Coca-Cola Bottlers Japan Holdings Inc

TSE:2579

Earnings Call Transcript 2021-Q1

[Raymond Shelton, executive]

Good morning. 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 2021 earnings call for analysts and investors. I'm here with President, Calin Dragan; CFO, Bjorn Ulgenes; 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. Simultaneous translation in both Japanese and English is being provided for today's call 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. 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.

Also, I would like to note that today will be my final quarterly earnings presentation as Head of IR and Corporate Communications at Coca-Cola Bottlers Japan. In the future, the Investor Relations function led by [ Masaomi Gomi ] will be reporting directly to CFO, Bjorn Ulgenes; and the public affairs, communications, community and sustainability functions within Corporate Communications will be reporting to Chief Transformation Officer, Maki Kado.

It has been my distinct pleasure to represent this company over the past 8 years as the Coca-Cola bottling system in Japan has integrated and transformed itself during what has been a very dynamic period of change for the beverage industry and Coca-Cola in Japan. I very much appreciate your support and engagement over these many years.

With that, I'd like to turn the call over to President, Calin Dragan. Calin?

[Calin Dragan, executive]

Thank you, Ray, and thank you for all your leadership of the Investor Relations and Corporate Communication this past years. It's really highly appreciated. Good morning, everyone. Calin Dragan here. Please turn on to Slide 4 of our presentation.

Today, I will talk about how we are navigating a difficult period impacted by the coronavirus pandemic, while doubling down on our ambitious transformation agenda. Although we did start to see improving trends in the fourth quarter of last year, the Japan market faces ongoing uncertainty in 2021, with the announcement of a second and now a third state of emergency with restrictions on travel, commercial activities and people movement through the at least 31st of May this year.

Please look at Slide 5. Amid the volatility and uncertainty of this pandemic, we remain laser-focused on controlling what we can control and pushing forward our transformation program. We are actively working to mitigate the ongoing impact of COVID-19, even as new states of emergency are declared and the competitive promotional environment intensifies.

Similar to quarter 2, quarter 3 and quarter 4 last year, the first quarter is cycling a period with less COVID impact. We would expect to see improving year-on-year trends as we move into the second quarter onwards this year.

In the meantime, we are keeping our eyes on winning in the market as we recover retail market share and continue growing vending market share with renewed marketing investments and product launches after posing in 2020 during the peak initial impact of pandemic.

Finally, we have been building a solid foundation for the future growth through fundamental transformation in the areas of digital, product supply, sustainability, working style and more. And we started well before we even heard the term COVID-19.

As part of this foundation for the future, we are keeping our focus on the core beverage business. In quarter 1, we completed the sale of Q'SAI health and skin care business, with JPY 45 billion cash in and JPY 12.8 billion in profit.

Since I returned to Japan in 2019 to lead this transformation, I have always told our employees, business as usual is not an option. Now more than ever, this is true as we fundamentally pursue changes in our own business while the world around us changes, too.

But there are a few things that haven't changed in terms of our priorities and commitments. This includes the safety and security of our stakeholders and partners. I want to say thank you to the people helping to keep us safe and healthy during this difficult time.

Our mission here at Coca-Cola Bottlers Japan is to deliver happy moments to everyone while creating value. And this motivates us to work every day to provide a safe and secure supply of beverages and services to our customers who are navigating new and challenging situations as well.

We are also responding in an agile way as circumstances change with updated and more flexible processes and systems and a more empowered workforce to ensure we stay ready for the future. Finally, our experience over last year is helping to build business resilience grounded in the foundation we have set, thanks to the important transformation work that was accelerated in 2020.

I mentioned the transformation work that is underway and accelerating. On Slide 7, let me share the progress we are making as we navigate this challenging environment. We have made great strides in completing the transformation of our vending and retail organizations and service models ahead of plan as you should expect further progress in our supply chain organization in 2021.

Our in-house supply capacity has been expanded and upgraded over the past couple of years, and digital technology and automation will be ramping up with the launch of our so-called mega distribution centers. Digital technology is also helping us to be more efficient and flexible in terms of demand planning and inventory management.

Even in a period of strong cost discipline, we are making investments in our people. We are taking what we call an end-to-end approach to people development and management.

We have launched our Coca-Cola University as well as multiple talent development programs with more flexibility than ever before in terms of workforce environment, workflows and tools to get the job done wherever it makes the most sense. We have also been making strong progress against our diversity targets, and we raised our female manager target from 6% to 20% earlier this year.

Finally, we have established a solid and transparent corporate governance framework centered on our core beverage business. We have divested or exited businesses and activities that are not actively contributing to the growth of our beverage operations.

We sold the Q'SAI business in quarter 1, and we recently made the difficult decision to exit the team ownership of the Coca-Cola Red Sparks rugby team. Our organization structure is flatter and simpler to enable faster decision-making. And we have a diverse and experienced Board of Directors supported by an Audit and Supervisory Committee comprised of outside and independent Board members.

Let me finish my introduction with a few specific examples on how we have transformed, what we are going -- what we are doing differently and why I believe we are in good position to emerge stronger from the current headwinds. Slide 8 shows how we are adjusting to the so-called new norm to identify and capture new opportunities.

