Q&A from Small Meeting with President (Dec. 11-14, 2018)

I think that there are various styles of the “asset-light business model.” Up until now, we have been following the FIT & GROW policy, which is divided into structural reform and growth. There are businesses within the food products business, which we have positioned as the head of the GROW strategy, that we must make asset-light. What we want to do is to make top management-led decisions on the areas we will address. There are three approaches to this. (1) We will focus on categories where we will rank in the top three in our strong markets. We will establish these categories as subdivided business units to achieve the top three ranking. By doing this, we will become a company with a high ratio of top three ranked categories, and will aim to become one of the global top ten class food companies. (2) For example, in the frozen foods business, assets in Japan and Europe/United States are managed separately, but we will integrate them according to our strategy and focus on areas where they should be expanded. The KPI at that time is a top three ranking for market share, and being able to steadily increase ROA. The minimum standard for ROA is 15% in the food products business and 10% in the AminoScience B2B business. If we don’t do that, we will not be able to create a structure that will translate into ROE. We have shared this so far in the three-year plan, but the food products business will require six years (two Medium-Term Management Plans) as we must look further ahead for ROA improvements. We will make investment decisions during this period about the required amount and whether the investments will be used in strategically important areas. There are parts of the AminoScience B2B business which will require ten years. In either case, we will add what we can definitely achieve on a business unit basis as requirements. (3) The initiative for a 2.5% ratio of the Group shared costs to sales is just around the corner, as we head toward the FY2020 target. As this is a shared cost-sales ratio, it is a FIT initiative, not tied to business. We will continue to promote efficiency for commonly held assets (e.g.: logistics assets). There is one reason for this. Global competition is intensifying in food products as a whole, which we have positioned as the engine for our growth. The ICT revolution is also taking place in our markets and competition, and competition is intensifying. There is competition between manufacturers as well as with small-market products. The bigger the percentage of e-commerce, the more intense the competition between conventional distribution channels becomes, and it is no longer possible to work as quickly that we had in the past. For example, unlike in the past, passing on an increase in logistics expenses to product prices now takes quite a bit of time. Therefore, we cannot survive without a structure more focused on our stronger areas. 

In answer to your question about the kind of company we want to become, our aim for the time being is to be a “Genuine Global Specialty Company” and to become one of the global top ten class food companies. We have established five criteria, including ESG factors. Our initiatives in non-financial areas are in line with our targets. Our global environmental initiatives are making progress. This is because improvements are proceeding in our related mainstay products. Unfortunately, the progress on our financial targets is behind schedule. This is because we have not been able to achieve the structural components of our financial indicators. We would like to become a corporate group that ranks among the world’s leaders on both financial structure and non-financial initiatives, a group employees can be proud of and customers can count on.

The first category is the seasonings business (dry savories: umami seasonings, flavor seasonings, and bouillon cubes). We have the number one position in the global market, with a market share of 23%. And, if we include the liquid seasonings, such as mayonnaise, ketchup, and oyster sauce, we are ranked in the top five or six. In this area, there is no company with an overwhelming lead, but we probably rank in the top three if menu-specific seasonings are included. It is not only a mainstay but also an area of strength so we definitely want to realize this. The second category is the frozen foods business. In Japan, we rank in the top three, and we rank top in both Japan and the U.S. for the Asian and ethnic foods category. In Europe, we are about to be top in the category. We want to strengthen it. The third category is the powdered drinks business, particularly Ajinomoto AGF, Inc. We have also expanded into Thailand, Vietnam, Brazil, and the Philippines. We want to make this category one of our pillars by adding our techniques for deliciousness and technology for improving nutrition. I think that we will be able to create this as a business although it will likely rank lower than the previous two categories. Healthcare is a medium, a growth factor. In the area of CDMO, there is potential for us to rank in the global top three for oligonucleotides and antibody-drug conjugates, and we are making investments. Currently, ROA (after allocation of common expenses by business) is approximately 7% in the AminoScience business and 11% in the food products business. ROA for the seasonings business is pushing upward.

