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

Hello, everyone. I'm Ota. Thank you all for taking time out of your busy schedules today to attend our financial results briefing for the fiscal year ended March 31, 2023. As I explained a year ago in May, we were affected by a sharp increase in raw material prices and energy costs that were higher than expected during the fiscal year as well as the significant impact of foreign exchange rates. In terms of earnings, this was lower than the initial forecast and the previous fiscal year. However, in terms of sales, we were able to steadily increase the top line, mainly in focus domains and exceeded our forecast at the beginning of the period, achieving record high sales for the second consecutive fiscal year. As we will explain later, the effect of the price revision was more than planned, and we believe that the results were generally in line with our expectations. Today, I would like to explain the details of the previous year's results, the forecast for this fiscal year and the progress and outlook of the 2021 Medium-Term Business Plan as this is the final year. First, here are the full year results for the previous fiscal year. Net sales were JPY 194.3 billion, an increase of JPY 13.1 billion over the previous year or 107.2% on a percentage basis. As commented above, the "in-" business, the U.S. business and Direct Marketing business, all of which are focused domains continued to perform well, recording record sales for the second consecutive year and achieving the sales plan of JPY 190 billion for the current fiscal year. The final year of the 2021 Medium-Term Business Plan, 1 year ahead of schedule. The contribution of this revenue increase was so large that the 2.4 percentage point deterioration in gross profit due to the soaring cost of sales was offset by a JPY 13.1 billion increase in revenue, resulting in a JPY 0.8 billion increase in the gross profit level. However, operating income decreased by JPY 2.4 billion due to a strategic increase in intangible investments such as advertising and R&D in order to achieve the 2030 vision. Since operating income at the beginning of the period was JPY 16.5 billion, it was about JPY 1.3 billion less than the forecast at the beginning of the period. And the first right, the forecast comparison, this is a comparison of the figures announced in February when Q3 was disclosed and the figures were higher than expected, but Q4 results were better than expected. These are the numbers for that Q4, and I have graphed the trend in quarterly earnings. In Q4, overall sales were up 109% from the previous year with particularly large increases in Confectionery & Foodstuffs and Frozen Desserts sales, resulting in a JPY 1 billion increase in gross profit for the entire company. The gross profit margin on the right was also minus 1% from the previous year. And since it was minus 2.4% for the year just ended, you can see that the scope of the cost increase is also becoming smaller, although it is partly due to the effect of price revisions. The next factor is the change in operating income during the year. Factors contributing to the decrease in profit are shown in red and factors contributing to the increase in profit are shown in blue. Even with the inclusion of cost reduction efforts, the 2 top items, raw material prices and energy costs increased by approximately JPY 7.8 billion and advertising expenses increased by JPY 0.72 billion in Japan, including the overseas expenses. Total advertising expenses increased by about JPY 1 billion. As for the increase of JPY 0.54 billion in other, it includes R&D, personnel expenses, et cetera. Including this, the red-colored portion is approximately JPY 9.2 billion. The effect of price revisions is JPY 3.53 billion, which is an increase of JPY 0.66 billion from the JPY 2.87 billion forecast at the beginning of the period. There was additional revision. The sales increased below that was more than planned at the beginning of the fiscal year but even with all these could not cover the negative factors, resulting in a decrease of approximately JPY 2.4 billion in profit from the previous year. As I have included in the bottom column, the actual exchange rate for procurement in FY 2022 was JPY 128 per U.S. dollar compared to JPY 109 in the previous year, which means a significant depreciation of JPY 19 per U.S. dollar. Next, we produced quarterly coverage rates based on the effects of price revisions and revenue increases. This is an updated version of the material that was released at the time of Q3 earnings disclosure in February. Looking at Q4 alone, we were able to offset cost increases with price revisions and revenue increases. And as you can see, we have been able to beat back against cost increases as the quarter progresses. Next, we summarize the topics of the domestic and U.S. markets over the past year, including the post price revision situation from here. For Japan, SRI data and over-the-counter year-on-year