Ajinomoto Co.,Inc. Q1 FY2027 earnings call

• Company Context & Strategic Initiatives

  • Ajinomoto maintains the ASV growth initiative and 2030 strategic roadmap, with the goal of achieving roadmap targets ahead of schedule. The company continues to increase investment in intangible assets (human resources, marketing, R&D) to drive long-term sustainable growth.
  • The company announced plans for an absorption-type merger of wholly owned subsidiary Ajinomoto Fine Techno (core of its electronic functional materials business) into Ajinomoto Co Inc, effective April 1, 2027. This merger is intended to streamline management, accelerate growth, and enhance competitiveness amid faster-than-expected semiconductor industry growth driven by AI expansion. Management expects potential positive tax impacts from the restructuring.
  • Management offered support and sympathy to those affected by the recent Kumamoto earthquake, committing to full support for recovery.

• Operational Performance Updates

  • Domestic Japan seasonings and quick nourishment (excluding coffee) hit 101% of prior year sales, with volume up 2% and unit price flat; the slight unit price decline stemmed from sales mix shifts after last year's launch of the premium Kiwami product line.
  • Key overseas seasoning markets: Thailand grew 1% overall, with 2% growth in seasonings; Indonesia grew 6%, Vietnam grew 7% (both maintained strong momentum); the Philippines was flat overall due to temporary April-May production issues for umami seasoning, but other seasoning categories grew 9%; Brazil saw short-term distributor inventory reduction that suppressed reported sales, but end consumer demand remains robust.
  • Company-wide Q1 organic growth rate hit 5.7%, business profit growth hit 27.3%, and EBITDA margin reached 20.3%.
  • CDMO business: AgiCap licensing revenue has grown steadily quarter-over-quarter, and the Forge cell/gene therapy platform continues to add new customers and maintain its prior strong growth pace.

1. Seasonings and Foods: Overall sales and business profit increased. In Japan, coffee, soups, and solutions/ingredients saw higher sales, with coffee and seasonings driving significant profit growth. Overseas, all sub-segments saw higher sales, with a profit decrease in quick nourishment and solutions/ingredients offset by growth in the seasoning segment, leading to overall profit growth. The segment delivered a 4.7 billion yen year-to-date profit increase against a full-year target of 2.8 billion yen, including a one-time positive gain from reduced unrealized gain elimination. This segment contributes ~40% of total consolidated revenue.
2. Frozen Food: Overall sales increased, driven by strong core gyoza product performance in Japan, but overall business profit fell by 600 million yen against a full-year target of 3.7 billion yen growth. Japan profit decreased by 300 million yen due to higher raw material and logistics costs. Asia profit decreased by 100 million yen. Overseas sales rose (driven by North America and forex effects), but profit fell 400 million yen from delayed post-recall recovery and rising input costs. This segment contributes ~18% of total consolidated revenue.
3. Healthcare & Others (includes functional materials, amino acids, CDMO): Profit increased 9.7 billion yen year-to-date against a full-year forecast of 13.7 billion yen. All sub-segments delivered sales and profit growth:

• Functional Materials (ABF electronic materials for AI/network semiconductors): Sales grew 50% year-over-year, profit grew 70% year-over-year, driven by robust demand for high-performance applications and improved product mix. This is the fastest growing segment.
• Amino Acids for Pharmaceuticals & Foods: Sales and profit increased, driven by high-value amino acids for biopharmaceuticals and culture media.
• CDMO: Overall sales and profit grew; small molecule and gene therapy segments saw growth, while middle molecule (AgiCap) revenue and profit declined temporarily due to shipment timing, in line with initial annual plans. Overall consolidated Q1 results: Total sales up 13% year-over-year, business profit up 27% year-over-year, profit attributable to parent shareholders up 13% year-over-year, all recording new Q1 records.

