Coca-Cola Bottlers Japan Holdings Inc

TSE:2579

Earnings Call Transcript 2018-Q1

[Raymond Shelton, executive]

[Foreign Language] Good afternoon, everyone. I'm Raymond Shelton. I head up Investor Relations for Coca-Cola Bottlers Japan. Thank you very much for joining us today for our First Quarter 2018 Earnings Presentation for analysts and investors. I'm joined today by our senior executive officers here at the front of the room, and following prepared remarks by President Tamio Yoshimatsu and CFO, Vikas Tiku, we will be happy to take your questions.

This presentation is intended for analysts and investors, so we do ask members of the media in attendance to please hold your questions for our media session scheduled separately today. Simultaneous translation in both Japanese and English is being provided for today's presentation and during Q&A. [Operator Instructions]

Before we begin, let me remind you that today's presentation does contain forward-looking statements, including statements concerning annual and long-term earnings objectives and should be considered together with cautionary statements contained in our supporting presentation deck. Both are posted to the investors' section of our company website at ccbji.co.jp. Please look on our website for this information in both Japanese and in English.

Now I'd like to turn the presentation over to President Yoshimatsu. Yoshimatsu, [Foreign Language].

[Tamio Yoshimatsu, executive]

Good afternoon. I am Tamio Yoshimatsu, President of CCBJH. Thank you for joining us today in the Coca-Cola Bottlers Japan Holdings First Quarter 2018 Earnings Presentation. Today, Vikas and I will take you through an overview of first quarter 2018 results, integration progress and outlook for rest of the year. We will take your questions after our prepared remarks.

For those of you in the room today, we have prepared product samples, including Coca-Cola and our FIFA World Cup number bottle and newly launched products such as Georgia Japan Craftsman and Aquarius S-Body. We are also pleased to present Coca-Cola's first alcoholic product, the Lemondo Chu-Hi drink.

Georgia Japan Craftsman uses cold brew technology to combine a fresh and crispy feel to the aroma richness of coffee. For café latte, we use smooth textured milk to achieve a flavorful but clear taste.

Aquarius S-Body is the first functional food claim or FFC product in Aquarius franchise with a citrus flavor and 0 calories.

Lemondo, the first alcoholic product in the Coca-Cola system, will be launched on May 28, exclusive to the Kyushu region. Please also check out the variety of products in the cooler of the venue.

As a total beverage company providing Beverages for Life, we offer products that are there for our consumers throughout their days and their lives, enriching their moments with both intrinsic and extrinsic value.

Next, to 2018 Q1 highlights and commercial activities. As explained in our February presentation covering the full year, 2018 has been positioned as a year of growth. As shown on Page 5, our activities are based on the following 3 points: local presence with national scale, driving innovation and generating synergies, and we believe we are gaining early traction.

On Page 6, we show highlights from Q1. Sales volume in the beverage business increased by 1% pro forma. We have also been able to kick off the second quarter with a solid start in April. Market share grew both in terms of value and volume, and value share growth is ahead of volume.

Ever since integrating, we have been consistently in line with our strategy to emphasize profit, and we have seen a balanced growth in our market share. Revenue increased by 116% compared with the same period last year due to the business integration effective from Q2 2017. Compared with pro forma Q1 2017, revenue decreased 2% due to a decline in vending channel sales, intensified price competition and other factors. Operating profit increased by 46% against prior year, again, mainly due to the business integration. Pro forma-wise, there was a 14% decrease due to an increase in goodwill amortization of JPY 1.4 billion. However, excluding impact from goodwill, operating profit growth was positive. Vikas will explain the details later. But steady synergy generation and cost-reduction initiatives contributed to these results.

Page 7 highlights the integration progress. We have been integrating with speed and steadily implementing financial framework initiatives for value creation. The integration is on track, enabling us to capture JPY 4 billion of synergies in Q1 centered around SCM and procurement. This is slightly ahead of plan and a good start to achieving the full year synergy target of at least JPY 8 billion.

As part of our efforts to create value for our shareholders, which is one of our key financial strategies in our midterm plan, we completed a public tender offer of treasury stock in April. We have also introduced a performance-oriented equity-based compensation plan for directors and executive officers upon approval at the General Shareholders' Meeting in March.

In order to further simplify and optimize the organization, we have reorganized our subsidiaries. And as of April 1, the number of legal entities has decreased to 14 companies down from 25 on day 1.

Page 8 summarizes our Q1 marketing activities. Newly launched products included Coca-Cola PEACH, the world's first peach-flavored Coke; Ayataka Chaba no Amami, a flavorful tea drawing out the natural sweetness of the tea leaves; Craftea, a premium black tea with honey and orange juice from Minute Maid; THE TANSAN, a soda with stimulation of strong carbonation and clear tastiness, amongst others.

Also implemented was the Pyeongchang Winter Olympics campaign across the categories, including the Coca-Cola and Aquarius trademarks, contributing to the growth of each category as well as supporting us for pivoting from integration-focused growth mindset -- sorry, pivoting to integration-focused growth mindset.