You can see examples in online with label less packaging and subscription services; in digital, as we expand the Coke ON app to a true digital platform; in food, delivery and takeaway with new and clever package design to spark demand; and across the business, diversifying package sizes and configurations to stay relevant with the current consumer trends.

I mentioned a more agile and flexible supply infrastructure. Please look at Slide 9 for more details. In Saitama, so the Saitama Mega DC has started operation and will be ramping up over the course of the year. 21 robots are up and running, and I'm looking forward to giving you a chance to see it for yourself once COVID restrictions are eased and we can start traveling and meeting face-to-face again.

We have installed what we call the next-generation aseptic technology at our state-of-the-art new Hiroshima plant. This lets us launch innovative and new products like the hugely popular Costa Coffee and Fanta Premier series. In fact, Costa Coffee started off so strongly, we had to pause the launch in April to build up inventory levels, and we will relaunch it from June 7.

Finally, we are again expanding in-house production capacity for our ready-to-drink alcohol business. I also mentioned a flatter organizational structures, new working styles and a shift to digital, which makes us a more agile company and better able to react to change and challenges when they come.

A real-life example of this is the recent IT system outage we announced on March 12 after a maintenance issue in the external IT host environment. The problem was resolved after the successful restart -- system restart, but in the meantime, we were able to shift to manual and remote workarounds with virtual working teams to ensure minimal impact to customer service and product supply.

This remote and flexible worker teams and flatter organizations allow not only for faster decision-making, but also for quicker resolution to business issues when they happen. We are actively learning from this experience to manage future issues as what I call a learning organization, in line with our core company values of learning, agility, results orientation and integrity.

Please move to Slide 11. I am proud to note that we continue to make strong progress in the area of ESG, which is at the core of what we do every day in the local communities where we live, work and serve. Our World Without Waste initiatives are on track to deliver on targets of 50% recycled content in the PET plastic packaging by 2022.

The announcement this year of brand Coca-Cola in 100% recycled PET, what we call bottle-to-bottle recycling, reflects our strong commitment here. Also, we have been partnering with local communities to place vending machines that contribute to and raise awareness of food loss prevention programs, an area of growing focus here in Japan.

We are improving our reputation as a great place to work, with recognition of diversity, health and productivity management. We are increasing our targets for female managers in our workforce from 6% to 20% as we rapidly ramp up hiring and support programs to encourage a more diverse and inclusive workplace and workforce.

And during this pandemic, we are taking important steps to support our employees and local communities. We announced paid leave for employees to receive COVID-19 vaccinations during work hours, and we continue to donate beverages to local food banks and medical institutions, 80,000 cases only this year.

In February, we provided 2021 guidance on elements of our business that are in our direct control while navigating the uncertainty of the COVID-19 pandemic and the market impact of new states of emergency on consumer traffic and sales volume and channel mix. Let me give you a quick update on our progress against these business indicators.

We are growing market share, especially in vending, in a market that has declined due to the coronavirus restrictions. This set a good foundation for growth as the market starts to recover. Value share remains a priority.

We pointed to an additional JPY 7 billion to JPY 9 billion in recurring transformational cost savings this year, on top of the JPY 13 billion achieved in 2020. We have delivered about JPY 2 billion in the first quarter, well on track to deliver for the full year.

In a more restrained environment, we have reevaluated our CapEx investment needs. Our target is JPY 45 billion to JPY 50 billion in CapEx for the year, much lower than our recent annual run rate. In quarter 1, we are at JPY 20.1 billion, which is on track. The Saitama Mega Distribution Center was capitalized in the first quarter, and this represents the bulk of this CapEx to date.

Similarly, depreciation is on plan as we keep tight control on CapEx spending. We reinstated our plan to pay an annual dividend of JPY 50 per share in spite of the current volatility, and that target remains for us unchanged.

Finally, I mentioned earlier that we are on track to deliver on our bottle-to-bottle recycling targets. So we stay focused on what we can control, building resilience in our business and setting a foundation for recovery and growth.

Let me now ask the CFO, Bjorn Ulgenes, to take us through the first quarter results. Bjorn?

[Bjorn Ulgenes, executive]

Thank you, Calin. Good afternoon, everyone. This is Bjorn Ulgenes here. Let me direct your attention to Slide 14. Because we announced the sale of the Q'SAI health and skin care business last year, our results this year are compared against numbers that have been adjusted to exclude Q'SAI.

Revenue declined about JPY 25 billion in the quarter as total beverage volume declined 10%, and we incurred a loss on the business income level while net income was positive, reflecting profits from the sale of Q'SAI. The first quarter is cycling a period that was still largely unaffected by COVID-19. And remember that January and February last year were relatively strong months as we got off to a good start in the first year of our mid- to long-term strategic plan period.

As we start to cycle, the most intensely impacted periods during last year's first COVID state of emergency and as we invest again in marketing activities and product launches after posting in 2020, we do expect to see a year-on-year recovery trend in the coming quarters.

