Coca-Cola Bottlers Japan Holdings Inc

TSE:2579

Earnings Call Transcript 2022-Q1

[ゴミ マサオミ, executive]

[Interpreted] Thank you for joining us today for our First Quarter 2022 Earnings Call for Analysts and Investors.

I'm here with President, Calin Dragan; CFO, Bjorn Ulgenes; and 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. Please look on our website for this information in both Japanese and English.

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

[Calin Dragan, executive]

Thank you, Gomi Masaomi, and good morning, everyone, Calin Dragan here. I will begin by sharing the summary of our first quarter 2022 earnings. And please, turn to Slide 5 of the presentation. In the first quarter, sales volume increased by 4%, exceeding the market growth. With the end of the quasi state of emergency measures, traffic and economic activity gradually recovered. We captured returning demand with new product launches and promotions in each channel. However, sales revenue remained flat year-on-year, reflecting lower wholesale revenue per case and negative mix due to ongoing competition and changing consumer behavior. Total channel value share grew 0.7 points versus last year. This was supported by 36 months of value share growth in our important vending channel. It's no mean to continuously increase market share over a period of 3 years. We feel justifiably confident that our efforts to date have strengthened our foundation to capture demand.

Compared to the previous year, business income declined. We did, however, see volume growth and cost savings efforts are progressing well. We faced severe market competition, and this has led to increased promotional spending and the decline in wholesale revenue per case. Sharp rise in global commodity prices and the cycling of last year's onetime cost savings also had an impact.

Transformation initiatives towards sustainable growth are progressing well. We delivered approximately JPY 3 billion of recurring cost savings in the first quarter as planned, and as good stewards of capital, we have controlled the investment expenditure and continue divesting idle assets. We are working towards building a stronger profit base. And in the first quarter, we successfully conducted a price revision negotiations with customers for large PET products. We took the leadership in the market and implemented the price revision from May 1 shipment as scheduled. From a profit standpoint, we are still in a difficult situation. However, we are capturing the recovery trend in traffic and in terms of volume, steadily returning to a growth trajectory.

In April, we continued to achieve volume growth and are off to a good start for the second quarter. To strengthen our business foundation, we are making steady progress in transformation, price revisions and other initiatives.

Now let me ask our CFO, Bjorn Ulgenes, to take you through the details of the first quarter earnings.

[Bjorn Ulgenes, executive]

Thank you, Calin. Hello, everyone. This is Bjorn Ulgenes. Please see Slide 6 for the first quarter results. As Calin explained earlier, although sales volume increased by 4%, sales revenues remained flat for the previous year. This was mainly due to a combination of factors, including the severe competitive environment. Business income decreased by JPY 1.2 billion from the previous year, resulting in a loss of JPY 12.7 billion. The factors behind the decrease will be explained on the next slide. Our operating loss improved by JPY 5.5 billion from the previous year. This includes the effects of continued balance sheet improvements, such as the approximate JPY 3.7 billion gain from the sale of ex-assets. Net income decreased by JPY 7.9 billion. This was mainly due to the cycling impact of a JPY 12.5 billion gain on the sale of shares of our subsidiary Q'sai being included for 2021.

On Slide 7, you can see our primary business income drivers. Starting on the left-hand side, our volume, price and mix, which show the year-on-year change in marginal profits from the commercial activities of our beverage business. Volume price and mix deteriorated JPY 0.2 billion from the previous year.

Although volume growth contributed, channel and package mix deteriorated affected by changing consumer behavior and increased competition, causing wholesale revenue per case to decline. Rebates also increased as we responded to intensified competitor promotions. As volume grew, fixed marketing expense or DME increased by JPY 0.8 billion from the previous year. As a pillar of our commercial strategy this year, we have implemented marketing investments focused on profitability. We believe that investments in growth channels and packages will lead to market share expansion and volume growth over the mid- to long term.

The impact of commodity prices resulted in a JPY 2.9 billion deterioration versus the previous year. We have been affected by rising raw material prices, driven by geopolitical risks and the general inflationary environment. To offset this, we have taken all possible mitigation measures, such as utilizing hedging. But we are still affected by the rising prices in aluminum, PET and other materials. In addition, the sharp depreciation of the yen has also had an impact.

Manufacturing costs improved by JPY 0.8 billion from the previous year. We improved manufacturing efficiency, and that helps absorb the cost of higher energy costs due to the high crude oil prices.

In other costs, we saw further savings of approximately JPY 2 billion compared to the previous year. Labor costs increased due to the cycling of last year's temporary release, but we achieved a net positive contribution, thanks to lower logistics costs brought about by our new mega DC. Controlled CapEx has also yielded a decrease in depreciation expense. This also includes lower depreciation expense due to the change in the useful life of sales equipment from 9 years to 11 years. These are the main drivers of business profit. As a result of these factors, business profit for the first quarter decreased by JPY 1.2 billion from the previous year, resulting in a loss of JPY 12.7 billion.

Please see Slide 8 for volume performance by major channels and categories. Sales volume increased by 4% despite the continued COVID impact. We captured demand as traffic return with the lifting of the quasi state of emergency measures. New product launches contributed as did measures implemented to meet changing consumer purchasing behavior at each channel.