Page 9 shows our market share and retail price trends. Our share grew 0.4 points in value and 0.2 points in volume in Q1, with continued improvement in market share since our integration last year. Value share grew ahead of volume, which demonstrates a strategy focused on profitability in the fierce competitive environment.

The share growth in sparkling, NSTs and sports categories contributed to overall market share growth, with a thorough regional approach applied to product introduction and campaigns. This has led to category share growth and share growth overall.

Retail prices. Our retail prices of our large and small PET packages were negative against prior year due to intensified price competition as well as the cycling of significant improvement in 2017. In particular, water retail price was impacted as a result of the cycling of strong product launches in I LOHAS brand small PET packages in 2017 and the comeback of 2-liter Morino mizu brand water after the strategic pullback in 2017. However, helped partly by FOSHU and FFC contribution, our small PET pricing has continued to be higher compared to the industry average.

Aggressive new launches by competition and intensified price competition have been challenges for us in the short term. We continue to engage in commercial activities rooted in our strategy to improve profitability whilst responding to competitor movement when necessary. I would like to explain some examples on the next slide.

As we have been saying, our activities are consistently focused on profitability. In supermarkets, drug stores and discounters, there have been initiatives to improve category profitability and competitiveness. Thorough emphasis has been placed on the profitability of our core products, while strategic adjustment of wholesale price of our sub-brands and subflavors are being introduced to take on discount activities by competitors. The latter activities are based on in-depth analysis by area and by category characteristics. We have also continued activities to acquire more Teiban space or regular shelf presence for our profitable, high value-added products such as FOSHU and FFC. This has led to the growth of these functional products compared to the end of 2017 to 4% of our volume and 7% of our revenue.

In our profitable vending channel, we have been working various initiatives to achieve profitable revenue growth by executing selective price optimization and product assortment based on consumer needs. The details will be provided later.

Let's look at volume. In the first quarter, increased by 1% from the previous year, driven by the growth of OTCs such as supermarkets, drug stores, discounters and convenience stores. The growth of revenue per case has slowed down due to cycling from improvements in the previous year. We maintained a mid- to long-term profitability improvement trend in major sales channels. In supermarkets, drug stores and discounters, our volume has grown in sparkling, NSTs and sports. This was mainly driven by the growth of future consumption packages leading to the slowdown in the revenue per case growth.

In convenience stores, sparkling and NST growth was supported by the success of newly launched products such as Coca-Cola PEACH and Ayataka Chaba no Amami. Revenue per case improved in this channel driven by FOSHU and FFC listings on Teiban shelf. Coffee volume in convenience stores recovered to previous year volumes supported by the growth of bottle can products with improvement or revenue per case.

Continued channel shifts and intensified price competition resulted in 6% volume decrease in vending, balanced by volume growth in sparkling, NSTs, sports and others.

Now I would like to briefly introduce some examples of our vending channel transformation initiatives I have been mentioning on the next slide. We are implementing both long- and short-term initiatives to fundamentally transform and revitalize our vending business. As for the short-term challenges, I have set up a vending task force project team under my lead to develop thorough segmentation measures and implement them in a more agile manner.

Consumer's preference and competitive landscape are different by area, and it is necessary to thoroughly enforce community-focused principles. Based on this concept, we have been active in implementing measures such as selective price optimization, product assortment and by-location strategies, leveraging merit of scale at this company.

Regarding mid- to long-term initiatives, we have been focusing on 3 areas to be more granular: leverage digital to establish new retail model; enhance engagement with consumers; and improve operational efficiencies. Given competitive considerations, we are unable to disclose the details, but we have been piloting initiatives to transform the vending business and are preparing to implement the initiatives we consider as effective.

News on our smartphone app, Coke ON. In April, we added a step count feature and users can obtain loyalty points simply by walking. This new function is in line with the rise of health awareness and heightened interest in walking and daily exercise. We will continue to strive to provide updated value through our vending machines by offering consumers new and innovative experience.

Turning to by category performance. Sparkling volume grew thanks to the growth of trademark Coca-Cola, led by the world's first peach-flavored Coke, Coca-Cola PEACH and Coca-Cola Plus, which came out last year. We also introduced THE TANSAN as a big [ bet ] product to leverage growth in the sparkling water segment. THE TANSAN has been performing well since its launch.

In non-sugar teas, Ayataka led the growth of overall category supported by Ayataka Chaba no Amami, which was introduced in February. As explained earlier about core and sub-segmentation, we have positioned Ayataka Chaba no Amami as a sub within NSTs and leverage it to achieve profitable revenue growth.

In sports category, volume recovered with growth in most of the channels supported by the combination of Aquarius and Pyeongchang Olympics campaign and by stimulating growth on the branding side. In the water category, I LOHAS has been struggling due to cycling of prior year new products and competitions. Large-sized PETs volume grew.

