Ajinomoto Co Inc
TSE:2802
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Ajinomoto Co Inc
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Good evening. This is Nakano. Thank you very much for taking precious time to attend this meeting. Now without further ado, we would like to start from the Page 2 of the presentation. I would like to begin my explanation. These are the key messages for today. First of all, in the first quarter, we achieved growth in both revenues and profit. Sales and business profit was both the highest for the quarter since we started using IFRS in 2016. Secondly, the price increases that we have implemented, as a result, we have been able to achieve a steady increase in unit prices. The marketing expenses were efficiently utilized. So therefore, as a result of these initiatives, we have been able to come to the cost increases, resulting from the surge of raw material, logistics and personnel costs. And from the second quarter onwards, we have announced that we plan to implement price increases, but we will closely monitor the reaction of consumers so that we can strengthen our profitability.
The recent current exchange rates and the prices for raw materials and fuel are somewhat favorable compared to our initial forecast. So they are in a positive territory compared to initial forecast. However, we believe that the situation remains to be very volatile. So we will continue to closely watch the trends going forward because the movement is still unclear. Therefore, as a result, we have decided to remain the full year forecast unchanged for now.
The next page, this is the summary for the first quarter performance. Sales came in at JPY 321.6 billion, which amounts to 116.4% over the same period of last fiscal year.
Business profit, the organic sales, excluding the business divestitures and currency impact was 9.9%, making a favorable progress. All the major business segments achieved growth in revenue. And of course, there are impact from the currency translation, but the drivers behind this were the Seasonings and Foods business also the Frozen Foods business because we have revised the prices which resulted in the sales growth and also the electronics materials for the Healthcare segment and also the Bio-Pharma Services & Ingredients. All of the growth of our business profit or the organic growth.
Business profit came in at JPY 40.5 billion, although there was an impact from the surge of fuel costs and the raw material cost, but we were able to offset this with the currency translation and price increases. And of course, due to the growth of revenues from Healthcare segments, we were able to achieve record high quarterly business profit.
Consequently, profit attributable to the owners of parent came in at JPY 27.7 billion, 125% of the same period of last fiscal year.
Next page, these are the factors behind the changes in business profit. Overall, the fuel and ingredient cost there was an impact, which is the upper part of this box here. Because of the impact of the Ukraine situation, on a net basis, these caused a negative impact of JPY 4 billion. However, we have implemented price increases as planned or even front-loaded the implementation of such price hikes.
And also, the SG&A, although there was an impact from the increase of logistics cost, which was higher than our expectation, but overall, we have been able to control the SG&A within the range of our expectations.
And then on top of that, the currency translation impact came in, and therefore, we were able to achieve a growth in profit. So the actual number for the first quarter came in more positively higher than our initial expectations.
The next page items that impact the business results. We're talking about the maintenance sub fementation raw material prices. So this, as far as the main and sub raw material prices are concerned, actually, ammonium and grain prices reversed their trends. So the most recent market situation or the prices came in lower compared to our initial projections. However, on the other hand, the energy prices remains to be a plateau at very high level.
And also mainly in Southeast Asia markets, we have not been able to reflect the fuel prices to the purchase prices as planned. This reflection is delayed. Therefore, we are still keeping a very cautious view, right now.
Next is the lower one, on Page 6. This is the cost and effect on how we had responded. So for this, for whole Seasonings and Foods segment, and when you look at the first quarter, you can see that although we had increased the price, we were able to increase the volume as well. In the first quarter, we pay more than anticipated effect of our measures on the price revision than what we had assumed in the first quarter. We are progressing. However, if we see any decline in purchasing power of the consumer due to inflation, we will be coming up with counter actions. We are now progressing rolling forecast initiatives for our major companies so that we could come up with the counteractions earlier than the past.
Next is the priority KPIs. As for priority KPI, for organic growth, you can see seasons and foods -- Seasonings and Foods and Healthcare and others, they have been growing steadily, exceeding our initial expectations.
Frozen Foods segment, they had volume decrease in North America from lower operation due to labor shortages. That is continuing partially from last fiscal year. But they are -- and they should strive hard to achieve the initial plan.
Lastly, going to Page 8, factors behind the changes in business profit. You can see the lower portion is the lower graph shows business profit progress vis–à –vis our initial forecast for fiscal '22.
