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

[Interpreted] So good afternoon. Thank you very much for participating in Ajinomoto's earnings call for the first quarter of fiscal year [ 2027 ]. I am your moderator from the IR division. My name is Koto. For today's telephone conference, we have Executive Officer and General Manager of IR, Kaji, is present. We are planning this meeting to be 60 minutes. First, Kaji will explain -- conduct the presentation based on the disclosed material. And after that, we'll go into Q&A. The material is posted on the homepage IR site in Ajinomoto's website. Kaji will mainly conduct the explanation based on the presentation material. Please refer to the outline of the consolidated results and revised forecast presentation for your reference. Today's presentation is going to be recorded and is going to be posted on our IR site. Please understand. Let's start. Kaji-san, please.

[Interpreted] Thank you very much for participating in the earnings call for Ajinomoto. I am Executive Officer, General Manager of IR, Kaji. Before we start the presentation, I would like to offer my heartfelt sympathy to the people of Kumamoto who has suffered from the earthquake. We are praying for the earliest possible recovery and restoration. As a group that focuses on food and health, we will offer all the support that is necessary. Let me start my presentation based on the financial results material posted on our website. So please turn the page to Page 3. These are the key points. In this first quarter, sales, business profit and profit attributable to owners of the parent company all set new records for the first quarter. Business profit grew 127% year-over-year, setting a new record for a single quarter. By segment, in Food Products business, the Seasonings and Foods business, which includes Sauce and Seasonings, Quick Enrichment and Solutions and Ingredients saw increased sales and profits in Japan and overseas. Healthcare and Other segment saw significant increases in both sales and profit with the Functional Materials continuing to perform well. In addition, the Biopharma Services and Ingredients business as a whole also posted higher sales and a significant increase in profit. Regarding the full year earnings forecast for fiscal year 2026, we have reflected the impact of the Middle East situation that we have not factored in at the start of the fiscal year while maintaining the forecast for the overall food products business. Furthermore, in light of the strong sales performance in the Functional Materials business, we have revised the forecast upward for this segment. Consequently, we have revised the company-wide forecast upwards for sales, business profit and profit attributable to the owner of the parent company. We will absorb the impact of the increased costs resulting from the situation in the Middle East by taking agile measures and aim to achieve the revised earnings forecast. We will further enhance the group's human organizational capabilities to advance ASP initiative and continue our endeavor to achieve the goals of the 2030 road map ahead of schedule. Next, please to Page 4. This is the digest of the first quarter results. We achieved strong growth with sales up 113% and business profit up 127%. Profit attributable to owners of the parent company increasing by 113%. We remain firmly committed to profit attributable to owners of the parent company and will strive to achieve our revised earnings forecast for the current fiscal year. Please turn to Page 5. This page presents the analysis of the changes of the business profit for the first quarter. Changes in the gross profit due to the changes in sales, this is second from the left, which contributed to the JPY 18.4 billion increase in profit. This was driven by contributions from Seasoning and Food Products, Functional Materials and Amino Acid for Pharmaceuticals and Food. And the next graph, change in gross profit due to the change in gross profit margin factor, which contributed to a JPY 7.2 billion increase in profit was driven by Overseas Seasoning, Domestic Coffee and other Quick Nourishment products, Functional Materials and Amino Acids for Pharmaceuticals and Food. Regarding SG&A, we continue to expand investment in intangible assets such as human resources, marketing and R&D to achieve sustainable growth in line with the 2030 road map. Turning to Page 6. This is an analysis of changes in business profit by disclosed segment. For the Seasoning and Foods segment, compared to the full year profit growth target of JPY 2.8 billion, an increase of JPY 4.7 billion was achieved in the 3 months from April to June. However, this increase includes a onetime positive impact of approximately several billions of yen resulting from a decrease in the elimination of unrealized gains. The Frozen Foods segment posted a JPY 600 million decrease in profit compared to the full year plan of JPY 3.7 billion increase. In the Healthcare and Other segment, profit increased by JPY 9.7 billion compared to the full year forecast of JPY 13.7 billion. Turning to Page 7. I would like to turn to the key points of the financial results by segment. Overall, combining the Food Products business, this combines the Seasonings and Foods and Frozen Foods segment, both sales and profit increased. First, the pink colored area. This is for the Seasonings and Foods business. In the domestic market, Sales increased for Coffee and Soups and Solutions and Ingredients also saw higher sales, resulting in an overall sales increase. Business profit rose significantly for Coffee in addition to higher profits in Seasonings, resulting in a substantial increase in profit overall. So