Although it is by no means satisfactory, we recognize that all of the factors involved are related to us. The biggest reason is the fact that the growth drivers are not growing. All of the drivers established in the FY2017–2019 Medium-Term Management Plan (FY17–19 MTP), including the Five Stars, AWI, and Healthcare, have stalled. Given these circumstances, I believe that we are responsible for the fact that there are concerns about the lack of business management. In order to close the perception gap even if by a little, we are considering monthly disclosures of information on the International Food Products business, including the effects of changes in the external environment to everyone.
From the perspective of consolidating our defense, the external environment, including foreign exchange rates and fermentation raw materials and fuels, should be relatively stable. Therefore, there is a possibility that the impact of volatile businesses will decrease, and we should be able to concentrate on consumer food products and Healthcare to accelerate growth. We will continue to drive with both top line growth and cost reductions.
Looking over the next one to two years, will you be able to achieve the FY17–19 MTP targets for both sales and business profit through organic growth?
With regard to business profit in FY2018, Birdy® profit in Thailand will have a major impact. In addition, the question of when AWI will manage a gross margin according to the plan is an important point.
(Q: Supposing that these two points do not go according to plan, is there a possibility of not reaching the level of business profit margin in FY2018 planned in the FY17–19 MTP?)
There could be an impact.
(Q: Conversely, could there be any upside?)
There might be upside for Birdy®.
In terms of the overall management approach, what kind of management will you pursue when factors for a downswing materialize in the future? I’d like you to explain any concrete countermeasures.
In the very short term, we will work to control and reduce SG&A, including marketing expenses, in the BtoC business. This is how we will respond to momentary instability. As for volatility in principal raw materials, we will flexibly substitute the raw materials we use.
We have established ROA-based management indicators. At present, we are proceeding to shorten the cash conversion cycle according to plan by shrinking excess assets and cutting inventory.
I think that you were inclined toward buying out minority interests in Thailand, but how is it going? Please update us.
Historically, there have been minority interests in ASEAN, not just in Thailand. At present, we are proceeding systematically with preparing for returning them to the parent company. We will continue to tackle it in stages while keeping watch on the cash balance with regards to ASEAN countries
(Q: How are you planning to carry out the buyout?)
While forecasting annual operating cash flow of around JPY 120.0 billion, we will implement capital expenditure and R&D strategic investment according to plan. We are planning for improvement little by little while maintaining a three-year cumulative total return coefficient of 50% and a single fiscal year payout ratio of 30% for shareholder returns. We will respond systematically while watching how much we can do with surplus cash.
Please explain your approach to governance. Is there a danger that governance will no longer be effective as your business domains and the regions in which you operate expand? Do you have any preventive measures for the possibility that feedback from the frontline no longer reaches headquarters?
Given the recent misconduct at major manufacturing companies, we are having discussions with our Outside Directors and External Audit & Supervisory Board Members. The main risk is second-tier subsidiaries outside Japan. We conduct internal audits of subsidiaries every two years through an organization that reports directly to the CEO, and remedy any issues while managing them. However, we cannot cover all of the second-tier subsidiaries, so we are establishing internal audit functions and Audit & Supervisory Boards for the Boards of Directors at the main subsidiaries so they can monitor themselves and most of their subsidiaries. Nevertheless, it is not possible for them to deal with all of the small-scale second-tier subsidiaries specializing in manufacturing, for example. Therefore, in these cases we are changing to a framework whereby those second-tier subsidiaries are covered directly by Ajinomoto Co. I cannot say unequivocally that the current system is rock solid, but we are working toward that. For example, the biostimulant company that we acquired in Spain is a second-tier subsidiary, and its governance system will be through a subsidiary. However, we have already established audit systems for the food business, where there is a risk of significant damage to the brand due to inadequate auditing, the mainstay Healthcare business, and the Life Support business, which has a major impact on earnings.
(Q: How much work is required if you conduct an audit every two years through a direct-reporting organization?)
We audit about 30 companies a year, and multiple teams work simultaneously. The number of audits required overseas is also increasing, and we are thinking about establishing audit department functions in North America and Europe as well, during FY17-19 MTP.
