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

Hello, everyone. I'm Eijiro Ota. Thank you very much for taking time out of your busy schedules to attend our financial results briefing for the fiscal year ended March 31, 2022. First up, I'd like to talk for about 30 minutes. Our earnings were heavily impacted by the COVID-19 pandemic, and the figures could be set to be abnormal for some products. I think the figures may have made for unclear and ambiguous reading. Under these circumstances, I'd like to provide an analysis of results from the previous fiscal year, provide our earnings forecast for this fiscal year and in particular, explain our estimates for further increases in raw materials costs and how we intend to accommodate them. I'd also like to discuss the progress we've made in the first year of the period covered by the 2021 medium-term business plan with an emphasis on the measures we intend to employ going forward. First, here are the results for the fiscal year ended March 2022. Net sales increased JPY 13 billion year-on-year or 7.7% to JPY 181.2 billion. We chopped up further growth with sales recovering in all businesses from the COVID-19 impact last year. The sharp sales growth was particularly due to the strong recovery and rejuvenation of in Jelly products and brisk sales in the direct marketing and overseas segments. If we were to restate past figures in accordance with the accounting standard for revenue recognition that was first applied last fiscal year, this JPY 181.2 billion in net sales would mark a record high. Midway through last fiscal year, we added and aggressively increased our investments in advertising. In doing so, we were able to significantly boost our top line, which had struggled over the last few years. Next, operating income came to JPY 17.6 billion. This topped our initial forecast of JPY 17 billion that we announced in May last year, but fell short of November's upwardly revised target of JPY 18 billion. In terms of a year-on-year comparison, it represents a decline of JPY 1.5 billion, while the operating income margin was 9.8%. Profit attributable to owners of the parent rose JPY 14.3 billion year-on-year to JPY 27.7 billion. This amount was buoyed by extraordinary income generated from the sale of Morinaga Milk shares. At the very bottom is EBITDA, which came to JPY 27.7 billion. This too is a record high. The comparisons with forecast on the right-hand side of the table are based on the earnings forecasts we announced when selling off Morinaga Milk shares on February 28. Next are the factors driving change in operating income. The negative factors are in red at the top of the graph, while blue towards the bottom are positive factors. Firstly, the impact of skyrocketing raw materials costs tended operating income by JPY 1.93 billion despite our cost-cutting efforts. Higher depreciation amounted to JPY 2.12 billion. Advertising expenses and intangible investments together totaled JPY 1.77 billion. Coupled with distribution expenses and the other items below it, the total cost increase was JPY 7.7 billion. Even though the breadth of profit decline was narrowed by the JPY 13 billion net sales increase and product mix improvements owing to sharp in Jelly sales growth, operating income still declined overall by about JPY 1.5 billion. Here, we have listed the 4 main factors driving change in operating income when compared to our November forecasts. I discussed the forecast shown in the middle of the table 6 months ago. First, raw materials. We expected a deterioration in operating income of JPY 0.91 billion in November, but it ultimately worsened to JPY 1.93 billion. And this basically means raw materials prices dented operating income by JPY 1 billion, more than we expected in the space of less than 6 months. Also 1 year ago, at the start of the fiscal year, we plan to recover the entire amount of negative impact stemming from higher raw materials costs. Much like the current year-on-year comparison over the full year, the raw materials impact on operating income deteriorated by about JPY 1.9 billion versus our forecast at the start of the fiscal year. Major factors included skyrocketing prices and foreign exchange movements leading to the weakening of the yen, and these had a more significant impact than the market expected. Depreciation decreased slightly from our November forecast. As for advertising expenses, as I explained 6 months ago, we carried out additional investments as planned in the focused domain of direct marketing, which continues to perform well. Over the full year, we ramped up our investments by JPY 1.35 billion from the previous year. Production efficiency had a stronger positive impact on profit than we were forecasting back in November. This was attributable to a recovery in Choco Monaka Jumbo sales and increased in-house factory production volume driven by brisk sales of confection