Morinaga&Co., Ltd. (2201) Earnings Call Transcript & Summary

I am Eijiro Ota. Thank you for participating in our earnings briefing for the fiscal year ended March 2021 despite your busy schedule. My presentation will be about 40 minutes. We have put together a rather grim operating forecast for the fiscal year ending March 2022. So at this session today, I will be brief on the reviewing the financial results for the fiscal year ended March 2021 and focus on the years beyond the grim earnings forecast, describing the business plan toward 2030 and the 2021 medium-term business plan. But first, the new corporate philosophy, which I talked about a year ago. I became the ninth President of the company 2 years ago as the company celebrated the 120th anniversary of its founding. And in my first message, I called upon the employees to return to the founding spirit and think about the relevance of the Morinaga & Co. Group for the future and solicited their thoughts and ideas. I received a response from nearly 1,000 people or 70% of the entire workforce. After more than a year of discussion, we put together this new corporate philosophy that you see here. It incorporates the thoughts of many employees and my strong desire to pursue the purpose management. Our purpose or mission reads, the Morinaga Group will continue to create healthy foods that can be enjoyed beyond generations, thereby bringing smiles to the faces of people around the world now and in the future. Just because the company has continued for 120 years does not guarantee that it will remain so in the future. So we aspire to use this purpose as the basis of our corporate activities, aiming to become a long-lasting company that will continue to grow. We will issue a press release on this today, and we also made a video, which will be posted on our company website. Let me now turn to operating results for the fiscal year ended March 2021. Net sales were JPY 199.99 billion, down about JPY 8.9 billion year-on-year but was JPY 2 billion higher than the forecast announced a year ago. In the preceding year, in fiscal year ended March 2020, Pringles sales totaled JPY 7.4 billion. The impact of COVID-19 on sales varied by product. But overall, sales were close to the previous year's level. As will be described later, the COVID impact on sales is estimated at minus JPY 8.8 billion. Operating income was JPY 19.162 billion, down approximately JPY 2 billion year-on-year but JPY 1.162 billion higher than the forecast. COVID impact is estimated at minus JPY 2.4 billion. With an operating margin of 9.6%, we were able to secure a near double-digit operating margin even in the very difficult environment under COVID-19. Net income was a record high at JPY 13.4 billion, up JPY 2.5 billion, partly reflecting an extraordinary loss recorded in the previous year. Next, results for the Food Manufacturing business, which is by far our largest segment, accounting for 96% of sales and 98% of profit. In Confectionery & Foodstuffs, group-wide results of HI-CHEW, which has a high profit contribution rate, was down to 85% due to COVID-19. Candies struggled overall while positives included biscuits at 119% and hotcake mix at 145%. Operating subsidiaries in Japan saw a significant decrease in sales and profit due to COVID-19. And as for Frozen Desserts, 2 years ago, our results grew by nearly double-digit percent while the market dipped below the previous year's level for the first time in a long while. And last year, we recorded a significant increase in sales and profit with distribution shipments at 115% while the annual storefront SRI in the entire market was 103%. Jumbo group was 111% and sales of Choco Monaka Jumbo increased for the 20th consecutive year as single SKU. ICEBOX was 116% and Ita Choco Ice grew significantly on a full year basis. Overall, Frozen Desserts grew significantly for the second consecutive year. COVID seriously affected health products in Jelly, as explained in November, with sales dipping to 50% in April and May. But then through various measures, sales exceeded 120% in September, but still, on a full year basis, it remained at 84%. in Bar and Collagen drip, sold through a jar, marketing performed strongly, but could not make up for the decline in Jelly, resulting in a significant decrease in sales and profit. Overseas, sales were very strong despite COVID-19. In particular, HI-CHEW sales in the U.S. reached JPY 7.2 billion. And on a local currency basis, it marked 119%. Other overseas business also performed strongly to account for 6.1% of total, up 0.8% or 0.8 points. As for COVID impact, a year ago, we forecasted minus JPY 8 billion on sales and minus JPY 2.5 billion on operating income. The actual impact was minus JPY 8.8 billion on sales and minus JPY 2.4 billion on operating income. The main negative impacts were felt by in Jelly, HI-CHEW and domestic operating subsidiaries. Morinaga Shoji selling product for industrial use and seller in Morinaga market development. There were some upsides for hotcake mix and biscuits, but the negative factors were larger. Next, variation analysis of operating profit down by about JPY 2 billion. By far, the largest factor was a decrease in sales due to COVID. There also was an increase in depreciation and selling expenses. Despite such positives as product mix and cost reductions, including SG&A, we could not cover the decline overall and profit decreased. Moving on to the forecast for the fiscal year ending March 2022. First, COVID impact, which, in the previous fiscal year, was JPY 8.8 billion on sales and JPY 2.4 billion on profit. There still are many uncertainties making forecast difficult, but we expect impact to remain on the 3 domestic operating subsidiaries mentioned earlier. And impact is estimated at JPY 2 billion on sales and JPY 400 million on operating income. Based on the new