By channel, supermarkets, drugstores and discounters and online grew by 3%, 5% and 39%, respectively. We are capturing the continued at-home demand in the wake the state of emergency. Vending channel grew by 3%, mainly by capturing demand with the recovery of traffic.

We also saw the benefits of new vending machine installations which have been reinforced in the second half of last year, while monitoring market conditions. Strategic use of the Coke ON application also contributed to this growth. For the wholesale revenue per case, the declining trend from the previous year continued with severe competition. The increased sales of large water packages on the back of rising at-home demand also contributed to such trends. However, we expect to see improvement from the second quarter onwards, especially in supermarkets, drugstores and discounters as we have implemented price revisions starting from shipments on May 1.

By category, the coffee category, where growth has been challenging amid the intense competition grew 4%. Coffee volume grew in all channels and was driven by new and renewed cost of flavors as well as the positive impact of Georgia's promotional activities.

Slide 9 highlights market share trends. Our operating areas total channel value share for the first quarter grew by 0.7 points over last year. This was due to the contribution from the vending channel's value share growth. Vending value share has grown for 36 consecutive months and was up 4 percentage points in the first quarter from the previous year. We believe the steady increase in our market share in vending, an important channel for us is the result of our digital strategy, building a solid foundation through transformation and leveraging Coke ON. On the solid foundation we have built, we will continue to grow our market share and capture the expected traffic recovery. In OTC, we continue to face a severe competitive environment. We are implementing measures to protect market share. Convenience stores are especially challenging and we continue to strengthen customer management initiatives.

Regarding OTC retail price, our products maintained a premium price to the market average, both for small and large PET. We continue efforts to supply attractive products and implement effective promotions.

Now I'd like to introduce the Chief Marketing Officer of Coca-Cola Japan, Takashi Wasa, to take you through marketing initiatives update. Wasa-san, please.

[Takashi Wasa, executive]

This is Wasa from Coca-Cola Japan. Let me take you through 2022 quarter 1 review and quarter 2 marketing highlights. To begin with, 2022 quarter 1 in review. Under the Coca-Cola new global campaign, Real Magic launched last year. This January, we executed a Fortune bottle campaign. We successfully receded new users through 2.6 million promotion participants, one of the largest ever for a Coca-Cola brand package promotion. In March, we launched a new Coca-Cola Zero campaign. The campaign conveys that Coca-Cola Zero with its refreshing after taste communicates positive energy. Coca-Cola Zero drunk when you want to do fresh throughout your daily life has been described as a case that can be expressed in words or zero words. In addition, we conducted a must win promotion with [ 9 ] points and successfully recruited new users.

Next, I'll talk about Georgia and COSTA. This January, Georgia launched a renewed brand campaign, The Coffee That Makes You Grow. Georgia believes in power of coffee, drinking a delicious quality coffee gives us meantime to realize our true feelings and thoughts to go forward positively and grow. In February, 3 Georgia black coffee products were upgraded with a unique Aroma technology under the theme of as deliciousness as if it was freshly brewed to embody the new brand campaign.

In March, we renewed Georgia-Japan [ crossman ] by combining did coffee and cold brew coffee to create a lasting favor of PET coffee, a taste you will never tired of drinking. A campaign was launched to convey a taste last for the beginning to the end of the drink. In March, Costa Coffee launched a new campaign, Do You Like Good Coffee to further establish the brand. The campaign features [ Ryoko Yonekura ] as a new brand ambassador and communicated the Costa Coffee' commitment to delivering a taste as great as if it has been carefully hand brewed by [indiscernible]. Leveraging our strong dual brands, Georgia and Costa Coffee, effectively, we have successfully expanded our market share of coffee category.

Next is Ayataka. In February, Ayataka launched Ayataka Sakura Design bottle based on the concept of Cherry Blossoms and great taste in blue. In February, Ayataka Cafe Matcha Latte, which gained great [indiscernible] last year was launched under the theme of Cherry Blossoms, to convey the lasting effects experienced only Ayataka Cafe can offer. Through these activities, Ayataka brand successfully achieved sales growth and recruited more users. In March, Lemon-dou, a brand specializing in Lemon sour launched Lemon-dou [indiscernible] Or no sugar lemon and Lemon-dou [indiscernible] lemon, new lineup that will satisfy alcohol lovers. Along with the new products launched a new TV commercial campaign, starring actor Hiroshi Abe and comedian Kendo Kobayashi was launched. The commercial picks the characteristic of the new products for alcohol lovers in an easy-to-understand and comical manner.

In addition to strengthening the core of Lemon-dou, in March, we launched a new product, Lemon-dou, [indiscernible], tapping into the growing lemon sour of concentrate market amid the COVID-19 pandemic. In February, we successfully tapped into the non-alcoholic beverage market with Yojana in Lemon-dou, the system's first non-alcoholic brand with an alcohol content of 0.00%, offering an authentic lemon sour taste. By strengthening the core and launching new innovations, we successfully grew our sales and expanded users.

Please turn to Slide 12. We Next, I'm going to walk you through on quarter 2 highlights. Coca-Cola and Coca-Cola Zero, 100% recycled PET bottles of 350 million were launched in April as a new label less bottle available only through the online channel.

