Morinaga & Co Ltd

TSE:2201

Earnings Call Analysis

Strong H1 Performance and U.S. Growth

The company reported a net sales increase of JPY 11.2 billion, reaching JPY 109.6 billion, and an operating income increase of JPY 3.9 billion to JPY 14.1 billion, partly due to successful U.S. expansion. All business segments saw revenue growth, especially Frozen Desserts, confectionery, and the U.S. subsidiary. The company forecasts a net sales of JPY 210 billion and an operational income of JPY 18.7 billion for the fiscal year.

Company Performance in Q2 FY2024

The company reported strong performance in Q2 with sales, operating income, and net income exceeding plan expectations, despite challenges such as raw material price hikes and yen depreciation. Sales increased by 111.4% over the previous year, reaching JPY 109.6 billion, and operating income rose to JPY 14.1 billion, which is an improvement from the past year and higher by JPY 2.2 billion than forecasted. Operating margin also improved by 2.5 percentage points to 12.9%, leading to record high figures for H1 across all phases of income.

Projected H2 Performance and Medium-term Business Plan

The company anticipates accelerated investments in H2 related to growth and foundational management, leading to increased sales but reduced profits for the period alone. The fiscal year is the final one for the 2021 medium-term business plan, and the company has been making strides towards it, particularly in the U.S. business, which has doubled its sales target to JPY 20 billion, far exceeding the original JPY 10 billion goal due to strategic initiatives and an expanding market presence.

Strategic Initiatives and Market Expansion

Noteworthy strategic initiatives include the U.S. business outperforming with sales forecast doubling the set target. In the global market, the HI-CHEW branding office was established to further promote the brand internationally. The Frozen Desserts business is on track to meet its 2030 target of JPY 50 billion in sales earlier than expected, with market share now over 11%. Initiatives like Salted Caramel flavor under HI-SOFT are being explored to leverage existing market capabilities. The company is also working on creating new markets with its technological advantage, such as frozen pancakes and Ice Box for alcoholic beverages.

Confectionery & Foodstuffs Business Challenges

The Confectionery & Foodstuffs business has been hindered by soaring raw materials costs, resulting in an operating profit margin suppression to 2% last fiscal year. Despite efforts to recover through pricing and sales composition strategies, the forecast operating margin is 3.8%, indicating that further structural reforms are needed to reach the 2030 target.

Sustainability and Financial Strategy

The company has joined the TNFD forum on biodiversity and climate change and has been recognized in the FTSE ESG Investment Index. A shared financial strategy is focused on sustainable growth and maintaining shareholder returns, keeping in mind the cost of capital. A new share repurchase was announced recently, with a particularly sizable increase in total shareholder return over the last three years.

Forecast and Strategic Goals Moving Forward

While facing more than JPY 19 billion in increased costs, the company expects to achieve near-record profits close to JPY 18.7 billion for the fiscal year, just shy of the JPY 19.2 billion from 2020. This is underpinned by strong sales momentum in various segments like Frozen Desserts and biscuits. The company continues to invest in intangible assets and growth initiatives, working towards a robust 2030 vision. The new 2024 medium-term business plan is set to be announced in May, with the goal of achieving record operating income and continual corporate value improvement.

Earnings Call Transcript 2024-Q2

[Eijiro Oota, executive]

Hello, everyone. This is Ota. Thank you very much for taking time out of your busy schedule to participate in our financial results briefing for Q2 of the fiscal year ending March 2024 today. From what I explained 6 months ago, sales, operating income and net income have exceeded the plan. Although raw material price hikes and yen depreciation still had a significant impact, we were able to offset them with price revisions and increased sales, resulting in higher sales and profits than planned, both in domestic and overseas.

However, as I will explain later, in H2 of the year, we will accelerate investments for further growth and the establishment of a management foundation. So we plan to see increased sales and decreased profits in H2 alone. In addition, this fiscal year is the final year of the 2021 medium-term business plan. So I would like to give you the status update, including its progress.