In general, ESG, Environmental, Social, and Corporate Governance, is something that a company must deal with for as long as it exists. On the other hand, investors are concerned with current business performance. There is an impression that the timescales for ESG and business performance are different, and some companies do not actually engage in conversation about this. What is your perception about this timescale gap? Also, looking at your Sustainability Data Book, in the survey of experts there were a number of responses that “Promotion of suppliers’ CSR” needs higher importance. There is a trend for companies around the world to consider CSR throughout the supply chain, including the issuance of CSR procurement guidelines. How is Ajinomoto Co. responding in this context?
With regard to timescales, in terms of ESG, we have established countermeasures and other means to address the 2030 United Nations sustainable development goals (SDGs) and the food issues due to the 2050 peak in the global population as milestones, for example. As the timespan is extremely long, the timescale differs from that for business performance. With regards to ESG, there are also several targets that we cannot achieve unless we start working on them now. For example, at Ajinomoto Frozen Foods Co., Inc., we set 2020 as our target for the elimination of CFCs as refrigerants and replace all CFC freezers with natural refrigerants or new refrigerants, and we are progressing steadily toward achieving this. We established this target around 2005. We have tried to avoid bringing about excessive expenditure by starting early and sharing. We have managed to switch to new refrigerants through the regular updating of equipment. Responding at the last minute means a lot of short-term expenditure, and damage to the financial statements. We believe that capturing the subtlety of how much we invest in medium- to long-term ESG targets is an important point of investor relations. In addition, we presently receive opinions from approximately 80 experts. At first, we started by conducting a dialogue with four people in 2005. What was CSR management at the time has now become the theme of sustainability. These people are requesting an increase in supply chain management transparency. The main points in this are the problems of forced and child labor. In the past, we shared information with suppliers on traceability regarding safety and security. The demands from customers in Japan are strongest for safety and security. Consequently, this is the area that we prioritized. On the other hand, addressing safety and security is a fundamental prerequisite in Europe and the United States, while global sustainability and in terms of sustainable supply chains, forced labor and child labor are matters of great concern. While we have policies regarding this, the experts pointed out that our responses are not keeping up with regard to methods for confirmation and remedies. With respect to this, we issued a declaration of compliance with policy in the FY17–19 MTP, and we will put together our response. This system will likely be established within the next few years.
(Q: You said that with regards to ESG you look ahead to the future and consider what needs to be done now. Have you also presented a long-term vision and not just the three-year vision of the MTP?)
If you look at our Integrated Report and Sustainability Data Book, we declared that we will achieve the United Nations SDGs early, rather than in 2030. Moreover, in FY2016, this was all we determined because there were areas in which study was required into the actual circumstances of the 17 main goals. With respect to this, we committed to inserting them in the FY17-19 MTP in the form of ESG goals at an early stage in 2018. Consequently, it was not in time for the start of the MTP in FY 2017. I think that the plan should be available in FY2018. However, with regard to the priority SDG items related to the environment, we will focus on the five priority reduce greenhouse gases, reduce food loss, secure food resources and protect natural environment, including ecosystems and biodiversity, conservation of water resources, and 3R for waste material (Reduce, Reuse, Recycle), and implement initiatives in these areas early. Other than this, the goals are broad, so there will probably also be cases where we will share information about the current status of Ajinomoto Co. with you and continue by following up by having you look at the actual circumstances.
Ajinomoto Co.’s philosophy and ESG approach in the food sector are excellent. How will you try to get that philosophy to penetrate globally going forward? Overseas, you have promoted strategies to match the local area, but this results in the dilution of Ajinomoto Co.’s beliefs, and I get the impression that there is a case-by-case approach.
When considering how to strategically enhance value based on the ASV approach, there are four areas for solving problems. These are (1) physical health, (2) mental health, (3) the joy of eating together, and (4) exchanging food culture. In all countries, we have improving nutritional balance, the joy of eating together, and smart cooking at the core of our strategy, and we start with menu development, menu proposal, and corporate advertising. To measure results, we carry out brand evaluations by country through Interbrand. If the corporate value of local affiliates is established, it also leads to new business opportunities.
(Q: Do you mean that you will continue to get global penetration for the Ajinomoto Group based on brand rather than product strategy?)
It’s not just conceptual. Through Ajinomoto products, we can provide value; namely improvement of the nutritional balance of the day’s meals in total. If the importance of nutritional balance is recognized, we can solve a problem naturally by supplying products. However, looked at on a global scale, there are many countries where there is no food education at all, and the importance of nutritional balance is not recognized. It is extremely important that food companies doing business locally take the lead in response to this, and I think that is also being sought.
