Coca-Cola Bottlers Japan Holdings Inc

TSE:2579

Earnings Call Transcript 2019-Q2

[Raymond Shelton, executive]

Good afternoon, everyone. I'm Raymond Shelton, Head of Investor Relations and Corporate Communications for Coca-Cola Bottlers Japan Holdings. And before I go further, I'm pleased to see and realize that we have a consumer group full of Coca-Cola Energy drinkers here. I see a lot of Coca-Cola Energy on the desks today.

Thank you very much for joining us today for our year-to-date second quarter 2019 earnings presentation for analysts and investors. I'm joined by our leadership team here at the front of the room. Following prepared remarks by President Calin Dragan and CFO Bjorn Ulgenes regarding year-to-date results, rest-of-year outlook and an overview of our strategic business plan, we will be happy to take your questions.

This presentation is intended for analysts and investors, so we ask members of the media in attendance today to please hold your questions for our media session scheduled separately today. Simultaneous translation in both Japanese and English language is being provided for today's presentation and during questions and answers.

Finally, before we begin, let me remind you that today's presentation contains forward-looking statements including statements concerning annual and long-term earnings objectives and should be considered together with cautionary statements contained in our supporting presentation deck. Both are posted to the Investors section of our company website at ccbj-holdings.com. Please look on our website for this information in both Japanese and English.

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

[Calin Dragan, executive]

Thank you, Ray, and good afternoon, everyone. I'm Calin Dragan, and thank you so much for joining us today. CFO Bjorn Ulgenes and I will be taking you through our year-to-date results as well our updated 5-year strategic business plan. I have also asked Mr. Takashi Wasa, Chief Marketing Officer at Coca-Cola Japan, to join us today. And he will speak later about how Coca-Cola and Coca-Cola Bottlers Japan are committed to working and investing together to create value through focused bets on innovation and better leveraging our portfolio of core brands.

Here on Slide 4, let me briefly summarize the key points of today's presentation. First, our year-to-date results. Beverage volume was down 4%, reflecting a 7% decline in the second quarter after the initial rollout of the large PET price increase in April. Remember that we were first to introduce this wholesale price increase, the first in 27 years, and there was a time lag of a couple of months when the shelf price of our products was higher than other beverage players. Business income, it's trending in line with the revised full year plan announced already in May, reflecting expected quarterly phasings in 2019 after the last year supply disruption.

We announced a goodwill impairment of JPY 62 billion in the second quarter. This impairment was determined as a result of changes in our business outlook and time horizons with the initial integration of Coca-Cola West and Coca-Cola East Japan in early 2017. This is a onetime noncash charge impacting our 2019 results. There is no change to our business income forecast or to plan interim and year-end dividend payments, but we have updated our operating income forecast for the full year. I would say that this is a sign for us. Operating like business as usual is no longer an option.

And this mindset is reflected in our new 5-year strategic business plan. We have developed the strategic plan focusing on cost savings not just from integrating companies but from fundamentally transforming processes, systems and culture and making smart investments for growth in order to grow volume and value share, improve profit margins and increase return on equity, in other words, a plan to put us back on a growth trajectory over the coming 5 years.

Before going into detail of the strategic plan, I would like to ask the CFO, Bjorn Ulgenes, to briefly review our second quarter results and provide an update on the outlook for the rest of this year. Bjorn?

[Bjorn Ulgenes, executive]

Thank you, Calin. Good afternoon, everyone. I'm Bjorn Ulgenes, CFO of Coca-Cola Bottlers Japan. Let me take a few minutes to discuss our year-to-date second quarter financial results and business performance.

On Slide 6, you can see a summary P&L including a segment breakdown of our beverage business and the health & skincare business. Revenue declined 3% on a 4% volume decline as we cycled the disruption in supply from the second half of last year and the initial impact of the large PET price increase which hit volumes in the second quarter. Year-to-date business income is trending in line with our revised full year plan announced in May. We had an operating loss of JPY 65.5 billion in the year-to-date period. This includes the JPY 62 billion goodwill impairment that Calin mentioned earlier. As you know we have experienced a sharp drop in profitability. Our midterm plan that I will discuss more later reflects the lower profit outlook for the planned period and the investments required to return to growth over the planned period. This will lead to a cash flow that could not support the goodwill from the integration in early 2017.

On Slide 7, you can see the main drivers of our year-to-date second quarter business income. As mentioned in our first quarter earnings presentation, we have been expecting negative phasing in the first half of the year as we cycle the impact of the disruptions from the prior year and continue to experience higher supply chain costs as we recover and grow production capacity and return to a more normalized supply infrastructure. And we are indeed seeing this in the first and the second quarters.

Let's start on the left-hand side of the slide, the impact of volume, price and mix. You can see a net JPY 7.3 billion decline in volume, price and mix. Beverage volume declined 4% overall with a 7% decline in the second quarter due to the initial impact of the wholesale price increase. The 3% decline in the vending channel and a 5% decline in the Convenience Store volume year-to-date is driving overall negative channel mix which has been partially offset by the price increase.

