Coca-Cola Bottlers Japan Holdings Inc

TSE:2579

Earnings Call Transcript 2019-Q1

[Raymond Shelton, executive]

[Foreign Language] Good afternoon, everyone. I'm Raymond Shelton, Head of Investor Relations and Corporate Communications for Coca-Cola Bottlers Japan Holdings. Thank you very much for joining us today for our first quarter 2019 earnings presentation for analysts and investors. I'm joined by our leadership team here at the front of the room.

Following prepared remarks by President Calin Dragan and CFO Bjorn Ulgenes regarding first quarter results and rest of year outlook, we will be happy to take your questions. This presentation is intended for analysts and investors, so we 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 the Q&A.

Finally, before we begin, let me remind you that today's presentation contains forward-looking statements, including statements concerning annual and long-term 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, ccbj-holdings.com. Please look on our website for this information in both Japanese and in English.

Now I'd like to turn the presentation over to Calin Dragan. Calin-san?

[Calin Dragan, executive]

Thank you, Ray, and good afternoon, everyone. I am Calin Dragan, and thank you for joining us today for our first quarter 2019 earnings presentation and my first presentation to you since I came back to Japan and since I became President of Coca-Cola Bottlers Japan on March 26. I am pleased to connect with you once again through the Coca-Cola business in Japan, the country that I call it my second home.

I'd like to start the presentation today with a summary of our first quarter results and the reflection of my first 60 days or so at Coca-Cola Bottlers Japan.

Clearly, the first quarter has gotten off to a challenging start, although we did expect to have more difficult phasing in the first half of the year as we cycle a period of last year without the disruptions from flooding and production capacity. Beverage volume was down 2%, and we stay focused on minimizing the impact on value share despite the volume pressure.

Business income was negative JPY 4.1 billion, reflecting the volume decline and negative channel mix as well as an ongoing higher supply chain cost as we take this year to recover from the supply chain disruptions of last year.

Operating income was negative JPY 12.8 billion, including JPY 8.7 billion in onetime costs from the voluntary retirement plan, which had a higher employee acceptance than we planned and thus higher costs.

We have solid plans in place to deliver second half results in line with our initial plan for the year, but it will be difficult to fully catch up in the rest of the year to overcome the pressure year-to-date. So we announced yesterday a revision to our full year plan, which will be a key starting point for our mid-term strategic plan, and Bjorn will share the details later.

In spite of this short-term challenges, we are making progress in setting a solid foundation for the future. For example, we successfully concluded the negotiation for the very first customer price increase in 27 years. We have started to stabilize vending with 1-coin strategy and expanding Georgia Japan Craftmans across the country. We completed a major reduction in our workforce with a voluntary retirement program for 950 employees.

Production capacity, it's starting to recover with the start up of 2 new high-speed aseptic lines in Kyoto and Kumamoto, and we have completed a JPY 25 billion share buyback program in February, our second in a year.

Now I would like to take this opportunity to reflect on my first 60 days since becoming the president of Coca-Cola Bottlers Japan Holdings. As you may know, I have worked in Coke bottling businesses around the world and also, for close to a decade now, here in Japan, having worked for both Coca-Cola West and Coca-Cola East Japan before leading The Coca-Cola Company's global bottling operations based in Singapore.

In the last 2 years, I did not kept such close tabs on the business in Japan. So since my return, I treated that as an opportunity to use fresh eyes to get reconnected with the business. And my takeaways from almost 60 days back at CCBJH is the following. We are doing things right, but are we always doing the right thing? What do I mean by this? I mean we are doing many things right each and every day as we react to the daily ups and downs of our business and we navigate an intensely competitive market and retail landscape. And as we combine the basic operation of the 2 biggest Coke bottlers in Japan, it identified cost savings from current as-is business model. But if we focus too much on improving the as is, we are actually doing the right thing for the future of our business and our role to become the most efficient and lowest cost beverage provider.

The Coca-Cola system in Japan is dynamically changing itself while facing rapid changes, and Coca-Cola Bottlers Japan has made solid progress on its integration journey. But we need to see this period in time as a call to action to truly modernize ourself and show a strong presence in this industry with a growth-based transformation.

What are the big bets to help us change the status quo? Since coming back to Japan, I am convinced that one of the biggest challenges we face is moving from old to new. Yes, we should be proud of our history and traditions, our community-based and our customer-centric legacy, but to win in a rapidly changing market with intensifying competition, we have to renew ourself with structural and process changes, with improved capabilities, investments for the future and, most importantly, a renewed growth mindset. And some fundamental changes are already in motion, some of which we'll share with you here today. All of these changes are building blocks for the mid-term strategies we will share with you in August.

When I say we need to modernize ourselves, what do I mean? The beverage industry in Japan needs to be more agile and able to react to the new constant change. Coca-Cola Bottlers Japan must use the opportunity of our integration and size, basically, to fully modernize ourselves to stay fit to fight to win in this changing market. Populations and consumer demands are on the move with dynamic urban areas, like Tokyo, growing and demand for new and innovative products putting pressure on outdated regional product supply networks. The vending operating model hasn't fundamentally changed since the bubble economy years, while consumer shopping habits and preferences have completely transformed.