(Q: How many years will the improvement in ROA will take?)

We will aim for FY2020, but we want to plan so that we will be able to achieve it at the earliest possible timing under the next MTP.

It is difficult to answer that question at present.

(Q: You have indicated the results in terms of withdrawing from commodities. Is it really possible for you to change direction amid the past mentality of expanding business? Can you say that progress can be made, because this point is different from in the past?)

We hope to be able to introduce the vision for the high priority frozen foods business and the reform of corporate divisions as examples as soon as possible. With regard to other businesses and assets, we will indicate our approaches in turn as the time comes.

Information has been shared, but we have not yet brought the full vision of the asset-light business model down to the organization. We will make selections using the criteria I explained earlier. There are several possibilities, but we will start with what the management team is looking at. We have shared two key themes from among the possibilities, and we have a Management Base Review Committee led by the President to turn them into activities. We are certain about those two themes.

(Q: What are the two key themes?)

The two key themes are the revitalization of the frozen foods business and the 2.5% ratio of the Group shared costs to sales. The latter has a target of FY2020. The specifics have been put out, and at the end we will need to carry out some reshuffling and introduce some systems, so we are promoting this as a priority.

There has to be a balance between business profit and topline cash inflow. We will implement the model in stages to avoid any significant decline. I’d like you to wait until the next Medium-Term Management Plan for specific figures. The extent to which business profit falls will be a balance between contracting businesses and the fixed costs associated with them. It will depend on the timing. We will not do it while there are fixed costs.

(Q: Is it correct to envisage growth, including existing businesses?)

I think there will be some cracks in business performance temporarily. What we are aiming for is \130.0 billion in the absolute amount of business profit. I think that this is the necessary level for our targets of 10% for the business profit margin and over 10% for ROE. However, it is difficult to keep everything going up, and I believe that there is the possibility of something declining.

(Q: Is there a possibility of specific figures in FY2019 and FY2020 and beyond, even though not at the current stage?)

Yes. If we only engage in consideration of figures, the organization will be worn down from that alone.

Activities such as consumer foods marketing will all be local. Therefore, before consolidating strategy, we need to consider which strategies and functions to pull together. One of these is production technology. We will continue to consolidate more innovative and efficient production technologies that earn gross profit. Specifically, we will start with the frozen foods business. A second is in research where we have separate laboratories that conduct basic research and laboratories that develop food products. We are thinking of integrating them. A third is the food R&D function which is currently dispersed between Ajinomoto Co., Inc., Knorr Foods, Co., Ltd., Ajinomoto Frozen Foods Co., Ltd., and Ajinomoto AGF, Inc. We will strive for collaboration by one team, consolidating the R&D functions at the Kawasaki research laboratories, first with Ajinomoto Co., Ltd. and Knorr Foods, Co., Ltd. in FY2019 and then with Ajinomoto Frozen Foods Co., Ltd. and Ajinomoto AGF, Inc. in FY2020.

When we assess the seasonings business broadly, the five or six companies in menu-specific seasonings each have their own strong categories. One manufacturer is a soy sauce manufacturer (seventh or eighth) while another manufacturer blends seasonings based on spices. Ajinomoto Co. has strengths in umami seasonings and flavor seasonings. Menu-specific seasonings focus on an area that was previously handmade by consumers, and offer new products. The percentage of sales is approximately 10%, but is growing in excess of 10% annually. We can strengthen menu-specific seasonings further. By doing this, we believe we can raise our position from fifth or sixth to third. Thus, we are putting a significant focus on it. The example of the frozen foods business was brought up, and it is fair to say that Gyoza is a number one product in Japan and the United States. However, the purchase experience rate for frozen gyoza in Japan is only 18%. Even though there is potential for further expansion, there are also new domain products and categories that are becoming red ocean products, and our share of the frozen foods market in Japan is 11%, which makes us number three. Turning a number three category into a number two or number one category is not very meaningful. It is rather easier strategically to improve our positioning in domains such as gyoza, a strong category with a purchase experience rate of only 18%, shumai, fried rice, and desserts, which can get stronger if we focus.

