Morinaga & Co Ltd

TSE:2201

Earnings Call Transcript 2023-Q2

[Eijiro Oota, executive]

Hello, everyone. This is Ota. Thank you very much for taking time out of your busy schedule today to participate in our financial results briefing for Q2 of the fiscal year ending March 31, 2023. First of all, I would like to talk for a little over 30 minutes about H1 of this fiscal year, which has been affected by higher-than-expected raw material prices, higher energy costs and the weaker yen. However, we were able to steadily raise the top line of sales, especially in focused domains, and we expect to further accelerate this momentum in terms of total sales in H2.

However, in H2 of the fiscal year, we expect the scope of raw material price hikes to be even greater than in H1 of the fiscal year and we are now revising our forecast for the full year. Today, I will explain the details of the price revision and future steps and prospects.

First, here are the results for Q2. Net sales were JPY 98.4 billion. Sales increased by JPY 5 billion compared to the previous year. 105.4% in percentage terms. This was JPY 0.6 billion, less than the forecast announced 6 months ago in May. In business, direct marketing and U.S. business, which are the focus domains continue to perform well.

Next, the profit and loss aspect. Operating income was JPY 10.2 billion. Profit decreased by JPY 2.9 billion compared to the previous year. This was JPY 0.5 billion less than the forecast. Profits declined significantly due to the impact of higher raw material and energy costs and strategic advertising investments.

In addition, profit attributable to owners of parent for the year was JPY 6.5 billion, a decrease of JPY 3 billion. This was JPY 0.4 billion less than the forecast. The next factor is the increase or decrease in operating income. Factors contributing to the decrease in income are highlighted in red and factors contributing to the increase in income are highlighted in blue.

The 3 above-mentioned factors, soaring raw material prices and increased energy costs, plus increased investment in advertising for future growth amounted to about JPY 4.5 billion. Below, others includes R&D personnel, sales, distribution and other expenses and the red area is approximately JPY 5 billion.

This was offset by the effects of price revisions and higher sales but not all of it was covered, resulting in a decrease of approximately JPY 2.9 billion. As we have included at the bottom, outside the column, the actual exchange rate for Q2 procurement of this fiscal year is JPY 118 to the U.S. dollar. The previous year was JPY 105.

Next is a summary by business segment. In terms of sales, all sales, except for Confectionery & Foodstuffs and Frozen Desserts increased and total sales increased by more than 5%. In particular, sales in the U.S. increased significantly by 140%, partly due to the impact of foreign exchange rates. It was also 126% in local currency terms.

In terms of operating income, the decrease in profit from Confectionery & Foodstuffs and Frozen Desserts had a significant impact. The following is the increase or decrease in operating income by business segment and the factors behind the increase decrease.

Here is a staircase chart with the figures from the previous page, which I hope you will review later, including the factors. From here, we have summarized the topics of the domestic and U.S. markets over the past 6 months, including the situation after the price revision. SRI data and year-on-year comparisons at the storefront are graphed by month.

First, in domestic confectionery, Morinaga Biscuits. The overall market has maintained the large expansion in COVID-19. Our company is on the red line, but there was a supply-demand adjustment in Q1 related to line expansion. In addition, although June saw a large drop due to price revisions, we picked up from the second half of August. And with the launch of new products, our growth in September was much higher than the market growth.

Next is HI-CHEW, but the overall candy market is on a recovery trend, although it declined with COVID-19. HI-CHEW has also continued to perform well since last year. And although a price revision was made in July, the impact of the price revision was minimal and the product continues to perform well.

Next, Carré de chocolat and DARS. The chocolate market is down trending, especially for pure chocolate, which is very tough. In this context, Carré de chocolat revised its prices in July ahead of its competitors. In September, the performance of Pistachio, which was launched in the previous year, was down significantly from the previous year. On the other hand, DARS has been able to significantly grow, thanks to promotions although the company raised its prices at the same time as the September renewal.