food stuffs and frozen desserts in the fourth quarter. Next is net sales and operating income by business segment. This is the first time we have disclosed net sales and operating income under these business classifications. Looking at the table, I think you will immediately see that net sales increased in all businesses except for Confectionery & Foodstuffs. As for operating income, however, with the exception of the in business, all 4 domestic businesses posted year-on-year declines due to skyrocketing raw materials prices and higher depreciation and amortization. These declines were partially offset by positive results at domestic operating subsidiaries and overseas operations, but the consolidated total was still down year-on-year. This is also the first time we have disclosed operating income for the overseas business. It was only in fiscal 2019 that the overseas business overall as well as the U.S. business went into the black for the first time. While over the last 2 years, the U.S. and overseas business overall have now locked operating income of JPY 1.4 billion and JPY 1.8 billion, respectively. Earnings have certainly been boosted by exchange rates and a weaker yen, but there is no denying that the contribution from the overseas business last fiscal year was very considerable indeed. This slide shows a graph of changes in our operating income by business segment. As described in the comment at the top of the slide, significant contributions to operating income came from the in business and the United States as well as the recovery from the pandemic in earnings at domestic operating subsidiaries and Stella, Morinaga Shoji and the Morinaga Market Development. On the other side of the coin, there were mark declines in operating income, in Confectionery & Foodstuffs and Frozen Desserts because those businesses bore the brand of surging raw materials costs and higher depreciation. With these next few slides, I'd like to focus on results in the domestic and U.S. markets. These graphs show year-on-year comparisons across all 4 quarters. Domestic data is based on SRI data. First, HI-CHEW sales of which were hard hit by the pandemic, the year before last. As you can see, with the April through March cumulative sales value comparison with 2 years ago, HI-CHEW and the sugar confectionery market as a whole have yet to recover to pre-pandemic levels. However, despite sales struggling over the full year, both the sugar confectionery market and HI-CHEW returned to positive year-on-year growth in the third and fourth quarters, thereby pushing full year sales growth back above the year earlier level. And even though tough conditions persisted overall, we came up with various ways to drive brisk sales of 12-piece HI-CHEW, including 12-piece packs of the new Suppai Chew and Umai-Chew products, which you can see pictured on this page. According to SRI data, full year sales of the 12-piece packs were up 12% year-on-year. Next, let's take a look at biscuits, sales of which was strong the year before last, on the back of stay-at-home demand during the pandemic. As you can see, with the April through March cumulative sales value comparison with the last 2 years, sales of Morinaga Biscuits and the overall market have been brisk. Next, let's look at chocolate. As you can see, with the April through March cumulative sales value comparison with the last 2 years, the market overall and Morinaga have really been struggling. Over the full year, Morinaga sales struggled more than the broader market, but then outpaced the market average in the fourth quarter. 6 months ago, I mentioned the first revamp for DARS in 20 years. We also made marketing strategy changes for Carré-de-Chocolat. These initiatives helped chocolate sales recover in the fourth quarter. Fourth quarter shipment data also revealed that shipments rose 8% year-on-year for dollars and 2% for Carré-de-Chocolat. Next, the focused domain of Frozen Desserts. In the year before last, sales of Morinaga's Frozen Desserts strongly outpaced the market and then cleared that hurdle again last year with year-on-year growth of 1.9%. And thus posting sales higher than the overall market for 2 consecutive years. Also, despite rebounding in the second half, sales of Choco Monaka Jumbo unfortunately fell short of the year earlier level, thus ending its 20-year long streak of year-on-year sales growth for a single SKU. Our shipment data point to an 8% year-on-year decline in the first half and a 7% increase in the second half. Shipments increased very significantly in the first half of the year before last, on the back of COVID-19 stay-at-home demand, which explains the year-on-year shortfall in the first half. In the second half, shipments were up versus the same period of the previous year but down 3% year-on-year over the full 12 months. Next, another focused domain in Jelly. In April and May of the year before last, in