Fixed marketing expense or DME decreased JPY 2 billion driven by cycling of prior year marketing spend and a significant number of new launches last year as well as timing of our planned investments this year such as the launch of Coca-Cola Energy in July.

Raw materials and commodity cost pressures have eased to almost flat.

Due to elevated manufacturing costs driven by increased reliance on outsourced toll packers and lower manufacturing efficiencies, manufacturing results were negative JPY 1.2 billion versus last year. This has been an area of synergy delivery in the past, but our ability to deliver manufacturing synergies in 2019 will continue to be limited until supply capacity normalizes by the second quarter of 2020.

In others, although there was a benefit from a reduction in personnel expenses due to the voluntary retirement program and consolidation of retirement benefit plans, this was offset by increases in logistics and distribution expenses that are expected to continue into next year. Business income for the healthcare & skincare business decreased JPY 1.2 billion, reflecting weaker sales.

You can see our CapEx and depreciation progression at the top right which is in line with our full year plan to invest almost JPY 100 billion in CapEx this year.

You can find year-to-date volume performance with commentary by channel and category on Slide 8. Total beverage volume declined 4% in the year-to-date period and 7% in the second quarter, reflecting the initial impact of the wholesale price increase in April. The negative trend in vending continues. However, it has moderated over the last 2 quarters, supported by strategic price points and package size offerings to bring back consumers to the vending channel as well as increasing coverage of Georgia Japan Craftsman coffee.

Let me draw your attention to the Supermarket and Drug & Discounter channel wholesale revenue per case improvement driven by the wholesale price increase. On Slide 9, I'd like to provide an update on the wholesale price increase as well as OTC market share and retail price increase. We successfully initiated the first nonalcoholic ready-to-drink beverage price increase in 27 years, and our wholesale price for large PET packages went up as planned starting in April. As explained in our May presentation, sales volumes initially dropped, but over time, the volume has been trending in line with our expectations with better price mix and gross margin for large PET products.

You can see here that sales of large PET products declined in the Supermarket and Drug & Discounter channels after the price increase in the second quarter with significant improvement of wholesale price per case in both channels. Second quarter market share reflects the impact of the price hike, and we have focused our efforts on minimizing the impact on value share despite the volume share pressure.

And a similar story for retail price especially large PET packages which showed an improvement versus the market average as we were the first to initiate the wholesale price increase in the market. We have observed that retail prices for large PET have been rising since May for the industry as a whole although there were differences among companies.

Slide 10 provides outlook for the rest of the year as well as 2 examples of marketing initiatives in the third quarter centered on our flagship Coca-Cola brand. For those of you in attendance today, we have provided the new Coca-Cola Energy launched in July and slim bottle cans of Coca-Cola with the Japan National Rugby Team and Olympic Torch designs. Please enjoy.

In terms of outlook, as you may know, this year we experienced a much longer than usual rainy season, and this poor weather had an impact on July sales across the beverage industry. On the other hand, we expect a positive impact from cycling the disruptions in the second half of 2018, so a bit of tailwind in the all-important peak third quarter summer season. And as mentioned earlier, the goodwill impairment will impact our full year operating income and net income forecast. There is no change to our dividend forecast for this year.

On Slide 11, you can find our revised full year 2019 forecast reflecting the goodwill impairment. The impairment impacts our operating income and net income with no impact to our underlying business, so there is no change to our outlook for revenue or business income. This revised outlook is now the base for work underway with our newly developed strategic business plan. As you heard Calin say, this impairment is a signal that a status quo is no longer an option for our business. And we have approached the development of our new strategic business plan with this urgent mindset.

Now I'd like to ask Calin to join me to take you through introduction of the plan. Calin?

[Calin Dragan, executive]

Thank you, Bjorn. So let me go into more detail on our strategic business plan.

You may remember in May I said we faced a call to action to modernize and lead, to move from old ways of doing things to new and show a strong presence in this industry with the growth-based transformation. And I said we must now focus on doing the right thing for the long-term health of this business while also getting the day-to-day right.

This is how we have approached the creation of our new strategic plan. Our business faces challenges across the areas of growth, cost and capabilities. We need to seriously acknowledge these challenges and face them head on. It is true we have made some progress in the areas of cost improvements and revenue initiative, as you can see on Slide 14, but it has not been enough.

Let's move to Slide 15. This to me is one of the most important views of the state of our business right now. I know you are familiar with our midterm plan announced in June 2017, and it is clear that our results until now are not what we anticipated at that time. And it is not possible or realistic for us to make up that difference between now and the original time line of 2020. Reflecting this change in circumstances, outlook and time line, we have impaired JPY 62 billion of goodwill in the second quarter of this year. Clearly, we must transform. We are facing a critical turning point in our business, and I believe the next 3 to 5 years is our chance to reset and transform. This is our starting point. Business as usual is not an option.