On Slide 15, you can see the primary drivers of our first quarter business income which continues to be largely impacted by the COVID-19 situation and the new state of emergency announced in January. Starting on the left-hand side of the slide are volume, price and mix, which show the year-on-year change in marginal profit from the commercial activities of our beverage business.

We experienced a net JPY 10 billion decline in marginal profits on JPY 25 billion in lower revenue in the quarter, driven by a 10% beverage volume decline and negative channel mix. The marginal profit decline in the first quarter is an improvement versus fourth quarter 2020, which itself was an improvement versus Q3 and Q2.

Of the JPY 10 billion decline in marginal profits, negative volume and channel mix make up approximately JPY 9 billion as the vending, convenience store and retail food channels declined. Price and product mix were negative, reflecting shifts in consumer behavior towards larger packaged at-home consumption.

Our alcohol business sold about 1.6 million cases in the first quarter. This helped to offset some of the volume and mix pressure while variable expenses, such as vending commissions and promotional discounts, declined due to lower volume and less promotional intensity.

Fixed marketing expense for DME increased slightly versus last year, reflecting a return to more normalized levels of marketing investments and brand launches after pausing in Q2 and Q3 last year. We expect this to help drive year-on-year growth in the rest of 2021.

Raw materials and commodity costs continue to have a fairly benign impact on the P&L in the first quarter. But we do expect that we will start to see cost inflation, especially in sweetener and metals as we move through this year.

Manufacturing costs increased slightly by JPY 500 million, reflecting lower production volume and higher depreciation expenses from the investments we have made in new production capacity. This has offset some of the efficiency gains in manufacturing we are seeing from new lines and transformation work.

Depending on how sales volume trend in 2021, we could expect renewed benefits from efficiency and scale as we fully cycle the initial impact of COVID-19 in Q1 2020. But it is too early today to tell how volume and mix will trend given the renewed state of emergency announced in April and extended through the 31st of May.

In others, there was a benefit from significant cost savings in labor, travel and entertainment and other areas we have focused on during the COVID-19 period. We are also seeing the continued benefit from accelerated transformation in vending operations. This reflects about JPY 2 billion in additional recurring cost savings in the quarter.

Business income from the first quarter was negative JPY 11.6 billion. This reflects what is always a softer quarter for us, given seasonality as well as comparison versus last year before the impact of COVID-19 pandemic started to be felt. Although there is too much uncertainty to give specific guidance on top line volume and mix for the full year, we should start seeing positive year-on-year progression from Q2 onwards.

You can find volume performance by major channels for nonalcoholic beverages on Slide 16. Growth in online, supermarkets and drug and discounter channels reflects where consumers are shopping during this pandemic. First and foremost, we need to make sure we are winning where the growth is.

Although the vending channel continues to be impacted by temporary reduced consumer traffic during the pandemic, we continue to grow value share. We did start to see recovering trends in the fourth quarter last year, but vending volumes have been impacted by the new COVID-19 state of emergency announced in January and again in late April.

Although average wholesale revenue per case is negative this year, it is primarily driven by changes in package mix, with volume growth in large PET packages and declines in small PET and cans. Starting in Q4 2020, average wholesale revenue per case showed a sharper decline than previous quarters in retail channels.

This is mainly driven by a change in configuration of number of bottles per case for the 1.5 liter PET package from 8 bottles per case to 6 bottles per case and does not reflect the deterioration of price/mix per bottle. This change in case configuration improved shipping efficiency, allowing 20% more bottles per pallet which should also result in more efficient truck loading and fleet management.

On the next slide, Slide 17, you can find first quarter volume details by beverage category. In general, the first quarter reflects consumer demand and mix shifts due to the COVID-19 situation, similar to what we have experienced over the last 3 quarters and are very reflective of the restrictions or states of emergency that are in place at any given time.

Sparkling and tea categories reflect consumer traffic declines in convenience stores, vending and on-premise food outlets, partly offset by new product launches. Water volume grew 8% as production capacity has expanded and also reflecting growth in the supermarket and drug and discounter channels.

For coffee, ongoing weakness in can volumes was partly offset by the contribution of PET bottled Georgia Latte Nista. Finally, juice volumes reflect a stronger negative trends in the on-premise food channel given store closures and restricted operating hours.

Slide 18 highlights our continued momentum in market share performance. First quarter retail for OTC value share was even, reflecting the recovery we started to see in the fourth quarter 2020 and supported by a return to more normal levels of marketing investment and activation.

In vending, market share growth momentum continues with 24 consecutive months of value share growth. This is an important reflection that our current transformation efforts in this channel are delivering results even during this depressed period of traffic during COVID-19. Fundamentally, we believe this puts the vending business in a healthy position when consumer traffic and sales volumes return.

Finally, on retail pricing, we are observing a continued price premium versus the market average, which shows we have held the line against intensifying competition in the marketplace. Finally, on Slide 19, let me summarize. So in today's presentation, we have highlighted the important transformation efforts underway that will set a more solid foundation for the future while we stay focused as well on mitigating current risks.

We have achieved recurring cost savings in Q1 of about JPY 2 billion. These are cost savings that will stay even after the current turbulence eases and they represent good progress against our targets of JPY 7 billion to JPY 9 billion in recurring cost savings for the full year, on top of the JPY 13 billion in recurring cost savings in 2020.

