Morinaga & Co Ltd

TSE:2201

Earnings Call Transcript 2022-Q2

[Eijiro Oota, executive]

Hello, everyone. This is Ota. As before, I am very sorry that I cannot feel the expressions and reactions of the audience through this screen this time. We still have no choice. So this is how it is today.

I know we don't have much time, but I would like to thank everyone for your cooperation. Thank you very much for taking time out of your busy schedule to participate in our financial results briefing for the second quarter of the fiscal year ending March 2022 today.

First of all, I would like to talk for about 30 minutes about the second quarter, the first half of the year. Last year, especially in April, May and June, we were completely affected by the pandemic, and the figures were abnormal for some products. There are good things and bad things about this. In this context, it is very difficult to read the figures for this fiscal year, including how the impact of the pandemic will be viewed. In addition, it was very unclear to what extent the various measures we took would affect the numbers. Under such circumstances, the first half of this fiscal year which I will explain in a moment, exceeded the forecast for May.

Today, I would like to explain the contents of the plan, and I would also like to focus on the first half of the current fiscal year. and future plans for the 4 focused domains newly selected in the 2030 vision and the 2021 medium-term business plan, which were announced in May of this year.

First, here are the consolidated results for the second quarter. Net sales totaled JPY 93.422 billion, a year-on-year increase of approximately JPY 8.5 billion. Year-on-year change increased by double digits, 110%. This was an increase of about JPY 2.4 billion from the earnings forecast announced 6 months ago. Overall sales increased significantly due to a significant recovery in the health category, especially in Jelly which had fallen significantly in the previous year due to the impact of the pandemic as well as strong overseas sales.

Next, operating income was JPY 13.188 billion, a year-on-year increase of approximately JPY 1.6 billion. This was an increase of about JPY 1.0 billion from the earnings forecast. The operating income margin was 14.1%. And this operating income, both in terms of amount and margin, was the highest ever in the consolidated results for the second quarter.

I will explain the factors behind the increase and decrease in income later. Profit attributable to owners of parent was JPY 9.544 billion, an increase of about JPY 1.2 billion. This was an increase of about JPY 1.6 billion from the earnings forecast. We have also included EBITDA figures at the bottom.

Next is the contents of the Food Manufacturing business, which accounts for about 96% of total sales in the segment by division. Due to the time constraint, I will not explain the detailed content of Confectionery & Foodstuffs, Frozen Desserts and Health Products, but I have attached them as reference information at the end of this document. So please check them later.

As you can see, Health Products was the major driver. Sales grew significantly by 126% and operating income increased by approximately JPY 1.9 billion. As you will see later in this document, overall sales of in Jelly were 127% compared to the previous year. In Bar was 121%, and the mail order Morinaga Collagen drink was 118% of the previous year's level.

Next, as I mentioned at the beginning of this report, overseas sales were also strong with 144.7% compared to the previous year and 141.4% in the United States, which we have positioned as a priority area this time. As a result, the overseas sales ratio also increased by 2 percentage points to 8.3%. This shows factors in change in consolidated operating income. Factors causing a decrease in income are shown in red above and factors causing an increase in income are shown in blue below.

At the time of the earnings announcement and forecast in May, I mentioned that there will be a significant increase in depreciation expenses this fiscal year. And in the first half, that increased by JPY 1.22 billion. As for raw materials, we promoted cost reduction efforts, but the total increase was JPY 0.52 billion.

Then below that, there is an increase in sales of about JPY 8 billion due to other cost increases, and there was a figure of JPY 2.94 billion. In addition, the product mix improved due to a large increase in sales of in Jelly and other profit boosting effects offset the decline in income resulting in a total income increase of JPY 1.64 billion.

From here, we summarize the topics in the domestic and U.S. markets for the past 6 months. This is a graph showing the year-on-year change by month. The data for Japan is from SRI in stores. First of all, HI-CHEW, which was negatively impacted last year to a large extent, has not returned to pre-pandemic levels, including the entire sugar confectionery market.

If you look at the cumulative total for the period from April to September versus the period from April to September 2019, on the bottom right of this page, you can see that HI-CHEW of our company achieved 85.9% of the total, and the sugar confectioning market as a whole achieved 86.2%. However, even in the midst of the overall struggles, HI-CHEW 12 pack, as you can see in the product images of Suppai Chew and Umai-Chew performed well through a variety of measures.