We must transform our business, and we have mapped out a path not just to reset but to lead the way in terms of innovation and operational excellence in the future. We call this plan THE ROUTE to 2024. The first phase of this journey is actually the foundation we have built since our integration in 2017. Now that our company and systems are -- and processes have been put together, we are faced with the need to really reset and transform, to focus on significant cost savings and building capabilities for future growth over the next 5 years. In other words, we will drive agility and efficiency on the cost side while making front-facing investments to reignite the sales growth from a serious commercial transformation. This will represent a very big change. As I said, business as usual will not be an option, and I am confident that we have strong plans in place and solid partners at Coca-Cola Japan to make these plans a reality.

So please turn to Slide 17. Our strategic plan is fully grounded in the idea that fundamental change is necessary. Since I took my current role, I have involved the full management teams from both sides of the Coca-Cola system at Coca-Cola Bottlers Japan and The Coca-Cola Company in Japan. Over the 4 months of development, we have aligned on commitments to growth and the plan for fundamental processes, system and structural transformation with clear role-sort and an emphasis on delivering results and accountability. I have to say that this level of engagement and alignment from the full Coca-Cola system in Japan is something new in my experience. And it is critical to ensure our continued success in Japan.

Our new challenge is to reset and transform ourselves by installing what I call the software to truly run as a single integrated system and deliver next level of cost efficiencies, capacity and growth and ultimately, to be a leading bottler across the global Coca-Cola system in innovation and operation.

These cost savings will help us to prioritize the biggest opportunities we have. First and foremost, that is reengineering the entire vending value chain for growth. And second is expanding the space to sell through looking at our route to market and frontline capabilities.

So let me review the key strategic focus area of our plan. We have 3 main strategic focus areas: one, it's product and growth; two, infrastructure and cost savings; and three, enablers to make things happen. All are shown here on the left side of the Slide 19 in the Coke bottle image. As I mentioned earlier, both sides of the Coca-Cola system have been fully engaged in putting together this business plan. As a good example of this engagement, I would like to ask the Chief Marketing Officer of Coca-Cola Japan, Takashi Wasa, to join me on stage to briefly talk about product and portfolio strategy as one of the key initiative in the important area of products and growth.

Wasa-san, please, stage is yours.

[Takashi Wasa, executive]

[Interpreted] Thank you, Calin. I am Wasa from CCJC. It is a pleasure to be here today.

Calin mentioned that we have worked in strong partnership with Coca-Cola Bottlers Japan as they developed their strategic plan. We created value through our strong -- we create value through our strong portfolio of core brands with customer -- consumer insight and a full pipeline of innovation. And Bottlers deliver value through customer engagement together with quality and efficient manufacturing and sales activities.

At Coca-Cola, our portfolio strategy has 3 elements: one, driving core portfolio; two, developing customer and channel-specific products and services; and three, entering new areas or white space.

Let me give you some examples. First, let's talk about how we leverage our core portfolio. At Coca-Cola, we nurture our brands through sharpening our brand edge. Brand edge is the relevant features that give our brands their competitive advantage. For example, let's look at brand Coca-Cola. Coca-Cola's brand edge is uplifts people to unite and bridge divides. All of our programs for Coca-Cola must live up to sharpen the brand edge. Products innovation examples are Coca-Cola Frozen and Coca-Cola Ice Cubes sold at Koshien for a pilot test, which provides new -- renewed Coca-Cola experience in addition to our core portfolio. Our partnerships with Olympics and Rugby World Cup are about creating moments of upliftment in celebrating togetherness. And at events that gather people with high affinity to our brands such as Christmas, we offer the Coca-Cola Ribbon bottle to add color to events for families and friends gathering. All Coca-Cola brands, product innovations and marketing campaigns must live up to this brand promise to sharpen our edge.

Next are some examples on customer and channel-specific initiatives. Let me give an example in convenience stores with 7-Eleven Japan. We launched Hajime brand green tea [ one per day ] developed with fully recycled PET, made 100% from PET bottles collected at 7-Eleven stores. This is the world's first to establish fully closed-loop PET bottle recycling, and this is a great example of how we can partner to create value.

The next important channel is vending. We have developed a portfolio of products exclusive to our vending channel to offer something new in vending to our customers. And we will continue to leverage the successful Coke ON mobile app platform offering new functions such as Coke ON Pay cashless transaction.

Our online business is rapidly growing led by 3 reasons: one, expanding marketing programs within online customer sites; two, strengthening our online portfolio through functional and FOSHU products; and three, by using our Coke ON platform to drive traffic to online customer sites. As for supermarkets, Bjorn-san has talked earlier, so I will skip this part.

Finally on Slide 23 I will give 2 current examples on how we explore new opportunities. There is still a huge market opportunity for Coca-Cola to grow. Where we currently play, ready-to-drink soft drinks market is approximately JPY 5 trillion. If you look at all other categories including alcohol, non-RTD coffee, chilled drinks, opportunity is an additional JPY 7 trillion. As an approach for these new white spaces, we are taking an agile approach where we work as a project team cross-functionally between CCJC and CCBJI, allowing us to move faster in the market.