Next is Frozen Desserts. The overall market is strong at 100.8% year-on-year for April to September. The red line is us, and we are at 102.5%. Although the price was revived in June, sales have remained steady without being significantly affected.

In the same view on the right are Choco Monaka Jumbo and Vanilla Monaka Jumbo. Choco Monaka Jumbo has been sold steadily since the price revision in June as a result of the 50th anniversary promotion this year. In this SRI, it is 100.5% compared to the previous quarter. Shipments also exceeded the previous year. However, Vanilla Monaka Jumbo is struggling, with SRI April to September total at 94% of the previous year's level.

Next are in Jelly direct marketing and HI-CHEW in the U.S., which are focused domains. While the jelly drinks market as a whole is doing well, in Jelly itself continues to do well. Next, direct marketing. This, too, is growing at a rate far exceeding the growth of the health food market in direct marketing. Both Morinaga Collagen Drink and Morinaga Aojiru have steadily increased the number of regular customers and strategic advertising investments have also been effective, resulting in continued strong sales.

Finally, it is the U.S. HI-CHEW. We revised the prices of bags last December and stick products this February. The market as a whole is doing well, but HI-CHEW is well above its market average. As mentioned above, price revisions vary from product to product, but the total progress has been favorable. And at this point, I think we can say that the transition is in line with our projections.

Next is our forecast for the fiscal year ending March 31, 2023. As mentioned in the recognition of the business environment, the price hike of raw material and energy costs are expected to be much higher than the forecast at the beginning of the period. And although we are trying to recover through self-help efforts, the outlook is very severe. The severity of the external environment is quite uncertain for the future.

We expect this trend to continue in H2 of the fiscal year. Under such circumstances, we will continue to strengthen our response to these 4 initiatives on the right, which are our own initiatives as before, but we will revise our earnings forecast for this fiscal year, looking at the current situation and the future.

We have revised our forecast for the current fiscal year, which we announced in May. Net sales are expected to be JPY 194.3 billion, sales increased by JPY 13.1 billion compared to the previous year. The rate is 107.2%. This sales figure is JPY 4.3 billion, more than the forecast announced in May and this sales figure is expected to be the highest in the company's history.

Operating income is expected to be JPY 13.5 billion. Profit decreased by JPY 4.1 billion compared to the previous year. This is a JPY 3 billion decrease from the May forecast. Profit attributable to owners of parent for the year is expected to be JPY 8.5 billion. We sold shares in Morinaga Milk Industry Co. Ltd. in the previous year. This is a negative JPY 2.2 billion from the forecast.

Next, other factors that contribute to the increase or decrease in operating income in the current forecast for the year. During the year, raw material price hikes amounted to about JPY 7.3 billion, including foreign exchange. Energy cost increase is about JPY 1.3 billion. Advertising investment is JPY 0.78 billion for the year. Other increase is JPY 0.9 billion. This will be offset by higher sales and the effect of price revisions, but the total income is expected to decrease by JPY 4.1 billion.

Each of these items, which differed significantly from the assumptions at the beginning of the period will be explained later. As for the exchange rate for procurement, the annual forecast is JPY 133 per U.S. dollar, and the actual exchange rate for the previous fiscal year was JPY 110 per U.S. dollar.

The next table looks at the increase or decrease factor in H2 alone. The actual operating income for H2 of the previous fiscal year was JPY 4.5 billion. But the surge in raw material prices in H2 of this fiscal year alone is JPY 4.5 billion. We are expected to see increase in energy costs of approximately JPY 0.8 billion. Adding the 2 actual figures for raw material price hikes and energy cost increases mentioned earlier for H1 of the fiscal year, we estimate JPY 3.3 billion, which we expect to be JPY 5.3 billion for H2 of the fiscal year.

We are aware that some raw material prices are currently peaking out, but we are not optimistic and assume that the upward trend will continue. We plan to cover this further headwind with the effects of price revisions and increased sales, but we will not be able to cover all of them resulting in a profit decline of approximately JPY 1.2 billion in H2 alone.