Coca-Cola [ Sponsor ] logo is [ debossed ], which is the opposite of [ embossed ]. With a concave shading process, enable us to deliver our branding as well as reduced plastic usage.

Next is Georgia. Under the new brand campaign, The Coffee That Makes You Glow. Georgia has started campaign because its your break make it the best with Georgia figure in April for all [indiscernible] Can coffees, including Emerald Mountain Blend and Georgia [ Shot and Break ]. The communication aim to inspire people to take a few minutes out of the delivery a daily workday in order to refresh with a cup of coffee and return to work with a good feeling. At the same time, a variety of promotions will be implemented to encourage people to enjoy a change of pace.

In April, Ayataka will celebrated its 15th anniversary this year, renewed its package graphic design. The new package design expressed is the unique taste of Ayataka, which allows consumers to enjoy the original aromatic favor of green tea but slowly and carefully opening the TVs, just like a [indiscernible].

The new TV commercial describes how the aromatic flavor of Ayataka can be enjoyed in peaceful and relaxing manner based on the concept of [ aromatic mummy ] made with the [ kiwi fruit ] until it's fully opened. Through this big campaign, Ayataka will deliver a relaxing piece that is close to people's daily lives.

In April, Ayataka Cafe Houji-cha Latte, the second favor from Ayataka Cafe, series of authentic lattes was launched. The product is made with carefully selected quality ingredients and proprietary manufacturing process that uses a luxurious 100% domestic powder Houji-cha, to provide an elegant milk flavor that comes the taste of Houji-cha.

Furthermore, in April, a next-generation relaxation drinks chill out was renewed. Together with the renewal launch, a new campaign, want to chill or push too hard campaign was launched. The campaign aims to create -- expand a new category through enhancing product awareness and product understanding and expanding trials. And in May, we will launch a new energy drink in cooperation with Yoshiki of X-Japan. Real Gold X is inspired by uplift in rock music, and Real Gold Y is inspired by concentration of classic music.

Through the message, nothing is impossible and music asset marketing. We will inspire our next generation to take on various challenges. With this new energy drink, we will aim to top into a profitable energy drink category.

This is a summary of my presentation today. Our marketing strategy for this year continues to have 3 main pillars: pivot to core; fewer, bigger innovations; and captive stay at home demand. We will continue to respond flexibly and quickly to change in the enrollment and further grow sales and revenue by strengthening our core brands and strongly accelerating the growth of second year innovation launch last year and new innovations in this year. That's it for my presentation today. Our marketing plan is underlying our company purpose, refresh the world, make a difference. We will continuously strive to deliver refreshing moments and positive feelings through our beverages. Thank you very much.

[Calin Dragan, executive]

Thank you, Wasa-san. Calin here again. Please turn to Slide 15. We will now explain our previously undisclosed full year earnings guidance for 2022. In 2022, we anticipate a certain level of recovery in traffic.

At the same time, we expect the business environment to remain challenging due to the increased raw material costs as well as factors such as severely competitive environment. The cycling impact from temporary cost savings implemented last year will also pressure profit. Even under the circumstances, as traffic recovers, we will target a 2% volume growth by executing commercial strategies to capture growth opportunities.

We will continue to reduce costs through transformation and improve our earnings foundation. We aim to maintain business income at the same level as the previous year. We are currently off to a good start in the second quarter with preliminary 4% increase in April sales volume. We are confident that our actions leading up to the first quarter have allowed us to capture demand. And as part of our efforts to improve our earnings base, we implemented price revision for large PET as scheduled starting from May 1 shipments with the agreement of our customers.

We believe that efforts to improve our earnings base are important and urgent tasks in operating our business during this severe environment. We are currently considering additional pricing measures as well. In addition, we will continue to focus on efforts to lower our space. Transformation is expected to deliver cost savings of JPY 5 billion, as explained in our previous earnings call.

Please see Slide 16. This is the P&L for the full year 2022 financial outlook. Revenue is forecasted to increase by 4.3% year-on-year. This is based on a volume growth of 2%, driven by demand growth on the back of traffic recovery and market share growth. The benefit of the large PET price division implemented on May 1 is included in this. The guidance calls for revenue growth to outpace volume growth. This growth will be given by vending, which has a higher wholesale revenue per case as well as improvement in price and mix.

The cost of sales is expected to increase from the previous year due to the impact of increased volume as well as raw material prices. SG&A expenses will be controlled and is expected to increase by only 1.2% compared to a revenue growth of 4.3%. The improvement in the SG&A to sales ratio is the result of the cost-based transformation we have been working on. We predict a decrease in business income due to the factors such as the continuous severe competitive environment, the cycling of onetime cost savings implemented in the previous year, the recent rapid raise in raw material prices and the ongoing depreciation of the yen.

Despite this, business income is expected to remain flat year-on-year, supported by the measures to mitigate the short-term impact on business performance and savings through ongoing transformation.

In the following Slide 17, I'll explain the factors behind the changes. In 2022, although we expect a recovery in traffic, we anticipate the difficult business environment to continue creating headwinds for profitability. This includes raising commodity prices, continued intense competition and the cycling of temporary cost savings of about JPY 18 billion achieved last year.