The coffee has been declining, impacting the decrease of small sizes OT packages -- sorry, impacted by the decrease of small sized SOT packages. Newly launched PET packaged coffee products launched by competitors continue to intensify competition. Challenges surrounding coffee are a high priority for us in 2018. We will continue to support Georgia through various initiatives, from enhancing its competitiveness in vending and in creating new demand for PET bottled coffee, Japan Craftsman.

I have just taken you through a summary of Q1 results and commercial activities. I would like to now ask Vikas Tiku, our CFO and head of transformation, to take you through the details of Q1, integration and synergy plans.

[Vikas Tiku, executive]

Thank you, Yoshimatsu-san. Good afternoon, everyone. I'm Vikas Tiku, Chief Financial Officer and head of transformation for CCBJH. While Yoshimatsu-san has taken you through an overview of our first quarter results and commercial activities, I would like to spend some time discussing our first quarter financial results, progress on integration, synergy capture and initiatives of financial framework.

Let me take you through the numbers. In Q1, we had a steady pro forma volume growth of 1% compared to prior year. However, due to weak channel mix, including weak vending trends and cycling of strong revenue per case growth in 2017 Q1, pro forma revenue declined 2% in the quarter.

Pro forma operating income declined 14%, mainly due to JPY 1.4 billion of goodwill amortization. Excluding this impact, operating income grew 25%, reflecting our ongoing focus on operational efficiencies to generate synergies.

We delivered 2% pro forma net income growth, driven mainly by cycling various extraordinary expenses related to the creation of CCBJI ahead of our first day of operations in April 2017.

On Page 16, you can see the key drivers of our first quarter pro forma operating income of JPY 3.2 billion. Price mix pressure was offset by strong JPY 4 billion net synergy delivery in Q1. As mentioned earlier, pro forma OI grew JPY 800 million, excluding the impact of goodwill amortization resulting from the integration.

Starting on the left-hand side of the slide, we did have some challenges which weighed on our top line performance. You can see that we experienced a net JPY 2.8 billion decline in gross profit from volume, pricing and mix. To double-click on this JPY 2.8 million reduction, the majority of the impact was driven by a 6% volume decline in our profitable vending channel, offset by a positive impact of volume growth in other channels. We did experience some slight price and mix pressure as well, mainly driven by price competition in the OTC market. Pricing in vending was slightly positive in Q1.

DME, or direct marketing expenses, increased JPY 1.7 billion versus prior year, reflecting volume growth, stepped-up marketing activities, including the support for the Pyeongchang Winter Olympic Games and cycling of lower DME spending in Q1 last year.

As explained in February, we're expecting increased pressure from raw materials and commodity pricing this year. In Q1, the impact was JPY 700 million, and we expect this pressure to continue for the rest of the year.

We delivered solid net cost savings of JPY 2.4 billion versus prior year for manufacturing. This reflects steady generation of synergies, as well as ongoing programs for manufacturing efficiency, improvements and other procurement benefits.

Other operating expenses are a positive JPY 3.9 billion mainly from savings and logistics and labor costs, as well as positive cycling from harmonizing accounting policies in 2017 such as depreciation.

We're making strategic investments in 2018 related to the integration of our business, including areas such as standardizing our HR systems and processes, as well as other transformation projects which we believe are essential to building a solid foundation for success. As a new standardized HR system was introduced across CCBJI in April, we expect integration-related expenses to ramp up from Q2, in line with our business plan.

Operating income for the health & skincare business in Q1 grew JPY 40 million as we focused on operational efficiencies and cost savings.

Finally, goodwill and amortization, including purchase price allocation relating to the integration, was negative JPY 1.4 billion for Q1. As already pointed out, excluding the impact of goodwill amortization, pro forma operating income grew JPY 800 million.

Overall, we're making good progress on our synergy commitments and delivered JPY 4 billion in net synergies in Q1, slightly ahead of our plan and setting a good base for delivering at least JPY 8 billion in net synergies for the full year.

Let's move to more detail on the progression of integration synergies, CapEx and depreciation expenses. Our Q1 net synergy generation was JPY 4 billion which, as I said, was ahead of plan and represents steady progress towards our full year goal. The source of synergies mainly comes from supply chain, including manufacturing, logistics and procurement, as well as positive cycling of prior year accounting harmonization activities. As mentioned on the previous slide, we expect investments for synergy generation to start to ramp-up beginning Q2.

The table to the right shows our quarter 1 CapEx and depreciation as well as the plan for 2018. Q1 CapEx was lower than pro forma Q1 2017, mainly due to timing of investments. We expect higher CapEx investments during the year-to-go period as timing of various investment programs and projects kicks in. The full year capital plan includes JPY 19 billion related to strategic capital investment.