As for us at Coca-Cola Bottlers Japan, our infrastructure, it's pretty old. The average age of our factories, it's almost 40 years old. And our IT and distribution infrastructure comes from 12 regional bottlers that serviced an employee population and customer and consumer landscape that is vastly different than what it was originally designed for. This is my personal and professional reflection of how I see our business and how I'm approaching the creation of our new strategic business plan.

Now let's look at what challenges the business has already put into motion, starting even before my return to Japan.

Slide 8 shows how we have renewed our Board of Directors with best-in-class standards of governance, independence, diversity and experience to support our strategic agenda and growth mindset. This new Board of Directors has a majority of external directors and only 2 executive directors, myself and the CFO, Bjorn Ulgenes. Of 9 directors in total representing 6 different nationalities, 3 are women. And we have identified and nominated directors who have very specific and relevant professional experiences from across industries as well as from within the Coca-Cola system, including other bottlers integration. Our board members also better reflect our own consumers and shareholders, which I believe can be a competitive advantage.

Building up our workforce and workplace are also critical in developing an organizational culture of winning and growth. Our most recent intake group from this year, new graduates hiring cycle, is the largest and most diverse group of employees we have ever welcomed into the company. And we have made changes that I believe will help them succeed in their new careers with us.

Ultimately, we're competing to attract and retain talented people to grow and lead this business into the future, and I view this as a competitive advantage if we get it right.

Finally, as you know, we have been investing aggressively to recover our supply network and build a solid foundation for growth. We started up to 2 new high-speed aseptic manufacturing lines in Kyoto and in Kumamoto in the first quarter as well as a new warehouse in Hakushu. We broke ground for a new mega distribution center in Saitama that represents a planned investment of JPY 14 billion as part of Project Shinsei, and we are adding 60 new trucks or trailers as we expand our private fleet. Remember that we will have 7 new aseptic production lines by spring of 2020 when we return to what I call a normalized operation to meet the demands of the market and our business.

But all of this is not enough. We really do have an opportunity and a responsibility to make decisions now that will be impactful many years from now on. In other words, we must do the right thing for the long-term health of this business, while also getting the day-to-day right. And personally, I'm committed to do so.

Now I would like to ask Bjorn to join me here on stage to present our first quarter results and operational highlights and provide an update on our outlook for the rest of the year. Bjorn?

[Bjorn Ulgenes, executive]

Thank you, Calin. Good afternoon, everyone. I'm Bjorn Ulgenes, CFO of Coca-Cola Bottlers Japan. Let me take some time to discuss our first quarter financial results and business performance.

On Slide 13, you can see a summary P&L, including a segment breakdown of our beverage business and the health and skincare business. Remember, our results are now presented in International Financial Reporting Standards or IFRS.

Revenue declined 3% as we continue to experience the impact of supply constraints from the second half of last year. New product launches and renewals underperformed and vending channel volumes declined 4%, business income, therefore, declined JPY 4.1 billion. This does reflect our expectation that quarterly phasing this year would be negative in the first half as we cycle the impact of restricted product supply and flooding disruptions in the second half of last year, but is trending below plan so far, primarily due to the decline in volume and revenue.

Operating income declined JPY 12.8 billion in the first quarter. This includes JPY 8.7 billion in onetime expenses related to the voluntary retirement program due to the higher number of applicants than planned. Revenue in business income for our healthcare & skincare business declined driven by weak sales.

On Slide 14, you can see the main drivers of our first business -- first quarter business income. As mentioned earlier, we did expect negative phasing in the first half of the year as we cycle the impact of the disruptions from the prior year and continue to experience higher supply chain costs as we recover and grow production capacity and return to a more normalized supply infrastructure. Let's start at the left-hand side of the slide, the impact of volume, price and mix.

You can see a net JPY 4.7 billion decline in marginal profit. Internally, we consider this metric to be the marginal profit of our beverage business, and we believe it as an important KPI as we monitor the progress of our operations.

Beverage volume declined 2%, overall, with a 4% decline in vending and a 3% decline in convenience store volume, resulting in overall negative channel mix.

Of the JPY 4.7 billion, we saw a JPY 3.1 billion decline due to volume, price and mix. And of this JPY 3.1 billion decline, the impact of volume and channel mix alone was JPY 3 billion with a very small net impact from pricing and package mix.

The remaining JPY 1.6 billion impact includes deductions from revenue and other variable expenses. Here, we include the impact of other variable volume-linked expenses as well as deductions from revenue as required by IFRS.

Fixed marketing expense or DME decreased, partially driven by timing of our planned investments this year as well as cycling of prior year spend, such as the Pyeongchang Olympic campaign and a significant number of new launches last year.

Raw materials and commodity cost pressures have eased to almost flat in this first quarter. Manufacturing delivered slight savings as volume came in lower than planned despite elevated manufacturing costs driven by increased reliance on outsourced copackers. This has been an area of synergy delivery in the past, but our ability to deliver manufacturing synergies in 2019 will be limited until supply capacity normalizes by spring 2020.

In Others, although there was a benefit from a reduction in personnel expenses due to the consolidation of retirement benefits systems, this was offset by increases in logistics and distribution expenses that are expected to continue through the rest of the year.

Business income for the healthcare & skincare businesses decreased JPY 800 million, reflecting weaker sales.

On Slide 15, you can see our first quarter performance by channel and by category. Volume was down 2% as we continue to experience the impact of supply constraints from the second half of last year, including some reductions of retail shelf space. New product launches and renewals also underperformed, and supermarket and drug and discounter channels saw less promotional activity in the first quarter, in anticipation of the large PET price increase.

