Ajinomoto Co Inc

TSE:2802

Earnings Call Transcript 2022-Q1

[Tetsuya Nakano, executive]

Good evening. This is Nakano speaking. Thank you very much for attending despite your busy schedule. From my side, based on the presentation that we have distributed, I will give you the outline for the first quarter results.

First of all, going to the PowerPoint material, and this is on Page 2. This is the first quarter summary. For the first quarter, overall sales and business profit both grew double digit compared to previous year. So we have been able to have a smooth start in line with our plan.

It's the first quarter of last year was when the COVID-19 was spreading, and there was a dramatic contraction of the restaurant business. And especially in April, the consumers has stacked up on food. And due to these special factors, in this presentation, we are showing the comparison where we can with fiscal year 2019.

First of all, in terms of the sales for the first quarter, as you can see here, in a major segment, that is seasoning and foods, frozen food, healthcare and others has been -- all the sales, goods. Specifically, in the overseas seasoning and North American frozen food and the biopharma service and electronic materials business, we saw an increase in sales.

In terms of the business profit, the increase of profit was JPY 5.1 billion. For the food and -- seasoning and foods business, we have been conducting a very proactive marketing spend. And last year, there was a decrease in our share, but we have been spending to increase our share. However, as you can see under reference on the lower right-hand side, this is a comparison against the fiscal year 2019. As you can see here, in terms of SG&A compared to 2019, it's only JPY 500 million increase of the SG&A expenses, and we have been able to control the increase of SG&A, including the ratio against our sales.

So please go to the next slide. This is the sales and business profit by segment. As you can see, in terms of the sales for all the major segments, we have seen an increase of sales. For the business profit, in the frozen food business, in particular for the North American market, there has been difficulty in securing the labor force, and there has been a temporary decline in utilization. And there has been a cost increase, including personnel costs. So it was a decline in profit here, but I would like to refer to this later. But in terms of the countermeasures, we already have these in place. On the other hand, if you go to the healthcare segment, we saw an increase in sales for the biopharma service and the functional materials. So overall, the business profit increased strongly.

So if you go to Page 10, there is a comparison against 2019 for both sales and business profit by each segment. Even compared to Page 19, sales and business profit for each of the businesses, so an increase.

And then going back to where we were, going to Page 4, that is 1-3. This is the sales and business profit by region. So if you look at the chart on the lower part of the slide, in terms of the seasoning and foods segment, in all the regions, we saw an increase of sales. Specifically, in Asia, we saw increase of sales. In the Americas, we saw an increase of sales as well. In Japan, soup continued to show strong sales. While some of the products, that is a Chinese flavors and western flavor seasonings and menu-specific seasonings, they saw a reactionary decline from last year -- from last April, because people have been stacking up back at that time. So for these type of products, the increase of sales was somewhat subdued.

In Asia, so we have the Page 5 of the -- sorry, Page 3 in Ajinomoto consolidated results first quarter ended June 30, 2022 (sic) [ March 31, 2022 ]. So we have by region, overseas sales growth rate. For Thailand, it's plus 9% in growth. For Indonesia, it's plus 8%. For Vietnam, the Philippines, a double-digit increase. So you can see that the Asian region has been growing very steadily.

So for each of the countries, there has been a steady at-home demand, and there has some partial recovery in the restaurant-related business, and that led to an increase of sales. For the major countries, I would like to explain more in detail about the situation. And verbally, I would like to explain about this on local currency value base comparing to the previous year, just to give you the percentage of the changes for this first quarter.

First of all, for Thailand. Last year, for the restaurant-related business, it was slow but declined sharply. But this year, the Ajinomoto business, so we -- the high single-digit increase of sales. For the flavor seasonings, the high single-digit growth. So this is due -- this is basically related to the partial recovery for the restaurant business. And for Thailand instant noodles, last year in the first half, there has been some challenges in the production, but now we see a double-digit growth. For beverages, high single-digit level of growth has been seen. So for Thailand, basically, the recovery has been in line with our expectations.

