Nichirei Corporation

President’s Investor Meeting – Q&A Session
Date:
Venue:
Presenter:

June 10, 2022 (Friday)
Online format
Kenya Okushi, Representative Director & President

GeneralQ. The current Medium-term Business Plan states that Nichirei will emphasize sustainability,and proactively make environment-related investments. How do you plan to linkenvironmental action with enhancing enterprise value?
A. Measures for the environment and human rights is already one of the requirements for conducting
business with foreign-affiliated customers. We anticipate a similar trend to emerge among othercustomers in the near future, and are making investments in preparation. There is also a possibility
that Nichirei will be indirectly affected in a number of ways in terms of food material procurement.
Nichirei has relied on overseas suppliers for much of its food material, which has provided costbenefits and other types of competitive advantage. However, because of the risk that we will nolonger be able to maintain stable procurement, we are responding by rebuilding the supply chain.
Q. What is your method for utilizing return on invested capital (ROIC)? Is ROIC managed only at
the managerial level, or subdivided more finely by employee?
A. ROIC is utilized not only at the management level, but also applied to each worksite. To achieve ourtarget of ROIC of 9% or higher by 2030, we have set target figures for ROIC by business segment.
We then use backcasting to set target figures for each business in the current business plan, andmonitor the progress on a quarterly basis.
Q. Regarding the management of ROIC, do you adjust capital cost by business segment toachieve tight control? Also, when target figures are not reached, what sorts ofdeterminations are possible?
A. We first determine the weighted average cost of capital (WACC) by business, then set a target ROIC
for each business company. When the figures cannot be significantly improved within the businessplan target ROIC, and there is no prospect for improvement going forward, management discusses
the situation, including business continuity, and considers it as one of the determining factors fordecision making.
Q. Regarding how best to view the balance between top-line growth and capital investment,
you’ve explained that the current business plan is the peak for capital investment, and thataround 70 to 100 billion yen in capital investment will be required in the next business plan.
Because of the nature of your company’s business, there is a tendency to prioritize capital
investment when seeking top-line growth. How do you plan to improve ROIC while balancing
these factors?
A. In terms of Temperature-controlled Logistics, adequate capital is required to build refrigerated
warehouses. We have achieved steady growth up to now while making capital investments within
the scope of depreciation cost. However, since the industry is expected to undergo significant
structural changes when new work regulations come into effect in 2024, we decided to sharply
increase warehouse capacity at a stretch with the aim of top-line growth. At the same time, theassets in which we invested up to now over the long term have depreciated considerably, so evenwith such large-scale investments, profitability will not suffer.
In Processed Foods, we secure capital efficiency by producing high-margin products at our in1