accounting standards, we forecast sales of JPY 175 billion, 104% year-on-year; and operating income of JPY 17 billion, down JPY 2.1 billion year-on-year. The cash flow based EBITDA shown at the bottom is estimated to be JPY 27.6 billion, up JPY 550 million. This exceeds JPY 27.4 billion EBITDA posted 2 years ago when the record-high operating income was achieved at JPY 21.2 billion. This is the variance analysis of operating income. For this fiscal year, we have combined the depreciation costs in Q1, which are to increase by JPY 2.7 billion. In the previous fiscal year, we controlled advertising expenses and saved JPY 890 million. But this fiscal year, we plan to spend almost a similar amount in overseas and main brands advertising. Intangible investment, such as R&D and DX, will be JPY 680 million. We will also spend selling expenses mainly overseas. Unspent SG&A expenses totaled JPY 1.8 billion in the previous fiscal year, but we plan to spend a certain amount this fiscal year assuming COVID will be brought under control to a certain extent. Despite increased sales, recovery in in Jelly and Hi-CHEW and improvement in overseas costs, operating income is expected to be JPY 17 billion. Historical changes in depreciation costs are shown on the right-hand side, starting from 2018. Actually, going back further from 2010, depreciation costs remained constant at around JPY 6 billion a year until last year when it increased to JPY 7.9 billion, up JPY 1.7 billion; and this fiscal year, further to JPY 10.6 billion, up JPY 2.7 billion or a total increase of JPY 4.4 billion in 2 years. As will be explained later in cash allocation, we are to drastically increase capital expenditure, including increasing advertising and intangible investments by JPY 1.5 billion this fiscal year. Let me now look back on the 2018 medium-term business plan. This is the summary. The graph shows the sales and operating income amount and ratio for a total of 6 years, 3 years under 2015 medium-term business plan and 3 years under 2018 plan. The preceding 3 years under 2012 plan was a very difficult time with operating income of around JPY 3 billion at a profit margin of 2% to 3%. In the initial year of the 2015 plan, operating income exceeded JPY 10 billion for the first time in the company's history. The amount and the rate of operating income steadily increased over the 3-year period. It was against this backdrop that 2018 plan started. We aimed to solidify the upgraded state of operating performance. The plan envisioned operating income to grow from JPY 20 billion to JPY 21 billion and JPY 22 billion in 3 years. And we achieved that in the first and second year. But in the third year, due to COVID impact totaling JPY 2.4 billion, the result was JPY 19.1 billion. However, I think the solid foundation was late, and we gained confidence under the medium term -- 2018 medium-term plan. In the 2018 plan, we grouped our businesses into 3 existing domains, wellness domain and global domain. In the interest of time, I will skip the details, but we were able to bear fruit in each. Please review the details later, including key management indicators. Moving on to the 2021 medium-term business plan and the issues to be resolved for further growth toward 2030. In a nutshell, the key point for the company is the evolution of the growth strategy. In both the 2018 and indeed in 2015 business plans, we described wellness and global as the basis of growth strategies. That will remain unchanged, but we learned a lot through various actions. So we will reexamine our approaches and thinking to promote evolution. The slide reads, to execute balanced strategies tailored to individual businesses, we will further evolve the growth strategy. In terms of changes in society and markets, there are digitalization and COVID-19. There is a rise in health awareness, including health of mind, and there is a drive towards realizing sustainable society. We will make the best use of our strength, such as 120 years of history, trust, technology and brand. We will make a good use of these strengths. From here, I will explain the 2030 business plan. I mentioned at the first briefing after becoming the President 2 years ago that at least for the last 20 years since 2000, our business plan covered only 3-year period in the form of medium-term business plan. That was because we were facing tough times, which forced us to focus on immediate improvements. I said that. But now that the company's performance is in a different stage, we are discussing a medium- to long-term plan toward 2030. Last time, I talked about the approach of backcasting from our aspiration for 2030. So this is the vision for 2030, which reads, the Morinaga Group will change into a wellness company in 2030. We will further evolve reliability and technology built on its 120-year history to support people's wellness lifestyles in all generations worldwide. This also links to the purpose under the new corporate philosophy mentioned at the outset. The Morinaga & Co. Group's concept of wellness is defined as the state of realization or pursuing enriched glorious life on the basis of healthy mind, body and environment. So what does it mean to change into a wellness company? In the 2018 and in the 2015 medium-term business plans, we defined wellness as delivering health of body to our customers. This time, we have declared that we will change into a wellness company that continues to provide the 3 values of health of mind, health of body and health of environment to our customers, employees and society. Next, efforts for becoming a wellness company. Here, I would like to explain the core efforts related to the health of mind and health of body of our customers. First, regarding health of mind. More so with COVID-19, we will work to better understand scientifically emotional values or a sense of