Ajinomoto Co Inc

TSE:2802

Earnings Call Transcript 2021-Q2

[Takaaki Nishii, executive]

Good morning, everyone. Thank you very much for taking time out of your busy schedule to attend our briefing. So I'd like to provide you an update of our results. This is our agenda for today. There are mainly 2 items to discuss. First is the summary results for the first half. And second is the progress on the MTP strategies considering COVID-19 and structural reform status.

First, I'd like you to -- I'd like to report to you on the summary of financial results for the first half as well as the forecast for the full year. So this is taken out from the financial results. Just to highlight the first half results. There is a gradual recovery for the international markets and -- but foodservice sales went down compared to last year. The sales for home use products, on the other hand, rose because of the increased home cooking and dining opportunities at home.

Compared to last year, as shown on the slide, a JPY 5 billion sales decrease and JPY 8 billion profit increase was reported year-on-year during Q2. Compared to sales decrease of JPY 15.8 billion and business profit increase of JPY 6.2 billion during Q1, the overall sales was on a recovery trend. As for the business profit, which rose significantly, if you look at the breakdown of business profit, the situation differed from Q1, which included GP reduction due to sales decline. GP ratio fluctuation's because of improved cost spending. And if you look at the breakdown of business profit, the situation differs, as you noticed from Q1, and let me highlight some key points.

First, the sales is as mentioned here. And second, the difference arising from the change in the GP ratio included electronic materials product mix, unit price growth for amino acids as well as animal nutrition fixed cost reduction and smaller discounts for seasoning -- sauce and seasonings and frozen foods during Q1. That was the situation during Q1. However, in Q2, however, overseas seasonings cost trend favorably and electronic materials product miss continues. And SI or Solution Ingredients, so falling price of nucleotides and biopharma services.

So in terms of the GP ratio improvement, the profit decreased in this particular perspective. Third, SG&A expenses, about 60% came from the advertisement and sales promotion expense. So the situation is quite similar to Q1.

Compared to -- Q1, however, while during the restriction phase, we were unable to execute large-scale promotion plans or activities. However, during Q2, we have made preparations. But measures need to be implemented in the second half rather than the first half. That's the situation.

Next slide, please. So let me summarize our year-to-date results for the first half. As you can see, all businesses, excluding specialty, chemicals, saw decreased sales because of COVID, which is posing us a challenge. However, business profit significantly rose, thanks to GP increase through improved product mix as well as smaller marketing expense.

Next slide, please. Going forward, I'd like to touch upon the focus for the full year going ahead. As you can see in this diagram or table, the direct impacts of COVID-19 are reflected in this chart. As you can see overall, thanks to our recoveries or improvements made in Q2, sales is gradually recovering. However, business profit-wise versus last year, there is a 7% impact overall and measures are reflected. And there are some new additions.

On the second line, amino acids for pharmaceuticals, which is solid and robust. And this is a new item. And also for the 7th item from the top, because of the U.S.-China trade frictions, impacting the electronic material segment. However, at this point in time, the impact is quite limited. So this is a positive factor.

Having said that though, as highlighted in yellow here, compared to the initial forecast and the July forecast, it is becoming quite difficult to extract COVID-19 impacts alone because of the complex situation emerging and unfolding right now.

Next slide, please. And this chart illustrates how GDP is likely to trend going forward for major markets. In terms of the GDP recovery, it is likely to take place after second half of 2021. That's our prediction.

Next slide, please. In revising the full year forecast for this fiscal year, the way you're looking at the quarterly results for the first quarter and the second quarter and the forecast for the third quarter and the fourth quarter, and we have the revenue and the business profit for the second half, both revenue and the profit will decrease. And later, I'm going to give you more details later on.

Next page, please. So this is the revised portion of the forecast against the July forecast. The revenue that is upwardly revised by JPY 9 billion and the business profit by JPY 10 billion. So significant of the regions up. It's a good news.