Going to Indonesia. Again, this continues -- this country continues to be strong. The Ajinomoto, digit double-digit growth. For the flavor seasoning, double-digit growth. Menu-specific seasoning because last year, it was high single-digit decline due to this reactionary situation.

For Vietnam, Ajinomoto and the flavor seasoning both saw a double-digit growth. And in terms of the volume, it is smaller. But going to the Philippines, Ajinomoto flavor seasoning -- menu-specific seasoning also double-digit growth.

And going to Latin America, Brazil, overall grew 29%. So Brazil was strong. And the major product, that is for flavor seasoning, they saw a double-digit growth.

And going back to the -- going back to Page 4, where we have left off, going to the frozen food. In Japan, last year, as we have been explaining, especially for the unprofitable restaurant-oriented SKUs, we have been trying to reduce the number of SKUs. Because of this, for the restaurant business, for the key account, business has declined, sales has declined, and we saw a decline both in sales and profit. But for the home use, frozen food, we saw an increase of sales.

For North America specifically, the demand with the restaurant has been recovering sharply. In both restaurants and for at-home use, we have seen an increase of sales. More specifically, for the restaurant business, it is a high growth of double digit.

Next, please go to Page 5. Now we would like to look at the profit on different levels. As you can see on this page, in the first quarter, gross profit margin remains high at 39.3%. So it remains high. In 2019 fiscal year, although it is not shown on this page, the gross profit margin was 36.8%. So it is better than that in 2019, and it has not come down so much from the level of fiscal year 2020 as a whole.

As I mentioned earlier as to SGA, please look at the SGA ratio against sales, it is well controlled. And under the business profit line other operational expenses, in Europe, we sold the company of Animal Nutrition in April. And that came with some expenses, which are reflected on this page. So the profit attributable to owners of the parent company, this line is showing a slight decline. But without this one-off sales of the Animal Nutrition company, the profit attributable to owners of the parent company would have been positive.

Please move on to Page 6, the items that impact business results, namely from the second quarter and on. Number one, as described here, already in western countries, there have been some development eyeing the post-COVID era. In the restaurant business, it's showing a strong recovery. And as to major countries, including Japan, the vaccination progresses. The economic activities are expected to continue to be normalized and as happened in the U.S. The temporary -- the strong recovery of the restaurant business, which is giving some reactionary decline to the home-use-related business, that possibility still remains, and we assume that possibility.

While in ASEAN countries and other developing countries, the virus is still spreading. And there are some production side and sales side constraints, which would give some temporary negative impact. But we experienced that last year, and we could cope with the changing environment flexibly and adequately last year. So we believe that we can adapt to the changing market going forward as well.

Number two, it's about pricing and especially the prices of the raw materials. More than we expected, some raw materials, their prices have been increasing. That said, in Indonesia and Brazil, we have already raised prices for major seasonings. And as to Frozen Foods North America, we are raising prices. And going forward, in each country, we have a plan, a specific plan, to deal with the situation in different countries through pricing. So basically, the cost increase, we believe, can be offset by the price increase.

Earlier, I said that the first quarter saw decrease in the sales of the frozen food, and there has been some HR cost increase, logistics cost increase and the operational slowdown, utilization slowdown due to staff shortage in North America, but we believe that we can offset the situation with price control. Through such activities, we remain committed to achieve financial targets through price increase in organic growth and the achievement of budget, and the management has been in agreement to achieve the financial goals.

And with that, I would like to conclude my presentation.

[Unknown Executive]

Nakano-san, thank you very much. Now we plan to move on to Q&A.

[Operator]

So this the first question, Fujiwara-san from Nomura Securities.

