Q&A from Small Meeting with President (Jun. 8-19, 2018)

In FY2017, we disclosed our ESG initiatives in depth, mainly in our Integrated Report. In the FY17-19 MTP, we conceived the brand value KPI as a composite of financial and non-financial targets. We do not attribute our brand value’s FY2017 increase to earnings performance. We believe that the Ajinomoto brand has hitherto been undervalued relative to our market capitalization. We expect a linkage to form between brand value and earnings over the medium term. Further increases in brand value are likely contingent on business growth.

We intend to effectively manage our operations to ensure that we do not fall short of the targets. Our next MTP will begin in FY2020, not FY2021. We update our management agenda, including investment and cash management plans, at three-year intervals.

Initiatives toward our non-financial targets are generally progressing well. Some of them, including greenhouse gas and governance initiatives, are tracking ahead of plan. Others, including initiatives to promote improved nutrition, are tracking in line with the plan. The only initiative that might prove problematic is related to deforestation. We have a target of switching all the palm oil we use to certified sustainable palm oil by 2020, but we are having difficulty sourcing certified sustainable palm oil due to severe supply limitations. In response, we are working together with the Consumer Goods Forum, a group of global consumer goods giants, to soon collectively request an increase in availability of certified sustainable palm oil.

Regarding CO2 reduction, we aim to reduce existing CO2 emissions, mainly by installing biomass boilers, and increase renewable energy’s share of our energy usage to 28% through such means as purchasing greenhouse gas rights. We should be able to achieve the CO2 reduction target by 2020. We need to further broaden the scope of our CO2 reduction initiatives to challenge the Paris Agreement’s 2030 targets and the UN’s Sustainable Development Goals.

We finally set ESG-inclusive targets and disclosed policies in our FY17-19 MTP. We had previously been lagging behind the top 10 with respect to these points, but I believe we have been catching up. On the other hand, there is still a gap between us and the top 10 in terms of business profit and shareholder returns. To close this gap, we would need to increase our business profit to ¥130 billion.

In April 2018, we reorganized and formed a Global Corporate unit to strengthen top management support. These changes will accelerate growth and strengthen our management foundation. Additionally, in Japan in particular, we are cutting administrative costs through such means as consolidation of back-office functions. We plan to reduce our ratio of administrative costs to sales from 3.2% at present to 2.5% by 2020. Specifically, we will standardize workflows by upgrading core IT systems as set forth in the FY17-19 MTP. At Ajinomoto Co., Inc., we will upgrade our systems in 2020. We plan to install identical systems at core subsidiaries such as Ajinomoto Frozen Foods Co., Inc. and Ajinomoto AGF, Inc. in 2021. We consider formulation of these initiatives and specific plans to be payoffs from the new governance framework and executing them to be a challenge.

First, we decided to reduce the number of inside directors and increase outside directors’ share of Board seats to one-third. Inside directors’ oversight functions are increasing dramatically as a result. When outside directors’ share of Board seats increases, inside directors’ verbal participation in Board meetings should likewise increase at the same time. We are also narrowing down Board meeting agenda items to topics that can be discussed intensively.

I expect FY2018 to be a decisive year for the campaign. We are holding a World Umami Forum in New York on September 20-21. We plan to assemble 200-300 key opinion leaders from around the world. The Forum’s program has yet to be finalized, but we have decided to feature MSG as one umami seasoning and focus on its low-sodium content.

Additionally, we will release a historical review by American scientists on why MSG has been vilified. A survey found that 28% of Americans have a positive image of umami while many have a negative image of or are unfamiliar with MSG. However, the deeply rooted negativism of the past has diminished substantially, though vaguely negative impressions of MSG are still widespread. We therefore might be able to largely clear up misconceptions about MSG if we can explain the connection between umami and MSG and MSG’s benefits as a low-sodium seasoning.

The World Umami Forum will be run entirely by Americans. What makes it unique is that Americans will be providing correct information about MSG to their fellow Americans.

