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Edited Transcript of 2802.T earnings conference call or presentation 8-Nov-19 1:00am GMT

Q2 2020 Ajinomoto Co Inc Earnings Presentation

Tokyo Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Ajinomoto Co Inc earnings conference call or presentation Friday, November 8, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Takaaki Nishii

Ajinomoto Co., Inc. - President, CEO & Representative Director

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Presentation

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Takaaki Nishii, Ajinomoto Co., Inc. - President, CEO & Representative Director [1]

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We have just introduced the new members of the executive team: Mr. Fukushi here in the new cabinet of ours. He is the CDO, Chief Digital Officer, also concurrently serving as our Deputy President, so that's another role of him; Mr. Tochio is still heading the Corporate Affairs; Kurashima is the Head of the Food division, but as you may know, some of you here have met him in Thailand. So previously, he was the Head of the Asian Division; and Mr. Bompas, he is the new head of our AminoScience division, and he previously was the Deputy of the European business, and previously, he was responsible for PCM, General Manager and currently, he is heading the AminoScience division. And the new CEO, Mr. Nakano here, and he will be supported by Mr. Tani, the Head of the Finance team. So with these members, we would like to go through the presentation, so please bear with us until the end. Thank you.

Now I would like to spend some time to make a presentation on the forecast for fiscal 2019, ending March 2020 and the outlook for the future. Please turn over to the next page. Next page, please. Next, please. As for our results for the interim period, the first half, as you may know already. So I would like to talk about the full year projections towards the second half. So I would just like to talk about the details of the financial results. First of all, we have made a revision to the full year guidance.

The things that were not really good about Ajinomoto and the structural reform that are going to -- that we are planning to tackle going forward, we actually try to bring forward these structural reforms, and these efforts are starting to deliver results to some extent. So we are -- had a mixed results of these efforts, and that's reflected in the results. So all of you here may find it difficult to understand even more than usual. And we are so sorry for this, not really easy to understand context. But I'll try to explain them. As you know, this is the interim results, and I think you're already familiar with the results. There are some ups and downs relating to sales performance.

For business profit, as you know -- because of the animal nutrition business and the environment surrounding that business and also the currency impact and the asset-light and the Hong Kong (inaudible) impact is not included. So therefore, we have recorded a decrease in sales. Unfortunately, there were things that we were not really able to predict in the beginning, the Promasidor African joint venture impairment losses kicked in here. And also to some extent, in the animal nutrition business, the African swine fever extended beyond our imagination. So this was actually something beyond our expectation. The impact was larger than what we had predicted. So that was the bad side, the negative side of Ajinomoto.

For the full year, on the contrary -- you may look that the performance in the second half is much worse compared to the second -- compared to the first half, but this animal nutrition business is likely to deteriorate going forward, rather than turning around. So that is factored in here. So we are expecting a decline in sales, and of course, the decline in profit still contains some significant amount of risk, and that's the reason why we had predicted this number.

And another thing is -- which will have a negative impact on sales, is the full year currency impact, which we are currently estimating at JPY 107 towards $1. So this strong Yen is likely to continue. So the negative impact from the currency translation is going to -- likely to expand compared to the first half of the year. And I'm sorry, going back and forth, but for the profit, the -- in addition to animal nutrition business deteriorating due to the expanded impact of the swine fever and also the business -- the Umami seasonings for processed food was outperforming our expectation. It was too good in the first half. And in the second half, we believe the demand-supply situation for the nucleotides will moderate. And therefore, some sales volume will start to level off in this regard. So that's the reason why we had made a conservative outlook here. And for these reasons, we have made this estimate for the full year.

In addition, in the first half, as we mentioned at the beginning of the year in May, as part of our structural reform, we are estimating to have JPY 2 billion of company-wide shared expenses, which was not the case in the first half, but as planned, we are going to incur these costs in the second half. And these shared expenses are factored in, in the plan here in the second half. So JPY 48 billion in the first half and the second half business profit is estimated to be JPY 40 billion. And therefore, the revised forecast for fiscal 2019, as you see here, on a business -- profit basis is JPY 88 billion, as you can see here.

Now next page. This is the results by segment for the first half of the year. And this is already factored in, in our results announcement in the financial statements, but I would like to highlight some of the points. As for the Japan Food Products, there is a decline of JPY 0.7 billion. This is due mainly to coffee. Due to the cold summer, the liquid coffee product was sluggish in sales. And for that matter, I think we have already shared information with you. In AGF, they are producing stick coffee, regular coffee, instant coffee, and they are making shift to the premium products in these categories. So the single-type liquid coffee that we had last year, is no longer sold in the market. And we are actually shrinking and that's -- therefore, this is a natural outcome of that.

