Ajinomoto Co., Inc.

The materials to be used for today's session is already posted on the IR information site of the Ajinomoto's corporate homepage, so please take a look at them at your discretion. Please be advised that this session is recorded all the way to the Q&A session and will be posted on the IR site of the company later on. Now, without further ado, we'd like to begin shortly. Mr. Nakamura, the floor is yours. Thank you very much for making the time today to join Ajinomoto's results briefing session. My name is Shigeo Nakamura, CEO of the company. Thank you in advance for your attention. First of all, I would like to begin with a summary. We set new records for sales, business profit, and profit attributable to the owners of the parent of the company for the first half. Business profit increased to 125% of the level the previous year. For each segment, in the foods, product business, revenue and profit increased both in Japan and overseas for the seasoning and foods business overall, which includes sauce and seasoning, quick nourishment, and solution and ingredients. In the healthcare and other segments, revenue and profit increased significantly, and functional materials, electronic materials, and others continued to perform well. In the biopharma services and ingredients segment, revenue increased overall, but business profit decreased due to temporary factors. We revised our full-year earnings forecast for fiscal 2026 as we did in this first quarter, raising our forecast for sales, business profit, and profit attributable to the owners or the parent To absorb the impact of the cost increases arising from the conditions in the Middle East, we will act agilely during this fiscal year as we work to steadily achieve our planned numbers. While continuing efforts to achieve the 2030 roadmap ahead of the schedule, we will take discussions of post-2030 roadmaps to the next level and create new value aimed at mid- to long-term growth of the company. This slide presents a digest version of the first half results. Strong growth continued, with sales reaching 112% and business profits 125% versus the previous fiscal year. Profit attributable to the owners of the parent company was 143% versus the previous year. In the second quarter, tax effects related to the absorption-type merger of Ajinomoto Fine Techno yielded a positive impact. We will continue to pay close attention to profit attributable to the owners of the parent company, and we will work steadily to achieve our plan for the current fiscal year. The next slide analyzes the changes in business profit between the first half of 25 versus the 26 first half. Seasoning of foods, functional materials, and other business contributed to the changes in GP due to changes in sales, which was the factor behind the profit increase of 34.9 billion yen. Sauce and seasoning overseas, coffee in Japan, and functional materials contributed to the change in GP due to change in GP margin, the factor behind the profit increase of 7.1 billion yen. But as for SG&A, we will continue to increase our investments in human resources, R&D, and other intangible assets aimed at sustainable growth aligned with the 2030 roadmap. This slide presents an analysis of the changes in business profit by a disclosed segment. The top graph is the comparison of the results for the first six months through the second quarter and over the same period of last fiscal year. The bottom is the comparison of first half results for the previous fiscal year versus the revised forecast of August 6th. In frozen foods, first half results were challenging relative to the full-year forecast of profit increase of 3.7 billion yen. Conversely, the seasoning food and healthcare and other segments made good progress relative to the forecast, yielding positive results for the first half overall. The next slide looks at our revision of the FUSCO 2026 full-year forecast. Following the revised forecast announced at the time of the first quarter results announcement on August 6, in the second quarter, we further increased the forecast for sales by 35 billion, business profit by 8 billion, and profit attributed to its owner by 11.5 billion yen. We revised business profit forecast in functional materials upwards based on the strong second quarter results from July to September. In frozen foods, however, we revised the business profit forecast downwards due to increase in raw materials and logistic costs, mainly in overseas market, despite solid sales. We revised the profit attributable to the owners of the parent company upwards to 135 billion yen. This slide shows an analysis of the changes in business profit by disclosed segment in the new revised forecast. The top graph is a plan change in the profit by segment comparing the full year results for the previous fiscal year with a new revised forecast. The bottom graph is the comparison of the full year results for the previous fiscal year with a revised forecast as of August 6. In the functional materials business, conditions remain very strong at present. We will continue working for the full-year profit growth in the business. Next, I would like to talk about the impact of the Middle East situation and our response policy. Reflecting the results through the second quarter, we scrutinized the future impact under the continued assumption of Dubai crude oil at 110 dollars per barrel and an exchange rate of 158 yen to the dollar, and kept the annual cost increase at about 25 billion yen unchanged. There is no change to our policy of absorbing the impact of the cost increases during the current fiscal year. We expect that the impact of cost increases due to the increased tension in the Middle East will occur primarily in the food products business. On the slide, the orange part indicates the effect of our responses through increased revenue and cost reductions, and the gray part indicates the impact of cost increases. Our measures to combat the impact of cost increases will include pricing measures and cost reductions. By responding agilely, we will absorb the cost increases during the current fiscal year, and we will work steadily to achieve our plan. The impact of cost increases due to the tensions in the Middle East has become pronounced since the second quarter in particular. In products for consumers, there is a degree of time lag before the effects of pass-through pricing become apparent. In the second quarter, on a net-net basis, we have not yet been able to fully push back the full impact of the cost increase. In the second half, on top of the effect of pass-through pricing, we will steadily capture the effects of revenue increases and cost reductions and will absorb the full impact of cost increases due to the Middle East situation during the current fiscal year as we work to achieve our current plan.