comparisons are graphed by month. First, in the domestic confectionery and Morinaga Biscuits, the overall biscuits market continues to maintain the large expansion achieved by the pandemic. The red line shows that in Q1, there was a supply-demand adjustment due to the expansion of production lines, and the price revision in June caused a large drop, but the market has recovered since August and has greatly exceeded the market growth since September due to the launch of new products and advertising investments. On an annual basis, the market as a whole was 102.6% and the company's performance was 103.9%. Next is HI-CHEW. The candy market as a whole was depressed by COVID-19, but has been recovering with overall market growth of 109.3% for the year, nearly double-digit growth. HI-CHEW has also continued to do well since the year before last with 2 price revisions in July and March and the various tricks have also been effective. Next are Carré de chocolat and DARS. H2 was on par with the previous year, but the chocolate market as a whole was at 98% of the previous year's level, and the year included a particularly challenging trend for pure chocolates. In this context, we implemented price revisions during the year to improve the profitability of both Carré de chocolat and DARS. While the month-to-month variation, sales is significant, the annual results show that we have struggled in both cases and less than 95% year-on-year in SRI for the year. In terms of shipments, a DARS was 100% of the previous year's level and 94% of the previous year's level for Carré de chocolat. Next, Frozen Desserts. The market as a whole was strong with the overall market as 101.6% year-on-year, and our company marked by red line was 104% year-on-year. We have also revised our prices of frozen desserts twice in June and March, and they have remained steady without being significantly affected outpacing the growth of the market as a whole. The same view right is of Choco Monaka Jumbo and Vanilla Monaka Jumbo. Choco Monaka Jumbo has been sold steadily since the price revision, thanks to the promotion of the 50th anniversary of the product's launch. In this SRI, 102.3% and shipments exceeded those of the previous year. However, Vanilla Monaka Jumbo has been struggling with the SRI annual total at 91% of the previous year's level but it has been on a recovery trend since the March price revision. Next, are in Jelly, Direct Marketing and HI-CHEW in the U.S. in the area of focus. This graph shows that the jelly beverage market and in Jelly continue to be strong with roughly the same transition. During the year, the overall market was 115% and in Jelly was 113%. Next is Direct Marketing, which continues to grow much faster than the mail order health food market with the number of regular customers steadily increasing for both Morinaga Collagen drink and Morinaga Aojiru and strategic advertising investments are also paying off. Finally, there is a U.S. HI-CHEW. Although the second price revision was implemented in the previous fiscal year in last November, it has remained above the overall market average, which is strong. As mentioned above, price revisions vary from product to product, but the total progress is favorable. Although additional revisions were made in March, looking at the SRI data for April, it can be said that at this point, the trend is in line with our expectations. Next is a summary of the full year results by business segment. In terms of sales, all divisions achieved an increase in revenue. The colored figures show that the focus domains of "in-" Direct Marketing and the U.S. business stand out but the business subsidiaries that were greatly affected by the pandemic, which is shown under Direct Marketing, such as Aunt Stella Inc., Morinaga Shoji Co., Ltd., Morinaga Market Development Company Ltd. and others are also making a comeback. In terms of profit, Confectionery & Foodstuffs and Frozen Desserts saw a significant decrease in profit which was largely affected by the sharp rise in raw material prices. Next, the last part of the explanation of the previous year's results -- the topic of the balance sheet at the end of the period is the reduction of net cash. The implementation of a cost-of-capital-conscious financing strategy has resulted in a significant reduction in net cash, minus JPY 29.3 billion. As I explained 6 months ago, we issued a Sustainability bond, contributed funds to the retirement benefit trust and repurchased and redeemed shares to enhance shareholder returns. Forecast for the fiscal year ending March 31, 2024. It states the recognition of the business environment and our basic approach. This fiscal year is the final year of the 2021 Medium-Term Business Plan, the first stage towards the realization of the 2030 business plan. The changes in the external environment shown to the right, especially the sharp rise in raw material prices and the increase in energy costs have greatly exceeded the assumptions made when the 2021 Medium-Term Business