[Satoshi Fujiwara, analyst]

This is Fujiwara of Nomura speaking. So this was a wonderful financial result, and I am a bit surprised. So some question. For the overseas major market growth, so you have been explaining by product. And of course, in terms of the more established at-home eating, that's understood, but the growth seems to be quite strong. So in terms of the organic growth, potential, I think that is a KPI that you're focused on. Does it mean that you have been able to enhance your organic growth capability? So from your point of view, what is your evaluation about this?

[Tetsuya Nakano, executive]

Mr. Fujiwara, thank you very much for your question. To be frank, for Thailand, we were concerned about the situation. But relatively speaking, the infection is still continuing in Thailand, and there are some various constraints. The state of emergency is continuing in Thailand, and we were a bit concerned. However, we have started to see a recovery for the restaurant demand. That has been quite apparent. And on top of that, well, for Thailand specifically, I think the biggest reason is the recovery of the restaurant demand. But for the other products, for the at-home demand has been more or less stable. So for the coffee, the RTD, that has started to recover. So I think they will be able to maintain this momentum.

However, that said, as has explained, currently, the infection is widespread. And for Thailand, I don't think that there will be -- there's not a major constraint on the daily activities. But for instance, Indonesia, Vietnam, for those countries, the -- in terms of the factories operation, there has been some constraints. For instance, the staff will have to stay in the factories or else will not be allowed to manufacture goods or the public market is close in some areas, where the operating hours are shortened.

In some countries, we are seeing this constraint, but we've experienced that last year, and we think that we'll be able to respond to these type of situations. But in the second quarter, there is a possibility that these will -- situations will impact our performance.

[Satoshi Fujiwara, analyst]

So you have explained about the current situation. But as you pointed out, last year, you have experienced that, so there's no difference in the base. So in terms of the growth, I think it would be safe to say that the strong growth will continue. Can you respond to that?

[Tetsuya Nakano, executive]

Yes. More specifically, if you look at Indonesia under this environment, so we were able to increase our sales even under this environment. So the at-home demand or the recovery of eating at home, we want to leverage that and then link that to our organic growth.

[Satoshi Fujiwara, analyst]

So sorry, sorry, one follow-up. So the share of each of the markets, isn't that have been increasing?

[Tetsuya Nakano, executive]

It seems that way if you look at the numbers, it seems that way. And for some products, we have seen our share increase. So if we just look at the numbers, some are stable market share. And the statistics themselves, so the data tends to be concentrated on the major city so it's not that accurate. So it's not a complete apple-to-apple comparison. But as they feeling, I think we have been able to increase our sales in a very stable manner.

[Operator]

Next question is from Mr. Yamaguchi, Goldman Sachs. Sorry, Ms. Yamaguchi from Goldman Sachs.

[Keiko Yamaguchi, analyst]

About healthcare, actual results and how you evaluate them by your pharma and the functional materials. As to biopharmaceutical, I think different quarters had different results. So do you think that the first quarter results were too good? How would it be sustainable? And probably about 50% of the full year, the increased sales has been realized or more than 50% when it comes to profit. What are you looking at them -- how are you looking at them? And functional materials, very strong progress. And the healthcare, the full time -- full year results are likely to exceed your forecast?

[Tetsuya Nakano, executive]

Well, as to the first quarter, it was better than our expectation. So if the trend continues for the full year, well, we do not think so. As to amino acid, pharmaceutical usage, demand is very steady or tends to go up. As to biopharma services, last year because of the pandemic, there were some cancellations or delays. And after that, demand is beginning to recover, we believe. Also in Belgium, low molecular part production capacity, but the utilization rate is rather high, and so the cost situation will continue to be very good. As to electronic materials, so those network and games -- gaming, for these uses, demands are strong. The question is whether the current trend will continue or not. We will need to be watching the situation closely.

In the first quarter, biopharma services had some one-off revenue, and so that will not continue. That part will not continue. But as long as the environment is concerned, we expect the continuous strong growth in demand. Thank you.

[Keiko Yamaguchi, analyst]

So the one-off revenue, was it a big one? Or is it something that we don't need to worry about the reactionary recoil?