Many companies struggle with getting Creating Shared Value (CSV) to penetrate in-house. I think that you have provided a range of training to get ASV to penetrate. Have you gotten the desired response?
In-house understanding of ASV is progressing quite a bit. The core of the FY17-19 MTP is ASV, and we have provided training for nearly all our employees on the underlying CSV. Although there is a struggle in terms of how to utilize that knowledge in strategy, we will continue to expand ASV while we struggle with that. For example, our Ghana nutrition improvement project is not yet adequate from the CSV perspective. On the other hand, if the Vietnam School Meal Project expands nationwide, and can be introduced to the approximately 4,000 elementary schools, it will mean that nutrition will improve at the same time as our seasoning Aji-ngon® is delivered extensively. This can clearly be described as CSV, and the program was selected for the ASV Award in FY2016. I think that publishing the results in the Integrated Report, which is not just in-house but is also seen by people from outside the company, had an impact. Employees seem to be starting to think about what level of activities they need to practice to create value through ASV.
(Q: Do you mean that employees are getting into the habit of considering ASV as the core?)
Yes. If we can keep it up for five or ten years, I expect that it will penetrate even more, and we will become a better group.)
With regards to the Japanese coffee business, amid the trend of growing demand for drinking restaurant and institutional-use coffee away from home, how will Ajinomoto AGF, Inc. (AGF), which has strengths in coffee for household use, respond going forward?
Coffee bean consumption itself has grown steadily every year in Japan. In the decline in consumption at home, the growth in counter coffee at convenience stores and the increase in coffee chain stores are probably factors. While AGF’s strength lies in diverse flavors of stick coffee for consumption at home, the current situation is that convenience store counter coffee accounts for an extremely high proportion of commercial coffee varieties. We need a variety of coffees for commercial use, but we are still in the midst of addressing this issue.
(Q: I think that convenience stores are high risk as their product update cycle is rapid. What is your perception?)
Although it may seem like convenience store counter coffee suddenly became big business, it has been gradually increasing over about five years. It is the result of elaborate initiatives, including test sales and machine adaptations, and got up and running rapidly thanks to five years of steady efforts. It is already assumed that if the business expands, competitors will enter after a few years, and then a certain share will be lost. Anticipating this, we expanded product variety from supplying only the traditional black coffee to café latte. The price is a bit higher than the black coffee, and introduction of the machines at convenience stores is behind schedule. It should contribute to earnings in FY2018. I cannot comment on the details, but we are looking into the next challenge. With this kind of business, you have to always be reading needs ahead of time together with customers.
Don’t you think the target for top line growth is too high, particularly for the Five Stars? Looking at the performance for the first half of FY2017, I cannot imagine there is a realistic possibility of achieving the targets. Even with steady growth, there is a negative image from not achieving targets.
There is no need for overall revisions, but revisions to the Thai sales target are likely to be necessary. All the markets in which Ajinomoto Co. is involved, seasonings, beverages, and instant noodles, are sluggish, and this situation has persisted for over a year. Thailand is such a large constituent that it could have an impact on the overall targets. We are currently scrutinizing the figures, so I would like to touch on this when we release our performance forecasts for FY2018. At present, we have only set the top line targets, but we will also properly work out the balance of business profit.
It is more positive to set realistic targets and over-achieve. I have the impression that sales forecasts for the second half of FY2017 are unrealistic. How about trying to adjust the way you set targets?
We will bear it in mind.
Why was it necessary to revise the plans for the top growth business, namely the International Food Products business, based on the interim FY2017 business results even though you had just announced the FY17–19 MTP? I am aware that the International Food Products business covers a broad range, but I am worried that management may not be functioning. Are you, president Nishii, aware of and able to control the actual conditions of each business?
We put considerable energy into establishing a three year medium-term plan. However, current business performance fluctuates due to a variety of factors. In particular, the International Food Products business can be divided into seasonings which grow stably, such as AJI-NO-MOTO®, flavor seasonings, and menu-specific seasonings, and processed foods for which competition is intense, such as Birdy® and instant noodles. In the past, we were able to offset the fluctuations in sales of processed foods with growth in seasonings. However, this has become difficult as the scale of processed foods expands and has a greater impact on overall performance. As for the medium-term trend, a particularly large revision is not needed, but we need to keep watching Thailand carefully. In the FY17-19 MTP, we planned on 11% CAGR for the International Food Products business overall, and we planned this with steady mid-single digit (4%) growth, excluding excise tax, in Thailand, but I think it will be necessary to revise this.
