Edited Transcript of 2802.T earnings conference call or presentation 26-May-20 1:00am GMT

Tokyo Jun 4, 2020 (Thomson StreetEvents) — Edited Transcript of Ajinomoto Co Inc earnings conference call or presentation Tuesday, May 26, 2020 at 1:00:00am GMT

Ajinomoto Co., Inc. – President, CEO & Representative Director

Ajinomoto Co., Inc. – Corporate Senior VP & GM of Global Corporate Division and Global Finance Dept.

Ajinomoto Co., Inc. – Associate General Manager of IR

Watanabe Yumiko, Ajinomoto Co., Inc. – Associate General Manager of IR [1]

Good morning, everyone. This is Watanabe, the IR Group of the host. Thank you very much for participating in the Ajinomoto Group Fiscal Year 2019 Results Briefing despite your busy schedule. First, we’d like to sincerely apologize for the 2-week delay in arranging the earnings call because of COVID-19. Today’s session will be streamed online live, followed by a Q&A session through a teleconference. We are sorry for the inconvenience. Today’s materials are also posted on the Ajinomoto Co. Inc. website, IR information site.

We have 2 presenters today. First, Tetsuya Nakano, Corporate Vice President and CFO, will be presenting the financial results for the fiscal year ending March 2020 and the forecast for the fiscal year ending March 2021. Next, Takaaki Nishii, CEO, will explain the impact of COVID-19 and the progress on structural reform.

Tetsuya Nakano, Ajinomoto Co., Inc. – Corporate Senior VP & GM of Global Corporate Division and Global Finance Dept. [2]

So this is Nakano speaking. I would like to talk about these financial summaries and the forecast. In terms of the financial summaries, in terms of sales, it has gone down. Business profit has gone up. Out of which the core businesses, the growth was about 3%. And in fiscal 2019, the effect of COVID-19 overall has been minor. What happened was that in the seasonings and foods business in each of the countries, there has been a closure of restaurants for the foodservice products or the Umami seasoning or the flavor seasoning, large packages — large volume packages sales has gone down. On the other hand with the at-home demand, because people stacked up to eat at home, it’s increased. In some countries, there has been some restrictions in sales activities for the frozen food at home and abroad. But home use, the sales has increased. For foodservice and desserts, it dipped dramatically. For the amino acid — for the pharmaceutical amino acid, it has increased for infusion purposes. These were the things that happened, but the overall impact was minor.

For the profit attributable to the owner of the parent, because we have accelerated the asset-light initiatives and — so the impairment loss booking, it was 18 — the loss was JPY 18.8 billion. We’re not being able to achieve the 2-year plan. The business profit margin was 9%. And because we have booked some impairments, the ROE was 3.3%.

So in this slide, I’m showing the business profit forecast that we have revised in the second quarter and the gap. The increase of sales of electronic material, frozen food, coffee, international, seasoning, processed food, cost situation has improved. Specifically, there was some upside coming from the usage of the resource-saving fermentation technology. In the animal nutrition, the unit price went down. Some of the unit prices have gone down and against expectations.

On top of what we had booked into the third quarter, in the fourth quarter, for the seasoning business in Turkey, putting into account the impact of COVID-19, we have revised our outlook from 2020 onwards. We have booked a JPY 2.2 billion of impairment due to this process. So on top of the impairment losses, there are other JPY 15.5 billion under others. So this is a special second career program for managers, and this is worth JPY 6.5 billion.

So we have 2 scenarios, Number 1 and 2. Based on these 2 scenarios, an assumption is that each country’s GDP is going to go down. And then we are — we’ll be looking at the situation in April. We’re taking this into account. We conducted a simulation of the impact of COVID-19. So just taking this into account in terms of sales, a negative impact of JPY 76 billion in terms of business profit, a negative impact of JPY 23 billion has been reflected to our forecast due to the impact of COVID-19. So these — we have given you the specific assumptions. And Mr. Nishii is going to explain in more detail the countermeasures that we’re going to implement that’s not been fully reflected into our forecast.

So if you look at this slide, the reason why the impact has been large, as you can see in this diagram, the major countries where we conduct business, the economic recovery will be happening from fiscal year 2021 and onwards. So that will be our assumption. So this is the quarterly sales and business profit and how the impact is going to play out. For the seasonings and foods business, that will be Asia and Latin America. For the frozen food, that would be North America and Europe. These will be the businesses that will be impacted substantially.

