Ajinomoto Co., Inc. (2802) Earnings Call Transcript & Summary

Good evening, everyone. Thank you very much for joining the earnings conference call for the fiscal year ended March 2023 of Ajinomoto Group despite your busy schedule. I'm [ Kaji ] from the IR Group. In the call today, we have Mr. Mizutani, Executive Officer and Vice President. Today's call is scheduled for 60 minutes. First, Mr. Mizutani will provide explanation based on disclosed presentation materials for 20 minutes or so followed by Q&A. Please note, today's call will be recorded and posted later on our IR website. Without further ado, we'd like to get started. Mr. Mizutani, please start.

Thank you very much for taking time despite your busy schedule to join our earnings call. Based on our presentation materials, I'd like to provide explanation for 20 minutes or so and then followed by Q&A. First, please turn to Page 3. This page shows today's 5 messages. First, in fiscal year 2022, we increased revenue and profit. And we hit record high in revenue profit and profit attributable to owners of parent. Secondly, amid COVID-19 pandemic, input costs increased. Up through to Q3, Seasonings and Foods and Frozen Foods segment were -- had declining profit, however, turned to profit growth on a full year basis. Thirdly, regarding Healthcare; and fourthly, regarding shareholder returns. Next, please turn to Page 5. As I explained earlier, as you can see from top left, sales, business profit and profit attributable to owners of parent, we marked record high especially the net profit was JPY 94 billion, close to JPY 100 billion level, which should lead to increasing EPS. On a continuous basis, business profit and profit attributable to owners of parent, we continue our efforts in increasing them. Next, Page 6. This page shows changes in business profit in the waterfall chart. At the beginning of the fiscal year, due to COVID-19 pandemic and also issues in Ukraine, the cost for fuel and raw materials increased, and the gross impact was JPY 55 billion. However, through cost reduction effort and price increases, net impact became smaller, down to JPY 2 billion. Please turn to Page 7. This page shows the waterfall chart by segment. As you can see, we recorded positive growth in all the segments. And [ JPY 2.5 billion ] is equity method investments. And please turn to Page 8. We mentioned -- talked about the increase in costs at the beginning of the year. Ammonia and other sub raw material prices rose significantly. However, in the second half, the main raw materials, fermentation materials like tapioca and raw sugar started to increase, and that continues as you can see in the chart. Under such environment in each country and region, we are doing price increase and cost reductions to minimize the impact. Please turn to Page 9. This page breaks down sales by Japan and overseas for the first time, left-hand side Japan and right-hand side overseas. Japan first, as you can see, volume was slightly down year-on-year. And at the bottom for Japan, input costs increased, and we were not able to absorb the full impact for price increase and cost reductions. However, on the other hand, overseas, sales were 111% of the previous fiscal year, double-digit percentage growth. As you can see at right bottom, cost increase were almost pretty much offset. As for Japan, amid such environment, we will continue -- we continue to see increasing input costs. So as for soup, we will implement measures to counter the situation through price hikes. Please turn to Page 10. Just one thing on the page, priority KPI results. ROIC against the 8% target for the medium term, we achieved 9.9%. Page 11. It is priority KPIs by segment. I will not go through this page. And moving on to Page 12, the results with the asset reductions. The plan was JPY 100 billion reductions, but we actually reduced JPY 214 billion in assets. And as you can see for ROIC for WACC 5%, we achieved 9.9% ROIC. Moving on to Page 13. This is the forecast and guidance for FY 2023. Sales, JPY 1,465 billion. Excluding the FX impact, 107.8%, business profit, JPY 150 billion, 110.8%. 111.8% excluding the currency impact. Next page. The waterfall chart, if you can refer to the bar second one from the left, with price increase, we will use that fund for marketing investment for top line growth in the future. Please turn to Page 15. This is by segment waterfall chart, particularly, as you can see, the second bar from left, Seasonings and Foods, you see that big number. On the following page, you see the breakdown by Japan and overseas. Please turn to Page 16. This page shows the breakdown for Japan and overseas, Japan 109% in terms of sales and overseas 105%. As for Japan, unit prices and volume are to be increased. What we will be doing will be explained using the following slides. Please turn to Page 17. As I have explained, in Japan for Seasonings and Foods, profit improvement is expected. As you can see, 3 points. One is flavor seasoning. We will launch new and revised products for menu-specific seasonings, the similar effort. And as for soup, as explained earlier, we plan for price increase and efficient -- and effective sales promotion. And marketing design center will be established, which I will explain later. Page 18 similarly show Seasonings and Foods for Japan, export. We have been doing this from before, but we are trying to enhance this now. And we have 3 points described here. And number one, this is something we have been doing from before. For example, in the middle, we have a soup package, and there is a symbol of Hokkaido. This is being sold in