going to overseas. Sales increased in all the subsegments in overseas, resulting in a significant overall sales increase. Business profit saw a decrease in Quick Nourishment and Solutions and Ingredients segment, but this was offset by the increase in the Seasoning segment, resulting in an overall increase in business profit. Next is the Frozen Foods segment. In Japan, sales increased overall, driven by strong performance in our Mainstay Frozen Food products. Business profit decreased by JPY 300 million overall due to the impact of raw material and logistics costs. So Asia, which bears some of the manufacturing base on a combined basis with Asia, business profit decreased by JPY 100 million. In the overseas market, sales increased overall, mainly in North America, partly due to the ForEx effects. On the other hand, business profit decreased by JPY 400 million overall due to a somewhat delayed recovery from the impact of product recalls and rising costs for raw materials and logistics. Going to Page 8. This page covers the Bio and Fine Chemical businesses overall. Functional Materials reported sales and profits increase across all of its businesses, which are the functional materials, amino acids for Pharmaceuticals and Foods and CDMO, resulting in the overall strong growth in both sales and profits. In Functional Materials segment, Electronic Materials continued to perform well, driving a significant increase in both sales and profits. Amino acids for Pharmaceuticals and Foods saw an overall increase in sales and profit driven by high value-added amino acids for biopharmaceuticals and culture media. The CDMO segment saw an overall increase in both sales and profit driven by small molecules and gene therapy. I will explain the detail later. Going to Page 9. This is the revision of our forecast for the fiscal year 2026. So please refer to the material revised earnings forecast by segment for fiscal year 2026 posted on our website. The revised earnings forecast incorporated the impact of the situation in the Middle East, which has not been reflected at the start of this fiscal year. In addition, based on the performance of the Functional Materials business through the first quarter, we have revised the forecast upward for this business. Consequently, we have also revised the company-wide forecast upward for sales, business profit and net profit. Specifically, we have revised the forecast upward by JPY 9 billion for sales, JPY 5 billion for business profit and JPY 3.5 billion for profit attributable to the owners of the parent company. Regarding the Middle East situation, if you look at Page 10. This is something we covered during the earnings presentation in May for the full year of 2025 and the impact of the Middle East conflict and the response policy is also stated here. At the beginning of the fiscal year, with respect to the incremental cost resulting from the escalating tensions in the Middle East, we anticipate a potential annual cost increase of JPY 30 billion in terms of business profit. However, after scrutinizing the future impact based on the first quarter results, maintaining the assumptions of $110 per barrel for Dubai crude oil and an exchange rate of JPY 150 to the dollar, we revised the projected annual cost increase to approximately JPY 25 billion. To address this impact of the rising cost, we will take measures such as price adjustments and cost reduction, responding effectively to absorb the cost within the current fiscal year, and we will strive to steadily achieve our revised earnings forecast. Page 11. Here, I will explain the impact of the cost increase caused by the escalating tensions in the Middle East on our overall food product business, including Seasonings and Food and Frozen Food businesses and how we plan to respond to them. The slide here presents the first quarter results, the impact of cost increase in the second half -- second quarter and the second half due to the Middle East conflict, the revenue growth effect from passing on the cost increase to the prices, the cost reduction measures and their overall impact on the business profit. So the image of these things are illustrated here. The orange part represents the effect of increased revenues and cost reduction and the gray portion represents the impact of the increased costs. As for the first quarter, as of the first quarter, because the impact of cost increase caused by the Middle East situation was still limited, as you can see here. And also because we were able to offset this part of cost increase to some extent. So consequently, as we presented on Page 6, the Food Product businesses overall, including Frozen Food, recorded a profit growth of JPY 4.1 billion. On the other hand, for the second quarter, as the cost increase impact due to the Middle East is expected to kick in, in full scale, we continue to implement the offsetting measures, including price hikes. However, especially in the Consumer segment, we need to anticipate a certain time lag before the effects of cost pass-through materializes. Therefore, whether we can completely offset the cost increase caused by the Middle East conflict with these offsetting measures remains to be seen. For the second half of the year, in addition to the effects of the cost pass-through, we will steadily build upon the increased revenue effects and cost reduction measures to absorb the full year impact of rising costs due to the Middle East situation all within this fiscal year and thereby deliver on our full year guidance. Now turning to Page 12. This slide presents an analysis of the changes in business profit. The upper section shows the variance with -- between the revised forecast versus last