First, here are the consolidated results for Q2. Net sales were JPY 109.6 billion, an increase of JPY 11.2 billion over the previous year or 111.4% of the previous year's sales and JPY 3.6 billion higher than the forecast announced 6 months ago in May.

Operating income was JPY 14.1 billion, an increase of JPY 3.9 billion from the previous year and JPY 2.2 billion higher than the forecast. The operating margin was 12.9%, an improvement of 2.5 percentage points from the previous year. We achieved record high figures for H1 of the year in terms of net sales and all phases of income.

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. Increase in raw materials and energy cost had about JPY 2.9 billion impact.

Main items in other include investment in DX and human resources, including labor cost and wage increase. In total, red part amounted to around JPY 3.5 billion, which was offset by price revision and top line increase.

Moving to the lower part of the chart, there was a significant earnings contribution by the U.S. business. These resulted in a total profit increase of approximately JPY 3.9 billion. As we have included at the bottom outside the column, the exchange rate for Q2 of this fiscal year was JPY 134.84 per U.S. dollar, actual funding rate compared to JPY 118.04 per U.S. dollar for the previous year, which was about JPY 17 weaker than the previous year.

Next is a summary by business segment. All businesses, both domestic and overseas reported increases in revenues, particularly double-digit or greater increases in revenues from Frozen Desserts, business and operating subsidiaries and overseas. In terms of profit, the increase in confectionery and food stuffs, Frozen Desserts, and the U.S. business are largely responsible for the increase.

Here are the topics for the domestic and U.S. markets for the past 6 months, including the situation after the price revision in March of this year. Monthly SRI data and year-on-year comparison at the storefront are graphed by month. First of all, in the domestic confectionery biscuit market, the overall market was 103.6% compared to the previous year. While the company's market growth was 124.4%, which is much higher than the growth of the market as shown in the red line.

The Morinaga Biscuits brand had record sales in September of this year in terms of moving annual total. Existing products centering on MOONLIGHT are performing well. And the premium series, which was launched in September and has a high unit price of JPY 280 compared to the existing products, JPY 220, is also contributing greatly to the strong turnover at stores.

Next is HI-CHEW. The candy market as a whole, continued its strong performance from last year. And as you can see there, the overall market was 118.3% and that of HI-CHEW was 117.2% compared to the previous year. Compared to the year before, the overall market was 127% and that of HI-CHEW was 129%.

Like Morinaga Biscuits, HI-CHEW also achieved record sales in total brand sales. The rollout of HI-CHEW Day in August was also well received. And as shown here, the popular Fantasy Mix in the U.S. also made a significant contribution to the rollout in Japan.

Next, Carré de chocolat and DARS. Carré de chocolat suffered a large year-on-year drop due to a product launch timing in September and also struggled in H1 of the year as a whole. But the SRI data for October, the most recent month in which the launch was staggered was 118% year-on-year.

For DAS, we launched a new concept product. Pictures of Handy Sweets and Flavor Series are shown here. They made a significant contribution with the SRI data at 127% in H1 of the year versus last year and shipments also strong at 123%.

Next, Frozen Desserts. Although H1 of the year was really outrageously hot in summer, both the market as a whole and our company performed well with the overall market totaling 111.8% from April to September. And our company's Frozen Desserts, shown in red, was 114.2%, which is higher than the market average.

Jumbo Group, of course, is a big driver in H1 of the year. In addition, Ita Choco Ice and ICEBOX also performed well. Looking at shipments in H1 of the year. Ita Choco Ice was 141% and ICEBOX was 123% of the previous year's shipments.

Similarly, figures on the right of Choco Monaka Jumbo and Vanilla Monaka Jumbo. As for Choco Monaka Jumbo, product renewal this spring has been well received and in-store turnover is also increasing. Vanilla Monaka Jumbo, which struggled a bit last year, has recovered this year, and the introduction of commercials for the product has also helped to increase in-store turnover, resulting in an SRI data of 117% compared to the previous year.

Next, in Jelly, direct marketing and HI-CHEW in the U.S., which are the areas of our focus. As for in Jelly, the impact of the previous year's special demand was significant, and shipments fell below the previous year's level at 99% in H1 of the year. But in SRI data, as shown here, it enjoys nearly double-digit growth, continuing steady sales in the stores.