Taiwan. We are going to grow this. And number three, AGF products. We want to enhance sales of this through cross-border EC. This is what we're focusing on. Please go to Slide 19. From here on, we have Seasonings and Foods overseas. And here especially, bar graph, the orange, dark orange part at the top. Thailand, Indonesia, Vietnam, Philippines and other countries, sales growth are shown here other than Brazil as well. As you can see, especially in the past 2 years, it has grown significantly. And from next page onwards, I would like to give an example of one country. So please go to Slide 20. And the name of the country is not described here, and this is an example of Cambodia. Please take a look at the graph on the left side. FY '20, around this time, we have established a branch office, and now the business is growing. We have established a corporation. And fiscal 2014, we have turned profitable, and we no longer have cumulative deficit anymore. It's steadily growing now. In Thailand, which is next to Cambodia, Thai Ajinomoto and ASEAN regional headquarters, the intangible assets from these countries like technology, manufacturing, marketing and corporate. And support has been provided to provide support for the growth of Cambodia, and we're doing this in other countries as well. Please go to Slide 21. I'd like to talk about Frozen Foods from here on. As for Frozen Foods, Gyoza especially the sales of Japan and overseas is almost now 50-50, and what drove this significantly are 2 factors. And number two, North America especially. Gyoza in North America grew significantly. This is one of the drivers, and another is Europe. In France, Gyoza is growing. Furthermore, we'd like to continue to grow Gyoza. Please go to Slide 22. This is North American business for Frozen Foods. Last month, in April, I visited North America. The situation was as described here exactly. So focusing on core category, which is in the red part of the pie. And at the same time, we are improving production. So with synergy, we are improving efficiency. In the past 3 to 4 months, we have been able to realize this. And going forward, from Japan, production technology professionals will be sent and injected. We'd like to accelerate this move furthermore. Please go to Slide 23. This slide talks about Functional Materials. So as you already know, in the short term, FY 2023, especially in the first half, the semiconductor market will be going into adjustment phase, and we probably will be impacted. And on the right side, please take a look at the bar graph, especially electronic materials, servers, data centers, the usage volume is much bigger compared to PC usage. And therefore, the growth rate, double-digit growth that we have been maintaining up until here will be maintained going forward as well. That's what we expect to see. And Slide 24 is Bio-Pharma Services. And last August, at the business briefing, I -- we talked about this, the midterm sales forecast. We made an upward revision. And the reasons for the upward revision is that pipeline is being enriched smoothly. And going forward, we would like to continue to make efforts to achieve further growth. Slide 25 is ASV indicators. This is ROE for the company overall, ROIC, EBITDA margin. On February 28, we showed this on the road map. And on the right top, it says reference. So we'd like to triple EPS by fiscal 2030 -- in fiscal 2030. Slide 26 is the actual by segment, so I would like to omit explaining. Slide 27. This is about total assets. Fiscal 2023, 2022 will be around the same as you can see in the bar graph, but please take a look at the line graph. This is net D/E ratio. As you can see, fiscal 2023, this is 30% plus. Our range is 30% to 50% for net D/E ratio, and this is the bottom of the range. So we'd like to improve the numbers within this range. On Slide 28, this is about the cash flow. FY 2022, unfortunately, because of 2 factors year-on-year, there was a decline. And one of the reasons is because of that yen depreciation and also because of Ukraine, the inventory has increased. And another reason is because the pension, the -- if we include that, we will be able to achieve the numbers. But fiscal 2023, we are expecting JPY 177 billion. We'd like to use this fund to make investments for growth. Slide 29. This is about strategic investments. This is the CapEx. And not only that, intangible asset investments will be made as well. Slide 30. This is important management indicators. There are 4. ROE, so there is a dotted line, it says 11.1%. So this is excluding special factors. So 11.1%, next year 12% and ROIC as well 9.5% exceeding the previous year, fiscal year. We are aiming to achieve these numbers. And please go to Slide 31. We showed this to you on February 28. And also, we have added the cash flow for fiscal 2023 added. As was explained already last time, WACC is described on the right bottom. And we'd like to shrink the ones below WACC and use the funds for growth investment. So we'd like to grow organically, so make investments for organic growth, investment and M&A if there are opportunities. And if there are no opportunities for such investments, we'd like to do share buyback. Slide 32, and this is return to shareholders. There are 2 points. First, fiscal 2022, [ JPY 60 ]. So this is an increase in dividends by JPY 16 year-on-year fiscal 2023, JPY 74. This is increased by JPY 12. And share buyback today, we have disclosed today JPY 50 billion is the upper limit, a cap to do the buyback. And after that, so the business briefing explained already the others on February 28, and so that is all for me.

