Coca-Cola Bottlers Japan Holdings Inc

TSE:2579

Earnings Call Transcript 2020-Q1

[Raymond Shelton, executive]

Good afternoon. I am Raymond Shelton, Head of Investor Relations and Corporate Communications for Coca-Cola Bottlers Japan Holdings. Thank you for joining us today for our first quarter 2020 earnings call for analysts and investors. I'm here today with President, Calin Dragan; CFO, Bjorn Ulgenes; Head of Commercial, Costel Mandrea; and Mr. Takashi Wasa from the Coca-Cola Japan Company. Following prepared remarks, we will be happy to take your questions.

This presentation is intended for analysts and investors, so we ask members of the media listening to today's call 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 with separate telephone lines for Japanese and English.

Before we begin, let me remind you that today's presentation contains 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 ccbj-holdings.com. Please look on our website for this information in both Japanese and English.

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

[Calin Dragan, executive]

Thank you, Ray, and good afternoon, everyone. I am Calin Dragan, and thank you for dialing in to today's earnings call.

First and foremost, on behalf of the company, I would like to express our deepest sympathies to all those who have been affected during the COVID-19 outbreak. We are operating in unprecedented times with great challenges for society as a whole and, of course, for our own business. Our company mission is to deliver happy moments to everyone while creating value even in these challenging times, and we have been working with comprehensive business continuity actions in place to ensure safe and secure product supply.

We also sincerely appreciate those who have been working on the frontlines in the medical community and elsewhere to keep us all safe. We have seen and experienced these efforts and have agreed a program with the Coca-Cola Company in Japan to donate up to 1.3 million beverages to medical professionals in need in cooperation with the Japan Medical Association. This is in addition to our ongoing commitment to supporting local communities through our active Food Bank Donation program.

I also applaud the efforts of our employees who are working every day to ensure the health and continuity of our business as we continue to support our consumers and customers with essential beverages and services in challenging times.

Today, I would like to share our experience and learnings from this evolving situation and what actions we are taking to not only protect our business but to ensure we are best positioned for the future. We will present our first quarter financial results and current outlook as well as our initial thoughts about the business post COVID-19.

Let's look at Slide 6. Although we face a serious situation and we are operating in uncertain times, it is important to note that 2020 started with good momentum, and I'm pleased that our transformation work was kicking in before the initial impact of COVID-19. January and February delivered results in line with our plans in key focus areas such as the vending channel and Lemon-dou alcohol brand is very positive. We have continued to successfully execute our transformation initiatives. And this is a good indication, I believe, that we have been moving in the right direction.

However, as the COVID-19 outbreak expanded and the government announced countermeasures, including school closures at the end of February, we started to see pressure on our business. In March, the foodservice and vending channels declined, which offset some of the positives in our first quarter results. We expect the second quarter to have a bigger impact. The government declared a state of emergency in April with the goal of reducing face-to-face contact by 80%, and it recently extended the emergency declaration until the end of May.

At CCBJI, we started work from home, nonpeak commuting and child care support measures in February, and we have been distributing approximately 200,000 face masks per week to frontline employees. Because of the ongoing uncertainty of the coronavirus situation, including its initial impact on our first quarter results, we have decided to withdraw our full year 2020 forecast until we can appropriately estimate the outlook for the full year. It will be important to evaluate the scale and duration of the pandemic and its impact in the summer, including the delay of the Olympic and Paralympic Games and how channel and package mix will evolve over the coming months. In the meantime, we are working to protect our business in extraordinary circumstances and to ensure we continue to support our customers as well as employees and communities in need.

Given this unprecedented situation, good stewardship of capital and maintaining a solid financial position is essential. We are actively reviewing our capital allocation priorities and investment plans. We can't let up to our key transformation initiative in this tough environment, rather we must dig deeper for change as we continue to build on the solid progress we have achieved so far and as we address shorter-term savings to prepare our business for a gradual exit and recovery. I always say business as usual is not an option, and this is truer now than ever before.

COVID-19 is having an impact, both in general and in our industry, as you can see on Slide 7, represented by the worst consumer confidence readings ever and beverage industry volume declines since March. Clearly, the situation is unprecedented, and we must prepare for changes once this initial crisis has passed.

Slide 8 summarizes our initial assessment of our reaction to outbreak. We are tackling the current impact of COVID-19 and actively finding opportunities to drive deeper transformation. Since March, the beverage business has experienced volume declines and a shift in purchase behavior and channel mix as consumer traffic has fallen off and people stock up at home. We have been actively adjusting supply plans and in-market actions to meet these consumption changes. The work style reforms we started last year have greatly helped to minimize disruption to business operations. We provided smartphones to all employees in 2019 in addition to work from home and flextime policies, which have smoothed the transition to remote working during the COVID-19. And we are protecting our business today while preparing for the future by reviewing discretionary spending and CapEx appropriately managing liquidity and access to cash and tracking examples from the global Coca-Cola system as different markets experience different phases of the COVID-19 crisis.