Plan was formulated. We would like to counteract that through various 6 initiatives as described below. The outlook for the harshness of the external environment is quite uncertain, and we are making plans based on the expectation that headwinds will continue in the current fiscal year but we intend to continue strategic investments for the medium to long term. And it is in this context that we make our forecast for the current fiscal year. We hope to achieve JPY 204 billion in net sales, an increase of JPY 9.7 billion year-on-year, a rate of 105% and a record high net sales for the third consecutive year. Operating income is projected at JPY 17.3 billion, up JPY 2.1 billion year-on-year and net income at JPY 12.2 billion, up JPY 2.2 billion. Next other factors that contribute to the increase or decrease in operating income in the annual forecast. For the year, we assume that raw material price hikes will still continue, including exchange rates. And these 2 factors including increased energy costs will increase by approximately JPY 6.7 billion, compared to JPY 7.8 billion in the previous fiscal year. What has gone up significantly is expected to go up even more, and it is not yet settled. The effect of the price revision and the increase in sales will almost cancel this out amounting to JPY 6.6 billion. And in addition, the effect of the increase in profit from the U.S. business, the second item from the bottom will amount to JPY 1.7 billion, resulting in a total projected increase of JPY 2.1 billion. Advertising investment in the 4 domestic businesses alone is minus JPY 0.28 billion per year. But if we add the overseas businesses, advertising expenditures for the entire company will be plus JPY 0.3 billion. The exchange rate was JPY 133 to the U.S. dollar in the current period and JPY 128 in the previous period. We expect a JPY 5 depreciation. Next is an annual forecast summary by business segment. We plan to increase sales and profits in each of our mainstay businesses and operating subsidiaries with particularly large gains in our U.S. business. As for the U.S. advertising expenses will increase. The effect of the substantial increase in sales and the 2 price revisions in the previous fiscal year will be significant. Next, I would like to discuss shareholder returns. For financial year 2022, we plan to increase the dividend by JPY 10 to JPY 100 per share, which will mark the eighth consecutive year of planned dividend increases. Also, as you can see there, the total of JPY 15.8 billion including JPY 11.1 billion for share buybacks is the largest shareholder return ever. And now at the time of our earnings forecast, we also announced perhaps for the first time for our company, an increase in the dividend for financial year 2023. Our policy is to raise the level of DOE over the medium to long term and this is a statement of management's intention to achieve this goal. At the same time, the company also announced a JPY 5.2 billion share buyback. The company will continue to consider acquiring treasury stock as necessary and in a flexible manner, keeping in mind the total return ratio. Next, we will review the 2021 Medium-Term Business Plan, the final year, this fiscal year and its future. These are the sales and operating income figures projected for the current fiscal year, the final year of the 2021 Medium-Term Business Plan and a comparison with the Medium-Term Business Plan. We forecast net sales to reach JPY 204 billion, an increase of JPY 14 billion and well above the midterm target. But we forecast operating income of JPY 17.3 billion, a shortfall of JPY 4.2 billion due to soaring raw material and energy cost increases that were far above expectations. As shown on the right, the results for the 3 years of the 2018 Medium-Term Business Plan showed that although market prices rose cost reduction effects were also significant, resulting in a total of minus JPY 1 billion for the 3 years, which was a positive for profits. When we formulated the 2021 Medium-Term Business Plan in response to this, we assumed that the market would rise about JPY 0.5 billion annually, which we thought was within our ability to beat back. However, we were going to secure a certain amount of upfront capital to promote sustainable raw material procurement and in fact, although we did not announce it outwardly at the time, we assumed a level of several hundred million over a 3-year period. If this is the case over the next 3 years, as projected for the current fiscal year, the increase would be JPY 16.5 billion. Next, here are the figures for the main KPIs of the 2021 Medium-Term Business Plan. Both overseas sales ratio and focused domain net sales ratio greatly exceeded the target of the 2021 Medium-Term Business Plan in the previous fiscal year's results. Overseas sales ratio was 9%, while the previous year's result was 11.2%. Focus domain net sales ratio was plus 5 points, while the previous year's result was plus 7.8 points. However, operating income is