Q&A at Results Briefing (May 17, 2017)

You should consider the JPY 8.9 billion increase in profit from business factors a well-founded forecast because it accurately tallies the profits from each business. As for fermentation raw materials and fuel prices, when we formulated the FY17-19 Plan, we used prices as of December 2016 as the basis and also assumed factors such as future price trends and price negotiations with suppliers to set forecasts for each site. As you indicated, these assumptions may appear conservative, but please understand that they anticipate tough price negotiations. Also note that exchange rate assumptions have an impact on what you pointed out as a low business profit forecast. We assumed USD 1 = JPY 100 when formulating the fiscal 2017 budget, but we revised it to JPY 108 to take the latest market conditions into consideration. However, since it is honestly difficult to judge whether or not it is appropriate to set the rate at this level, we have shared information on exchange rate sensitivity for major currencies.

I view the slight improvement in results in Thailand in the fourth quarter of fiscal 2016 as a positive trend. The main factors were a product renewal for Birdy® 3 in 1 powdered beverages in November 2016 and an increase in fourth-quarter domestic sales in Thailand compared with the same period a year earlier. However, competition with our competitors’ products has been intensifying. I do not think that situation will change in fiscal 2017, but we intend to prevail over the competition.

In light of this situation, we believe that our sales growth target of 2% on a local currency basis is definitely achievable. In Myanmar, results for Birdy® 3 in 1 are still far below the previous year. A packaging factory for AJI-NO-MOTO® is scheduled to begin operation in September 2017, so we will use it as a base for a thorough crackdown on counterfeit Birdy® 3 in 1 products. I believe that will enable a V-shaped recovery. You can look forward to it.

Birdy® canned coffee holds the top share in Thailand at 60%. The share for Birdy® 3 in 1 powdered beverages is around 10%. Our competitor is Nestlé. Two other companies, including an energy drink company, have entered the market and competition is intensifying. The slump in sales of Birdy® canned coffee is due to a delayed response to modernization, with the growing trend toward purchases at convenience stores. Profit is flat because we are deploying sales promotion expenses. AJI-NO-MOTO® Plus, RosDee® and menu-specific seasonings are performing well and gross profit improved substantially in fiscal 2016, so we are diverting these capital resources to sales promotion expenditures for Birdy®. There is still room for improvement in gross profit from seasonings. Also, we have plans for a new cube-type RosDee® product in addition to its powdered form, which will further reinforce the business structure.

Sales in Brazil increased by 37% in fiscal 2016, but this includes the reclassification of powdered beverages, which had formerly been included in sweeteners. Excluding powdered beverages, growth was 12%. Due to the growth of Sazon® flavor seasoning, menu-specific seasonings and powdered beverages, we have returned to the level of growth in fiscal 2015. We view 12% growth in fiscal 2017 as a well-founded forecast.

(Follow-up: In fiscal 2016, growth in Brazil was from powdered beverages, but what will grow in fiscal 2017?) Growth in 2016 was not exclusively from powdered beverages. Sales of Sazon® flavor seasoning and menu-specific seasonings also grew. I think the same will be true in fiscal 2017.

It is evident that Japanese companies are developing their business in North America. However, we are in the middle of reorganizing our portfolio to enhance each of the four categories of Asian, Mexican and Italian foods and appetizers. Looking at last year’s market for Asian food, which is our main focus, competition was based on value rather than price. Competition advocating “clean labels” is increasing. We want to enhance our products by adding new value and new ways to delight consumers. There has been no major change in our strategy. In France, we are using MSG in products that are being rolled out from sales on a trial basis to more than 4,000 stores nationwide. Although some people have a negative impression of MSG, I think a correct understanding of MSG will support sales. Trial sales went well, so we intend to focus on expanding sales.