Revenue per case improved in the drug and discounter channel as we reduced sales of large PET water. And convenience store channel benefited from the launch of Ayataka Tokusencha FOSHU green tea.

In the vending channel, revenue per case declined, cycling prior launches and reflecting increased coverage of the smaller coffee can at JPY 100 price point to drive purchase transaction growth.

You can see here the various drivers of channel and category performance in the first quarter. I would like to highlight vending and coffee which have been a priority over the past year. Although vending continues to be tough at negative 4% volume, the pace of decline is shrinking and progress this quarter was generally in line with plan, thanks to the contribution of Georgia Gran Bito and Deep Black as well as strategic expansion of the 170 grams small cans of coffee. We also expect to see progressive expanding coverage of Japan Craftsman over the rest of the year.

Coffee volumes were even in the quarter, reflecting the moderating trends we have seen in lending as well as expansion of Georgia Japan Craftsman. We will continue to prioritize expanding availability of this brand across supermarkets, drug and discounters and in the vending channel, where it previously was underrepresented due to supply constraints.

The new production line in Kyoto, which started operations at the end of the quarter, can manufacture Japan Craftsman, so we expect the pressure on our supply capacity to ease further.

On Slide 16, you can see our OTC market share and retail pricing trends. We have focused our efforts on minimizing the impact on value share despite the volume share pressures we experienced in the quarter. Retail pricing declines have eased, especially in large PET as we pulled back on promotions ahead of the price increase, and we expect to start to see the impact of the wholesale price increase in large packages as we move through the year.

On Page 17, I provided an update on our CapEx and depreciation progression, which is in line with our full year plan to invest almost JPY 100 billion of CapEx, as outlined here. We completed the JPY 25 billion share buyback program at the end of February with JPY 13 billion in repurchases in the first quarter. Also, we filed a shelf registration for bond issuance on April 25. The bond issuance is geared towards several uses: new investments in production lines; vending machines; refinancing a short-term debt; and upcoming bonds that come due in 2019 and 2020.

As we have stated before, our financial framework stays intact. We aim for returning value to our shareholders through, first and foremost, delivering growth in financial performance, dividends, share buybacks, et cetera. CCBJH has a good credit standing, which we will use to take on the reasonable amounts of debt to improve our DE ratio over time. We will use such measures and options, as required, to deliver, over time, an improved return to our shareholders.

Now I'd like to move on to the rest of the year outlook given the results year-to-date and the revision to our full year earnings guidance that we announced yesterday.

On Slide 19, you can see a status update on how we are delivering against our plan for 2019. As we have outlined in this presentation, revenue and business income have been a challenge in the first quarter.

We have gone through a process to review our performance for the first months of the year and concluded that it will be difficult to make up for our current softness later in the year. We have had challenges in new launches, especially in convenience stores, with performance below plan.

Vending remains weak even if it is on plan for Q1 as the 1-coin strategy in Craftsman is starting to take hold. Supermarket and drug and discounter volumes will suffer in the near term as the large pack price increases takes effect across customers. Supply chain expenses will remain elevated during the balance of the year as we have planned for. And finally, we have booked an additional JPY 2.7 billion in onetime expenses, higher than our initial plan from the voluntary retirement program.

We now estimate revenue will be even versus prior year and volumes will decline 1% with a business income target of JPY 15.4 billion. We are on track for the investments we plan to make this year, and there is no change to our outlook on dividends for the year at JPY 50 per share.

Let me take you through the key elements of our revised outlook for this year. We do have a solid plan for new launches, campaigns and initiatives over the rest of the year. Here, I can show you some of what is planned in the second quarter.

We are expanding coverage and availability of Japan -- Georgia Japan Craftsman with other renewals and product launches centered on hydration and sports categories ahead of summer. We will continue to ensure that our vending business deliver its plans for the year with expanded Coke ON promotions; increased coverage of Georgia Japan Craftsman; and vending-exclusive products, package sizes and price points to drive purchase transaction growth.

For those of you in attendance today, we have provided Japan national rugby team-designed cans of Coke and Coke Zero as well as our 25th year's hit song bottle package, [Foreign Language], a vending exclusive acquired speech, so please enjoy.

That being said, we see some variability in the rest of the year as well. Negotiations for the customer price increases have been successfully concluded. This is a really important example of how we are exercising what Calin referred earlier as new growth mindsets.

We do expect to see higher wholesale revenue per case ramping up through the rest of the year for large packages, which represents about 20% of our total volume. But we are seeing declines in large package volume in the second quarter as the price increases initially take effect and competitors, retailers and consumers react. This will be something we monitor closely. And realistically, we'll need to give the initiatives some time to judge the success of this important initiative.

Here, just a reminder about our supply chain outlook for the rest of the year. We are building up higher inventory levels at an earlier point in the year in order to ensure sufficient product supply. On average, during the first 4 months of the year, inventory levels are 30% higher than last year. There is cost associated with this in terms of additional warehouse, space and longer shipping distances.

Remember that we lost about 22 million cases of annualized production volume from the Hongo plant damage alone. And this year, we're expecting roughly 30 million new cases of annualized production capacity. But some of that in the spring and some of that in the fourth quarter. And some of that is from tapping into third-party production, which is more expensive than when we produce in-house. And there is an upper limit to what we can supply if sales volume grow materially higher than expectations.