Bottom line, transformation continues now more than ever. We have moved quickly in an agile way to address the immediate challenges of volume and mix pressure in important channels like convenience stores, vending and food service due to reduced consumer traffic all while continuing to make deep changes in people, processes and systems to set a solid start in 2021 and beyond.

Now I'd like to introduce Chief Marketing Officer of Coca-Cola Japan, Takashi Wasa, to take you through an update of marketing initiatives and outlook this year. Wasa-san, please?

[Takashi Wasa, executive]

[Interpreted] Good morning, everyone. This is Wasa from Coca-Cola Japan. I would like to share with you a review of the first quarter 2021 and highlights of our marketing activities planned for the second quarter.

There are 3 main guidelines, which we continue to use from last year for our marketing activities during the COVID pandemic. Fewer, bigger innovations, pivot to core and capturing stay at home demand. With these major guidelines, we will continue to be flexible and take timely actions to adapt to changes.

First, let me review the major activities in Q1. As a core brand campaign, we kicked off 2021 with Coca-Cola Live the Moment campaign and used the popular group NiziU. The campaign was successful in gaining support from many consumers. In addition, the instant win campaign in which participants can apply for prices from the eligible products was also well received with more than 1.1 million people participating in the campaign.

Next, the Georgia and the Gundam campaign, which was led by the Georgia-Gundam collaboration in can design allowed consumers who purchased the can to enter a promotion and with a wide range of channels for the promotion, more than 2.6 million users entered this campaign.

Next is the Ayataka traditional crafts donation bottle. A portion of the proceeds will be donated to support traditional Japanese crafts. And this campaign will help support young crafts people who will be the leaders of traditional crafts in the future. This campaign was successful in attracting twice as many participants versus last year's campaign.

In January, we introduced a new product, Aquarius Mamoru lactobacillus water, which includes 10 billion shield lactobacillus. During the COVID pandemic, we received high support from many parents and children in response to the growing interest in family health management.

And in February, we introduced Japan's first ever FFC with double effect on memory and blood pressure. This product contains GABA and with its moderate bitterness and refreshing taste has been well received by people in their 40s and above that it can be continued as a daily health habit.

Following was Fanta Premier. Fanta Premier was launched in March last year as a premium sparkling drink for adults and succeeded in attracting consumers in their 30s and 40s back to the Fanta brand. In March this year, grape was renewed and orange was launched as a new flavor.

With the refreshing sweetness from the original fruit and the excitement of being a sparkling beverage, it proposes a quality breaktime that adults can enjoy and refresh themselves to get ready for the next step. Fanta Premier is solidifying its position as a premium sparkling drink for adults.

Next, I will go over the 2021 Q2 highlights from the marketing perspective, focusing on April and May. First, we are working to strengthen our core brands. Coca-Cola 350 PET and 700 PET were first launched in January last year in the Tokyo metropolitan area and have been well received as just the right size that can be consumed with great taste until the end.

In March this year, Coca-Cola Zero and Coca-Cola Zero caffeine were added to the lineup, expanding the sales area nationwide. In April, 350 PET and 700 PET versions of Fanta, Sprite and Canada Dry will be available at supermarkets, drug stores and discount stores nationwide. We are driving the expansion of the sparkling beverage market by discovering new ways to enjoy sparkling beverages at home and demand for takeout.

Next, in April, Ayataka launched the My Choice is Ayataka campaign. As awareness of eating and drinking increases in the new lifestyle known as the new normal, the new commercial featuring Hiroshi Abe and Rino Sashihara conveys the message that 86% of people place importance on taste when choosing green tea and that Ayataka offers a good balance of flavor, bitterness and taste. The brand is supported by those who are looking for tasty green tea and the user base is expanding.

And the Ouchi-de-Café Georgia campaign. More and more people are telecommuting as their lives and work environments undergo major changes. Many are spending more time with their family. But on the other hand, they are too busy with household chores and child care to get a good rest. Georgia provides an easy and luxurious cafe experience to all those who spend their busy time at home.

Next is our big bet product for April and May. Costa Coffee, a cafe brand that has been loved in Europe, the home of coffee for 50 years, is our big bet. We released new premium coffees, Costa Black and Costa Café Latte in PET bottles that offer the taste of high-quality hand brewed coffee. Costa Black and Costa Café Latte were first released on April 12 through some distributors and then nationwide on April 26.

We apologize to our customers and business partners for the inconvenience caused by the shortage of products due to the sales far exceeding our expectations, and we had to temporary suspend shipments. It has been now scheduled to resume sales from June 7. So we kindly ask everyone to wait just a little more.

On April 26, Coca-Cola launched Yakan no Mugicha. It is a new type of barley tea made with 100% carefully selected barley using Coca-Cola's unique high-temperature boiling process and barley extract. In today's age of convenience and simplicity, barley tea brewed with care and attention will provide you with a moment of peace.