We will invite guests to the Forum from developing countries also. These guests are slated to return to their home countries and build networks to spread the word about MSG. In October 2017, we adopted a globally uniform Ajinomoto Group Global Brand Logo to set the stage for such brand evangelism. I suspect that misconceptions about MSG exist even in regions where AJI-NO-MOTO® umami seasoning is sold, including the Five Stars. We intend to change the perception of MSG to that of a product that is popular because it is healthy, nutritious and backed by ample evidence of deliciousness.

We are launching a similar program in Thailand also.

In Vietnam, we first approached Hanoi Medical University and started a dietitian training course. Demand for basic dietary education subsequently emerged, leading to our current school meal program.

In Thailand, we launched the program in collaboration with the Thai Ministries of Health and Education through Mahidol University. Because Thailand has better infrastructure than Vietnam and we have more influential partners there, we expect the food meal program to take less time to get up and running in Thailand than in Vietnam.

We are approaching prospective allies in other countries, mainly the Five Stars, but Thailand is the only one where we have gotten a response as receptive as in Vietnam. Government institutions and universities have less influence in some countries than in others and independent organizations exist in certain countries, so we need to tailor our approach to each country.

We have three major nutrition policies. The first is improving nutrition through daily meals. The second is the psychological benefits that accrue from eating together with others and reducing time spent preparing meals. The third is evidence-based nutritional claims. In the case of protein, for example, people are advised to consume a minimum of 60g daily, but the elderly have difficulty consuming enough protein from meals alone. They can efficiently supplement their dietary protein intake with Amino Aile®.

The initiative that best exemplifies this approach is a program we offer in Tokyo’s Kita Ward called Kachi-Meshi® for the Elderly. We have developed menus and a meal checklist on which elderly people can record their daily meals for 10 days. Kita Ward publicizes them to its local residents. The menu items are available in local supermarkets. We hope to see similar programs launched throughout Japan.

Outside of Japan, we sell the amino VITAL® line in Korea, Russia and Singapore and certain amino VITAL® products in Brazil. Regulations on amino acid products like amino VITAL® differ among countries. In some countries, we can roll out amino VITAL® immediately; other countries have restrictions. Our marketing approach, however, is the same everywhere. We initially promote amino VITAL® to elite athletes, like in Japan. In North America, we are developing localized products. We are starting to offer unique products targeted at regular consumers like busy housewives, for example.

In terms of athlete support, our partnership with the Japanese Olympic Committee is working extremely effectively in Japan. We have started to similarly support top athletes in other countries also, including Thailand and Singapore.

As a result of working style reforms, average annual hours worked per employee at Ajinomoto Co., Inc., have decreased to 1,842, a year-on-year reduction of roughly 70 hours. Given our lack of earnings growth in FY2017, there might be mixed feelings about working style reforms, but we believe that productivity is increasing. We mainly attribute the productivity growth to two initiatives. First, we have installed IT infrastructure that has realized paperless workflows and enables employees to work remotely. Second, we granted employees a ¥5,000/month base-salary increase to alleviate any financial worries stemming from reduction in overtime hours. In one year, we were able to recoup about 80% of our upfront investment through reduction in paper consumption and business travel expenses. This affirms that our working style reforms have yielded an economic return. At the same time, we believe we still have plenty of room to further improve efficiency.

In non-Japan Asia, we have currently have minority shareholders because we have historically needed them as partners. Our minority shareholder structures differ between Thailand and Indonesia, so I cannot make blanket statements, but our Thai and Indonesian subsidiaries have both started to generate substantial cash flow.

If they distribute large dividends in the future, some of their cash would not flow back to the parent company. We are currently repatriate the Ajinomoto Group’s overseas cash to Japan before deploying it in our operations. Thailand is about the country where maintaining a local pool of cash would give us much more financial strategy flexibility than we currently have from a number of standpoints, including foreign exchange fees, currency risk and investments funded in local currency.