You can see at the top right of Slide 22 that in-house capacity should rise to meet expected demand growth in 2020 for aseptic products as our production infrastructure is restored.

Finally, here, you can see the final results of the voluntary retirement program. The acceptance rate was higher than initial projections with 950 applicants versus the plan for 700 applicants. Because the program was voluntary, it was not possible for us to foresee with absolute accuracy how many would take up the offer of severance.

On average, the mix of incremental applicants skewed toward longer tenured employees with relatively lower salary levels. So we booked a total of JPY 8.7 billion in onetime expenses in the first quarter, an increase of JPY 2.7 billion versus our initial expectations. And we expect approximately JPY 5.7 billion in cost savings for 2019 and annualized cost savings of approximately JPY 7.7 billion from 2020, which leads me to our revised full year 2019 forecast here on Slide 24.

Average volume is expected to decline 1% and revenues will be even for the full year. We expect business income to come in at JPY 15.4 billion and operating income will be JPY 8.8 billion. At the bottom of the page, you can see the segment breakdown of our beverage and healthcare & skincare businesses.

On Slide 25, I provided the updated business income waterfall reconciliation versus prior year, which shows the main drivers for the revision of our outlook. This business income will be the new baseline for the midterm plan and targets that our teams are working on and that we will share with you in August.

This concludes my portion of today's discussion. I would like to ask Calin to join me to wrap up and then we'll take your questions. Calin?

[Calin Dragan, executive]

Well, thank you, Bjorn. And let me summarize what we have presented today and milestones for this year. I hope now you have a good understanding of our performance in the quarter and our expectations for the rest of the year. We are not satisfied with our performance in the quarter.

I started the presentation by saying this year is a call to action to modernize ourselves and drive growth-based transformation, and we will act in this way. Clearly, our current performance, no matter how we measure it, is low whether in terms of revenue growth, ROE, operating margin or other metrics. Our and my long-term success will be measured by our progress against such targets, and we will act in this way.

We will continue to implement important structural and process changes, while making big but smart investments in order to support a renewed growth mindset for the whole Coca-Cola system in Japan.

The revised outlook for 2019 we shared today will be the starting point for our updated midterm plan. And you can see on the right side of the Slide 27 the milestones for this year.

The next major milestone is our second quarter earnings announcement in August, where we will share our updated midterm plan and targets reflecting the new growth mindset of our entire Coca-Cola system in Japan. I look forward to seeing you again in August. And now I look forward to your questions. So now let me ask Ray Shelton to come back on stage for question-and-answer session, please. Ray?

[Raymond Shelton, executive]

Thank you, Calin. Thank you, Bjorn. Let me remind you this Q&A session is intended for analysts and investors, so we ask members of media in attendance to please hold your questions for our media session scheduled separately today.

Please provide your name and company when asking a question, if possible, and please try and ask one question at a time as we are translating your questions into English. Okay so I think we're ready for questions. If you could just raise your hands, please. Right here at the front.

[Nobuyoshi Miura, analyst]

[Interpreted] This is Miura from the Citi. Calin-san, welcome back. I would really like to welcome you and thank you for the great presentation. I have 2 questions. First, we are not happy with the current Q1 performance and we are pessimistic about it. And now that you have been appointed as the president, so 2020-'21, in order to make sure there's a V-shaped recovery, what do you think is the priority now? Can you elaborate on that, please?

[Raymond Shelton, executive]

Calin, I think this will be for you. You've mentioned that you're not satisfied with current performance with the first quarter this year. What would you call your first priorities for improvements as you look to 2020 and beyond?

[Calin Dragan, executive]

First and foremost, [Foreign Language] for welcoming me back. So highly appreciated and I'm very happy to be back. Trying to answer to your question, Miura-san, I have to say that I try to be as realistic as possible with the current realities of the business. And as described, do we still have a lot of actions to be done to fix the current status of the business, basically, catching up into the supply chain investments and coming back to a normal status, as I called it, by mid-2020. I would say the top priority would be for a stabilization of the vending trend. As well, we are going to keep a close eye on the effects of our price increase on which we are putting significant expectations. We are not having any precedent for the last almost 3 decades in that matter, but it can be a significant turning point for the future of the industry.

My first priorities inside the organization will be to work on our culture and moving towards a growth mindset of this organization, renewing moving from old to new, from [Foreign Language] to [Foreign Language], in term of processes and systems, which I describe them as being really old and outdated. But that will take time, that kind of fundamental transformation takes a number of years, but we are seriously committed to do so.

Now the realities, the quick wins, the quick savings are, in a way, gone by now? Unless we do this major transformation, we are not going to be able to focus on our journey to become the lowest cost operator in Japan. I hope that answer, by and large, your question. More concrete targets, more concrete actions. I promise to come back with our mid-term plan in August.

[Nobuyoshi Miura, analyst]

[Interpreted] The second question I had is about the price increase that you mentioned. In the industry, large PET per bottle, the wholesale price, we believe that it's been increased by JPY 10, that's the rumors or that's the impression. Is that correct?

[Raymond Shelton, executive]

A follow-up question is specific to the price increase, just getting some confirmation on how that's going and general ranges of increase. Bjorn, you want to take that one?

