Ajinomoto Co.,Inc. Q2 FY2027 earnings call

• Strategic Focus on Mid-to-Long-Term Growth: Management is accelerating efforts to achieve the 2030 roadmap ahead of schedule and is initiating discussions on post-2030 strategies through a new Company-Wide Growth Strategy Committee.
• AI Integration for Productivity: The company is deploying Generative AI across departments (e.g., auditing, QA) to reduce work hours (12,000 hours saved in FY2025) and redirect human capacity toward value creation, aiming for symbiosis between humans and AI.
• Overseas Expansion via Malaysia: Ajinomoto Malaysia will become a wholly-owned subsidiary to strengthen decision-making and serve as a key base for expanding into neighboring regions and Middle Eastern markets using halal-certified products.
• Frozen Foods Recovery & Innovation: Despite challenges from raw material costs and a North American recall, the frozen food business is recovering. Initiatives include expanding Hane-style gyoza and ramen sales in North America and integrating know-how with the seasoning business for synergistic products like 'Ayate' lunchboxes.
• Human Resource Strategy: Focuses on improving employee engagement globally and building a global talent management system to place the right people in growth areas, underpinned by Diversity, Equity, and Inclusion (DEI).
• Sustainability: Agri-food initiatives, such as the Agipro L supplement for cattle, are being recognized (e.g., SBCOP Awards), linking social impact to business growth.

The company reported record-high financial results for the first half of FY2026, with sales reaching 112% and business profit 125% of the previous year's levels. Profit attributable to owners increased to 143%. The Food Products segment saw revenue and profit growth in both Japan and overseas, driven by strong performance in sauces, seasonings, quick nourishment, and solution ingredients. The Healthcare and Other segment, particularly Functional Materials, experienced significant increases in revenue and profit, supported by strong demand for electronic materials. In contrast, the Biopharma Services and Ingredients segment saw overall revenue growth but a decline in business profit due to temporary production losses at its CDMO subsidiary, Forge.

• Full-Year Forecast Revision: Raised the full-year forecast for FY2026 once again following the Q1 revision. Sales increased by 35 billion yen, business profit by 8 billion yen, and profit attributable to owners by 11.5 billion yen.
• Specific Segment Adjustments: Functional materials profit forecast was revised upward due to strong Q2 results. Frozen foods profit forecast was revised downward due to rising raw material and logistics costs overseas, despite solid sales.
• Profit Target: Revised profit attributable to owners of the parent company upwards to 135 billion yen.
• Cost Absorption Policy: The company plans to absorb approximately 25 billion yen in additional costs arising from Middle East tensions during the current fiscal year through agile pricing measures and cost reductions.

• Geopolitical & Cost Pressures: Tensions in the Middle East are driving up crude oil and logistics costs, impacting the Food Products business primarily. There is a time lag before pass-through pricing fully offsets these costs.
• Production Operational Failures: The Biopharma CDMO subsidiary, Forge, suffered significant batch production losses due to human error during rapid expansion, negatively impacting short-term revenue and profit.
• Market Volatility: Uncertainty remains regarding external environments, including potential impacts of US midterm elections and AI regulations on data center construction pace, though demand remains robust.
• Low Margin Businesses: The Frozen Foods business currently operates below WACC (Return on Invested Capital < Weighted Average Cost of Capital), posing a risk to overall profitability if not improved.

Q: Mizuho Securities asked about the conservative nature of the second-half functional materials revenue projection (7% growth vs. >60% in H1) and the drivers behind the biopharma services' projected profit margin improvement to 13.4% in H2. / A: CEO Nakamura stated the forecast acts as a commitment line, not reflecting major environmental changes or concerns, but rather a conservative baseline open to upward revisions. Regarding biopharma, the profit surge is driven by stabilizing Forge’s production (eliminating Q2 errors) and skewed budget contributions from Agiphase and Agicap in the second half, leading to significant volume and profit recovery.

Q: Morgan Stanley questioned ABF capacity constraints (one to three shifts until 2030 plant completion) and why B2C seasoning profits might dip in H2 despite price hikes. / A: Management confirmed that while shifting to three shifts increases capacity, it is not linearly triple; thus, a new Gunma plant (¥21.5B capex) is needed for 2030+ demand. For seasonings, H2 profit pressure stems from increased marketing spend to secure volume against Middle East cost pressures, with price hike effects still maturing.

Q: Bernstau analyst asked if Forge’s production issues were inherent to large-scale gene therapy manufacturing or a specific hiccup, and why ABF profit growth hasn't matched revenue growth (margin compression). / A: CEO clarified Forge’s issue was a specific human error by unaccustomed workers during rapid expansion, not an inherent industry flaw, and stabilization is underway. On margins, he noted that while high-performance AI chips improve mix, general trends of price declines and rising raw material costs prevent margin expansion from keeping pace with revenue growth.

Q: Goldman Sachs asked what pressures would impact H2 food product profits and why share buybacks weren't announced earlier given cash flow visibility. / A: Management explained H2 profit pressure comes from higher sales/promotion spend to maintain volume amidst cost inflation. Regarding buybacks, they emphasized a policy prioritizing organic growth investments (Malaysia subsidiary, functional materials, R&D); existing buyback programs continue, but no new program was launched because excess cash is being allocated to these strategic investments and debt management.

Q: UBS asked for a timeline to fix Frozen Foods’ low ROIC (below WACC) and why share buybacks were paused despite favorable spreads. / A: Management acknowledged the need to improve ROIC above WACC through portfolio optimization and productivity gains, viewing frozen foods as a future growth driver despite current low margins. Share buyback timing was adjusted due to comprehensive cash reviews, interest rate environments, and the strategic priority of funding growth investments over immediate shareholder returns.