The estimated exchange rate for H2 of the fiscal year is JPY 145 to the U.S. dollar compared with JPY 112 for the previous fiscal year. Next, we list 4 items that have significant changes in amount from the beginning of year forecast. Above all, including raw materials and exchange rates, we were looking at JPY 4.3 billion. But now, we are at JPY 7.34 billion, a difference of JPY 3.04 billion.

Energy costs are also up JPY 1.27 billion from the JPY 0.4 billion increase estimated at the beginning of the period. The 2 are about JPY 3.9 billion higher than the forecast at the beginning of the period. The effect of the price revision is an increase of approximately JPY 0.5 billion from the beginning of the period due to the revision of additional in Jelly and other factors.

Sales growth is also expected to be positive from the beginning of the fiscal year, and the effects of this are being felt. Here are 2 of the most recent price revisions. Implementation is scheduled to begin on November 1 for HI-CHEW in the U.S. and on December 1, for in Jelly in Japan. We plan to continue to respond flexibly to price revisions in order to overcome this further headwind.

Next, is the annual forecast by business segment. In terms of profit, the trend is the same as H1. But in terms of sales, Confectionery & Foodstuffs had a JPY 0.4 billion decrease in H1, but we plan a JPY 1.8 billion increase in sales or 102.5% for the year.

Sales of Frozen Desserts also declined in H1 but are expected to increase in H2 and are projected to increase for the full year. Sales are expected to be 104.4% of the previous year's total in Japan and 135.9% in overseas. The overseas weighting is expected to exceed 10% for the first time this fiscal year, rising to 11.4% for the year.

Next is the profit increase, decrease by business segment and factors. The figures on the previous page are shown in a staircase chart. We hope you will check them later to see what the factors are. This is an explanation of Q2 results and the revision of the annual forecast.

From here, I would like to discuss the progress of the 2021 medium-term business plan, future steps to be taken and prospects for the future. Last year, we announced the 2021 medium-term business plan and our first long-term business plan, the 2030 business plan. The 2021 medium-term business plan was launched with the aim of building a new foundation for 2030. But as I have already mentioned, we have been facing very significant headwinds in the form of soaring raw material prices and rising energy costs, even including the efforts to beat back the raw material price hikes, exchange rate fluctuations and energy cost increases in the 2 years between the start of the 2021 medium-term business plan and the current fiscal year, the increase was more than JPY 10 billion over the 2 years.

At the time of the start of the 2021 medium-term business plan 1.5 years ago, we expected an annual increase in raw material prices of about JPY 0.5 billion, which we assumed was within our ability to offset the increase. In fact, at the presentation last May, we had announced that the annual increase for the previous fiscal year was expected to be almost plus or minus 0. This is now more than JPY 10 billion in 2 years.

To counteract this, we have revised prices, further reduced cost of sales, streamlined expenses, including operating expenses and scrutinized investment efficiency. To cope with further headwinds in H2 and beyond, we will develop high value-added products. Specifically, we will increase the value of wellness products and raise the unit price of premium products.

This is already in hand, but we would like to further accelerate and make it into a larger mass. We are also beginning to consider the export of domestically manufactured products to the U.S. other than HI-CHEW, which I will explain later.

In addition, we would like to strengthen our efforts for inbound and event activities, which are undergoing a resurgence. Even under these circumstances, we have been making investments for 2030, especially in advertising and R&D. And we are making investments with the will to achieve medium- to long-term growth in 2030, although the current situation is very difficult.

Incidentally, advertising investment is expected to increase by approximately JPY 2 billion over the past 2 years. As a result, the top line of sales has expanded. And the sales target for the final year of the 2021 medium-term business plan was JPY 190 billion, which we expect to achieve this fiscal year, 1 year ahead of schedule.

We believe that the fact that we have been able to grow our top line, especially in focused domains and that we are overcoming price revisions with our strong brands in a difficult environment will act as an impetus to improve profitability when these headwinds subside. We feel that in the midst of this retrograde trend, we are learning to create more profit than ever before.