At the beginning of the year, at the start of the MTP, the numbers that we expected. Compared to those expected numbers, we are still a bit behind in terms of revenue or sales. And we would like to overcome that challenge.

Next page, the second half and going forward, and the summary here, the revenue will go down by JPY 13.1 billion, and the business profit go down by JPY 13.5 billion. And let me explain about it. The first quarter and the second quarter, the same breakdown is shown here.

First, the GP, the difference, minus JPY 8 billion. The half of it is due to the overseas sauce and the seasonings. And the rest is the unit price down of nucleotides, for example. As to the international, the sauce and seasonings, in the second half, the depreciation cost of the new factory that will be booked and there are some delays of the maintenance of the factory into the second half. That had also some impact.

As to SG&A, there were some measures that we could not implement in the first half, which will be delayed to the second half. And there are some new products concentrated in the second half and the PR investment for that. And domestically, the major product share down is visible. So we need to do something about it, and that requires investment. It's also included.

And from the second -- next year on, we need to invest in major products which support organic growth. And as you know, the economy and unemployment ratio is rising in various countries and it's getting very serious. And going forward, whether the consumption level goes down or not, and also the uncertain political landscape exist. For example, some anti-government demonstration is happening. There are some unexpected changes in the environment that we need to brace themselves for that. So all in all, our guess is rather conservative.

Next page, please. So the business profit and the lines below that is shown here. A point here is as follows: the structural reform expense, which is included in the others. The other operating income and expenses, impairment losses, others, the JPY 35.8 billion minus. And in the first quarter, we booked JPY 16 billion for the structural reform. Now it is increased to JPY 20.3 billion.

Next page, please. So the topics of the forecasts, the specialty chemicals. We revised the sales by JPY 5 billion and business profit by JPY 3.3 billion, and we are now living in new normal with COVID-19. And the PC demand had been on the decline, but now it is trending up. And with the advent of 5G, along with that, the demands for data center servers and other telecommunication-related demands are in rapid increase, which is reflected in those numbers.

So as to corporate operational transformation, in April, Ajinomoto and Accenture formed the joint venture. So that's the unconsolidated corporate function. Part of it is transferred to joint venture. Please look at the graph, and this is the common expenses. The JPY 36.7 billion for FY '19 and JPY 3.7 billion was added for systems, but the [ existing expenses ] is JPY 33 billion. So there's some improvement here.

On the right-hand side, we have the repositioning of corporate staffing. So we could increase expenses here. And the leverage partner's expertise and know-how, it's not just a simple consultation, but now we have the JV with Accenture and we can sophisticate our business, and we are getting some positive elements from the staffing as well. Going forward, as future development, we are going to expand the target operations and roll out within the group in Japan. And for 2022, the corporate expense would be 2.5% or so.

Based on the forecast that I mentioned earlier, I'd like to brief you on the MTP strategies faced in COVID or considering COVID and the progress towards the structural reform. As I mentioned earlier, during the pandemic, there is a lot of unpredictability lies ahead. But in terms of the sales impact of COVID, there are positive signs and challenges. So the baseline sales is quite transparent right now. Of course, we need to remain prudent, but we need to address challenges and strengthen our strength. That is the motto we have for the MTP. And this is just a repetition of what we have highlighted previously. This is our key message.

Our 2030 vision has it that we contribute greater wellness for people worldwide, unlocking the power of amino acids to resolve the food and health issues associated with eating habits and aging. And to realize the vision, we see new lifestyles emerging under the new norm as an opportunity. The next slide explains our concept. First, we think that new styles emerging during the pandemic will continue throughout 2021. And there are 4 items that we'd like to highlight. One, major trend is -- the emerging trend is people are becoming more health-conscious to protect themselves and their family members. They're particularly interested in how to boost immunity and to protect the health of the elderly. This propensity dovetails with our measures to address metabolic syndromes through diet, sleep and exercise as well as to alleviate insufficient protein intake. And so this is a positive sign, along with our key strategy.