unfortunately behind schedule and is expected to fall short of this year's plan. In addition, although we have not yet achieved ROE at present, we intend to achieve our target level of 10% in the current fiscal year of financial year 2023 with the will to do so. Next, I will now review and explain the future of each of our businesses, focusing on our focused domains. First, the "in-" business. In Jelly, sales during the pandemic in financial year 2020 declined sharply to the 80% level for the year, but in financial year 2021 and financial year 2022 a V-shaped recovery was achieved. And in financial year 2022, sales reached a record high of 114% compared to the previous year. Purchase rates are increasing and efforts to expand consumption scenarios and targets are working, resulting in new demand. In addition, in the previous fiscal year, special demand from COVID-19 and vaccines was added, and we expect the current fiscal year to be affected by this, but sales at convenience stores have been strong probably due to the recent recovery in human flow. Although special demand is disappearing, I believe that the number of active situations is increasing and there is a resurgence of human activity, including commuting to work, school and leisure activities. So I have high expectations for this area as well. Next is in Jelly's future growth strategy. We will continue to work on expanding consumption scenarios and targets in response to changes in the environment. As I explained earlier, in the short term, the special demand from the pandemic is disappearing, but I believe that there will be more scenes of revival. Also in the medium to long term, there are various mechanisms to the right of that, which I explained to you 6 months ago. We will continue to do various things, although some of them are still in the testing period. Next is the development of the "in" brand outside of in Jelly. First of all, the in Bar business struggled in the last fiscal year amid intensifying competition. And as you will see in the reference material that follows, annual shipments were 93% of the previous year's level. We believe that the need for protein and simplified food will continue to grow in the future, and we will aggressively develop both products and promotions with the aim of making a comeback in the current fiscal year. As you can see a photo there, there is a great deal of talk about the use of Nootbaar an MLB player in the commercial. We will use that as an opportunity to re-expand this bar as well. We are also working on the creation of new foods as you can see on the right side, we have released 2 products which are still in testing, and we are working on other themes. As you can see below, in order to strengthen the relationship between Morinaga and the "In" brand, we have strategically increased advertising since the previous fiscal year and have been promoting the product through TV commercials and other means. Next is Direct Marketing business. Here, too, we have been strategically increasing advertising input in the last quarter in an effort to acquire subscription customers. As a result, sales growth of both Morinaga Collagen Drink and Morinaga Aojiru have exceeded plans. Direct Marketing business is directly connected to our customers, and in a sense, is a very important business. In the previous fiscal year, we revamped our direct marketing system to strengthen our ability to respond to each individual customer and we are currently developing a data utilization platform for this purpose. The lower right-hand corner shows initiatives for further business expansion which include overseas expansion of collagen drinks, mainly in China and Thailand at the moment. We are also working on expanding into areas other than Morinaga Collagen Drink and Morinaga Aojiru in the Morinaga Direct store. We will also consider alliances and M&A in the search for inorganic growth. Next is the United States business which continues to perform well. In the 2030 business plan, we set the U.S. as a focused domain and concentrated investment in the U.S. to aggressively develop the business and sales in financial year 2022 reached JPY 14.6 billion. The original target for the current fiscal year, the final year of the 2021 Medium-Term Business Plan was JPY 10 billion in sales. So I think it is fair to say that sales have grown much faster than expected, in part due to the exchange rate. Because of the recent large fluctuations in exchange rates, the graphs here are sales trends in local currency and U.S. dollar terms. In the previous fiscal year, in yen terms, we achieved 138.9% compared to the previous year, as shown on the right. In U.S. dollar terms, we achieved 121% and we plan to achieve 127% this fiscal year as well. With a current market share of only 1.24% and an awareness rate of only 51% we believe we can continue to grow significantly in terms of various indicators. In addition, as you can see there, the store stocking ratio has expanded and store turnover continues to