year's performance, while the lower section shows the variance between the initial cost versus previous year's actual results. As I mentioned earlier, Healthcare and Others segment, reflecting the strong first quarter performance of Functional Materials, we revised the business profit forecast upwards by JPY 5 billion. Page 13, let us talk about the sales breakdown of Sauce and Seasoning and Quick Nourishment. First, on the left, this is about Japan. Coffee saw a significant increase in sales, partly due to the price revision in response to the rising bean costs. Excluding Coffee, the combined sales for Sauce and seasonings and quick nourishment for Japan as of the first quarter stood at 101% of the previous year's level, with volume at 102% and unit price 99%. The slight decline in unit price was primarily driven by the setback from the introduction of the two new products under the Kiwami series introduced in the last fiscal year, which resulted in a shift of sales between -- sales mix between the premium and other mix over the past 3 months. Next, the right-hand side, the overseas market. Sales stood at 103% of the previous year's level with volume 102% and unit price 101%. Let me add some more comments regarding the situations of the five key markets. Please refer to the Page 3 of the document titled Ajinomoto Inc. Consolidated results for the first quarter ended June 30, 2026, which is available on our IR website. In the 3 months from April to June, Thailand achieved an overall growth of 1%. Coffee products underperformed slightly. But on the other hand, Seasoning category achieved sales growth in the mid-2% range. Indonesia grew by 6% and Vietnam 7% maintained their favorable momentum. The Philippines, on the other hand, for the first quarter remained broadly unchanged from the previous fiscal year. In the first quarter, there was a temporary production issue with the Umami seasoning in the time frame of around April and May, which prevented shipments from meeting the planned schedule. However, Umami seasonings are -- when Umami seasonings are excluded, the combined sales of Flavor Seasonings and Menu-specific Seasoning achieved a 9% growth. In Brazil, partly due to the impact of inflation in the domestic market, in the April to June period in that 3 months, the results were affected by the move among the wholesalers to reduce inventories in distribution. However, the final demand again continues to be robust. Next, Page 14. Let us turn to the Healthcare and other segment and the Functional Materials in particular. In the first quarter of this fiscal year, we achieved significant increase in sales and profit compared to last period. Last year, sales was 150% business profit, 170%. Demand for ABF for high-performance applications such as those for AI servers and networks remain robust and the product mix also improved. In light of these first quarter results, we revised our full year forecast upwards. Turning to Page 15. As announced today, together with the results, we issued a press release titled notice regarding the basic policy for absorption-type merger of Ajinomoto Fine-Techno Company by Ajinomoto Inc. We have initiated the preparations to absorb Ajinomoto Fine-Techno, our wholly owned subsidiary and the core of our Electronic Material business into Ajinomoto Company Inc, with an effective date of April 1, 2027. When we formulated the 2030 road map, we positioned ICT as one of the four key growth areas. And ever since, our group has continuously evaluated the optimal management structure to accelerate business growth, and we started the concrete studies on this acquisition from early 2025. Driven by the advancements in AI, the semiconductor industry is currently growing at a pace exceeding expectations and the business opportunities are expanding significantly in the ICT area, a key driver of our group's growth. Given this business environment, we determined that by combining our management foundation and the control capabilities with Ajinomoto Fine-Techno speed and execution capability, we can further enhance the competitiveness of the entire group and drive the mid- to long-term growth of Functional Materials business. We anticipate that this absorption-type merger may have a positive impact from a tax perspective. We will conduct a detailed review going forward and promptly announce any matters that require disclosure. Turning to Page 16, the CDMO business. Overall, the first quarter results showed an increase in both sales and profit. By modality, small molecules and Forge, the gene therapy business, recorded an increase in both revenue and profit. Meanwhile, regarding the middle molecule AJIPHASE, revenue and profit declined due to the impact of shipment timing for the first quarter, but the progress was in line with the initial plan that we have developed in the beginning of the fiscal year. Leveraging our unique technological strength and by expanding our communication with customers using the Ajinomoto Group's network, we expect to achieve a significant increase in profit this fiscal year in the CDMO business. Page 17. Finally, here is the progress of the ASP indicators by segment. For the first quarter, on a company-wide basis, organic growth rate was 5.7%, business profit growth was 27.3% and the EBITDA margin was 20.3%. For the full year, although uncertainties remain in the business environment such as the impact of the Middle East, we will unite the forces of the entire company and take agile measures to achieve our full year profit targets at all levels. We look forward to your continued guidance and support, and thank you very much for your attention. That's all for myself. We'll now move to Q&A.