The applicable products are high value added products, primarily seasonings and soup, and the goal is to further raise productivity. In that sense, it will result in structural reinforcement. At present, factories that manufacture products and factories that package products are located in separate locations so efficiency is poor, and without straight-through operations there is no flexibility. The factories are in a weak position for manufacturing flexibility amid today’s demand for small-market products. As a result, small-market products are encroaching. Our production systems will be revitalized into highly flexible factories. We will consolidate operations for flavor seasonings into the Tokai Plant starting in FY2020, and we will complete the restructuring of production systems, including Cup Soup, from FY2021. The new plants will be automated to a considerable degree, and the production lines will be flexible. The 2% improvement in the business profit margin for the applicable products will be due to rationalization. The figure from the growth perspective will be reflected in the next Medium-Term Management Plan.

(Q: Is it is correct to consider this as separate from the asset-light business model initiative?)

It is a growth sector initiative. We have not drawn it as a picture of balanced contraction.

We will promote the model while keeping a balance. In terms of the dry savories domain, M&A candidates presently remaining are the global brands of major global companies and equivalent core local brands, but there are few candidates in actuality. However, menu-specific seasonings is a rapidly growing market, and we think there are opportunities with the possibility that major global companies will sell brands in this domain.

When we announce the next MTP, we will not disclose the numerical targets for the FY2023–2025 MTP, which will follow it. However, I think that we should be able to share some guidelines in the form of business selection criteria.

There are three reasons for the sale. The first is the asset-light business model. At present, Hong Kong-based Amoy Food Ltd. is a company that generates profit, but the profit is lower than the level we initially expected. Speaking from the perspective of future ROA, a large amount of new capital expenditure on the existing obsolete factory would be required, but it would probably be difficult to get it to a structure that could return on the investment in the future. The second reason is that the brand value of Hong Kong-based Amoy Food Ltd. can be maximized by combining it with the group of manufacturers, distribution, and e-commerce under CITIC Capital. This will be a positive for Amoy Food. The third reason is that anticipate synergies from the perspective of access points to the distribution network and e-commerce that CITIC Capital has in China. For this reason, although we will sell 100% of the shares in Amoy Food, we will take a 15% stake in CITIC Capital Asian Food Holdings Limited.

That is how we would like you to understand it. However, the organizational design is also important. At present, at the Corporate Governance Committee, which I chair, we are discussing how we should increase the transparency of the Board of Directors. The current position is that, as the chairperson, I monitor everything, but in the future I want to link the tasks of the President to the Board of Directors. I hope to proceed in a form that properly builds up the approach, progress, and review. So far, we have entrusted a large portion to sites, but we intend to create mechanisms for key areas to be in the hands of the President and the Board of Directors.

(Q: I would like a frank impression on the extent to which the current Board of Directors is aligned.)

The Board of Directors was informed and gave its approval before the interim results briefing. I subsequently announced it to all members of the Executive Committee. As part of this, we shared the specific scope and basic approach, and we are proceeding to reflect the high priority themes in the FY2019 business plan. I understand that it is sinking in.

Under the asset-light business model, we will select and reduce the inefficient businesses in the food products business. We will concentrate on seasonings, Asian frozen foods, and quick, nourishing food and drinks. These will primarily be included in part of FY2019 business plan and in the FY2020–2022 MTP. As we strengthen expanding areas while carrying out business selection in the food products business, growth in the food products business might slow and the healthcare area might expand first. In this case the food products business, which accounts for 80% of the sales composition ratio, could shrink temporarily, and this may create a structure with a slight increase in healthcare. However, we do not have the objective of creating that structure. The objective is to return the food products business to a growth rate of 10%, primarily in the focus areas. There is a possibility that the ratio may change slightly depending on what kind of options are added through M&As.