be strong. For the United States, we will continue to accelerate the growth of HI-CHEW and create a market for Chargel toward 2030. For HI-CHEW, we will further strengthen sales and marketing, strategically implement advertising, et cetera, and increased advertising expenses. We will also increase production lines in Taiwan and export products from plants in Japan. In April of this year, we established the HI-CHEW Global Promotion Office at the head office, and we are now examining the protection system from a global perspective. As for Chargel, we are not at the stage of presenting numbers or results yet, but we are getting a good response from the sampling and other activities. Japanese supermarkets, mainly on the West Coast are beginning to carry the product, and we have high expectations for the future. HI-CHEW also started out from Japanese supermarkets and over time, has come this far. We will continue to make various efforts to steadily penetrate Chargel as well. Also, as for the exploration of a third arrow, we are not at the stage of being able to announce it yet. But we hope to make a start on this by the end of this fiscal year. Next is Frozen Desserts business. This graph shows the growth rate of the moving annual total when April 2019 is set at 100 in the SRI data, and we are well above the market average, rising to fourth place in market share this past March. More than a decade ago, we were the seventh largest manufacturer. So the leads we have made in the past few years have been remarkable. By the way, this graph comparing April 2019 to March of this year shows that our company grew 131% compared to 103% for the market as a whole. However, in the past 2 years, Frozen Desserts business has been greatly affected by the sharp rise in raw material prices. And in percentage terms, the impact has been the highest among the businesses. In this context, we implemented 2 price revisions in the previous fiscal year and have been working to improve profitability. Next, is the freshness marketing of the Jumbo group. Last year, our 50th anniversary efforts were effective in increasing revenue. And this year, we have a new quality improvement. Under this, we hope to revive the Vanilla Monaka Jumbo, which struggled last year by running TV ads for the Vanilla Monaka Jumbo product alone this year. Below that, we described the acquisition of customers in peripheral markets and the creation of new markets. The initiatives for Ita Choco Ice and The Crepe and the challenge for ICEBOX liquor splitting material. As you can see a photo of a pancake we will also take on the challenge of developing frozen food products. Next is the Confectionery & Foodstuffs business, which is a basic domain. The Confectionery & Foodstuffs business has set a profit margin target for 2030. And this time, it has been most affected by the soaring raw material prices in terms of amount. In the previous fiscal year, we tried to recover by revising the prices of some products twice, but we were not able to cover the cost and the profit margin was in the 2% range which is a very difficult situation. There, I explained that we will increase the sales weighting of biscuits and candies to improve the profitability of the confectionery business in the 2021 Medium-Term Business Plan. And this 3-year comparison shows that as a result, financial year 2022 is up 3 points compared to financial year 2020. There is also a graph of the change in SRI data with April 2019 as 100, which shows that both categories have outpaced the growth of the market and increased their market share. As for chocolates, both DARS and Carré de chocolat have been working to improve profitability through price revisions in the previous fiscal year but sales are still struggling to break out of this difficult situation. We will be making a drastic strategic and tactical review this fall in order to re-expand. Under this, wellness products, we are planning to develop new high value-added products, which we believe are also very important initiatives for 2030. The following is a description of the wellness product development in its Confectionery & Foodstuffs business. I will not explain each one individually but all of these will also contribute to improving the profitability of the Confectionery & Foodstuffs business as high value-added products. We hope to make it bigger towards 2030. I included 2 slides a handout on Health of Mind. We have explained several times about the 2030 vision there, which is to change into a wellness company, and some have pointed out that definition of Health of Mind is difficult to understand. We have defined the definition of Health of Mind, Kokoroku and are conducting seminars to disseminate it throughout the company and have started efforts to improve employee engagement. First, it is important to understand empathize and personalize within the company. We have also started contributing to businesses. One example of which is the start of Jumbo Smile project. We will promote this