Ajinomoto Co Inc

TSE:2802

Earnings Call Transcript 2019-Q4

[Takaaki Nishii, executive]

Good morning, ladies and gentlemen. Thank you very much for joining us despite the busy schedule today and also come all the way from the station to the south, which is a bit different from the place that we usually have this meeting.

Today, as you can see, I'm going to talk about 3 topics. I'll talk about the financial results of the previous fiscal year and then the outlook for this fiscal year together with the management policies. And then third is the next medium-term management plan. I'd like to share with you our thoughts behind this plan.

First, the review of the financial results of fiscal 2018. As you know, in fiscal 2018, the sales have increased by 1%. Business profit was down by 4%, and profit attributable to the owners of the parent company was JPY 29.6 billion, 49% of the previous year, which is quite disappointing. And I really feel sorry for this.

And for business profit in the fourth quarter, JPY 6.4 billion upside was seen. As you can see, international seasonings price hike have had more impact than we had expected. And in Healthcare, expenses were less than we had expected. And also the share of profit of joint ventures have increased as well.

And let me just give you the highlights by business segment. First, on Japan Food Products, frozen foods and coffee products have seen sales decline and profit decline, about JPY 9 billion decline in profit year-on-year. So this was the main factor for the entire company's profit decline.

For International Food Products, the mainstay, the seasonings, was expecting the higher -- much higher raw materials cost, and we have focused on price hikes in order to respond to that. And the sales growth slowed down because of that, but together with the efforts to reduce production costs, we would be able to manage and overcome the cost increase. But there were some impairment losses. And also the international frozen food profit drop were there, so we were not able to offset all of those negative factors.

And for AminoScience business, we saw the business profit increase by JPY 4.1 billion, which was the main contributor. And the amino acid for pharmaceuticals and foods achieved a record-high profit, and pharmaceutical custom manufacturing enjoyed large increase in sales and profit. And in Life Support, we see steady growth in electronic materials and personal care ingredients. We were able to cancel out the decline in sales and profit in animal nutrition business.

And as for profit attributed to the owners of the parent company, U.S. frozen food business and JV in Africa posted impairment loss in the third quarter. There was also impact of food business in Turkey, which has the [ CRB ] increase and posted impairment loss, but this was actually incorporated in the revised forecast that was announced at the third quarter earnings.

And next page, this is the factors influencing the fiscal 2018 business profit. The ForEx had JPY 1 billion positive factor and minus JPY 9.7 billion for Japan Food and JPY 4.3 billion for Overseas Food and JPY 3.2 billion for impairment loss and JPY 3.2 billion for Life Support and JPY 200 million for Healthcare.

And from this slide onward, there are no handouts distributed to you. It's just the one that is on the screen. And this is about Japan Food Products. The past 8 quarters year-on-year growth was shown by quarter, and pie chart shows the BP breakdown in fiscal 2018.

And Japan Food Products total is shown by a black line, and fiscal year 2018 dropped by 23% year-on-year. And the orange line, which is the seasoning and processed food, this is minus 6%, and this was primarily due to the cost increase in restaurant and industrial use. Our home use business, as you know, was affected by the extremely hot weather in summer in the first half. And so it slowed down, but in the second half, it recovered and back to the same level as the previous year. But industrial and restaurant use was in negative number.

And frozen food, 47% decline in full year. But the production cost was increased for the full year, and this was a drag. And also in the first half, the products -- new products from the previous year were now disposed of as inventory, but in the third quarter and fourth quarter, the Gyoza dumpling and fried rice were focused, and the sales have recovered. But rice products and fried chicken still had some challenges.

On green line, the AGF business profit dropped by 35%. As you can see, in the third quarter and fourth quarter, it looks -- it has deteriorated. But from the third quarter, stick-type products, we have spent marketing expenses to counter the competitors' actions. And also, in addition, the liquid coffee reduction was decided, and personal liquid coffee inventories were disposed of in the third quarter as a result. And the new products that were expected to be launched in fourth quarter was canceled, and so that is how we ended up at this level. In stick-type coffee and gift set and out-of-home, the mainstay products, turnaround will be done the next fiscal year.