The source of seasonings business, wheat, has responded agilely to various inflationary phases in the past, absorbing the impact of cost increases while continuously increasing sales volume. In response to current cost increases due to Middle East tensions, we will take further actions from the second half, incorporating the risks of other cost increases as well. We also firmly control the impact on revenue, including by optimizing marketing expenses. This slide presents the first half results for sauce and seasonings and quick nourishment. First, the left side, which is about Japan. Revenue increased significantly in coffee due to reasons, including price revisions, excluding coffee in the combined seasonings of food and quick nourishment in Japan. Sales increased to 103%, volume to 102%, and unit price to 101% of the previous level in the previous year. Revenue increased in flavor, seasonings, and soups. Next, the right slide is for overseas. Sales grew to 104%, volume to 102%, and unit price to 102% of their levels in the previous year. Revenue increased in umami seasonings, flavor seasonings, and menu-specific seasonings. This slide presents our initiatives to strengthen our foundation in Japan. Even amid population decline, high prices, and other changes in the business environment in Japan, we will strive for sustainable growth by capturing the diverse needs of consumers and expanding the value that we provide. Specifically, we are expanding products that address unmet needs and products that become points of contact with new customers as we promote growth along three axes. Expanding the customer base, increasing the amounts used by existing customers, and increasing unit prices by increasing value provided. This approach is leading to the creation of New Japan as seen in examples including Kuno Sakusaku Dekopan selling 13 million units in the first year release and the Kukudu Kiwami Premium Series selling a total of 24 million units in the three years since release. We're also developing products that capture different needs than before, including Pure Select Mayonnaise Fuwa Ama that takes its mild, mellow taste from honey and domestic fish eggs collected less than three days earlier, and White Rice Dozo, which is added when cooking the rice and yields rice with unchanged taste but slows down the absorption of sugars. Even amid the population decline in the Japanese market, we will create new demand and boost the value provided to every customer to create sustainable growth in a domestic business. This slide introduces our efforts to strengthen our business foundation overseas. As announced in our press release in June, we plan to make Ajinomoto Malaysia a wholly owned subsidiary. Procedures are moving forward smoothly, including the obtaining of approval at an extraordinary general meeting of shareholders of this company. Ajinomoto Malaysia has already grown its business to a scale on the level of the groups of our subsidiaries in our five major countries. Through the wholly owned subsidiary, we will further strengthen decision-making and collaboration within the group, and while achieving greater growth in Malaysia, we will expand the business outward into neighboring regions. Drawing on the strength of our halal-certified products, we believe there are opportunities to also grow and expand into new markets other than neighboring countries including in the Middle East. We will take full advantage of the business foundation of Ajinomoto Malaysia to make the country one of our key bases supporting overseas growth leading to future growth. The frozen foods business was affected by the high prices of raw materials and fuels and by delayed recovery from the North American recall that took place in February of this year. However, the impact of the recall was generally eliminated by the end of the first half. The North American market for Asian category frozen foods is the largest in the world. It is a market that has immense potential, with nearly 130 billion yen in growth projected from 2025 to 2031. To firmly capture this market growth, we will promote the expansion of Hane-style gyoza as well as new Asian category products in areas in which we are strong, such as shumai. In June, America's largest premium retailer, which has about 600 stores, began selling a brand of frozen ramen. In the second half, we will further expand sales channels for these products and accelerate the growth of the North