(Follow-up: I think that if you release a product with the AJINOMOTO brand, it will not be considered MSG-free. Are you conducting activities to raise awareness that associates AJI-NO-MOTO with umami, rather than MSG? I think the number of people in France who are aware of umami is high. In the United States, “all-natural” products do not use MSG. However, MSG is used in products in France. Has there been some change in attitudes toward umami?)

As you are aware, the relationship between umami and MSG is difficult to tie together. Umami is the source of the deliciousness of Japanese food, and popularizing that idea has gone well. Umami has a positive reputation in the United States and Europe. In Europe, its reputation is even more positive because it is linked to Japanese food. The American attitude of embracing umami but shunning MSG is not completely unknown in Europe. As part of strengthening our corporate brand strategy under the FY17-19 Plan, we are planning an Umami Forum, the first of which will be held in New York during fiscal 2018. Its objectives will be highlighting the usefulness of umami, explaining glutamic acid as an important substance in umami and dispelling misunderstandings about MSG. We will invite a professor from Harvard University to unravel the history of how MSG became a villain in the United States. We have a budget of JPY 1 billion, and will continue this initiative from fiscal 2017 onward.

Japan Food Products consists of seasonings & processed foods, frozen foods and coffee products. Let me explain why we did not link the exchange rate for trade to each segment. On page 29 of the presentation, we have adjusted for the main effects of the exchange rate for trade, but of course transactions in Japan also have an effect on Japan Food Products. However, the impact of individual positive and negative factors complicates matters. In addition, price negotiations for procurement of raw materials have yet to begin. Incorporating the entire amount of the impact into Japan Food Products invites misunderstanding. Therefore, in announcing our earnings forecast for fiscal 2017, we put our exchange rate assumptions for the effects of both currency translation and the exchange rate for trade in our results for the previous year to make it clear that it is the amount of impact on the Group as a whole.

By a simple calculation, frozen foods results would be negative. It is my job to make sure that doesn’t happen. Each of the major frozen food companies generated a profit in fiscal 2016, but they offered discounts by deploying exchange rate benefits in promotional expenses. We are not thinking of raising prices in fiscal 2017; rather, we will work to achieve our initial plan for a JPY 1 billion increase in segment profit by reducing discounts and marketing expenses.

(Follow-up: Does an increase of JPY 1 billion in profit mean you aim to achieve the fiscal 2017 budget before all-company adjustments?) Yes.

As for coffee products, we prepared our budget at USD 1 = JPY 100, and the current weak yen puts us at a disadvantage. However, even in the JPY 115-119 range, we have a scenario where we can achieve our budget targets. In addition to the exchange rate, the market price of coffee beans also has an impact. While keeping an eye on both factors, we will strategically and appropriately carry out offense and defense. We are also considering cutting back on sales promotion expenses. Moreover, as a structural reform to generate profits, we have revised a considerable number of SKUs since the second half of last year, which should also have a positive effect.

Up to now, we have been implementing growth (“GROW”) and structural reform (“FIT”) in line with the medium-term management plan, and growing our specialty businesses, albeit with slight fluctuations from year to year. The expansion of our specialty portfolio in the past forms the basis of the FY17-19 Plan. To reach our fiscal 2019 target of JPY 124 billion in business profit from the forecast JPY 102 billion in fiscal 2017, we will need to grow by about JPY 10 billion yen a year for two years, but since our structural reforms are progressing, growth will be on the upswing for the three-year period. Our main theme in fiscal 2017 is completing structural reform of animal nutrition. In addition, because we make capital expenditures and investments in marketing for the future, the sales growth rate and profit growth rate do not necessarily run in parallel. Our overall growth driver is sales of international consumer food products, for which we forecast 12% growth. In addition, supplements and amino acids for pharmaceuticals and health foods in Japan, which are included in “Other” under Healthcare, have also grown substantially. In the short term, this business will be a pillar of the healthcare business, followed by our leading-edge biopharmaceutical business. Continuing to further grow our specialty businesses is an initiative for achieving the targets of the FY17-19 Plan.