By continuing to work on volume growth and improving the earnings base, we plan to target business income to achieve a level similar to the previous year. From the left side of the slide, you will see price, volume and mix impact. We plan to increase of JPY 11.4 billion from the previous year through volume growth as traffic recovers and an improved price mix, including the effects of the price revisions for large PET. With the recovery in traffic, DME will be controlled and used at appropriate level so that it will lead to mid- to long-term growth. Through such strategy, we expect the DME to remain flat versus the previous year. The commodity budget is expected to have an impact of JPY 11.3 billion from the previous year. This is due to raising raw material prices, reflecting external factors such as geopolitical risks. The sharp depreciation of the yen will also have a negative effect.

In manufacturing, although efficiencies from increased production volumes are expected, we anticipate a deterioration of JPY 2.7 billion due to increases in energy costs caused by higher crude oil prices. Other costs are expected to improve by JPY 2.7 billion from the previous year. The main focus on -- the main factors contributing profit are a decrease in depreciation expenses due to extension in the useful life of sales equipment and the decrease in logistic costs. Labor costs are expected to increase as we cycle the last year's temporary relief.

Now please look at Slide 18. This are target metrics for 2022, which we explained during the February earnings presentation. As part of our full year guidance, we remain committed to improving shareholder value, and we will continue to work towards achieving these targets. We have made steady progress so far. Depreciation expenses have been updated from the initial JPY 55 billion to JPY 47 billion, accounting for approximately JPY 8 billion impact due to the change in useful life of sales equipment.

Please look at Slide 19 of our commercial strategies. This year, we have set 4 major pillars of commercial strategy to expand portfolio edge, margin-focused pricing, growth through vending channels and customer management and execution excellence. And we're making steady progress on each of these initiatives. On the next slide, I will explain our efforts in one of the pillars margin forced pricing.

Please look at Slide 20. This year, we will look to achieve rational pricing and implement promotions at appropriate levels to strengthen our revenue base. As part of this effort with the understanding of our customers, we took industry leadership and revised prices even while maintaining a premium-to-average market retail prices. The price revision for large PET products is effective from the May 1 shipment as scheduled, and we will continue to monitor the impact on sales.

On the other hand, the current business environment continues to be challenging. And as raising prices raw materials and crude oil prices, as well, yen depreciation have become major factors impacting the earnings. Although we are taking company-wide cost-saving initiatives to mitigate these effects, it has become difficult to absorb the effects through our efforts alone. We believe that efforts to improve our earnings base is an important and urgent task to operate our business in such a challenging environment.

We are currently seriously considering price revision for small packages by the end of this year. Details are to be determined. But at this point, we are evaluating the revision mainly for small PET packages in all sales channels in the second half of this year. While considering future price revisions, we will strive to communicate carefully with customers and consumers to ensure that we gain their understanding. By rebuilding our revenue base, we will continue to provide high value-added products and attractive promotions in the future.

Now please look at Slide 21. I would like to explain our growth through our vending channel. Vending is a particularly important channel for us in terms of profitability. The entire vending market has been severely affected by traffic decline from COVID. However, we have continuously grown our monthly value share for 12, 36 months. This gives us confidence to say that we have built a solid foundation for growth. This year, we will firmly capture the traffic recovery momentum and aim for future growth based on such a foundation. And as explained during the last earnings calls, our activities in 2022 are focused on growth measures, such as increasing sales per machine, installed base growth, leveraging Coke ON, and operational efficiencies.

As for growth initiatives, we will expand sales per vending machine by offering attractive product lineups and implementing a pricing strategy that balances profitability with capturing demand during the recovery in customer traffic. We have recently seen a noticeable increase in the number of visitors at tourist spots, and we expect this trend to continue. We will strengthen our activities while carefully analyzing such traffic trends. We will conduct targeting on location-specific basis.

In addition, since the second half of last year, we have been working to strengthen our efforts, including the placement of new vending machines in anticipation of a recovery in traffic while keeping a close eye on the market environment. This year, we will further strengthen such activities, targeting a net increase of over 10,000 vending machines. Coke ON downloads have steadily increased to over 35 million and serves from vending machines that support Coke ON are higher than those that do not support it. To maximize the use of such an asset, we will take measures to increase the quantity of active users. And such measures include increasing the number of Coke ON compatible vending machines and implementing Coke ON promotions.

And in the first quarter, we achieved record high and new and returning users as well as the number of users of Coke ON Pay. And from operational perspective, we will work to increase the number of online vending machines to further improve efficiency while and stable operations of the fundamentally device operating model. By utilizing data from online vending machines, we will analyze data in real time and utilize it for sales forecasting, sales activities, inventory control and other operational elements.

Now please look at Page 22. Let me explain our efforts in the supply chain, which is the foundation for growth. This year, we will work on optimizing our logistics network through leveraging the Mega DCs and on synchronizing sales and supply chain activities. For the Mega DCs, the aim room to ensure stable operation of the Saitama Mega DC and the smooth rollout of the Akashi Mega DC. Akashi is scheduled to start operations in July this year. We will aim to a smooth start-up by taking the learnings of the Saitama Mega DC, which has operated since February 2021.