In the event the Thai sales growth rate does not reach 4% in FY2019, the final fiscal year of the MTP, how should we view the business profit margin? Is there still room to keep raising profit margins?
I think there is room to raise profit margins. For Thailand, we have to distinguish between seasonings, which are strong, and Birdy® brand canned coffee. We should be able to raise profit margins for seasonings. For beverages, competition is intensifying, but as far as we can estimate from our profit analysis of the competition, our competitors are fighting us in the red in the coffee category. We will continue to devise countermeasures while watching the competitive circumstances. Also, we have value-added products such as Ros Dee® cubes and AJI-NO-MOTO® PLUS in the seasonings category. I believe there is room to grow the top line and improve the gross margin while increasing unit prices.
Seasonings sales have been recovering. Sales of AJI-NO-MOTO® and AJI-NO-MOTO® PLUS have risen. Sales of Ros Dee® and Ros Dee® cubes are good. Consequently, the concern is the sales trend for Birdy®.
(Q: How much have seasonings sales risen, specifically?)
The increase is in the mid-single digits.
Is business profit for canned coffee on an upward trend for the time being? Or, will the performance trend of the first half persist in a more challenging competitive environment?
We need to monitor the situation a bit more. However, what is fundamentally different from the first half is the fact that sales of Birdy® Thai Milk Tea, launched in August, will contribute fully in the second half. We are expecting that to contribute. Overall, we will aim for a recovery in the Birdy® category through an upturn in the area that has been under attack from the competition, and the launch of new products. Top line shipments in October and November are getting back on track. Unfortunately, one of our competitors announced price increases, but as inventory priced prior to the increases remains in stores, the prices will be switched over gradually on the consumer purchase price base rather than all at once. Another competitor also announced price increases but has not made the specific timing for the switchover clear. Ajinomoto products have all been switched over.
(Q: In October and November, market share was still falling, but will it recover from December onwards?)
We have not assessed market share in November yet. The prices of competitors were not switched over, so we have to wait and see.
Regarding beverages in Thailand, what is your perception of why local companies have entered the canned coffee segment at this time? Also in what sector do those competitor companies earn their money?
They are major energy drink companies. Birdy® by Ajinomoto Co. was the first canned coffee business to get up and running in Thailand. In Thailand, coffee is drunk to stay awake and get energized through caffeine, rather than for general refreshment. For example, it is something that truck drivers buy and drink at roadside markets and convenience stores. In Thailand, the target markets for energy drinks and canned coffee overlap somewhat. Consequently, the competitors have jumped the fence and entered the market. Apart from this competition, we have launched Birdy® Thai Milk Tea, and we will expand the target segment beyond the original Birdy® segment.
(Q: Is demand for energy drinks shifting to canned coffee in Thailand?)
There is not necessarily a shift. There was originally a demand for energy drinks. You can therefore consider that canned coffee has entered some of that demand category.
Looking at October and November, should we consider that, overall, Thailand is in a recovery trend looking, even though you implemented price increases?
Due to the price increase on November 1, there was temporary demand for canned coffee in October, and a rebound to that occurred in November. Sales in October–November were about even with the previous year. Also the competition has not completely increased prices. It is important to monitor whether the current performance trends continue or not. One competitor has announced price increases, but their shop prices have not been switched over yet. Other competitors have also announced price increases, but the timing for implementation has yet to be established.
I feel that companies with a large proportion of their business in Brazil are looking brighter. Is this the same for Ajinomoto Co.?
We feel that with the change of government, the uncertainty has clearly been dissipated and consumption has resumed.
(Q: What will FY2018 be like?)
Our view is that Brazil is a country where consumption has always been strong, mainly among the middle class, and with the recession finally over, Consumer Foods will also return to normal growth.
(Q: Do you expect further growth in the third and fourth quarters?)
The food business in Brazil is making steady progress at present. The animal nutrition business makes up a large proportion of company-wide sales so, although there is some risk of fluctuation, profit is earned through Consumer Foods, and that point is a positive. There is a presidential election in October 2018 so we will be watching how things develop.