Jelly sales slumped to around half of the year earlier levels but have since recovered strongly. According to SRI data they are back to levels above the year before last. Our shipment data too indicates that full year figures for in Jelly overall are above the levels seen 2 years ago up 22% year-on-year and up 3% versus the year before last. Next, let's look at another focus domain. The direct marketing business. In the second half of last fiscal year, we spent more money on advertising in a bid to gain more subscription customers. And as we anticipated, this initiative did attract more subscribers which subsequently drove brisk sales all year for both Morinaga Collagen drink and Morinaga Aojiru. This time around, we have included a comparison with the market as a whole. I think you can see that our sales figures are solid when compared to the average for health food products in the direct marketing channel. Moving on to HI-CHEW in the U.S. market. Foreign exchange rates also contributed, but net sales have already topped JPY 10 billion, 2 years ahead of schedule. The brand recognition rate currently stands at 48%. And up by more than 10 percentage points from 3 years ago. Another way of looking at it is that we are still only at 48%. So we think there is still plenty of more room for growth. Also, the store stocking ratio per SKU is above 70%, up by more than 15 percentage points from 3 years ago. Usually, store turnover turns downward slightly when the store stocking ratio increases, but store turnover is also healthy and holding steady. The sales value share is still only just above 1%. So we believe there is still a lot of growth potential in the product. We have included comparisons with 3 years ago for all of these metrics to give you an idea of how steadily and stably HI-CHEW is growing in the U.S. market. America's non-chocolate candy market is roughly 4x the size of Japan. We will push ahead with confidence in order to sustain the strong growth of the HI-CHEW brand realized thus far in the United States. Next, our balance sheet at the end of March 2022. This fiscal year, we endeavored to reduce our cross shareholdings, including selling off shares in Morinaga Milk. As a result, our cross shareholdings as a percentage of consolidated net assets as of the end of March dropped below the 10% mark to 8%. We are also planning to buy back shares worth up to JPY 10 billion over a period of 12 months. We have already made steady progress acquiring JPY 1.3 billion of shares in March and JPY 1.7 billion in April. Next up, our key business indicators. The third year targets in our 2021 medium-term business plan for overseas sales ratio and focused domain net sales ratio both of which are indicators of growth potential and business portfolio realignment have been achieved 2 years ahead of schedule. Profitability is lagging slightly with our operating income margin dropping below 10%, but we have managed to keep ROE above our medium-term business plan target at 10.1%. And which is calculated after stripping out the impact of the extraordinary income from the sale of Morinaga Milk shares. Next, let's turn to our results forecast for this fiscal year. ending March 31, 2023. Our basic approach has 3 components. The first 2 remain unchanged from when we unveiled our 2021 medium-term business plan 1 year ago. But we now intend to implement a wide range of measures to address the sharp and significant increases in raw materials costs, including price increases and doubling down on reducing the cost of sales, streamlining operating costs, and scrutinizing investment efficiency. Here are results forecast for this fiscal year. We are targeting net sales of JPY 190 billion, an increase of JPY 8.8 billion from last fiscal year. This would mark record-high net sales which incidentally is the net sales target for the final year of the 2021 medium-term business plan. So we are planning to achieve it 1 year ahead of schedule. We are targeting operating income of JPY 16.5 billion, a decrease of JPY 1.1 billion from last fiscal year. and profit attributable to owners of the parent of JPY 10.7 billion. The profit decrease here owes to the selling of Morinaga Milk shares. For reference, we have also included our EBITDA forecast at the very bottom. Next, the factors behind the change in our full year operating income forecast. We estimate a negative impact of JPY 4.3 billion from higher raw materials costs and ForEx impacts based on our assumptions for cost increases over the full year at an exchange rate of JPY 128 to the U.S. dollar. We also forecast utility and energy cost increases to the tune of JPY 0.4 billion and JPY 0.91 billion full year increase in advertising expenses. As we work towards achieving our 2030 business plan, we intend to ramp up advertising spending in our focused domains. In particular, we will continue to spend on advertising for the in business, which