[Interpreted] [Operator Instructions] Let's start the Q&A. First, from Mizuho Securities, Saji-san, please.

[Interpreted] I want to ask about the Functional Materials. This is my only question area. So the 54% increase in sales in the second quarter to the fourth quarter, after the upward revision, 10% increase of sales. So it was JPY 79.2 billion last year and JPY 17.5 billion this year, so a 10% increase. So it means that the 10% increase is not that different from the initial forecast. The growth of the first quarter and the second quarter onwards growth trajectory, what is the difference? And maybe a word on what I'm going to say. You have the tax benefit coming from making the AFT at subsidiary. What is that specifically?

[Interpreted] In terms of functional materials, in the first quarter, results was very good, and that is the reason why we have revised the full year plan. So based on the macro environment and the risk that may appear. So at the initial forecast that was quite conservative. But the second quarter onwards, we have maintained that stance in terms of our outlook. On the other hand, for July to September, we are seeing a very robust demand situation is continuing. So in terms of the Fine-Techno, the absorption-type merger and what is the tax effect coming out of this? Well, currently, we have just started the deliberations in the details if something is decided, we will inform you. But I think a considerable level of impact can be -- it is possible that type of impact may be seen.

[Interpreted] Another follow-up. So the July to September, very strong demand is continuing, you have said. In your business presentation in the fourth quarter, 42% sales increase. The strong situation has been continued. And then this time, it was about 54%. This strong demand continuing this 42%, 54%, if that is the level, is it the same level of growth is continuing?

[Interpreted] Well, in terms of the actual growth numbers, I cannot mention about that, but let me say that the very strong -- we think that this very strong momentum can be maintained. That is our expectation.

[Interpreted] Now moving on to the next question. This would be from Goldman Sachs, Miyazaki-san.

[Interpreted] This is Goldman Sachs. Miyazaki is my name. So my question relates to CDMO. Roughly speaking, you said you're in line with the initial plan. But this fiscal year, significant revenue and profit increase in Biopharma Functional Materials, I think you are talking about expecting that a significant increase in revenue. So rather than -- in addition to the organic growth, are you expecting something more? That's the point that I would like to confirm. And also for the -- for first sector, have you seen any of them materializing in the first quarter already?

[Interpreted] Mr. Miyazaki, thank you very much for the question. I would like to add some more comments. I think you asked me to add more comments and give some more color for the Health care and others business. I think, so for the guidance for this fiscal year, organic growth is reflected in the initial guidance, and that has been maintained this time around as well. And also, this fiscal year, as far as CDMO is concerned, as of May, the revenue growth in terms of the size of the revenue growth, the third quarter and then the second quarter, the fourth quarter and the first quarter, that was the order of the revenue size that we mentioned during the earnings call in May. And going forward, depending on the circumstances, the quarterly shipment may change. There is a possibility that shipment timing may change. But basically, I think in the second half of the year, a significant increase in revenue and profit is expected for this fiscal year. That's our projection. And I think you can expect that to happen. And also, if I add more -- some more color to that, in the first quarter, in the -- originally, we had assumed that the nucleic acid shipment timing and this revenue impact was in line with our projection. But when it comes to small molecule and Forge businesses, they have been maintaining a very favorable momentum of late. So we would like to -- we are well positioned to achieve the guidance that we have given to you. That's -- we are very confident about that. When it comes to the amino acid for pharmaceuticals and food, of course, there are some fall from the -- due to the foreign exchange situation, but the amino acid for the culture media and also for pharmaceuticals, those high value-added products are shipping out as planned. So I think the favorable momentum will be maintained in the future. That is our plan.