On Slide 9, I'd like to double-click on the current situation across different channels, which I think provides a good perspective on the various moving pieces impacting the industry and our top line performance. I call this our navigation slide, as we consider various scenarios for the business over the rest of the year.

The supermarket and drug and discounter channels have seen sales volumes hold up, although with a lift -- with a shift in product mix and consumers stock up at home. Foot traffic has been more stable, though consumers are reducing the frequency of visits in line with government recommendations, and we have observed an increase in some promotional pricing of large package sizes.

Convenience stores and vending have experienced declines in traffic as consumers stay at home and avoid gatherings. In convenience stores, this decline has been most evident in urban locations. And our vending business has been most impacted in train stations, schools, leisure facilities and offices, basically any location where foot traffic has declined temporarily due to coronavirus countermeasures.

Foodservice has seen the greatest impact of COVID-19 outbreak as outlets have closed or reduced operating hours and moved to take out or delivery only. The longer this goes on, the greater the risk that some operators will not be able to recover.

And finally, online sales have seen a big spike since the outbreak, and the important question will be to what extent this represents a permanent change in consumer preference and behavior. As everyone can understand, this pandemic is affecting personal lives and business deeply, forcing us to challenge ways of thinking, living and working. Relationships in our industry and the industry landscape itself will likely change driven by changes in consumer spending habits and purchase choices. We can already see signs of this new direction. While we expect recovery will take time, we need to be flexible to make adjustments now in real time.

On Slide 10, let's look at what this situation means for Coca-Cola Bottlers Japan. I've said we have got off to a promising start in 2020, but this crisis hit at the beginning of an important year for us, the first year of our midterm plan, with strategic investments coming online and transformation initiatives starting to deliver. As the industry is being hit by overall consumption changes, we have been gaining share in both OTC channels and vending. This gives me comfort that when the market recovers, we'll be in a good competitive place to continue on our journey of growing value to prioritize big bet brand investments and an efficient supply chain to produce and supply beverages that meet growing consumer demand.

The current pressure on the business makes it crystal clear that we can and must drive further transformation to address the heavy fixed cost base inherited from a fragmented bottler landscape in Japan. I believe our current strategy is appropriate and on track, but more is needed. You will see us accelerating our current transformation plan in order to drive deeper and faster results so that we are fit to fight when the market recovers to its new normal. And we also urgently identify, what I call, onetime savings to help us to get over the hurdle of this year.

Let me now ask CFO, Bjorn Ulgenes, to review our first quarter results and year-to-go outlook for 2020. Then I would like to ask Wasa-san of Coca-Cola Japan to talk about the brand and marketing outlook. Bjorn?

[Bjorn Ulgenes, executive]

Thank you, Calin. Good afternoon, everyone. I'm Bjorn Ulgenes, CFO of Coca-Cola Bottlers Japan Holdings.

Let me discuss our first quarter results and rest of year outlook. Slide 12 is a summary P&L view of our first quarter results. Consolidated revenue was essentially flat with a 2% volume decline in our total beverage business as core beverage performance helped to offset the decline in the health care and skincare business revenue. Consolidated business income declined year-on-year mainly due to the impact of beverage volume and mix pressure in March and higher depreciation as we finalize major investments to recover and grow the business. We had an operating loss of JPY 7.9 billion in the first quarter, which was a JPY 5 billion improvement from the prior year in spite of the initial COVID-19 impact as we cycled onetime expenses, such as the voluntary employee retirement program, in Q1 2019.

On Slide 13, you can see the main drivers of our first quarter business income. As Calin said, we had good traction through February with transformation initiatives progressing well and encouraging results in key areas like vending and alcohol. But initial volume and mix declines in March triggered by COVID-19 put pressure on our overall Q1 results.

Starting on the left-hand side of the slide, you can see volume, price and mix, which shows the year-on-year change in marginal profits from the commercial activities of our beverage business. We experienced a net JPY 1.9 billion decline in marginal profits driven by a 4% volume decline in NARTD beverages and negative channel mix. Of the JPY 1.9 billion decline, negative volume and channel mix makes up approximately JPY 2.9 billion as vending declined 3%, and the drug and discounter channel grew 3%. Price and product mix were also negative as package mix declines offset the benefit of the large PET wholesale price increase in April 2019.

Our Lemon-dou alcohol brand sold 1.9 million cases in the quarter after expanding nationwide in October last year. This and the decline of variable expenses, such as vending commissions and promotional discounts, helped to offset some of the volume, price and mix pressure in the first quarter. We estimate the volume impact in March from COVID-19 was in the range of 4 million cases. And without this impact, first quarter volume would have delivered in line with plan.

Fixed marketing expense, or DME, increased JPY 400 million as we focused on big bet brand initiatives like Fanta Premier Grape and Georgia Latte Nista and we cycled prior year lower spending. I mentioned in our last earnings presentation that we will look to shift investments away from deductions from revenue into fixed DME investments. And this, too, is reflected in the decline in DFR and higher DME. Due to the volume decline in March, our DME spend in the first quarter was slightly below plan.