In this week, on May 10, Coca-Cola Japan launched its strongest ever carbonated water Icy Spark. Generally speaking, the lower the temperature of water, the easier it is for gases to dissolve in water. Icy Spark is the strongest carbonated water in the history of Coca-Cola Japan made possible by cooling spark technology that focus on this property.

By responding to the simulation demanded by carbonated water drinkers, we aim to further revitalize the sugar-free sparkling water market. While we can't talk about the details yet, we are planning to further enhance our brand portfolio in the alcohol category as well in order to further accelerate our growth. We are planning to introduce a new brand in the near future. So please look forward to it.

Also to activate our core assets, vending machine, we have started a new campaign, "Unexpectedly, it is the future." Also, our official app Coke ON started to offer a subscription service called Coke ON pass from April to the first 100,000 users signing up for the service. The service is expanding its number of subscribers faster than expected.

The monthly fee is JPY 2,700, and users would be able to enjoy one Coca-Cola product they wish to every day through our 340,000 vending machines that are equipped with Coke ON Pay. We will continue to offer new beverage experiences with Coke ON and continue to develop services that match our consumers' various needs.

And from March, we started a promotion for the Tokyo 2020 Olympics Torch Relay. By scanning our purchased product bar-code with the Coke ON app camera, you can get 1 Coca-Cola Tokyo 2020 point a day. If you collect points, you would be able to participate in an instant win campaign, which is a lottery campaign that 10,000 participants can win original goods. Already more than 2 million people have participated.

And from May 31, we will launch Coca-Cola and Georgia Japan Craftsman, made from 100% recycled plastic bottles. With this launch, reduction of CO2 emissions will be 60% per bottle and approximately 35,000 tons for the entire Coca-Cola system. The Coca-Cola system in Japan will continuously support the global vision World Without Waste and promote initiatives to recycle plastics.

That was the last page for my presentation today. It has been a year since COVID started to bring major changes to our daily life. And now consumers' mindsets and behaviors have changed. Our market plan will quickly follow the new trends with agility. Following our mission, refresh the world, make a difference, we will strive to offer refreshing moments and positive feelings through our beverages continuously.

Thank you for your attention, and back to Calin.

[Calin Dragan, executive]

Wasa-san, Calin here again. Now let me discuss some elements of our 2021 outlook. Although we saw traffic and sales volume weakness moderate through the end of 2020, the resurgence of COVID-19 infections and 2 new states of emergency have introduced more uncertainty.

Predictions are difficult at this time. But after a big hit to the Japan economy in 2020, a rebound to some level of GDP growth, and therefore, volume growth should be expected in 2021. As the current wave of COVID-19 infections continue to grow, however, consumers traffic has declined, again, with the announcement of the third state of emergency, but at more moderate levels than during the first declaration in early 2020.

Last year, we talked about this crisis as time-bound, but the experience has been a prolonged one, and we have to manage our business in a with coronavirus environment with multiple scenarios amid changing conditions. Because of this uncertainty, including the expected impact on volume and channel mix, we have not provided an update to 2021 earnings guidance. Instead, we stay focused on what we can control while pushing forward our transformation program.

I mentioned that we will go where the growth is and this means that the leverage changes in consumer -- that we will leverage the changes in consumer behavior to capture the new demand. And through it all, we act as good stewards of capital. Let's look at each of this focus area.

Our first focus area is transformation. On Slide 30, I share what I call our transformation dashboard, where we track our progress against key elements of our transformation program. You can see how we are delivering on those elements within our control around cost management and risk mitigation, investing appropriately for growth and building an agile operating structure and financial framework for value creation.

All of this are setting that foundation I have talked about. While we are in a depressed market environment, growth initiatives are lagging, but again, I believe the foundation is being put in place for growth once the external environment returns to some kind of new normal.

We have shown that we can raise and maintain pricing with the first wholesale price increase in 27 years for large PET packages in 2019. And we are pulling the levers on package mix with initiatives such as the 350 and 700 ml packages introduced for sparkling beverages. Also, we are seeing progress in innovative higher value new products using our unique next-generation aseptic technology.

You heard today from Coca-Cola Japan Company, Wasa-san, about our growth drivers, building consumer engagement, identifying new consumption occasions, selectively investing behind bigger bet brand launches and white spaces opportunities and leveraging core assets and capability for growth like the Coke ON digital platform and leadership in sustainable packaging. These efforts are translating into improving market share, which sets the foundation for growth when the market recovers.

On Slide 31, here are some examples of our second focus area -- second quarter focus area to adapt to change and turn it into an opportunity. In the second quarter, we will continue to leverage our next-generation ascetic technology to launch exciting new products like Fanta Premier Orange and Costa Coffee, which are already in the market.

Coke ON, together with Cole ON Pay and the subscription service, Coke ON Pass, will expand. In support of this digital platform, Coca-Cola Japan has launched a television campaign to introduce consumers to Coke ON, and I'm really pleased with this campaign and have to -- and we have provided a link to this commercials on the log inside for today's earnings call. I invite you to have a look at it.

Finally, our successful first step into white space or ready-to-drink alcohol has been very successful. Watch this space as we continue to expand in this category with new launches that we are very excited about.