In Seasonings and Foods, in Solutions & Ingredients, we had MSG and restaurant you see price revision went on and that the effect is showing up. So compared to what we had assumed earlier, the negative portion is smaller.
Frozen Foods progressed within our expectation. In Healthcare, Bio-Pharma and Ingredients, at shipment timing to meet our customer needs. So they had exceeded our expectation. And you can see under this segment, Functional Materials, this is also progressing steadily.
And for price hikes and revisions on Page 13, as it's written, the major things are written there. As you can see, after the second quarter and onwards, we have scheduled to implement price measures or price revisions in our major companies, including Thailand, and they should proceed on schedule or even earlier. So that's about it.
And I'm sorry, this is not in the material. Based on the material that we've distributed to you.
By country, I'd like to talk about the sales. So if you could turn to Page 3 of the nonmetal company consolidated results for the first quarter ended June 30, for Page 3 is based on this geographical area sales progress.
First, Japan. As for Japan, until last year, we had a rebound, and home eating was very affluent. But because of the price hike in various materials, and I think consumers are not trying to save what they had spent in the past. For example, the vegetable prices are increasing, and that is affecting the consumers. So in case of Seasonings and Foods, as you can see, the Seasonings and Foods Homebase consumer, this is -- the sales is in a single binate low and menu seasonings Cook Do and sauce and so for a double-digit decline and Cook Do sauce double-digit decline and soup is the lower in the single-digit.
Coffee for home use, this is a single-digit decline, the home liquid size. We had reformed that and changed that excluding that, this is flat year-on-year. And for the restaurant is in the single digit.
So 2 DC effects, we are trying to increase and trying to come up with a demand. So for those with the saving minds, we are providing a new and proposing menu to the saving minded home and families. So I think we will be also revising the prices as well so we would maximize -- or would like to maximize these effects.
As for overseas, first of all, with overseas markets overall, because of the eating out channel has been recovering, there has also been a stable demand for in-home use and price hikes have also delivered good results. Of course, when it comes to flavors and also so the menu-specific seasonings, we have been affected positively by this recovery in the market.
For the overseas market overall, Ajinomoto in a local currency basis, second 2-digit growth has been achieved. For the flavors, Umami seasonings, a single digit, lower part of single-digit growth. Menu-specific seasonings also seeing lower single-digit growth.
By market, if I may add some explanation by market, we look at the bottom, Item #2, Thailand, 7% increase in the local currency basis, up 7% in the April-June quarter.
If I give you a breakdown, Ajinomoto, upper single-digit growth, seasoning flavor, lower single-digit decrease. And instant noodles, because of the production trouble in the previous year set 2-digit growth. And also drinks, beverages, Birdy, because demand has recovered at 2-digit growth. And also for the powders, single-digit decrease because competition has been intense.
For Indonesia, Ajinomoto 2-digit growth, double-digit growth, but flavors and also menu-specifics seasoning of mid-single-digit decrease.
For the liquid seasoning, upper single-digit growth.
In Vietnam is Ajinomoto and Umami flavors to both double-digit growth.
Philippines. As for Philippines, Ajinomoto, double-digit growth, the Umami flavoring also double-digit growth and many specific seasonings such as the fried chicken powder on par with last year.
Brazil finally. Umami flavors on par with last year. So that was about the food and seasoning situation for the overseas markets.
Of course, S&I are also included in the overseas market performance. So Solution & Ingredients business for overseas. Because for the dining-out market, we have achieved a double-digit growth because dining-out business overall has been recovering.
MSG sales. double-digit growth. Nucleotides are also double-digit growth. And so for MSG and nucleotides on a global basis, we have implemented price hikes, and that is making favorable progress. And also for the frozen food. Frozen food, as far as Japan is concerned, for in-home use, single lower-digit decrease was reported. But for the restaurant, industrial use, a single-digit growth was achieved.
For Gyoza and Shumai and hamburgers, we are making progress. And for the in-home use, the rice and also chicken decrease was reported. For overseas, in North America, double-digit growth was achieved.
Last year, in the fourth quarter, the utilization has been reduced because some factories are still suffering from that lower utilization. But in terms of cost, we are seeing also a trend of recovery.
Healthcare and others, Bio-Pharma Services, if you look at the previous phase, I think that's easier to understand. If you look at the by-segment results, Bio-Pharma and Ingredients. If you look at the revenue number there, we have achieved a very significant increase. Among them, if you look at the amino acid for pharmaceuticals and Foods, we have achieved a double-digit growth. And this is because we have been able to achieve an increase in the culture. And of course, this is affected by the shipment timing, but that has resulted in a revenue increase.