Let me give you a brief update regarding our strategic investments in 2018. In Q2, we have started construction of a new automated warehouse at our Hakushu plant in Yamanashi Prefecture as part of the important Shinsei logistic network optimization project that we have talked about before. Shinsei is one of the major initiatives driving strategic CapEx investment over the coming years and the Hakushu automated warehouse project is expected to be completed by the end of 2019.

Depreciation expense in Q1 includes positive cycling of the accounting harmonization changes in the prior year and decreased JPY 1.2 billion in the quarter. Year-ago depreciation will increase, reflecting our investments for growth, in line with our business plan.

Slide 18 shows an update of our financial framework initiatives. As announced in February, we set a new dividend policy, prioritizing the payment of a stable dividend while allowing share owners to benefit from profit growth. Following that policy, we plan to pay an annual dividend of JPY 50 per share in 2018, an increase of JPY 6 per share. And after the adoption of IFRS, we will target a dividend payout ratio of 30% or more beginning 2019.

In Q1, we introduced a performance-oriented equity-based compensation program for directors and executive officers. We also completed a tender offer to repurchase our company shares. The equity-based compensation plan aligns senior management's compensation with the mid- to long-term performance targets of CCBJH. The current target for this equity-based compensation plan is 2% revenue growth from 2017 to 2020, with a 2020 ROE target of 6.6%.

We also completed the share buyback of 17 million shares amounting to JPY 55.9 billion as of the settlement date, April 13, 2018. We continue to proactively consider other options as part of our clearer framework for value creation with the goal of driving shareholder returns and the return on equity.

Slide 19 shows a comprehensive view of our first quarter reported results, as you see them in our earnings release or Kessan Tanshin, including the breakdown of reported first quarter results for our core beverage business and our healthcare & skincare business. As you know, the year-on-year comparison in this table is against the consolidated first quarter 2017 results of legacy Coca-Cola West as we were integrated as of April 1, 2017.

With that, let me ask Yoshimatsu-san to come back to explain our year-to-go strategies and wrap up for today. Yoshimatsu-san?

[Tamio Yoshimatsu, executive]

Thank you. So Vikas, thank you. This is Yoshimatsu again to briefly talk about our year-to-go outlook.

On Page 21, we show our 2018 forecast announced in February. Basically, there have been no changes, but we have revised up our EPS forecast as a result of the acquisition of treasury stock in April 2018 to JPY 149.66.

Let's next look at our new launch and marketing calendar in quarter 2. In our top priority category, coffee, we launched Georgia Japan Craftsman in April. This is in the growing PET bottle coffee segment with stylish packaging and the quality taste of cold brewed. This should help us acquire new consumers and support the growth of the coffee category.

In sparkling, in April, we launched a new version of regional limited Coca-Cola slim bottle design with the theme of Ohenro, or Japanese traditional pilgrimage in the [ Kengesh Shikoku ] area. The regional design slim bottle serves an important role in supporting sales activities of our regional sales organizations by strengthening relationship with local communities. We will continue the offering of regional design bottles as well as seasonal design bottles. This is 1 example of CCBJH scale merit and how we can provide segmented activities customized for different areas.

Also on the back of our successful launch of THE TANSAN, we are extending the lineup with an apple mint flavor at the end of May.

As for sports, which has been struggling to grow with the category, we launched Aquarius S-Body at the end of April. Aquarius S-Body is the first FFC product in this franchise with the functionalities of hydration and moderating body fat. We hope to grow volume and revenue through this product.

We will continue to introduce other innovative products and initiatives such as a new marketing campaign leveraging FIFA World Cup Russia with a clear focus on profitable growth.

As a new challenge, we are entering a new category with Lemondo, our first alcoholic drink as a limited product in the Kyushu region on May 28. We are constantly looking for ideas and innovations to provide value to our consumers and customers. Among alcoholic beverages categories, Chu-Hi is a growing category that is popular with consumers, and we think that there is affinity with our business. Lemondo leverages the lemon premix technology, which soaks whole grated lemons in alcohol in advance to fully extract lemon flavor. We offer 3 variations of Lemondo in the lineup with different rates of alcohol content and juice content. We will consider how and when to deploy this product throughout the territory after hearing consumers' and customers' voices in the pilot launch in Kyushu.

For those who are here with us in the presentation venue, we offer the Teiban lemon flavor modeled after the standard [ lemon-hi ], short for lemon Chu-Hi found at izakayas or Japanese pubs.

Page 23 summarizes targets for 2018 announced in February and our self-assessment based on the first quarter results. Although some challenges remain after Q1, we believe that overall, we are progressing in a steady pace towards our goals.

I would like to wrap up today's presentation now. We aim to achieve growth in 2018 based on the foundation we built in 2017. We have been executing various initiatives based on the following 3 themes: local presence with national scale; driving innovation; and generation of synergies.

In Q1, challenges remained in revenue and volume growth impacted by continued weakness in vending as well as intensified price competition. However, synergy generation was slightly ahead of plan and we can say we are making steady progress toward full year operating income target achievement.