Second propensity is the changing dining and cooking opportunities, which means that more people are cooking and dining at home, and highly processed foods as well as deli are booming amongst our consumers, where we excel. However, we see some challenges which I'll explain later.

Third is changing consumer motivation and food expenses. I'm sure many investors are particularly paying attention to this matter. Low-income earners are increasingly saving money, while all consumers spend less on other commodities to purchase modestly luxuries, food items, and this trend matches our strength and strategy whereby through seasonings, quick nourishment and frozen foods, we offer many options, diversified many options with a wide-ranging price ranges. So this is a positive sign. And in terms of smart eating, there is a strong demand as well.

Fourth, this is a challenge or an opportunity in a different sense. Channels are diversifying changes, not only with e-commerce but conveniently located stores combined with home delivery services as well as changing business categories in urban food services are rapidly advancing. And we need to do more to cultivate this particular area.

For key accounts in e-commerce, food services and deli, we'd like to work with them to create a new channel by leveraging our development team as well as sales forces. And now we have a system in place to do so.

In addition, we embarked on collaboration with a food tech venture company, which we'd like to further enhance going forward.

Next slide, please. Overall, while the -- to capture the new normal, I'd like to outline our road map to recover food business towards FY '21 from a short-term perspective. Without losing the home cooking and dining opportunities or demands, the question is how to bring up the entire level of foodservice category without harming the home cooking dividend. By doing so, we'd like to maintain the growth -- maintain and also enhance the sales baseline for our entire group.

Next slide, please. Based on the changing environment, this is an update on our major initiatives for the MTP strategies considering the changing environment. First is the efforts to see the new normal as an opportunity and threat; second, vision to drive unit price growth through health and nutrition strategy; and third, the current status of structural reform.

First, I'd like to view the new normal -- we'd like to view the normal through the lines of opportunity and threat. This shows the results of a survey we conducted on home cooking and dining opportunities. The bar graph in the upper left shows the frequency of home cooking. About 50% of the respondents say that they cook more at home during the pandemic. The graph in the lower left shows their intent in future for home cooking. About 70% of those surveyed were content with the current frequency. Together with those who intend to cook more at home, about 80% regard home cooking as their new lifestyle. This poses an opportunity for us.

On the other hand, nearly 20% want to cook less at home, as you can see in the same graph, because they see home cooking as an increased burden to them. So this poses as a threat and challenge. In the upper right, about 30% eat nutrition conscious meals. The graph in the lower left -- lower right indicates more than 30% intend to eat nutritious meals more, providing us a great opportunity.

Next slide, please. So against this opportunity and threat posed by the new normal, both in Japan and overseas, in sauce and seasonings as well as frozen foods, we enjoy a tailwind, significant tailwind. And we'd like to seize this moment and capture the surging demands so we can grow more and maintain our strong growth going forward.

And under the health care and others, amino acids for pharmaceuticals demands as well as personal care ingredients, amino acids use for detergents are surging as well. Together, all these -- combining all these, we'd like to create the foundation that can buttress the entire growth for our company. Going forward, we'd like to add or implement health and nutrition strategy so that we can further the growth of the food services business during the MTP. But the challenge lies with the food service business. This is an example in Thailand and Vietnam. But for the entire company, the sales is unlikely to recover to the previous year's level, during FY '20. Food values, which food services used to offer, are now eroding because of cancellation of entertainments and large-scale events. So we are considering what channels can alternately be deployed to deliver similar values. And this is our challenge. Through trial and error, we are exploring ways to do so. For example, home delivery is now on the rise in food service industry. But many challenges lie ahead, for example, how to deal with the delivery cost and quality issues. To solve the issues, Click and Collect is the new service burgeoning in the U.S. Similarly, in Japan, taking advantage of their convenient locations, retail stores and restaurants are offering similar services in Japan as well. And in the near future, we would like to start working with the logistics or distribution channel that has such a Click and Collect feature going forward.