For Bio-Pharma Services, in Europe, depending -- based on the needs of customers, there was a good timing and we were able to achieve shipments and resulted in the revenue growth. Functional Materials, double-digit growth as well, 25% increase actually. So the application has been diversified. And of course, customers base has also diversified. We have made a steadfast progress in these areas. So consequently, we were able to achieve good performance for Functional Materials. So just briefly, that was my explanation from my side for the first quarter results. And also the details pertaining to the sales of each segment. Thank you very much for listening to my explanation.
Thank you very much, Nakano-san. So we would like to move on to a Q&A session.
So from Nomura, Fujiwara-san, please?
This is Fujiwara from Nomura Securities. As for the Foods and Seasonings, I have a question. Earlier, according to Nakano-san, Japan, after the price revision and increase, you are seeing a weakening. But the overseas are favorable. So the -- when you think about the timing of price hikes, we -- as for the first quarter, the Foods and Seasonings had been reduced profit. But how about second quarter and so forth? After second quarter, are you going to be able to go with the situation? Can you elaborate on this point?
Yes. First, in Japan -- as for Japan situation, yes. The recent things we are seeing price hikes, not just our products. And -- but on the other hand, the income and salaries is not increasing. So the consumers have a mind to save. And I think that consumers mindset have increased. So for that purposes, I think for that, there are, I think, brands that have not increased prices yet. We see that kind of tendency in some manufacturers. That is the actual thing happening. But I think from here, we are going to head for winter, and we would try to influence the demand. So that, for example, we would like to propose a menu so that -- and menu of Seasonings could be utilized for the homes that is trying to save their spendings. So from that, we would like to try to come up and increase our sales.
How about overseas? Asia, you're seeing reduced profit.
Yes, for overseas market in that sense recently, we -- I think that it's continued from the COVID-19 situation, information sharing. We are doing that on a regular basis. And in that sense, we are confirming the situation. Basically, we have a decline in the profit, but vis–à –vis budget, I think we are along the line. So that is our awareness.
As you can see, marketing spending in the first quarter, we did not spend much. So we would want to be flexible, trying to look at the consumers' behavior, actions and try to come up with marketing and sales promotions.
And this is to confirm in Japan. First, quarter was minus JPY 1 billion for profit. And of course, you are going to increase the price. But in the second half, is that the image -- can we image that you're going to increase the profit in the second half? Of course, overseas in Thailand, you are having a decreased profit. But Umami seasoning, I think you are going to increase the price, right? You have decided. So from the after second quarter, are you going to turn that trend from decreased profit to increase profit?
Yes, whether it be Japan or overseas, I think the major product price hike will be scheduled. So I think the effect of those price hike, we would like to turn it maximum and provide a good performance.
This is from Goldman Sachs Securities, Yamaguchi-san.
This is Yamaguchi from Goldman Sachs. All right. So let me begin my question. I have a question relating to nonfood-related businesses. I wanted to give some more color to this, especially in ABF and also the Bio-Pharma business. Our ABF, is this -- are you achieving growth a very strong growth because there was a timing difference, just like Bio-Pharma. Can you just elaborate on the reason why the background why you're achieving this steadfast growth. On the other hand, for Bio-Pharma, you talked about the culture shipment for the pharmaceutical business, but Bio-Pharma has also achieved a growth, but can you also talk about the trend, the forecast trend for the third quarter onwards?
Okay. As for Functional Materials, if I talk about the Functional Materials segment, if I give you more detail of this segment, the first quarter Functional Materials revenue, sales revenue, JPY 17.3 billion. Out of which, JPY 15 billion was from electronic materials. So you can consider that the bulk was from electronic materials.
Then for this portion, certainly compared to last year, electronic materials, shipment has increased substantially. And of course, there's a timing issue here. So the full year Functional Materials budget, if you talk about the progress vis–à –vis the full year budget, it's about 25% for the first quarter. So of course, every time you point out that we are always conservative, but we try to be -- provide a very accurate observation this time around. But I could say that we are making favorable progress vis–à –vis the forecast.
The substrates for our PC, this demand has come down. It is a rumor that these demands have come down in the market. But of course, the application, the usage have diversified. Some are for servers and some are for 5G devices. So we shall be able to make up for the decline of PCs through these other applications.
