Ajinomoto Co Inc

TSE:2802

Earnings Call Transcript 2019-Q2

[Takaaki Nishii, executive]

Good morning, ladies and gentlemen. Thank you very much for joining us today despite your tight schedule. Thank you for the big turnout. Without further ado, I would like to start the announcement.

Please go to the next page. First, I will start with the progress on midterm management plan followed by growth strategy, FY 2018 financial strategy and lastly, FY 2019. And that is the last year of the current plan. And from 2020, we're going to have new midterm plan. So I would like to talk about what will change in our management.

Next page, please. First, for the year to end in March 2019, we have already illustrated here the forecast and the results for the first 2 quarters. It would be very regrettable, the result. And please refer to paper entitled: consolidated results interim period ended September 30, 2018. And this box in the solid line, in the first half sales plus 3%, business profit minus 5%. As to the other first half of the year, although science business with good results of the other specialty chemicals and Healthcare so increases both in sales and profit. Struggling Japan Food Products and -- as well as the cost increase in international frozen foods as we reported earlier, significantly decreased profit in food business as a whole. The second half, measures taken to solve those issues will lead to increase in both sales and profit. But on a full year basis, sales is forecast to increase by 3% year-on-year while business profit unfortunately will remain flat.

Here, we have illustrated the state of initiatives in the businesses with issues. On the top, we have canned coffee Birdy in Thailand. As we reported before, the price increases and the strengthened sales measures are working and the progress is in line with the plan. And the quality, the improvement and the preparation for that is on the track as well. #2, 3 and 4 are the big issues here as well as the coffee products in Japan compared to the initial forecast. The competition is intensifying in the market. So we are taking the short-term measures and midterm initiatives, and we are working on them.

Number three, frozen foods in North America. We have completed the transfer to the new factory as we reported in the first quarter, and we are working on the stabilization of the production. And another concern, namely, the increasing logistics cost since December last year. To cover that -- the cost, we raised the prices. And the first quarter being at the bottom from the second quarter, we are bottoming out. But unfortunately, logistics cost is continuing, as you know. So in order to reach the expected profit structure, we still need some more time. The production stabilization on one hand and also how to cover logistics cost increase, we are working on these 2 things as well.

Number four, Frozen Foods in Japan. It might sound like an excuse, but in the first quarter, there is a reaction coming from the growth in home use demand of last year. The competition of key categories is intensifying, as I'm going to explain later on. We will take some measures to pursue some uplift in the second half, but on a full year basis, the profit is going to decrease year-on-year.

And number two. Expected risks in Africa and in Turkey. The political economic situation is uncertain and causing the local currency depreciation and weakening consumption and the other -- that description is added as comment to the announcement.

Next, FY 2018, the business profit. This is the waterfall graph against the initial forecast. Again, please refer to the additional document titled: FY 2018 Forecast by Segment. The first full year result, please look at the right-hand side of the -- as comparison to the initial forecast. Japan Food Products is JPY 6.8 billion short. The breakdown is about minus JPY 3.1 billion for coffee and minus JPY 2.6 billion for the frozen food. International Food Products, due to decreased profit of frozen foods in North America, is JPY 2.2 billion short. On the other hand, Life Support, driven by electronic materials is plus JPY 2.1 billion. And Healthcare, where the budget was very challenging one, it grew as expected. So Healthcare stands at plus JPY 900 million.

Some comments for other business category. The packaging business in Thailand is currently in the process of structured reform and that will be cleared within this fiscal year. And as to the cost cut, including implementation that requires less resources and affects other impacts. And some additional material, they are included in these numbers. But as to the implementation of the raw materials and the fuel prices, we expected that it to [ aggregate ] by JPY 8.2 billion compared to the 2017, but it seems [ next year ] that we can save JPY 2.8 billion as a result of measures that we have taken. And as to the FX translation in trade, about minus JPY 100 million. The JPY 5.7 million -- JPY 5.7 billion, it includes about JPY 2.6 billion or so from the resources, the fermentation. And all in all, FY 2018 business profit will be JPY 95.7 billion.

The next page. This is the forecast for FY 2019. The revised it downward looking at the -- we will target JPY 116 billion and the other, it will be the JPY 20 billion in addition. So to be honest with you, JPY 116 billion business profit target is a very tough one, but we will work on the key issues and the current measures taken for these key issues, and the structural reform brought forward. As I'm going to report later on, we are going to revise the projections for fiscal year 2019, and we would like to report on that on a different occasion.