Next, biscuit which performed very well last year due to the coronavirus crisis and stay at home demand continues to perform well this year. If you look at the year-on-year change and the period from April to September versus the period from April to September 2019, you can see that both our company and the market as a whole are doing well. Also, as you can see in the image here, our new Pistachio Cookies, which were launched in July this year, also performed very well.

Next is Frozen Desserts, which also performed well last year, but sales here have fluctuated greatly month by month due to weather factors. This shows how hot and how high the temperature was in July compared to July in the previous year. If you look at the year-on-year change and the period from April to September, versus the period from April to September 2019, in the lower right-hand corner, you will see that we had a large increase in the market last year, and we had a big record of the previous year.

But this year, we cleared that number, and it was 102.9% at the store and continuing from last year, the overall market was 98.3%, down from the previous year, but our results exceeded this. Choco Monaka Jumbo and ICEBOX struggled, but they were compensated for by Ita Choco Ice and other products.

Next is Health Products, including in Jelly, in Bar and direct marketing. In April and May of last year, sales of in Jelly by half of the previous year's level or around 50%, but they are making a big recovery. The figure on the lower right of the chart shows that in-store data shows 98.6%, which has not yet returned to the level of 2 years ago.

But in our distribution shipments in total, in Jelly has returned to the level of 2 years ago in the first half of the year with a performance of 102% compared to 2 years ago. However, this is still less than the previous year for the other 4 core products, including energy.

The contribution of the new products we launched to recover, especially the Glucose jelly was significant. Also, in Bar continues to do well. In direct marketing, sales both Morinaga Collagen drink and Delicious Aojiru continued to be strong from last year.

Next is the U.S. HI-CHEW. This is the distributor rate, the handling and it compares 2018 with 2021, which is this year. I hope this color will give you a sense of the steady expansion of our products. I will explain this. Initially, we started on the West Coast. As of this 2018, this left part, the West area handling was 70% to 80% here. However, everything else was below 60%.

For the past 3 years, the handling of these products has been steadily expanding. And in 2021, which is this year, in the West area, it is 80% to 90%. And in the area from the middle to the right, there are no areas but less than 60%. The figure on the right is the sales value which has been growing faster than the overall market for the past 6 months. I will explain more about the U.S. later.

Next, we have revised our earnings forecast for the current fiscal year, which was announced in May. Net sales are expected to be JPY 179.2 billion, an increase of JPY 4.2 billion from the forecast announced in May. Operating income is expected to be JPY 18 billion, an increase of JPY 1 billion from the forecast. Profit attributable to owners of the parent is expected to be JPY 12.8 billion, an increase of JPY 1.1 billion from the forecast. For reference, the EBITDA figures are also shown at the bottom.

Next, I would like to explain the factors behind the increase and decrease in operating income in this annual forecast. For the year, the increase in depreciation and amortization is JPY 2.27 billion. Advertising expenses are JPY 1.38 billion. Raw materials is JPY 0.91 billion. In addition, there will be an increase of JPY 0.6 billion in investments in intangible assets such as R&D and DX. There are some other things that have changed since the May forecast, which I will explain in the next sheet.

The following are the 4 items that have the largest change in amount from the forecast. First of all, some of the depreciation and amortization expenses have been brought back, resulting in a decrease of JPY 0.45 billion from the initial forecast. In the second half of the fiscal year, we will make additional investments in advertising in direct marketing, which continues to perform well in focused domains.

I will explain this later but that is JPY 0.53 billion more than the forecast at the beginning of the fiscal year. Although this is an adverse factor, we plan to offset the increase in raw material prices at the beginning of the fiscal year, but we now expect that the price will rise more than expected and that the impact of the weaker yen will be significant.

In terms of production efficiency, total manufacturing output has increased, but the ratio of purchases from our own factories has risen significantly, especially for Frozen Desserts. This is due to the struggles of Choco Monaka Jumbo and ICEBOX, which have negatively impacted the absorption of fixed costs as well as the increase in the unit labor cost. I explained the results for the second quarter and the revision of the business forecast.