Next is Direct Marketing, which includes a comparison with the growth of the mail order health food market. Morinaga Collagen drink were almost on par with the previous year, while Morinaga Aojiru was 128%.

Next is HI-CHEW in the U.S. The market as a whole continues to be strong, but so does HI-CHEW for the most part. In comparison to the year before the previous year, the overall market was 134% and HI-CHEW is 155%. I will explain more about the respective efforts in these focused domains: in Jelly, Direct Marketing and the U.S. business later.

Next, is the forecast for the fiscal year ending March 2024. The awareness of and response to the business environment section includes a description of the company's own initiatives and the external environment. Each of the company's own initiatives are actively and promptly implemented. The measures to offset the sharp rise in raw material prices in H1 of the fiscal year are working well. And we feel that we are on track for a V-shaped recovery in profits, our biggest goal for the current fiscal year. But the outlook for the external environment is still uncertain.

We will further strengthen our investments in H2 of the year to achieve further growth and build a management foundation for the next medium-term management plan and beyond, incorporate these investments into our figures and then revise our forecast for the current fiscal year in light of the current and future situation.

We have revised our earnings forecast for the current fiscal year, which was announced in May. Net sales are expected to be JPY 210 billion, an increase of JPY 15.7 billion over the previous year, a rate of 108% or JPY 6 billion higher than the forecast announced in May.

Sales are expected to be record high. Operating income is expected to be JPY 18.7 billion, an increase of JPY 3.5 billion from the previous year, and an increase of JPY 1.4 billion from the forecast. Net income is expected to be JPY 13.6 billion, an increase of JPY 3.6 billion from the previous year and an increase of JPY 1.4 billion from the forecast.

Here are the H1 results and revised H2 forecast side-by-side with comparisons to the previous year results and the forecast at the beginning of the year. These figures offer net sales and operating income, domestic total, overseas total and consolidated total.

Looking at sales figures alone, one may sense a slowdown in H2 of the year compared to the previous year. But originally, the plan for this fiscal year was skewed towards H1, especially in Japan, given the high baseline in H2 of the previous year.

As explained earlier, the results of H1 of the fiscal year were favorable with the effect of the price revision as planned and figures that exceeded the market average growth in almost all categories, even exceeding the ambitious targets.

Looking at the sales forecast comparison against the initial forecast, the domestic H1 results, a 102.1% and H2 forecast is 102.7%, with H2 also expected to exceed the original plan. Also overseas in the U.S. business, on a local currency basis, excluding the effect of exchange rates, H1 results were 130% of the previous year's level and H2 forecast is 127%. So H2 of the year is not expected to see a significant slowdown compared to the strong H1.

However, in the U.S. business, amid concerns of a recession in the U.S. economy, we have significantly increased advertising expenses from the plan at the beginning of H2 in order to achieve sustainable growth in the next fiscal year and beyond. Therefore, if you see H2 alone, we expect a profit decrease compared to the initial forecast.

Operating income for H2 of the consolidated total is expected to decrease compared to the previous year and to initial forecast due to a smaller revenue increase compared to H1 and an increase in investment in additional strategic advertisement, R&D, DX and human resources.

Next are the factors that may cause operating income to increase or decrease in the full year forecast. Raw materials are expected to increase by about JPY 4.8 billion, including foreign exchange. And advertising investment is also expected to increase by JPY 0.27 billion per year for domestic market. And if we include the U.S. and overseas, advertising expenses are expected to increase by about JPY 0.8 billion per year for the entire company.

The price revision and sales increase will cover these impacts. And the U.S. business is expected to make a large contribution to profits, resulting in a total increase of approximately JPY 3.5 billion. Intangible investments in advertising, R&D and DX for the current fiscal year are expected to total approximately JPY 1.9 billion higher than the previous year.