Progress has been made in the implementation of financial framework for value creation for our shareholders as was committed in the midterm plan. In the 2 major themes, vending channel and coffee, we are making sure we understand the causes and take relevant measures while preparing for peak summer season. We remain committed to achieve profitable growth with focus on profitable market execution and steady synergy generation.

So this is all for myself. Thank you very much.

[Raymond Shelton, executive]

Thank you very much, Yoshimatsu-san and Vikas. Let me remind you that today's Q&A session is intended for analysts and investors. So we ask members of the media in attendance to please hold your questions for our media session, which is scheduled later today.

If possible, please provide your name and your company when asking a question and please try and ask 1 question at a time as we are translating questions into English. We appreciate your patience.

With that, I think we're ready to take the first question. [Foreign Language]

[Raymond Shelton, executive]

Yes, right here at the front.

[Unknown Analyst]

This is [ Samira ] from the Citigroup Securities. The first question is about the price competition. You've mentioned price competition many times within your presentation, and when you turn to Page 9, the small PETs and the large PETs, the retail price is coming down, the unit price coming down, the revenue per case coming down. Can you explain that part again? Is it just the I LOHAS cycling from the previous year or what is the reality? If you can elaborate on that situation. That's the first question that I have.

[Raymond Shelton, executive]

We'll make sure we got it. The first question is on price competition, especially the information shown on Page 9 looking at revenue per case. Could you give some more detail on what's driving this? Is it cycling or something else that's driving that?

[Tamio Yoshimatsu, executive]

So let me answer this question. So we shouldn't be stuck in the trivials. It's not like the price is really fluctuating. But as I'm saying, in the locations by each of the channels, the syndrome is happening. For example, in the vending channel, in different places, there are price competitions by the competitors, depending on the locations. And January and February, we had some inventories. Therefore, the turnover was a bit slow. And because of the competition, the price might have come down. And we did have to take some countermeasures against that. However, as I have been repeating again, our concept has not changed, our approach has not changed. The necessary countermeasures will be taken. However, we will not be taking excessive actions. And by areas, we have price guidelines and price guardrails. It's not that each of the sales rep, on their discretion, they are going to be able to change the prices. That's the structure that we have put in place. So this is the syndrome that is happening in only some limited areas. In order to prove that, to give you a concrete example, the NST, in reality, the price is coming down as a tendency. However, as part of the value protection, we have the so-called -- against the main brand or core brand, we have the Chaba no Amami. So if we exclude the Chaba no Amami, the core brand, the Ayataka itself, actually, the price per case is going up by JPY 22. However, because of the volume, it becomes imbalanced. Anyhow, the core SKU, the core brand, we are not going to discount the price. We are going to protect the value and necessary measures are taken against the competitors. That is the current reality.

[Unknown Analyst]

The other question is on Page 16. I think this is what everybody asks in each of the sessions. The volume price and mix impact, the JPY 2.8 billion negative profit impact. Can you give us the breakdown by volume, price and mix? I think earlier, the coffee and the vending machine impact was elaborated in the previous sessions. So again, in this session, can you give us some details?

[Raymond Shelton, executive]

We got it? So on the operating income step chart, the -- a little bit more detail on the gross profit from pricing, volume and mix impact? Vikas, do you want to take this?

[Vikas Tiku, executive]

Yes, I'll take this. So if the slide can be put up back there, Slide 16, that might be helpful. As I said in my prepared remarks, gross profit declined JPY 2.8 billion from volume, price and mix. Difficult to separate volume and mix from price, so volume and mix combined, which is both channel and product mix, was by far the bigger component. Pricing itself was a fairly minor component of the JPY 2.8 billion. So less than JPY 600 million was related to pricing. By far, the bigger impact was the channel mix, and within each channel, the product mix element that were driving our results for this year. Let me also add something to the first question. It is also tied to this, if it helps you. Some of you have heard me say this before, our strategy is very clear. We are going to focus on value and we're going to lead the industry in showing the right path in terms of value. But we have also said it's not going to be a straight line. There are times when, due to competitive pressures, we will have to respond to make sure that our business continues to stay healthy for the long term. So last year in quarter 1, we had significant revenue per case improvements. And cycling those revenue per case improvements in each channel was a pretty high order given the competitive situation. In my mind, that doesn't mean in any way and shouldn't be taken in any way that we are not consistent with our strategy to continue to focus on value for the long haul. Quarter-to-quarter, there may be some volatility in those numbers, but over a reasonable period of time, you should see improvements as we continue to focus on our strategy. Thank you.

[Unknown Analyst]

So roughly JPY 2.2 billion is the mix -- the channel mix, and I'm assuming that you're referring to the vending. So I believe that there has been some fundamental transformation taking place. But what are the countermeasures? From Q2 onwards, what is your thinking? Can you give us some details around that fundamental transformation, are you talking about the price? The volume of the vending channels, the volume is coming down by 6%, so I know it's a very tough situation. So can you give us some details around that?