Next, I would like to talk about the progress we have made toward the 2021 medium-term business plan and 2030, which were announced in May. First of all, I explained this right part in May in order to achieve the 2030 business plan. As part of the business portfolio shift, we have selected businesses with potential for future growth and profitability. And here are the first half results for the 4 focused domains. This is the first time we are making a disclosure in this category.

Each of the 4 businesses is off to a good start with the in business at 127% year-on-year; direct marketing at 119.1%; the U.S. at 141.4%; and Frozen Desserts at 104.1% for a total of 4 items at 54.4%. Since it is the first half of the year, sales are higher due to seasonality, but the results were up 2.4 points from the previous quarter. I will explain each of the 4 in the following sections.

First, the in business, which we want to symbolize our rebirth as a wellness company and in Jelly, which is the core of the in business. We have talked many times about the loss of demand due to the coronavirus crisis in April and May of last year. But after that, we subsequently implemented a variety of measures aimed at bringing about a recovery.

I explained these measures in detail at a briefing in November last year. In addition to the impact of those measures, external factors also had a positive impact, enabling us to achieve the strong first half results. However, there is more to come. This is positioning of the most important product that holds the key to achieving the highest profits in the final year of the 2021 medium-term business plan, not to mention 2030.

This is a graph showing the status of the revival of the 4 core products. I think you can clearly see that we are making a V-shaped recovery. Demand is also increasing due to external factors, increased human flow and the need to prepare for adverse reactions to vaccines.

And most importantly, we believe that our proactive approach is paying off. This is a sheet of growth strategies that will make us grow for the future. As I have mentioned many times, we are working on various things to expand the target demographics and suggesting new ways to consume in Jelly, which we believe is important.

First, on the left, in the expansion of the target demographics for women, we have whole fruit jelly. And for children, we support their growth. This is a Glucose jelly that was launched in September last year, and it has been selling well and is being established.

Then there is the energy management for fitness management which is a product with 90% less sugar. Heat stroke prevention is shown on this slide as a seed for further growth. This will involve the launch of a frozen jelly product, something that I think can safely be called an innovation. This is a nutritionally complete meal replacement that is sold only through e-commerce. Although the products are still limited channels and are still being tested, we would like to develop these products for the future.

Next, this is the purchase rate of in Jelly. The in-Jelly purchase rate has increased significantly. In fact, in the 2018 medium-term business plan, the target for the purchase rate was 13%, which we disclosed, but we could not achieve it even before the pandemic.

In the first half of this fiscal year, the percentage was 13.3%, a significant recovery from the decline caused by the pandemic and a record high which is very encouraging data for the future. However, the purchase rate, even at its highest point, is still 13.3%. So we believe there is still a lot of room for expansion.

Next is in Bar and creation of future foods. In fact, also for in Bar, we were forced to temporarily suspend sales of some of our products due to a lack of product supply last year, but we are steadily recovering. We are also on a growth trajectory. We are also making steady preparations for efforts to create future foods, which are part of point 3 for the in business as was announced in May, and we hope to release it during this midterm plan. This is a brief explanation of the in business in some detail.

Next, direct marketing. The moving annual growth rate of net sales has been shown and the number of subscription customers has been steadily increasing which has led to increased sales. In addition, we will invest in additional advertising in the second half of the fiscal year as the efficiency of acquiring customers through advertising has been on a positive trend.

This is an investment in advertising to acquire new subscription customers and contribute to profits in the next fiscal year and beyond. And we have now made the decision that this is necessary to achieve profits in the final year of the 2021 medium-term business plan.

Next is our U.S. business, HI-CHEW. We set up a local subsidiary in 2008, so I'm writing about the history of marketing, production and sales since 2008. Also, the results so far have been significant and steady growth in sales. The CAGR of sales over the past 5 years is over 20%. And sales have more than tripled in 5 years. We are also still in the process of increasing investment to expand the scale of our business.

But I think it is also significant that we were able to return to profitability starting in 2019. Also, our market share is still a little over 1%, and we believe there is still a lot of room for expansion. I also received a Nielsen Design Impact Award, which is mentioned below. We are the first Japanese manufacturer to receive this award and we feel that our reputation among consumers and the industry has been steadily increasing.

Next is the future growth strategy of HI-CHEW in the United States. There is still a great deal of room for expansion in sales, marketing, production and all other areas. And we would like to achieve our target of JPY 10 billion in sales in the final year of the 2021 medium-term business plan as soon as possible. And we believe that this JPY 10 billion is still a passing point.