happiness of products that lead to better health of the mind, thereby improving customer satisfaction. An example of this is the crisp texture as shown on the slide. Since there is a limit to such research work based on our own knowledge, we will actively promote collaboration with external research institutes. The second is the acceleration of health of body. In the midst of growing global trend toward improving health through food, we will accelerate growth by making in products a symbol of the wellness company. The third is the evolution from health of mind to health of body. We will continue to drive evolution by -- while preserving the product value work on adding positive elements and reducing negative elements. Including Confectionery & Foodstuffs and Frozen Desserts, Morinaga has always been contributing to health of mind by providing emotional value, a sense of happiness, such as delicious, fun and healthy. As the times demand more, we will scientifically elucidate the source of its value and increase customer satisfaction by providing products that make people more happy. And of course, in the area of health of body, we will contribute mainly through in products, direct marketing so as to become a true wellness company. This is the basic idea for achieving the 2030 business plan. It boils down to what to concentrate on and which business to concentrate management resources on from the perspective of health of mind and health of body. I will explain in more detail later. We believe there is still room for improvement in terms of structural reforms, and it is essential to solidify the business foundation. And above all, for the realization of all of the above, it is very important to create a system that enables employees to perform vibrantly. We backcasted from what we want to be and formulated 3 basic policies and business plan. There are 3 basic policies. Let me explain each of them. For the optimization of business portfolio, we selected focused business domains. From the perspective of growth potential and profitability, we chose 4 businesses, in direct marketing, Frozen Desserts and the U.S. business. The graph shows sales over the last 10 years, although the in business declined due to COVID in the recent past, you can see steady growth in all of them. The 4 focused main categories that drive future growth accounted for approximately 40% of total sales on average during the period under 2018 medium-term business plan. We are aiming to raise this to 60% in 2030. The basic domain category for cash generation is the Confectionery & Foodstuffs business, domestic operating companies and Taiwan. The exploration and research domain category is overseas other than the U.S. and Taiwan and new businesses. This is also very important, and we would like to turn these into the focused domain category in 2030. Next is the structural reform for functional sectors and building of business foundations linked to business strategies. There are 4 categories: sales, procurement, logistics and manufacturing. There are still many things that can be restructured. And there are strategies on human resources, R&D, finance and DX. Investment will be required for R&D and DX. I will explain this later. And the third is promotion of diversity. When I became the President 2 years ago, I declared that the diversity will be at the center of the management strategy. And we established the promotion office right directly under myself. And we formulated diversity and inclusion policy and 5 guidelines. The purpose is to continue to create innovation through diversity and inclusion to continuously generate new values to respond to the expectations of our customers. So this is the entire picture of 2030 business plan. Now let me discuss 2021 medium-term business plan. Now this business plan is positioned as the first stage for attaining 2030 business plan. The theme is new foundation building for big leap. So this is the description of the image that I talked about. Now let me explain 4 focused domain categories. First is in business. State desired to be in 2030 is to become #1 brand among foods, supporting health of mind and body, pivoting around sports. The sales target for 2030 is JPY 50 billion. This is not just an extension of the existing business, but is a major target or plan based on the backcasting approach. The same way of thinking also applies to the other 3 focused domain categories. Now in business. Point one is the recovery and growth of in Jelly products. This is urgently needed. This applies to 2030 but also, this will be the key in achieving the third year target of 2021 medium-term business plan. There was a major damage from COVID-19, but we are starting to see the recovery. in Jelly in-store SRI data starting in April is showing the 40% increase as a market as a whole and in Jelly is recovering by 64%. This is close to the level of 2 years ago. So we think that this is a very encouraging data. The April was also under state of emergency, same as the year before. But we are seeing the major changes happening. We feel that in expanding the target and drinking scenes, we would like to take advantage of our #1 market share, brand capability and technological capability. Point two is growth of in Bar products. We believe that the needs for the protein is going to expand, so we'll be very much focused on this. And point three, which is new, is the new brands. As a symbol of Morinaga changing into a wellness company, we start to make efforts to create future foods by taking advantage of the in brand. I cannot talk about the specifics. But during the medium-term business plan, we would like to come up with something specific. And towards 2030, we would like to have a series of products. As for the investment of management resources, for the human resources, R&D and advertising, we will be making