[Tetsuya Nakano, executive]

Maybe it was just a single digit -- it's not something that we need to worry about the reactionary recoil.

[Operator]

Next from Mizuho Securities, Saji-san, please.

[Hiroshi Saji, analyst]

So you had the KPIs, this organic growth that you've announced in your midterm plan. Price increase, organic growth, 4%. 2% of your price increases was your KPI. So if you look at the financial results for the first quarter, I think it's very difficult because COVID-19 has an impact. But in terms of the price -- unit price increase, what is evaluation about that for the first quarter? And in terms of the KPIs, what was the contribution?

And for the low salt products, you said that you're going to launch the low-sat products at once at each of the markets. So would you like to elaborate that as far as you can explain about those launches?

[Tetsuya Nakano, executive]

Thank you very much for your question. So in terms of the unit price increase, of course, it is true that due to COVID-19, things -- it's very difficult to compare that -- the first quarter, we have not been able to disclose about that much. But one thing that I might say is that -- so the passing on the cost increase portion to the prices, I have been able to do that partially in the first quarter, and that will continue to be conducted in the second quarter and onwards. And of course, this is a positive development.

If you look at the current situation, because last year because of COVID-19, so the small lot products has increased and the large volume Ajinomoto or the flavor seasonings, that's for the restaurant business, has declined. So maybe that saw some negative movements. So if you look at the first quarter only, it has not been developing to a large increase of the price -- unit price increase. However, that said, in terms of our organic growth targets, that's 6% for this year. For the flavors and seasoning -- seasoning and foods or frozen food, we want to do that. And so this is a target for the price increase. We are committed to achieve that.

[Hiroshi Saji, analyst]

In terms of the low-salt products, for the launch of those products, can you comment on that?

[Tetsuya Nakano, executive]

So currently, in each of the markets, the sales have just started. So in terms of the situation, how much that is growing, we don't have the exact figures right now. But well, we are still under the influence of COVID-19. But the health rate demand, people are more -- becoming more aware about health, and we want to leverage on that type of trend.

So in terms of the price of these products -- excuse me, for the prices, so because of the competitive environment, for instance, Vietnam, we have been discounting prices. But because of the increase of the raw material, so -- and I think Nishii said that we are not in an environment that the prices will go down because of the higher raw material costs.

[Hiroshi Saji, analyst]

Is that the situation right now?

[Tetsuya Nakano, executive]

Well, we have not been able to clearly say that it is not -- we are not competing on the price because it depends on the market. For instance, in Japan, the price competition is becoming harsher. So we cannot say for sure that we are not competing on price anymore. But going forward, this is about cost. It will not impact, not only our company, but the competitors are under the same environment. So the price increase, I think that is unavoidable.

[Operator]

Next question, Takagi-san from SMBC Securities -- Nikko Securities.

[Naomi Takagi, analyst]

This is Takagi. The raw material, the price, that there was a JPY 3 billion of cost increase and from the second quarter onwards. Am I right to understand that the price will go up even more, so that will amount to more than JPY 10 billion of cost increase for the full year? But listening to you, it seems that you think that you can offset it with the price increase. But historically, when it comes to the cost increase, that your action was delayed and that you missed out on some opportunities when the demand came back. But this time, it seems that your message action is changing internally and that you now believe that you can minimize the risks coming from the material cost increase.

[Tetsuya Nakano, executive]

Well, it's not that we have not done it in the past, but here is how the management thinks whether they understand that the cost is increasing very rapidly. So we deal with it with price increase, and there is the consensus among the management, among all the people at Ajinomoto.

And then, for example, Ajinomoto itself is manufactured at 6 different locations. And of course, we export the products to other locations. And when we are going to raise the transport price internally and in the countries where they input the Ajinomoto, they have to think about when they are going to raise the other prices. So this time, the corporate business department -- business planning department has been coordinating with other players in the group, and that's very important.