Today, we will probably receive questions about the profit forecast for the next fiscal year, the final year of the medium-term business plan. So I will mention it there. But in any case, the future situation of raw materials, energy costs and foreign exchange rates is very uncertain.

In order to overcome this headwind we will take the various measures I have explained today with speed, but we are aware that it will be extremely difficult to achieve the profit target for the next fiscal year, the final year of the medium-term business plan.

As for our plans for the next fiscal year, we will have to watch the external environment a little more closely, including the exchange rate to see how we view trends in raw materials. Additional measures are being assembled and will be explained at the end of this fiscal year.

Next, here are the sales and annual forecast figures for the focus domains. As I mentioned earlier, we expect to see significant growth this fiscal year, with the composition ratio exceeding 50% for the first time. Incidentally, the figure for the previous period was 48.8%.

We would like to further accelerate the process. From here, I will briefly explain each of the 4 focus domains. First is the in Jelly of the in business. As I explained in detail 6 months ago, we have fully recovered from the COVID-19 disaster and are at an all-time high.

In H1, sales were 117% higher than the previous year and the purchase rate also at 14.5% was the highest-ever. Active initiatives are gaining new demand. Here is the future growth strategy. As we have been talking about for some time, we will further expand the target market and strengthen the appeal of drinking scenes.

On the left of this, it says women's snack. This fruit product for women. And in the middle, the dextrose Ramune flavor of improved concentration. These have been big numbers. Also in the meantime, there is a personal care for your concerns, which I'm introducing for the first time, a product called in Jelly clear, in Jelly's first foods with Function Claims was launched in September this year, exclusively in the drug market. This is an example of a high value-added product that I mentioned earlier that increases value through wellness. We will also make sure to plant seeds for various other new growth.

Next is direct marketing. The revenue structure was issued for the first time. How can we increase regular customers by advertising as a prior investment. It is a business model that is different from other businesses, the so-called subscription. In the current fiscal year, we have made progress without any decline in the efficiency of acquiring regular customers, and we continue to invest aggressively in advertising.

The result is the graph on the right, which shows a steady increase in the number of regular customers, which will generate significant sales profit ahead. Exactly as written, I believe that this is an investment in advertising for future profit generation.

Next is the United States. This fiscal year, the forecast in yen has come to JPY 15.3 billion, partly due to the impact of foreign exchange rates. You can see the rapid growth over the past few years in the graph. Since the target of the 2021 medium-term management plan was to achieve sales of JPY 10 billion in the next fiscal year, the final year of the plan.

It can be said that the growth has far exceeded the plan. I believe we are steadily expanding the brand in terms of store stocking ratio, store turnover and SKU increase. Last month, I went on a business trip to the U.S. for the first time in 3 years. The response to expanding awareness is through sampling and securing a firm position on the candy sales floor at U.S.-based supermarkets. They can also be found in local supermarkets and airport kiosks.

We have experienced firsthand, the increase in penetration compared to 3 years ago. Even with such a smooth U.S. HI-CHEW, there is risk and this is something we talked about a year ago at this briefing. I am sure you will have questions. So I will introduce 4 of them here. One is the concern about recession with considerable inflation in the U.S. itself.

This may be something I also felt very much during this business trip in comparison to 3 years ago. So the success of price revisions will continue to be a major key. The second is stable supply. We have to respond to the rapid increase in sales and in addition to expanding our production lines in Taiwan and the U.S. We are now considering exporting Japanese-made products, as I mentioned earlier, in a few words.

This will be done by allocating Japan HI-CHEW's manufacturing capacity to U.S. exports, which we hope will also increase capacity utilization in Japan and ensure a stable supply in the U.S. where the market is strong. Although it can be said that this is a flexible response to the weak yen, we are currently working as a team to study the establishment of a drastic production system, and we recognize that this is an important management issue.