Bakery came all of a sudden, so maybe you may not be familiar with this, but in the Japan Food Products, in the processed food, this is included under the processed food. This is for industrial purpose and for major accounts. We are selling frozen bakery products, and this is a business that has been lasting for 25 years or so. And due to the competitive environment, the large accounts that we are supplying products with, the competition among them have become intense. And therefore, we cannot expect a similar amount of profits going forward from this business. And therefore, this is likely to result in impairment losses, and that has accounted for this -- some portion of the decline in sales.

For other businesses. The seasoning for home and also for processed food, those were favorable, and for frozen foods and also instant coffee, the coffee products, which were somewhat a concern last fiscal year -- of course, we haven't recovered completely, but the core products, we are now concentrating to the large pillars of revenues, and we are making steady progress in that effort. So compared to last year, we have been able to increase the amount of profit for those products.

For International Food Products. We have a separate slide later in the presentation. But other than Vietnam, the seasonings as well as the processed food delivered so so good results. What happened in Vietnam, I will come back to this topic later. In the local currency basis, it was comparable to last fiscal year, as you see here, and including the Vietnam factor. But if you look at the details, excluding Vietnam, the seasoning and the processed food was 104% versus last year. And the frozen food, we have -- it was 100%, on par with last fiscal year because the mixed results on individual items were mixed.

And unfortunately, Promasidor, the African business, we had recorded a second impairment loss. But as I said earlier, we are making a shift to these products that are generating sales, and we are recovering in these products, and therefore, that contributed to a profit increase.

Life Support, the numbers I explained here. What is included is the material -- raw material and fuel cost, and I'll come back to this topic, but this has offset to some extent in losses in the animal nutrition business.

For the Healthcare, the performance is mixed. Some products are good, such as pharmaceuticals and for the amino acid products for the pharmaceuticals, thanks to the structural reform, this is delivering good results, and the amino acid demand, in this category, is now enjoying a tailwind. So riding on this trend, we are now ready to offer value-added products. So the pharmaceutical amino acid is now driving a growth in both sales and revenues -- sales and profit. The challenge is that direct marketing functional nutrition product supplements, if you will. This is one of the pillar.

Amino Aile. Unfortunately this product, starting April this year up until today, we have to disqualify as a nutrition supplement product because there are some issues relating to the health claim, and therefore, that was instructed by the ministry. So that's the reason why we have posted a significant decrease in sales and profit, which has been a drag for this Healthcare segment, but the overall -- the amino acid products for pharmaceutical was the driver behind the recovery and offsetting the negative impact.

Next, I would like to come to the external impact of the animal nutrition business. I hope that you'll take a look at this later. The production of hogs in China has come down by 60% due to the African swine fever impact. And this is the most important slide, so I would like to supplement some additional information verbally. So in the beginning of the year, JPY 97 billion is the business profit that we anticipated in the beginning of the year. Compared against this, including the impairment and the overseas -- international seasoning and also processed food is coming down by JPY 5 billion -- JPY 5.6 billion, including the impact of Vietnam. So the impairment losses plus the Vietnam factor, if you exclude them, by and large, the -- we are landing with other businesses at the beginning of the year projection level.

For the processed food, there was moreover JPY 3 billion incremental sales in the first half, but in the second half, we are not expecting a similar increase in the second half. So in totality, we are talking about JPY 3 billion. I said that nucleotides is increasing in demand. But that's one factor, but this is due mainly to the cost reduction due to the resource-saving fermentation technology and the raw material costs did not increase as much as expected, including the fuel cost. The fuel cost and raw material cost compared to the beginning of the year forecast compared to fiscal '19 is going -- was expected to deteriorate by JPY 3.6 billion, but in reality, it had a positive impact -- will likely have a positive impact of JPY 4.7 billion. So this is a JPY 1.1 billion reduction compared to 2 years ago. So this benefit accounts for 80% of this number. So this JPY 1.1 billion accounts for 80% of this incremental.

And on the other hand, animal nutrition here. This fiscal year, JPY 2.3 billion business profit was the ambition this fiscal year, but delta is JPY 7.7 billion negative impact. So this is account -- included already in the JPY 88 billion '19 figure.