[Interpreted] AJICAP. As far as AJICAP is concerned, the license revenue I think that incremental revenue from license fee, I think, was -- I think that was my understanding at least. But what about the progress for the first quarter? Is this going to be the driver for the revenue and profit increase in the second half of the year? Can you talk about the progress of AJICAP?

[Interpreted] Okay. Thank you very much. As far as AJICAP is concerned, in the first quarter, we have steadily achieved revenue from the licensing of this business. And if you look at the quarterly trend, as we go quarter-by-quarter, the amount is increasing every quarter.

[Interpreted] Okay. Then the pace is not going to accelerate all over. But you are rather expecting a steadfast increase on a quarter-by-quarter basis. And now Forge, how significant is the growth of Forge business? Is it similar to last year? Or is the hurdle becoming higher? Are you expecting a slowdown in that? Can give us a hint on the pace of growth of Forge?

[Interpreted] As a general trend, the momentum has not changed significantly. The favorable paces have maintained.

Next. So this is from the English line, we have a question. Miguel Marques from Bernstein, please?

Firstly, on the ABF segment, you've obviously had very strong margin expansion in the first quarter. Can you help us understand a bit more about the mix of drivers that delivered that margin expansion? To what extent was this about volume and scale leverage versus improved product mix? And was there any benefit from price increases in the first quarter?

Can you wait a while? There has been some break in the audio. So would you please wait? [Technical Difficulty] So it seems to be the case that there has been some issue with the line -- in the connection with the line. Mr. Marques, maybe we can come back to you later? So excuse and apologies, but we will get back to you later. So we will continue with the other questions. [Interpreted] Daiwa Securities, Igarashi-san, please.

[Interpreted] So this is Igarashi from Daiwa Securities. So I do want to hear some comments about the expectations for the upward forecast. So I think basically, you talked about -- in terms of the revision, it was just about the Functional Materials. But in the first quarter, in terms of the Japan and in terms of the Sauce and Seasoning, it was good. At the beginning of the year, you talked about the investment in the human capital and et cetera. And in terms of the cost, I think basically, you are anticipating a decrease in the margins, but you are spending, but at the same time, you have been able to improve your margins. So I would like to hear about the sustainability of this momentum.

[Interpreted] For the first quarter, in line with the initial plan in specific categories, we have been investing actively in marketing. On the other hand, overall, so in terms of the Seasonings and Foods business, we have been able to see good results in the first quarter. So some ForEx following has been enjoyed and some Middle East situation in terms of the cost increase in the first quarter, we didn't see much of the impact coming from that. So going forward, the impact of the cost increase will become stronger. So initiatives against that with that as a whole company, we are implementing various initiatives in each market, each categories to respond to that. And we have started to execute those initiatives. So that is the situation. So I do want to say that this momentum is going to be maintained. But depending how the Middle East situation is going to be, there is may be some changes in the cost. So we will incorporate the impact right now. At the same time, we are committed to steadily achieve our targets. So that will be the core of initiatives.

[Interpreted] So the marketing investment and this type of expenses, you are spending as planned, but at the same time, have been able to grow?

[Interpreted] Yes, that's true. So from the first quarter onwards, in terms of how the cost is going to come out, depending on that, we will be flexible and agile in terms of our responses. So we will flexibly put in -- conduct various initiatives to respond to the ever fluid situation.

[Interpreted] Now moving on to the next question. This will be from Morgan Stanley MUFG, Tsunoyama-san.

[Interpreted] This is Tsunoyama from Morgan Stanley. So I also have a question regarding the impact from the Middle East and also your thoughts about Sauce and Foods -- Seasoning and Food business. This JPY 25 billion impact, are there any difference by region? Can you talk about that? This JPY 25 billion impact? Can you just give us a breakdown of how you arrived at that number? And also and the countermeasures you said, like you, are making progress with respect to price hikes? If you can give us some more color on that, that would be appreciated. And also, in the first quarter, I think it's about Asia, but I think the baseline is coming down. Brazil, I think. Is that something unique to Brazil? If you can comment on that point as well, that would be appreciated?