Now we would like to talk about the initiatives in MTP strategies for the health and nutrition strategy and unit price increases. The issue here is too much of salt intake. And the major countries where we operate have that problem. About 20% of the world population or about 1.5 billion people are taking too much salt. That's the background.

Next page. And this is the overall picture of health and nutrition strategy. We have communication strategy and, at the bottom of the page, we have built national and regional ecosystems. And the marketing strategies of different countries will be linked up with communication strategy to boost up the unit price. That is our MTP concept. And please look at the pie part, it says Nutrition Without Compromise. And the global communication with that message will start in the third quarter FY '20.

What this Nutrition Without Compromise means? Well, first of all, deliciousness and the food access and availability for everyone. And also, without sacrificing local dietary life, to make the healthy and nutritionally balanced food solution. That is Ajinomoto's basic stance.

And please look at the second part of the page, smart salt. In Japan, we started this initiative, the cross-product marketing strategy. And on the right-hand side, we have some pictures, Malaysia and Vietnam. And this is the initiative to build ecosystem. We already started that. And with these measures included, the integrated strategy has already started in ASEAN affiliates and Brazil in FY '20.

Next page. So now I would like to talk about PR activities to support these health and nutrition strategies. On the left-hand side, we have the Nutrition Without Compromise. So with that concept, Ajinomoto promotes the delicious reduced salt food and also the protein intake to avoid malnutrition for aged people. And that will contribute to the extension of lifespan of 1 billion people in the world in 2030. And we are targeting at the Tokyo Nutrition for Growth Summit of 2021 to be held in December next year. We are sending lots of messages to the various international forums. FY '20, we participated at UN Food System Summit and CGF and other international conference arenas. And we are also tying up with GAIN and other global initiatives.

Through such activities, for our nutrition strategy, some European media is taken up our initiatives. And one of the contents there is, bottom left, namely, Ajinomoto Group Nutrition Profiling System. In April, we made an announcement as follows: to express the value of nutrition included in each product. And in Europe, lots of discussions are already going on. But in Japan, it is rather rare to develop products, including such nutrition index, is very rare in Japan. It's not only about single product, but in the going forward we would like to extend it to many of the specific products so that we can give more benefits to the users. It's a very unique part of Ajinomoto, and the media and experts outside are paying lots of attention to it.

So now, I'd like to talk about the progress on the structural reform, starting with Animal Nutrition business. As you can see here, on October 1, we have integrated the AANA to Ajinomoto Health & Nutrition, or AHN, which is basically food business for processing and restaurant. And the redundant corporate functions have been integrated to improve earnings.

And going forward, AHN and this AANA have the factory sites in the same area. So the production area can be converted to the amino acids with multiple applications. And so we are going to continue such reorganization. And the details will be announced at the beginning of the next fiscal year. And at the bottom of the page, we resumed the negotiations in Europe for divestiture entire of Animal Nutrition business. After some delay, we could resume it, and at this moment we believe we can reduce our asset as planned.

Next page, please. So as to the other announcement, the frozen food reform is in line with the plan. It's not a single simple asset-light, but to work on the commoditized, the Italian or part of Mexican category business and make a shift to the fast-growing Asian category. Please look at the left-hand side graph, with the table, for example. We have closed [indiscernible] factory. And we are now ready to -- we are now making capital. We are not -- we are going to complete the capital expenditure in the fourth quarter to make a shift to Asia.

And also, please look at the bar graphs on the left-hand side, the blue is the market overall of the frozen food without the ingredients and orange is Asian category. So as you can see, the orange is growing so fast.

On the right-hand side, we have our Asian category frozen food retail sales in 2020 fiscal year. Because of the shortfall of capacity, and with the COVID-19, we could not grow it as we had expected. In the first quarter of this fiscal year, with the completion of capital expenditure, we would like to make a jump.

In the slide based on the MTP strategies, the asset-light measures in FY '20 is likely to bring additional JPY 20 billion earlier than the initial forecast predicted. Together with the point I mentioned earlier, without the -- excluding the structural reform costs, the progress is going ahead according to the MTP, and we are making steady progress with our structural reform. And this is an update on corporate culture reform under the banner of Digital Transformation.