For the pharmaceutical custom service, the customer’s development schedule has been delayed, and we will be impacted by that delay as well. So by quarter, by area, we are assuming the impact. But currently, we have not reflected our initiatives. And this scenario basically has reflected the maximum level of the negative impact. However, the situation is changing day by day, country by country. The assumptions will be changing. So by each quarter, we will assess the difference in the gap between the assumption and the actual situation, and we think we have to update our situation and forecast.

As a result, the current forecast is to be — a decline in sales and profits year-over-year. The exchange impact in terms of sales is minus JPY 40 billion. Business profit is a minus JPY 3 billion. For the net profit, JPY 22.5 billion ROIC will be 3.0%.

So fiscal ’20 structural reform stage is what we are showing. In the others operating expense, there is JPY 29.2 billion. And within this, JPY 16 billion of structural reform cost is included. I cannot refer to the content yet, but this is related to noncore businesses.

So in terms of the structure that we’re targeting for the mid-term management plan, so this is the indicator for the fiscal year 2020. We have not been able to grow because of the impact of COVID-19. So ROIC, if we exclude the impact of COVID-19 and the exchange rate, it is about 4.7%, the organic growth rate has been 105%. That has been the initial plan.

In terms of the unit price growth, we are unchanged in this policy. We will continue on a plan to improve this by — through the product mix, by launching premium products such as low-salt content products and aim to improve the unit price. But because of the impact of COVID-19 and the sales is going to go down, and we have not been able to increase our prices, so we haven’t been able to quantify this.

So by segment priority KPI, this is shown on this slide, the same as the organic growth. In terms of the organic growth, if you exclude COVID-19 and the exchange rate impact for the seasonings and foods business, it’s 106%. Frozen foods, we are going through structural reform, it’s 100%. Healthcare is 110%. And on the mid-term management plan, this is what we want to put into action in 2020.

So in terms of the financial strategy, in terms of the dividend in fiscal year 2020, it will be 40% against a net profit level. So this going to be JPY 32. So one of the potential strategy is to purchase the noncontrolling interest and we’re going forward on this with Thai Ajinomoto. So end of fiscal year 2019, we have been able to increase our interest to 94.52%.

And this describes ESG measures. We obtained SBT validation in April for GHG.

Lastly, I’d like to mention 3 points on corporate governance. First, we appointed Ms. Indo as a new member of Audit and Supervisory Board. Second, we will add a TSR together with ROIC and other indicators to evaluate MTP performance-linked compensation for the executives. Third, we will change the accounting auditor to KPMG AZSA, considering their willingness of auditing services as was immediately disclosed on the 25th.

That concludes my presentation.

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Takaaki Nishii, Ajinomoto Co., Inc. – President, CEO & Representative Director [3]

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Good morning, everyone. First, I’d like to give you an overview of the — how we are dealing with COVID-19 and how we are progressing towards structural reform. First, to repeat, we’d like to sincerely apologize for the delayed announcement of consolidated results for fiscal 2019. Thanks to dedicated health care providers who are fighting at the final defense line to prevent a social collapse, our business is able to continue its business. And for that, on behalf of the entire group, we’d like to offer — express our sincere gratitude to those dedicated health care workers.

I’d like to outline how we are fighting against COVID-19 throughout the period and our current and future initiatives to minimize its impact as well as to bring up the entire level of our progress. Let me also report on the progress of our MTP, mid-term management plan.

This message represents how we’re dealing with COVID-19. We are very grateful for being able to continue our business, and we’d like to do our utmost effort to work as one team to commit or contribute to those working against — the fight against COVID-19. We’d like to gain the growing momentum for all of our consumers who are seeking healthy and new lifestyles. We would like to seize this moment so that we can achieve a V-shaped recovery in fiscal 2021 by minimizing the negative impact of COVID-19. The pandemic hit us in the very first year of the current MTP, in particular during the 2 months since the end of March, we fought a defensive war by protecting our employees from infection while maintaining the production activities.

Performance-wise, overall, food services are affected negatively while at-home dining is booming. The negative impact on the domestic business can be cushioned mostly by surging at-home dining demands, however overseas business cannot, especially for the frozen foods which have a relatively large portion of food services.

By region, the U.S. and Latin America are facing rampant infections and will suffer from persistent impact of COVID-19, including second wave going forward. Therefore, we expect a lingering impact of COVID-19. And for these reasons, we have the worst scenario.

