinomoto Frozen Foods Co., Inc. conducted Ajinomoto Co.’s business in North America, we covered about 1,000 mass retailers. However, Windsor already had distribution channels covering tens of thousands of stores, with the ability to ship virtually anywhere in North America. Today, Ajinomoto Windsor, Inc. has sales of approximately JPY 100 billion, but Asian and ethnic foods, which we will expand, account for 40% of sales, and Japanese food sales are only about JPY 10 billion. The growth rate of the North American market is around 2-3%, but by promoting sales of Japanese food using Windsor’s distribution channels, we intend to achieve annual growth of 5% or more by 2020.
(Question: Will it be necessary to make changes to the current distribution channels to achieve annual growth of 5% or more?) In fiscal 2015, using Windsor’s distribution channels for Japanese-style dumplings increased the number of stores we shipped to by more than 200. Consequently, I don’t think we need to make any changes at present. 

The yen is appreciating, but conditions will differ depending on how long it remains high. At present, we haven’t had any requests to lower prices, but if the yen remains high, such requests are a possibility. We hypothesize the impact of raw material prices when preparing our budget, including company efforts to reduce costs, then conduct negotiations to raise or lower prices. I believe we were able to carry out price increases in fiscal 2015 because there was a trend throughout Japan toward ending deflation. 

It depends on how long the yen remains high, but price reductions are unlikely in the first half of fiscal 2016. If the yen remains high for a prolonged period, we can only assume that prices will go down.
Particularly for products such as edible oils where product costs have a direct bearing on the sales price, prices could be reduced. 

Consumers respond sensitively to the prices we set. If we reduce prices, total sales will also increase for products where we can expect an increase in sales volume. However, we will not reduce prices of all products across the board, which would have an impact on the operating profit margin.
Trends for major products are likely to affect the operating profit margin. 

Specialty products faced a tough fight in fiscal 2015 mainly in sales of AjiPro®-L and Valine. For AjiPro®-L, the price of milk fell in North America, reducing the motivation for dairies to increase volume and making it hard to justify spending money on a new product to increase the volume of milk produced. However, even in this worsening environment, customers who have already started using AjiPro®-L do not stop using it. In other words, the big payoff for us is the customer’s recognition of the product’s value. Accordingly, in fiscal 2016 we need to increase the number of new customers, and we are considering sales measures focused on that objective. We have already appointed a new sales distributor whose strong suit is finding new customers, and we have seen results, with monthly sales volume increases in February and March. Including improvements in product specifications, we aim to achieve a sales volume target of 6,500 tons in fiscal 2016. In addition, we will strengthen sales expansion outside North America. For Valine, in fiscal 2015 we became able to manufacture in Brazil as well as at AJINOMOTO EUROLYSINE S.A.S. There was an impact on production and sales during fiscal 2015, due in part to problems at the startup, but things have stabilized. We are also promoting alliances with customers, and will conduct measures for expansion at our two bases in France and Brazil.

As for your question about the low operating profit margin for animal nutrition and its volatility, we aim to incorporate specific measures for increasing specialty products in the FY2017-2019 Medium-Term Management Plan. We are already carrying out structural reforms, including R&D and investment plans, for that purpose. We will increase the operating profit margin and stabilize the business. 

Even though the pharmaceuticals business is now accounted for by the equity method as EA Pharma Co., Ltd., the custom manufacturing business still remains in the Other Business segment. Although net sales have been scaled down substantially, we recorded a loss because of the fixed expenses allocated to that business. From fiscal 2016, we will need to evaluate the results of the pharmaceuticals business together with equity in earnings of non-consolidated subsidiaries and affiliates, but because the budget for EA Pharma Co., Ltd, is currently being prepared, it has not yet been recorded in Ajinomoto Co.’s fiscal 2016 budget. We will give ongoing consideration to how to reduce the burden of the fixed expenses of the pharmaceuticals business on the Other Business segment. 

We have two in the profit structure. First, excluding our addition of Ajinomoto General Foods, Inc. to consolidation, there is not much organic growth in our top line. The gross profit margin is trending upward with our shift to highly profitable products centered on restaurant and institutional-use products, including specialty products in B2B2C. Second, we will introduce an automated production line for food products at the Kawasaki Plant. We will use new technologies and automation to raise efficiency at facilities throughout Japan where production efficiency is low even though we have completed depreciation. These will be core measures for Japan Food Products in the FY2017-2019 Medium-Term Management Plan.
These two measures will get results. 

For sales of international seasonings and processed foods, it is difficult for everything to go according to plan, partly because of the various conditions in each country. Still, overall growth on a local currency basis for fiscal 2015 was not bad. However, the growth rate in Thailand, where our scale of business is largest, was weaker than we expected. To put it in context, the country’s economic growth rate was weak. Even though the growth rate in other ASEAN countries was around 5%, it slowed to between 2-3% in Thailand. In addition, Brazil’s economy was also more challenging than we expected. Adding in the impact of exchange rates, weak economic growth rates in our main countries show up most prominently in the fourth quarter.

In Nigeria, which we expect to become the next growth driver after the Five Stars countries, there are concerns about a foreign currency shortage due to the drop in the price of crude oil and a resulting lack of funds to pay for imported raw materials. As a result, we have minimized production volume by making production adjustments from the fourth quarter.

On the other hand, viewed by product, seasonings continue to grow as expected in each country, including Thailand and Brazil. To be realistic, 10% growth in Thailand is difficult. Looking just at seasonings, growth is 4-5%. In Brazil, flavor seasonings are growing by more than 10%, even under the current severe economic conditions.