Now the Overseas -- our International Food Products local currency business profit. The black line shows the entire International Food Products. The business profit went up by 5% year-on-year on a local currency basis. Excluding the impairment loss related to trademark, the business profit would have gone up by 13%. And there was impairment loss in Q3, and excluding this, we would have increased by 8%. In the third quarter and fourth quarter, there was late recovery, and I will explain in Five Stars later as well.

And blue line, the international frozen food, 46% decline, but there was support from Japan for production stabilization. And the replacement that the local management had done was not perfect, but in the third quarter and fourth quarter, we were seeing -- we have seen improvement upon the production losses, and the gap has been reduced. But the fundamental realization to shift focus to Asian cuisine has yet to be done. So logistic efficiency improvement is one of the challenges, and together with that, we would like to make steady progress in the next fiscal year.

And this is the Five Stars sales changes for the past 8 quarters. The black is the total of Five Stars. For the full year in fiscal 2018, the sales increased by 5% year-on-year. And different countries are shown with different colors, and the highlight is that there are stars in the pie chart where the price hikes were done. And double circles show the product quality revisions that were done.

The foundational raw materials cost increased in fiscal 2018. So AJI-NO-MOTO and AJI-NO-MOTO Plus and flavor seasonings, the price hikes of those products were more focused and implemented compared to previous years. And right after the stars, you can see sales growth slowed down until the competitors followed suit. The sales growth declined was seen in each of the subsidiaries. But in the fourth quarter, we have seen some impact -- positive impact. And dual circles show the price hike in Thailand and Masako in Indonesia and also the quality provisions.

And there are 2 specific points to note. In January, in Thailand, there was a price hike of AJI-NO-MOTO and AJI-NO-MOTO Plus that was approved. And we have to get approval from the authority for price hike, and this was the first time in 7.5 years. And so the first quarter have the effect of this price hike as well. And in April, in Vietnam, the AJI-NO-MOTO main products price hike was done, and the total change of -- or rather last-minute sales demand was seen in March. So you have to take account for that.

So next is the forecast, managerial policies for fiscal '19 and plan. So for fiscal '19, it's the final year of the midterm plan. However, due to the slowdown in the food business, it is now hard to achieve the midterm plan target. The forecast is shown here on this chart.

The main measures are mentioned here. However, the food business is sluggish. And due to the slowdown, we have said that this is a factor, but we believe the reasons why are the following. Due to the progression of ICT, consumption is -- patterns are diversifying and it's accelerating in diversification. And also due to the emergence of e-commerce, digital transformation investments are needed. And with that, the consolidation of the retail and distribution industry are being promoted. And hence, sales channels and its structure is largely changing.

Due to that, markets were led by the mass-market brands in the past. However, competition is intensifying, and we are seeing its impact. And this stands out particularly in developed countries, such as Japan, but in major cities in emerging countries, this is happening as well. Therefore, going forward, you need to have dominant quality advantages driven by technological capacity. As well as through digital marketing, you need to enhance your core brand and do big data analysis and visualize differences in preference or else we are in a serious competitive environment where you are not able to survive.

We're now going to start from the next midterm plan with regards to our efforts. However, the structural targets, we wish to ensure that we'll be able to achieve those targets in the future, and we will start the reform efforts from fiscal '19. We will do concentrated investments into our core businesses so as to strive for a steady growth and grow sales by 3% and business profit by 4% and aim for business profitability of 10% and ROE of more than 10% in the next midterm plan. In order to do so, for categories that can become the global top 3, we will position them as core businesses, and we'll concentrate our growth investments.

And thirdly, on the other hand, for the noncore businesses, we would like to control investments so that investments can be minimized and consider whether we should withdraw or shrink the businesses. And fourthly, on a company-wide basis, we will engage in digital transformation, and we will be working in a digital-driven way for growth. And we will also work on operational efficiency at the same time.