Thailand’s ready to drink market is stagnating. We do not think this is a short-term trend. We believe the market has entered a stagnation phase. Although away-from-home coffee consumption has been growing rapidly in Thailand over the past 3-4 years, we were slow to respond to this trend. Additionally, our canned coffee’s qualitative advantage has been eroded by the emergence of local competitors, but we again failed to respond fast enough. In FY2018, we intend to regain lost share by capturing and retaining loyal users. Our efforts do so have already started to pay off, but we expect our Thai canned coffee business to recover in earnest in FY2019 by virtue of a planned major quality upgrade using Ajinomoto AGF’s technology and know-how.

In the North American frozen food business, weaknesses in production operations’ capabilities that we were not aware of when we acquired the business have come to light. In response, we intend to strengthen support from Japan and assemble a team of local plant managers over the next year to import the Japanese strength of closely monitoring and improving granular productivity KPIs. Specifically, in the appetizer business, we sold the former Piedmont Plant on May 18. We have completed relocating two of its three production lines to a new plant [Editor’s note: relocation of the third line was subsequently completed by the end of June], enabling stable production. In the Mexican food business, we purchased a plant to which we were previously outsourcing production. We will retool the plant for our operations as planned. We are accordingly laying the groundwork for achieving our targets for FY2018, which is designated as a year for solidifying the North American frozen food business’s foundations. If we can stabilize sales and production by converting appetizers and Mexican food to specialty businesses, we believe we can achieve a V-shaped earnings recovery in FY2019.

In the domestic coffee market, competition will intensify further in FY2018. We are targeting 5% top-line growth in FY2018, but sales are tracking below target after the first two months of the fiscal year. The key question is whether we can bring our liquid and instant coffee sales growth rates back to parity with market growth. Additionally, we aim to capture away-from-home coffee demand through various approaches. We accordingly cannot yet offer any assurance of recovery in FY2019.

Prices of auxiliary raw materials such as ammonia and caustic soda are in uptrends that we expect to continue for long time. When we prepared our earnings forecasts, we had already formulated a plan to offset these price increases through cost reductions and use of resource-saving fermentation technologies. Key raw material prices, however, deviated from their normal pattern in the second half of FY2017. We were unable to implement measures to absorb these input cost increases. In Thailand, tapioca is harvested once a year, usually in October-November. During this harvest season, tapioca prices tend to fall because supply increases. In FY2017, however, tapioca prices rose instead of declining, even in the fourth quarter. The price increases signaled a decisive supply shortage. We accordingly prepared our earnings forecasts on the assumption that recently high tapioca prices would persist until the 2018 harvest season. We think tapioca prices will normalize over the medium term, but we expect our earnings to be affected in FY2018. Among the Five Stars, tapioca is used as a primary fermentation ingredient in Indonesia, Thailand and Vietnam. Costs will increase in such countries. We have already raised prices in certain countries and are currently deciding whether to do so in others.

We are currently trying to see how far we can progress with first-generation resource-saving fermentation technologies. In terms of technical level, however, we are developing technologies to increase fermentation bacteria’s potency so we can use a number of alternative ingredients or dispense with use of auxiliary raw materials. We plan to complete development of such technology by around 2022. Beyond developing such technology, we have no way to increase our fermentation operations’ cost competitiveness. When we compare our technology’s cost competitiveness with rivals’ technological capabilities and potential to cut costs, we decided to scale down in-house production in our animal nutrition business. We are of course conducting basic research on algae’s edibility, but our research has not yet reached the stage where we can embody it in a specific business plan.

(Q: You said you are researching on-site ammonia production. How far has this research progressed?)

In FY2019, we aim to launch on-site ammonia production at one of our plants in collaboration with Tokyo Institute of Technology. If it proves as profitable in practice as it is in theory, we want to switch to on-site ammonia production at our overseas fermentation plants in 2021-22, at our main plants by 2025 and at all plants by 2030. Among our ESG targets, attainment of our greenhouse gas reduction target by 2030 assumes a partial switchover to on-site ammonia production, though we have not yet factored it into our business profit projections.