[Interpreted] The impact of the Middle East, of course, our projection for the future may change depending on the circumstances in the region. However, at least, from the first quarter towards the second quarter, I don't think there's a skewed impact by region. It's about the packaging material costs and it's about the logistic cost and also, in our case, amino acid fermentation related -- production-related raw material cost fluctuation relating to that and also the some materials. So those are the cost risks that we are looking into. It's not really skewed or there's a difference by region. But depending on the production volume, the actual cost will vary depending on the business or depending on the region because of that. As for the Americas Sauce and Seasonings, if you look at the Page 3, there is a decline of JPY 700 million. This was mostly driven by the Umami seasonings for processing. That was a major factor behind this.

[Interpreted] So it was not really the inventory adjustment, but that was for the Umami seasonings for processing food -- processed food?

[Interpreted] Yes, for Brazil, of course, there was an impact of inventory adjustments at the distribution channel, so it was flattish. That's what I mentioned during the presentation. But the major drivers behind the decline in the profit was the Umami seasoning produced in Brazil because the market condition remains very tough. That's the reason why they are suffering from a decline in profit.

[Interpreted] Just as a confirmation, so in the Seasoning and Food, as for next fiscal year, in the second half of the year, a cost increase will be made so that you can absorb the cost for this fiscal year? So that is the basic approach, right? Is that correct?

[Interpreted] Yes. It's too early to talk about next fiscal year, but it's all about how the cost situation will change in the future. So of course, our ambition is to try to maintain our margin and improve the margin on a continuous basis, and we are taking measures towards that goal constantly.

[Interpreted] Next, BofA Securities, Sumoge-san, please.

[Interpreted] Sumoge from BofA Securities. From my side, I would like to follow up to the previous questions. So I would like to hear more about the impact of the cost coming fundamentally situation. So I do understand it's difficult to separate it segment by segment. So you put in measures in the second quarter and the third quarter and onwards, the profit is going to be improved. I think that is your plan. So currently, right now, you are increasing prices and putting in measures to reduce the cost. And I think you do have specific initiatives. So currently, can you explain more in detail that these are the measures that we're putting in. So that is the reason why we will be able to absorb this JPY 25 billion of cost?

[Interpreted] So in terms of our measures to -- for the cost, so I think the major theme is that we do have to respond by pricing. And already in the first quarter, we have putting initiatives but efforts to reduce cost. Combined -- these two combined, overall, this fiscal year's predicted cost increase coming from the middle situation, we think we'll be able to absorb all that. For instance...

[Audio Gap] [Interpreted] so when things settle down in terms of Seasoning and Foods and Frozen Food profit, how is this going to trend against your plan? Do you have any idea about that?

[Interpreted] So this is quite difficult. So today, if we look at Page 11 of our slide. As we have shown on Page 11, within this slide, what we're talking about is that cost increase coming from the Middle East situation and what we are doing against that, specifically for the Middle East situation. In the first quarter, so the gray portion is larger, the cost increase. And in terms of the recoveries, maybe about half against that. But actually, besides that, there are some impact coming from the increase of sales. So that is the reason why we have been able to see increased sales and profit for the first quarter. In the second quarter, for this specifically, if you look at the Middle East situation, for the second quarter, we will not be able to cover all of the cost increase. That's the current prediction. But for the other initiatives that we are implementing, there's those. And depending on that because maybe you should consider the other initiatives that will be taken in the second quarter, for instance. So if this is the case, this -- in terms of the $110, I think it will be very in terms of the oil price, $110, I think it's quite conservative. And maybe if you'll be able to increase your top line, then maybe there's some expectations to overperform. Well, yes, I do hope that we'll be able to perform as you are expecting us to do so.

So the English channel was disrupted earlier. So I'm sorry for the inconvenience. So the channel is now recovered. So Mr. Marques, if you can raise your hands once again because your question was stopped in the middle. [Interpreted] So as we wait for him to call, we would like to take the next question. So we'll go with Hirata-san of UBS Securities.