[Naomi Takagi, analyst]

I see. So what about the demand after the price increase? The demand increase is now a tailwind for you. So we don't need to worry about demand trend going forward?

[Tetsuya Nakano, executive]

Well, not necessary. So we cannot be reassured, not necessarily when we look at the economy. But each country is being helped by its government, and we understand that such help will continue. And already in those countries where price increases happened, we are not seeing a big decrease in the quantity of sales. So I think -- we think that we will be fine.

[Naomi Takagi, analyst]

Initial forecast, there will be some negative impact of more than JPY 1 billion comparing the cost and the price. So you're saying that the actual numbers will not be so different from your initial forecast?

[Tetsuya Nakano, executive]

JPY 1.8 billion is the impact in the initial forecast, which remains unchanged at this moment. But some -- the costs are increasing more than we had expected. So question is how we -- how much work we have to do for that part, and the business planning department or the business headquarters should -- actually, it is in the discussion with different countries.

[Naomi Takagi, analyst]

So you're saying that you are communicating a lot.

[Tetsuya Nakano, executive]

Yes.

[Operator]

Let's go to the next question. From Morgan Stanley, MUFG Securities, Miyake-san, please.

[Haruka Miyake, analyst]

This is Miyake from Morgan Stanley. So my question is kind of a follow-up of Yamaguchi-san question. So this biopharma service, so the increase of profit, the level of increase is JPY 2 billion. And JPY 400 million, you said, is about a one-off revenue. But even excluding that, I think basically you have seen a substantial increase in your profit. So if we look forward, so I think basically, there will be some high utilization in your operations. And I think each quarter, is it the image that the profit is going to increase quarter-by-quarter? So I do not have a clear understanding. So I would like to hear about what are one-offs and what are not one-offs.

On top of that, for the healthcare segment, you have others. So it has seen the increase of profit here. And already, you have exceeded your budget for the full year. So are there any other factors that is going to be impacting this others sector?

[Tetsuya Nakano, executive]

For the other business, mainly because we are going to start the reform for the animal nutrition business and we have some products that are remaining from Valine, for instance, the price of these type of products is going up. And another factor is that the unrealized -- elimination of unrealized gains, there are some one-off factors here, but that has translated to some profit. So those are not recurring type of profits or kind of one-off factors.

And in terms of the -- your question about the healthcare, there have some recent questions about the healthcare business. And of course, it is true that it's doing well currently, and the environment, per se, is not bad. But -- so for the biopharma, there is some -- in terms of the -- or whether the orders are recovering, I think we have to observe the situation a bit more carefully. So whether this trend is really being connecting -- being connected to the real recovery or is it going to go down again, I think we have to observe the situation very carefully. So when we know about -- we have a more clear understanding of the situation as early as possible, if necessary, we will conduct a review.

Then first quarter, I think the orders have been stopped or canceled, and it came out once. So we saw a huge jump in the profit performance. And so maybe you want to understand the situation more to give more clarity. Is that your thinking?

[Haruka Miyake, analyst]

Yes. Yes, that's what we are thinking. I think the business operation in themselves are thinking in that way. So at the full year plan, at this point, for the biopharma services for the full year plan, it seems that it's on an upward trend. But for the full year, not so much of the upside. Are you saying?

[Tetsuya Nakano, executive]

Well, currently, our target is to achieve our initial plan. And I think basically, we are trending so that we can achieve a full year plan. But if we have to do a review, we will do that and review the situation.

[Operator]

Next question, Morita-san from Daiwa Securities.

[Makoto Morita, analyst]

Here is Morita with Daiwa Securities. Well, there's something that I don't understand. In the first quarter on a consolidated basis, in line with your plan, it seems that there has been more upside compared to the plan by segment, could you please make a short comment? And for the first quarter and then the second quarter, there will be some other downward trend in the profit after the big profit increase in the first quarter.