the very aggressive investments to enhance them. Next is direct marketing business. Next, the previous fiscal year, the collagen drink has grown by 14%. We are seeing the increase of the subscription customers steadily. State desire to be in 2030 is evolving into the health care business, supporting customers' wellness realization. The sales target is JPY 20 billion. The most important thing here is evolution of the existing business to grow the business with regular subscription service. [Foreign Language] is also increasing in terms of the number of customers steadily. And you see the digital marketing here, we would like to use the digital technology to maximize customer experience, service tailored to individual customers. Point two is creation of new business. By utilizing customer base cultivated in the mail-order business, we will explore new possibilities. In terms of the investment of management resources, the DX investment is important. As we build the foundation to utilize customer data, we will try to respond to the individual customers. Next is U.S. business. State desired to be in 2030, and is the growth of the U.S. business through expanding the Hi-CHEW brand and creating a Jelly drinks market. Sales target is JPY 30 billion. Point one is product acceleration of Hi-CHEW. Last fiscal year, we reached JPY 77.2 billion. The market share has exceeded 1%. But the number of SKU is less than 1/3 of our competitors. We are currently improving the brand lineup -- product lineup. The number of the stores carrying HI-CHEW has increased by 27% previous year, but there is much room for improvement. As for the medium-term business plan, the third year, our target is to achieve JPY 10 billion in sales. But based on the market share and number of the SKU and the percentage towards carrying our products, the JPY 10 billion is a traditional point. Point two, this is to be announced for the first time, is the creation of Jelly drinks market. We took time to conduct a consumer survey for the Jelly drink product developed for U.S., and we have had a good feedback to start this business. We would utilize the business foundation that we built with HI-CHEW to realize 2030 vision and change into the wellness company also in the United States. Originally, also in Japan, we launched these products in 1994. And with this type of package, there are no other functional energy products in the United States with a smaller volume. There are some baby food and medicine, but this is quite new. So this is a major challenge. But we did the same in Japan, and we have reached this growth. And actually, we are seeing good growth in Taiwan. So I think there is a huge potential depending on how we approach this. So during this fiscal year, we would like to start the sales. And first, it will be only for the limited area and the channels. The point three is the execution of the third area. In order to expand the U.S. business further, we are thinking of exploring the possibilities of the third product, following Hi-CHEW and Jelly drinks and others. And we'd like to utilize our differentiated products and product in the wellness domain. We'd like to start this during the 2021 medium-term business plan. We have felt the strength of Hi-CHEW in the United States, and we feel the potential in U.S. So we will be aggressively investing our management resources. Next, Frozen Dessert business. This was the basic domain category until now, but this is now focused domain category. As you saw in the graph, we saw the major growth in the past 10 years. And also the market environment is changing, the market is growing. And also there is a potential global warming. And more importantly, the -- our uniqueness and differentiated products have been highly evaluated by our customers and our growth has exceeded the average of the industry. The state desire to be in 2030 is stably expand the Frozen Desserts business by concentrating on differentiated products that exploit the confectionery technologies. Sales target is JPY 50 billion. Point one is evolving of the freshness market, especially the Jumbo group. In the past 20 years, we have seen the increase of the sales of Choco Monaka, including Vanilla. We'll be expanding the target in sense of eating. And this would also contribute to the health of mind, as I mentioned earlier. Under point two, Ita Choco ICE, the grape and new are mentioned. By utilizing the confectionary material and the technology, we'll be enhancing our differentiated products. Point three is ICEBOX potential. We will be expanding the application of flavored ice product including for the professional use and create a new market. Investment of the management resources here is, first of all, the major investment for the Takasaki factory #3. And in order to enhance the R&D, we would also make investments. Next is the Confectionery & Foodstuffs business, one of the basic domain category. The state desire to be 2030 is change the category portfolio so as to build a high revenue base. Here, the target is operating income margin of 10%. Point one says, overall, in order to improve operating margin, the percentage of high profitability categories, including candy and biscuit, will be enhanced. Also, we have to consider the sales aspect by different channels. And as I have been mentioning in the past few years, in addition to the convenience store, we'll strengthen our efforts for the drugstore channel. As for chocolates, especially the Carré-de-Chocolat and Dars, we will secure the sufficient sales scale and have been working on the different channels and thinking about the acceleration of the new format. The Carré-de-Chocolat was not carried by the convenience stores, and we tried many times and we are starting to see some progress. And as for the biscuits and sugar confectionery, which we will expand from now