[Tamio Yoshimatsu, executive]

So let me answer on the vending part. The vending issue, basically the vending trend, how has the vending channel trended? And not only that, but what is the competition trend? So we need to divide it into those 2 parts when we come up with the analysis in order for us to come up with the countermeasures. Of course, the consumers of the vending machine is decreasing, and there may be some channel shifts or there maybe the number of the vending consumers decreasing, which we need to tackle in the mid- and long term. It's not something that we can immediately change. So we have a vending project from mid- and long-term perspective, and as for this issue, competitive advantage, how are we going to improve the competitive advantage? And from that perspective, we are going to totally relook at the business model. That's what we have been so far explaining. In terms of this content, I'm not going to be able to get into the details because of the competitive edge. But by having a healthy competition, there are some disadvantage. Going back a little bit, with the consumption tax hike, we tried to lead the industry and we were taking all of the headwind. And in terms of the competition, the competitors, the 170 milliliters initiatives and also we have been shifting to the small and mid-PETs and we have been trying to differentiate against our competitors. And that has led to the lower VPM machines, especially when the vending machine is beside the competitor's vending machine. So what we're doing this time is by regions, by areas, we are going to do a detailed analysis to try to understand why we are disadvantaged as compared to our competitors, and we identified 3 causes. And as you can see here, one is the selective price optimization, is that conducted? And also, do we have the appropriate assortments? And the third point is by each of the locations, do we have the appropriate business or appropriate strategy. And when you look at it by the sales, we don't have so many machines in the low vending VPM machines. However, the overall universe is high. So by making the changes here, we believe that we are going to be able to make a change in the current landscape. So we are going to come up with the countermeasures by areas. That is going to be leveraged and reflected in the actions taken between June to August. And we just finished the Q1. And what we are starting to do is having a positive impact on the VPM and towards the peak season of June to August, as a contingency, we're not going to be lenient and accept the fact that the tendency is improving. But whatever the situation, we are going to make sure that we are not going to deviate from the business plan. And that initiatives are going to be different by regions, areas, promotions -- price promotions, nonprice promotions. From different perspectives, we are going to be implementing different strategies, actions to make sure that each of the areas has developed their by-area strategies. So of course, the major issue is the issues by channels, the different shift by channels. But wherever we are disadvantageous, we are going to take immediate actions. By doing so, the worst case, I think it was 8%, 6% for Q1, that decline we are going to try to minimize it to maybe 2% or 1% level as we planned. So we are going to try to turn over this declining trend. That's what we are preparing. So that's the details that I have provided. Thank you very much.

[Unknown Analyst]

So just to confirm, so when it comes to the vending decline, the -- with or the size of the decline is going to be improving from here on.

[Tamio Yoshimatsu, executive]

Yes.

[Unknown Analyst]

So the Lemondo in front of us, it's probably very tasty. How are you going to engage in this area? I would like to ask that question.

[Unknown Executive]

I think that you are aware that we are trying to position ourselves as a total beverage company and the main concept there is Beverages for Life. It means that we are going to be in the everyday of our consumers. We are going to be there for our consumers throughout their days as well as throughout their lives. So the way we are going to be providing value must become more diversified. In that sense, alcohol can be part of that platform. How are we -- how can we truly provide value, that's what is being tested in this launch, as well as the pilot that is taking place in Kyushu. Now whether people will be responding, whether consumers will be responding and market will be responding to our thoughts, that's what we're trying to find out. So we're not committing anything.

[Unknown Analyst]

So are you going to be just in distribution or production?

[Unknown Executive]

Right now, of course, it's being co-packed. As a result of the test, if we feel that there is a strong need for internal production, then there is a possibility that would happen. Thank you very much.

[Raymond Shelton, executive]

[indiscernible] at the front, right here. [Foreign Language]

[Naomi Takagi, analyst]

So this is Takagi from SMBC Nikko. My question again revolves around revenue per case. So if it is as you say, then after the second quarter, are we going to improve to a positive trend again as you were saying that first quarter was a very high obstacle or wall? But if there are some other factors that will contribute to improved revenue per case in the future.

[Unknown Executive]

Are you talking about compared to quarter 1? If so...

[Naomi Takagi, analyst]

Yes.

[Unknown Executive]

Because we are going to do our best to strive to get revenue per case according to the plan.

[Naomi Takagi, analyst]

How about compared to the same term in the previous year?

[Unknown Executive]

Well, we already have a plan which is an add-on to the same term in the previous year. And, of course, there's going to be a change in mix. What are we going to do? What are we going to strive for? Of course not to move away from the plan, but it's also by package against the previous year. We take the -- we are not looking at the total divided by cases to get to the revenue per case.

[Naomi Takagi, analyst]

So this is something that you've been showing all the time, this slide. And you were saying how -- Page 13, you've been saying how this has been continuing and we felt that this was improving. However, other than convenience store channel, there was negative. Last year, 2017 was better performing. You showed some good performance, so I understand the cycling. But I think this is the reason why Q1 results were not so good. So I was wondering if you could give me an answer about what will happen in the rest of year here?