Our first venture into the alcohol category is the pilot test of the Lemon-Dou brand in the Kyushu region. The pilot test that started in 2019 at Kyushu has been extremely successful, and the team of Lemon SKU is the #1 SKU in the Chu-Hi category. Another good example of the progress we are making in expanding into new categories by leveraging our core portfolio is Coca-Cola Energy. This was launched about a month ago, and we are very pleased with this progress so far. Today, I have talked about Lemon-Dou and Coca-Cola Energy as examples, but there are other examples of how Coca-Cola is approaching growth opportunities differently such as the recent announcement of an investment in [ India ] with [ I&A ] and our initial test launch on innocent smoothies in Japan. We would like to continuously launch new products to activate the market.

This concludes my short presentation. I have covered 3 growth strategies: strengthening our categories; customer -- consumer-exclusive products and services; and entering white space.

Coca-Cola Japan will further strengthen our partnership with Coca-Cola Bottlers Japan to create new values in the market.

Now back to Calin.

[Calin Dragan, executive]

Just as CCJC is responsible for value creation and innovation, CCBJH is accountable for execution of our transformation and value delivery.

Let's talk about one of our most important initiatives to drive both growth and cost savings, the end-to-end reengineering of our vending business. Simply put, we need to reignite growth in the vending channel, and we do that in 2 ways.

First, through horizontal growth or what I call column expansions. Over the past few years, we have removed many unprofitable vending machines from the market. This was important, but now we need to start growing the number of machines in profitable locations which we can do through new placements or alliances with other manufacturers or third-party operators.

And second, we need to sell more in our existing machines. We do this through vending-exclusive products and innovations such as Coke ON that Wasa-san has just discussed. We also need to think about our machines as if they were our own retail stores with valuable shelf space instead of just another distribution channel.

At the same time, we are already reengineering the end-to-end vending value chain. You may remember we tested a new way to operate last year in the Shinsuna area in Tokyo. We were encouraged by our learnings, and we are taking that work to a new level including in service operation to reduce costs, leveraging digital and investing in frontline sales capabilities to improve the productivity of our sales force. This is an area of heavy focus and commitment to invest to reset, stabilize and grow the important vending business.

We are also focusing on expanding the sales space to capture growth potential in retail channels through customer activation and management. We have a competitive advantage, our own sales force. And we are redeploying our field force in order to put more resources in front of customers. We are investing in digitalization and sales force automation and building up their competencies.

Looking at the current market dynamics, we see opportunities in new packages and new price points. And we will update our portfolio leveraging the investments we have made in the supply chain capability.

We need to sharpen our customer back thinking anticipating customer needs and delivering on our promises. Building capabilities will be so important. By applying global best practices and investing in our people, our resources can be redeployed more efficiently. We can allocate more investment where it matters.

We continue to have significant opportunities to leverage our infrastructure to drive cost savings. We have a good track record here and I believe, a good line of sight to deliver savings plans.

In supply chain and manufacturing, we are well on our way to deliver our project Shinsei logistics network plan with construction of mega distribution centers on schedule. We expect to open 2 new warehouses this year, providing central capacity and new capabilities in automation and digitalization. We are in the process of rolling out 7 new high-speed and efficient manufacturing lines this year and through the second quarter of next year. And we will integrate our vending service model into one efficient and sustainable consolidated supply model.

Further, on the back office, we continue to centralize our indirect and direct procurement spends, and we have been rapidly expanding our shared service organization by consolidating transactional processes into the most cost-efficient centers of excellence. This work will continue. Finally, the multi-year rollout of the Coke One+ ERP system will be completed later this year.

We have talked about many changes to what I call the hardware of our business. But without an equal investment and emphasis on our software side, we will not be successful. We are building a performance culture grounded in accountability. We will provide more opportunities for employees to learn English, improve digital skills and build leadership capabilities in managing large and complex organizations.

The next 2 slides illustrate our sustainability goals which we call THE ROUTE To Shared Value. As part of our strategic business plan, we have identified priorities across areas related to environment, society and governance, which you can see here and which are incorporated in all aspects of the business plan.

Let me specifically call your attention to the World Without Waste program. Coca-Cola Japan recently announced ambitious targets towards a world without waste, and we at Coca-Cola Bottlers Japan are committed to delivering on this growth. The Coca-Cola system is undertaking activities built on the 3 pillars of design, collect and partner to resolve the problem of packaging waste. We plan to reach a target of 50% recycled content in our PET bottles by 2022 and 90% by 2030. And we look to become a model case for PET recycling in the world by deepening collaboration with excellent recycling schemes in Japan.

So from here, I would like to ask again Bjorn took come to explain what all this means in numbers. Bjorn?

[Bjorn Ulgenes, executive]

Thank you, Calin. Bjorn Ulgenes here again.

