Bankruptcy prediction- Morinaga-milk, Meiji, Meg Milk -

Introduction

• Method– To apply SAF model to three main companies

in dairy industry• Objective

– To find out the reason why the difference between them is observed

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If one of their SAF values is not good, we could suggest how they can improve it

Milk demand

Demand is gradually decreasing because of the acceptance of the the taste

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Market EnvironmentCustomer demand

Milk and Food industry sensitivity

Demand loss because of cold summer (ex. Ice-cream)

Production loss because of an extremely hot weather (ex. Milk)

Downturn in demand due to low birthrate and aging population

Drinking frequencyof milk

Everyday 5-6 3-4 1-2 Less thanper a week

Japan Dairy Industry Association

Companies’ Profile

Morinaga-milk Meiji Yukijirushi

Meg-milk

Logo

Established 1917 1917 2009 (1925)

Main businessMilk Confectionery Milk

Ice-cream Milk Food products

Main product

Sales(2011)Financial report 2012

\ ¥578,299 m \ ¥1,109,275 m \ ¥509,413 m

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Morinaga milk- Main business -

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Morinaga milk(Sales \ ¥578,299m)

Milk / Dairy / Ice cream / Others

Financial report 2012

Chairman Akira Ohno

President Michio Miyahara

Employees 3,091 (as of March 31, 2012)

Major Business

Production and sales of milk, daily-based beverages, yogurt, custard, condensed milk, powdered milk, butter, cheese, ice cream, non-dairy beverages (juice, tea, coffee), clinical liquid diets, manufacture and sales of animal feed; design and construction of plant equipment

Capital 21,704 million yen(as of March 31, 2012)

Head office - Tokyo

Sales branches 9

Plants 16

Subsidiaries 30

# of Consolidated companies 75

Financial report

Meiji- Main business -

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Meiji(Sales \ ¥1,109,275m)

Milk / Dairy / Ice cream / Others

Financial report

Chairman Shigetaro Asano

President Shigetaro Asano

Employees 15,338 (as of March 31, 2012)

Major Business

1. Dairy: milk, condensed milk, powdered milk, butter, cheese, ice cream, daily-based beverages, nutrition, livestock products, etc.

2. Confectionary: sugar, corn sweeteners

3. Healthcare: healthcare products, drugs, management of sports club

4. Pharmaceuticals: ethical pharmaceuticals, agricultural chemicals, veterinary drugs

Capital 30,000 million yen(as of March 31, 2012)

# of Consolidated companies 59

Yukijirushi Meg-milk- Main business -

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Yukijirushi Meg-milk(Sales \ ¥509,413m)

Milk / Dairy / Ice cream / Others

Financial report

Chairman Yoshiharu Nakano

President Yoshiharu Nakano

Employees 4,989 (as of March 31, 2012)

Major Business

1. Dairy: milk, condensed milk, powdered milk, butter, cheese

2. Beverages and Dessert: ice cream, daily-based beverages, Yogurt

3. Feedstuff: Feedstuff

Capital 20,000 million yen(as of March 31, 2012)

# of Consolidated companies 26

Each company have various different business segments, but we focus on the main segment which is common, dairy industry.

　 Morinaga-milk Meiji Meg-milk　 2009 2010 2011 2009 2010 2011 2009 2010 2011

X7: Retained earnings to total assets

19.25%

19.83%

23.80%

23.80%

16.43%

20.04%

X10: Net income before

tax to total assets

3.03% 2.20% 2.48% 1.99% 3.28% 3.52%

X37: Inventory turnover period 0.70 0.71 1.17 1.17 0.85 0.82

X26: Interest expenses to

sales0.30% 0.32% 0.30% 0.23% 0.20% 0.18% 0.35% 0.24% 0.19%

SAF2002 - 0.94

0.92 - 0.9

40.9

3 - 0.90

0.95

Rating - BB BB - BB BB - BB BB8

Companies’ financial statementbased on SAF2002

Comparison of SAF model• 3 companies are placed on higher level

over cutoff point 0.68 of SAF model

Meg 0.95Meiji 0.93

Morinaga 0.92

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Why?How to improve?

Cause of Changes in Financial Position- Logic tree-

SAF 2002

Interest expenses to Sales

Inventory turnover period

Net income b/f tax to Total assets

Retained earnings to total assets

Retained earnings Total Assets

Net income b/f tax Total Assets

Interest expenses Sales

Raw Materials and Storage

InventorySales

Merchandises and Finished

Goods

Work In Process

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Inventory

Divided into each valuables to clarify the cause of changes

Cause of Changes in Financial Position- Logic Tree-

SAF 2002

Interest expenses to Sales

Inventory turnover period

Net income b/f tax to Total assets

Retained earnings to total assets

Retained earnings Total Assets

Net income b/f tax Total Assets

Interest expenses Sales

Raw Materials and Storage

InventorySales

Merchandises and Finished

Goods

Work In Process

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Cause of Changes in Financial Position- Logic Tree-

SAF 2002

Retained earnings to total assets

Retained earnings Total Assets

Net SalesOperation profitOrdinary profitNet income before taxNet income

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Profit AnalysisMorinaga-Milk Meiji Meg-milk

In 2011, loss on inventory due to quality deterioration (172 million yen) lowered the ordinary profit. Retained earnings have been accumulated from positive net income.