Through direct contact and communication with local subsidiaries and local offices, these are what we feel right now. However, Japan and Asian countries are moving into a new stage of resuming their social and economic activities while coexisting with the virus. We are certainly not complacent with the forecast numbers. Of course, we will take measures to bring up the entire level going forward. We will not seize our efforts towards structural reform stipulated by the MTP. In a long fight against COVID-19, Ajinomoto can be conducive to improving dietary habits for consumers as well as in our health care businesses.

In my view, responding to COVID-19 provides us an opportunity to further accelerate our MTP strategies in order to realize our vision. COVID-19 threatens both our mental and physical health. Professor Yamanaka of Kyoto University appeared in TV and stated that COVID-19 appears to affect multiple organs in those who suffer severe symptoms by exacerbating metabolic syndrome-related illnesses in a very short time.

We are strengthening our business, driven by important themes such as low salt and diet that can prevent low nutrition in the elderly. In fact, sales of low-salt products are brisk in Japan, where customers are well aware of the relationship between dietary habits and lifestyle-related diseases. We’d like to contribute to the betterment of consumer health all around the world by furthering our business activities.

In the next few slides, let me outline how we are addressing COVID-19 by drawing real examples. Let me cite actual examples of how we are dealing with the virus. These pictures show the management encouraging employees in order to continue business activities while top prioritizing the health of employees and partners as well as their family members. Multiple messages have been sent to a lot of stakeholders to stimulate each other’s motivation. Employees feel proud of being able to contribute to society through essential businesses, and there is a growing sense of unity among ourselves to fight against the virus as one team. Almost 90% of our employees are working from home, apart from the production department in major group companies in Japan, including headquarters.

Thanks to various efforts taken under the work-style reform, we are effectively sharing transformation-related tests in line with the MTP and implementing emergency measures in response to COVID-19. And we would like to seize this moment of furthering our efforts.

Although the production and sales department are struggling, we managed to continue production activities at all plants all around the world amid rampant community infections in the U.S. and Latin America. Every time when employees contract the virus, we suspend production lines and disinfect the entire place before resuming production.

Plants in the U.S. and in Europe mainly producing frozen foods for food services were forced to adjust production levels for a certain period of time to deal with the sharply declining demands. In Europe, the Philippines and Malaysia where strict lockdown measures were implemented, we have no choice but to reduce operation level.

On the other hand, in-home use foods in Japan, production was unable to catch up with the surging demands and logistics were overwhelmed. In some cases, we had to request our retailers to cancel their discounts and to focus on essential items. We invoked BCP, business continuity plan, that was formulated in the wake of 2011 Great East Japan Earthquake. On future impacts, we will be facing delays in production developments and CapEx scheduled after autumn 2020. Those need to be addressed this year.

As of May 25, 96% or [76] of our employees were affected, especially in the Americas. In addition to the efforts to continue production, we are strengthening our ties with suppliers and supporting their businesses in order to secure and maintain procurement. Funding-wise, we maintain a sufficient liquidity on hand. In addition, we set commitment lines with our major banks through which the safety of funding is secured. Thus, there is no concern with our funding for risk management to prepare for a protected war against COVID-19. In addition to daily measures taken by vertical business lines, cross-regional scenarios are being updated for possible COVID-19 impacts. We are hosting scenario planning meetings globally with an aim to examine strategies that can lead us to take additional measures during the co-existing phase and to set a trajectory towards recovery. This slide outlines social support activities to express our gratitude toward health care providers and consumers and these are already taken.

Let me report to you on item #2. We have concluded a deal with the U.S. Federal Emergency Management Agency to sell the vial that can contain COVID-19 specimens. By the end of September, we expect to sell or we will provide 2.5 million units by the end of September. We will also do our utmost effort to support society as a company solving food and health issues through support to supply chain partners, restaurants and corporate health insurance associations.

From now on, I’d like to describe how to recover our business during the co-existing phase. First, we revised our global communication in early May to deliver a message to people around the world that we support improving dietary habits. This message is consistent throughout our group company’s websites.

What Ajinomoto values most. To our customers, we’d like to support your well-balanced meal and healthy daily lives. Eat well and live well. This is our consistent message to consumers. We encourage them to nourish themselves with balanced meal and have a good amount of sleep and a good amount of exercise. In collaboration with supply chain partners, measures are being prepared to continue to supply essential commodities. We will continue delivering our support messages when we implement those additional measures.