[Tetsuya Nakano, executive]

Segment by segment, well other than that, I would like to talk about seasonings and foods first. From around June in Indonesia and Vietnam and Thailand, there's more spread of the infection, so we need to look at the potential impact. There might be some impact.

As to frozen foods, as I mentioned earlier, we will deploy a price increase. It is challenging if we can do it completely, but our management is committed to it. So we'd like to watch carefully.

As to healthcare, for pharmaceutical use, biopharma services namely, as I mentioned earlier, whether the medical-related amount will continue or come down. And as to biopharma services, whether the increase in orders will continue or will stop, and we need to watch that carefully as well.

As to functional materials, unless there is a big event, maybe not exactly as the current trend, but the overall trend will not change so much. So we expect that it will grow. So in terms of sales, how we are looking at it.

[Makoto Morita, analyst]

What about profit? In the first quarter, the actual profit exceeded your plan or in line with it?

[Tetsuya Nakano, executive]

Well, slightly topped the plan, but more or less in line with our expectation.

[Makoto Morita, analyst]

Understood. And you need to think about risks, as you mentioned.

[Tetsuya Nakano, executive]

Yes. As I mentioned earlier, for example, Thailand, we assumed there's risks, but now we are happy that we have seen recovery, I'm sorry.

As to the healthcare and the other pharmaceutical-related business, so mainly the revenue increased in which part it decreased. And as a result, it's in line with the plan. I'm talking about profit.

Well, as to healthcare, historically, there have been some fluctuations year-on-year. So if you look at a certain quarter, you cannot address the trend. Through the communications with the business, we believe that it is in line with the plan. So all in all, it is in line with the plan, but there will be some fluctuation. I'm not saying that -- we are looking at it conservatively.

[Makoto Morita, analyst]

Understood. But from the second quarter and on, there is a possibility that you will see more profit?

[Tetsuya Nakano, executive]

Well, we will continue to watch carefully.

[Operator]

Yoshida-san from JPMorgan Securities.

[Ami Yoshida, analyst]

Yoshida from JPMorgan. So with each of the reasons for the -- what I want to talk about, the at-home demand and the restaurant demand. You talked about the frozen food on the U.S. and Thailand. You saw a recovery in the restaurants, and then the at-home demand is quite stable. So I think for the ASEAN region, there is some risk. But in terms of the business, it's going to be coming back for the pre-COVID situation. Then what's going to happen at the home-use products? When the business use goes up, maybe the home use is going to go down. But in terms of the sales, are you going to increase the sales by increasing the prices for the home-use products? Or if we look at a 1- to 2-year span, what is your idea about these type of situations? I would like to know your thinking.

[Tetsuya Nakano, executive]

Well, again, this is a very difficult situation that we are in because what we are assuming is that for the restaurant-related product, it will recover. However, in terms of the way of recovery, it will be slow. So going completely going back to 2019 level, that will take more time to recover to the 2019 level.

However, that said, as I said before, so temporarily, there will be some -- because the higher vaccination rollout and temporarily there will be some kind of a onetime jump in the recovery, that happened in North America actually. So if that is the case, there is a possibility that will happen in other markets as well. So this will be a one-off factor, but the restaurant demand will go up and the home demand will go down as a possibility. Temporarily, there is a possibility that, that type of thing will happen. That's what we are assuming.

However, from the mid- to long-term perspective through this COVID-19 situation, I think people have had more heightened awareness about health. And specifically at home, we're eating together with at home, I think there are more and more occasions people are enjoying those type of opportunities. So it's not going completely back to the pre-COVID days. I think this type of way of living will be more or less established, and we want to invest in those types of developments going forward.

[Ami Yoshida, analyst]

So if the restaurant business is going to be -- going up, there will be a temporary drop in the home-use business? But overall, we'll be able to grow the business and the home use will drive the demand.

[Tetsuya Nakano, executive]

Yes, that's what we are thinking.

[Operator]

Next is from UBS Securities, Kawasaki-san, please.