In Turkey, we acquired Orgen and Kukre, both of which we plan to merge with our pre-existing Turkish operations in August 2018. In France, we acquired LTS, a frozen foods maker. It is performing well. We expect the LTS acquisition to help our pre-existing French operations, which revolve mainly around Gyoza (Chinese dumplings), to achieve mainstream status.

In Spain, we acquired Agro2Agri (A2A), an agricultural biostimulant maker. Ajinomoto OmniChem, a Belgian contract manufacturer that mainly manufactures pharmaceuticals but also sells byproducts of its production processes as agricultural inputs, aims to expand its sales by utilizing A2A’s sales channels. In Thailand, we are initiating trials to determine if Ajinomoto AGF’s know-how can be leveraged to meet away-from-home coffee demand. We have no plans to expand the Thai canned coffee business to Japan.

Our Client Innovation Center (CIC) has visualized 37 technologies that we previously referred to collectively as advanced bioscience and fine chemicals. The technologies on display at the CIC basically contribute to all of our businesses. For example, the resource-saving fermentation technologies responsible for some ¥2 billion of annual cost savings are an application of a technology on display at the CIC.

Our term for next-generation growth drivers is Integrated Food Solutions. We hope to build a business that provides not only seasonings when foods are processed but everything else as well, including other ingredients and even production processes. A case in point is kokumi [richly flavored] substances derived from technologies on display at the CIC. We first used them in our own products and we plan to sell them externally at some point.We hope to eventually commercialize fermented flavors also.

In terms of how we collect and analyze marketing data, we purchase market data like every other company, but I believe we have a unique approach to gleaning insight into consumers’ purchasing behavior. We periodically conduct our own consumer preference surveys, menu surveys and purchasing behavior surveys and apply the resultant data in combination with marketing data to develop new products and marketing campaigns both in Japan and overseas. In July 2018, we will establish a Consumer Data Analysis & Business Creation Dept to improve overall supply chain efficiency. We will consolidate Ajinomoto Co., Inc., Ajinomoto Frozen Foods Co., Inc. and Ajinomoto AGF, Inc.’s respective analytics functions into the new department.

In terms of e-commerce, I see three approaches. One is to sell directly to consumers. Another is to sell through online marketplaces like Amazon. The third is to combine a distribution website with bricks-and-mortar stores. We have of course amassed data on many consumers through the direct sales channel. We are now starting to deploy the other two approaches. In April 2018, we consolidated functions into our Consumer Foods & Seasonings Dept in Japan. We are starting to collaboratively analyze ID-POS data, develop marketing methods and adapt products.

We have established a new Solutions & Ingredients Department to control the Integrated Food Solutions business. It is working on fermentation-derived natural vanillin as an ingredient. We will reclassify it as a solution so we can pitch it to customers. We have already manufactured samples. That alone is not enough for commercialization, so we are working on completing a module to enable us to launch a fermentation-derived natural vanillin business.

In the case of core brands and brands that overwhelmingly command top market shares, we believe we can upgrade to higher-value-added products. We have already done so to the Cook Do® and Knorr® brands, for example. Even in the frozen food business, we are constantly improving the quality of our Gyoza and Cha-han (fried rice) products while maintaining high market share rankings. When we consider M&A inclusive of the post-M&A stage, we do not think we can realistically integrate acquirees into our Group. Japanese food makers tend to be overstaffed. If we were to acquire one, we would end up with its bloated workforce. M&A therefore still poses a high hurdle in Japan. We may make overseas acquisitions and sell the acquirees’ products in Japan or vice versa. For example, we acquired the French frozen food maker LTS, which possesses exceptional dessert technologies and brands. We believe we could easily sell its desserts in Japan and elsewhere. Another example is Cambrooke Therapeutics, a medical foods company we acquired in the U.S. It provides everyday foods for people with inborn metabolic disorders. We are currently planning to expand its business to other countries, including New Zealand, Germany and France. We should be able to use the Ajinomoto Group’s network to do so. Additionally, we are looking into offering Cambrooke products in Japan. We should be able to capitalize on the networks of medical professionals that our functional food and CDMO businesses have built. We intend to continue to expand our food products portfolio from such a standpoint.