Next, the updates profits, including business profits and profits under that line. Please read them. And I'd like to move on to the update of key growth strategy. First, the international seasonings and processed food products. As you can see, on a local currency basis, 105% year-on-year and that's the result of the first half. And in this fiscal year's target is 107%, so against it, we are slightly behind the target. Toward the end of last year and also in the first half of this year, we raised the prices of the seasonings. And that effect is taking some time to emerge but it will be much clearer as an effect in the second half of the year. So on a full year basis, we believe that we can achieve 107%. In particular, on the local currency basis, Umami, as a whole, 101%, but AJI-NO-MOTO Plus with the nucleotides of highly functional other seasonings is growing 113%, AJI-NO-MOTO Plus 113%. And about the other 4% growth for the other flavor seasonings. And for the powder and liquid many other seasonings, the 113%, it is now counting for the other 8% of the overall seasonings. So the many seasonings in AJI-NO-MOTO Plus is driving the overall growth, with their 2-digit growth, they are the growth engine.

Next page, Japan Food Products. The seasonings and processed foods, 101% year-on-year. And this year's target, 104%. And we are going to make some recovery in the second half. We probably do not reach 104%, but we would like to reach 103% on a full year basis. The 2 mainstay product, Knorr brand products, including Knorr soup. And the Cook Do with 40 years of history since the launch, they are doing very well. As to Knorr Soup, in the first half, because of very hot weather, means the cup soup saw some slowdown, but the soups, there was an appeal on vegetable ingredients and the freeze-dried, the EX soup did well. So in the first half, it reached 102%. But the other cash cow is the soup, which was not doing very well. But in autumn, the cup soup is recovering significantly. So on full year basis, we would like to -- we think that we can achieve 103%. Cook Do commemorating 40th anniversary since the launch. Now that you saw the new TV commercial, it is growing 108% year-on-year, it's driving the whole sector. So Knorr and Cook Do. Knorr Soup is for easy preparation, grasping personal demands and that's how it started. And added the appeal on breakfast or anytime and anywhere and good with rice, so we have been expanding the occasions. And in addition, pasta was added. And also the vegetables because this product is good for light meals. So we have been adding some more values to this processed foods and that strategy is working very nicely. And Cook Do, the same story. It started with the authentic Chinese, the more variety. And after year 2000, the concept became family meals. And now -- so the concept is getting away from the very original one which is authentic Chinese, but it is actually the accumulated growth coming from those different concepts. And if we can do the same thing for other businesses, that also will be even much better.

So for the overseas frozen food, on a local currency basis, is 103%. So France, they've had done some acquisitions, so it's about [ 20% ] for Europe. But including [ story in U.S. ] for North America, so it's very close to 110%, specifically for the Gyoza, fried rice, Ramen, these categories what we call the Asian Food Category compared to the previous year, it's grew by 25% -- or 125%. So this has been the driver of the overall strength. But The challenge is about the manufacturing cost. So the new factory for appetizer that transferred to Dublin. And the new plant for the Mexican food, that's in San Diego. For those start of these factories, this cost has been booked for the first half. And as I said before, on last year, the logistics cost has gone up. And in April, we have raised the prices. But even more than that, the logistics cost continue to go up. And from this first half, we have generated a loss. In terms of the stabilization of the manufacturing, so on top of these 2 factories that we have challenges in the mainstay agent factories run to stabilize manufacturing and this is generating stable results. So the Asian food foods. So we will continue to -- and it has been a major improvement in these Asian food factories, and we would like to expand that into mainly 7 factories, and we want to go forward steadily in these initiatives. But in terms of making the logistics more efficient, we have to put in more measures. In terms of the logistic costs, we have announced a second round of price increases towards the second half. But it's just trying to -- I don't think by raising prices, we will be addressing the root cause. So for instance, the restructuring the logistics system and making the logistics more efficient, we have sent out a specialist from Japan, the same as manufacturing, and started to take initiatives here. On top of that, from October onwards, we have replaced the local President. Bernardo, the previous President, in terms of the top line growth, he was very capable, and I think he has been able to show results. But in terms of the restructuring of the manufacturing or the logistics restructuring in terms of structural reform, he was not the right person, so may I say. So that's the reason why we have changed the President. And we are executing maximum level of support from Japan, and we are determined to conduct a V-shaped recovery in this business.