[Unknown Executive]

As I mentioned, the supermarket volume overall, if you divide it by the volume of supermarkets as a whole, then you see that the revenue case -- it looks like the revenue per case is fluctuating because the mix changes. So for example, if you have high revenue, high-priced products selling very well, then it looks like it's going to go up, revenue per case is going to go up or if we sell a lot of water, then it will lower the unit price or revenue per case. So that's what I'm saying about by package. We're going to look at this by package because for mix, not everything is under our control. So it is important to improve revenue per case by package.

[Raymond Shelton, executive]

Follow-up on that at all, our head of commercial?

[Costel Mandrea, executive]

Thank you. Good afternoon. This is Costel Mandrea. I think one of the -- Yoshimatsu-san mentioned the big topics of interest for us. So we need to see what's in our control, and this is the selling price and the promotional strategy. And in this one, our strategy remains unchanged. We focus on value ahead of volume. So we don't discount, we don't engage in value-destroying activities. Of course, we are very specific, and once there is a need to have a location-based pricing or portfolio, of course, we react. But overall, internally, we stay committed to our value ahead volume strategy. There are also external factors which we try to get advantage on it. So for example, drug and discount, especially drug stores, they're increasing their presence in Japan and especially in the big cities. And of course, this is -- if the shoppers prefer to shop there, we can only be happy and make sure we list our product, we have activation and we increase the share of Teiban. What we see in Q1, 2 big things: Number one, we cycle a very aggressive NSR per case a year ago. So you remember the growth last year for every quarter was anything between plus 15 and plus 21. Significant. So of course, to cycle this back, it's pretty challenging. And also what we see in Q1, we see the channel mix going a bit in the direction of drugstores discount. And as Yoshimatsu-san explained, we definitely stay focused on what we can manage internally and take advantage of the external trends. I hope this is answered.

[Naomi Takagi, analyst]

So for pricing, in the first quarter, it was negative. But the second quarter and on, pricing factors are going to be changed to more positive situation?

[Unknown Executive]

Well, of course, it depends on the competitive environment as well as the weather. However, our basic stance is that we are going to raise revenue per case. So unless the market responds in a very different way than we had been expected, we will continue with the strategy.

[Naomi Takagi, analyst]

When we look at the revenue per case and mix leading to JPY 2.8 billion negative, so it seems like you have started off from a very difficult situation given that the annual outlook is plus JPY 9.9 billion. Are there any other additional initiatives that you are planning? Is that the kind of mindset you have or...

[Unknown Executive]

The JPY 49.7 billion in OI is something that we need to achieve as a mission. However, please remember that there are not only negative trends. For example, the vending is on an improvement trend. We at least see signals. And in OTC, the volume is growing in all the subchannels. And synergies are above at what we had planned. When we take all of these into consideration in OI, JPY 49.7 billion, achieving this is something that we believe we can make happen. So obviously, we are not going to commit. At times, we might have to prioritize cost reduction in a temporary manner, but overall, it is our mission to achieve our OI target. Thank you.

[Raymond Shelton, executive]

Thank you. It's okay, right there. Yes.

[Haruka Miyake, analyst]

Miyake from Morgan Stanley. I would like to ask about the vending. The first quarter, the industry overall, the vending volume was coming down by 4%. That will be my understanding. The coffee demand has shifted towards the CVS. I think that's one of the things that happened. Under that situation, the vending channel dropped by 6% in your company, meaning it was even further declining compared to the industry trend. So what is the analysis behind that? Meaning you mentioned that some of the competition is becoming fierce, depending on some of the locations or depending on the areas. So if you can give us some concrete details. And going forward, are you going to, at least the minimum, recover to the industry average or industry level? I wasn't able to fully understand that part. So I would like to confirm that point. And the other point is the VPM, you are saying that you're starting to see some sign of recovery and you're seeing some improvement in April. But at the same time, in April, it was the historically high temperatures and hot days. I think that was some of the extraordinary factors for April. So even if you take that away, are you saying that you're gaining traction? Can you explain that part, please?

[Tamio Yoshimatsu, executive]

So like I said earlier, the vending machine, the issues that we are challenging, we need to divide it into the short term and the long and -- mid- and long term. And your earlier question I think is more towards the short-term actions. The overall industry is 4% decline whereas our decline was 6%. So there is a 2% difference. Isn't that showing the difference of the competition strength? And I have mentioned that we have done a thorough analysis. And as a result, the machines that is beside the competitors, please we need to do a selective price offering and also we need to work on the assortments. And also for the low VPM machines, we need to work on our merchandising. So those were the 3 things that we have identified. Therefore, the actions necessary, we're working on it. And that's the first pillar and that is showing some effect. So it's not that the numbers are turning good just because of the weather, but because we want to understand what is the effect that is done by the first pillar. And we're doing a quantitative analysis and we're looking at our competitors as well. So therefore, we believe that what we are doing is working.