I will explain in more detail later. We think depreciation expenses will come to around JPY 0.6 billion, but we hope to offset this with price increases and higher net sales. All up, we are forecasting a year-on-year operating income decline of JPY 1.1 billion. On to the next page. Here, we've included a slide detailing our plans for price increases. Overseas, we've already carried out price increases in the United States in December. You can see the details of the price increases in this table. Next, I will discuss the details of our capital investment. We will continue to aggressively make capital investments with the aim of achieving the 2030 business plan targets. A year ago, when I was discussing the 2021 medium-term business plan, I explained that we were planning approximately JPY 45 billion in capital investment over the 3 years covered by the 2021 medium-term business plan. And this plan has remained basically unchanged. As I mentioned a moment ago, amid the significant changes in the business environment, we will examine the investment efficiency of our investments even more thoroughly and make revisions as appropriate for each investment. However, on the other hand, there is a possibility that we will make additional investments in other highly important projects centered on our focus domains. This slide shows the main capital investments we will make during fiscal 2022. These are the earnings forecasts by business segment. Regarding sales, we are forecasting an increase in net sales, both in Japan and overseas in all businesses. In terms of profits, we are expecting a decline in operating income in the in business, but this is due to the impact of strategic investments in branding and advertising. We are also forecasting a significant increase in net sales in the U.S. business, but raw materials costs are increasing in the United States as well, which will affect profit. We plan to continue to invest aggressively, targeting further growth for Chargel and HI-CHEW. As a result, we are expecting a small increase in profit for the entire U.S. business. This graph shows our earnings forecast figures by business. All of our businesses are being impacted by soaring raw materials costs. Please take a look at the details. Next, I will discuss shareholder returns. This will be formally decided at our general meeting of shareholders, which we will hold in June, which we are planning to increase our dividend by JPY 10 per share to JPY 90, which will be the seventh consecutive fiscal year of a dividend increase. I have also included our forecast for this fiscal year on this slide. We are also planning to execute a share buyback, and we have included the amount for that as well. There has been no change to our basic line of thinking, which is to continuously and stably deliver shareholder returns. And this time, we have included DOE figures as well. Going forward, we will strive to raise the level of DOE over the medium to long term. Also, we will keep an eye on the total shareholder return ratio and consider flexibly carrying out share buybacks as needed. That concludes my explanation about last fiscal year's results and our forecast for this fiscal year. From here, I will discuss our progress on and outlook for implementation of the 2021 medium-term business plan. The biggest point is we look to achieve the targets of the 2021 medium-term business plan and the 2030 business plan is the transformation of our business portfolio. We have selected 4 focused domains, and our target is to increase the weighting of net sales in these focused domains to 60% by 2030 by realizing dramatic growth. through the aggressive investment of management resources. In year 1, each focused domain performed well. We were able to significantly grow the top line in each domain, and the annual weighting in fiscal 2021 was 48.8%. The average during the 3 years covered by the 2018 medium-term business plan period, was 42%. So it increased by 6.8%. And the 2021 medium-term business plan target was achieved 2 years ahead of schedule. Total net sales in these 4 businesses increased 14% year-on-year, rising by JPY 11 billion. A moment ago, I mentioned that consolidated net sales increased by JPY 13 billion. So JPY 11 billion of this increase or 85% was from net sales and focus domains. I would now like to briefly discuss each of these 4 businesses. I will start off with the in business. This slide shows the achievements in fiscal 2021 and the key points for fiscal 2022. I will refrain from talking about the achievements in fiscal 2021 in detail as I just discussed them. One thing I'll mention, though, is the purchase rate for in Jelly, which is shown in the middle. This topped 14%, setting a new record high and surpassing the pre-pandemic level. There was certainly some demand from people who didn't feel well after receiving the COVID-19 vaccine, and there has been a definite