[Bjorn Ulgenes, executive]

Thank you, Miura-san. As we said in the prepared remarks, we have concluded the negotiations with the customers, and the wholesale prices are starting to take effect in the markets, and I think you can appreciate we will not be making comments about specific pricing levels for the customers. And we're now taking stock of the market research, how the price is starting to materialize into consumer changes, and we'll come back and keep on monitoring that very closely as we move forward.

[Raymond Shelton, executive]

And maybe I'll ask Ichihara-san, head of our key accounts as well, just to maybe give a quick update on price increase as well. [Foreign Language]

[Masanori Ichihara, executive]

[Interpreted] So this is Ichihara from the Key Account Management. About the price increase on January 8, we have announced that we are going to make the price increase. And after that, to all of our customers, we have the negotiations, we have the discussions. As a result, as planned, we have been able to increase the wholesale price. As increased, we have been able to complete the negotiations.

Now when it comes to the shelf price, this is ultimately something that the retailers are going to decide on. But based on the different data from April onwards, we know that there's been a change after April 1 onwards. As for this price increase, I would like to refrain from the detailed financial data, but we believe that from next -- Q2 onwards, there will be a positive effect. But on the other hand, there may be some changes in the market situation, so we will continuously monitor what is going to happen there.

[Raymond Shelton, executive]

We're ready for the next question, please. Right here at the front.

[Ritsuko Tsunoda, analyst]

[Interpreted] I'm Tsunoda from JPMorgan. Welcome back, and I have 2 questions. The first question is about the first quarter and is about the volume. So you mentioned that it's minus 2% in the first quarter. And looking at the full year outlook, it says minus 1%. So you first said it is going to be flat, but now it's minus 1%. And think about the first half and the second half, what are the assumptions for the volume growth for the first and second half? That's my first question.

And for your company, the minus 2% volume in the first quarter, was there any supply issue? Probably it was not the supply issue because the aseptic inventory has gone up by 30%, so I believe it's not the supply issue. I think it's the loss in the sales side. So based on your analysis, what is the view? Continuously, you might have been weak because you have lost volume share to your competitors. And to change that situation from old to new, what do you have to do? What is your thought around that, I would like to ask. This is, overall, my first question. So that's my first question.

[Raymond Shelton, executive]

That was a long first question, mainly around volume. The 2% decline. In the first quarter, but we're expecting to be minus 1% for the full year. Specifically around the 2% decline in first quarter, what was some of the driver, specifically? There was a question around inventory growth during that period as well. And then as we have seen some lost in volume share, what's your priorities or what do you think we should be doing to recover that or to address that?

[Ritsuko Tsunoda, analyst]

[Interpreted] And also, the breakdown of the first half and the second half for the volume assumption, the growth rate.

[Raymond Shelton, executive]

The second half assumptions. Calin, I'll let you start with this.

[Calin Dragan, executive]

I will start with this and then probably we are going to invite my colleagues to give you far more concrete numbers. But first and foremost, thank you so much for welcoming me back, so happy to be back and interact again with you.

I have analyzed the numbers and we were looking altogether on how we plan for the year and actually what have we achieved. As you could notice from the chart that we have presented, our overall stock level, our inventory level went significantly up, and that came on purpose because we know that we have shortage of capacity historically coming with the incidence of last year, so we have to build stock in low season in order to be able to have it when the volumes are going to go up in the season. That's one element of it. So the second element that I want to give to you is that within that portfolio, in order to be able to fulfill the demands of our customers and consumers, we had to have some -- to make some choices. We had to prioritize.

So -- and we have prioritized certain SKUs and certain portfolio for the very first part of the year and which probably we're going to do the same for the second part of the year. We'd choose what to produce. Now that was an estimation and there was a certain error versus how much we estimated versus how much we were able to sell. But what makes us confident for the second part of the year is that we are seeing certain trends, which seems to be encouraging. Vending, though it's still negative year-on-year, the gap, it's smaller and we are cycling some poor performance in the later quarters of last year. Second thing is the price effect, which we are not commenting for the moment because the period is quite short, but it's pretty much on plan as we forecasted. And in general, we are confident with the current level of stock, we are going to be able to fulfill the demand. However, because of our stock production shortage, beyond the certain limit, we are not going to be able to go, so we are going to have also an upper limitation in term of volumes. But to deliver the results that we are forecasting, we are confident that we have enough production for the second half of the year. That's a general trend, first half versus the second half. For more concrete answers, please.

[Raymond Shelton, executive]

I think, since the question is on volumes, volume assumptions and drivers, I'm going to ask Costin to step in and give us a little more color, please?

[Costel Mandrea, executive]

Good afternoon. My name is Costin Mandrea, I'm in charge of commercial. Thank you, Tsunoda-san for the question. So let me summarize. We are definitely not happy with the performance for Q1. We had a tough start of the year. And looking into performance drivers, we identify few factors.

First to fall, we are still lagging behind getting back on shelves due to the supply shortage last year. It takes a bit longer than we estimated, but we are making good progress.

Number two, vending is still negative year-on-year. Although the rate of decrease is significantly lower, and we see in vending some very good signs of improvement, especially in coffee and in SOT can at 1-coin point -- price point.

The third part is about our new products. And our portfolio, it's a broad one, and it's across many categories. And we take an approach of renewing some of the products or coming with new innovations. This year, we're more cautious in first quarter and we renew most of our products. And what we see, some of them performing lower than our expectations.