Regarding the logistics network, we are conducting in-depth improvement activities to optimize all areas. We are focused on network reorganization centered around this Mega DCs. And by leveraging Mega DCs, we have been able to reduce the number of touches from factory production to customer delivery, leading to a reduction in logistic costs.

Mega DCs also play a major role in inventory storage and shipping functions. And by consolidating product inventories that we have previously held at various sales centers, quality and inventory levels have been improved. In addition, we are swiftly consolidating and closing sales centers in conjunction with these initiatives and have already completed the closure of 5 locations this year, realizing asset compression and cost reduction.

In terms of agility against demand fluctuations, we are working towards deeper collaboration between commercial and supply chain, taking advantage of lessons learned last year to supply products in a timely manner and at low cost in response to changes in the environment, we are working to improve coordination, help upgrade simulations and leverage digital technology. Although the market environment is expected to remain uncertain, we hope to improve the forecast accuracy while minimizing the loss of sales opportunities through such initiatives.

Slide 23 is an update on our ESG initiatives. With creating shared value as the foundation of our management, we have positioned inclusion communities and resources as 3 platforms of our sustainability framework.

Our ESG initiatives have been highly evaluated, and in addition to the DJSI, we have recently been selected as the member of the FTSE Blossom Japan Sector Relative Index and ESG Investment Index. With regards to climate change initiatives, we endorsed TCFD recommendations. We will work to further enhance our analysis of the financial impact of risks and opportunities related to climate change and our disclosure of measures to address them.

Please turn to Page 24 for today's summary. Over the past several years, we have been forced to navigate a challenging business environment under the influence of COVID. Despite such conditions, we have pushed forward without slowing our transformation to build a solid foundation for sustainable growth. Our efforts are showing results, but as evident in our first quarter results, COVID continues to impact our business at the high cost of raw material prices has had a negative impact.

In 2022, we will continue to capture the demand recovery, minimize commodity impact and continued transformation. At the same time, we expect the business environment to remain challenging. That said, in April, volume continued to grow following the first quarter, we feel that we have built a foundation to capture the demand recovery. On May 1, we have implemented price revisions for large PET as planned, and we will continue to push forward with measures that will lead to improved profitability for the future.

In a business environment that has changed dramatically during COVID, we are focused on protecting our business. However, looking ahead to the post-COVID world, we believe it is necessary to grow our business again to maximize shareholder value based on the solid foundation we have built. We are currently developing a midterm business plan for sustainable future growth.

Since our integration, we have responded to changes in the market environment, such as the rapid increase in aseptic products, restore the plant that had to shut down due to a natural disaster. And since 2020, we have further promoted transformation. While we have worked to build a solid foundation for growth in automation, we faced businesses. And for instance, we faced a revenue decline of approximately JPY 100 billion in a single year in 2020 due to COVID.

In spite of this, we are focused on what we can control, implemented activities to protect our business and market share based on swift decision-making and pushed forward with key measures of transformation. This has resulted in recurring cost savings of more than JPY 20 billion over the past 2 years with the total savings amounting to approximately JPY 27 billion, including the forecast for 2022.

In addition, we have implemented price revisions for large PET with a strong will to build a revenue base. Furthermore, we have communicated that we are seriously considering a price revision for small packages as a further measure to improve profitability as we expect the severe business environment to continue.

As for the next step, we explained earlier that we need to move from protecting our business to growing our business. And after 2023, we will focus on achieving growth based on the foundation that we have built, and achieving sustainable growth over the medium to long term and in the course of developing our midterm business plan, placing importance on shareholder value creation, growth and sustainability. In particular, I intend to focus more than ever on shareholder value creation. We will target a healthy market share growth based on business foundation we have built to date and generate solid profits.

In addition, we have been working to be good stewards of capital by focusing on our core beverage business and selling all idle assets. We will further promote these efforts to maximize cash flow, which will be the source of returns to shareholders. While maintaining stable dividends, we intend to take opportunities to increase returns and to consider measures that will increase shareholder value.

We will also strengthen our efforts on ESG to promote sustainability, important for sustainable business growth. And as for details for the initiatives for achieving sustainable future growth, we are developing a medium-term business plan and were announced at the soonest. That concludes my presentation today.

And now let me ask Gomi-san to come back and take us through the question-and-answer session.

[ゴミ マサオミ, executive]

Thank you, Calin Dragan. Let me remind you this Q&A session is intended 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 your questions in the language you are tuning. Japanese, on the Japanese phone line and English, on the English phone line. [Operator Instructions]

Now I would like to begin the Q&A. Operator, please put through the first question.

[Operator]

[Operator Instructions] The first question is from Credit Suisse, Ihara-san.

[Rei Ihara, analyst]

[Interpreted] Hello from Credit Suisse, this is Ihara speaking. And I have two questions. My first question is about the price revision. So to be more specific, what is your image? What kind of plan do you have for this price revision?

So for example, what is the commodity costs you're trying to absorb? Or how about the can package? What is the strategy? You mentioned that this is going to be for all the channels, but between channels is the price revision, the price range is going to be different. So whatever you can say will be appreciated. What is your detailed plan behind the price revision?