increase in the number of people who drink this product. At the results briefing 2 years ago, I spoke about how the COVID-19 pandemic had resulted in a dramatic decline in opportunities for people to drink this product as fewer people were commuting to work or school or otherwise moving around. Since then, we have made a lot of effort to increase the opportunities for people to consume in Jelly as well as to widen the target consumer demographics. Our efforts, including the increase in advertising and efforts to enhance the products can be seen in the results. I feel that the increase in the number of people out and about has also been a major factor. Next, I will discuss the key points for fiscal 2022. We will work on new branding initiatives, which is also one factor behind our forecast for a decline in profit. Specifically, we will bolster our efforts to make the in brand a symbol of our fresh start as a wellness company and strengthen our initiatives to tie the in brand to the Morinaga corporate brand. Also, we will expand the scope of target consumers as we accelerate the growth strategies. One of the images on the slide is of a fruit jelly product, which we have launched, aiming to increase the number of female customers, and we have created a TV commercial for this. This product is currently enjoying strong sales. Regarding in Bars, this fall, we are planning to launch a product aimed at becoming the #1 protein bar in the market. Next, I will discuss the direct marketing business. We are forecasting that net sales in this business will exceed JPY 10 billion for the first time in fiscal 2022. In fiscal 2021, we made significant additional advertising investments in both Morinaga Collagen drink and Morinaga Aojiru, which led to an increase in subscription customers as we had expected. In terms of selling the seeds for longer-term growth, as noted on the slide, we entered from the powdered collagen business. Key points of fiscal 2022 include continuing to expand the business scale as well as upgrading our systems. For starters, we will integrate and utilize our direct marketing customer data. In the future, we intend to build a customer data platform that extends across all of our businesses. Next, I will discuss the U.S. business. In fiscal 2021, we achieved net sales of JPY 10 billion, which was 2 years ahead of schedule. The foreign exchange rate had an impact. So we have also shown net sales on a U.S. dollar basis below the Bar graph. I've already talked about the achievements through fiscal 2021. The key points for fiscal 2022 are further sales growth and business growth, and we have set a net sales target of JPY 14.4 billion. This year, we established a local R&D center, and we have sent researchers from Japan to work there. Also, based on the strong sales of HI-CHEW, we have started to consider bolstering production capacity in the United States. In terms of products, at our briefing 6 months ago, I talked about product development focused on health. As planned, we have added 5 more SKUs centered on products with a focus on health. Lastly, I will discuss Chargel jelly drinks. This February, we launched sales of our e-commerce site, and we are now ready to make a full-fledged start. There are no jelly drinks of this type in the United States market. So we will work steadily on nurturing the product. I think I will be able to discuss this in a little bit more detail at our next briefing. Next, I will talk about our fourth and final focus domain, which is Frozen Desserts. This focus domain has been growing significantly in recent years. even compared to our competitors. As has been mentioned already, in terms of upgrading the production platform, Takasaki Factory #3, full scale is now fully operational. Also, as I briefly mentioned earlier, Choco Monaka Jumbo saw a decline in sales in fiscal 2021, but the purchase rate was a new record high. This number includes Jumbo group, which includes Vanilla Monaka, but Choco Monaka itself also marked a record high. Sales of winter-only Jumbo group products was strong and contributed to net sales in the fiscal second half. In fiscal 2022, we will work to successfully increase prices as a measure to counter the surge in raw materials prices. Also this year, we will celebrate the 50th anniversary of the launch of Choco Monaka Jumbo. We used various communication strategies to create buzz. And although the record of 20 straight years of increasing sales came to an end, we will now embark on a fresh start. We will also work to further grow Ita Choco Ice of our next pillar, switch to full year sales of the [ grape ] and [ sell the seeds ] for medium- to long-term growth. I will now discuss the basic domain of the Confectionery & Foodstuffs business. In terms of profits, it is an extremely challenging environment due to surging raw materials prices and an increase in depreciation costs. In fiscal 2022, the keys