Currently, HI-CHEW's production plants are located in Japan, Taiwan, China and the U.S. This is truly a global concept. Then there is the response to the rising cost of raw materials and the worker shortage. However, as you can see there, we have recently recorded record manufacturing output. And I believe that the various measures we have taken have been successful.

I also visited the U.S. plant last month to check on how well things are going. We will continue to work hard to address this risk. Next is Chargel. We are just getting started and what we can report is limited but we are in the process of planting the seeds. Our target audience of men in their 30s and 40s is highly rated, and we have included the voices of EC purchases there. In any case, we would like to sit back and take our time.

Next is the fourth domain of focus, Frozen Desserts. As this is a focused domain, we had planned for significant sales growth, but we expect to fall far short this fiscal year. Profits are also expected to decrease significantly due to the impact of the sharp rise in raw material prices and increased depreciation expenses.

As mentioned earlier, sales are expected to be almost 100% for this year. However, as I explained earlier, H1 is also above the market average at the storefront. And looking at the past 3 years, we have made significant growth. The graph shows the moving annual total in April 2019, with 3 years ago as 100. Our growth is beyond the market.

This fiscal year is expected to be tough against the plan, but we are confident that we will do well with the 3 strategies. We would also like to take on the challenge of creating new markets of #3.

Next is the basic domain, Confectionery & Foodstuffs business. Morinaga Biscuits and HI-CHEW were explained earlier, both are steadily producing results with growth well above the market average, and we are working to improve profitability. DARS is also off to a very good start this fall.

The total DARS shipments for H1, 101% of the previous year's total. In addition, with the return of inbound tourism to our events, we saw an opportunity for souvenirs and renewed all of our souvenir HI-CHEW products. In the domain of exploration and research, we've included the expansion of HI-CHEW overseas here in Oceania.

We would like to accelerate the HI-CHEW initiative including the high recognition rate, examples of sales flow development and Europe. And we would like to do a good job of HI-CHEW development on a global scale.

Then I would like to introduce you to 2 new businesses, SAI MEAT and Passienol. This is the characteristic of SAI MEAT. Our proprietary technology enables thick and large chunks of meat. It has no soy smell and can be stored at room temperature. Passienol is also a food material that is compatible with Functional Claims, and we will aim to expand its use as a raw material.

Next, we have sustainability-related issues. We endorsed TCFD in April of this year. Subsequently, a climate change scenario analysis was conducted and information was disclosed in June of this year. Above, we have established the Sustainability Advisory Board and the first meeting of the Advisory Board was held in May of this year.

We have 3 outside experts participating in this project. This is the second year of this year's integrated report, which has already been issued at the end of September. We hope you will take a look. On the right, shows the fundraising, and we recently issued a release on this as well. Sustainability bonds will be issued for the reconstruction of the Shibaura building.

It says that we aim to create an environment that is easy for employees to work in and promotes the utilization of diverse human resources while also contributing to disaster prevention and mitigation for local residents.

Next and last is the mid- to long-term financial strategy. Mr. Takagi, who is present today was appointed Chief Financial Officer this year. and is updating the financial strategy and working on it as part of the management as a whole. This is the first time we are mentioning this in our presentation. Although we have included it in this year's integrated report, we have broken down our financial strategy into 3 elements: financing, investment activities and shareholder returns, and we will implement our financial strategy with an awareness of the cost of equity.

This is the last page. Here, I will explain the shareholder return part. The original 2021 medium-term business plan called for shareholder returns of more than JPY 12 billion over the 3-year period. And we have already returned JPY 18.6 billion to shareholders over the past 12 years. In addition, the company plans to cancel about 10% of the treasury stock issued at this time at the end of November.

With an eye on the total return ratio, the company will consider flexibly acquiring treasury stock as needed in the next fiscal year. We expect to have a difficult business performance this fiscal year. But as I have explained, we intend to make a strong effort to return profits to our shareholders. Please refer to the following 5 pages for reference information. That is all for my explanation. Thank you for your attention.