American frozen foods business. To improve profitability, we will revise prices to combat increases in the cost of raw materials and fuels. To improve productivity, we are using the production know-how of the Ajinomoto Group as a model and have begun lateral deployment at eight factories in North America. We are also introducing a system for the real-time visualization of production status at factories and are introducing the system first at two factories in North America. With the ability to assess the progress of production and the operational status of equipment in real-time, we are creating mechanisms to improve productivity by having detailed visualization and cause analysis of losses on each production line, strengthening factories' on-site capabilities. I have made several mentions of the contribution of the frozen foods business to our brand, but here I would like to provide a more quantitative analysis. At the top of the slide is an analysis of purchasing trends for Japanese consumers aged 15 to 79. The analysis revealed that the percentage of Ajinomoto frozen food users who purchase Ajinomoto seasonings is about 20 percentage points higher than the targets of the analysis overall, with about 80% purchasing Ajinomoto seasonings. In addition, these users' annual purchase amount of Ajinomoto seasonings is about 1.5 times that of targets overall, revealing not only a high purchase rate but also a high purchase amount. In other words, Ajinomoto frozen food users tend to purchase their products and seasonings in other categories as well. We view these users as a particularly vital customer base for the food products business overall. The bottom part of the slide introduces our Ayate frozen lunchbox product. We launched a new noodle series in October of this year. In particular, the spicy Chinese mixed noodles have been well received. The product is supervised by Cook Do Kiwami Premium and was collaboratively developed by the frozen food business and the seasonings and foods business. Going forward, by integrating the know-how of these two businesses to create synergies, we will continue to create new value. Regarding the Ayete frozen lunchbox, we are collaborating with on-site workplace meal service provider Okan to bring the product to offices. Next, I would like to discuss the healthcare and others business. First is a look at functional materials. Sales and profit increased significantly in the first half. Sales increased to 163% and business profit to 181% of their levels in the previous year. Demand for ABF or high-performance applications such as AI, servers, and networks remain strong, and the product mix is also improving. Following our revision in the first quarter, we again revised the full-year forecast upward based on the strong performance in the second quarter. This slide presents our view of future ABF demand. With the advance of AEI agents and other uses of AEI, demand for GPUs used in learning, high-performance CPUs used for inference, and high-throughput ASICs is expected to grow. In line with this, in addition to that total amount of CPUs, GPUs, and ASICs being installed increasing, it is thought that size increases and multilayering will continue to advance in packaged substrates for high-performance CPUs, GPUs, and ASICs, which we expect will lead to increased ABF usage. We also believe that the evolution of physical AI could lead to demand for service for robot learning and simulation, in addition to semiconductors for robots. Looking ahead to this future expansion of demand, we decided to build a new varnish factory on the grounds of the existing Gunma plant. Mass production of ABF varnish is slated to begin in FY 2030 at the factory. The planned amount of investment is approximately 21.5 billion yen. Anticipating increased demand for ABF in line with the growth of the semiconductor market, we will expand the production capacity to ensure that we can fully meet demand. We will also continue to maintain and strengthen our status as a de facto standard with stable supply and strengthen competitiveness enabled by a high-speed development system. Throughout the supply chain, including coating companies, we have secured a supply capacity capable of fully meeting current demand. Looking ahead to future growth in demand, we are in ongoing discussions with companies concerning capacity and we will secure the required supply capacity throughout the supply chain to match growth in demand.