And this is, again, related to the price revision. But looking at the first quarter, your volume is up but the revenue per case is down, not just you. This is the same for Suntory too. So I know that this recent situation, there is the intensified competition. And talking about you and Suntory, we see a gap between the 2 companies on the price revision. I'm just wondering if all the companies are able to revise the price so that they can secure certain level of profits? That's my second question.

[ゴミ マサオミ, executive]

For your question -- so your question was around pricing.

And if possible, to elaborate more details regarding the price hike. Within your question, you also included parts about how much as in -- sorry, as a part of your questions, you are seeing volume growth in the market but not feeding through the earnings. How do you intend to fix that through pricing measures? I will ask -- I will have Costel-san answer that question.

[Costel Mandrea, executive]

This is Costel Mandrea. Thank you, Ihara-san, for your question. For us, pricing is a very important decision. And as we showed you, we are serious about it. For the last 2 years, we took price increases for large PET, although we have premium in the market. In the beginning of '22, we announced you that we see inflation going up, and we see pressure from commodities and will take price increase from large PET. This is a big decision. And we spent significant time with our partners, with customers to make this price increase a reality.

From first of May, we implemented this price increase. And although it's very early, our main focus right now is to understand which are the implications to our business tend to the overall industry of beverages. What we saw recently is that commodity pressure is accelerating. And that's why we came today and we said that we are seriously considering raising price for small PET. And what this means, it means that we have -- we are working on all the options, also we did not yet made a decision. But let me explain to you what kind of considerations, what kind of implications we are looking at. First of all, we need to evaluate the impact of the large PET increase, what's the impact in terms of revenue, what's the impact in terms of our consumer purchasing and overall, what's the impact on the industry.

Second, moving forward. we are very concerned about the competitive environment. So before we make a final decision to move with small PET, we need to consider what is happening in the market. We tell you many times, we are already premium in the market. And what we saw is it's an increasing pressure on price promotions, on buy-one-get-one free.

On top of this, for the last months, we see our competition upsizing their small PET from mainly 500 ml to 600 ml. All of this are creating pressure on us because we need to continue to stay affordable with our consumers. We need to make sure that our customers will partner with us in taking further price decisions.

So in summary, taking price increase, it is a delicate decision for us. We showed in the last 3 years, we took leadership and we implemented 2 price increases. And right now, we are working final details for small PET price increase, and we'll decide if we increase, when and what's the exact mechanism. I hope this is answering your in about pricing.

And if you allow me briefly to discuss about the second question, which has to do with wholesale per case, as you saw in Q1. Okay. I will -- yes. Sorry. So briefly, in Q1, we're growing volume with 4%. We're growing revenue with 2%. And we see here 2 significant changes in the market. The positive one is that we see a recovery starting to appear in the market. Although in Q1, we are still on the state of emergency.

Gradually, we are getting out of this. It's very important for us that channel mix, how fast vending and CVS more channels with higher wholesale price per case, how soon they will grow. And also, it's very important for us to monitor and to react to the competitive environment. I explained to you earlier, there is significant pressure in terms of competition. We stay very disciplined in our pricing promotions, but obviously, we have to maintain our competitiveness. I hope this answers your question. Thank you.

[ゴミ マサオミ, executive]

Ihara-san, we hope that answered your question.

[Rei Ihara, analyst]

[Interpreted] So for the ICY package, the price revision, -- so I guess that you're going to have a -- it's not that you're going to have an aggressive approach to make the first announcement. You're going to see how it goes in the market. And then you're going to consider. So you're just in the process of considering at the moment.

[ゴミ マサオミ, executive]

We wait the price revision, looking at what the competitors would do in the market.

[Costel Mandrea, executive]

Right now, like I said, Ihara-san, we are -- we just implemented large PET. We are motoring and there is a complex process of assessing our next steps. We'll inform you if, when, and how much will take the next time.

[ゴミ マサオミ, executive]

Ihara-san, we hope that answers your question. Due to time constraints, I'd like to go to the next question.

[Operator]

The next question is Mitsubishi, Tsunoyama Tomonobu.

[Tomonobu Tsunoyama, analyst]

This is Tsunoyama speaking. Can you hear me? I have a question about commodity price. This will be a detail about the commodity. Because in the current guidance, you have mentioned that you will have an impact of the impact from the commodity at about JPY 11.3 billion. I would like to understand the breakdown of that. And also in the first quarter, you have a JPY 2.9 [ million ]. And then you are saying that for the full year, it's like JPY 11.3 billion. So I think this is a lot of small. So how -- what's the rationale behind this? Or is there any upward risk from JPY 11.3 billion. So can you share your view on this?

[ゴミ マサオミ, executive]

Around commodity prices, our more details around JPY 11.3 billion, the breakdown. And also the second part of your question was that the full year expectation of JPY 11.3 billion looks a little bit conservative looking at the JPY 2.9 billion incurred in the Q1. I will have this answered by Bjorn-san.

[Bjorn Ulgenes, executive]

Thank you for the question, Tsunoyama. First of all, I cannot give detailed breakdowns of our commodity buying. But I will tell you that in 2021, the main drivers of the close to JPY 3 billion commodity search we had at type time came from sugar and then aluminum. For this year, as you have noted, we have stated JPY 11.3 billion as the incremental impact for this year. That is coming first and foremost, from PET, again, driven by oil price surges, aluminum again, and now the depreciation of the yen, especially versus the dollar.