• Full-year fiscal 2026 company-wide guidance was revised upward, with sales increased by 9 billion yen, business profit increased by 5 billion yen, and profit attributable to parent shareholders increased by 3.5 billion yen.
• The Healthcare & Others (functional materials) segment guidance was revised upward to reflect its strong Q1 performance and continued robust demand momentum, while overall food business guidance was maintained after incorporating updated Middle East conflict cost impacts.
• Management maintained the base assumptions of $110 per barrel for Dubai crude and an exchange rate of 150 yen to the U.S. dollar. The projected total annual cost increase from the Middle East conflict was revised downward from 30 billion yen to 25 billion yen.
• Management expects that the full impact of Middle East-driven cost increases will hit in the second quarter, with partial offset from price hikes and cost cuts, but full absorption of the cost impact will be achieved by the second half of fiscal 2026 via full cost pass-through and additional cost reduction measures, allowing the company to hit its full-year revised target.
• ABF electronic material demand remains very strong entering the second quarter, and management expects the current strong growth momentum will be maintained through the second half of the fiscal year.
• CDMO full-year guidance is maintained, with management confident of hitting the planned significant annual profit increase, with larger revenue concentrations expected in the second half of the year, consistent with prior guidance.

• Uncertainty over the evolution of the Middle East conflict creates ongoing risk of higher-than-projected crude oil, raw material, logistics, and packaging costs; if the conflict escalates further, cost increases could exceed the 25 billion yen projected in guidance.
• Consumer-facing food segments face a time lag before the full benefit of price increases to offset higher costs is realized, creating short-term margin pressure in the second quarter. Competitive pressure in B2C markets may limit the ability to fully pass through cost increases in some regions.
• Brazil's umami seasoning market remains highly competitive, with ongoing profit pressure that has not shown signs of improvement in Q1.
• Temporary production and shipment disruptions (such as the Q1 umami seasoning issue in the Philippines) can create short-term volatility in quarterly results.
• CDMO quarterly revenue and profit can fluctuate based on customer shipment timing, creating variability in sequential quarterly performance.

Q: Mizuho Securities asked: The upward full-year revision for functional materials only reflects strong Q1 results, with the second half outlook kept at the initial conservative forecast. Is strong demand for ABF continuing into Q2, and what is the expected tax impact from the Ajinomoto Fine Techno merger?

A: Management confirmed that robust demand for ABF has continued into the July-September Q2, and expects the strong current growth momentum will be maintained. Deliberations on the merger's tax impacts are just beginning, but management noted that a material positive impact is possible, with further details to be disclosed once finalized.

Q: Bernstein's Michael Lish asked: What drove the strong Q1 margin expansion for ABF, and how much came from volume/scale leverage, product mix improvement, or price increases?

A: Management explained that the main driver of margin expansion was improved product mix from faster growth of high-value-added ABF products for AI servers and high-performance applications. Volume growth also contributed, and raw material costs for ABF have not increased enough to require price increases to date, so price changes were not a factor.

Q: Morgan Stanley MUFG asked: Is the 25 billion yen Middle East cost impact evenly distributed across regions, and what is driving that impact? Also, is the Brazil profit decline unique to temporary distribution inventory adjustment?

A: Management noted that the cost impact is not skewed heavily by region, and affects packaging, logistics, and fermentation raw materials across the business, with variation only based on production volume. Brazil's profit decline is not just from temporary distribution inventory adjustment; tough market conditions for locally produced umami seasonings are the main driver of ongoing weakness.

Q: UBS Securities asked: What is the breakdown of offsetting measures between price increases and cost cuts for the 25 billion yen Middle East cost impact, and can price increases still be implemented as easily as in 2022 amid more competitive markets?

A: Management stated that price increases will make up a larger share of the offset than internal cost reduction, but the specific split is not disclosed publicly. For B2B products like umami seasoning, the company expects to be able to pass higher costs through to customers rationally. The full 25 billion yen impact is already incorporated into guidance, with offsetting measures planned to fully absorb the higher costs by year end.