Thank you very much, Mr. Mizutani. And now we are going into the Q&A session from now. I would like to explain how to ask questions. [Operator Instructions] So we'd like to start the Q&A. First question is from Mizuho Securities. Saji-san, please.

I have one question. First, Bio-Pharma Services. I'd like to confirm the number or the results. You have made an upward revision over the medium term. Looking at the breakdown by segment, last year, CDMO grew 30% or so, quite brisk. Overall, this year, Bio-Pharma Services & Ingredients, 8% growth I think was recorded. Bio-Pharma Services and amino acid for pharmaceutical and Foods, what are the basic assumptions? Similarly, the growth rate of Healthcare, in Functional Materials, JPY 81.2 billion. So in yen terms, 12% growth year-on-year. Margin is 52%, which is to be maintained. And with electronic materials only, do you expect this level of growth? In the first half, you mentioned it's going to be tough. So that means that the second half is going to see a huge jump. So I'd like to confirm these points. That's it.

Thank you very much for your question. Bio-Pharma Services & Ingredients, especially for Bio-Pharma Services centered in Japan, big growth is expected. In addition, as for Functional Materials, as you said and as I have explained in the first half, mainly we will be affected. But after that, we expect to achieve growth. On the other hand, the cost for fuel and materials are increasing. So we will consider price increase. So that was a qualitative comment.

Question again, as for Bio-Pharma Services & Ingredients, in total, JPY 140.2 billion. So it's 8% growth top line from JPY 129.5 billion. This 8% growth, I think it's slow, relatively slow in terms of growth rate. And for Functional Materials total, JPY 81.2 billion, up 16% year-on-year. The first half is going to be tough. So the second half, you're expecting a huge boost. Is it right?

Yes, that's the right understanding. And the margin improvement is also expected.

Question, Functional Materials from -- it looks that the 1 percentage point decline is expected from 52.6%. But is the margin going to increase?

Outside electronic materials, we will challenge to improve margin. Outside of the electronic materials, we expect to achieve margin improvement.

Okay. So Functional Materials overall, the margin will decline. So do you expect to see much decline in the electronic materials?

No, we don't expect margin to decline for electronic materials.

So you're expecting flat. So not a huge decline.

That's correct.

Bio-Pharma Services & Ingredients, 8% growth is expected. But if you look at CDMO only, you will grow dramatically. But amino acid for pharmaceuticals and food, you're expecting a big decline, correct?

Not necessarily. Outside of Bio-Pharma Services, we plan to achieve growth.

I see. But overall, on the 8% growth is expected, correct?

Yes. That's correct.

So you're not really expecting a huge growth.

Excluding FX, we are forecasting double-digit growth.

Thank you very much. And next, Nomura Securities, Fujiwara-san, please? Fujiwara-san, can you hear me? It seems like -- Fujiwara-san, please wait a while. Sorry for the inconvenience.

Hello?

Yes. Yes, thank you very much. We can hear you now.