The current speed of growth for the Five Stars apart from Thailand has slowed, but could you get out of this by stepping on the accelerator and achieving growth that exceeds the market? In order to achieve this, I think that initiatives for the existing seasonings business rather than processed foods are important. How will you expand existing business?
We can roughly divide existing business in the Five Stars into seasonings, which are robust, and processed foods, which have issues. For seasonings, AJI-NO-MOTO® and flavor seasonings are the current core. There are also various menu-specific seasonings, such as deep frying flour, on which we are concentrating the most effort at present. The target growth rate varies depending on the product, but in general, about 2– 3% for AJI-NO-MOTO® and close to double digits for flavor seasonings. The level for menu-specific seasonings is at least 20%. The Five Stars apart from Thailand are close to these targets. However, menu-specific seasonings is a wide area, and extends to mayonnaise in Indonesia and oyster sauce in the Philippines. With the progress of urbanization of a nation, the need for the simplification of cooking increases, as in Japan in the past. This is likely to proceed from the replacement of things that are currently handmade. With regards to Thailand, the expansion of product roll out has settled down, so we will adjust our target settings going forward.
Can we assume that the reason for the current slowdown of growth in the Five Stars is that your response to the emergence of convenience stores has not been enough? In that case, going forward, will you strengthen menu-specific seasonings as a response to convenience stores?
As convenience stores become more prominent, we will continue to strengthen the prepared take-out foods domain, which is the Integrated Food Solutions business, and our response is not sufficiently established yet. Going forward, we hope to strengthen it and turn it into a future mainstay. Menu-specific seasonings are a BtoC brand that has already been commercialized, and we will grow it steadily.
We hope to have a common strategy. The pillar of the strategy is food service. Rather than chain stores, we will capture key accounts like the major Japanese convenience stores. We hope to increase business with high profit margins by co-developing products with them. This requires an integrated response, from product proposal through to development, so it is a domain in which there is little competition. For example, there is marked growth in the major convenience stores in Indonesia and Thailand. These convenience stores are likely to be the center of consumption in both countries. When introducing this initiative in presentations, we mainly discuss development in terms of the Integrated Food Solutions business, but our strength is that we can implement key account-targeted marketing that integrates R&D and marketing, not just development alone. We will apply this strength across other areas. I hope you will think of it as a support business for customer control towers.
I would like to ask about frozen foods in North America. At the November analysts’ briefing, there was discussion about reviewing not only the senior management, but also the entire production system. Also, I think you explained that the reason for the downturn in sales growth was due to the cutting of Italian products. Can you explain what kind of initiatives you are currently implementing concerning these issues?
As for senior management, after acquiring Windsor we appointed a new CEO in April 2015. He has experience managing a business of close to JPY 100 billion in size, and is a person appropriate for switching to Ajinomoto’s added value-type of business. He has exhibited strong leadership, promoting reform at the management level. In the process of planning the scraping and building of plants and trying to change to the optimal combination of production, issues were exposed from the viewpoint of stabilizing production. We are switching to the right people from the perspective of production management and supply chain management. As a concrete example, appetizers, which are AWI’s second mainstay, were produced at the Piedmont plant in the past, but we sold that plant and built a new plant in Missouri. There were delays due to the hurricane, but it will be up and running pretty much according to plan, operating in December. We needed to accumulate inventory at the Piedmont plant to tide us over until the new plant in Missouri is running smoothly. However, with strong demand, we have been receiving more orders than we have capacity for, and there was confusion at the production site. As a result, growth in the first half was only 2%. We are trying to restructure our systems so that this kind of opportunity loss does not arise at the new plant. I don’t think that the loss of orders for Italian foods is that serious. The mainstays at AWI are Asian food, appetizers, and Mexican food, followed by Italian food. While the weight of OEM from major customers is significant, and though it has been shrinking, accounted for about 10% in the first half. Because it is not competitive, we lost orders. By rights, this should be offset by the mainstay businesses, namely Asian food and appetizers, but that could not be done. There was a problem with production of appetizers, and although we revamped Asian food considerably, there was a large impact with shipments to major customers being delayed until the end of August. Looking at the situation in October, the introduction of Asian food progressed, partially offsetting the loss of orders, and there was a turnaround to revenue growth. While revenue for April–September was in line with the previous year, there was revenue growth in October. However, since the new plant will be started up in December, effectiveness will not increase from the perspective of stability of production. The state of revenue growth and profit decline persisted in October. However, the extent of decline in profit looked at year-on-year recovered considerably compared with April–September. This is the result of firm growth for Asian food that needs to be expanded.