[Haruka Miyake, analyst]

So we need to continue to work on this which means when we look at it individually, you might not be bringing down the prices. But matching that location, if that location, the machine is set beside the other low price vending machine, then the portfolio overall price is shifting downwards. So that you provide more assortments and therefore, you can appeal the pricings. And therefore, the VPM is improving. Is that the right way to understand?

[Tamio Yoshimatsu, executive]

We're trying to improve the attractiveness of the vending machine in total. We need to make sure that there is a range of variety and we need to make sure that these vending machines are more attractive. It's not just from the pricing perspective, is the product assortment right in that location? And if we want to focus on the female consumers, do we really have the right assortments? The Craftea is actually working from that perspective. So by each of the vending machines, by each of the locations, we need to understand the environment. And therefore, we are trying to have an effective by-area strategy.

[Costel Mandrea, executive]

Yes, thank you, Ray. And I will not refer to pricing, but we do a lot of other things. For example, you remember for the last 2 years, in CCBJI, we took back from the market a lot of unprofitable machines, a lot. Now, together with our partners from the Coca-Cola Company, we decided that we reached the optimum number of machines in the market. So you'll not see any more massive withdrawals. By contrary, we focus on placing new profitable machines. This is one. Second, also with our colleagues from Coca-Cola Company, we bring to market on a very fast track a new machine which is called Stallion, it's the internal code, but basically has doubled the number of columns. So this is giving me, based on the tests we are doing, additional revenue, additional VPM increase and better efficiency on these machines. Because when I can fill more SKUs, I can visit less often. So it's productivity. And the third thing, again, something that we are doing for the last 2 years, dedicated packages for vending. And here, we started the year with 280ml Coca-Cola PEACH, which was a fantastic success. Kochakaden Craftea kind of the dry ginger ale strong dedicated for vending. Georgia Brazil Blend dedicated for blending, Roaster's dedicated for blending. So everything is working well from this point of view. So it is a portfolio of actions that we are taking for vending. We are confident and there is a lot of belief in the Coca-Cola system, that vending is a growth, is a platform for growth. Yes, so looking forward.

[Raymond Shelton, executive]

Thank you. Saji-san, I think you had your hand here.

[Hiroshi Saji, analyst]

So this is Saji from Mizuho Securities. So Craftsman, how is it going to impact Georgia? When it comes to cannibalization, I think that there are probably negatives and positives; negatives on the pricing side and positives on the volume side. When are you going to place them into vending machines? For instance, by channel, what kind of impact are you expecting?

[Tamio Yoshimatsu, executive]

So I have a few experts in my team. And -- but I would like to give you a basic answer and then perhaps my other members can complement my answer. So Japan Craftsman, as well as Craft Boss, have gone into a completely new segment. When it comes to the quality, when it comes to pricing, I'm sure you have various different opinions, perhaps criticism as well. But for canned coffee users and regular -- what we call regular coffees, therefore, brewed coffees, fresh brewed coffees, we have been able to attract a lot of both such users. And also, there has been attraction for some female users who have up until now not been attracted to RTD coffee. So in fact, cannibalization itself is not so severe. The performance of our new products, of this new product was at par with company [ assets or centuries ] product. At this point, of course, we haven't [ not ] gone through detailed analysis. But at this point, we do not see a negative impact on the numbers. When we load it into our vending machines, we believe there will be good results. However, how are we going to talk to our consumers as we differentiate our product from others? So perhaps depending on the deployment from our competition, we believe that we will have a differentiation strength.

[Raymond Shelton, executive]

Maybe Ihichara-san, a couple of comments as well?

[Masanori Ichihara, executive]

So my name is Ichihara, and I would like to explain or complement Yoshimatsu-san's answers. So we started off from the small-sized can, SOT can. We then moved on to bottled can. That's the shift that has happened slowly from about 10 years ago. Then Craft Boss opened up this new PET coffee segment. And then on the 23rd of April, our Craftsman started off in certain convenience store channels. When it comes to cannibalization, at this point, we do not see any serious cannibalization of our SOT can. Between bottled can and PET, yes, I think that there has been a partial incidence of that. However, for the bottled can segment, it in itself has also been growing. So as Yoshimatsu mentioned, new users, new occasions are being acquired -- obtained. That's what it probably means. On the other hand, our products -- new product has gone into only part of the convenience stores on the 24th of April. So we do not have a full understanding -- full view. In fact, it's today that we have covered the other channels. So depending on how this second part of the launch goes, we would like to clarify how the cannibalization situation is.

[Raymond Shelton, executive]

We are looking forward to following up with you for the next 3 quarters. We believe we're getting good traction for the year, synergies delivering ahead of plan, and we believe we're on track to deliver at least synergies of JPY 8 billion for the full year. Thank you very much.