Raw materials and commodity cost pressure eased to positive JPY 400 million driven by favorable ForEx and commodity trends, including resin. Manufacturing costs increased JPY 600 million, reflecting lower sales volume, increased depreciation expense by commissioning 4 new lines since Q1 2019 and the ongoing response to supply disruptions after the flooding in the second half of 2018. In others, there was a benefit from a reduction in IT, outsourced consultancies and other small cost savings, partially offset by an increase of personnel and logistics expense.

Business income for the health and skincare business decreased JPY 200 million, which was substantially in line with plan. The business has been less impacted by the COVID-19 outbreak compared with the core beverage business. It is primarily based on telesales, but we continue to experience some ongoing pressure. So all in all, it was a quarter marked by progress in the strategic plan, offset by the initial hit from COVID-19.

Let me give some more detail on our first quarter beverage volume performance, excluding alcohol. As you see on Slide 14, we started the first quarter with good traction through February with growth across multiple channels, including the important vending channel. In March, we experienced a 10% volume decline triggered by the COVID-19 situation, mainly in retail, food and vending channels, as people refrain from going out, more people work from home and schools were closed. This decline in the media consumption package volume was exacerbated by a mix shift of consumers stocked up for home consumption with growth in the drug and discounter channel.

April volume pressure was heavier than March with an NARTD beverage volume decline in excess of 20% as the government announced a nationwide state of emergency, and countermeasures were more strictly adhered to. We are actively working on scenario planning. But the extent and duration of the COVID-19 impact and outlook for the summer are unclear. We currently expect the second quarter to be under the most pressure. You can find volume performance for nonalcoholic beverages with commentary by channel and category on Slide 15.

As explained earlier, the retail and food and vending channels were hit with the initial impact of COVID-19 in March. Even though vending declined 3% in the first quarter, the channel was positive through February, and outdoor per machine performance was less impacted than indoor locations where work-from-home policies hit harder. Growth in the online channel means that it now represents about 2% of overall volume. Improving revenue per case trends continued in supermarket and drug and discounter channels as the benefit of the wholesale price increased for large PET packages introduced in April 2019 has been maintained.

By category, volume performance was positive through February excluding sports, which has been impacted by an overall market decline. All categories turned negative in March. Coffee declined in the quarter as growth in vending driven by Georgia Japan Craftsman was offset by declines in the bottle can package. Water growth in the quarter was led by I LOHAS brand plain water in supermarkets and drug and discounters. First quarter volume that are by package can be found in the appendix of today's presentation material.

We maintained positive value share momentum in Q1 even as overall market volumes contracted, as shown on Slide 16. This positive value share momentum in Q1 can be observed in both over-the-counter and vending channels, and the trend continued into April. Although we are starting to see more discounting in the market, we continue to exercise the strength in promotional discounting and deductions from revenue. The growth in vending market share is encouraging as we continue to push fundamental transformation of this important channel, even when the channel itself is pressured during this COVID-19 pandemic. OTC value share growth was driven by the sparkling and coffee categories as premium-priced big bet brands, such as Fanta Premier Grape and Georgia Latte Nista, were launched. We also continued to observe positive retail pricing in large PET packages in Q1, influenced by the wholesale price increase introduced in April 2019. You can find data on retail price trends in the appendix.

Now let me move to our rest of year outlook on Slide 17. As Calin mentioned, we have withdrawn our full year forecast given the expected strong impact from COVID-19 in the second quarter and uncertainty regarding the rest of the year. The beverage sales volume contraction in March and April has continued into May. The volume decline in foodservice, vending and convenience store channels is continuing, and this is expected to drive negative channel mix pressure. In addition, as a result of the postponement of the Tokyo 2020 Olympics and Paralympic Games, we are revisiting our product launch and promotional plans to match new circumstances. We are evaluating multiple scenarios for the 2020 plan as well as potential impacts to our midterm strategic business plan assumptions while, at the same time, urgently implementing mitigation plans to help protect the top line and aggressively looking at cost-saving opportunities.

Cost-saving opportunities are in 2 major buckets: ongoing savings that will continue to lever over the midterm plan period and savings that are more onetime in nature in order to help us get through the immediate impact of the COVID-19 crisis. Ongoing savings will come primarily from accelerating and deepening the transformation work that is already successfully underway. Examples of onetime savings this year includes cutting or postponing planned CapEx and marketing investments. We have introduced the paid temporary leave program for all employees during the second quarter and reduced shifts at manufacturing plants or sales centers as volumes have declined and customer outlets have reduced operations. We are also carefully monitoring production plants and inventory levels to ensure we are in line with volume trends and can minimize the risk of inventory write-offs or excessive discounting.

Now more than ever, driving key transformation initiatives is critical while we also quickly shift gear more tactical responses. On Slide 18, you can see examples of how we have reacted quickly with initiatives in vending and retail channels. In vending, we introduced direct sale of cases from the delivery truck to workplaces, and we have expanded promotions using the Coke ON app. In retail, we have ramped up availability of case sales with additional coverage in front-of-store displays. And we appreciate -- accelerated the planning launch of the 950-milliliter size PET package at convenience stores.