And of course, when it comes to unit cost, we have been able to increase the prices to offset the impact of the decline. So I think this business is progressing quite favorably.
And also for the Bio-Pharma side, Bio-Pharma relatively speaking, because of customers' issues, there were some larger impact from the timing difference, the timing changes. So in this segment, amino acid, as I alluded to earlier, the culture for pharmaceutical applications, these shipments are concentrated.
And also for the Bio-Pharma Services in Europe, there was an increase in sales. And also for the Americas, relatively speaking, the progress has been quite favorable. So for the profit for the first quarter, the amino acid production cost increased so that had a negative impact to some extent. But by and large, the pharmaceutical, the Bio-Pharma business has been favorable because we believe we are able to offset that negative impact from the price revisions.
All right. Thank you very much.
So for ABF, if you look at it on a quarterly basis, although there might be some volatility depending on the shipment timing. But you are well positioned to achieve your plan, business plan. Yes, we are confident that we are able to do so.
Okay. So for, if you just single out Bio-Pharma, you are achieving an increase in revenues, but a decrease in profit, but for the initial plan, there was a decrease of profit for the pharmaceutical applications, but Bio-Pharma was increasing. Can you elaborate the reason why we are achieving an increase in revenues but a decrease in profit?
More for this matter, especially the sites in Europe, the raw material prices have surged, and that has impacted this business. So in this -- but in the future contracts, I think we shall be able to cover them up.
So from the second quarter onwards, price adjustments can be done.
Yes, we believe so. Yes. There will be changes in the product mix as well. So I think these will improve going forward.
Next magnet question. Saji-san from Mizuho Securities.
I have a question regarding frozen foods as JPY 3.2 billion of increased profit. In the first quarter, it's reduced JPY 800 million. After second quarter, there were a price hike effect you mentioned it will improve. Can I confirm on this point? Does that mean that domestic versus overseas, what would be the contribution?
And overseas based on U.S., I think retailers, they are down-trading, there would be refraining from buying much. So to your increased plan, increased sales profit. Is -- would there be any possibility of such external factor impact?
Yes. In reality, last year -- from last year for 3x for home use frozen food, we did price hike and for restaurant and industrial use, 5x, I think we had so far increased the prices. And under such circumstances, I think our sales were very steady. But currently, volume-wise, there are some hard situations occurring. Here, production first, the market demand -- we are not able to meet the market demand fully. Part of our plan starting from fourth quarter last year, we had COVID-19 effect centering on Omicron, and we had shortage of labor. So the production -- in order to stabilize the production, we were not fully producing. That means we are making some adjustment that production was not in full scale. But I think this has already improved. So I think we will normalize the production. And restructuring and reform has continued to see unprofitable SKU would be reduced and will continue.
So for the time being, the initial plan or budget, as was mentioned earlier, I think we would definitely -- would like to achieve, and that is the plan that we have formulated. We want to stick to it, and we really would like to achieve this goal, including the local people. I think they have that kind of thinking.
Yes, from the second quarter, that means the first quarter has dragged and the first quarter is dragging the last year's fourth quarter. But from second quarter, does that mean that the image is to upturn?
Yes, we assume that. And especially in the second half, we want to recover the situation and get back to normal.
And about the retail environment, the U.S., there is an environment change. What is the negative impact on you? Do you see it?
Yes. As mentioned earlier, the volume, volume, reduction of volume, I think is reflecting that these, I think, including sales promotions. We would have to think about how to wisely use our spending on marketing.
And so that means that you are taking that as the risk?
Yes. But I think our target and goal here is I think what we can definitely achieve. So we had formulated the plan in such a way. So I think we can achieve that.
The next question we'll go on to the next question. This is from SMBC Nikko Securities, Takagi-san.
This is Takagi. Can you hear me.
Yes, I hear you.
Thank you. Nice to talk to you. My first question, regarding the seasoning and food, understand, according to your explanation, you got off to a better start than expected. But the driver behind this is the solution and ingredients, I believe. And the seasoning per se has not really made a good progress vis–à –vis your plan. I'm not just curious about that. I'm not really sure about that. But when looking at the sales trend, there are many specific seasoning and the flavors, only a single-digit growth, and you have also conducted a price hike. But without the price at, it would have been in a negative territory. So can you just elaborate on these points a bit further?