So this is a waterfall chart that looks at the forecast for business profit. Please look at the forecast by segment for fiscal '19 that has been handed out at the same time. By business, we are expecting organic growth to be up by 4% that we put together in a cautious way, and we are expecting asset-light related costs to increase. And this profit increase therefore is expected to go up by JPY 10.8 billion. Fermentation raw material is expected to go up by JPY 3.6 billion, and we are expecting a negative impact from FX of JPY 2.8 billion. And thus, the business profit expectations are JPY 97 billion.

By business, here are the highlights of each business plan. For Japan Food Products, we are going to concentrate on #1 brands, that is brands in seasonings as well as processed foods. And we would like to look at soups and soup stocks that are #1 as well as Chinese food cuisines that are #1. And with that, we are going to strive for 3% growth, including peripheral products as well.

Also for Japan Food Products, we are going to strengthen the digital-driven marketing. We're not going to be doing this group by group, but we are going to concentrate our efforts and we are going to support marketing on a company-wide basis.

And secondly, for frozen foods, we are going to concentrate our efforts into Gyoza dumplings. As for rice products, we would like to expand our lineup. And by concentrating our efforts here, we would like to put utmost profit -- priority on earnings growth.

For AGF, we would like to introduce new products with new value for stick beverages, and we would like to strengthen the premium category as well. By doing so, we would like to engage in new areas rather than engaging a price competition. For personal liquid coffee, it's going to end its life, and Starbucks products are going to end as well. And with that, we are forecasting a decline of revenue and profit.

Finally, we will be accelerating EC-related efforts on a group-wide basis. Premium products for mall-type e-commerce sites and products with health values are going to be strengthened, and we would like to acquire the small mass market and try to lead in acquiring the middle mass market as well and try to create a pattern around this. Over the short term, we will be starting cross-border e-commerce as well, and we would like to ensure that there's collaboration between marketing in Japan and marketing in East Asia.

Turning the page. This is our plans for international seasonings. This is going to be centered around the ASEAN region, and we would like to expand the area for Umami seasoning AJI-NO-MOTO. We would like to leverage our technological advantage and also strengthen the quality around flavor seasonings and steadily extend and also have many specific seasonings that conform to local markets. And because families are more 2 generation in the city area, we would like to ensure we capture the consumption trends as lifestyle patterns changes.

Over here, the picture shows CRISPY FRY from the Philippines. It is for fish. It is a new type of deliciousness that we are providing instead of no breading and no batter, and we have improved the oil splash attribute. And this product tends to be doing very well.

Next is highlights of the Healthcare business. For the pharmaceutical custom business, the ADC contract development facility has been completed last fiscal year. And also oligonucleotides development contact center has been completed in the fourth quarter in Osaka with GeneDesign.

For the pipeline, for oligonucleotides contracts, we would like to connect our efforts with Tokai factory because they have large-scale contract facilities. For commercial pharmaceuticals and drug development pipelines that are raised here, as you can see, contracts are expected to steadily increase. So we would like to ensure that the CDMO business increases by double digit this fiscal year.

Here is Life Support. With electronic materials at its core, together with specialty chemicals, we are striving to increase sales by JPY 2 billion. As for electronic materials, due to the expansion of cloud services, server demand has been captured, and it's doing well. Also new applications would be another area of focus such as games, automobiles and so forth. We are expecting the markets to expand, and we have started to engage in efforts. So we are expecting steady growth during the course of the next midterm plan as well.

Next is efficiency efforts through structural reform. There are 2 highlights here. First is structural reform around global frozen foods. We are going to start measures to become asset-light from this fiscal year. As of April 1, we have established the global frozen foods division. We are going to collaborate together, and we are going to oversee the integrated strategy for global production. And we are going to offer local support as well.

For policies, we are going -- we need to expand capacity for Asian cuisine and desserts globally, so we will focus on that. And we will also strive to improve ROA through our asset-light efforts. Also for North America and Europe, we still need to do logistic-related measures, so we will take countermeasures and establish a better supply chain. And we will extend our efforts to support the local markets. Each of the subsidiaries will concentrate their growth investments into their core businesses and control other areas so as to strengthen their business structure.