Calin and I have mentioned accelerating ongoing transformation initiatives. You have heard us talk a lot about the vending pilot work we started late last year in the Kinki region and the sales force transformation pilots we have started in Tokyo. Both are demonstrating good initial progress, and we have quickly decided to expand them from pilot to nationwide by the end of the second quarter.

Finally, given the high uncertainty we face this year, it is imperative to be, what I call, good stewards of capital by maintaining our solid financial position and ensuring liquidity while reevaluating priorities for capital allocation, including CapEx and dividends. Let me provide an update on Slide 20. We borrowed JPY 50 billion in short-term bank loans in April to provide appropriate flexibility and liquidity to respond to the short-term pressure on our business from COVID-19. Also, we are reevaluating our CapEx plan and dividend outlook for the year and have identified JPY 10 billion to JPY 15 billion in saving opportunities versus the initial CapEx plan for 2020. This includes temporary suspension of new vending machine purchases and cutting other discretionary CapEx.

As for dividends, we have made a decision not to pay an interim dividend in 2020, which will be the period most impacted by the COVID-19 situation. And we have withdrawn our full year dividend outlook pending announcement of an update to our 2020 earnings guidance. We are continuing with our strategic investments in supply capacity at the new Hiroshima and Zao plants as we expect continued growth of aseptic product demand, and this capacity is key for the short term as well as in preparation for, what we call, the new normal once this crisis have eased. Actual CapEx in the first quarter was approximately JPY 16 billion with depreciation of JPY 14.7 billion.

Now Chief Marketing Officer of Coca-Cola Japan, Takashi Wasa, will take you through an update at the Coca-Cola Company in Japan and then Calin will rejoin for the wrap-up.

[Takashi Wasa, executive]

[Interpreted] Good afternoon, everyone. I'm Wasa of Coca-Cola Japan. Today, I would like to talk to you about 3 topics. Firstly, the Coca-Cola system response to the COVID-19; second, what are our marketing activities in this situation; and lastly, I would like to talk about portfolio communication in response to the postponement of the Tokyo 2020 Olympics to 2021. Next page, please.

First, I would like to express my condolences to the people who have been affected by the COVID-19. I would like to reiterate my respect and gratitude to the medical professionals who are working hard to treat and prevent the spread of infection to the government, municipalities and public institutions and to all those who are involved in the distribution of daily necessities even in this difficult situation. As a beverage manufacturer, we have been searching for ways to contribute to the local community, even if only in a small way. Japan Coca-Cola System has launched the Refresh Japan program to donate approximately 1.3 million bottles of soft drinks to medical institutions to support health care professionals who are dealing with the COVID-19, starting in mid-May through the Japan Medical Association.

In addition to emergency product support, in the second quarter, the Coca-Cola system is looking to provide products to the frontline of medical community throughout this year. In addition, as part of its support for the prevention of the COVID-19 outbreak, Moriyama plant of Coca-Cola Japan manufactures ethanol preparations that can be used as hand sanitizer, alcohol and provide it free-of-charge to medical institutions and other organizations that are in need. We also are pleased to inform you about our Refresh at Home program conducted through the official Coca-Cola smartphone app, Coke ON. The campaign closed on May 10, and over the course of 5 weeks, more than 1 million participants and more than 600,000 drink tickets have been delivered. Finally, there is the social distance awareness campaign. The photo on the top right is an outdoor ad for Times Square in New York. In Japan, we will also be rolling out our store media with the message of "Staying apart is the best way to stay united."

Next, let me talk about the flexibility in our marketing plans. In the time of COVID-19 outbreak, consumers are spending more time at home due to the widespread use of work from home and following the guidance to refrain from going out. And this has led to significant changes in consumer awareness and behavior. In particular, nesting consumption and growth of online shopping has been particularly noticeable. We are as flexible as possible when it comes to our marketing, implementing a planned respond to the changing behavior of consumers. With household consumption rises, our core brand activities are also switching to campaign to enhance time in the home. From April, trademark Coca-Cola has launched its screen time campaign to show that screen time brings an even more exciting and special moments to enjoy movies, drama, sports and online videos in the comfort of home. In addition, Ayataka is running the Relax at Home campaign to provide time to relax at home with the Amami learned from the Kyushu view.

Next is about how to tackle the fast growing e-commerce online channel. The first is expansion of our portfolio. This year, we are also focusing on mineral water and sparkling water. And in addition to our core brand products and FOSHU and functional needs, we are going to treat them importantly online. We launched label-less natural water from I LOHAS nationwide in April 2020, and it's performing particularly well in the online channel. The product is label-less, environmentally friendly and have the advantage of being able to easily separate the waste at home. In addition, the containers are made from 100% recycled PET, making the product environmentally friendly. This product is sold in case only and the label indications, such as the name of raw materials normally planted on the label, are planted on the outer cardboard to enable the sale of label-less products. In addition, we have implemented regular deals on our online customer site and enhanced loyalty programs to increase the frequency of purchases.

Finally, here are our thoughts on new product launches. In 2020, we continue to focus on the new big bet products. In particular, the new big bet products, Fanta Premier Grape, Latte Nista and Georgia Craftsman will be formally launched.