We have the top-ranked brand in many categories of seasonings. We aim to maintain these brands’ margins at 17-18%. Once margins exceed 20%, various fissures tend to crop up, so we have no intention of boosting margins beyond 20%. In the frozen food business, we have extremely strong, top brands for certain individual products like Gyoza. Overall, however, our brands are ranked second or third in both the home-use and restaurant- and industrial-use market segments. So we aim to first achieve an overall profit margin of 10%. In the restaurant- and industrial-use market segment in particular, we have many problems and therefore room for improvement. In the coffee market, we have number-one products in certain niche categories like instant coffee sticks. Overall, however, one of our competitors is ranked number one by a large margin. Although we are working on value creation, we do not think we can easily earn margins in excess of 10%, so we are first aiming for 10%.

Marketing is a comprehensive capability. It includes developing distribution and forming alliances with other companies. Opportunities in the marketing realm have expanded by virtue of growth in e-commerce. Our Ajinomoto Park website has some 1.23 million registered members. Until recently, its content consisted mainly of nutritionally balanced recipes overseen by registered dietitians. Since April 2018, Ajinomoto Park started using AI to offer meal plans (staple food, main entrée and side dishes) instead of recipes for individual dishes. What Ajinomoto Park members want is ideas for balanced meals, not only individual recipes. If we can build a stronger link to e-commerce, Ajinomoto Park could help drive sales growth.

Reconfiguring our business portfolio is always on our minds. We both acquire and divest businesses. I believe the market gives us credit for this to some extent. At present, we have no interest in divesting Ajinomoto AGF. However, we believe that continuing to hold impaired businesses over the long term is a misuse of cash. We will accordingly make disciplined decisions. We are always on the lookout for large M&A deals. Any such deal could change our business portfolio substantially.

(Q: If Ajinomoto AGF resumes growing, how do you envision its business from that point onward?)

What we expect from Ajinomoto AGF is application of its know-how and technology to powdered drink businesses we operate in non-Japan Asia. We believe that the strategy we have been pursuing –namely, creating and growing markets for personal stick-type– is correct. We also believe that such markets still offer opportunity. Given the trend toward away-from-home consumption of coffee, we are glad we created the convenience store counter coffee market, but we have subsequently failed to create value quickly enough. The away-from-home coffee market still has a lot of potential, so we aim to make a comeback. For the coffee business as a whole, both in Japan and overseas, sustained future growth hinges largely on stable sourcing of coffee beans. In this regard, we are strengthening our supply pipeline from source countries by assisting producers in strongly positioned countries such as Brazil through our overseas food businesses. Over the medium term, we expect to increasingly gain an advantage in terms of coffee-bean sourcing.

In our case, I think it is best to employ a step-by-step approach. When expanding into e-commerce, for example, we should first do so in businesses best suited to e-commerce. In existing distribution channels as well, we need to determine how much value we can add to businesses such as coffee and seasonings for prepared take-out foods while defending their top-lines.

Our group companies all have completely different cost structures. At present, our business profit margin is derived from maintaining those cost structures. It is not feasible to make all group companies the same as each other. We believe we can build an agile development platform and create added-value by having group companies play their own highly specialized roles without imposing a uniform Group-wide structure.

We see no need to produce all products in-house. We should produce core-brand products and key ingredients in-house and also embed flexibility into our production operations. For other products and ingredients, however, please understand that we will rely on a combination of outsourced and in-house production.

In general, raising prices in Japan is quite difficult but we intend to continue to adjust our pricing in markets in which we have strong brands and categories in which we are the leader.

We have never once raised prices solely on the grounds of raw material costs. We raise prices to reflect a variety of factors, including labor costs and long-term exchange rate trends. To the extent possible, we try to time our price increases to coincide with upgrades in product value to facilitate price increases by distributors and retailers also. This policy will remain unchanged going forward.

(Q: From a long-term perspective, are price increases to sustainably increase margins still a ways off in Japan?)