Please go to next slide. Well, this is the Healthcare business. This is going very steadily. For the full year, we are expecting double-digit growth. What's driving this growth is the pharmaceutical custom manufacturing business, and I'm speaking in more detail about this. For this fiscal year, we have integrated the CDMO business for -- of Europe and United States. And we say here, this is very symbolic Aji Bio-Pharma service and the company name is going to be -- changed the same name for the United States and Europe. And because of this, the global service [ provision ] system has been built, and we have been able to see good results coming out of this. For the CDMO market, so generally speaking -- for the CDMO business, the pharmaceutical market is growing by 5% per annum and it's about 10% of this pharma market. And that is the assumption. So this is our data, in fiscal year '15, that was USD 72 billion, that was the market size. So the CDMO business is growing by 67% per annum, so it is a growing market. To be able to tap into this growth, we are looking at globalization, and we are going to put in the system. In a nutshell, we want to enhance the capability to respond to the global market. More specifically, as we have shown you here, first of all, in terms -- we want to cover the wide range of growth areas, that will be API, so HAPI, and, with the [ vellum ] finish and antibody conjugates oligonucleotides. We want to have a CDMO that can respond to all this type of growth areas. And in terms of the supply chain, making it more efficient, that's not only about manufacturing, it means that we want to establish a supply chain that has a high level of quality assurance, and by doing so, enhance the trust from the customers. And by having able to integrate this network, means that this will allow us to target contracts of commercial pharmaceuticals and drug development. So in terms of these target contracts here, we are in line in terms of the contracts that we are able to achieve.

So let me go back some pages. So this is about the Japanese Frozen Food business. Last year, we have seen a backlash from the last year's home use products. But for the fried rice and kara-age category, there has been a fierce competition. So the first half, the sales have been below the previous year's level. That has been the challenge. On top of that, because we wanted to promote new products like ONIGIRIMARU or the other types of businesses, to be able to introduce new products, we have been accumulating expenses. So that's the reason why we are showing the decline in profit for the first half. For the second half, we are going to enhance the line up of our Gyoza products and have been able to see a good start of this initiative. And the Gyoza and pasta shumai will drive market activity. And by focusing on that -- these activities, overall, we would like to recover to 104% in the second half. So the kara-age, which has been a challenge, including new products, I think, basically we'll be able to go back to the previous year's level by in terms of the fried rice. So competition is fierce. In the second half, still will be below the previous year, that is a possibility. But in total, we want to recover back to 104%. And going to our coffee business, the Japan coffee business. So it has been away from home and then again, we have the sticks and variety flavor sticks for in-home consumption. There has been an overall trend. So the instant coffee and the -- that is volume category and the volume on regular coffee has been shrinking. And this trend is continuing this year.

So within the major manufacturers, there has been a fierce price competition. And AGF, the basic strategy is to focus on the home use stick beverages and make a differentiation through quality improvement and offer a wide variety of flavor. So by doing this enhance new demand, there has been their strategy. But the competition has taking a very strong price offensives and they've had to respond to that price competition. So that has been the reason why the profit has declined substantially. On top of that, in terms of the CVS coffee, we have seen a decline of market share. So that is the reason why in the first half, you have seen substantial decline, both in sales and profit. In terms of the instant coffee, so instant coffee business is shrinking, but we are seeing increased share in instant coffee. And in recent survey in office and out-of-the-home market, this is actually growing very steadily. But overall, it's still a small portion. This area still has a small portion of our, I guess, overall sales. It's not been able to compensate the overall sales. For the full year outlook, we are going to assume a huge decrease of sales and profit. But I would like to talk about a more midterm initiative that we're going to take.

And going to this slide, let's change on the different topic. This is nonfinancial initiatives. I would like to make 2 report updates. First, there are 3 written here, but I would like to focus on 2. So this is one that's going to talk about this more in detail. So the Umami dissemination MSG -- dispelling the MSG negative image, I would talk about later. In terms of the environment issues, challenges. There has been progress in the Paris Treaty. In terms of the plastic waste issue, we have declared a new group policy. By 2030, we will target to reduce the waste plastic usage to 0. So per year, we use about 25,000 tons of plastic, but we would like to target this going down to 0. Plastic waste 0 will be a target by 2030. More specifically, we will enhance initiative to reduce, reuse and recycle. And on top of that, renewal. This will be the new R. The 4 Rs will be the focus of this initiative.