First of all, in terms of sales, as I mentioned earlier with this map, I think we can continue to expand stores selling HI-CHEW. Secondly, in terms of marketing and products, the number of SKUs is currently only 1/3 that of our competitors, and we will continue to expand by diversifying packaging.

As you know, the U.S. is more wellness oriented than Japan. So we are planning to launch wellness-oriented products in the next fiscal year. Thirdly, in terms of production, the annual sales forecast for this fiscal year in the U.S. is over JPY 9.8 billion. As mentioned in the reference information section that you can see later. This figure is much higher than our May forecast, and we are now moving forward with the consideration of increasing production capacity.

Things are going very well in the U.S., but we need to be aware of the risks as well as the good things and respond to them. First, there is the problem of labor shortages. There is a shortage of labor in factories and their retention is declining. We are preparing and implementing a variety of measures so that our employees can work for as long as possible.

We will continue to place top priority on securing manufacturing output and stable supply. The third and most recent concern is the rising cost of raw materials and logistics. On the raw material side, the price of the main ingredient starch syrup has skyrocketed, and this has had an impact.

In terms of logistics, the global shipping disruption, which has been widely reported in the media lately has been particularly severe for transportation from Asia to the U.S. In addition to soaring logistics costs, there have been many delays. This is expected to have an impact on our profit and loss. Under such circumstances, we are considering the option of price revision if cost increases cannot be absorbed.

Next, the last of the 4 focused domains is Frozen Desserts. Takasaki number 3 factory has started operation. The operation has started smoothly with the production of Ita Choco Ice in April and Choco Monaka Jumbo in July. As for Choco Monaka Jumbo, we are struggling for the first half of the year. But in the second half of the year, we will roll out limited time products for a longer period than last year.

In the next fiscal year, we will also be preparing a variety of measures to celebrate the 50th anniversary of Choco Monaka Jumbo. Regarding Ita Choco Ice on the right, this is the second year of spring, summer expansion and sales have grown even more, reaching a record high. The product was actually expanded for the first time in the spring and summer of last year to become a year-round product and achieved very large sales which is one of the factors that made us stand out in the market comparison last year.

When we talk about these products in the first and second years, it is often difficult for the second year to clear the large number from the first year. However, in the second year of the sales of this Ita Choco Ice, it has surpassed the first year's record high sales. I am happy to report that the business is expanding steadily, as you can see the description of 9% March financial year 2021.

I have talked about the focus domains. But among basic domains, we have added a sheet about chocolate in the Confectionery & Foodstuffs business. In the case of chocolate, the most important thing is to expand and revive sales of Dars and Carré-de-Chocolat, which have been struggling in spite of the capital investment.

As for Dars, as you can see the slide, we have made a major renewal this fall for the first time in 20 years, expanded our product lineup, set our main target to Generation Z and are developing our marketing strategy. This fall, Carré-de-Chocolat is also developing a marketing strategy to return to its original value of quality.

There is an image of wine. And as chocolates that go well with wine certified by top sommelier, we are currently rolling out our wine sales stand at about 1,000 retail locations across the country with our over-the-counter follow-up stores, and we will strengthen our sales activities to expand that further.

There is also the diverse packaging. As we have talked about many times before, with respect to the convenience stores of missing channels, we have tried several times in various forms. And here it is. We have been able to get good data in this form. I have high hopes for the future expansion of this project.

Lastly, in terms of updating ESG information, we published our first integrated report in September, which was also explained at the financial results briefing in May. I hope everyone will read this book, as it covers all aspects of financial and nonfinancial performance.

As a new initiative since then, we have launched the in Jelly recycling program which I would like to introduce here. As part of a joint project with TerraCycle Japan GK to promote the recycling of plastic resources, special collection boxes for in Jelly will be installed in schools nationwide. As I mentioned earlier, we have attached the first half results by division for your reference. So please take a look at them.

So to sum up, we would like to achieve the forecasted figures for this fiscal year, which will lead to the next fiscal year and the final year of the 2021 midterm business plan. In addition, as I have just explained, we will make sure to invest for the future. Thank you for your continued support. That's all from me. Thank you very much for listening.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]