Red characters: Corrected from the answer on February 21.
You talked about wanting to enhance value provided for existing products, and I think this is one of the key points. What is the most important issue that you face right now in order to accomplish this? Where do you think you must make the big changes? Could you tell us about the concrete strategies for accomplishing this?
When speaking primarily about core businesses in regard to the shift to a value-enhancing strategy, you can take it that we are talking about a shift in the international consumer business. We have already been aggressively implementing strategies to increase unit prices in the Japan Food Products and Healthcare businesses. Consequently, the target will be the consumer business, including the international frozen foods business, which the Company has not addressed so far.
As we have pursued deliciousness in this area to date, we have dealt with any increases in the cost of various raw materials by simply increasing prices. However, it is very important to shift to a strategy that consists of enhancing the basic value of products and delivering this value to customers who will give it a positive evaluation and buy products with high unit prices.
In terms of how we will achieve this, first we need to change our message and marketing strategy on how umami, which will form the base, can successfully promote salt reduction. I think we can achieve it based on umami seasonings (products: AJI-NO-MOTO® and AJI-NO-MOTO® Plus) by changing and adding to our basic marketing strategy without product revisions. Consequently, we will start first with the pursuit of health value in FY2020 and hope to gain a positive response on price increases and value enhancement. Then we will add on to the mainstay flavor seasonings with the launch of salt reduced products in the leading countries and continue our marketing.
We got a message that you want to increase prices sustainably, primarily in emerging countries. Could you give us a picture of the breakdown for this? I think that there will be an improvement in the product mix, and there seem to be two things involved: price increases due to an increase in the percentage of high value-added products, which have health functions, such as salt reduction, and simple price increases, including existing products. Do you have an image of the weightings over the next three years? Also, since you are talking about “sustainably,” I believe you must continue to increase prices beyond that point. Will there be a change in the balance at that time?
Slide 19 shows the structure of price increases. It includes unit price growth through promotion of health value and unit price growth by pursuing deliciousness that responds to diverse lifestyles. Going forward, our approach is to try to achieve unit price growth of 1.3% in FY2022 compared to the current level, combined with unit price growth due to urban-style consumption.
Considering value-added products, such as low-salt products, the target is probably high-income households, as shown in the slides. Turning to sales channels, there will likely be a shift from traditional trade (TT) to modern trade (MT) and e-commerce. I understand that the Company has significant strengths in TT, but challenges remain in MT, relatively speaking. What are your thoughts on sales channel strategy in this regard?
Even if the sales channel structure is based on TT, what I would like to say is that consumers themselves have a big interest in this problem and have been changing. The middle class is already increasing and will continue to grow moderately from now on. Higher income households will also increase in what we have called the emerging countries. These households will grow by 5% per year, forming a significant mass.
Naturally, this kind of customer will come to buy through TT as well, and I would like to say that our message and marketing strategy for consumers will be about promoting salt reduction with umami seasonings. Of course, we will work on delivering products directly to new channels such as expanding e-commerce and demand from offices in order to achieve growth, but it certainly does not mean that we cannot capture these types of customers through TT.
My question is about the margin improvement of around ¥30.0 billion over the three years from FY2020 to FY2022. If we calculate business profit by simply multiplying the three main business segments by organic sales CAGR, profit growth seems even higher at around ¥48.0– ¥49.0 billion. Can this disparity with ¥30.0 billion be interpreted as the increase in expenses due to structural reform?
The figures for each business on slides 36 through 38 do not include business risks, but the margin improvement on slide 18 takes account of Company-wide business risk.
To give you some additional information, the margin improvement of ¥30.0 billion mainly consists of approximately ¥10.0 billion in sales growth and unit price growth (including the increase in the ratio of premium products), approximately ¥10.0 billion in cost reductions, and approximately ¥10.0 billion in profit growth associated with structural reform.
It is now being said that asset reduction will be extended until FY2025 with an amount of ¥200.0 billion, which is double ¥100.0 billion. The Company has already reduced assets by ¥50.0 billion with ¥100.0 billion in reductions to be made over the next three years. Can you explain the background for adding ¥50.0 billion in the period FY2023–2025? You may be confident about obtaining good results, but what areas will you focus on in working to reduce assets going forward and what is the background to the addition in terms of the approach to date? I would like you to explain something about the review process.