Now moving forward for the second part of the year, for the year to go, we are taking a more balanced approach in terms of renewal and new innovations, and we are benefiting from the increasing capacity that our supply chain is building right now. So going forward for the other part of the year, we are confident we have strong plans in order to deliver our internal plans. As Calin said, there are many months in front of us, there are many uncertainties. The biggest one is the fact that, yes, we increase the prices from 1st of April and, still, we are following carefully what is the effect in terms of large PET with the consumers. So at this point in time, for the year-to-date plans, we are focusing strongly on it.

[Ritsuko Tsunoda, analyst]

[Interpreted] And talking about the convenience store shelf space, when would you get it back from the second quarter? Do you think you will regain those spaces that you lost? Can we have expectations?

[Costel Mandrea, executive]

I would say the following and Ichihara-san can continue. Our -- last year, we suffered due to the supply shortage mainly in supermarket. So here is where it takes a bit longer to get back the space of share. Convenience, same with vending, is relying heavily on innovation. And the innovation, I explained to you what happened in the first quarter. We are more cautious. We did more renewals in not big innovations and that's why you see CVS in the first quarter performing negatively. But moving forward, because we have extra capacity and by deploying -- accelerating Georgia Craftsman, the coverage of it, we expect to be in line with our plans. You want to add?

[Raymond Shelton, executive]

Ichihara-san, would you like to add anything?

[Masanori Ichihara, executive]

[Interpreted] Yes. About the shelf space at convenience stores. Of course, we suffered from the disaster last year, as Costin mentioned, and it was very limited for convenience store channel. And do we have impact now? The answer is, no. But thinking about the fight at convenience stores, as you are aware, it's about the weekly fight. Every week, every week, there are new launches as same as -- and that's the same for us. And if this new launch succeeds or not, depending on that, the shelf situation will change greatly, which is the same story that we had before. So are we able to recover from the second quarter? The answer will be we will really put on efforts and we'll have heavy business negotiations so we can get this space back. And we have started negotiations with the new launches, as usual. So to get back on the shelves, we would like to really aggressively talk with the customers and we want to win on the shelves.

[Ritsuko Tsunoda, analyst]

[Interpreted] And my second question is in the previous midterm plan, you talked about synergies. And in this presentation, you said old to new, and I see that you will require many investments. That's what Calin-san said. So those investments, I believe those are going to be new investments. So in the last midterm plan, you had a synergy that you assumed, but it might be changed because the investments will be different. Would that be true?

[Raymond Shelton, executive]

The second question is building on the old versus new theme for today. Looking at synergies in the original plan and what kind of synergies we'll be looking to in our updated plan given requirements for investments as well. And so the question is sort of how are you thinking about investments and how are you thinking about synergies versus what we talked about previously. Calin, I'll let you take that first.

[Calin Dragan, executive]

Here, I just want to say a big thank you again for following up onto this old versus new transformation. What I try to say when I highlighted a couple of times in my presentation, that challenge that we're having is that we need to change culture processes and systems so that we are matching the new reality. From the old aging infrastructure, from the old method of serving the vending machines, like 30, 40 years ago, to new ones that are going to enhance our capabilities.

It's true, some of them will require investments, additional investments, some of them will be okay through some diverting and refocusing certain investments that we are having. But for me, right now, I would say it's premature to comment on concrete numbers, Tsunoda-san, on this matter. I have to say, if I remember correctly, this Friday afternoon, we are having the very first review of the journey of the midterm plan, internally. So I will be able to answer in far more concrete numbers at our midterm plan presentation in August, on what are we going to focus and how much money are we going to commit.

[Raymond Shelton, executive]

Thanks. I hope that answers your question. Okay, we're ready.

[Makoto Morita, analyst]

[Interpreted] This is Morita from the Daiwa Securities, and I have 2 questions. First question is the key word that you talked about, the old to new. So in your head, Calin-san, is there any specific structure or process that you have in mind? Do you have the image already in your mind? And are you going to be thinking about and you're going to be working on the execution or are you going to start planning from the 2B status? Which stage are you in now? That will be my question. And in order to execute that or in order to do that, what is the biggest bottleneck? If you can share that all together.

[Calin Dragan, executive]

I can take that directly. Thank you so much, just to save time. Thank you so much for the question. I just want to jump and explain myself of what I meant when I said that we need to change our approach. But before that, I will say that Coca-Cola Bottlers Japan has done fantastic steps ahead. Coca-Cola Bottlers Japan Holdings have made big steps in term of integration of the entities, a lot of progress in integrating the business, catching up from behind with the investments in manufacturing. We are having now in-house probably the best technology in the world in term of production. And some of our production lines, we discussed it proudly yesterday, are at the highest, for example, system line efficiencies in the world of Coca-Cola operations. And all this makes us very, very proud.

Let me give you another example from the past. And some of you, I'm sorry for exclusion, but some of you might remember me about 4 years back, I came here in front of you and I presented the CokeOne project, basically, the SAP implementation. One ERP for the new company. Now that's what I call the right thing to do and not necessarily doing the things right.

I have -- I remember that I had to come and apologize here a couple of times in front of you and bow for the hurdles created by the CokeOne implementation. But right now, 4, 5 years later, that was the right thing to do because right now, we are having basically all our company covered by CokeOne, the system work flawlessly. It is the main source of driving synergies and capturing information right now.