When it comes to the full year impact on your second question, if there's further risk. First of all, I just want to remind you that we, as Coca-Cola Bottlers Japan, we predominantly buy PET, aluminum and sugar. We do not buy coffee beans, et cetera, that is bought by the Coca-Cola Company. So therefore, the factors that influence us are baked into the JPY 11 billion, nothing else. When it comes to further risk, we are using our global procurement system to help us forecast and anticipate the impact of the commodities. And we will always -- we will always tend to look at this from a realistic base throughout the year and again, using the global procurement organization to help us hedge and forecast the impact of this. So at the moment, this is our best estimate of the impact for the year to JPY 11.3 billion. Thank you.

[Tomonobu Tsunoyama, analyst]

[Interpreted] So one follow-up question. So you mentioned that you're thinking considering about the small PET price revision. But in terms of the cost up, in order for you to absorb this negative impact of JPY [ 11.3 ] billion, which kind of price strategy are you planning for? Or rather, are you thinking about the price hike so that you can actually absorb more than JPY 11.3 billion or to say rather a couple years of cost up. So what is your main objective of your price revision?

[ゴミ マサオミ, executive]

A follow-up question. So your follow-up question was -- how do you mitigate the commodity pricing -- commodity rights? And what are the initiatives, including pricing that we are taking? And what measures specifically is actually against the commodity pricing mitigation. Bjorn-san, I would like you to take this question, please?

[Bjorn Ulgenes, executive]

Thank you again, [indiscernible]. So -- as we said in the prepared remarks, we are seriously considering small PET price hikes. And as you can have or have heard from Calin's prepared remarks, all of the different measures we are working on is, again, to return us to profitable growth. And the profitable growth will come from several measures, market recovery, for instance, in the different channels. impact of pricing on decisions we have already made, like large DCs.

And again, remind everybody, this is the second time in 3 years, we're taking price. Commodities, of course, as we spoke about, or the ongoing transformation. So all of these measures for us are important building blocks to return to profitability. So therefore, pricing, as I said, is one of the building blocks, but there are, of course, several. Thank you for the question.

[ゴミ マサオミ, executive]

Tsunoyama-san, thank you very much for the question. We hope that answered your question. Due to time constraints, we would like to move to the next question. And I understand that we have reached our originally planned time, but we will be extending this session for additional 10 minutes. [Operator Instructions] Operator, please put through the next question.

[Operator]

The next question is from Bank of America, Kaneko-san.

[金子 駿兵, analyst]

This is Kaneko from BOA. Can you hear me?

[ゴミ マサオミ, executive]

Yes, we can hear your Kaneko-san.

[Tomonobu Tsunoyama, analyst]

Okay. And about the price revision again. It might be a duplicated question, but I have the same kind of question. So you mentioned that you are considering a price revision for the small packages for all the channels. So for example, let's say, vending machine, which is one of your core channels. So maybe you will rise the price of the small PET packages, but maybe you maintain the price for the can products. Will that be a scenario? Do you have any direction that you can share at the moment?

[ゴミ マサオミ, executive]

Thanks for the question. So the question was around the expected price hike and in all channels. Within that question, what do we think about the vending as tax increases, our prices may increase but what happens to the other packages? I will have Costel-san answer this question.

[Costel Mandrea, executive]

Thank you, Kaneko-san. This is Costel. Basically, this is what we described right now about all the scenarios that we are working on. We took price increase for large PET. Now we are considering small PET, which is the most important part of our portfolio. It's 40% of our volume, and it's almost 2/3 of all the transactions.

So you can imagine this is a significant decision. Right now, we are working on scenarios by channels. And like I said, we need to keep in mind how competitive will be in the market and what will be our position in a very competitive market. So we'll definitely inform you how if and how we'll transition to this small PET increase. Thank you.

[ゴミ マサオミ, executive]

Kaneko-san, we hope that answered your question. We will -- operator, we would like to go to the next question, please.

[Operator]

The next question from Fujiwara-san from Nomura Securities.

[Satoshi Fujiwara, analyst]

[Interpreted] This is Fujiwara speaking. With regards to the competitive environment in mid- to long term, is my question is about if you are going to revise price for the small PET, probably the others will follow. But after that, in mid- to long term, I'm just worrying that we might be seeing yet another price level.

So in normal -- in current market, you see a price competition for small PET in the market. And just before you just announced about the large pit price hike. But with -- along with this kind of price hike and the price competition, which kind of plan or perspective you have for the beverage industry as a whole?

[ゴミ マサオミ, executive]

Competitive landscape. So your view is that if we raise our expected prices, others may follow. But would that be sustainable? And would this be positive for the industry health in the long term?

[Costel Mandrea, executive]

Thank you, Fujiwara-san. First of all, I'll state, I cannot comment on other people moves, but I will share with you what we know for sure. What we know for sure is that in the last 3 years, we took 2 price increases in large PET. And we saw in the industry, a mixed -- a mixed movement. So nothing significantly better in terms of improving the health of the industry.