And finally, we will provide an update to full year earnings guidance when we are better able to estimate the impact of our outlook. In the meantime, we stay focused on our third focus area being what I call good stewards of capital in order to improve shareholders' value and maintain an appropriate cash position given the current macro uncertainty.

So I will end my presentation on Slide 33 with where we stand at today. In times of uncertainty, we are focused on what we can control, continuing to build resilience in our business and setting a solid foundation for growth as the market begins to recover. And as we develop more clarity on the volume and channel mix outlook for the year, we will update full year earnings guidance. In the meantime, we will continue to advance against the indicators you see here.

Thank you for your time today, and please continue to exercise caution and stay safe as positive COVID cases are on the rise here in Japan. Let me now hand over to IR Head, [ Masaomi Gomi ], to join me for questions and answers.

[Unknown Executive]

Thank you, Calin-san. [Operator Instructions]. Operators, please put the first question through.

[Operator]

[Operator Instructions] [Foreign Language] The first question is from Fujiwara-san, Nomura Securities.

[Satoshi Fujiwara, analyst]

[Interpreted] This is Fujiwara from Nomura Securities. I have 2 questions. So I will ask one by one. My first question, I'm going to ask about the competitor situation in the industry as a whole. In your presentation, you have mentioned that the promotional activities from the competitors are becoming more fierce. And what is the situation right now? And of course, towards the summer, you have more new launches, and that will be the same for the competitors. But what is going to be the situation from now on? Do you think that the competition will be more fierce than now? So this is my first question.

[Unknown Executive]

So we have correctly understood your question. Your question is around competition of the overall industry and what is the condition -- sorry, what is the overall -- sorry, excuse me, the competition of the overall industry and what is our outlook for the competitive environment? I will have Costin-san answer that question.

[Costel Mandrea, executive]

Fujiwara-san, this is Costin Mandrea. First of all, indeed, we see the competitive environment, it is intensifying, and especially the promotional environment. But in CCBJI, we maintain our focus and our clear commitment for profitable investments in the market.

As you know, we do not offer a simple discount. And you saw in the presentation that our retail price is higher than the market average.

In the same time, we introduced new packs and new products, like 350, 700, the right package size and all the value-added products, Fanta Premier, Ayataka, Icy Spark. Also, we focus on customer-oriented activities, whatever we can execute in the stores at the point of sales.

Moving forward, we stay focused on appropriate market investments. we are watching carefully what's happening in the market, and we will decide when and if to act accordingly. Thank you.

[Unknown Executive]

Fujiwara-san, we hope that answered your question. Please go ahead with your next question, please.

[Satoshi Fujiwara, analyst]

[Interpreted] And this will be my second question about vending machines. Coke ON Pass, the new subscription service, is very interesting, actually. It's a great service, and this might be only done by your company.

And you mentioned that the number of subscribers is higher than expected and by higher, how much is that -- what do you mean? And also, by doing this, how is this going to boost up the vending machine share that you have right now? What is going to be the impact? I want to have some numbers, if you have any.

[Unknown Executive]

Your question is around the vending Coke ON Pass. What do we mean by above expectation? And how would that impact our vending market share? I would also have Costin-san answer that question.

[Costel Mandrea, executive]

So I will start with the vending overall performance you heard from Calin. We continue to grow share for 24 months, and we see our strategies continue to deliver good performance. When we look at the way to transform the vending in the future, obviously, digital, it's a key factor.

And you know we have Coke ON platform for more than 4 years right now. We have 27 million downloads, and we have significant usage and growth of consumer engagement. We also have Coke ON Pay, which helped us to purchase touchless for the last 2 years. And we are very happy to see all the numbers are growing.

When it comes to the subscription service, Coke ON, we targeted initially -- because it's for the first time somebody is doing something like this on Japanese market, we targeted 100,000 consumers to access this monthly pass, monthly subscription. And after the first 3 weeks, we are trending ahead of this target. So a lot of people are interested to purchase this monthly pass and to be able to have a good offer every single day to select their preferred beverage.

And we are going to learn from this and to expand for the rest of the year. And I want just to close saying that we are putting a lot of effort into growing our digital platform, Coke ON, and we started a TV commercial campaign, which I encourage you to watch.

[Unknown Executive]

Fujiwara-san, we hope that answered your question.

[Operator]

The next question is from Morita-san from Daiwa Securities.

[Makoto Morita, analyst]

[Interpreted] This is Morita speaking from Daiwa Securities. I have one question about OTC share. I think one of the theme for you is to improve the OTC share. And by looking at the first quarter, it's about flat. So you haven't improved much. So what will be the key success factor in improving the share going forward?

[Unknown Executive]

Just to restate your question, your question is around the OTC market share trend. I will also have Costin-san answer that question.

[Costel Mandrea, executive]

This is Costin. And I will start with 2020. As you remember, in the middle of 2020, we decided to pause our marketing investment because of the delayed Olympics and Paralympics. And we saw our market share in 2020 decreasing in Q3.

Since fourth quarter, we intensified our efforts to recover share and we succeed to be flat in fourth quarter. And the trend of growing market share in OTC channel is continuing also in Q1 with good results. How we grow this? We're launching new products. You heard from Wasa-san that we have big bets investments.