The businesses under assessment include businesses with high ROA but low growth rates and businesses with low ROA but extremely high growth rates. The former will be the target of Phase 2 through the additional ¥50.0 billion in asset reductions. As of FY2022, Company-wide ROIC will be at the 8% level. Once we attempt to raise this to 11–12% and further to over 13%, the criteria will be reset in FY2022. We believe that there are currently some ¥50.0 billion in assets at businesses where aiming even higher is considered a challenge.
(Q. Can this be understood to mean you will reduce businesses that are asset-heavy as much as possible to accelerate achievement of the business model that truly reduces risks on balance?)
That is correct. However, it will have to be balanced with growth, and the transformation into a business that increases value added structurally rather than through demographic dividends is a big issue for achieving growth, and this will also be a challenge. In the meantime, our approach to businesses of concern with asset reductions worth ¥50.0 billion will be to hold onto them as cash cows and make the decisions in Phase 2.
I want to ask about the frozen foods business on slide 17. It will take another five years to achieve ROIC on par with WACC. This seems to suggest you must bring the schedule for asset reduction forward, and furthermore that it is not a profitable business. Why will it take so long? Are there any measures for improving profitability ahead of schedule? I would like you to explain these points.
I appreciate your observations. These are points that we have also discussed. However, if you look at how the ROIC for frozen foods increases on the diagram, it is currently -0% and will be over 1% in FY2022. This will rise rapidly toward FY2025. We believe that after that the pace of increase will be over 8%, and that the business can achieve 11%. However, with regard to the question of why it will take so long, a significant part of asset reduction in the global frozen foods business currently depends on restructuring business in North America. The strategy does not simply envisage a balanced reduction by withdrawing from Mexican and Italian foods categories, but will also simultaneously achieve growth in the Asian foods category. The Asian foods category is growing tremendously and is key to delivering healthy frozen foods, but there isn’t enough production capacity or assets right now. On the other hand, we are in the process of structural reform in order to make the shift. In addition, with significant goodwill on acquisitions, ROIC will inevitably be lower than in other businesses. As there will be no improvement without the growth of acquired businesses, we decided to keep frozen foods as a core business, bearing these circumstances in mind.
(Q. Does this mean that asset reduction is focused on North America, and there will be little change from the present situation in the frozen foods business in Japan?)
North America accounts for a large proportion of the overall weighting, which is why I spoke about it. However, in terms of the frozen foods business in Japan, plants in China and Thailand which supply products to Japan are also subject to asset reduction, including their operations.
(Q. I could not understand the connection between the fact that Asian foods category in North America is still growing and lacks capacity, and the fact that asset reduction in unprofitable categories will not proceed quickly. I would like you to explain it in simpler terms.)
There is extreme growth in the existing Asian foods category, and we will proceed with the shift while maintaining stable operations for this category. We think there is a big risk that it will destabilize operations that struggled badly two years ago and things will not go as envisaged if we proceed recklessly. Taking this into account, we decided to take our time.
In this Medium-Term Management Plan (MTP), it is extremely easy to understand the vision for the Ajinomoto Group and what you want to become, compared with the previous MTP, and I grasp it better than the previous MTP. I think what is required now is the execution capabilities to actually get it done. For example, I would like to know what measures and strategies you have to increase the speed of execution and enhance execution capabilities, such as clarifying responsibility and increasing awareness of target achievement.
The execution capabilities for achieving our vision are exactly what is required of management, and we will strengthen our organizational management. We are promoting Company-wide operational reform using digital transformation (DX) to not only strengthen our organization but also to speed things up. In my presentation, I mentioned reforming our organizational management operations to do this and, at the same time, raise employee engagement and have employees make ASV their own initiative in the area of priority KPIs. Making ASV one’s own initiative refers to each and every employee being able to act autonomously. At present, we are, unfortunately, only at 55%, but we will increase it to over 80%. Doing this will lead to increases in effectiveness and speed. We will combine this human resources management with measures to increase motivation. Such a Company-wide review of existing management is one of our measures. Another is the creation of a new business model in Phase 2. This cannot be achieved without digital innovation, and we will work on bringing in a new growth model that differs from our conventional organic growth in food by establishing new businesses in partnership with companies that are pioneers in so-called foodtech. We want to do this with a sense of urgency that will enable us to prepare the groundwork by FY2022 and commercialize these new businesses from FY2023. This is the main point of our big transformation.
My question is about the seasonings and foods business. I think that the key point for unit price growth will be the development of value added in health functions. In your presentation, one of the examples was expanding the Iwate Prefecture Model horizontally, but I feel like I do not have a good grasp of the scale of success so far despite being told about the details. I would like to check what level of success you have had to date.