And we just included the ups and downs for these 3 major businesses. So let me try to sort the things out here. This fiscal year of JPY 88 billion full year forecast. This includes the Promasidor impairment losses of JPY 33.9 billion. This is extraordinary losses. That's already included in the JPY 88 billion. Set aside that -- other than that, the structural reform-related expenses in the second half of JPY 2 billion are also factored in. And on the positive note, the impairment loss, the sizable impairment loss was down for the fixed asset in Europe for the animal nutrition business of JPY 10 billion or so. And Promasidor impairment loss. And also the Japanese Bakery, JPY 3.8 billion business -- Japanese Bakery business of JPY 3.8 billion.

On the other hand, the depreciation cost has a positive impact to some extent. So these elements will be incurred and recorded. And that's already factored in, in this revised forecast. And for the Umami seasoning for the processed food, JPY 3.4 billion in the first half. Actually, JPY 3 billion out of that is due to the nucleotides and the raw material. If you think about these environments, the tailwind, the favorability is somewhat included in here.

So in that regard, towards the next fiscal year, the short-term factors that was included in the forecast, some of these will have to be subtracted for the next fiscal year, which is the favorability of the Umami seasonings. And something that will disappear next fiscal year would be the impairment factor as well as the special expenses of JPY 6 billion altogether. These factors is something you don't have to consider for next fiscal year. In addition, in 2020 -- towards fiscal 2020, the resource-saving fermentation technology, that had a positive impact towards 2020, but beyond 2022, of course, we have to wait for some scrutiny.

But the positive factor from this resource-saving fermentation of some low-billions of Yen can be expected, and the asset-light measures that will be implemented in the second half, plus the structural reform measures, with these measures, we can save some cost, which is estimated to be JPY 2 billion or so for the full year next fiscal year. So that's something that we can enjoy next fiscal year. And therefore, of course, we have to think about the currency translation impact. And also we have to improve the accuracy of the forecast for the raw material cost and the fuel cost. But I think definitely, the costs that were required for the cost and structural reform this year will have a positive impact from next fiscal year onwards.

Next slide. This is for the impairment loss in the first half. So we have already covered animal nutrition. As to Promasidor, why the second time for the impairment, if you have any questions then you can ask them in the Q&A. The biggest trigger is the Algeria, the business environment getting the worst. The fiscal -- the situation of the country, depending on the oil, that is worsening and the economic situation of the country is worsening. The goods are not selling very well. And our joint venture business, powdered milk products, which is one of the business pillars, is faced with the tailwind because of the increasing the cost, and we are struggling to make a recovery. But the current situation will continue, and based on that judgment, the second impairment.

The bakery business, which was in the scope of asset-light from the next year to reduce the assets of this business. But last year, it was in the red in the first half, also in the red, so the first half we impaired all the fixed costs in the assets. And the JPY 14.9 billion of the asset for the animal nutrition, that represents 75% of the fixed asset in Europe. So it was the big treatment as the #1 and #3 businesses. Please understand that these are accelerated asset-light initiatives.

Next page. So the headlines under the business profit. We have already covered impairment losses and others, JPY 22.6 billion. And for the structural reform, JPY 15 billion is included. And with that, profit, pretax profit goes down this way. And as to income taxes, at the beginning, it was 28.7% tax rate, but after revision, 35.7%. The Promasidor impairment, animal nutrition, part of its impairment are not treated as the nontaxable.

Next page. This is the medium-term management plan progress. Unfortunately, we regret that for the FY '19, 7.7% business profit, 3% for ROE, 6.2% ROA. But as to ROA, compared to the forecast at the beginning of the year, Japan Foods and the International Foods and Healthcare businesses. So core -- the core businesses ROA improved for all of these core businesses. But unfortunately, the impact coming from the animal nutrition, Life Support, the -- dragged the situation. So 6.5% ROA went down to 6.2%.

Next page. The shareholder returns. As I mentioned earlier, were the -- it was a regrettable result. But as to cash in -- operating cash in, under the current circumstances, as to profitable businesses, we are earning cash profit JPY 120 billion or so and the cash in though, is achievable. So in line with the original forecast. So as to shareholders' return, dividend forecast remains at JPY 16 -- the JPY 32 for the year. So without impairment, the total shareholder return, the 50.9%, and so it is in line with the promised level.