Thank you very much for the question. Well, of course, the local markets, we believe that they are making progress as planned. Of course, most recently, of course, we have seen a little bit of weakness, especially when it comes to seasoning and food or the flavors, of course, there has been a 2-digit growth last year. So there was a reaction from that compared to the first quarter of last year. But of course, as I said earlier, we talked about the domestic business.
The dining-out channel is recovering quite strongly. So because of that, those home use of seasoning has been affected negatively and recorded a decline.
But in the case of Southeast Asia, the consumers' purchasing power or purchasing appetite has not declined significantly. That is not happening. So for example, as we talked about earlier, coffee is recording very brisk business. So in local currency basis, we are making a steadfast progress in these markets.
All right. Then if that's the case, then with the price hikes, the demand was not dampened because of price hikes. And you're not, the consumers are not detached because of the price hikes. Is that correct?
Yes, I believe so.
And also, so if that's the case then, when it comes to the many specific seasonings and the flavor seasoning, the momentum from the second commerce, how do you view that? Are you seeing an improvement? The improvement trend from the second quarter onwards.
Just give me a moment, please. If I add some more explanation. In the first quarter, the overseas seasoning overall Ajinomoto flavor seasonings as also many specific seasonings, for overseas seasonings overall, in the local currency basis, 12%, 112% versus the last fiscal year. So there was a 12% increase.
Of that growth, unit price growth accounted for half of that 5% or so. And then the quality accounted for, let's say, another half of it, about 6% each, let's say. So that is the breakdown. And so overall, the quality increase has still being achieved, so we can -- that's the current situation.
So in the second quarter and beyond, the quantity growth will achieve that. We'll try to achieve quantity growth and drive organic growth as planned. That is what we are planning for. So there's no change to our plan.
Okay. That's clear. And also Nakano-san, in the beginning of the fiscal year, you talked about the raw material prices, JPY 45 billion or JPY 40 billion will have a negative impact of that size. And -- but you'll try to make up for that while the unit price increases. So the net impact would be only JPY 10 billion, but you said that you wanted to shrink that damage to the minimal. But when you look at the external situation, the external environment has changed significantly. So can you just give us an update of that situation around there?
Yes. Well, the fuel and raw no material prices on a year-on-year basis, there is a negative impact of slightly above JPY 4 billion -- or JPY 40 billion, of which JPY 30 billion, we have countermeasures planned for that. That's what I have already explained.
And as Fujiwara-san has I mentioned, the recent raw material and fuel performance, this gap has been narrowed compared to before. That's how we view it. And of course, the price hikes that we have planned, all of them have been executed, and we are well positioned to execute them. And of course, there are also some leeway to bring forward the timing of implementation. Each country is working on it. So with that, I think we shall be able to further reduce the gap.
All right. So then the negative factor, which is the raw material cost,, so the JPY 40 billion impact could become smaller than the initial projection?
Yes, it's difficult to make a definitive projection, but that's the reason why we have not changed the forecast this time around. But our views on each market is that for western markets such as the United States and Europe, grain and ammonium and those prices have already plateaued and therefore, the trend has reversed already. And in North America, the logistics costs have slightly come down. We have received that kind of information. So because of that -- but still when it comes to Asia, the recent purchase prices, we have not been able to reflect the prices -- the cost into the prices expeditiously.
But we are taking the market prices in the western market. So if we consider all these things together, we would like to be more precise and then factoring in these costs from the second quarter onwards.
But the price revisions, the positive impact of the price revisions, do you have any plans to further expand the effect of that compared to initial projection?
Yes, the timing of price hikes will be brought forward by, even by 1 month or 2 months while taking such measures we shall be able to achieve that. We are tenaciously trying to implement them in each market. So I think those effects can be expected.
So if that is the case, the net impact of JPY 10 billion, you said that you said at the outset of the year, could be compressed significantly?
Yes, that is correct. In the first quarter, the, out of the JPY 10 billion difference, first quarter, it was only JPY 4 billion, we recorded this gap of JPY 4 billion in the first quarter, but we'll try to offset and recover as much as possible from -- in the 2 quarters.
Okay, understood. So the first quarter, JPY 4 billion, then what will be the size of the second quarter? Will it be larger or smaller? What do you think?
The raw material prices and fuel costs. We have to keep an eye on that and how that unfolds in the future. We hope that this will have a more positive impact on our business. So in the second half onwards, it will be more positive. Yes, that's how we view it.