The last part of my presentation will be about portfolio communication in response to the decision to postpone the 2020 Tokyo Olympics to 2021. First of all, as the longest-running sponsors of the Olympic Games, we will continue to work with the IOC and the Tokyo Olympic Committee to ensure the safety and success of the games. This year's activities include the "Hope Will Bring Us Together" campaign, a positive message that leads to next year's Olympics. A comprehensive program is planned, including television advertising with a positive message for the future.

I would like to finish my part by saying that our mission is Refresh the World, Make a Difference, that is, enrich and refresh the world and to bring about positive changes. We will continue to provide activities that are massively for the local community by providing refreshing moments and positive feelings through our soft drinks.

Thank you very much for your attention.

[Calin Dragan, executive]

And thank you, Wasa-san. Calin here. So let me quickly summarize what we have discussed today and how we are thinking towards a post-COVID-19 world. There is still much uncertainty around the trajectory towards a post-COVID-19 recovery and what it looks like. But what we have heard from other Coca-Cola markets and their experiences is that we can expect 3 distinct phases.

Let's have a look at Slide 26. We started the year on the right track with good initial signs of traction in our results before the COVID-19 outbreak. We are currently in, what I'd call, the high-impact phase, starting from the government's emergency declaration with impact across society, our business and the macro economy. I don't know how long this high-impact period would last, but we expect the second quarter to represent the peak, and we have discussed today how we are working on immediate actions to mitigate the worst outcomes while doubling down on cost savings and transformational change to prepare us for the future post COVID-19.

We should expect conditions to be different in each phase, from high-impact to initial recovery and to recovery, and the timing will depend on how soon and how widely the country is able to exit from the current coronavirus countermeasures. Currently, the emergency declaration has been extended until end of May with regional easing. Our scenario planning must reflect this phasing as we evaluate investments, market execution priorities and make decision on capital allocation to prepare us to win in a further -- further that looks different -- in a future that looks different than many of us planned for.

Please look at Slide 27 to wrap up today's presentation. We started this first year of our strategic transformation plan with good progress through February. In a time of high uncertainty, we are making decisions to protect the business in the present while accelerating the transformational initiatives already underway. We expect heavy pressure in the second quarter with uncertainty for how the rest of the year will develop. We have withdrawn our guidance for the year and are reviewing our 2020 plan under various scenarios, with the goal of ultimately emerging from this COVID-19 period stronger and more agile. We will look to provide an update on our 2020 earnings and dividend outlook once we have more clarity on what to expect in this summer.

I have often said business as usual is not an option. And now more than ever, this is true. But I believe we have been moving on the right track, and driving more fundamental strategic change will be key to how we emerge from this crisis.

Finally, times like this are a good reminder that we are all in this together. At Coca-Cola Bottlers Japan, we are proud to deliver essential goods and services to society, and our employees are working hard every day to ensure we can fulfill our social obligations to provide a safe and secure supply of beverages and be successful in our mission to deliver happy moments to everyone while creating value.

Last Friday was the 134th birthday of Coca-Cola, a brand that has endured through many ups and downs. During this COVID-19 pandemic, the safety of our employees, customers and consumers is our top priority, and we will continue to make decisions with their safety and the powerful legacy of the Coca-Cola business in mind to help fuel us through these challenges.

And let me now ask Ray Shelton to come back for the question-and-answer session.

[Raymond Shelton, executive]

Thank you, Calin. Let me remind you this Q&A session is intended for analysts and investors, so we ask members of the media on the call to please hold your questions until our media session scheduled separately today. We are using simultaneous interpretation, so please make sure to ask questions in the language of the line -- phone line you are joining, Japanese on the Japanese line and English on the English line. [Operator Instructions] I'll now pass the call over to the operator. Operator, please?

[Operator]

[Operator Instructions] The first question is from Saji-san from Mizuho Securities.

[Hiroshi Saji, analyst]

[Interpreted] So I heard that I'm only allowed to ask one question, so I have a question. This is about the online business. What is the status of online? Do you think there will be more potential in the post-coronavirus world? So -- and with that, I believe that in the first quarter, your online was growing by like 2%. Other companies have grown their online by like 10%. So I think you are far behind the other businesses in terms of online. So the question is, why are you behind in the growth of online business? And another question is, in the future, to expand this online business, do you have a strategy? This is my question. And also, in e-commerce, if you sell the same product online versus the regular business, how does your margin look like? And my question is overall relying to post coronavirus role in terms of the online business.

[Raymond Shelton, executive]

I'm just going to double check that we got your call -- your question correctly. Question is on online business and what the potential for that online business is post coronavirus and comparisons with the online business versus other channels. And before I pass this off to Costin, Head of Commercial, I'm just going to correct, the 2% number for online is a percentage of total. So the 2% for online is percent total. So it's been growing quite fast. Costin?