Now some specific topics. In the International Food products, seasoning is the core business. Some supplementary comments. As to Umami seasonings, without Vietnamese factor, on a local currency basis -- actually, it was less than the previous year. But without Vietnamese inventory issue, the 106% year-on-year. So due to the price hike from the last year as to flavor seasonings, 104% growth. This includes a Vietnamese business impact for the global market level, the growth. And we would like to exceed the market level, and that is the current -- that is the challenge. As to menu specific seasonings, 11% growth rate on a local currency basis, in line with our expectation.

Next. How we are going to increase international under seasonings business? The details will be in our midterm business plan. But as you know, our strengths in this area is the development of products adapted to the locality, #1 brand and the delivery capabilities. So the traditional trade visits through that kind of approach to the usage of distributors, modern trade, CVS approach other such a combination -- the localized combination, that is a traditional way of doing business.

In addition, we are trying integrate some businesses as global strategy. The seasonings Umami or flavor or menu specific seasonings -- because of the Umami, the component, you can continue the low-salt diet, and that is discussed in the academic paper, and there is evidence for that. So from the next year on global savory business will be the integrated entity to work on that strategy. Umami and flavor seasonings, the large volume businesses will be increased through this strategy.

As a topic, the good news is as follows: At last year, we conducted World Umami Forum, in New York. And that move is spreading out gradually in the market. For example, the large -- the sales or the entities approaching us are the 2 -- other work with us with the Umami, the components to create more delicious products, and so we're receiving many requests from those entities. And in Japan, after that forum, there are no additives to the -- in other words, other chemical additives. That we have been engaged in very active discussions. The -- in 2009 -- from the second half of 2009, 106% increase for the very first time for Ajinomoto. So I don't know, we hit the bottom and the other put ourselves on the recovery track. And so this strategy is already proving itself. We are confirming the effects of this strategy. So we would like to continue to work on that.

Next page. It's growth strategy. Important pillar, namely electronic materials business. New market information is to be provided here. First, Logic IC product. This is the market forecast data. This is for the calculation, very high functional IC for calculation. And this is the market forecast about our growth, and the bottom is the data server number forecast. This is based on the market information. And in 2017, being the sideline for the other electronic businesses and 1.7x growth by 2022, and this data is the evidence for us to achieve it.

This is the pharmaceutical custom manufacturing strategy and some data is provided here. What is distinctive about this is the position of the ADC, new technology. And also we have this Aji Bio-Pharma services and the oligonucleotides, we have uniqueness in both Japan and in western markets and also full right, we have the low molecule business and trusted business. So U.S., Japan and Europe, 3 locations are now operated as 1 team. And by doing so we will be able to provide service and strengthen our services to the large pharmaceutical companies

And fiscal 2019. The commercial products are more than 55 in the pipeline and in the drug development, more than 100 is in the pipeline. That's the target. And in the first half, we have progressed in line with this plan.

As for the nonfinancial initiatives. By and large, all the goals for fiscal 2020 are progressing in line or even faster than the plan. So therefore, towards the next midterm management plan, the targets and strategy relating to the nutrition, the qualitative targets as well as the solutions based on the materials as well as the social value improvement, we would also like to redefine the quantitative targets, again, based on all these factors and for environment.

The biggest theme is climate change. And for that, based on the TCFD recommendation, Scope 1 to 3 for those scopes, we are going to set the target initiatives as our action.

Next page. This is the fiscal 2018 simulation that we have conducted in Thailand. If the temperature rises by 2 degrees, what are the impacts? This is the simulation that we have conducted, and that's illustrated in this chart or picture. For example, tapioca and other raw materials, if there is a temperature rise of 2 degrees, there won't be any direct impact on those raw materials. However, fuel costs as well as the carbon tax, if new regulations like carbon tax are implemented, there could be some potential risks. That's the result of the simulation.

This Thai data was done for the Umami seasonings and the major businesses -- risks in the Southeast Asia region. This can be applied to that region. However, this fiscal year, we are going to expand the scope of the simulation to a larger area than Southeast Asia. This simulation is currently in progress. So we will like to reflect that in the risks when we announce the midterm management plan. And also the countermeasures for those would also be announced during this medium-term management plan presentation.

Next, this is also the road map towards the next medium-term management plan that we have announced in May. And this is the second important pillar of my topic today, I would like to talk about the asset-light measures, which has a size of JPY 100 billion. I've already alluded to some of these initiatives earlier, and of course, this resulted in impairment. But of course, this will remove some of the fixed assets, but this will lead to better execution of asset-light measures, so I think, because the fixed assets has come down in numbers.