(Q: With respect to the aims at the time of investment, how serious structurally are the problems with the short-term cuts to Italian foods and the lag in introduction for major customers?)
The Asian food category itself is a niche category, and, in exchange for competition not intensifying, handling priority is not high in distribution. Therefore, introduction gets postponed, and there will be such a risk in the future as well. Production stability is a major issue, and it has been revealed that there are weaknesses in the parts connecting normal operations and the supply chain to production planning. Therefore, I reported at the November analysts’ briefing that recovery may not end in FY2017 and could continue into FY2018.
(Q: What do you think you did at the time of acquisition for the current problems to arise? What kinds of mistakes were there?)
Looking back now, it would have been good if there had been a Chief Product Officer (CPO) to oversee production. We are trying to consolidate the production items at each plant in order to improve the future gross profit margin, but we developed a complex plan to produce many items at one plant until the system is in place, and the management of this plan is not going well at the present time. First of all, we gave Asian food priority. Next, appetizers are now starting up, and the plan is to rebuild Mexican food next fiscal year. If we had established a CPO, we might have received advice from the viewpoint of the plant restructuring plan overall. There were issues with communication between senior management and the management of the nine plants.
Looking from a long-term perspective, shouldn’t you work on a strategy of investing more marketing expenses to sell new products you are confident of for AWI?
It will take an enormous amount of marketing expenses. There is also the possibility that Asian food will no longer be a blue ocean market.
(Q: It’s not a realistic strategy?)
No. Mexican food has that element, but, like the pizza category, while Mexican food is a big market, it is primarily a low-price operation. Therefore, it is difficult to consider investing in mass marketing in this category to compete on a large scale.
(Q: Is advertising investment more unrealistic than promotions?)
It is unrealistic. The category takes extremely high introduction fees. Without the strength and size to bear those fees, mass advertising is likely to be impossible.
(Q: Are you considering a strategy of investing in advertising in Asian food to raise your profile?)
The approach to advertising expenses has changed quite a bit in North America. Companies invest in advertising corresponding to the size of sales through such media as YouTube and SNS. Marketing with high penetration has increased, and we are working hard on this point.
(Q: Will you work on such a strategy under the next MTP when the business profit margin is likely to exceed 10%?)
First of all, the business profit margin has to clear 10%. Without that, I don’t think we can move on to the next strategy.
With regard to the frozen foods business in North America, going forward, we can assume that private brand OEM will tend to continue increasing in terms of the overall market, due in part to the strengthening of the food business by the e-commerce majors. Asian food, where AWI has strengths, is a niche domain at present, but is there the possibility that competitors will enter and competition will intensify in the future?
Changes in consumer purchasing are occurring throughout the United States. Also, if you are aiming for a value-added business, there is always entry of competition at some time. However, in the Asian food and appetizer domains, there is a limited number of companies making products at a certain level, even among manufacturers. For example, technologically, only Ajinomoto Toyo Frozen Noodles Inc. makes delicious frozen noodles. Similarly, with fried rice, there are no competitors that can make a product as delicious as AWI. Assuming that OEMs will be strengthened, AWI should receive orders. In fact, the Portland plant has also been contracted for OEM production of gyoza (pot stickers) within a range where a certain profit can be made. On the other hand, there are many manufacturers that can produce snack food, for example, so there are many that receive orders for OEM production. This means the circumstances are different. In fact, Ajinomoto Frozen Food Co., Ltd. launched sales of Gyoza in the United States more than ten years ago, and there have not been big changes in the competitive circumstances for the gyoza domain since then. Meanwhile, there are manufacturers that receive orders for OEM production in Mexican food, so we want to create a system that can always produce value-added products, to avoid being stuck in a trap. With regards to appetizers, a consolidation of manufacturers is already taking place.
The number of millennials are increasing in the United States, and their consumption behavior is starting to have a significant impact on consumption behavior overall. There is a view that domestic demand will grow due to this impact, and demand for seasonings will expand. What is your view?