Yes. According to the conventional wisdom, such price increases are quite a long ways off but they are possible if we have strong products. The important point is that productivity is still very low. We will restructure our production operations by consolidating and automating them to increase productivity in line with market demand. We are also switching to batch production to enable low-volume, high-mix production runs.

Looking at logistics from a similar standpoint, Japanese food companies’ logistics expenses equate to around 6% of sales. Food companies ship their products in trucks that are only 40% loaded on average. They invest in old distribution centers throughout Japan in the name of owning their own centers. Many such centers operate very inefficiently. Rationalizing them can yield big improvements from various perspectives, including labor shortages and environmental impacts.

Additionally, our corporate functions’ expenses exceed 3% of our sales. We aim to reduce them to 2.5%, in line with the global norm, by 2020. As you can see, there is much we can do in Japan instead of merely raising prices.

Thai operations are off to a good start in the first two months of FY2018 [April-May], even taking into account that the year-earlier comparison base is low because sales were down in the first quarter of FY2017 after surging into the end of FY2016. Our Philippine operations are off to a weaker start than we anticipated amid intense competition from major global companies. Our Indonesian and Vietnamese operations are performing well.

In Brazil, April was a good month but truckers staged a major nationwide strike from May 21. The strike severely curtailed our shipments while it lasted. In May, we shipped only about 65% of our planned monthly shipment volume. The striking truckers agreed to return to work around 4 June. Our shipments have since been recovering. Consumers’ daily lives also were affected during the strike, with gasoline shortages preventing some people from going into town. Economic losses caused by the strike may never be fully recouped. From a production standpoint, Brazil is also a major exporter of MSG. We were forced to suspend some production for about a week due to raw material delivery delays. The lost production may increase first-quarter costs.

After the King's passing away in October 2016, Thailand was in national mourning until the royal cremation ceremony was completed in October 2017. During the mourning period, consumption activity was subdued. Now that the cremation ceremony is over, we think consumption is recovering from such self-restraint. The Thai market as a whole is recovering in our assessment. That said, recent structural changes in the canned coffee business’s environment still persist. We will therefore steadily execute our strategy in pursuit of our targets.

In Thailand, the RTD [ready-to-drink] coffee market’s growth has stalled, largely in response to a new excise tax. But another contributing factor that cannot be overlooked is that coffee of a quality previously unavailable to the general public has become available in cafes and elsewhere. We must pursue both canned coffee demand and away-from-home coffee demand, including convenience store counter coffee. Consumers’ spending on coffee, a luxury grocery item, differs by market segment. Demand for relatively inexpensive canned coffee and away-from-home demand for high-value-added coffee are therefore both important.

Our newly consolidated Turkish subsidiaries will contribute substantially to growth in the Rising Stars. We are now proceeding apace with plans to merge our three Turkish subsidiaries. We intend to complete the merger as planned.

We do not see any commodification of consumer seasoning products. In particular, we consider AJI-NO-MOTO®, flavor seasonings and menu-specific seasonings to be high-level specialties. The previous comment about 10% business profit margins was referring to average margins. Margins on seasonings are higher than 10% even now. In processed foods, we are incurring up-front costs to expand our portfolio. We use an all-in margin of at least 10% inclusive of such up-front costs as one benchmark.

On a constant currency basis, we pay more attention to gross profit and business profit growth rates than to top-line growth rates. If we achieve our cost-reduction target every year by using resource-saving fermentation technologies, much of the resultant cost reduction would be MSG production cost savings. MSG is exported by our MSG production subsidiary to overseas subsidiaries or used domestically to make products such as AJI-NO-MOTO®, flavor seasonings and menu-specific seasonings. Overseas seasonings and processed foods business would consequently benefit from the cost reductions in the form of improved gross profit margins. Additionally, we are achieving profit growth through efficient marketing activities, sales of new value-added products and some price increases. However, the ¥8.2 billion raw material cost increase factored into our FY2018 earnings forecast will mainly affect International Food Products. Gross profit margins consequently may worsen in FY2018.