So I would like to talk about the details of asset-light measures afterwards. And last time I talked about, as we move ahead with the asset-light strategy, how are we going to achieve a 4% growth. So that was somewhat misleading. So I mentioned that the asset-light measures is going to be conducted through the period up to 2021. During that period, will be achieved 1% growth but then thereafter, leveraging the improved structure, we will like to achieve a 4% growth in the period after that, up to 2022 and beyond.

And I will like to talk about the noncore business. 3 noncore business were defined. One is the global frozen food, Mexican and Italian foods. We were going to apply an asset-light measure for these foods. And part of the processed -- seasoning for processed food will also be covered as well. And also part of the animal nutrition business will also be subject to the asset-light for noncore business, given the current business environment, and I believe the situation will become more worse, and this is going to prolong, and therefore, we will like to move ahead deeper in this approach.

So for these I will like to talk about the current situation. Just briefly verbally here. The contraction in the -- the contraction of the business asset is covering, for example, altogether JPY 40 billion worth of assets company-wide. And the nutrition -- animal nutrition French business was impaired this time around. And 54% of this, likely to be covered this fiscal year. And the remainder will be conducted in the period between fiscal '20 and 2021. That is -- so out of our JPY 100 billion, JPY 40 billion applies to noncore asset-light measures. And the frozen food, to be conducted from fiscal 2020, for fiscal -- from fiscal 2020, maybe to some extent, up to 2022, JPY 4.5 billion worth of fixed assets will be contracted.

We have a global operations, but 4 plants are currently going to be reduced according to our current plan. And we also see further efficiency improvement. And when we announce the medium-term management plan in February, we will like to announce more details. And in August, the Fort Worth factory plant was announced to be closed. We are continuing the production there, but we are now making preparations for the transition of production. So in January next year, we will be closing this and -- start closing this and starting the transition thereafter.

So the Umami seasonings will persist for the manufacturers and the international business. So far, this blue part, the 70% -- or more than 70% was the target. And currently, it is 72%. For this year, a little bit over 70%. And we are trying to increase it, which is the consumer ratio, the 30% of the external industrial part that will be reduced.

Next page. The animal nutrition business, the communities will be even more thoroughly reviewed 2020. The in-house -- the production target was 50%, but this 50% will be -- further be reduced. We reduced production in Brazil and in Thailand. In May this year, we did lower to the production, and the Lysine production in Thailand is now being transferred to [MS3] plant. In addition, so we were planning to achieve 50% in-house ratio, but for that number, we can even lower it.

And as to specialties, the growth is slowing down, the minus JPY 5.3 billion for this year, that projection is shown here in this graph, orange part, specialty that is in the red as well. So the Valine price is coming down as well in the specialty. So the AjiPro-L and the amino acid plus value-added products now being dragged by that price hike. So the commodity specialty require that some -- the fundamental review, the reduction in commodity and alliance for specialties, the JPY 25 billion target here for business profit, this cannot be achieved. So for the next fiscal year, full year target, the animal nutrition negative impact will continue through the next year as well. So we need to strengthen our plan.

Next page, another part in the asset-light, in other words, resource allocation, these are the themes which are currently running. So JPY 40 billion for business reduction -- business asset reduction. For the midterm plan, business allocation, JPY 80 billion or so the reflux from the group companies to pay down the other debt or to sell policy shareholders or reorganization of functional subsidiaries or a reconsideration about the joint venture, the stake ratio. As to JPY 80 billion was reduction. For fiscal year 2019, we are going to have some reflux from subsidiaries or sell some shares.

These approaches will be for 35% and 65% of JPY 80 billion, that will be implemented in the other coming 2 years.

Next page. Yesterday -- well, this is not about asset-light, but corporate services and the improvement of efficiency of the services. The 2.5% for the plan. And the measures to achieve it, shared service center collaboration with Accenture from April 1 next year. And we made that announcement yesterday. So the JV alone will not make it very efficient overnight, we need to review the features, and we have identified where we can make improvements and using know-how and resources of Accenture, from the fiscal year 2020, we would like to achieve these targets.

The reduction in expenses will be about JPY 2 billion for fiscal year 2020.

Next page. Based on these factors, the 3-year plan from the next fiscal year, cash balance and the other shareholder return and investment, the features here remain the same from those that we covered in May. That's all I have. Thank you very much.

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