The consumption behavior of millennials has many points in common globally. On balance, they are local and natural-oriented rather than selecting big, national brands. The size of this segment has increased. A typical example is craft beer. In the future, it might become the mainstream of urban consumption.
Can you tell us if there are any synergies between animal nutrition and other businesses? I think that it is difficult to increase earnings even with the introduction of OEM. Would you consider selling out and expanding Healthcare and M&As?
The animal nutrition business is the business of improving nutrition for animal fattening. For example, there is lysine that is mixed with animal feed, and food-grade lysine that humans can eat. The lysine used in Koko Plus® for our Ghana Nutrition Improvement Project is food-grade lysine. Also, we are proceeding with the development of flavor materials as an integrated food solution with T. HASEGAWA CO., LTD. The technology of fermenting sugar to manufacture amino acids is the same manufacturing technology as for lysine, etc. We cannot consider spinning off the animal nutrition business. However, the current challenge is the fact that value is no longer being produced within the animal nutrition business, which is a commodity business. In trying to switch to a specialty business, we will outsource production, but we want to retain the technology itself at Ajinomoto Co.
I’d like to ask about M&As in the biostimulant business. Are you going to continue expanding this domain? Also, why such an extremely small-scale acquisition relative to the size of the global market?
The biostimulant business is not a core domain for Ajinomoto Co., so we will not necessarily conduct M&As aggressively in this domain. In making animal nutrition a specialty and developing technology for fermentation using fewer resources, it is vital to have a business structure with a sound material cycle that enhances the value added of byproducts produced in the fermentation process and sells them, rather than discarding them. We hope to promote this business structure using the platform of Dadelos S.L., which we acquired. However, this does not mean that we require a large number of agricultural raw materials companies. It may appear to be a small-scale acquisition relative to the size of the global market, but it is a niche domain, and our aim is to further strengthen the cost structure of products produced through fermentation, such as MSG and feed-use amino acids.
Could you tell us your vision for the Healthcare business in five or ten years’ time? If there are M&A possibilities, what kind of companies are you considering?
We will discuss this in the next MTP or the MTP after that. In the CDMO business, we are planning to grow oligonucleotides pharmaceuticals and large molecule biologics, and, at the least, there should be areas of drug discovery for oligonucleotides and areas that enter the clinical stage for large molecule biologics. In conjunction with this, we see dramatic increases in both sales and profit. The culture medium business currently produces products primarily for biosimilars, but the proportion of products for iPS cells will increase in the future, and it will be good if it contributes to sales. M&As will depend on the scale of drug discovery. In the area of medium and large molecular biologics, we have made capital expenditures since the acquisition of Althea Technologies, Inc. to establish adequate manufacturing capacity. With regards to cell culture medium, we may have to consider M&As at some stage from the perspective of handling iPS cells.
Did you also acquire the U.S. medical foods business with a specific aim rather than positioning it as a core business?
The medical foods business is part of the Healthcare domain, and we expect business expansion in the future through synergies with our food business. We acquired the shares of Cambrooke Therapeutics, Inc. in the U.S., and the medical foods that they are selling are covered by insurance, unlike in Japan. Patients with congenital disorders such as phenylketonuria, and people with specific diseases such as intractable epilepsy currently have a range of dietary restrictions, and Cambrooke Therapeutics has a product lineup that ranges from daily foods through to sweets and beverages. With these products, it is possible to comprehensively support people who must control their entire diet. It is a company that implements One to One marketing to people in a specific domain, and we expect that this know-how will produce synergies with Ajinomoto Co.’s food business. We hope to build a firm business position in the U.S. medical foods domain and in the future expand to Japan and Europe, too.
(Q: In the press release, you established a sales target of approximately JPY 10 billion in 2027.)
The target is for the U.S. medical foods business and does not include synergies with our food business. People with intractable epilepsy need to control sugar but, on the other hand, must also consume energy. Ajinomoto Co. only has supplements in terms of foods in the Healthcare domain, but Cambrooke Therapeutics has sugar-controlled bread as well, and in this domain, for example, we can expect synergies with the bakery business that Ajinomoto Co. operates in Japan and overseas. In the U.S., which has a large population, a certain percentage of people will always be born with specific diseases, so we hope to apply the know-how of the sugar-controlled food business.