[Costel Mandrea, executive]

Thank you for the question. This is Costin Mandrea. What we see during this period is that the online channel indeed is growing very fast, and it's a high, high double-digit in terms of percentages, it's already 2% of our total sales. And we see a great number of new users going online and shopping online. And this is important because the new users, we estimate, they will change their behavior and they will stay -- continue to shop online. We see growth both in exclusive online channels but also in customers that have websites. And we are working now with all these customers to deliver on the extra demand. We are running consumer promotions for Aquarius, for I LOHAS and so on. As well, we are growing online sales via dedicated channel teams, we have dedicated plans. We have online-exclusive SKUS and we have online-exclusive marketing plans.

As you said in the online, the value chain looks different, and it's a good opportunity both for the customers and for the consumers to shift to a more different way of selling. Wasa-san presented earlier, we have a new portfolio for online. We have label-less water, we are launching different sizes for our SKUS and we continue to innovate. So looking forward, we see a continuous growth, and we expect this growth to continue also in the later phases. And with our plans, we are getting -- we are capitalizing, and we'll continue to capitalize on this. Thank you.

[Raymond Shelton, executive]

Thank you, Costin.

[Hiroshi Saji, analyst]

[Interpreted] So the e-commerce, what is the margin versus the other channels? Is it positive or negative versus the other channel?

[Costel Mandrea, executive]

Imagine in e-commerce, we have a different structure. So the margins are a bit better versus the other channels. And that's why our interest right now is to continue to grow this. I hope this answers your question.

[Operator]

So the second person asking the question is from JPMorgan, Mr. Tsunoda.

[Ritsuko Tsunoda, analyst]

[Interpreted] This is Tsunoda from JPMorgan. So I have 2 questions. First question, so your sales situation in Q1, vending is minus 3%. And if you look at it by category, only water was positive. But about -- but you are still growing your value share in light of this situation. The 3% in vending, if you look at it by category, how does it look within vending channel or vending category itself? So can I get an update on that? So that's my first question.

[Raymond Shelton, executive]

This is specifically around a breakdown of our volume performance in Q1, with vending having been down 3%, the question was to provide some additional color related to our value share performance and our growth in value share.

[Costel Mandrea, executive]

Thank you for the question. This is Costin. So I would like to reinforce the importance of vending for our consumers during this period and, therefore, our commitment for vending. What we saw since the beginning of the year, we deployed the new strategic business plan. And we saw January and February performing in line with our expectations. We were positive year-on-year. And then, of course, in March, as people started to work from home and the traffic decreased, we saw a decrease in revenue.

In terms of categories, Tsunoda-san, vending is a significant coffee channel for us. And for the last weeks, what we see is a decrease across all categories. However, coffee has the lowest decrease in vending. We are getting market share in coffee. And as you remember, Latte Nista, our big bet, was executed in the middle of March with very good results. Also, we -- when we look in categories performance, we are glad to see also our sparkling is performing very well and is getting market share in vending. So looking forward, we are flexible with our plans, and we are -- with our launch plan. And obviously, vending will be very important to execute all of this marketing plans. I hope this answers to your question.

[Raymond Shelton, executive]

Tsunoda-san, your second question?

[Ritsuko Tsunoda, analyst]

[Interpreted] The second question again is related to vending machine. So post-April, the sales trend of vending machines have been declining significantly. And of course, that's industry consensus as well. Now your company, you are committed to vending. But some of your competitors are seeing less appeal in the vending channel, especially in light of this corona situation. So your strategy in vending, would that remain unchanged? I believe that it remains unchanged. But in post-corona, what would you see the industry consolidation in vending business? What is the risk you see? What opportunities do you see?

[Raymond Shelton, executive]

Thank you, Tsunoda-san. Just to repeat the question, make sure we got it. Question is, this company, CCBJH, is maintaining its commitment to the important vending channel while other players are making comments around how much they continue to look there, can we speak a little bit about the commitment to the vending channel going forward and how that might change, how we see that evolving post-corona. Costin, I'm going to send this over your way as well, please.

[Costel Mandrea, executive]

Thank you. This is Costin. And yes, we mentioned a few times our commitment to vending because it's a very important channel for our consumers. We have a vending transformation plan, and we presented this to you. And like I said, January, February, we saw very good results. We observed consumer shift, and we are investigating, we are watching very carefully the situation to understand exactly what the new needs will be. But let me provide to you from 2 angles how we look at vending today. Long term, our strategic plan for vending stays strong because we started -- we saw good results, so obviously, we need to execute what we put in the plan. We are indeed a bit more careful in terms of expansion. We are more focused in what kind of machines we are planning. And during this period, we are evaluating every single opportunity. Longer term, of course, is very -- it's still very important to grow selling space in vending.

However, during this period, we took this crisis as a way for us to double down, to focus deeper and to put extra focus on efficiency. The Kinki project that we share with you a few times delivering great results, we decided that we'll accelerate, and we'll expand the Kinki project nationally during 2020. I remind you this is delivering extra efficiency because we are looking at the operating model, the end-to-end process for vending, and we see significant results. Also, we are looking carefully in the way we invest, how we bring extra efficiency for vending. And this is what this -- the efforts that are going right now in terms of transformation. Overall, we know people will go back to offices. They will start commuting again, traveling and going to entertainment sports. We are getting ready to operate vending more efficient than before. I hope this answers your question.