Let me present our financial targets and framework for the new strategic business plan. We said that this is a plan to reset and transform and set the stage for future growth. We are targeting JPY 49 billion in business income by 2024. And you can see on Slide 31 the expected phasing of our business income over 5 years.

Let's look at the 2024 KPIs that we have set for ourselves as a picture of success. We plan to improve revenue by 0.5% to 1% by 2024 with volume growth of 1% to 1.5%. The delta between volume and revenue comes primarily from channel mix as retail channels grow faster than the vending channel.

Volume and value share growth are both important. We have seen declines in our volume share over the past couple of years that we need to recover through smart volume growth. And our goal is to grow value share.

Business income margin and EPS are both key metrics for our profitability. We expect to return to a business income margin target of 5% to 6% by 2024, and normalized EPS should improve threefold. Normalized EPS would exclude nonrecurring items such as this year's goodwill impairment and costs related to our voluntary retirement program.

Finally, we are focused on improving our ROE from its current low point to 5% to 6% in 2024 while maintaining stable dividend payments during this period of transformation. Business income growth of the 5 years will be driven by cost savings and investments for growth, as Calin outlined earlier in the presentation.

Let's look on Slide 33 at the drivers of our strategic plan. On the left in the column volume, price and mix, we expect an increase in marginal profits due to an increase in volume especially in the first half of the midterm plan as we benefit from initiatives to expand selling space and pricing and packaging options. Channel mix is slightly negative as retail channels outpace spending. DME will grow by JPY 6 billion over the period, reflecting an increased focus on growth and enabling our sales force to compete more effectively in the marketplace. CCJC is also stepping up its marketing activities for brand building, so we are working very closely together to drive profitable growth.

It is no secret that we're facing higher costs in Japan from rising labor cost to raw materials inflation. We expect an increase of approximately JPY 8 billion, but we will have to make up for cost savings initiatives. And we have identified JPY 35 billion in net cost-saving opportunities through transformation including ongoing initiatives from our initial midterm plan.

Finally, we expect our health & skincare business to deliver approximately JPY 600 million in growth over 6 -- over 5 years.

On Slide 34, we provide the major sources of our JPY 35 billion in cost savings through 2024. We have 3 main sources of cost savings: commercial; supply chain and procurement; and back office. Of the total JPY 35 billion in projected savings, we expect approximately 40% each to come from commercial and supply chain, respectively, and approximately 20% will come from back office and IT. This JPY 35 billion in savings also includes the ongoing delivery of synergies and savings from the initial midterm plan announced in June 2017. This includes supply chain-based savings that should start to deliver again once we get back to normalized supply capacity in Q2 of 2020 and the ongoing buildout of our project Shinsei logistics network.

Finally, let me remind you that we are keeping a consistent approach to shareholder returns through what we have called our financial framework for value creation. Our priorities continue to be, first and foremost, investing for growth. And our growth plan requires investments over the coming 5 years. We anticipate the total CapEx spend over the 5 years of approximately JPY 350 billion. We will increase our leverage while maintaining an acceptable credit rating; indeed, have plans to issue up to JPY 150 billion in bonds this year. During this transformation period, we will prioritize paying a stable dividend while considering other options such as share repurchases as appropriate. And as you can see again, our target for ROE in 2024 is to get to a 5% to 6% level.

Now I would like to ask Calin to join me on stage again to wrap up today. Calin?

[Calin Dragan, executive]

Thank you, Bjorn.

So let me quickly summarize what we have discussed today. We are tackling chronic problems. The goodwill impairment we announced yesterday is a warning sign that we cannot continue as we have in the past. You will see an end-to-end reengineering of our vending business to stabilize and recover. And we are investing in and leveraging enablers such as our supply chain and capabilities across the company.

We have clear financial targets and a consistent framework for shareholders value creation. And we are already working in new ways across the Coca-Cola system with a focus on getting things done with clear accountability and rigorous performance tracking.

I came into this new role saying we must absolutely focused on doing the right thing for the long-term health of this business, and I'm more convinced than ever that this is the route that we must follow. Our results this year represent the crisis that will force us to work differently for change, and I am committed to leading this change to return the business to growth. I look forward to interacting with you over the coming years and to providing updates on our progress towards 2024.

And now let me ask Ray Shelton to come back on stage for question and answers.

[Raymond Shelton, executive]

Thanks, Calin. Let me remind you that this Q&A is intended for analysts and investors, so we ask members of the media in attendance to please hold your questions for our media session scheduled separately today. If you would please provide your name and company when asking a question and please try to ask one question at a time as we are translating your questions into English.

All right, I think we're ready for Q&A. Yes, please, right here.