Yes.

With regards to the coffee business, we are mostly focused on the scope of FIT, and it has not yet been linked up with how to make it GROW. In the past, there has been far too little R&D investment for flexible product development leveraging the strengths of Ajinomoto AGF in powdered drinks. And because of joint venture agreement restrictions, it was not possible to get out of a range of beverages such as matcha and hojicha. However, about two years ago, the research and development of Ajinomoto Co. was adopted, and Ajinomoto AGF began to set up development operations that are very similar to those for food products. As part of this, it is establishing plans for the future. I want to inform you of this as positive information. 

(Q: Will there also be a review of areas with poor asset efficiency in the coffee business?)

Yes. I think that we have been given enough time to consider this, but haven’t fully answered it, and it is about the time when we have to make a decision. However, if we are going to reduce everything, it would be better to sell. But since I don’t think that is the case, the business is in the scope of the asset-light business model. We developed the know-how of Knorr and we think it is very strong, but fundamentally we cannot use the brand outside of Japan. We are considering whether this know-how can be combined with the assets of Ajinomoto AGF. We want to try to make it into a pillar that ranks after the seasonings business and Asian frozen foods business.

Functions based on the four amino acids become significant earners when materials with outstanding features are created, but second ranked players now catch up extremely quickly. For example, it takes about ten years to develop kokumi (richly flavored) substances, but it takes about two years to expand new materials in the market and to use them effectively at Ajinomoto Co. During that period, similar products are released. The speed has been increasing. To have a competitive advantage, we get things done at an early stage. In other words, we capture the market from the small-market product stage and, based on that information, actually producing product, then engage in marketing when it expands into a medium-market product. Within the Group, the electronic materials of Ajinomoto Fine-Techno Co., Inc. have been going well. In the past, the materials were only for use in PCs, but the portfolio has now expanded to four businesses with smartphones, servers, and vehicle-mounted integrated circuits. The reason for this is that it has a presence in Silicon Valley and its researchers collect information face-to-face with customers. This is the direction we plan to take.

We have a strong commitment to the Japanese market, but it does take up too many resources. We have carved out too many niche products. For example, because of focusing on new domains such as Yoru Kuji no Hitori Nomi, there has been cannibalization of sales, reductions, and stockouts of mainstay products in the frozen foods business in Japan. We have been developing the Japanese market, which is no longer expanding, but we have reached a certain limit. Nevertheless, we have resources, and we can do more if we go overseas. At present, we have established a territory system and make efforts in each individual country, so we think that we have to change. Organizational reform will be involved, so we want to realize that in 2020.

As symbolized by umami seasonings, our core competency is development capabilities centered on amino acids. By creating raw materials that don’t exist elsewhere and applying them to food products, we have grown through differentiated products and the addition of unprecedented deliciousness and functionality. This has been our strength in the past. As the background to our need to focus on the asset-light business model, competition has intensified and the second and third ranked players catch up faster. There is a change in the environment so that the model that succeeded in the past is not usable any more. While there may be some areas in which the decision capabilities of the management team are not in line with the times, the issue is not only that, but also that sites are not prepared for speed. In other words, we are doing unnecessary things, so it is difficult to address the issues unless we focus more. Rather than stopping the creation of unique raw materials that other companies do not create, we will strengthen the capabilities that will lead to an increase in the speed of commercialization and marketing. To this end, we will refine and concentrate our business areas.

The shift to the asset-light business model was decided immediately prior to the financial results briefing, but we spent about two months sharing the background with 30 executive officers worldwide. We input the latest information from each region, and came together in Japan in September to achieve mutual understanding. On that basis, it was concluded that we should focus, and the rules in that case were set out as the top three categories and certain improvement in ROA. Based on that, it was decided that the management team will promote the asset-light business model, led by the President.