On contrary, like I shared, we see during pandemic and recently, a very intense competition. We see continuation of buy one, get on free of the price promotions and also a move that it's in the -- again, it's making the market even more competitive. It's upsizing. All of this are obviously creating pressure on us in terms of affordability and in terms of our ability to capture demand.

In CCBJI, we are disciplined about everything, meaning price promotion. And like we showed, we are disciplined in implementing the 2 large PET increases. Right now, we are seriously considering the small PET and we'll decide if, when, and how much we'll do this because we believe in Japanese market, obviously, there is a necessity to improve the health of this industry. with significant competitive environment and also with the significant pressure that the industry is having on commodities. I hope this answers your questions. Thank you.

[ゴミ マサオミ, executive]

Fujiwara-san, we hope that answers your question. Due to time constraints, I would like to move to the next question, please. Operator, please go to the next question.

[Operator]

The question is from Morita-san, Daiwa Securities.

[Makoto Morita, analyst]

This is Morita-san from Daiwa Securities. I have one simple question. So the business income is minus again in your guidance. But when is it going to be on the profit side? I know that you're going to consider the price revision, you are reducing cost. But when is the timing that you're going to be profitable?

[ゴミ マサオミ, executive]

Your question was full year guidance is loss-making. When do you expect to turn to profitability? I will have Bjorn-san answer this question.

[Bjorn Ulgenes, executive]

Thank you, Morita-san. A simple question with a difficult answer. First of all, I will not be able today to give you an exact date or a time when we will return to profitability. As you have seen, we have issued the full year guidance for 2022 today. And as Calin said in the prepared remarks, our focus is, of course, a return to profitability. Again, I want to remind you of the key drivers of that return to profitability. First of all, market recovery coming in the key channels for us. developing price increases.

As we have said, we have already taken 2 price increases in this market over the last 3 years, and we are now considering the third. We will continue the transformation efforts and really push to become much more efficient in how we operate our business.

Commodities remains an uncertainty, I think, for everybody, almost independent of industry. But in the end, all of these are building blocks that will help us get back to profit.

So as I said, I will not be able to give you a date and time today, but I hope these drivers will help clarify what we are working on and what we can control to get on that path back to profitability. Thank you.

[Operator]

The question from Morgan Stanley MSG, Miyake-san.

[Unknown Analyst]

This is Miyake from Morgan Stanley. With regard to the price revision, which kind of volume environment will be the best. Because if you have a strong volume demand, are you thinking of a more stronger and aggressive price hike will be suitable. Like let's say, if you have a very hot summer and if you have a strong demand, do you think that it's rather difficult for you to do the price hike because of the strong demand. So I just wanted to understand what will be the relationship between the volume demand and the price hike strategy?

[ゴミ マサオミ, executive]

The price revisions and what will be the best volume conditions, including the likes of summer weathers, other factors that would have impact on the volume of the overall market as well.

[Costel Mandrea, executive]

Thank you, Mike. This is Costel. 2 folds to your question. First of all, we slowly start to see recovery of the market. with traffic coming back, we are able to capture demand. You see we are continuing to grow market share. And obviously, we are hoping a normal summer after 2 very challenging summer during COVID.

We are hoping a normal summer will help improve the overall results for CCBJI. But at the same time, we are dealing here with a significant inflationary environment with pressure on commodities, and we are dealing with a significant competition pressure in this market. So we took the decision to take the price for large PET. We are now seriously considering the small PET. And obviously, we believe this is a step that should definitely work together with the recovery of the market. both for the health of CCBJI business, but also for the health of the entire beverage in the state. Thank you.

[ゴミ マサオミ, executive]

I hope would like to -- with that, we would like to close it with one final comment from Calin-san.

[Calin Dragan, executive]

First, Calin on [indiscernible]. I just wanted to say, again, a big thank you to all present on this call. for the interest shown in our business. And I hope that through today's presentation, we have reinforced your trust in our initiatives and our actions on one hand to return to profitability. And the most important thing is probably is to build value for our shareholders.

I saw throughout the day huge interest expressed around our pricing initiatives. And I hope that through the answers that will provide, you got a picture about where we are in our initiatives and I would say as well, you get a sense about how determined and how seriously we are considering all these initiatives as a base for our return to profitability.

Well, we are always reminding you, and this is something that I feel the need to stress the fact that as a bottler of Coca-Cola products, in Japan, we have shown high determination on driving the business, but as well the entire industry towards healthier grants to call it like that. We have always promote healthy mix in our portfolio. We try to promote a healthy promotional activity in the market.

And more recently, in the last 3 years, we have put the prices up twice in probably the 3 decades of stagnation and the fact is that right now, we are announcing that we're seriously considering the small packages, price increases, I think it endorsed that determination towards a healthy industry and implicitly a healthy business for ourselves.

Having said that, I just want to say a big, big thank you again and looking forward to see you to our further encounter in the next period. I appreciate it.

[ゴミ マサオミ, executive]

Thank you, Calin-san. That will conclude our presentation for today. Thank you again for your interest in our business. The replay webcast of this call will be available on our Investor Relations website soon after finishing the call. We invite you to reach out to our Investor Relations team with questions or feedback. Thank you very much.

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