[Nobuyoshi Miura, analyst]

[Interpreted] I'm from Citigroup Securities. My name is Miura. So I have one comment I'd like to make. Today, from CCJC we have a representative, and this is really innovative. I haven't seen this kind of event in the past. And just one thing I would like to say. In the past decade as the Coca-Cola system, the share for the company has continuously declined. Even the BJI management people really tries hard, I know that you have been putting your efforts, but the top line is going down, and it's a dilemma. I think this is the root cause of everything. It's your problem. So I think there's 3 reasons why the share has gone down: number one, you are not quick; number two, no innovation; number three, the marketing organization was not consistent. It was kind of changing over the time. So due to these 3 reasons, I have heard that Coca-Cola has dropped their share, in my understanding. So in the coming 5 years, I understood that you're going to really collaborate together more than ever. But the view you have on the top line, what is the difference versus the past versus today? Are we -- are you going to be able to grow your top line because of this new collaboration? We would like to know.

[Raymond Shelton, executive]

So the question was specifically around share performance of the Coca-Cola system over the last number of years and the question about how The Coca-Cola Company and Coca-Cola Bottlers are working together and differently, what's changing now. I'd like to maybe start the question with Costin-san, and then we'll take the question over to Wasa-san as well, if we could get both to provide some input.

[Costel Mandrea, executive]

My name is Costin Mandrea. I'm in charge of commercial for CCBJI. Thank you, Miura-san, for the question. And indeed, it's the first time we come together in front of investors to show the new partnership we have with Coca-Cola Company and the way we plan to work closer from now on. I think the way our system works is very simple. The role of Coca-Cola Company is to create value, and Wasa-san explained to us what they are going to do in terms of portfolio edge, how to strengthen our brands. And our role as a bottler is to deliver value through execution basically, through redeploying the resources we have every day in the market, by creating updated capabilities, so bringing the capabilities of our organization to the world-class level and as Calin said, benchmarking, bringing successful practices and then redeploying. So working like this, we are very confident that we'll be able to drive the top line, and we are confident that we'll be able to bring share back.

And just to remind you one example where we pioneered from 1st of January, we created vending business unit where, for the first time, we co-located the team, and we have common targets. It helped us to deliver faster, and it helped us to execute all the innovations in an accelerated way.

And we see results in vending. The trend is improving versus what we saw for the last years. And the first good examples is the performance of coffee where we are gaining market share in vending consistently for the last few months. So Ray, for the rest of the answer, I suppose Wasa-san will have it?

[Raymond Shelton, executive]

Yes, let's pass it on to Wasan-san, please.

[Takashi Wasa, executive]

[Interpreted] Thank you very much, Costin-san, and thank you very much for the question as well. Looking at the past decade or 2, the Coca-Cola system share has gone down, and there are various reasons behind that, but we are very strong in the vending machine channel. But unfortunately, the shoppers are leaving the vending machine channel, and that's one of the reason why we have declined.

And sparkling is a category that we are really stronger now, so coffee too. If I look at the categories, there are categories that we are strong in and versus that we have categories that we are low like tea, water. And for the water, the sparkling water that are like straight drinking types, the sparkling waters are really building. But unfortunately, our share in the sparkling water is still low. So this is the situation. We need to figure out how we are going to recover the share in this kind of circumstances, and we have some answers. Once again, what we have to do is we really need to restrengthen our sparkling category, which is our pillar. I talked about Coca-Cola in my presentation to explain what kind of brand edge we are after. And in Coca-Cola, we say Coca-Cola uplifts people, unite and divide, that is like the definition, and remove the gaps, connect the people. And to do that we need to emphasize the brand edge. And once again, as Coca-Cola, we want all our consumers to drink Coca-Cola once again. And within the category of sparkling, we have Fanta, we have Sprite, we have Canada Dry. We also need to think how we can strengthen these kind of brands as well.

Next, Georgia. We had high share, but in the past of couple of years, unfortunately, the share has come down. Of course, the reason is due to the vending machine, but another thing we need to admit that we were behind in innovation. Emerald Mountain is one representative of coffee products which has a strong taste. It's a canned coffee. But the trend is towards like bitter, black, café latte, and we were not really quickly to jump on this new trend. And from the SOT can to the resealable, we were kind of behind to jump on that trend as well. So there are consumers that are after these new trends. We need to capture them and advance to use them in our innovation.

And it's not that we were doing nothing. Looking at the past decade or 2, in the tea category, our share was extremely low in the past. But due to our brand Ayataka,, we were able to gain high share in the tea market. The water market, we didn't have a national brand, but we established this really good brand I LOHAS for the small-sized PET bottles. And for the water, for tea and for sparkling, for energy, all the categories are growing, so I really believe that we should be introducing strong innovative products in those categories. This is going to be our core approach.

And another important key point is, as I mentioned in the presentation, there are white spaces in the market. So what I was covering, the sparkling, et cetera, that's like the JPY 5 trillion market. And in that JPY 5 trillion market, it's true that our share declined a bit. But the white space, what I mean is like the alcohol market, the chilled beverages, the non-RTD market, the total is JPY 7 trillion for that market. So JPY 5 trillion plus the white space, which is JPY 7 trillion, so right now with CCBJI, we are considering which white space we should go after. And there are some examples that I have introduced that are things that happened in the past: the one that we had in Kyushu, the Lemon-Dou success; and for energy, we had the Real Gold product as well. But when we say new, it's the energy boost category like Red Bull, Monster are the competitors, but that's like a unique category in the energy category. We didn't have a brand in that area, so we launched Coca-Cola Energy. So what we're after is this new white space JPY 7 trillion, and this is what we are considering right now and will be in our 5-year midterm plan. And I hope that we will be able to provide many surprises to you in the future.