This is just one example of what has been done right, it was creating some hurdles on short term, but we have done the right thing for the business. We need more of that. And let me give you an example where we haven't cracked it yet. And that's not only us, but I'm talking now about our Coca-Cola business here in Japan.

We are still operating our vending operation -- vending businesses, like we have done 30, 40 years ago. And we are stopping, for example, the truck with hundreds of SKUs, hundreds of products in front of every vending machine, and we basically ask the vending machine, choose, please, what do you want? How should I fill you? As you can understand, that's already an outdated model, and we are operating it like that for decades. There are far more efficient models of filling the machines. There are far more other way to operate and get at the reasonable serving cost, while you maximize the output of the operations. That kind of transformation I'm talking, and that's just one example.

Do I have a solution? I hope that I'm going to be able to come to present to you in August a far more concrete plan in our transformation journey.

[Makoto Morita, analyst]

[Interpreted] This old to new. I believe that it refers to -- it applies to different areas. For example, the organizational changes or the relationship with CCJC. Maybe it might not be fundamental, but maybe slight changes in the relationship with CCJC. Should we keep in mind some of the changes in this big picture as well?

[Calin Dragan, executive]

I'm trying to keep an open mind, and everything is under question mark. Meaning, we are not having any area which we consider it solved already. We are going to explore all the areas of opportunities and we are going to prioritize them. I'm not going to avoid the answer related with the Coca-Cola companies, specifically CCJC, but I think that the management here in Japan made already big steps ahead. And I don't know if how much briefing have happened in the past, but since last year, there's a new collaboration model in place with the Coca-Cola company. And I think that, that's going to deliver results as we are going to progress in our business. And you might have noticed as well that when I was talking in my notes before, I was talking about the transformation of the system in Japan.

[Raymond Shelton, executive]

And I think the creation of the vending business unit that we've talked about a little bit earlier this year, together with CCJC is one good example of how that's doing things differently in a new way.

[Makoto Morita, analyst]

[Interpreted] So I would like to move on to my second point -- second question. I have a question about the price trend. Looking at the weekly chart of the prices, it says excluding water, why have you excluded the water? The mineral water's prices are a little different. I would like to understand what was the reason for it. And also because it's right after the price increase, it seems like the volume is significantly negative. So I would like to understand what's the price elasticity and also the recovery of the volume. Already from May, the other competitors are raising their prices. So are you having a vision about the volume recovery?

[Raymond Shelton, executive]

I'm going to ask Ichihara-san. The question was in Japanese as well. But to summarize for everyone the question is on pricing trends going forward and some more details on how we're thinking about those, including water inclusive or not.

[Masanori Ichihara, executive]

[Interpreted] The reason why we excluded the water is because even before we increase the price, in terms of the large PET water, we have been executing different types of price strategies. Therefore, within this report, we wanted to exclude it. Because we thought that's appropriate in order to explain the effect of the price increase that we did this time, therefore we excluded the water.

Now the blue line, blue graph, the difference is on weekly basis. In terms of the specific price elasticity, I would like to refrain about the specifics right now. But, of course, the volume decreased, looking at the price elasticity. We have some assumptions. We did project volume reduction. When you look at it on a weekly basis, week after week, the reduction, the decrease is improving. So we believe that it's within our expectation. Just to confirm, the water price is also coming up. In terms of the wholesale price, as planned, we have completed the negotiations with our customers. Thank you very much.

[Raymond Shelton, executive]

Saji-san?

[Hiroshi Saji, analyst]

[Interpreted] I'm Saji from Mizuho. I only have one question, a very simple question. You mentioned that the VRP due to the -- it might not be for Calin-san, but the VRP, you targeted 700 people, but how did you define the target? And the actual was 950. But which department were they from? And are there any impact on the business because you lost them?

[Raymond Shelton, executive]

The voluntary retirement program and the assumptions around the 700 initial assumptions and the breakdown of the eventual actual application group of 950. Bjorn, I'm going to start with you. If you could give us a little bit of background on the overall program.

[Bjorn Ulgenes, executive]

Yes. Thank you for the questions, Saji-san. The program, as I mentioned in the prepared remarks was a voluntary program. So setting specific targets, therefore, is very, very difficult because, again, people can decide to take the offer or not to take the offer. In the end, we ended up with more people applying for the packages, which we think is our attractive packages so we have the better subscription. So therefore, to answer your question, it's difficult to say this was a specific target by function, by area.

And when it comes to the impact to the business, naturally, when you have 250 people more taking the package than what we had planned for when we were setting up the restructurings of the operations, of course, it will have an impact. But the operations, and the biggest one being commercial, have planned for this and we will probably do selected hirings where needed, where we have lost critical positions. And we're also using smaller amounts of overtime to manage the impact of the business. So overall, we believe we can manage this, yes. Thank you.

[Raymond Shelton, executive]

Thank you. Other questions, please? Yes, right here at the front.

[Haruka Miyake, analyst]

[Interpreted] Miyake-san from Morgan Stanley. About the revenue, this time, due to the nonperforming new products, it was not looking well. In the previous explanation -- in the previous session, together with CCJC, you are jointly working on the product development and the bottlers' voices are being more reflected. That's the type of the structure that you started to establish with something that was shared previously. Can you add on a little bit more to get a better image? In concrete, what is really happening. This is the Q1, so maybe you were not able to demonstrate that benefit effect full yet. But the new products were not high as expectation, and why was it not effective with the consumers? What is the reason?