(Q: I understand that although it is difficult to raise prices to pass through cost increases in Thailand, you plan to do so in other countries. Am I correct to assume that such price increases are factored into your earnings forecast to some extent?)

Yes. The reason it is difficult to pass through cost increases in Thailand is that AJI-NO-MOTO®, like sugar, is subject to government price controls. Price increases must be approved by the government. Ros Dee® flavor seasonings and menu-specific seasonings are not subject to Thailand’s price controls, so we can raise their prices if our cost structure worsens.

In the U.S. as in Japan, frozen food sales growth rates’ sustainability depends on the extent to which competitors copy what we do. If competitors release similar products, demand will fragment among the competing brands. In the U.S., we currently face no strong competition in the Asian food space. Asian food itself is very much a niche market to begin with and Ajinomoto Foods North America, Inc.’s own-brand products are the top brand in that niche. Meanwhile, Ajinomoto Foods North America is an OEM supplier of retailers’ private-brand products also. We believe we can control the market to some extent. Additionally, our strategy of raising prices of appetizers and Mexican food products in tandem with qualitative upgrades is still in its infancy. Mexican food is pervasive among consumers but it is very low-priced. We aim to give our Mexican product line a makeover by upgrading its quality on a par with our Asian food products. However, quality products are a challenge to stably produce. Stable production requires know-how more than technology, so we are currently struggling to gain the requisite production know-how.

With the San Diego plant’s acquisition, we have nearly completed our investments associated with the plant restructuring. We decided to follow up the Windsor acquisition with some additional investment, all of which is factored into in our FY17-19 MTP, including the San Diego plant acquisition and capital investment incidental thereto. However, efficiency upgrades still remain to be done. The restructuring program should start paying off from FY2019. We intend to turn Ajinomoto Foods North America into a company that can achieve sales growth and sustained profitability by FY2020 as promised.

Within the Healthcare business, the advanced biopharmaceutical domain has entered its prime. Through M&A and forward-looking investment, we have built a foundation and now have pipelines in two main CDMO business domains: antibody drugs and oligonucleic acid (ONA) medicines. Accordingly, the Healthcare business’s current earnings contribution is driven by pipeline progress, not new drug launches. Its earnings contribution should ramp up in earnest from 2020. The cell culture media business is likewise currently in the pipeline stage in our view. For embryonic stem (ES) cells and induced pluripotent stem (iPS) cells, we are entering the drug discovery phase, having initiated a few clinical trials. We expect the market for iPS and ES cell therapies to actually take shape from 2025. Our management has not yet decided on the role we will play in that market. We may partner with other companies instead of going strictly solo.

(Q: Is my perception of the CDMO business as a B2B business correct?)

Broadly speaking, you are correct but CDMOs work together with pharmaceutical companies from the development stage through ultimate commercial production. The structure is similar to food businesses’ B2B2C model. The current trend among major pharmaceutical companies is to focus their strengths on drug discovery. They are therefore likely to increasingly outsource manufacturing functions from the initial pipeline stage through production of the final product. CDMOs involved solely with commodified small-molecular drugs likely have low ROA and profit margins of only around 5%. In the case of medium- to large-molecular drugs, however, if a CDMO partners with the drug maker from the development stage, it can earn big profits from the outset, before the drug goes generic. We expect antibody and ONA drugs to be the next main fields for CDMOs. Our current pipeline is one of the top three or so globally. We aim to maintain this position even when the drugs in our pipeline have reached the market.

(Q: What are your plans in terms of synergies with other usinesses?)

At our recent briefing on Integrated Report topics, we talked about 37 categories of technology on display at our CIC. Many of these categories overlap at their core. Accordingly, the synthesis technologies we use to ferment and chemically restructure amino acids required by the CDMO business are being applied in food businesses to create flavors or kokumi substances from fermentation materials derived from amino acid fermentation. In other words, amino acid technologies and CDMO technologies contribute to some of our food businesses’ highly functional seasonings in addition to supporting the AminoScience business.