So if you look at Page 5, the figure on the Page 5, on the right-hand side, this red curve still today, is lower compared to our initial forecast. So as we speak right now, this gray curve that we see on the right-hand side, it still remains intact. But if it stabilized compared to this red trajectory, the gap will become available. This effect will become available.
All right, understood. Now kind of one more thing. Regarding the Healthcare business, Bio-Pharma and Bio-Pharma Services, in particular, I mean asset and Bio-Pharma Services, you got off to a good start in this business, but that was largely due to timing differences. And of course, compared to your full year forecast, what is the net impact? Timing difference. In addition to timing differences, are there any other factors? Do you think the performance has come in stronger than your expectations?
Well, in that regard, I mean asset for pharmaceuticals and the cultures, demand, the demand for such products remain very strong. And that continues to be the case. So we would like to take advantage of that so that we can achieve better performance, aim for better performance. But as we speak right now, we cannot give you anything more definitive compared to that. And that's the reason why we are projecting this way.
Morita-san from Daiwa Securities, please.
This is Morita from Daiwa Securities. This is going to be a summary of what has been asked. I think the external factor and an environment has changed cost-wise, inflation risks heightening. So to this external environment changes, so what would -- how it would impact your performance? Would it be positive? Or what are the negatives, especially positives, I think you had commented -- so what are the risks or the negative factors? If there is anything heightening risk. Can you elaborate on that?
Yes. Well, as for the positives, as was mentioned earlier, the electronics materials and Bio-Pharma Services, I think those segments not affected by the consumer mindset and consumer behavior. So I think we can steadily grow that part of business.
The risks, the biggest one would be the economic environment and lowering demand, lowering mindset of the people to purchase. For that, I think, this is seeing that we're selling. This is a basic product for the consumers. So I think we are resilient to those external environment? And how are we going to use the sales promotional expenses. Depending on the situation, we would like to make appropriate investment in the marketing. So according to the plan and budget, I think we can achieve and proceed.
Can I just say more Bio-Pharma healthcare ABF? I think those are along the line with the plan, but it is not upward that your message is that we will follow the plan.
Yes. Yes. Yes, we are steadily following the plan. Yes, we do not see any risks arising. So a longer plan. Yes.
For seasonings. Maybe there is a risk factor of reduced demand of the consumers because of the inflation, but it is going to be limited in Japan. It is not seen in Southeast Asia. And at the same time, you can come up with countermeasures. So this is within the range where you can cope and counteract?
Yes. Yes, I think that is the message.
Understood. One more. Solution ingredients was very favorable. What is the background sustainability. So is it because the Chinese players did not commit me just a onetime effect. Can you elaborate on that?
Yes. We did have that kind of effect and that is incorporated. And in that aspect, the negotiation with customers, I think, were able to be satisfactory. So that has shown into the result, and that, I think, trend probably would continue, we believe. Unless otherwise, there is no big changes in the demand, I think we would be able to commit on that.
Is there any risk factor of changing demand or timing? Do you have any image of that?
Well, the competitors' production is one of that. Currently, we do not see any big changes.
Thank you. Morita-san, the next question. We'll go to the next question. Mitsubishi UFJ Morgan Stanley. Tsunoyama-san, please begin the question.
Hello. This is Tsunoyama from Mitsubishi UFJ Securities. I have just one question. Regarding ABF, can you elaborate further and give us some more color? This has achieved a sales increase of close to 30%. And you said that the PC demand has been declining, but other applications are growing? Can you give us some more color as to the overall background of the market? And also potential risk for the future that we have to anticipate, is there anything that you have to call out? Can you give us some indication?
Okay. Although we have not included this in the material, but if you look at the previous material that we presented in the beginning of the year, in fiscal '21, the ABF by application shipments -- if you look at the trend of shipments by application, PC accounted for 30% of total, and this has come down to below 30% as we speak right now. And that's our estimate. But on the other hand, we have seen growth in other areas such as server network usage. In 2021, that accounted for 55%, and this is now accounting for a larger proportion of the total right now.
And for other applications such as image analysis, GPU kind of applications and ASICs, these applications are increasing. And also the customers, customer base has diversified quite significantly. So amid this environment, Actually, we haven't seen any emergence of new competitors in this area. So we have been able to capture the demand for those applications.