Each of these items, which differed significantly from the assumptions at the beginning of the period will be explained later. As for the funding exchange rate, the full year forecast is JPY 138 to the U.S. dollar and the actual rate for the previous fiscal year was JPY 128.09 to the U.S. dollar.

Next is a table of these increase/decrease factors for H2 of the year only. In H2 of the last fiscal year, operating income was JPY 5 billion. But in H2 of the current fiscal year, we expect a total of JPY 3.8 billion as negative factors, shown in red due to the soaring cost of raw materials, increased strategic advertising expenses and increased expenses for DX, human resource investment, R&D and other items as in H1 of the year.

This will be covered by price revisions, the effect of increased sales and the U.S. business. But we will not be able to reverse all of these effects, resulting in a profit decline of approximately JPY 0.5 billion in H2 alone. The estimated exchange rate for H2 of the fiscal year is JPY 142 to the U.S. dollar compared with the actual rate of JPY 134.72 for the previous fiscal year.

Here are the 4 items that have significant changes in amount from the initial forecast announced in May. Although the impact of raw material and energy costs have been reduced from the initial forecast, impact from additional advertising investment, indirect marketing and in businesses in H2 of the fiscal year and the 4 main factors in other in the bottom are the primary reason for difference.

Those factors include additional investment in DX, labor cost increased due to the investment in human resources and product raw material mix, including sluggish shipment performance of in Jelly. In addition, we expect to incur some costs for the disposal of unsold stocks.

Next is the full year forecast by business segment. Looking at the year as a whole, the contributions from Confectionery & Foodstuffs, Frozen Desserts, business subsidiaries and the U.S. business have been significant, both in comparison to the previous year and in comparison to the initial forecast.

As explained earlier, we are planning additional advertising for in and direct marketing, especially in H2 of the year, in anticipation of further acceleration of growth in the next medium-term business plan and expect a decrease in profit.

This concludes an explanation of Q2 results and the revision of the full year forecast. This is the final year of the 2021 medium-term business plan, and I would like to explain the progress and prospects of the plan as of this point in time as well as measures to be taken.

Sales are expected to be JPY 210 billion, above the plan by JPY 20 billion, far exceeding the medium-term target. However, operating income is expected to fall short by JPY 2.8 billion to JPY 18.7 billion as the company would be unable to offset all the major impacts in the business environment, including the sharp rise in raw material prices, including the forecasted raw material price hikes for the current fiscal year. The total amount of cost increase over the 3 years of the 2021 medium-term business plan is expected to exceed approximately JPY 14 billion.

Next is the outlook for key management indicators for the 2021 medium-term business plan. First, the ratio of overseas sales to total sales is expected to be 13.2% this fiscal year, well above the midterm target of 9%, thanks to the large growth in the U.S.

Next, the sales ratio of focus domains is expected to be 51.2% this fiscal year, which is also expected to significantly exceed the midterm target, which was planned to be plus 5 percentage points from the average of 42% in the 2018 medium-term business plan. However, operating income, as explained earlier, is expected to fall short as we would be unable to counteract all the major impacts in the business environment. We will aim to restore ROE to the target level of 10% this fiscal year with a strong will.

I would like to explain 4 focus domains and the basic domain of Confectionery & Foodstuff business. First is the in Jelly of the in business. During the period of the 2021 medium-term business plan, we were able to recover in 1 year from the large drop in sales in financial year 2020 due to the pandemic and to grow the revenue above the level of pre-pandemic period.

Purchase rate and moving annual total sales are shown on the page, thanks to our effort to appeal variety of consumption situations and expand target customers, the business grew significantly. In particular, Energy Glucose Boost, energy for concentration and thinking, which was launched in September 2020 to recover from the large drop in demand during the pandemic has seen gradual market penetration, steadily expanding the consumption situations. Energy Glucose Boost has grown to next largest after vitamins and minerals.

Next is the development of other in brand outside of in Jelly. First, in Bar, as shown there, the growth of the protein bar market has slowed somewhat and competition has increased. Amidst such a circumstance, shipments of in Bar in H1 of the year were 107% of the previous year's level and 113% of the in-store SRI. Successful advertising featuring [ nut ] bar among other factors, resulted in strong sales.