(Q: Are there structures for sharing information overseas, where change is even faster than in Japan?)

Yes. We compile information from every country, and disseminate and share it globally.

(Q: Has that been done since September?)

No. We always do it. The changes occurring at the moment are rapid and large in scale. Small, fragmented business units cannot address the current changes. For example, adapting to e-commerce and streamlining the supply chain have poor cost effectiveness with a small business scale even with plans to introduce AI demand forecasting. Therefore, the head office will determine the priorities for capital expenditure. These sorts of areas will be management-led.

Expanding our portfolio as living standards in emerging countries rise is extremely effective. In emerging countries, we adopt a basic approach, and it differs from the model in developed countries.

(Q: Strengthening business outside the Five Stars was discussed in the FY2017–2019 MTP, but should Ajinomoto Co. accelerate expansion in emerging countries?)

We are concentrating on the Five Stars, and have adopted a number one strategy with a focus on basic seasonings in the Rising Stars. We believe the Rising Stars are important in our strategy to be a world leader in the seasonings business, and we are not going to stop this.

(Q: Will there be any acceleration in the Rising Stars?)

Despite being termed the Rising Stars, the level of each country and region varies. Turkey and Africa are different, and India and Asia are different. Whether to accelerate or whether to expand the portfolio depends on the circumstances of the country.

(Q: There was discussion of expansion in Turkey and Africa in the days of the previous President, and quite some time has passed.)

The economic environment in Turkey is struggling due to the weak Turkish lira, but local growth has continued and we purchased two companies, taking the business close to \10.0 billion. We have engaged in regional expansion, but this has not been any burden because we are involved in basic seasonings. In Japan, we have focused resources for a 2–3% sales growth rate. Realistically, we may have to consider growth of around 1% for seasonings. From this perspective, we probably need to review our area strategy.

We have spare capacity, so there is no need to increase production. We produce parts for final products.

(Q: What kind of synergies are there between the chemical business and other businesses?)

The core technical components are connected. The business is the ultimate asset-light business model, and efficiency is extremely good. It is a business engaged in development services. It is the business model for our B2B business.

(Q: Have you considered, for example, making money through new businesses such as a service business or a licensing business leveraging the core technical components?)

As a B2B business, we have established businesses in collaboration with customers. Therefore, rather than expanding new business areas, we hope to gain profits by specializing in this area.

Any information will be disclosed by the other party. We do not launch the drugs themselves, so we cannot make any disclosures. In general, there are many cases in which OEMs do not make disclosure. Depending on progress on the pipeline, it will be possible to include sales. The sales of the CDMO business will increase, so we will be able to share information externally at that time.

(Q: Is the number of projects in each phase known at present?)

Our contract target for FY2018 is 40 or more commercial pharmaceuticals and150 or more drug development projects. Many of them are in Phase I and Phase II. In August 2018, Ajinomoto Althea, Inc. announced a new ADC (antibody drug conjugate) manufacturing line. Leading pharmaceutical manufacturers were invited for a tour of the facility. Contract and order receipt operations started in August 2018 premised on the completion of the manufacturing line in March 2019. In Japan, GeneDesign, Inc., which is an oligonucleotide pharmaceutical company, is also building a development center for high-mix, low-volume production using solid phase synthesis to be completed in March or April 2019. By dramatically increasing the processing capacity of the current line, it will be possible to increase the pipeline to 150. The contract system for the CDMO business will be fully in place from the beginning of FY2019.

It will be around February 2020. We will issue guidelines to each company in July 2019 and upload information in September 2019 and refine our focus areas. Finally, tasks will be incorporated into the business plan. In May 2019, we should be able to share the overall content of the next MTP and the direction in November.