This slide addresses the biopharma services or CDMO services. With the rapid expansion of custom numbers and orders, along with the growth of its business, FORGE is working to strengthen its production system. In the process of doing so, the company experienced several large batch production losses that impacted short-term performance, which resulted in a reduction in revenue and profit in the second quarter compared to the previous fiscal year. However, for the full year, by stabilizing forage productions and also due to the continuous strong performance of small molecules and contributions from Agiphase and Agicap, we expect to meet the full-year plan in terms of both sales and business profit. This slide depicts our image of forage sales by product stage. Forge is expanding its customer base on the strength of its proprietary adeno-associated virus manufacturing technology and platform, and is steadily making progress in programs that will lead to future commercial manufacturing. Its current sales are mainly coming from the manufacture of products in the development and clinical trial stages. However, In the CDMO business, as customers' drug development programs progress from clinical trials to approval and commercialization stages, even though they are the same program, the scale of manufacturing is expected to expand and lead to greater sales. As for programs currently contracted to FORGE, we expect that as development by customer progresses, an increasing number of programs will move from the manufacturing for clinical trials into the commercial manufacturing phase after approval is obtained. At present, we will first work to make steady progress in the stabilization of production. We will also further expand the customer base and provide long-term support for existing customer programs from the development stage to commercial manufacturing. thereby expanding our sales and connecting that to significant growth in the mid to longer term. The next slide here shows the First half 2026 results for ASV indicators and a new revised forecast for the 2030 roadmap. In the revised new forecast, ROE and ROIC for fiscal 2026 is estimated to be 17% and 12% respectively. We expect an organic sales growth of about 9% for fiscal 2026. This slide presents the fiscal 2026 first half results and a revised new forecast for the ASV indicators for each segment. From here, I would like to discuss our financial and capital strategy and our progress on them. Let me start with the status of our assets and liabilities. In fiscal 2025, we changed our financial discipline indicator from net DE ratio to now the net interest-bearing debt to EBITDA ratio with the aim of maintaining financial soundness and maximizing capital efficiency at the same time. We will continue to keep our financial leverage at an appropriate level, contributing to organic growth and capital efficiency. The next slide concerns our operating cash flow. We expect operating cash flow of about 240 billion yen for fiscal 2026. By growing the business, we will further increase EBITDA in the mid to longer term, improve working capital, and sustainably grow our operating cash flow. Now, about our investment strategy, we plan to make capital investments of about 130 billion yen for fiscal 2026. We will steadily invest in growth, focusing on the core businesses so that we can achieve organic growth. We will also continue to proactively invest in intangible assets, which will support our medium to long-term growth. While increasing cash generation through sustainable business growth, we are continuing to allocate resources in line with our roadmap, placing an emphasis on capital efficiency. In fiscal 2026, we will follow this policy to steadily invest in growth aiming at organic growth and continue returning profits to shareholders at the same time. Specifically, in addition to the ¥24.2 billion investment to make Ajinomoto Malaysia wholly-owned subsidiary, in the functional materials business, we have decided to build a new factory at the Gunma plant to meet future demand. Also, we will undertake capital investments in the GMP production by precision fermentation for recombinant proteins and peptides for pharma and food. As for dividends, we plan to raise our dividend per share to ¥52, an increase of ¥2 from our initial forecast of ¥50 and a ¥4 increase from ¥48 for the previous fiscal year. With regard to share buyback, we will continue to move forward with the share repurchase plan of up to ¥80 billion, which we announced on November 6, 2025. We will continue balancing investments for growth and shareholder returns while promoting capital allocation that leads to sustainable improvement of corporate value. From here, I will explain initiatives to increase corporate value over the mid to longer term. In fiscal 2025, we proceeded with organizing the strategic concepts for mid to long-term growth and the discussion points that management should address. For fiscal 2026 is positioned as a year in which we turn the content of those discussion into seven company-wide strategies. And while continuing to discuss these strategies, we'll translate them into tangible action. Among these, the mid to long-term growth strategy, portfolio strategy, human resource portfolio, financial strategy, and strengthening of intangible assets are being discussed collectively by the company-wide growth strategy committee, which we established this fiscal year. What matters is that we do not consider each strategy in isolation, but rather think about them together from a company-wide perspective. We have to consider what do we aim for in the mid to long term, which businesses do we allocate management resources to, and how to strengthen the human resources in an intangible assets we need. We will steadily advance the all-seven-company-wide strategy. We are building up the strong foundation for our human resources and organizations. That's the foundation for the strategies.