Q&A at Interim Results Briefing (Nov. 10, 2016)

Geographic dispersion of manufacturing and sales bases to the greatest extent possible will be crucial. Also, the growth of businesses that produce for local consumption ultimately leads to exchange rate management.

Considering the political instability in Brazil, we foresee considerable depreciation of the Brazilian real, with an assumed rate of USD 1 = BRL 3.8~3.9 in the second half. The current rate is USD 1 = BRL 3.2~3.3, so that is a risk factor from the perspective of the exchange rate for trade, but since we also operate a consumer business in Brazil, it will be positive factor for currency translation. Therefore, it is likely to balance out overall, but we will keep a close watch on trends in exchange rates.

Weeding out low-profit items must be done on a daily basis, but AWI is also revising its lineup toward value-added products that incorporate the technologies of Ajinomoto Frozen Foods Co., Inc., such as Tai Pei. Looking at individual factories, there are still low-profit and aging factories, so we want to deal with them in one way or another during the next fiscal year. Still, we forecast increases in sales and income for this fiscal year, which we intend to continue in the next fiscal year and thereafter. In doing so, we aim for an operating income margin of 9% by fiscal 2020.

There are three types of amino acids: acidic, basic and neutral. Glutamine is acidic, Lysine is basic and Threonine is neutral. Other neutral amino acids can be produced at the same facility. Accordingly, our basic policy for mitigating the volatility of Threonine is to respond with flexible production to manufacture higher-value-added neutral amino acids. Currently, we have switched to flexible production of Valine, which is having some success. 

About 70% is from the USD/JPY currency pair, and about 30% is due to exports from Japan to Europe (the EUR/JPY currency pair). Other than those factors, currencies in emerging countries are a negative factor, while imports of raw materials for frozen foods in Japan are a positive factor. 

Basically, we have been conducting measures such as cost reductions and flexible production in the animal nutrition business. However, this has not led to an improvement in the situation, and we will probably have to implement various measures in the future. I can’t say anything specific right now, but we intend to lay out our approach in our next medium-term management plan. 

We intend to take measures such as mitigating currency exchange risk with more flexible imports and exports. In Nigeria, we import MSG from Brazil but we could also import it from France, for example. 

The ratio of SG&A expenses increased somewhat in the second quarter. Even on a local currency basis (excluding the effect of currency translation), operating income decreased. However, if you look at first-half results, operating income increased by JPY 0.6 billion on a local currency basis, so we are maintaining our growth trajectory.
(Follow-up: Is that because, although the top line for mainstay seasonings is firm, you are deploying sales promotion expenses due to the impact of competition on other products, resulting in a slowdown in overall income growth?) Weak sales in Thailand are a drag on overall results, and the downturn in sales of canned and powdered coffee is particularly significant. We will conduct across-the-board product revisions and launch new products for a recovery in sales in Thailand. There is no change in our basic strategy of overall sales growth and double-digit increases in operating income. 

We were unable to respond immediately to this question. After the meeting, we investigated this point and determined that we had made a mistake in the sensitivity in the revised forecast. It should be the same as the initial forecast (0.1 BRL depreciation vs. USD 1 = approximately +JPY 200 million). Please accept our apologies along with this correction. 

Businesses where the exchange rate for trade has an impact are ones where the products are sold as raw materials: seasonings for processed food manufacturers (MSG, nucleotides), feed-use amino acids, sweeteners, and electronic materials. Electronic materials are not commodity products, and since we use about 70% of our MSG within the Ajinomoto Group, we can control the price of these two. We have rebuilt the sweeteners business, but since our customers are major beverage manufacturers, the business has not changed structurally, and we can’t easily raise selling prices. We have become able to control most prices, but gaps appear when there is a sudden change in conditions. 

Consider the reforms we have been conducting in sweeteners, pharmaceuticals and seasonings for processed food manufacturers (expansion of internal demand), where we previously conducted structural reforms. Unlike sweeteners or pharmaceuticals, we have extensive assets in feed-use amino acids, which makes structural reform difficult. Looking at the change in our Chinese competitors, competition must also be making their own operations difficult, even in terms of short-term business results. In view of these conditions, we will be able to consider a wide range of options for structural reform.
(Follow-up: What do you mean by business opportunities from the change in your Chinese competitors?) Overall, the industry is not making a profit. It’s difficult both for Ajinomoto Co. and for its competitors. If you look back at what Ajinomoto Co. has done in the past, I think you will understand. 

Preparations are under way for Ajinomoto Co., as the representative of the Ajinomoto Group, to reduce working hours by 20 minutes per day from April 2017. Our approach will be to change to an environment in which people can work anywhere using information and communications technology (ICT). This has been introduced on a trial basis in several departments. It can also be used in cases other than reduction of working hours to deal with nursing care or child care. Employees will be able to work anywhere, without commuting. In addition, we are cutting back on meetings and making them more efficient (paperless), and revising how reports are put together to make them paperless from the start. We will also invest in ICT. We are making steady progress, and I will report on it at another opportunity. 

Please keep in mind that one of our options for structural reform in the animal nutrition business is joining forces with a Chinese company. That does not mean we will do so, but we want to keep our range of options as wide as possible. 