[Calin Dragan, executive]

So if I may add to this, Miura-san, and thank you so much for the question which, by the way, I have to say I could anticipate that, okay, Calin, what would be different this time, or why should I -- why should we believe you. And that will answer the first question.

I just want to give you another aspect of this collaboration that we just started. We create this plan together, and it's a moment of turnaround for the business in Japan so that both sides of the system understood very well the gravity of the situation, hence, everybody enrolled properly in this work. What I can tell you here, it's the presence of Wasa-san here at the table, it's not cosmetics -- I don't know how to put it. It's not something just for diversity at the table. It's something really meaningful. But the other thing, that you don't see it and so you have to trust me, is that during the last months, during the discussions that we had, there was no tatemae money probably for the first time. There was just honne discussions on how are we going to move this on. And [Foreign Language], I learned about tatemae and honne when I came 10 years ago, but that's what we were cutting very, very, very short. We were not tolerating that because we don't have time for that right now. So -- and here we are. So that's pretty much what I wanted to add, and sorry if I was not truly politically correct.

[Raymond Shelton, executive]

Thank you for your honne answer, Calin. Okay. Next question, please? Yes, please, here at the front.

[Makoto Morita, analyst]

[Interpreted] Morita from Daiwa Securities. So your pricing strategy going forward, I have some questions about that. So on 32, I'm looking at your KPI. In terms of the revenue growth, your volume growth is only about 1 -- it's about 1% more. And also, your value share has always exceeded the volume share. But this time around, maybe it's only an initial stage, but the volume share will probably exceed the value share. So you point that out. So I want to ask you with honne. So volume share, I understand that's important, so in order to do that, realize that you're using pricing strategy to win back the share. Is that your sort of determination that you're showing, trying to demonstrate here? Also, can you give us your pricing strategy? How are you going to get the volume share?

[Raymond Shelton, executive]

That was clear but related to the role of pricing and the relationship between volume and value in our long-term KPIs, so I'm going to ask Bjorn to address that question, please.

[Bjorn Ulgenes, executive]

Thank you, Morita-san. As we developed the plan, which you saw Calin talked about initially, there's basically 2 stages to it: what we call the reset and transform and then transforming the business into more high-performing organization. In the beginning, you also saw that we will invest for growth. And basically from a volume standpoint, we will invest for shelf because we have lost some shelf during the last couple of years. And then as the business stabilizes and we start growing again, then I think it's fair to say volume and value will come closer together. So your observation is correct.

[Makoto Morita, analyst]

[Interpreted] Just a clarification. So in 2022, that's your reset timing, your shelf space will be expanding, so your investment will be done. And so after you gain back your share, you'll again refocus on value share. So is this a 2-step process?

[Raymond Shelton, executive]

Bjorn-san, do you want to take that as well?

[Bjorn Ulgenes, executive]

Yes. Thank you. I think it's fair to say yes, that we will start with the volume using our marketing investments to again get shelf space, as we talked about, or columns, as Calin alluded to. And as this revenue initiative starts really kicking in, then it's fair to say we will work more on the value side. So agreed.

[Makoto Morita, analyst]

[Interpreted] Just one more thing and just a follow-on question. In the past, in your initiatives in the past, when you went after volume, you were engaged in a price war. And so basically, everyone lost out on their profits. I think that's your experience, lessons learned. You understand that fully, and I'm sure you understand that and that you're still implementing the strategy. So how are you going to make sure that no one loses out on this, that you can go and get the volume share but still be profitable? How are you going to secure that?

[Raymond Shelton, executive]

She was clear, but I'll repeat it's a question on as we look to the relative roles of volume and value, how are we thinking about and how are we making sure that we're doing the right thing for the business in terms of overall market. Yes, Bjorn?

[Bjorn Ulgenes, executive]

Thank you. The strategy, as we said, is initially to reignite our marketing investments. And you saw from the waterfall chart that we will be putting significant amount of money back into marketing. That marketing is not only about shelf space. It's also about how we smarter get in and partner with the customers. It's about how we smartly expand our vending portfolio, as Calin talked about. And it's also smartly how we work, for instance, in the convenience channel. So it will hit all the major channels as we move into the first and the second phase of the plan.

[Raymond Shelton, executive]

Costin, do you have anything you'd like to add?