to our customers by communicating information about our effective research on crisp textures and will develop other activities aimed at creating ice cream that brings smiles to everyone's faces. Next is the financial strategy and cash allocation. The left graph shows the 3-year plan of the 2021 Medium-Term Business Plan, while the right graph shows the forecast with the current fiscal year's estimates. As for capital investment, this is discussed on the next page. We plan to return JPY 30.9 billion to shareholders over the 3-year period, an increase of JPY 18.9 billion over the plan and far exceeding the Medium-Term Business Plan. Next, we look at capital expenditures and depreciation. The construction of the new head office building in Shibaura was not included in the plan of the 2021 Medium-Term Business Plan but other capital expenditures were carefully scrutinized and reviewed and excluding the construction of the head office building, capital expenditures decreased compared to the plan. On the lower right-hand corner, this is the first time we have produced the depreciation to sales ratio. The rate is declining as the top line of sales is rising. Next is the progress of and outlook for intangible investments. First of all, advertising expenses were planned to be 10% higher than in the 2018 Medium-Term Business Plan, but we now expect to increase this by 19%, accelerating growth in focused domains and strategically investing in these areas. Also for R&D, we expect an increase of JPY 2 billion from the 2018 Medium-Term Business Plan instead of JPY 1 billion double the amount of the plan. We have also established a new R&D center. And as described there, we will make various efforts toward the realization of a wellness company as well as a global company. Then there is DX. This was 1.42x the plan compared to the 2018 Medium-Term Business Plan which is expected to be 1.1x the plan. We are promoting a variety of initiatives to improve operational efficiency, to improve profitability, including the Smart Factory initiative. I think it is fair to say that we were not able to invest in DX as planned. But as a whole, we invested strategically and with will in a very difficult environment to realize the 2030 business plan. Next, we included 2 slides related to sustainability. Left, I explained that sustainable management is at the bottom and foundation of the 2030 business plan. We have identified both purpose and financial and nonfinancial materialities to realize the 2030 vision and are implementing various initiatives based on them. We plan to disclose our performance against materiality in the integrated report to be issued in September. But today, I have included 2 updates on sustainability information on the next page. Promoting health and productivity management and initiatives on business and human rights. The company has also been awarded the White 500, 2023 certified health and productivity management, outstanding organizations recognition program and Sport Yell Company 2023 certifications. We also revised human rights policy. Please look at it later. This is a summary of what we have talked about so far, the outlook and future of the 2021 Medium-Term Business Plan. As a result of our willingness to increase investments towards 2030, in the midst of major external changes and headwinds. Profits are expected to fall short. But in terms of sales, we achieved a record high for the second consecutive fiscal year far exceeding our plan. In addition, both focused domains and overseas sales are exceeding the plan. ROE fell to 7.9% in the previous fiscal year, but we intend to recover to our target of 10% in the current fiscal year based on the details I have just explained. Finally, we have graphed the changes in net sales and operating income over the 6 years of the 2018 Medium-Term Business Plan and the 2021 Medium-Term Business Plan. The red broken line above is sales. The bar graph below shows the amount of operating income and the blue line in the middle shows the operating margin. Below, we have included the amount of raw material and energy cost increases by year. As you can see, in terms of sales, the impact of the pandemic in financial year 2020. Financial year 2020 was a decrease of approximately JPY 10 billion in value from the previous year but for 2 consecutive years since financial year 2021, sales have grown by more than 7% and increased by JPY 26.1 billion in value over the 2 years, achieving a V-shaped recovery and reaching a record high, exceeding the pre-COVID-19 level. Although as I explained today, profits have fallen sharply. We would like to make this financial year 2023 the starting year for a V-shaped recovery in profits, which will lead us to the next 2024 Medium-Term Business Plan. We are already in discussions regarding the next 2024 Medium-Term Business Plan, and we plan to announce it by next spring, including an update of the 2030 business plan. That's all for me. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]