And also, when it comes to the negotiations with the customers going forward with the new launches, even if you're able to secure the shelf space, if it's not going to be effective with the consumers, you're going to lose the shelf space. So how is it going to change in the future? What should we expect? That is -- it's kind of a big question, but that's why I would like to understand.

[Raymond Shelton, executive]

Thank you, Miyake-san. Very quickly, it's a question related to the volume and revenue decline that we saw in Q1. We talked about new products and new renewals which have underperformed. So the question is around how do we work together or differently with the Coca-Cola Company CCJC on product innovation. And a little bit more detail on the process around new products innovation and development and launches. Calin, I'll start with you.

[Calin Dragan, executive]

So let me thank you first for the question because I think it takes another angle to the whole process of innovation, and it's true for us. From year-to-year, I think we are improving our collaboration with CCJC so that we are having a stronger input on the market demand, our people being closer to the market.

All the innovation goes to a very rigorous process, and we are sharing -- we are not blaming in this answer any of the past, we are sharing the responsibility for the launches that we had in the very first quarter.

Now for the specific launches, who work or who didn't, I will let my colleagues to answer. But in general, the first launches of this year were not necessarily breakthrough innovations. And I understand that our planning, our calendar planning was related with the rationalized supply chain capacity. Hence, we decided more -- to focus more on renewals, and Coke Peach was one of them, which were not having the same effect that we were expecting because, last year, there seem to be a huge success. And just anecdotally, I can tell you I got that product in Singapore as well at that time, and it worked very, very well. But this year was not working that well. And I think that, that was part of the reason why launches, in general, were not having the same magnitude. But on top of that, if there are any other specifics, numbers and more detailed answer, I will ask my colleagues to help you understand better the situation.

[Raymond Shelton, executive]

Costin, I'll ask you to add any additional color, please.

[Costel Mandrea, executive]

Thank you, Miyake-san. Already, Calin-san explained the biggest part of it, but let me summarize. First of all, the way we operate with CCJC improved significantly in the last year, so we have a very simple and transparent process of developing new products.

Number two, we come after a very tough year in terms of supply chain capacity, so we were a bit more cautious in the first quarter in terms of coming with new concepts or new products. So we focused more on renewals. If you remember, last year, in Q1, we started super strong. Georgia Brazil blend, Coke Peach, Kochakaden Craftea, TANSAN, all of them super successes.

Now, first year, everybody wanted to try. Second year, renewal. Of course, the consumers are still interested. They still drink it, but we see a bit less interest in the renewal.

What do we do different? What we do different now -- and there is another point. Our top priority, as you remember, we said a few times, was Georgia Japan Craftsman. Great product and, last year, we were selling as much as we could produce. And our priority was and is accelerate the coverage. And that's what you see now Georgia Craftsman very fast growing in vending. We improved the -- from April, we renewed the product and is going well. Yes, so these were our priorities.

What we do going forward? We'd go into a more balanced approach. Yes, we are renewing products because, you remember, last year, Q2 or Q3, we had some good launches. We are renewing. We are improving formula, and we are addressing consumer needs. But also, we come with new concept. And you have on your table 2 of them, and I will insist only one I LOHAS Lemon [ Muto ], it's a great build. It's a great launch based on consumer insight. They want a natural mineral water, pure as I LOHAS. They want a bit of flavor into it, but they don't want to take the sugar. So we came with this [ Muto ], 0 calories filter, true lemon is performing very well. So for the balance of the year, you'll see more of these new products, but in the same time, renewals. So thank you for the question.

[Raymond Shelton, executive]

Thank you. Did that answer your question?

[Haruka Miyake, analyst]

[indiscernible]

[Raymond Shelton, executive]

Miyake-san, could you -- I think the translators can't hear you.

[Haruka Miyake, analyst]

[Interpreted] Last year, Q1, there were many new products, and the new products were doing well. However, when you look at the existing products, I guess it was a little weak. That's how I felt it. However, 2019, the renewals and the new products were not doing well. However, when you look at existing products, has it improved?

[Calin Dragan, executive]

Very good question. We are -- and this is the way we are looking at our business. New products, what they contribute and how the current products are performing. Let me give you an example, which is extremely important for our business and especially for vending, SOT can. Last year, we came with a lot of flavors in SOT can. And then, in Q4, we launched Georgia Gran Bito, very good performance. And then in Q1 this year, we launched Georgia Deep Black. Right now, you'll see in all our vending machines 3 SKUs performing very well. We consider this Georgia Emerald Mountain, Deep Black and Gran Bito our core, and we're very happy to see, in Q1, SOT can, it is flat versus last year after many years of decline.

Yes, it's still too early. Yes, we are looking very carefully and we are following the trends of this, but we are taking a balanced approach, new versus core. And, of course, with a wide portfolio as we have, this requires a lot of synchronization.

[Raymond Shelton, executive]

Thank you. And I think we have certainly gone past our time, so I want to thank everyone for your interest in the business, of course. We invite you to reach out to us and our team in Investor Relations if you have any follow-up questions or feedback. And we look forward to seeing you again in August with the Q2 results and midterm plan update.

Thank you very much for your attendance.

[Calin Dragan, executive]

Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]