That's okay. This is Fujiwara. I have 2 questions. First, I talk about sauce and seasonings. Japan, looking at the past year, you have tight prices, but the top line was very challenging. And this year, volume and price hike will continue so unit price and volume will continue, and 9% increase is expected. Can you really achieve this apart from different last year? Can you really recover? Including the strategy, why do you believe that you can achieve such strong growth? This is my first question. And the second question is related to electronic materials. In Q4, Functional Materials, if you look at that, Q-on-Q, there's 30% decline in sales, and there is a very big adjustment right now. So in the -- up until the first half, it will be challenging. In the second half, it will recover. And full year, you expect 16% increase in sales. And looking at the customers' forecast, I think you have a very bullish view. And can you elaborate a bit more about 16% top line growth for Functional Materials? Can you explain the background, please? These are the 2 questions.

Thank you for the questions. So I'd like to start with the second question. So first, Q4 the numbers, so it's not that much. So it will be a repetition again, but we believe that first half will be the bottom. And second half onwards, we expect to see recovery. And over the midterm, the growth we showed last year, we'd like to achieve that. So this is the answer related to Functional Materials. And as for Japan food, Q4 onwards, our actions are starting to show results. And fiscal 2023, Q1 onwards, I talked about the soup price hike earlier, and that will be done. And also, in July or August, new product is planned, and announcement is planned. So we have -- are planning to launch many new products, as many as we have never done at the same time. So we'd like to come up with new products at high volume. Otherwise, it will not be successful, so we'd like to carry this out. And also, we'd like to improve the utilization rate. By doing that, we'd like to boost the sales in Japan. So talking about overseas now, so this is the situation in Japan that I just talked about. And especially in fiscal 2022, Vietnam, Brazil was very strong. We'd like to maintain the momentum, and we'd like to grow further.

So that's all for me. And as for the first point, did I make a mistake in numbers in Q4 -- Q3, Q4 alone, Functional Materials sales have dropped very much. So I thought maybe 30% drop. Was I wrong?

Year-on-year, it's like 14% to 15%. Yes, you're right.

Okay. So you talked about price hike. Was that about Functional Materials? Or are you talking about Bio-Pharma Services?

It's hard for me to say specifically which price hike. So it's not Functional Materials whose price will be hiked.

Next question, SMBC Nikko Securities, Takagi-san, please.

This is Takagi speaking. I have questions about the top line for overseas. Slide 16, overseas sales. This fiscal year, the forecast 105% of sales. That looks weaker and volume 101% of the previous year. How should interpret this? What is happening for overseas sales?

Let me provide an answer from the first point. We have taken a cautious view.

Is that it?

Of course, we'd like to try harder or higher.

In reality -- well, what's really the reality?

Well, we just -- we haven't started the April as yet so it's hard to tell.

But you're forecasting decline in volume. So are you seeing any changes in the market? Do you need to factor that in?

No, totally not. Various actions have been successful. And as for overseas sales, they are quite strong.

So the forecast looks relatively weak, but the trend remains unchanged, correct?

Yes, that's correct.

Got it. So secondly, overall, medium-term management plan, business profit growth and CAGR of 15% or higher you're aiming at. In this fiscal year, which is the first year, you're forecasting 10% increase with JPY 150 billion, right? Then next year and the year after, you have to achieve 20% growth each year. Is that correct? If so, what are the drivers for that?

As you said, yes, we're having discussions around it. Next year and onwards, we have to aim higher growth rate. Bio-Pharma Services and Functional Materials, over the next 3 years, they are going to be drivers. But Food, Seasoning and Food, we'd like to turn them into a further driver for the business. As you can see on the slide of February 28, we will make sure that we will be lean through various initiatives, and we will generate fund to make investment for our future growth.

So based on what you said next year and onwards, Healthcare growth rate will be accelerated. In addition, various cost management will be in place, and you expect to see various benefits from such efforts. Is that right?

Exactly. Saito-san, which was appointed from August responsible for run transformation, he's working on to make the business and earning structure lean. So globally, we do business in a cross-functional manner. What we have done so far use that as a format and model and do business in a cross-functional manner.