Secondly, overall, with regards to common costs, we would like to reach 2.5% against sales in 2020, and we have already started to implement measures. For this fiscal year in particular, we would like to review the corporate service function and try to promote shared services. By executing this, we will strive to reach the target that we raised for fiscal '20.

Next, the production system reorganization for domestic seasonings and processed foods. In April, those 3 production divisions were integrated into a manufacturing subsidiary called Ajinomoto Food Manufacturing Co. In the fourth quarter 2019, the food seasoning production would be integrated into new Mie factory, and in second quarter 2019, new Kawasaki factory will follow by consolidating soup production. The production efficiency will be dramatically increased for seasoning and processed foods. A new Mie factory weekly managed flexible production will be realized, and production with the lot size 1/7 of the conventional one can be expected. So this will give us a tool to support the growth strategy of Japanese seasonings and processed food businesses.

Now this is the summary of the outlook for fiscal 2019. This is the forecast for each of the profit levels from the business profit level. And the overall losses to be incurred from asset-light initiative has been incorporated in other operating income and expenses for about JPY 7 billion, and then the profit attributable to the owner of the parent company is expected to be JPY 50 billion. And there was some expense included in the business profit. So from the asset-light -- in total, JPY 9 billion has been incorporated from asset-light.

This is, I guess, management for cash flow fiscal 2019. Fiscal '19 operating cash flow is expected to be JPY 120 billion, so for 3 years, it will exceed by -- the MTP by JPY 15 billion. As for investments for the group, gross R&D expenses are expected to total JPY 29 billion, and there is no major M&As expected.

And also the planned repurchase of noncontrolling interest is now on hold because of negotiations reasons, although this had been carried out so far. So in fiscal 2019, we plan to pay JPY 32 per share as dividend, and we can realize the payout ratio of 35%. And also 3-year total shareholder return is expected to be 63%.

And this is the progress on fiscal 2017-2019 and difference from the medium-term management plan. And this is the forecast and performance gap versus medium-term management plan in terms of business profit, and this is the nonfinancial initiatives. And this is the progress that we've made in most of the themes. And 4 major themes, we are in line with the plan or more progress has been made than planned. And also for environmental targets, the numerical progress, that has been shown in the separate attachments. So please take a look at that.

In addition, let me talk about new medium-term management plan next. First as a key message, through asset-light measures and digital transformation measures, we would like to enhance our competitiveness and go back to sustainable growth. We are aiming to become global top 3, and we would like to increase the number of business categories that will enable us to do so and concentrate on them. We will create innovation and ensure that we are able to sustainably grow.

In order to do so, we need to think about asset efficiency and select better businesses and concentrate on them and also look at assets apart from our core businesses so that we can make our balance sheet lighter weight. We will also do digital transformation so that we can create a new value for customers and grow and also promote operational efficiency. That is the kind of medium-term plan we would like to have.

Financial targets and the milestones. We raised the right-hand side block so that we could have a target over the longer term and to realize our competitiveness over the longer term. As an indicator to become one of the global food companies that's in the top 10, the capital efficiency targets have been raised upwards, which is ROE of 11%, ROIC of 11% to 13% and business profitability-based ROA of 12%. In order to realize the structure, top line growth targets will be raised, on the next page. But we will be concentrating on our core businesses, and CAGR-wise, we would like to sustainably achieve 4% or more.

You can see the ovals on this page where we show the core business ratio. Currently, it's at 60%, but we would like to raise this to 70% in fiscal '22 and ultimately, 80%. From this fiscal year, for the noncore businesses, we will intentionally make them smaller, so in the next midterm plan, CAGR is expected to be around 4%. And then after, we would like to phase it up so that CAGR can be 4% plus alpha.

So this will be the main part of strategy during our midterm plan from fiscal '20 to fiscal '22 in order to create this structure. So for business profitability, currently it's a little bit over 8%, but I would like to bring this up to 10% by fiscal '22, and we're aiming for 13% ultimately. So we would like to enhance asset efficiency in order to reach our target. And from this fiscal year until fiscal '21 over a 3-year period, we would like to reduce our assets by approximately JPY 100 billion.