At present, we sell through our own mail order site and through customers that are businesses. With regard to cross-border e-commerce, we have started test sales of Ajinomoto AGF products to China.

The evaluation of brand value for FY2018 will be provided by Interbrand around mid-February 2019. There is no current figure. The evaluation for FY2017 increased about 10% year-on-year to USD778 million. I recall that the factors leading to this increase were the progress in ESG and the strengthening of the corporate brand strategy. In any case, the weight of business performance is high in Interbrand’s evaluations, and I understand that the downward revision of our FY2018 business performance, which turned flat, could cause the brand value evaluation to stay the same. Brand value is unlikely to achieve the USD1,500 million level in FY2020 that we set as a target.

The employee turnover rate for the frozen foods business in North America, where there are business issues, is very high. We regard this as due to the disparity with the general economic buoyancy in the U.S., but there have not been any changes elsewhere. 

(Q: Has the turnover rate among employees in the Southeast Asian seasonings business increased?)

No changes have appeared. We have started conducting global engagement surveys in 16 languages, and Japan has a relatively lower score from the perspective of job satisfaction. Satisfaction levels are overwhelmingly higher overseas.

(Q: You are proactively dealing with ESG initiatives. How is the penetration of these initiatives among employees overseas and in Japan?)

The initiatives have penetrated to a considerable degree. We have shared with our employees the logic for enhancing ESG through our core businesses, centered on management that is based on the Ajinomoto Group Creating Shared Value (ASV). We have been emphasizing this area because it is clear that carrying out our business is connected to people’s health, reducing food loss, and reducing environmental impact.

(Q: There are concerns about whether employees have absorbed the emphasis on ESG, which was announced in this MTP, and since then short-term business performance has changed)

Speaking overall, the growth rate for the international seasonings and processed foods businesses, which are growth engines, is 7%. This is a 3% slowdown from the initial target, but ESG progress has not had that much of an impact. I understand that we are in line for the FY2020 goal. However, performance on financial targets is not keeping pace.

We held it in September this year. There were 229 influencers (specialists in physiology and nutrition, chefs, and members of the media) from 15 countries who took part. Ninety percent of the participants were satisfied with the content of the forum and provided feedback that their awareness of the MSG problem had increased. This time the forum was held in New York. Rather than holding an annual forum, we developed a mechanism for the continued transmission of positive information about MSG via social media and the media through a network of nutritionists and chefs. We want to make next year a year for checking this initiative and then communicate updated information at the World Umami Forum again in two years’ time. In terms of our final targets, we have created several KPIs. One of them is a communication target to halve the negative image of MSG among the 10 million people in the United States described as food forward (people with a high level of interest in food). The budget for the World Umami Forum is forecasted at USD10 million over three years.

There are three points that were commended about the World Umami Forum this time. The first point is that we actively addressed the issue without concealing our company name. The second is that only one of the specialists on the podium was a Japanese person. The third point was that the participants were actually able to experience preparing reasonable and economical reduced-salt dishes using umami. Going forward, we want to communicate as our key message the hopes for continuous salt reduction using MSG and that MSG is the purest umami ingredient. From the beginning, we have created a network with chefs in order to popularize AJI-NO-MOTO®, and 66% of North American influencers regard umami in a positive light. On the other hand, most nutritionists did not know about MSG’s salt-reducing effect and the reasons why MSG is regarded in a negative light. We adopted a communication strategy to disseminate the correct perception of MSG and its effects through the World Umami Forum, have the media cover this, and popularize it among ordinary consumers and restaurants.

We have greatly strengthened human resources in the healthcare business, where there was originally an issue. As this area is a global market, the leaders of the CDMO business, for example, are not Japanese. We also relocated the headquarters of the business to Belgium. This has been very effective. In the consumer foods business, the human resources who dream up marketing and creative business are dispersed. The asset-light business model also signifies bringing people together. We hope to overcome any of the issues you mentioned with this initiative.