However, processed foods with a high level of variation in individual preference, such as beverages in Thailand and powdered drinks in Brazil, are having difficulties. In Thailand, we made an all-out effort just to maintain sales at the level of the previous fiscal year.

We are aiming for 10% growth on a local currency basis in fiscal 2016. To achieve it, we made sizeable investments in advertising and new product development during fiscal 2015. We will ensure that these investments lead to results that also increase sales of processed foods in fiscal 2016 and beyond. 

The current market price of Lysine is around USD 1.20/kg, which is somewhat lower than our assumption of USD 1.30/kg for fiscal 2016. The price has been in a slump for a long time and the current price is still low from a historical perspective. As you would expect, competitors in the industry are also facing challenging conditions and many are starting to adjust production.

Ajinomoto Co., announced a price increase in North America in March, and other companies began announcing price increases in April. Since the balance of supply and demand has tightened in North America, Ajinomoto Co. announced another price increase this week, and immediately thereafter our competitors announced their own price increases. The price of Lysine appears to have bottomed out. If you look at our forecast of prices for the first and second halves of the fiscal year, we envision prices of around USD 1.25/kg in the first half and around USD 1.35/kg in the second half, which puts us well within range of our target for the full fiscal year.

Conditions for Threonine, with its softening price, are the same as for Lysine. In comparison with the full-year forecast for fiscal 2016 of USD 2.00/kg, the current price is around USD 1.70-1.80/kg. Compared with Lysine, just a few companies control a majority of the market for Threonine, so a substantial price increase in a short time is possible due to the pricing policy of a major Chinese manufacturer, like in 2014. Assuming that each company is finding profitability difficult at the current price level, we intend to rationalize prices while closely watching current conditions.

For Tryptophan, the current price is around USD 7-8/kg with the impact of increased production by a competitor, the entry of a Chinese manufacturer and other factors in fiscal 2015. Ajinomoto Co.’s market price forecast for fiscal 2016 is USD 8/kg, a somewhat conservative assumption. We are increasing production in Europe by 2,500 tons in fiscal 2016, and we expect a corresponding increase in sales. The increase in production will have the effect of lowering costs, so we envision meeting our target with steady sales of the amount of the production increase.

Although instability in the commodity market is causing concern, we can expect overall prices to increase from their current levels, making it fully possible for us to achieve our targets. 

For MSG in particular, the forecast for fiscal 2015 called for stable market growth of 2-3%, and the year ended generally as predicted. The same level of stable growth is forecast for fiscal 2016, but our strategy is to increase the ratio of MSG used within the Ajinomoto Group rather than to try to increase external sales. The principal cause of a decrease in operating income is a decrease in sales, but there were also some temporary factors in fiscal 2015. Excluding these factors, there will be no major change in profitability. However, 70-80% of the increase in income in fiscal 2015 was due to exchange rates, so there is no denying that they had a major impact.

Growth in the nucleotide market was forecast to be much larger than in the MSG market, but due in part to the slowdown in growth of the Chinese economy, actual growth wound up around 5%, compared with our forecast of 8%. The same level of growth is forecast for fiscal 2016. 

Major factors in the increase in sales in fiscal 2016 will be the impact of increased production of Tryptophan and an increase in the sales volume of specialty products. We plan a 2,500-ton production increase in Europe for Tryptophan, and although we have set our assumed selling price low, we expect an increase in sales from substantial growth in sales volume.
However, operating income will not grow to the same extent as sales because of the lower selling price.
(Question: Will growth in operating income be reduced by new investments and the increase in depreciation expenses for the expanded production facilities?) The increase in production of Tryptophan will substantially lower production costs, but operating income will not increase as much as net sales will. 

We expect a decrease in sales of sweeteners. The international household sweeteners business, which was recorded in the sweeteners unit until fiscal 2015, will be recorded in international seasonings and processed foods from fiscal 2016, and this will cause a decrease in sales because we are unable to reclassify results for prior years. Another reason is that we sold a plant in Europe in fiscal 2015, and the sales forecast takes into account production conditions at the Tokai Plant in Japan as our only production base. 

It’s very gratifying to be evaluated as number one in popularity by female university students majoring in science. On the other hand, number 53 among humanities students seems low to me. We want to build a structure that enables the active participation of diverse human resources so that Ajinomoto Co. has a positive reputation among university students.
Perhaps the reason for our ranking among science students is that the fields where they can put their specialization to use are limited compared with humanities students, so they had relatively fewer companies to choose from. 

We plan a 20-minute reduction in daily working hours in fiscal 2017. We have made fiscal 2016 a period to prepare for that target and have started our initiatives. But it is easier said than done. We have many issues to resolve in order to reduce working time, including production sites where work is done in three shifts and sales departments in Japan where business negotiations start in the early evening.

However, even within the Ajinomoto Group, it is only in Japan that there is a strong attitude that work can only be done in the office. We may be able to make greater use of a “free office” setup. In Tokyo, many employees have a commute of an hour or more, so round trip, that makes two hours a day they are not working. There are many methods for increasing flexibility in working practices, including the office environment. 

A qualitative analysis is difficult. We plan to incorporate key performance indicators in the FY2017-2019 Medium-Term Management Plan for employee satisfaction in areas such as worthwhile work. It will probably be necessary to explain the links between raising those indicators and improving productivity. Over the past ten years or so, we have been working to reflect employee opinions in management by conducting surveys of attitudes in the company called “organizational culture diagnostics.” Being able to compare ourselves with global companies and share the results with employees will lead to improving motivation as well as to numerical results. Accordingly, to the best of my ability, I want to take on the challenge of explaining how each of our ESG measures contributes to economic value.