[Satsuki Kawasaki, analyst]

I'm Kawasaki from UBS. So I would like to go to Page 2, and the sales, GP, SG&A has given us a breakdown, and I would like to ask about this slide. First of all, so the last year's first quarter in terms of the GP has been contributing JPY 7 billion of profit, and SG&A has been reduced by JPY 5 billion. That was the basis. I guess this, the first quarter, the GP has gone down only JPY 500 million. So I think that the biopharma business has contributed.

So in terms of the improvement of the GP, it has been able to be taken in. In terms of SG&A, so that has been spent for the organic growth. So the first quarter compared to second half to the last fiscal year, specific investment on marketing costs. Specifically, I think you have concentrated that investment in the fourth quarter. So the strong sales from April to June period, is that coming out from the contribution of the investment that are conducted in the fourth quarter? And so the SG&A in the first quarter, how much will that lead to the sales of the second quarter onwards? How much is strategic investing? So in the GP for the second quarter onwards, how should I think about that? Can you give us some color about that?

[Tetsuya Nakano, executive]

Thank you for the question. Well, difficult to understand. So the last fourth quarter, from that quarter as to -- that we have been investing for the SG&A, so the sales increase this time. For that increase, our investment paid off. It's not for all the products. But if you look at the later page of A4 size documents, you will see the share. The Japanese flavor, the Dutch seasonings and the menu-specific seasonings and soup for such products, the good trend, I think, is emerging.

That said, it's not that we are spending upfront. Well, for example, for the Southeast Asia and the impact of COVID there, we watch it carefully so that we can control SGA anytime we want to, and that is what we have confirmed with the business side.

So the first quarter, there's the strategic marketing expenses as much as in the fourth quarter. But as to SG&A, you will control it because the future is so uncertain that you can use the level of SGA to control. Yes. And when you compare the numbers with those 2 years ago, you will see that our marketing expenses are not that so high, so it is already well controlled.

[Operator]

Next question, Mitsubishi Morgan Stanley, Tsunoyama-san, please.

[Tomonobu Tsunoyama, analyst]

Tsunoyama is here. One question about the frozen foods in North America. From the second quarter and on, you might increase prices. Could you please elaborate on that? How are you going to make recovery? Specific strategies? And do we need to increase the ROIC of the business? Do you see any problems which would impact your longer-term strategy?

[Tetsuya Nakano, executive]

As I explained earlier, the sales is growing. But on the profit side, there is a challenge because of the cost. There's cost to increase, as I mentioned earlier. Due to COVID-19, different locations have different situations.

Within the U.S., there are some subsidies. And because of the subsidies, people tend to stay at home, and that leads to the staff shortage on a chronic manner. Chronically, there is a shortage of labor force, and that is causing the lower utilization ratio. So in the North America, the HR cost, personnel cost is skyrocketing, which, in return, is increasing logistics costs. That is the environment that we are looking at. And as to increased logistics costs, that are already factored in our budget. But there are some increases in the cost, which beyond our expectation, and that happened in the first quarter.

So in terms of the countermeasures, basically, for the -- in terms of the increase of the consumer price index, we are going to increase our prices. For the April, June and July, bit by bit, we have been increasing our prices. And furthermore, going forward, we are discussing about more price increases in some products. So by leveraging price increases, we will leverage on price increases.

And on top of that, so taking this as an opportunity, well, last year, we have actually reduced a lot of SKUs for unprofitable products. For this fiscal year, we want to offset the cost increase by the price increases. And by -- we will further deliberate reducing the SKU of unprofitable products. And by doing so, for the target, we want to achieve our targets through these activities.

[Tomonobu Tsunoyama, analyst]

I understood how you're going to -- I guess, the cost increase. How about the labor shortage? So under the macroeconomic situation, I think you have to look at the situation carefully.