will be to respond with price increases and boost the ratio of sales of profitable biscuits and candies. Looking at chocolate, particularly DARS and Carré-de-Chocolat, we revised the marketing last fall, which led to signs of a recovery, as I mentioned just a moment ago. So we will move this forward even more. On the manufacturing front, we have got started on structural reforms and will continue to carry out a variety of initiatives. Next, I will discuss R&D and digital transformation, which are business foundations for us. One of the 3 basic policies in our 2021 medium-term business plan is constructing a management base linked to business strategy. And last year, I spoke about strengthening our R&D capabilities. As you see here in the photo, our R&D center was completed in April and is up and running. I don't have enough time today to talk about this in detail but this slide includes some information about what we are doing to strengthen our initiatives. I will now move on to digital transformation. Last year, I spoke about how we would invest 40% more during the period covered by the 2021 medium-term business plan. The second bullet point on this slide is about our effort to revamp our direct marketing system, as I discussed earlier. With respect to the fourth bullet point, this incident caused some concern. We will further bolster security measures to mitigate the risk of information leaks from unauthorized access and the like and put in place a stringent information management system. We will look to enhance medium- to long-term corporate value by continuing to invest in intangible assets. Aiming for sustainable management last September, we issued our first integrated report, which includes both financial and nonfinancial information. In this report, we laid out our 5 top priority material issues. Developing full-fledged sustainable management is also a key theme as we strive to achieve the aims of the 2030 business plan. I would like to provide an update on our sustainability information. We were recently awarded a medal of honor for our One Chocolate for One Smile campaign, which we have been implementing continuously since 2008. We have also implemented a new measure inside the company. In line with increasing the level of engagement by our employees, this April, we introduced a side job system as well as volunteer leave to enable a wide range of personnel to play active roles. With respect to environmental conservation, we have endorsed the recommendations of the TCFD as we announced in our April 26 news release. Currently, we are identifying climate change-related risks and opportunities and conducting scenario analysis in accordance with the TCFD recommendations. In terms of human rights, we became a signatory to the United Nations Global Compact as we announced in the news release on April 27. We will consider implementing initiatives in line with the United Nations principles. We also established a Sustainability Advisory Board. By having 3 outside experts whose photos as shown on this slide, sit on the Board we will be working on improving the quality of our sustainability management. This slide shows Morinaga Angel Museum, Morium. The opening was delayed due to COVID-19, but the museum formally opened in January. The displays and visual content allow visitors to experience firsthand Morinaga's approach to our products, our technologies and our history. I certainly hope you will all take the opportunity to visit the museum. This is the final slide. Last year, we formulated a medium- to long-term plan for the first time and announced our 2030 vision and 2030 business plan. The first stage year 1 of the 2021 medium-term business plan has ended. As I discussed a moment ago, net sales reached a record high and we are expecting to achieve the targets for the final year of the 2021 medium-term business plan 1 year ahead of schedule. In addition, we have achieved the sales weighting target for focus domains, 2 years ahead of schedule, and have also achieved our target for the U.S. business, 2 years ahead of schedule. Overall sales have also been strong, outpacing the 2021 medium-term business plan targets. However, on the profit side, we are forecasting a challenging situation due to the impact of the larger-than-expected surge in raw materials costs. This fiscal year, in addition to flexibly and appropriately increasing prices, as I discussed earlier, we will continue to work diligently to lower the cost of sales and streamline operating expenses. We will continue to pursue further growth in our focused domains. In addition to this, by undertaking a variety of measures, we are hoping to achieve our operating income forecast of JPY 16.5 billion this fiscal year as a minimum target. That concludes my presentation. The remaining slides of reference data. Please refer to them at your leisure. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]