Also, we have launched 3 products under in Brand as part of creating a new norm of nutritional intake. We are still in the test launch phase, but we have high expectations for the future. And we'll continue to work on the creation of the new norm, expanding themes in other areas as well.

Next is the Direct Marketing business. We have been strategically increasing advertising investment to acquire subscription customers in the last fiscal year. In this fiscal year, we plan to make additional advertising investment in H2, resulting in a full year sales forecast of JPY 11 billion.

This advertising investment is aimed at acquisition of subscription customers and will continue to increase sales and profit in the next fiscal year and beyond rather than this fiscal year. We are committed to a steady expansion of business to achieve our 2030 sales target of JPY 20 billion.

The lower right-hand corner shows measures for further business growth to expand the range of food products with the picture of Caramel [ bun ] and other exclusive direct marketing products. Also, the overseas expansion of Morinaga Collagen drink is now mainly in China and Thailand. For the Direct Marketing business, we are also considering potential alliances and M&A to explore inorganic growth.

Next is the U.S. business, which continues to perform well. In the 2030 business plan, we have positioned the U.S. as priority market since financial year 2021, concentrating investment and aggressively developing the business there. The sales forecast for the current fiscal year is now at the level of JPY 20 billion.

Originally, the target for the current fiscal year, the final year of the 2021 medium-term business plan was JPY 10 billion in sales. So although foreign exchange rates are, of course, a variable factor, I think it is fair to say that sales have grown much faster than expected.

As shown, our various initiatives have been effective, and our store stocking ratio has continued to expand. SKUs have been expanded and recognition rates have steadily increased. However, the recognition rate is still 54%.

The market share is still just over 1.2% at present, and we believe that we can still achieve sustainable growth in terms of various indicators. In addition, we newly established the HI-CHEW global branding office in April of this year, and we are now examining the future production system from a global perspective.

The promotion office is truly the organization that plans and promotes HI-CHEW's global strategy. We intend to accelerate our HI-CHEW expansion strategy not only in the U.S., but also other parts of the globe.

Next, creation of a new jelly drinks market for Chargel in the U.S. We are not at the stage of presenting specific numbers or results yet, but we are getting a good response from the sampling and other activities.

E-commerce sales are increasing and Japanese supermarkets, mainly on the West Coast, have begun to handle the product with some successful sales. HI-CHEW also started out from the merchandise at Japanese supermarkets and over time has grown to such a large business.

I recently spoke with the President of Morinaga America, Inc. when he was in Japan. He has been involved with HI-CHEW launch in the U.S. since the early days and is one of the key players and big contributor in the field. He himself made a strong comment that he felt fairly confident after working on Chargel for the past year.

However, in the U.S., this type of product format is still largely unfamiliar and nearly unknown to buyers and consumers alike. It will take time, but we are thinking that a major investment and advertising and marketing investment for the time being will be necessary at some point. We believe that we will accelerate the effort somewhere in the future.

Also in exploring the candidate for third arrow, we launched Salted Caramel flavor under the HI-SOFT brand this fall. As we have mentioned many times, this is an initiative that takes advantage of HI-CHEW sales and market capabilities. which have a strong presence in the candy section of U.S. supermarkets. We have heard that the turnout has been strong. This is another area that we are excited about.

Next, the last area of focus domains is the Frozen Desserts business. The sales forecast for this fiscal year is JPY 44 billion. And I would say that we have reached the point where we can see the achievement of our 2030 target of JPY 50 billion at the fastest speed among our focus domain businesses. Currently, SRI's market share is over 11% in the September moving annual total and has risen to third place in market share.

More than a decade ago, we were ranked at 7th. So leads we have made in the last few years or last decade have been remarkable. In the most recent SRI for the month of October alone, the difference with the second ranked player is 0.1%, and we are steadily catching up with them. Jumbo Group is the biggest driver in this business. We are committed to further expansion through the evolution of freshness marketing.