First, regarding the scale, the model for success is in Japan. In Japan, reduced salt products only account for around 5% of flavor seasonings, but health campaigns such as the “Iwate Prefecture Model” have been rolled out on a large scale in 39 prefectures. Partly as a result of this, the domestic sales CAGR for seasonings and processed foods has increased around 1.6% in the past three years. I believe that the sales CAGR for the Japanese processed food industry over the same period is a bit better than -1%, so I think this difference is the result of our work.
(Q. Is it fair to say that the 1.6% sales CAGR is due to products such as reduced salt, and, although it is basically a volume effect, it has also been partly pushed up by the unit price effect over the three years?)
Recently we have been working actively to increase unit prices for Japan Food Products, so I would like you to understand the figures with the unit price effect included.
I think that the Quick Nourishment business is also an area that global competition is putting efforts into. Consequently, it can be assumed that competition will become considerably stiffer. I would like you to explain again your unique competitive advantage in promoting health functions.
I think our strategy differs from the Quick Nourishment strategy of global companies in that we have strengths in the three categories of seasonings, processed foods, and frozen foods. Product areas that simply add nourishment are extremely competitive. However, in product areas that meet the need for dietary improvements, seasonings play a role in salt-reduced, sugar-reduced, fat-reduced, and restricted carbohydrate foods as well as plant-based foods, which have grown significantly. So, we have the advantage of addressing health through the seasonings business. Consequently, in changing dietary habits themselves, seasonings will play a role; and Quick Nourishment and healthcare products will play a role for dietary supplements; and frozen foods will play a role with respect to mental and physical health associated with urbanization. I would like you to understand the structure overall as business for restaurant and industrial use being complemented through the Solutions & Ingredients business.
(Q. Do you mean that your strength is that you can provide health functions in regular food because seasonings have strong health function appeal?)
I think that seasonings are most effective with regard to changing dietary habits themselves. Speaking in extremes, if you make everything at home using ingredients, you use salt and sugar and add soy sauce or a local flavor seasoning, and so on. As a result, all the calories, salt and sugar increase. If you can cook using only flavor seasonings or menu-specific seasonings, or use umami seasoning to halve the amount of salt, this combination allows the reduction of salt and sugar in an entire dish. We think this is the power of seasonings. Consequently, we are hoping to adopt a strategy that communicates this properly.
Regarding slide 7, I would like you to tell me what percent sales CAGR will be in Phases 1 and 2. Previously, you explained that sales CAGR for the three-year period of FY2020–2022 will be 1%, partly due to asset reduction, but I want to confirm the figures in the MTP just announced.
We plan CAGR of around 4% in Phase 1 and around 5% in Phase 2. At the time of the interim financial results, we set CAGR at 1% assuming no growth in businesses under assessment, and the disparity has arisen because a certain level of growth is seen under this plan.
To give you some additional information, the organic sales growth on slide 7 takes into account downsizing at businesses subject to asset reduction, but does not reflect M&As. We will implement a ¥100.0 billion reduction in assets by FY2022. This is just over 7% of total assets, and around 5% in sales corresponding to these assets will be lost.
(Q. Sales CAGR by region is stated in the slide 41. If we use these figures with the composition ratio to calculate Company-wide sales CAGR, it gives a range from 2.5% to just under 3%. What is the difference between this and the 4% CAGR in the slide 7?)
In the slide 7, the latest results are considered with respect to the FY2019 forecast, but slide 41, the revised forecast for the interim period is listed without change. Please understand it as that difference and the difference from the rounding of decimals.
If the impact of M&As and asset reduction is not taken into account, it makes it difficult to ascertain the scale of business profit. On the other hand, we heard that business profit will be improved by ¥30.0 billion. Could you tell us some factors for improvement in profit other than unit price growth, such as the impact of business and marketing expenses and the impact of sales volume growth?
Slide 23 gives the scale of marketing investment, and topline growth by business is also given on slides 36 through 38. Basically, I would like you to combine this information to see the whole picture.
(Q. Do the figures for sales CAGR by business on slides 36 through 38 take account of asset reduction or not?)
The figures do not take account of asset reduction.
(Q. So we can’t simply multiply sales which are the base figures by the sales CAGR.)
Please understand that that is the case.
It has been explained that just over 7% of assets will go as a result of asset reduction. Could you give us a picture of the scale of the corresponding sales?