It is true that Thailand is holding international food products back. Growth in the first half was 4.5%, excluding the effect of currency translation. Countries with double-digit growth are Indonesia with 12%, Peru with 10%, Brazil with 13% and, although their sales are small in scale, Poland with 15% and France with 22%. The key will be how to bring about a recovery in Thailand. Thailand has reached an impasse both politically and socially. A major aspect of the social context there is that for many years in the past, the country attracted exporters with a preferential investment system under a model in which growth in exports meant the growth of Thailand. However, the country has become unable to maintain growth due to the economic slowdown in China. The country and the society are both struggling to progress by accumulating more technology. Ajinomoto Co. has done business in Thailand for many years and sells a large volume of seasonings there. Umami seasoning AJI-NO-MOTO® has a market share above 90%. Consumption per person has risen, but the growth rate has fallen below 5%. Flavor seasonings have a growth rate of 5% and menu-specific seasonings have a double-digit growth rate. Our mainstay canned coffee products are as I have already explained. Growth in Thailand will entail cultivating markets there and in surrounding countries. As for surrounding countries, we view Cambodia under a strategy of “Thailand Plus One.” The population there was formerly 7 million but it has now doubled to 15 million. Sales of seasonings, canned coffee and instant noodles exported from Thailand are growing steadily. As I explained earlier, our operations in Thailand are taking the lead in creating a market in Myanmar. In Thailand, we will create new businesses. We are considering whether we can create a market for frozen foods and desserts as one pillar. We have a variety of seeds to plant. This is not the time to discuss specific products and timing. When the time comes, we will make an announcement. 

As you have indicated, our efforts have not led to concrete results. A major factor is the structural reform of commodities that remains for us to accomplish. Another factor, which we will deal with in our next medium-term management plan, is to formulate measures that assume low growth in Japan food products. The business has been flat in monetary terms, but volume is shrinking, so it is inefficient to continue production on the same scale. To increase profits, we have been promoting Group operations, but our back-office operations are dispersed. To increase the operating income margin in Japan, the innovations in working style I mentioned earlier are also important for raising efficiency. We intend to increase the operating income margin with the addition of approaches that involve production, distribution and back-office operations.
Overseas is as Mr. Takato explained. Thailand accounts for an extremely large portion of our business, and its impact is great. We are making upfront investments outside the Five Stars countries, such as our acquisition of a stake in an African food company, which was announced yesterday. Although they are small, we will use them as our next pillars. I call them small, but the number of countries where the Ajinomoto Group has sales on the order of JPY 10 billion is increasing, and we will be sure to post double-digit growth. We expect the medium-term plan to establish several pillars like these.
(Follow-up: The operating income margin is 7-8% under Japanese GAAP. In the next medium-term management plan, will you set your sights on a minimum of 10% as stated in these presentation materials?) We will set our sights on 10%.
(Follow-up: Achieving 10% will require rather drastic structural reform of Japan food products. Strong medicine is necessary for your company’s organization, personnel, fixed expenses and other areas. Are you prepared for that?) The point I want to make is that preparations are already steadily under way. 

It will depend on exchange rates, but we have positioned operating income of JPY 150 billion as a criterion for becoming a global top 10 class food company. Assuming an exchange rate of around USD 1 = JPY 100 and the growth of the top 10 companies, we believe that operating income at a level of JPY 130-140 billion would be just enough to be top 10 class. Factoring in Ajinomoto Co.’s profit structure and other issues, we will need operating income of JPY 150 billion to achieve our ROE and other KPI targets. In that sense, we are committed to an operating income target of JPY 150 billion. 

From the start, our strategy has also covered developed countries through M&A. Moreover, by fiscal 2020 we will incorporate a business under our tie-up with T.HASEGAWA CO., LTD., which is included as a topic in today’s presentation materials. This will be a highly profitable undertaking. In addition, by fiscal 2020 high-profit businesses that we have been working on in the field of AminoScience through the acquisition of Althea Technologies, Inc. and other measures will be contributing to results. You will have to wait until the announcement of our FY2017-2019 Medium-Term Management Plan for details of the portfolio, but we expect a contribution from businesses that have been under preparation until now. 

A single consumer buys all three types of products ̶ chilled, shelf stable and frozen ̶ but that purchasing pattern is liable to change over the coming five years. There is also a shift in purchasing from supermarkets to convenience stores, and even among convenience stores the number that handle chilled products is considerably higher than it used to be. I don’t think chilled products and CookDo® are in direct competition. The impetus for buying a chilled food product is probably that it can be eaten right away. When you buy CookDo®, you also must buy meat or fish and vegetables, so the impetus has to be to prepare a meal. The important point is how suppliers provide consumers with useful information and create situations where they want to make a purchase. Supermarkets have changed significantly from ten years ago, and consumers spend the majority of their time in the fresh fish, meat and vegetables sections. Under those circumstances, the question becomes how to convey product information to consumers and create opportunities for them to use the products. Even looking at gyoza and fried rice, the highest-selling frozen foods, it is clear that after all is said and done consumers will buy delicious, high-quality products. For foods, the main point is how to provide delicious products. 

A growth rate of 4-5% for international food products is certainly insufficient to achieve our operating income target of JPY 150 billion in fiscal 2020, so by all means, we want it to recover. 

We will implement various measures to raise the growth rate in the next fiscal year. As for whether we are confident these measures will work, all I can say at this point is that we are. 

We have made quite a bit of progress in retrenching our commodity businesses, but the largest commodity business still remains. I want to conduct reforms of this business so that we can see results. On the other hand, there is also the problem of not being able to grow the specialty business sufficiently. In this area as well, I want to be able to produce concrete figures. Moreover, I want to rapidly generate post-M&A synergies, with Windsor and AGF as representative cases. We will continue our focus on M&A.