We are executing much better in the store. You remember, I told you we digitized our sales force, and we did empower them with sales force automation tools. We see the in-store execution of the national programs executed very well, and the Torch Relay program is one good example.

We think moving forward, we'll see volume share growing faster than the value share because the consumers are having new needs, and there is a new way to consume mostly at home and mostly large packages. But with our efforts to continue to grow market share in OTC, this is setting a very good foundation for us for growth as the total market will start to recover.

[Unknown Executive]

Morita-san, we hope that answers your question.

[Operator]

The next question would be from Mizuho Securities, Saji Hiroshi-san.

[Hiroshi Saji, analyst]

[Interpreted] One question for me. I had a question regarding the Mega DC. The Mega DC construction I hear is doing very well at Akashi. And conventionally, in East Japan, we have Saitama DC that has started to operate from February.

And in relation to this, you have revisited the supply chain. And a couple of hundreds of people have already finished taking their retirement package. And so in case the Akashi DC is to start, are there any opportunities to further do retirement -- provide retirement packages?

And the vending machine route you have mentioned to reduce by 20% and the fixed cost of vending machine, you have also mentioned about reducing the cost by 10%. But if we have the Mega DC, is there any upside to these figures is my question.

[Unknown Executive]

Thank you, Saji-san, for your question. Your question was around Mega DC infrastructure. I will have Bjorn answer that question.

[Bjorn Ulgenes, executive]

Thank you for the question, Saji-san. So thinking about the Mega DCs, these form part of what you recall from our strategic business plan launched in 2019 as part of Project Shinsei. And as we said back in February, we are continuing our strategic investments in this type of infrastructure optimization with the purpose of changing how we work to become more efficient, and therefore, over time, of course, reduce our operating expenses.

So we see clear indications from the first Mega DC implementations that our work is becoming simpler. And we will continue looking at further opportunities to optimize costs as we progress into further investments.

It's still too early to make predictions about the next wave of these type of investments as we still have to work through the impact of the pandemic. But of course, we will come back with further updates on savings related to this as we progress through the period. I hope that answers your question, Saji-san.

[Unknown Executive]

Saji-san, I hope that answered your question.

[Operator]

The next question is from JPMorgan, Yoshida-san.

[Ami Yoshida, analyst]

[Interpreted] This is Yoshida from JPMorgan. I have one question. This is about Lemon-dou. And it seems that a lot of players are launching new products in the lemon juice category. And I think your price is higher than the others, but talking about the future strategy, what is going to be the strategy for Lemon-dou? For Q1, I saw that the numbers went down a bit due to the cycling effect, but what is your midterm, long-term plan for Lemon-dou?

[Unknown Executive]

Thank you very much for your question. Your question was around our alcohol business. I will have Costin-san answer that question.

[Costel Mandrea, executive]

Yoshida-san, This is Costin. First of all, I have to express, we are very positive about Lemon-dou performance. We had a significant performance in 2020. It was the year of learning, and we learned a lot. We are happy to see Lemon-dou Teiban is #1 in share in lemon chuhai. And as you mentioned, we are selling our entire portfolio at a premium, JPY 30, on average, higher than the rest of the market.

We see a good performance, and we see good perspective for Lemon-dou. We just launched 2 weeks ago, the 500 ml home run package. And we continue our investment in local capacity in order to fuel the growth. Overall, alcohol is part of our total beverage portfolio. We are very excited about perspectives in alcohol, and we continue to expand selectively in this category. Please stay tuned. We have news coming in the next month.

[Unknown Executive]

Yoshida-san, we hope that answered your question.

[Operator]

Next question. Morgan Stanley MUFG, Miyake-san.

[Haruka Miyake, analyst]

[Interpreted] This is Miyake speaking. I have 2 questions. One, I think the first Fujiwara-san's question might be somehow related to this. Adding on that question, in the market, I suppose the competition is intensifying, particularly in the area of promotions.

And you talk about what you are doing in that arena. I suppose you have many channels like vending, supermarket, drug discount. So which channel that you're expecting highest competition going forward?

The second question is about the coffee category. When I look at your materials towards the end, the SOT can has declined by 14%, which is weaker than the cycling effect. I believe there might be come from the shift towards sort of PET or maybe because of the price adjustments since last year.

But this negative impact on SOT have to be controlled. Otherwise, then you will have a continuous negative channel mix. So what do you think the reason of this lower than vending average performance for SOT can? And what will be your plan for SOT can going forward?

[Unknown Executive]

Your 2 questions was, one was on the competitive environment, some more details. The second question was around our strategy in the coffee category. I would have Costin-san take this question.

[Costel Mandrea, executive]

Miyake-san, so the first question about where we expect the market to move. Obviously, we are watching during pandemic, the consumers are modifying their shopper behavior. They shop more in online, they shop more in supermarket, drug discounter. And here is where we focus a lot of our efforts, a lot of our investments.

Our online is growing 65% year-to-date. We have a good portfolio of activities we do there both with our labor less programs, but also with subscription. I remind you, in online, we are #1 share for many months now. So what we are doing there, it is sustainable.