[Ritsuko Tsunoda, analyst]

[Interpreted] A supplementary question or comment, your vending strategy, is this something that's conclusive within your company? Or would there be some sort of impact on your competitors? Is there a possibility of collaboration with your competitors or other industry players? So for example, in terms of water, maybe the success and maybe there's needs for outsourcing operations. I think that if there's kind of needs arising from your competitors, then would that maybe have a co-ride or a cooperation, joint operation, with competitors? Would that be some sort of opportunity for you? What is your view on this?

[Costel Mandrea, executive]

Thank you, this is Costin. So like we shared a few times, we are open and we are watching every opportunity on the market. We'll explore, if anything, interesting appears. Thank you.

[Operator]

[Operator Instructions]

[Tomonobu Tsunoyama, analyst]

[Interpreted] I'm Tsunoyama from Mitsubishi UFJ Bank. I have one question about the domestic beverage industry. In terms of the volume, I would like to seek your opinion about it. When you look in the past, the volume has been growing in the Japanese market. But then, we have been having a lot of changes over the past course of 2 years. So during the course of operating in this changing market, what's your view on volume strategy in your industry? Do you change any kind -- any strategy within yourself because of all these situations surrounding you?

[Raymond Shelton, executive]

I'll just rephrase the question to make sure we got it. So it's a question on the volume outlook in the industry here in Japan where we have been coming from growth, any change in outlook or strategy as we move forward in terms of a volume outlook. I think we'll hand it over to Costin-san, please?

[Costel Mandrea, executive]

Thank you. This is Costin. So what we know this year is we saw the first 2 months performing well in terms of total beverage market. And then we saw the market contracting due to COVID. So going beyond second quarter, it's pretty difficult to assess at this point in time. But what we also know in CCBJI is we have a full beverage portfolio. So starting from hydration to coffee to tea, energy. So whenever the demand is coming back, we are ready to supply and we are ready to provide beverages to our consumers. You mentioned about our volume strategy. I would just fine-tune it to say we have a value strategy. So everything that we sell, it's focused on NSR, and it's focused on value-added portfolio. So our innovations going forward, we are confident it will help us to serve the needs of our consumers. I hope this answers your question.

[Operator]

[Interpreted] The next question will be from Morgan Stanley, Miyake-san.

[Haruka Miyake, analyst]

[Interpreted] I'm from Morgan Stanley, my name is Miyake. I have 2 quick questions. My first question is, you had mentioned about you are getting ready for the new normal, but what is the new normal you have in mind? What is it? What is the definition? It might be too early to explain, but we want to get your image of the new normal. And secondly, to prepare for the new normal, after 2021, do you need additional CapEx? Do you -- are you going to experience more depreciation because you're going to face the new normal? Or are you going to have additional cost reductions? In the midterm, I want to know how you're going to build out the profit in this new normal world. So that's question number one. Question number two, is there any possibility for you to sell the health care, skin care business in the future? I think there were some possibilities earlier that might -- that were mentioned. I would like to know the possibility of selling the business.

[Raymond Shelton, executive]

I'll summarize the 2 questions you had. One was referenced to the so-called new normal, how we're thinking about that and preparing for that. And especially 2021 and beyond, do we have any initial early thoughts around -- does that require additional investments, additional cost reductions, how does that tap into the midterm plan, if I heard that correctly. And the second question was around the health and skincare business and the future of that business. I'm going to send this question over to Calin-san.

[Calin Dragan, executive]

Thank you so much, Calin, speaking. Thank you so much for the interest in our business. And let me try to answer to the best of my current knowledge these questions related with the new normal. For us, what we are doing right now, we are assessing the current reality that we are into. And we have presented that in the Slide #9 of our deck where we are looking at the current trends and -- in supermarket with volume growth and -- but as well with the shift in basket composition and size, with the convenience stores which are suffering from the traffic and volume declines in urban territories, vending as well suffering because of traffic and with the complete shutdown almost in the foodservice. In these current conditions, it's pretty hard to assess how the future would look like going on. What we are doing currently, we are focusing on assessing our strategic priorities. We are trying to observe these new consumer demand trends and as well address them with the portfolio and promotional initiatives on short term while preparing for the future.

We are looking at our core SKU strengthening in this environment because consumers know for sure that these are so-called safe bets for them to consume. There are winners in this competition, and that's -- there are winning channels. And of course, our focus is to boost capabilities in the growing channel and the growing categories.

Nevertheless, we are part of the Coca-Cola system, and we are looking to learn from around the world, parts of the world, which are more advanced, if I can call it, with respective inverted commas, in terms of this COVID-19 outbreak progression and to try to learn how the life after looks like. And this is what we have presented as well. We are looking for the future with a quite decent level of optimism, I would say, in the sense that although this might not dramatically transform our world, it's going to accelerate certain trends than before, like working from home, digitalization, a number of similar trends like mentioned before, online shopping and probably on-the-go consumption.