Net income is on the same trade as sales. Retained earnings have been accumulated from positive net income.

In 2011, revaluation of land(3,542 million yen) was incorporated into retainedearnings.

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unit: millions of yen unit: millions of yen unit: millions of yen

Cause of Changes in Financial Position- Logic Tree-

SAF 2002

Retained earnings to total assets

Retained earnings Total Assets

Total AssetTotal non-current AssetTotal current AssetTotal tangible fixed assetTotal intangible assetInvestments and other assets

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Cause of Changes in Financial PositionTotal assets are basically stable

Morinaga-Milk Meiji Meg-milk

Inventory is increasing from 2010 to 2011 due to slow demand after earthquake

Inventory is increasing from 2010 to 2011 due to slow demand after earthquake. Buildings for leases were reclassified as other assets

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unit: millions of yen unit: millions of yen unit: millions of yen

Inventory is increasing from 2010 to 2011 due to slow demand after earthquake

Cause of Changes in Financial Position- Logic Tree-

SAF 2002

Interest expenses to Sales

Inventory turnover period

Net income b/f tax to Total assets

Retained earnings to total assets

Retained earnings Total Assets

Net income b/f tax Total Assets

Interest expenses Sales

Raw Materials and Storage

InventorySales

Merchandises and Finished

Goods

Work In Process

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Cause of Changes in Financial Position- Logic Tree-

SAF 2002

Net income b/f tax to Total assets

Net income b/f tax Total Assets

-26.5% +5.1%Net SalesOperation profitOrdinary profitNet income before taxNet income

Total AssetTotal non-current AssetTotal current AssetTotal tangible fixed assetTotal intangible assetInvestments and other assets

Decrease of net sales Extra ordinary loss due to earthquakeDecrease of loss of securities for investment

Same as previous slides

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SAF 2002

Interest expenses to Sales

Inventory turnover period

Net income b/f tax to Total assets

Retained earnings to total assets

Retained earnings Total Assets

Net income b/f tax Total Assets

Interest expenses Sales

Raw Materials and Storage

InventorySales

Merchandises and Finished

Goods

Work In Process

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These 3 criteria are inventory.

Cause of Changes in Financial Position- Logic tree-

Morinaga-Milk Meiji Meg-milk

Even though the sales was decreased and inventory was increased, they kept inventory turnover period as 0.71. That means they controlled the inventory very well.

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0.70→0.71 1.17→1.17 0.85→0.82

Cause of Changes in Financial Position- Inventory Turnover Period-

(right scale)

(left scale)

(left scale)

(left scale)

Unit: million yen

Financial report

They kept inventory turnover period as 1.17. That means they controlled the inventory very well. But due to their pharmaceutical business, the period is longer than other competitors.

The inventory was increased, but the sales remained stable due to their diversified product line-up. They improved the inventory turnover period.

unit: millions of yen unit: millions of yen unit: millions of yen

Cause of Changes in Financial Position- Logic Tree -

SAF 2002

Interest expenses to Sales

Inventory turnover period

Net income b/f tax to Total assets

Retained earnings to total assets

Retained earnings Total Assets

Net income b/f tax Total Assets

Interest expenses Sales

Raw Materials and Storage

InventorySales

Merchandises and Finished

Goods

Work In Process

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Short term loanLong term loan matured within 1 yearLong term loan

These 3 criteria are interest bearing liabilities.

Morinaga-Milk Meiji Meg-milk

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Cause of Changes in Financial Position-Interest Expenses to Sales-

0.30→0.32→0.30% 0.35→0.24→0.19%0.23→0.20→0.18%

(right scale)

Unit: million yen

(left scale) (left scale)Financial report

Even though the interest bearing debt was decreased, the interest expenses was increased from 2009 to 2010 because their financial situation became worse. They borrowed the liabilities which has higher interest rate.

Even though the interest bearing debt was decreased, the interest expenses was remained from 2009 to 2010 because Meiji’s rating is very good.

The interest bearing debt was decreased and interest expenses was kept very small, that means their financial situation is stable.

unit: millions of yen unit: millions of yen unit: millions of yen

Conclusion

• SAF values for 3 companies are below cut-off point of 0.68. They need counter-measure to improve their business performance.

• Meiji (worst SAF value : 0.63) is trying to expand their business through capturing Asian market. However, since SAF value indicated, they are not healthy company and have possibilities to go bankrupt.

• We suggest following measures before expanding their businesses to new fields.– Reduce inventory turnover period to at least competitors’ level– Increase profit by capturing demand with before earthquake level by

strengthening brand of products.– Limit dividend payments to increase retained earnings for earthquake

recovery.

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Appendix A: Morinaga milk- History -

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Milk Confectionary1917 Nihon rennyu

Co,1910 Morinaga syouten

1920 Merger “Morinaga confectionary”

1949 Morinaga milk 1949 Morinaga confectionary

Morinaga milk and Morinaga confectionary are not related company at the moment.Morinaga confectionary was originally found as “Morinaga syouten” in 1910, and Morinaga milk was originally found as “Morinaga rennyu” in 1917. They merged in 1920, and again they separated in 1949.

Financial report

Appendix B: Morinaga milk- Main factors -

24Financial report

Appendix B: Meiji- Main factors -

25Financial report

Appendix B: Yukijirushi Meg-milk- Main factors -

26Financial report