When we look at the supermarket, we see shoppers moving toward a different behavior. And what we are doing, basically, we place our big bets on new innovative launches, but also the 350, 700 ml are addressing a new consumer occasion, 350 ml, 700 ml Coca-Cola, and now we expanded it also to Fanta, Sprite and Canada Dry. They show good results.

In drug discounters, we see more traffic. So we are promoting multi-packs, and we are moving toward bigger cases. And you remember here, we made the move to reduce the number of bottles in a case from 8 to 6. So our marketing and execution plans are addressing these new consumer behaviors.

And as we said in the beginning, answering Fujiwara-san, we stay away from offering simple discounts. Our strategy is to focus on profitable investments because we believe when the market will come back to normal, we are in a better position to grow. I hope this answers the first question. For the coffee...

[Haruka Miyake, analyst]

[Interpreted] So thank you very much for detail on that. But to start with, the market competition is intensifying on online, supermarket and drug discount. Is that the kind of view that you have? I understand your strategy on these 3 channel. But I was just wondering, it's very difficult to say which market has the highest competition right now. So which market do you think has the highest competition right now? Sorry, which channel?

[Costel Mandrea, executive]

So we see the biggest competition happening right now in supermarket and in CVS. We are watching carefully what are the promotion, what is the promotion environment. And I share with you, which is our strategy going forward.

But to make it very clear, nothing changed in our attitude, in our behavior toward profitable investment. We are not going to follow any aggressive volume share battles in these channels. We are focused on value ahead of volume. I hope this is answering.

Okay. If you allow me briefly to move to coffee. Thank you very much, this is a very important category for us, and we are watching what is happening in terms of consumer behavior and the shift in package preferences.

What we see for a few years now, we see the PET coffee is growing, and we are playing very well there with the Georgia, Japan Craftsman. And with Latte Nista, we are relaunching it, and we see good performance. Also, we did adjust our price for the bottle can because we see there are some consumers that still prefer the package. And again, we see good performance.

We launched Costa, like we said, and we believe going forward, Costa will position itself very well in the premium coffee market, and it will be a significant player. And SOT can, it stays. It stays on our radar screen. You remember, it was very well promoted during the Gundam promotion in Q1.

And we are involving Georgia SOT can in all the promotions moving forward. Because as I said, it is preferred by consumers, it has a very good consumer base, and it is profitable. So please look forward for the additional activities for SOT Georgia.

[Unknown Executive]

Miyake-san, we hope that answered your question. We will take 1 last question.

[Operator]

The next question is from Mitsubishi UFJ Morgan Stanley, Tsunoyama-san.

[Tomonobu Tsunoyama, analyst]

[Foreign Language] [Interpreted] I would like to ask one question as well. So you have decided to not disclose the guidance for the year. The second quarter, and after the first half, do you -- is there a possibility that you will not be releasing the guidance? And if you can elaborate on the timing of when you will be able to disclose the guidance?

Last year, we had a one-off cost down of JPY 20 billion. And we had emergency state declaration, and we also have a lot of transformations that are going on. And is there any thought that may not -- is there any thought that this JPY 20 billion may not be a one-off cost reduction?

[Unknown Executive]

I will have Bjorn take that question.

[Bjorn Ulgenes, executive]

Thank you for the question, Tsunoyama-san. First of all, when it comes to the guidance, as we said back in February, at present, it is difficult to give guidance on a full year basis, given the many uncertainties we have due to the pandemic. And now recently, we also have the third state of emergency kicking in, which, again, doesn't improve the outlook uncertainty aspect.

However, back in February, we laid out 6 KPIs that we are focusing on to manage through this period, which are all centered around how we can manage and influence the business. And by focusing on these 6 items, taking share that you heard from Calin-san and Costin-san, focusing on the transformation, focusing on collecting the transformation benefits, holding back on CapEx, reinstating the dividends, we believe at the end of this period, we will come out stronger than when this pandemic started. We are currently working on multiple scenarios as this uncertainty continues, and we will, of course, come back with guidance when we are seeing clarity on these outlooks.

When it comes to the one-off costs, you're absolutely right. We pocketed a lot of onetime savings in 2020. The efforts into 2021 again focuses on balancing transformation savings, while we still continue to focus on onetime savings where the opportunity arises. And we are, for instance, doing temporary leave as one of the measures to make sure we can offset the mitigations we see in revenues.

And when it comes to these one-off savings becoming permanent, if I understood the translation correctly, again, expenses are clearly distinguished between transformation, which are recurring and therefore, will continue, and one-off time expenses that is in its word one-off in nature. So again, as the scenarios transpire and become clearer, we will come back with new guidance on any of these programs.

But again, we highlight that we believe the state of emergency clearly impacts the markets at the moment, and we will continue to monitoring the situation. So hopefully, that answers your question.

[Unknown Executive]

Tsunoyama-san, we hope that answers your question. Thank you, everyone for your interest in our business. That concludes our call today. A replay webcast of this call will be available on our Investor Relations website soon after the -- finishing the call. We invite you to reach out to our team in the Investor Relations Department with questions and feedback. Thank you very much, everyone.

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