As for the potential risk for the future, it's not really on the demand side. It's rather on the supply side. Whether you'll be able to come up with products that are tailored to the demand of customers? Is that the larger risk? Can you say it that way?
Well, the production capacity there's no problem at all at this point of time. And even with the today's capacity, we shall be able to continue to supply our products up until 2024. And even more from this year, we are starting investment for capacity expansion. So in terms of the supply towards the demand, there are no risks whatsoever.
All right. So on the demand side, you are not foreseeing any particular risks?
Yes. Correct.
And just last question. The other day, as a new attempt. You talked about materials. What is the contribution to your business for this year? And what is the growth rate of that business, the next-generation material?
As I mentioned earlier, ABF in the Functional Materials, out of that total material, they account for a very strong proportion, a large proportion, and the magnetic material is not that significant. But by utilizing this material, power savings, energy savings can be realized quite significantly.
So the inquiries are now increasing and very high profitability is already generated with this new material. So we will aim for becoming a de facto of standard in this area. And if we are successful in that, we shall be able to achieve an expansion. However, as of this point, the business size is not that significant yet. But of course, we are well positioned to achieve growth in this business. Thank you very much.
Morgan Stanley, MUFG Miyake-san, please.
This is Miyake. I'd like to ask about functional material because I would like to have more understanding. JPY 15 billion was the figure you gave me. 29% increase in sales. If you exclude ABF and if it's only ABF, what -- how much is it? And the 29% is -- what is the extent of the foreign exchange influence?
Yes. For ABF growth rate compared to the previous year, it is 135% and, so -- and for the ForEx translation effect in Japan, this is produced in Japan. So how we decide the price we cannot comment on this. But -- so that -- therefore, we do have a bit of foreign exchange influence here, the yen depreciation, and that means a positive for us.
Annual plan, 14% sales increases assumed. You mentioned that you can achieve the plan. Local currency basis, you can achieve. Is that my understanding correct?
I'm sorry. Your voice is so small. So it's difficult. Can you repeat the last portion of your question.
Yes. According to our annual plan, on yen basis, 14% sales increase is expected, I believe. But you mentioned the annual plan. You mentioned that you can fully achieve. Does that mean that excluding the FX translations, you can achieve the goal or the plan?
Yes. Yes. On a volume basis, Yes, I think we can achieve our plan.
Now we would like to move on to the next question. This is from Sumoge-san of Okasan Securities.
This is Sumoge from Okasan Securities. I have a confirmation point regarding your materials. In the presentation Slide #6, there are items that impact business results, the bar chart there. On the right-hand side, the first quarter unit price and cost increase, illustrations are provided. It looks as though the cost increase outweighs the price increases. Then it looks as though that you are expecting a negative growth in the second quarter. But Nakano-san according to your previous explanation, it seems that you are successful in implementing price hikes and the costs are likely to come lower compared to your initial projection.
I'm so sorry that this is very difficult to understand. This time around, the -- we have not decided to revise the forecast. So we have provided a full year forecast and just carry them on as the first half numbers as is.
So the first half and the second half, we have not made any adjustments compared to the initial forecast that we developed. So of course, we were able to counter the negative factors are quite significantly in the first quarter. And if the trend stays on, we shall be able to achieve quite favorable numbers. And of course, that's our ambition. But this time around, we have not decided to change the full year forecast. So these numbers are not accurate. The one that you see here on the right-hand side are not accurate in that regard.
Okay. Then in the, in this part, the costs are likely to projected to increase in the second quarter significantly. But the trend, the underlying trend remains unchanged. The cost will increase, but you also have reaped the benefits of price hikes and therefore, be able to offset the negative impact. So the first quarter trend will continue into the second quarter?
Yes, that's the ambition. That's our goal.
Thank you very much. I'm very sorry, but this is time to close the meeting. So we would like to close the Q&A session. Thank you very much.
Nakano would like to say the last word.
So yes, thank you very much, ladies and gentlemen, for your participation. So in that sense, of course, the foreign exchange influence seen. But in the first quarter, I think we were quite steady, and we're able to achieve the performance that we have shown to you.
As for Frozen Foods, in U.S. We still have the remaining effect of the cost. But other than that, for other businesses, other than U.S. frozen food, from the budget and to the forecast, I think we are progressing according to the plan and steadily. So I think from now and onwards, I hope to make a better report to you. Thank you very much.
So this concludes today's conference. Thank you for your participation. Thank you very much.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]