In the area of acquiring customers in adjacent markets, we are focusing on Ita Choco Ice and The Crepe. In the area of creating new markets with our technological advantage, please look at the lower part of the slide. We are working on tapping the demand for frozen pancakes and Ice Box for mixing with alcoholic beverages.

Next is the Confectionery & Foodstuffs business under basic domains. The business has set a profit margin target for 2030. But this time, it has been most affected by the soaring cost of raw materials. And as shown in the graph on the left, the profit margin has been suppressed over the past 2 years, with an operating profit margin of 2% in the last fiscal year.

We have explained before that we are trying to recover it with 2 price revisions for some products and also to increase the sales composition of biscuits and candies in order to improve profitability. In the SRI graph, the figures for the 4 years starting in 2019 has been favorable, outpacing the growth of the market.

Although the operating margin in this fiscal year's forecast is 3.8%, a significant improvement from the 2% in the previous year's results, we believe that further structural reforms will be necessary to achieve the 2030 target.

Next, as an update to our sustainability information, we have included on slide in addition to the various sustainability initiatives we have already announced.

One is our willingness to participate in the TNFD forum, a nature-related financial disclosure task force that covers biodiversity in addition to climate change this August. Then this year, the company was selected for the first time as a component of the FTSE, a leading ESG Investment Index. I think it is fair to say that our company's efforts to date have been well received.

Next is our medium and long-term financial strategy. This concept, which I first explained here a year ago, is being further updated and the entire management is sharing this idea. In the rest of the document, in the reference information section, we have included several slides that explain in a little more detail, including ROIC-oriented management, so please refer to them.

In any case, we will strive to achieve sustainable growth in corporate value and continuous and stable shareholder returns by managing the business with the awareness of the cost of capital.

Here are details of our shareholder return. We recently announced a new share repurchase on November 10.

Total shareholder return for the 3 years of the 2021 medium-term business plan is JPY 30.9 billion plus extra, and the portion of plus extra will be added to the current amount. Together with dividends, this represents a significant increase compared to the 3 years of the 2018 MTP (sic) [ MTBP ].

The company also announced a stock split. The ratio will be 1:2 with the base date of December 31 of this year.

The last slide toward realizing the 2030 business plan shows the results for financial year 2020 before implementation of 2021 MTP (sic) [ MTBP ] with the sales and operating income for the 3 years of the 2021 MTP (sic) [ MTBP ].

We were able to achieve a V-shaped recovery in sales after a major decline due to the pandemic. And we now expect to achieve record sales for the third year in a row. However, for operating income, highlighted in red in the middle of the right-hand column, costs and expenses are expected to increase by more than JPY 19 billion in total compared to financial year 2020 due to JPY 14 billion increase of raw material and other costs as well as an increase in intangible investment for strategic advertisement, R&D and DX of around JPY 5 billion in the 3-year period.

Under such circumstances, we expect to recover to the point where our profit forecast for this fiscal year, reaching JPY 18.7 billion, slightly short of the actual profit of JPY 19.2 billion for financial year 2020, which amounts less than JPY 0.5 billion shortage at this point. However, although we are forecasting lower profits in H2 of the year, SRI data for October, which is the start of H2 shows that H1 momentum is continuing in Frozen Desserts, biscuits and other segments.

The year-on-year ratio of October sales of Frozen Desserts was 108% for the market and 130% for the company. While the overall market for biscuits was 103% and 118% for Morinaga biscuits. In H2 of this fiscal year, we will continue to vigorously pursue various initiatives to bring our results as close as possible to JPY 19.2 billion, which is the level of financial year 2020.

In any event, despite the very difficult environment and headwinds of the past 3 years of the 2021 MTP (sic) [ MTBP ], we have been able to significantly increase intangible investments with strong will to achieve further growth and the 2030 vision. And we feel that the company is certainly getting stronger. We plan to announce the new MTP (sic) [ MTBP ] 2024 medium-term business plan in May next year. The discussions are almost at final stage and the figures are being compiled.

As mentioned here, we would like to achieve record operating income during the next midterm period and aim for sustained improvement in corporate value toward achieving the 2030 business plan. That is all. Thank you for listening.

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