And going to the next slide. So in terms of the Umami -- dissemination of Umami and the dispelling of the negative image of MSG, and we have conducted the World Economic Forum on the 20th and 21st of September in New York. And I think you saw the video at the beginning of this meeting. And in terms of the communication strategy, based on this, this is the slide that talks about it. In terms of our short-term target is that we would like to target these people called food forwards in the United States. These are the type of people -- they have various positions, but they have a very strong interest in food through mass media and through SMS. They will be sending out messages, always sending out messages and these type of people are called food forwards. And across the United States, it is assumed that there are 10 million of these type of people. And what they send out as a message will be -- will have a huge impact on the general consumers. And for instance, restaurants, and manufacturers, and retailers, we think they are impacting these people [ as recent moves ]] as well. So we conducted a survey for these peoples, for the World Umami Forum. So the people who have a very positive image of umami is 66%. On the other hand, in terms of MSG, they are about -- close to 40% had a negative image of MSG. So through the World Umami Forum, we want to make this umami positive percentage to 90%. We want to reduce the negative of MSG to half. That will be the communication strategy that we are going to take. More specifically, as you can see here, such nutritionists and food writers, these are going to organize these influencers. Specifically, what will be more important will be that the chef network. On top of that, we were strong on this in the first place. This nutritionists network, we want to enhance this and this will be a very important fact. So for the World Umami Forum, we invited a lot of nutritionists and chefs, that is the very reason. So from utilizing chef networks plus the nutrition network will enhance that, plus the messaging of the influencers, we will send out message to the food forward. So in Japan and other strong areas that we have, we will set up our network and gradually send out messages. There 2 key messages, one is that the delicious, low-salt food using Umami seasonings, so you can continue to enjoy food by using Umami. So MSG is the purest form of Umami. This is important, specifically in the United States. So the target is that for the Umami and MSG turn the image positive, especially try to eliminate no MSG or no chemical additives in Japan that is, we would like to reduce that type of expressions.

So going to our financial strategy. The top -- the first half policy is not changed. I would just give you 2 updated informations. First, I think all of you know, in the first half, we have conducted a repositioning of our own shares. And we have on the 10th of October, we have retired these share repurchases. 549 million has been the outstanding shares. So with this retirement, we have been able to retire 22 million shares as 4% of our overall outstanding shares. And within our -- I think this is -- so in the cash flow statement. We purchased in the noncontrolling interest, we have started that initiative. In -- toward 2019, we have been saying that we will conduct this initiative. But towards that, we have already started our actions. Please let me report that.

This is my last slide. So this is towards the next medium-term management plan. The other day, we had disclosed this to the management. We have shared this content. So we are targeting to be the global top 10 class food company with sustainable growth. And we have -- in terms of financial targets, we are underachieving. In terms of occurring issues, I think they are threefold. One, the slowing growth of the consumer foods business. The reason behind this is that because the assets and business areas it is dispersed. But the business areas are not that broad but the assets is dispersed, and we have been not able to connect all of this. So as a result, the -- it's a dispersion of the strategy and we have seen their slowing down over the growth engine. On the other hand, the Healthcare business, we talked about the pharmaceutical custom manufacturing example. The global strategy has been clear, and we are focusing on the leading-edge areas. And by doing so, we have been able to generate growth. And we would like to use that way of doing business -- for the food business. And number three, the indirect business area, especially the group corporate sector, has been very heavy. So we will have to make this more efficient. And we think this is a current issue. And from -- starting from this fiscal year, these will be the things that we will be doing. And the idea behind this is that -- so it's not that 10% top line growth, 10% growth of profit. So even if the sales growth is 5% per year, the -- this is profit margin of 10%, ROE of 10%, we want to bring our management structure to realize this. We want to quickly bring this about. The concept of this is that there are 2, one is that switch to a asset-light business model. We will start doing this. And second is for consumer food business, we will integrate the strategy. So that will be savory, Asian cuisine, frozen food. And the foods with functional claims and drinks, maybe this is difficult to understand. Currently, we have Knorr Soup as a product and we have these powdered beverages or drinks. And we have good business in nutritional care. By integrating this, we will consider one strategic unit, and we will strengthen this area with our focused strategy. And to be able to execute this, we will set up a new task force directly under my control from the -- starting from November. So for instance, for the frozen food asset, we have the Ajinomoto controlled overseas frozen food. But the FFA managed assets, there are 2 separate assets -- the assets are separate. In terms of reporting, we reported integrated to you, but in terms of asset management, it's separated, but I want to integrate that. And by doing so, the business growth strategy will be integrated. At the same time, we would like to achieve the growth of ROA. In terms of AGF, functional claims of foods and drinks. So this will not be only coffee business. So this will have a functional feature and this will be a group company that actually will have the road to offer this functional drinks. And on top of that, the consolidation of the common corporate functions. So we want -- by 2020, we want to reduce the corporate cost from [ 2.3% ] to 2.25%, it's already starting. And we have already very detailed theme and plan and we are already moving forward on this. So that's all from me.

But I would like to process once again about the disappointing figures that we have been offering. But the last page that I have I talked about yesterday. This is what -- a fresh topic that I have shared with -- by the management. And not so new, it's 2 days ago when we announced our financial results. So I am determined to lead the way to execute all these initiatives. So I will thank you for your continued support. Thank you very much.