As I reported earlier in March, under my direct leadership, there is a specific task for it, newly set up to lead this initiative. And through the horizontal line representing supervision, and the vertical line representing decision-making and execution, we are making a steady progress. As you can see, under the digital transformation, all digital transformation is supervised by the CEO. And the information is shared across the entire team. The major components are supply chain management, marketing and R&D, DMP, data management plans utilization. We are planning specific measures to do so.

And also in order to proceed with this DX initiative, we have identified DX-related issues under the current structure. And the new task force set up to change how we operate business is also making progress under the leadership of CXO. Operational excellence management system is in place. And also management enhancement -- engagement improvement management is being introduced as well. And ROIC improvement is now incorporated as one of the KPIs, and we are sharing the information across the organization.

As you can see on the right, in order to create a new business, under the leadership of CIO, we are exploring ways to externally work with parties outside our entity. And there is progress is made with measures to entrepreneur new businesses and with the CVC established to work with a foodtech venture company, proceeded by investment into 2 major venture capital funds.

Next slide, please. And let me introduce our task force activity for the company-wide transformation. As part of our company-wide transformation task force, a great opportunity emerged to significantly improve our productivity in the procurement and supply chain areas.

In order to further reduce the purchase cost of indirect materials, in order to realize this visual target, we need to first standardize the procurement items -- purchase items and also optimize the diversified and decentralized operation and visualize the governance-related risks to alleviate those risks. So those challenges were revealed throughout this exercise.

And as shown, the measures are shown on the right, which will be implemented going forward. And as part of the company-wide transformation, I touched upon the supply chain management. And this part of the problems are actually common with the supply chain management as well. So in order to execute the plan, we'd like to examine the cost effectiveness. And based on that, we'd like to add those elements to the 2020, 2025 MTP going forward. And in addition to the structural reform in the North America for animal nutrition, we plan the details when we announce -- when we present the FY '21 forecast.

Next slide, please. This shows the expected progress against the structural targets in the MTP during FY '20. One item I'd like to report is the major contributor to the performance enhancement. Employee engagement was revealed during our survey that was conducted between July and September. The report suggests that 64% of our employees consider themselves contributing to ASV promotion, up 9% from the last year survey.

Page 31 is the priority KPIs by segment. And the next page, Page 32, we review the forecast. And for fiscal year 2022 period, we can make JPY 400 billion cash inflow. So no change there. But as I mentioned earlier, while we make improvements, this JPY 400 billion could go up. Then we are going to make some additional investment in digital transformation, food tech, and first of all, the D2C channel development.

Next page, I talked about engagement by employees. Well, lastly, I would like to talk about why we position the employee engagement in ASV as important metrics. We have never explained about it. So let me do that today. Please look at the right bottom, the corporate division and the understanding of the strategy, the empathy for the environment of work and so on, were listed as factors. And we did research of the correlation of these factors and the business performance. And as you can see, for each of these elements, it is at least 0.8. So very high correlation. So we have taken up this engagement by employees as important metrics. Since the announcement of the MTP, myself, CEO and 3 division managers and heads of each organization have had dialogues with all the employees about the vision, management strategy, operational reform and management. And in a very short period of time we could smoothly switch to online communication with the pandemic. And it's a big achievement. And with the dialogue with CEO alone, there were close to 400 Q&As, and we can report that the empathy to vision and commitment to corporate transformation is on the rise.

And lastly, I'd like to give you the following message. So the new normal of the COVID-19 pandemic is driving changes that will occur in the future. There are some difficulties on the path, but opportunities are great as well. We are putting together the systems that will unleash the potential of human resources through digital transformation to make us what we aim to be, namely a solution providing group of companies for food and health issues. We will never let up the speed of transformation to increase our corporate value. That's what I have. Thank you very much.

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