With regard to the Company-wide organic growth rate shown with figures of 2% and 4%, we will sell-off businesses as a result of asset reduction. Therefore, the sales in the year before the base year when a sell-off is implemented will be treated as sales of discontinued operations and will be eliminated. We have made a plan based on 2% growth compared with sales eliminated the previous year. You should note that the sales corresponding to ¥100.0 billion in asset reduction is around 5%. Consequently, although sales corresponding to 5% will decline from FY2019 in FY2020 and FY2021, we plan a structure in which the growth rate excluding the impact in each of these years will be 2% and 4%.
In addition, businesses with sales corresponding to this 5% barely contribute to business profit. For example, commodities in the animal nutrition business is a business in the red. You should note that there will either be no impact at all on business profit due to a decline in sales resulting from asset reduction or that it will have a positive effect.
You forecast Company-wide unit price growth of 1.3% as part of the 4% organic growth rate. On the other hand, you forecast 2.5% unit price growth for international consumer products. Does this mean that the unit price growth includes Japan Food Products?
The 1.3% unit price growth is basically primarily for consumer foods. As part of this, the biggest driver will be international consumer food products. Although we envisage a certain level of unit price growth even for other Japan food, it is international consumer food products that will be central to unit price growth.
You assume that the business profit margin will expand significantly to 10% in FY2022. Is it correct to assume that unit price growth will be the main driver? You explained the breakdown of the ¥30.0 billion improvement in profit as ¥10.0 billion from unit price growth and ¥20.0 billion from cost reductions. However, wouldn’t you expect the effect of unit price growth to be a little more, taking into account unit price growth of 1.3%?
As for the ¥10.0 billion from unit price growth out of the ¥30.0 billion margin improvement, we plan that the ¥10.0 billion will be a combination of several factors such as sales growth and unit price growth (including an increase in the composition ratio for premium products) in areas including seasonings and frozen foods in Japan and overseas, which will steadily contribute to the numbers.
There was some discussion that the businesses which will be the target for ¥50.0 billion in asset reductions in Phase 2 have high profitability, but have issues in terms of growth rate. If growth rate is the issue, it seems likely due to factors related to competition. As the competitive environment becomes increasingly challenging year after year, there is concern that it will become difficult to make corrections for businesses that face issues, unless action is taken now. Looking back over the past 20 years, there is an awareness that there have been problems with the Company’s ability to adapt to changes in the macro environment. I would like you to explain whether you have created or are creating advanced systems under this MTP so as not to repeat the mistakes of the past.
It has been mentioned that the businesses with growth issues on slide 33, parts of Japanese Seasonings, International Processed food, and Drinks, are, should be determined quickly. This does not mean, however, that the total will be ¥50.0 billion, but rather that there is the possibility of an additional ¥50.0 billion in asset reductions in these areas. However, we considered these areas as businesses under assessment and not as non-core businesses because of the possibility of upgrading them to core businesses as a result of the review of marketing and product strategy from the perspective of solving food and health issues. We review and adjust business assessment as part of the annual management cycle.
In the process of considering measures that will enable businesses under assessment to be upgraded to core businesses by FY2022, is there a system in this MTP for making early decisions in Phase 1 on whether to stop or not, when the expected level is not reached rather than postponing decisions to Phase 2?
We will review them as part of the management cycle. Basically, the management cycle considers a three-year period. However, because we check on performance disparities yearly, quarterly, and monthly, there is a system for speeding up decisions if there is no possibility of improvement.
My question is about slide 17. ROIC targets are given for each segment. Is it correct to interpret the figures as including all non-core businesses and businesses under assessment? In other words, is it the case that the figures do not take into account the profit that will disappear associated with asset reduction?
No. The figures for each of the three segments include the impacts of asset reduction.
You said ROIC in the frozen foods business will be 5% in FY2025 and will ultimately increase to around 11%. Are we to understand that achieving 11% is the vision for 2030? Also, in the same way, I would like you to tell us what you think will happen in the seasonings and foods business and healthcare business in terms of time.
Each of the three-year targets for ROIC are as shown on slide 17. At present, we have not disclosed the level and timing of ROIC for each business aimed at Company-wide ROIC of over 13% in FY2030.
(Q. There was a discussion of the frozen foods business as being able to meet the needs of urban consumption, but I think that the business has relatively poor ROIC compared with other businesses and a comparatively high cost burden from a Company-wide perspective. What should we consider as the role that the frozen foods business will play in the medium-to-long term?)