In the dry savories business, profits are growing more than sales, and we will invest the funds generated in the next pillars of our business, such as menu-specific seasonings and processed foods. This investment is necessary to expand the business portfolio and to continue to grow after fiscal 2020. If we do not invest in the future, we will lose opportunities for growth. However, we conduct these investments while keeping an eye on balance so that we do not invest excessively.

(Follow-up: Focusing on fiscal 2017, why do you expect profit growth beyond the sales growth rate?) Certainly, taking the effect of currency translation on all-company adjustments into consideration, sales are forecast to grow by 11% and business profit by 17% for the International Food Products segment as a whole. Although we have not disclosed a breakdown by sub-segment, sales and profit are forecast to increase in seasonings & processed foods, but the profit growth rate will exceed the sales growth rate because of the addition to consolidation of a subsidiary accounted for by the equity method. Sales and profit are also forecast to increase for frozen foods but the growth rates will be different, with significantly greater growth in profit than in sales. This will be the result of cost reduction efforts such as reducing the number of SKUs in addition to an increase in profit due to sales growth. Regarding frozen food sales, we launched Ling Ling® brand fried rice entrées and renewed TAI PEI® products in spring 2017 and shipments have been strong, but because of the size of the United States it will take some time before they are on retailers’ shelves. Therefore, looking only at fiscal 2017, the sales growth rate appears low. As stores rotate product stocks, the sales growth rate is likely to increase.

We plan on generating substantial growth in the Rising Stars under the FY17-19 Plan, and I will give you examples that are increasing our confidence in this regard. One is Nigeria. We are in the process of moving toward integration with Promasidor, whose stock we acquired during fiscal 2016, but in fiscal 2016 we struggled with the impact of the country’s foreign exchange shortage. However, in September we substantially reduced the volume and increased the price of products, and over the full year we recovered to a level slightly higher than the previous year. We reduced the amount per package while maintaining prices at which consumers can purchase easily, and this measure was accepted. I think we have returned to a growth trajectory, although perhaps not to the same extent as in the past. In Turkey, there are two companies, Kükre and Örgen, and we are integrating them. By simple calculation, the two companies have combined sales on a scale of around JPY 5 billion. From before our acquisition, Kükre was oriented toward the high end and it is very profitable. Örgen mainly makes cube-type seasonings, and its profitability is fairly good. We want to generate greater synergy for substantial growth.

In the sports nutrition business, awareness is rising of the contribution of amino VITAL® and other amino acids to sports nutrition and health. This is due to our marketing activities, as well as increased awareness of our contributions to the Olympics. The mass media raised this topic a lot at the beginning of 2016, drawing attention to the evidence-based efficacy of amino acids and their contribution to sports. With this backing, we have been experiencing double-digit growth.

In direct marketing, we are growing by raising awareness of the contribution of amino acids to health and carrying out labeling for foods with functional claims. In particular, sales of foods with functional claims have expanded rapidly since adopting a category-oriented approach to promote the effects on nutritional issues of products such as Glyna® for enhancing sleep quality and Amino Aile® for locomotive syndrome, mainly among seniors. We intend to use this category-oriented approach in other fields. Furthermore, in addition to supplements, we will expand labeling for food products, cosmetics and other products with functional claims in order to achieve rapid growth.

(Follow-up: The e-commerce market is expanding rapidly in overseas markets such as China and the United States. Could this be an opportunity for Ajinomoto Co. in the future?) What I said about direct marketing previously refers only to Japan. I think that food businesses, including Ajinomoto Co., made a somewhat late start overseas. Due to differences in labeling and regulation by country, these products are different from daily necessities. We are conducting a study led by Corporate Senior Vice President Etsuhiro Takato to look into high-quality sites. We do not want e-commerce that merely increases our top line; rather, we want to be able to contribute to lifetime value and to accurately track the attributes of our customers.