In response to COVID-19, some markets are growing with surging consumptions. To minimize the negative impact in fiscal 2020 and to ensure growth after fiscal 2021 and onwards, this was a key finding. This data is cited from an online household account book that has 1.3 million registered and active users a year. The graph on the left shows the purchase price or amount used on EC and home delivery which rapidly increased 130% between April and the holiday season in May, known as the golden week. Similar propensities were reported in the U.S. and Thailand. Going forward, the EC proportion is — and home delivery is likely to grow in Foods, which previously had a small EC ratio.

Second, health-type goods are growing. This is driven by at-home dining propensities in Japan. The overall supplements suffered tough demands. However, especially products with low-salt and low-carbon and protein intake features, they are surging and booming. Similar trends are also emerging in the U.S., especially with healthy foods. So these will be our future forecast going forward.

The first bullet point shows measures that we’ll be taking to recover business during the coexistence phase. However, we apologize for not being able to reflect these points on the forecast we present today. As the restrictions ease, we will drive these measures to improve our overall business performance. There are 3 key points. First, we will resume the suspended sales promotion for low salt and low nutrition in the elderly by enhancing product development efforts. Second, we will strengthen sales promotion for e-commerce EC, both domestic and cross-border between Japan and China as well as online supermarket in Japan and the U.S. Third, amino acid supplements will be available on EC, in addition to our in-house meal order system. We will expand sales channels to pharmacies as well.

Pertaining to the second bullet point, which was reported on the IR Day on March 25, 2 Transformation Task Forces directly supervised by CEO are making steady progress despite the pandemic. So we will never seize our speed of transformation. First, the Business Model Transformation Task Force appointed a new CIO, Chief Innovation Officer, who are leading internal task force operations to accelerate alliances with external food tech-related companies. Because this area requires capital alliance with venture firms, we decided to newly set up research department by inviting external experts. We are also examining the possibility of setting up a CVC, corporate venture capital. Second, Operation Transformation Task Force appointed a new CXO, Chief Transformation Officer, to work on 3 major points: first, to integrate managerial accounting with measures at each KPI level that utilizes ROIC as a management metrics; second, to cut costs for both direct and indirect materials and to improve SCM; third, to lead organizational management to raise employee engagement and to improve ways to promote organizational management. Both of the appointments will be completed as of July 1 after personnel appointment to perfect the promotion system so that we can all work toward a recovery after fiscal 2021 as one team, directly led by the CEO.

Next 3 slides describe additional measures to take place during this fiscal year regarding COVID-19 that I described right now as well as the organizational charts that promote 2 task force teams are shown. Let me mention the one team structure for the 2 — the task force under the matrix system. There were some concerns about the matrix system that we have presented our dealers earlier. So let me outline some key points.

As the slide shows, this has been updated since March 25. We paid a particular attention on the fact that this will be carried out as one team under my direct jurisdiction. To do so, we stipulate rules with horizontal supervision, CIO and CXO, CDO without any ambiguity in the decision-making processes were added as well and stipulated as rules. Third point is that we are working with external experts who are serving as our best partners to seek better leadership and some more recruited as well.

Finally, I’d like to report you on the activities to penetrate the strong management commitment across the organization that the MTP will transform our corporate culture, as was announced in February. As the table shows, starting from this year, the annual organizational management cycle will incorporate all these activities. On April 10, we — I address all group companies in online presentation. At the same time, for the Ajinomoto Co. Inc., I held online dialogue sessions for the entire group, except for the production and sales departments who were preoccupied with product supply. And third, executives are holding dialogue sessions. And once the restrictions are lifted, we’d like to conduct actual dialogue sessions in real workplace. Number four, we plan to conduct personal goal presentations at each workplace to cover 100% of offices. Number five, ASV award will be held to recognize best practices within the group sometime after September to raise the motivation among the employees. Number six, starting from this year, engagement survey will be held annually and it is scheduled to be conducted sometime between August and September, and we’d like to identify issues towards transformation, which will be reflected in the fiscal 2021 planning. Finally, through the direct conversations with employees, I keenly felt a strong support and resonance toward the new MTP, the new and current MTP.

Despite the difficulties we are facing with COVID-19, workers are ever more united. Unfortunately, fiscal 2020 has a tough business forecast. However, this environment rather provides us an opportunity to accelerate our transformation into a company solving food and health issues. We are fully committed to achieving a V-shaped recovery during fiscal 2021 to meet the MTP goals.

This concludes my presentation. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

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