At present, there are issues, and we are part of the way through structural reform. We have seen good prospects on that, so the business can recover to 5% ROIC in FY2025. At that point, we envisage asset reduction and growth with ROIC being raised further to 8–11%, so we positioned it as a core business.
My question is about management leadership related to the MTP. When you adopted the asset light model, you stated that it would be accomplished under your leadership. Now the scale of asset reduction has expanded and the time period has also become longer, but are you still considering the plan based on your leadership all the way through? Alternatively, are you considering it concurrently with a successor development perspective?
Slide 5 covers organizational management reform. Under the MTP, the Board of Directors is completely committed to leading the vision and the transformation aimed at achieving the vision, including asset reduction. In light of this, the President and executive officers produced the plan. In this sense, regardless of plans for my successors, the correct perception should be that the Board of Directors produced the plan as part of a commitment to the shareholders. Of course, as the CEO, I intend to do my best to see the plan through to completion, but appointments are entrusted to the Nominating Advisory Committee. I would like you to note that leadership changes in accordance with the decisions of the committee.
Considering a 7–8% decline in sales associated with asset reduction multiplied by the target business profit margin, business profit in FY2022 will be at the FY2019 level of ¥88.0 billion plus ¥30.0 billion. You have said that structural reform expenses will affect business profit. But am I to understand that structural reform expenses will mainly affect operating profit? Also, you mentioned the risk that structural reform expenses will increase during the three years from FY2020 to FY2022. I would like you to tell us about the upside and downside scenarios and what we should consider the scale of structural reform expenses will be.
As shown on slide 40, we think that structural reform expenses should peak in FY2020–2021 and decline in FY2022 and after. However, there is a bit of a range in terms of the amount. In particular, we expect the scale of the expenses to fluctuate in FY2021 depending on the circumstances of the projects we try to implement. There is a possibility that business profit growth will stagnate temporarily, but I would like you to note that profit attributable to owners of the parent company will increase gradually.
(Are we to understand that most of the structural reform expenses will affect operating profit?)
Yes. While some will affect business profit, a large percentage will affect operating profit.
The targets for ROIC and WACC set in this MTP are very ideal, so I can give them a positive evaluation. However, with it being the case that the ROIC and WACC approach have not completely penetrated the stock market, I would like to check the conventional P/L base. Is it correct to envisage that the target business profit for FY2022 is ¥120.0 billion or ¥125.0 billion?
With regard to the P/L base, we plan to disclose the results for FY2019 and the forecasts for FY2020 at the announcement of financial results in May, so I cannot tell you the details at the current point in time. The level of business profit which you asked about is the level that we originally set out to achieve in FY2019, so it will definitely be one of the benchmarks. Consequently, the plan is three years behind schedule.
Also, we set a target to “become a global top 10 class food company” under the FY2017–2019 Medium-Term Management Plan. This time, we prepared the plan based on the reflection that we have expanded the business to date with little emphasis on the ROIC, or asset efficiency, perspective. As the 8% target ROIC for FY2022 has still not reached the top 10 class level, we excluded “become a global top 10 class food company” from the targets this time.
The FY2019 results have returned to what they should be. The business profit forecast is ¥88.0 billion, but that is the figure when you revised the interim financial results downward. The stock market disagrees and has been moving on the assumption that the Company should come in on its initial target of around ¥97.0 billion. On the other hand, the Company has set the plan for FY2022 at around ¥120.0 billion based on ¥88.0 billion, so there is a disparity of around ¥10.0 billion in the starting point. Could we consider this disparity to be a buffer?
I cannot respond on the figures at the current point in time. However, I hope you will note that we announced this MTP with financial results updated as of January 31.
(Q. Since the third quarter financial results, the stock market has had a mindset that business profit of ¥88.0 billion can be achieved with room to spare as the FY2019 final results, but do you think it’s better to keep expectations low?)
I hope you will note that since the situation changed considerably between when we announced the results forecasts in the interim period and the end of January, we took the latest information as the base point and produced the pathway to FY2022 and FY2025 based on that.
(Q. Unit prices for international consumer food products have increased in a range of around 2%. Given this, isn’t the ¥10.0 billion from unit price growth out of the ¥30.0 billion margin improvement up until FY2022 likely to be low? What factors, if any, including unit price growth, would cause business profit to increase by FY2022? Alternatively, is there any downside risk?)
It does not mean that we will have any leeway for the targets we have set, but we certainly intend to achieve them.