[Tetsuya Nakano, executive]

Yes, we have already started to take some access. One is that is the allowance for retaining our labor force. And for instance, we are asking people from other divisions, departments to support. And by doing so, the utilization rate has gradually started to recover. And I think we have been able to see a gradual recovery in this area. But on the other hand, in terms of the personnel costs, they have seen an increase because of these activities. And there is a necessity that we have to pass that on to the prices.

[Operator]

So we have now -- the next question will be the last question. Miura-san from Citigroup Securities.

[Nobuyoshi Miura, analyst]

This is Miura from Citi Securities. I have 2 questions. So I think you have been more or less showing yourself to be a global company, and the global environment is recovering. I think what's important right now is that try to establish your position at the -- for the home-use products. So in terms of the menu-specific seasoning, that will be a very important product. But can you elaborate about that, please?

[Tetsuya Nakano, executive]

Thank you for your questions. So for the menu-specific seasoning, it is -- there are some markets that are growing. So I would like to explain in detail about each of these market situations.

First of all, going to Indonesia. For Indonesia, I talked a bit about, I guess, last year, the high single-digit local currency sales has gone down. So the reason behind this is that we are focusing on the fried chicken powder for the Nasi Goreng, for the local menu products, is what we are focusing on. So last year, there was a reactionary decline compared to last year. So that's the reason why we saw a decline in Indonesia. So for the fried chicken powder, there's a lot of competition in these type of products, but that has been the case from before. So we would like to compete in this area.

And going to -- in terms of the value, it isn't that much, but -- well, it's in a big market. But the Philippines, so the Crispy Fry, that is the #1 fried chicken powder. That's the product that we have. And for the first quarter for the FY '21, we saw a double digit or higher double digit. That will be more than 20% growth. And this level of growth has been continuing, so we will continue to maintain this #1 share and further enhance our share in the business.

And as to Thailand, it is yet to grow, but it's almost on the same level as last year. The slight decrease, something like Lupi menu, where the fried chicken powder accounts for not so much. But for the local menu, we are providing products.

So this year, well, because last year, the menu-specific seasonings grew double digit. And this year, all in all, if I remember correctly, mid-single-digit increase. But in some countries, there's some directionally recoil from the previous year.

[Nobuyoshi Miura, analyst]

For short-term profit, you are saving your marketing expenses. That's not the case, right?

[Tetsuya Nakano, executive]

Not at all. In the past, we decreased marketing expenses, prioritizing business profit, and that was not good. So as to the areas where we want to grow, we invest and that's one of the themes of the midterm plan.

[Nobuyoshi Miura, analyst]

Why didn't you change the initial forecast for -- in your midterm plan? Because the second quarter is visible. And the third quarter and the fourth quarter, unless you make a big effort, you will not reach JPY 115.5 billion, JPY 115 billion. Well, maybe you are seeing big risks. If not, it will not be JPY 115 billion.

[Tetsuya Nakano, executive]

Well, as I explained earlier, the price increase. We are committed to the increased prices, and there's an internal agreement on that. And the question is whether cost increase will stop or will continue even further. It's totally invisible, so we need to watch more closely. And if we have to change it, we would do so.

[Nobuyoshi Miura, analyst]

Depends on the FRVs, the rate, the policy. But basically, CPI tends to go up, and your pricing is based on the CPI as benchmark. So I don't understand why you are afraid of -- what you are afraid of?

[Tetsuya Nakano, executive]

Being afraid of is not -- well, we don't think that we are afraid of anything.

[Nobuyoshi Miura, analyst]

Well, if that's the case, maybe you can adjust information, change your information or give some comments.

[Tetsuya Nakano, executive]

We will do our best.

[Operator]

And with that, we conclude the Q&A session. The final comments from Mr. Nakano.

[Tetsuya Nakano, executive]

Thank you very much for your time. Let me repeat that there are some uncertainties, but we are committed to achieving a budget, and the management has confirmed that we will achieve the target. And there are some challenges, but we will make that happen. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]