house centers. Going forward, from the standpoint of sustainability, we will need to switch to atrusted supply chain. We plan to implement price revisions during the current fiscal year to regain
profitability, and transition to such changes.
Q. How do you feel about your company’s share price and evaluation in the market?
A. We think that there are three main factors behind the recent slump in our share price. The first isoperating profit in the previous fiscal year. Even after revising our forecast downward, the final
figure was well short of the business plan. The second is that while the share prices of companies
with a high proportion of overseas sales have remained firm, in the case of Nichirei, that result has
not been fully expressed numerically. The third we feel is our failure to sufficiently explain ourgrowth strategies for the mainstay Processed Foods and Temperature-controlled Logistics
businesses.
In response to these issues, as per the current medium-term business plan, we will post
positive business results, expand sales overseas, work to create new value, enhance earnings, andlower capital costs. In addition, we will pursue sustainability management to strengthen ourbusiness foundation. We will also further enhance our IR program, and provide more thoroughexplanations to stakeholders.
Processed Foods
Q. What is your thinking behind aiming for an operating margin of 8% in the future?
A. We expect the frozen food market in Japan to continue to grow. Nevertheless, while sales havebeen positive, this has seriously disrupted our profit structure. Restoring the profit structure to its
original state is a priority matter, and we are steadily implementing price revisions. In addition tothis, we plan to secure earnings through growth categories, as well as new categories.
Q. The yen has continued to weaken recently, bringing the risk of further expansion in material
costs. Is it fair to assume that the plan to absorb these costs with price revisions has beensuccessful? Also, in the next fiscal year, will the effects from price hikes fully contribute toearnings, leading to an improvement in profitability?
A. The price revisions implemented in the previous fiscal year have steadily gone into effect recently,
and are producing results. At the same time, since March this year the yen has weakened sharply,and remains below the level of 130 yen to the U.S. dollar. As such, since our initial forecasts werebased on an assumed exchange rate of 122 yen to the dollar, the additional cost will be around 3 to
4 billion yen. As we mentioned during the results presentation in May, we are holding discussions
with clients aimed at price revisions in August (for household-use products) and September (forcommercial-use products) to incorporate the effects of this cost increase. Of note, we expect thatthe negative effects of higher costs will appear first during the first half, but from the second half,
the positive effects from price revisions will emerge, leading to a restoration in earnings. During thenext fiscal year, even if the exchange rate remains at a similar level, the risk will evaporate.
Q. Nichirei’s determination to implement price revisions is clear, but at the same time, it seems
prudent to also consider the risk of falling short of operating profit targets.
A. Prices are rising not only for frozen food, but consumer goods in general, including other fooditems. Considering the good taste and convenience of frozen food, we expect customers will accept
a certain degree of price increase.
Q. For the next medium-term business plan, what are your thoughts regarding factors that draw
a line between differentiation from the competition, and competitive advantage?
A. Up to now, Nichirei has separated categories such as rice products and processed chicken products
according to the food material. Recently, however, products more like regular meals have emerged.
2Major companies have begun to take small steps into the market, and while there are needs fromelderly care facilities and other institutions for meals rather than individual items, very few
companies are able to meet this demand. Nichirei has begun to pursue measures in this area, but it
requires equipment that is adaptable rather than for mass production, so we plan to shift ourapproach to investment. Also, because Nichirei has a lineup of food material that includes
vegetables, rice, meat, and fish, and more developed sales channels than its competitors, webelieve this gives us an advantage in being able to work with customers on a broad range ofmeasures.
Q. Does Nichirei have any strategies for reducing volatility and improving profitability at its
subsidiary in Thailand?
A. GFPT Nichirei (Thailand) produces processed chicken products mainly for the Japanese market.
Operations declined in the previous fiscal year due to the difficulty of securing workers as a result ofcovid-19, with a considerable deterioration in profitability. Operations up to now have been laborintensive, but we plan to introduce greater automation to reduce volatility. Since pricing for theJapanese market is difficult, we plan to increase exports to Europe and China, where theinterrelation between economic trends and product prices is comparatively strong.
Temperature-controlled Logistics
Q. How does Nichirei plan to leverage its competitive advantage in the logistics industry when
new work regulations come into effect in 2024?
A. Regulations on working hours will formally be applied to truck drivers from fiscal 2024. The Work
Style Reform Act went into effect for a wide range of industries in 2019, and following a six-year
grace period, restrictions will now be legally applied. The background to these changes is thatworking conditions for drivers in the transport industry have been far from positive, and this has
become a major social issue. Nichirei plans to make large-scale investments in response to thesechanges. Improving the working environment for drivers is the primary consideration, and there aresome competing companies that will be unable to adapt. Nichirei will have the upper hand in termsof acquiring the logistics business that will become available, as well as with pricing that othercompanies are unable to match, which we believe we can leverage into earnings.
Q. Considering the advantage of conducting business both overseas and in Japan, is there any
potential for crossover, such as adopting successful examples from overseas in Japan, orimplementing success stories from Japan overseas?
A. Overseas, there are many companies that earn profit by providing a single function, such as storage
or transport. Nichirei was also such a company in Japan at one time, but as customer needs forcohesive services increased, and we found that we could expect appropriate fees for meeting thoseneeds, Nichirei shifted its course in that direction. Similar demand exists in Europe and Asia, so weplan to utilize the expertise we have acquired in Japan. At the same time, in overseas markets,particularly Europe, Nichirei is responding to demands for sustainability, an area in which many
countries are ahead of Japan. We have acquired various types of knowledge in this field, and areable to bring that knowledge back and apply it in Japan.
Q. What is the status of Nichirei’s efforts for an asset-light business model?
A. Currently, within the framework of a logistics platform for frozen foods, Nichirei is taking the lead tocoordinate an optimal logistics function, working to efficiently deliver goods to customers.
Compared to other companies, Nichirei has many logistics centers, and has built a transport anddelivery network that serves as a base for its business. Nichirei only builds the framework andhandles the coordination, and in some cases utilizes the assets of other companies, partially or inwhole. Since the company’s facilities will be candidates for scrap-and-build programs in the future,
we plan to carefully consider if holding on to those properties as company assets is the best option.
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Q. Nichirei is forecasting the negative impact from higher electricity costs to be 700 million yen
in the current term. Is this the net amount after the offset from price revisions?
A. That is correct. Since oil prices remain high, we will continue to carefully observe future trends andrespond accordingly.

Note: This document is not a complete record of the Q&A session, and has been edited byNichirei Corporation.

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