I will talk about cash balance later on, but for growth investments and shareholder return, we would like to ensure that we continue on with a similar level as the current midterm plan.

For asset-light, I'd like to elaborate a little bit more. We are going to look at it in 2 ways. One is resource allocation, which is by repatriating our group deposits, we would like to repay our debt; and also to sell down strategically held stocks. Thirdly, we would like to consolidate our functional subsidiaries and also review our joint ventures.

With regards to reducing business assets, we would like to look at global frozen food businesses in Asian food category as well as desserts, and we would like to make key investments there and rebalance our assets starting from this fiscal year. For the other businesses, I will explain from the next page onwards, but in any case, we would like to reflect our measures in the next midterm plan.

So we're focusing on the core businesses, and we got to determine what is noncore. We will be applying 3 standards. On this slide, we show a vertical axis, which shows growth rate, and also, ROA is on the horizontal axis. And standards for growth rates is a CAGR of 4% or more. This will be the standard for ROA standards globally. Food, amino acids companies will be looked at, and the average of 8.4% will be positioned as the center. Over the short term, we need the businesses to exceed the minimum of 7%, and we will -- the condition will be that it can become 12% on a company-wide basis in the future. And number three, it's not -- it's hard to quantify, but we will look at the branding power as well as how much the technological capacity -- capabilities can be leveraged.

With that, we will look at businesses that can become top 3 globally, and they will be positioned as core businesses. And for the noncore businesses, during the fiscal '19-'21 period, we will either shrink or withdraw from these businesses. For the other businesses that are on the upper left-hand side or the bottom right-hand side, we will look at its efficiency as well as reestablishing growth. Whether or not that is possible will be the basis of which we can determine the businesses' direction in the future.

So here, on this page, we will look at how we can enhance the growth rate of each of the core businesses. We basically would like to become closer to the customers. We will look at the 4 angles, as you can see on the left-hand side, and we will consolidate the group functionalities, the businesses, subsidiaries. We will collaborate increasingly so that the core businesses that have strength can also develop the small mass market and eventually capture the middle mass market as well so that we can ensure we grow by enhancing our brand power.

We will do big data analysis for the consumers and channels and also strengthen e-commerce. As for product categories, we would like to do agile product development and do data-driven marketing in order to develop the small mass market. And thirdly, we will look at core technology strength and enhance them. And fourthly, we would like to shorten the supply chain that adapts quickly.

Next, towards the next Medium-Term Management Plan. With regards to cash management and investments and shareholder return, it's shown here. For operating cash flow, 30 -- JPY 350 billion is what we are expecting, which is the same level as the current midterm plan. Asset-light cash-in is expected, and also borrowings, added together, is expected to be a cash-in of approximately JPY 400 billion. For investments, we are expecting approximately JPY 300 billion, which is JPY 220 billion of CapEx and JPY 80 billion of M&A. And we will control it there. And for shareholder return, we are expecting more than JPY 100 billion. That is our plan. By doing so, the policy for shareholder return is going to be sustained from the current one.

Finally is corporate governance structures, which will be changed. The aim is 3, which we show here. One is we're going to increase the amount of nonexecutive directors so that we can strengthen the supervision over core measures and supervision over affiliated companies. We are also going to assign a CDO, a chief digital officer, so that we could make progress on digital transformation and go back to the growth trajectory and make our efficiency stronger.

And also number three would be, we have the first female director that has been chosen internally, and also on the management committee, we have selected a non-Japanese member, which is a senior managing executive officer. And we would like to create innovation through diversity.

We would like to enhance the effectiveness of the BoD, and all of the 3 committee heads will be outside directors. And also we will also have a management foundation advisory panel that will be directly connected to the BoD so that our managerial decisions can be expedited. We will strengthen our governance so that the transformational speed can be accelerated. That is led by management.

That is all for myself. And the road map of the midterm plan as well as the FX impact is shown in the handed-out material. So I would like you to refer to it later on. Thank you very much.

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