on, because of the COVID-19, we saw the major growth of the biscuits sales. And we have decided to make the investment for production capacity increase for the Morinaga biscuits, including MOONLIGHT and the cocoa and Amazake Health brands will be also emphasized. Next is structural reforms, mostly on the functional sectors. There are 4 points in procurement. The premise on the sustainable procurement of raw materials, we will cap the rises in the percentage of raw materials costs through various measures. In manufacturing, we will start to turn our factories into smart factories with the digital and IoT technologies. This is in order to prepare for the labor shortage, which can be expected in the medium to long term. Now as for logistics, we are starting to consider the optimization of our logistics centers. Finally, the sales and marketing, we have conducted the reorganization in April. The changes in the market and the changes in distribution need to be considered, and we need to optimize the sales facilities. And strengthening the sales effort is also necessary. Next is the management foundation. I'd like to talk about R&D on this point. In order to realize 2030 vision, this is the most important aspect. And we'll be increasing our investments. New research center will be opened in 2022, strengthening the basic research, updating the important existing technologies and the wellness R&D, including the health of mind and global R&D tailored to local customer needs. All of those R&D activities need to be enhanced. Next is the financial strategy. This shows the cash allocation in order to execute the strategies that I have been explaining. This is something that we are explaining for the first time. The cumulative totals of the 3 years are shown here. Operating cash flow is about JPY 72 billion, which is much higher than JPY 54 billion of 2018 medium-term business plan. Cash out, the capital spending is about JPY 45 billion. Examples are shown here, the Frozen Dessert of Takasaki factory #3 new research center in -- and biscuit line in confectionery. The capital spending is JPY 39 billion in 2018 medium-term business plan. And in 2015, it was JPY 13.3 billion. So you can see, we are taking the measures for aging equipment and others to improve. But it also means that in the past, we could not secure the cash for those. As a result, 3-year cumulative total of depreciation cost is about JPY 33 billion and this fiscal year is JPY 10.6 billion. So coming 2 years, probably we'll be about the same level or a little bit higher than this. And shareholder return is over JPY 12 billion. We would realize a stable shareholder return with a dividend payout ratio of 30% as standard and stay conscious of the total shareholder return as well. And in realizing 2030 vision, the growth investment, we will be making those investments steadily. We will invest in the inorganic growth, such as tie-ups and M&A as well. We plan to be very flexible and proactive in doing so. In addition to the cash that we have, we will be also making the funding as needed. Next is business targets. Those are the numbers for the third year of the medium-term business plan. JPY 190 Billion in net sales; JPY 21.5 billion operating income, which is the -- exceeding the past record high of JPY 21.2 billion. Our plan is to increase the forecast domain sales ratio by 5 percentage points or higher. And for 2030, the JPY 300 billion in net sales and 3 KPIs are listed there. Operating income to net sales ratio of 12% or higher, overseas sales ratio of 15% or higher, focused domain sales ratio of 60%. Next is shareholders' return and dividend. This time, we plan to pay JPY 80 per share, JPY 80 increase. So this means that we are increasing the dividend for 6 years in a row. Lastly, is the sustainable management. And this was also part of the foundation of the overall 2030 vision. And we have declared that we will promote sustainable management. At top right of this slide, you see 3 values to provide, and health of environment to the society is what I'm talking about. We will be making contributions to realize sustainable society and work on ESG issues. About sustainable raw material sourcing, we already made a press release. And today, we announced our target of plastic use reduction in -- and by FY '30. As for the CO2 emission, I would like to reduce by 30% by FY '30 and zero-emission to be achieved by FY '50. As for strengthening of internal organizations, in April, we launched Sustainable Business Management Department. Morinaga is sustainable. Project to connect smiles to the future. This is also included in the purpose. Kyoro-chan of Chocoball is the ambassador for this. And we are distributing content from our website to let families enjoy thinking about sustainable. For sustainable management in order to realize the purpose and the 2030 vision, we have specified our 5 materialities, integrating financial and nonfinancial management challenges. And in September this year, we plan to publish more in our group's integrated report. Now it is a 2021 medium-term business plan. Due to the major investment that we made in the past several years, the operating income is under pressure. And in order to realize 2030 vision, we'll be taking the various initiatives. And we'd like to make sure that we grow our EBITDA while making steady investments. In the third year of this business plan, we would like to achieve the highest operating income. So I think that these are the years of kind of a preparation for the further leap or further growth and capital expenditure to rebuild domestic production has already reached its peak. And I'm sure that the changes in the environment will continue. But toward the 2030 vision, we would concentrate the whole company's resources in achieving 2030 vision. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]