So having said that, there is still a lot of new to be explored. And our plan is to relook at it once we are out of this stage, which is the peak of the crisis, as I call it, quarter 2. And as soon as we're going to come out, we are going to reevaluate towards what we are trending. But we were flexible, we adjusted our plans and we immediately responded to the market realities, to the current situations. And that's, I think, one characteristic of our company.

[Raymond Shelton, executive]

The second question was on health care and skin care business, please. I'll send it over to Bjorn, please.

[Bjorn Ulgenes, executive]

Thank you, Ray and Calin. This is Bjorn speaking. QSI or the health care and skincare business is a part of the Coca-Cola Beverage Holdings portfolio. And we're working very diligently now to improve the business, again, looking for opportunities across both the health care part and the skin care part. And for now, there's no plans to change this. And of course, we will update the market if anything should come on that front.

[Raymond Shelton, executive]

Thank you very much, Bjorn. I think on the next question, we've got someone waiting on the English line. [Operator Instructions]

[Leon Rapp, analyst]

It's Leon Rapp from Macquarie. So could you provide a little bit more of an update on what's happening with Lemon-dou? The -- I thought it was quite interesting in the presentation where, if you look at NARTD, beverage volume was 106 million cases whereas beverage business was 108 million. So I think that's largely taken -- that difference is largely due to Lemon-dou. But just to get a better picture of what's happening with demand, with sales as well and how you're essentially looking to potentially grow that business further. Are there any capacity constraints? For example, is there any issue with pricing because it is priced at a premium point to competitors as well? And general sort of profitability for that business going forward. And strategically, is this -- are the results of the initial rollout as you're expecting? Are they better than expected? Or just give us a bit more clarity on that, please.

[Raymond Shelton, executive]

Thanks, Leon. So the question was on Lemon-dou, progress, future growth prospects, capacity, et cetera. I'm going to start with Costin, and then I'll probably hand it off to Bjorn if there's anything to add. Costin, please?

[Costel Mandrea, executive]

Thank you, Leon. This is Costin. That's a very good category which we see selling very well even during the crisis. So since we expanded Lemon-dou nationwide, it was very well received, and it was loved by our consumers. We see the sales volume exceeding the forecast. Also, we see market share being on the positive side, continue to grow slightly. And as you mentioned, it's important to remind here, it's a premium product. Going forward, we are just -- our plans have to complete the first year since the national launch, learn from every single activity that we are doing. And we are working together with our partners from Coca-Cola Company to decide which are our next steps into this area. So overall, very pleased with the evolution of Lemon-dou. Bjorn, you want to add anything with this?

[Bjorn Ulgenes, executive]

Do you want to comment on the capacity part?

[Raymond Shelton, executive]

Yes.

[Bjorn Ulgenes, executive]

Okay. So thanks, Leon, for the question. This is Bjorn speaking. So overall, Lemon-dou, first of all, is a profitable product for us. And it follows the general profitability trends we have in the channels where it's selling, basically our convenience, supermarkets and drug and discounters. I'd remind again that we do not sell Lemon-dou in vending. But what we also have to remember when it comes to Lemon-dou is that even though it has a premium pricing, you also have to pay -- or we have to pay alcohol taxes for this product, which again equalizes some of the margin. But on average, a profitable product for us, and we're looking forward to see it grow and prosper in the future. Thank you.

[Raymond Shelton, executive]

Thank you very much. We've got one more question on the line, I think, please go ahead.

[Nobuyoshi Miura, analyst]

[Interpreted] This is Miura from Citigroup. My question is about Japanese beverage industry's consumption itself. I think like your company, starting from March, the market has been shrinking. But then soft drinks and beverages are living necessities. So I wasn't really convinced with the declining trend. I'm not really sure, maybe in Japan, does it mean that people are drinking more and more of the tap water? Or is that because of less exercise that people don't really feel thirsty? Like how do you analyze the situation of declining volume of the beverage in the market?

[Calin Dragan, executive]

This is an area where we look every single day. We try to understand how the behavior of the consumers is changing. Indeed, for example, as you said, the parks were closed, exercising less. So of course, we see a significant impact to the hydration category. We see offices being closed. So we see less coffee being sold. I'll remind everybody, our business, our -- we operate in the beverage market, which is highly an impulse category. So the moment you commute, you see a vending machine, you feel the need to have coffee to refresh yourself. Overall, we remain optimistic for the future of the beverage market after we pass this stage of the crisis. We are looking for solutions to adapt our marketing plans to the new consumer needs.

And I will close by saying when the government said refrain from going out and avoid contacts, we -- in CCBJI, we committed to continue serving beverages to our customers and to our shoppers. So we kept all the deliveries out. We kept the field force with extra protection going there and continuing to delivering beverages. Going forward, we are pretty optimistic we'll see a revival at some point in time. So we'll adapt our plans. I hope this answers your question.

[Raymond Shelton, executive]

Thank you very much. We've now reached our time. I'd like to thank everyone for your interest in the business and for dialing into this first conference call for Coca-Cola Bottlers Japan. We apologize for some of the line quality issues that you may have heard. And if you have any questions, please get back in touch with the Investor Relations team at a later date. Thank you very much, and we'll talk to you again in our next earnings announcement.

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