[Costel Mandrea, executive]

Right. So on top of what Bjorn said, let me provide a different angle. So some time ago, we came in front of you and say our new indicator aligned with Coca-Cola Company's revenue, and it stays revenue. Now what we see going forward, we see the channel mix being -- continuing to evolve in ways that over-the-counter channels will grow faster than the vending channel, and revenue per case, of course, are different. So when we go forward, you may say that seeing a different NSR per case can mean we are going to a discounting strategy. And I want to make it very clear. No, we'll not go back to discounting. And let's remember that on 1st of April, we were the first company who had the courage to increase prices after 27 years. And what we see right now in the market, we see prices increase -- we see this across the industry. So for us, the revenue, it's revenue, it's a combination of volume, price and channel mix. And we'll act very wise among all 3 indicators. So to give you an example, vending, vending was decreasing for 18 years, and we identify an opportunity to reduce the size of SOT can at a magic price point, JPY 100. What's happening? Transactions are growing, we bring consumers back to vending, and we are winning market share in coffee. So we stay committed to our strategy of driving revenue. And yes, as we move forward, you'll see moves across all 3 indicators. I hope this gives you the complete perspective of our position.

[Raymond Shelton, executive]

Thank you, Costin. Another here first, yes?

[Hiroshi Saji, analyst]

[Interpreted] I'm Saji from Mizuho Securities, and I want to ask about investment. So JPY 350 billion for 5 years is a number we have seen.Originally, the investment burden will be very heavy at the beginning years. So if possible -- sorry, JPY 35 billion, the costs that you are going to spend and also the burden on the fixed costs and the depreciation, I would like to know the burden. And for the profit targets for the coming 3 years, we have the numbers, but I want to know when you are planning to hit breakeven. So in the first half of this midterm plan, how much are you going to do in terms of cost reduction? And what is going to be the investment like CapEx impact and where is going to be the breakeven point is my question.

[Raymond Shelton, executive]

Looking on the investment requirements we've laid out for JPY 350 billion, what is the phasing of that investment and the phasing of cost savings, in other words, the phasing on how we're thinking about profit over the coming years. Bjorn, would you take that, please?

[Bjorn Ulgenes, executive]

Yes. Thank you, Saji-san. Yes, we have gone out with the approximately JPY 350 billion CapEx. And what is important here is to gain linkage with the phases that Calin discussed initially because in the beginning, we will have to invest in supply chain, as we said originally. But in addition, you also heard we will start investing in vending. And over time, we still have to maintain all the maintenance CapEx we have across our 16 old plants, but we're also getting a new plant in Q2 next year. So clearly, there's a CapEx burden that are going to come in the first phase. Strategically, about 40% of this CapEx will be truly incremental either, as I said, for capacity as we buy new lines, we replace lines, and we renew plants and warehouses. And also in here, it's important to consider that this planned period will see the completion of the supply chain Shinsei projects. Maintenance CapEx though is also something we have to consider because across the 16 plants, we also have plants, some are newer, some are older. And we still have to make sure that all of that is appropriately maintained and catered for.

When it comes to breakeven, we look at the 3% to 5% -- 3% to 4%, sorry, business margin by 2022, as we stated. And we believe we will get to a 5% to 6%, as we said, return on equity by the end of the period.

That concludes my answer. Thank you.

[Hiroshi Saji, analyst]

[Interpreted] Just one thing on the vending machines. You talked about this, and you talked about the 1-coin strategy that worked. That means that the unit price is going down, but maybe the drop you are experiencing in volume is becoming lesser. So I guess the profit you are going to get from the vending machine channel will be very important. And you have invested in vending machine, right, for digitalization. And due to this kind of investment, what is the decrease in costs that you have seen in the operational cost for the vending machines due to the investments?

[Raymond Shelton, executive]

The translation? So the question's specifically on vending. If we're investing in vending, we are seeing some price coming down, on one hand, but we also have been investing in cost reductions, et cetera and so how have we seen improvements in vending up until now certainly on the cost side? Saji-san, was that -- that was the right question, yes?

[Bjorn Ulgenes, executive]

Up through now.

[Raymond Shelton, executive]

Or going forward, as you like.

[Bjorn Ulgenes, executive]

Yes. As you saw in the waterfall, we have accounted for about JPY 35 billion of synergies or cost savings or cost efficiencies over the planned period. And about 40% of that is inside the commercial arena. In other words, vending channel is part of that. And when we have done the costing savings for the future, vending is a key and central element of that, as you heard both Calin and Costin mentioned. So we have accounted for savings, of course, in the vending channel as part of that synergy generation. So of the JPY 35 billion, I think it's fair to say about JPY 17 billion are truly new activities. You remember the original targets of JPY 25 billion plus the JPY 5 billion for Shinsei we said originally. And we now state JPY 35 billion as synergies in total. So that means we have to generate about JPY 17 billion of new savings, if you can call it that. In the supply chain arena, as you heard Calin said in the beginning, I think it's safe to say we will return to the synergy track again, which is what we had in the prior midterm plan. But from the commercial standpoint, we are generating new synergies, and vending is part of that 40% going forward, so it's baked into the plan.

[Raymond Shelton, executive]

Costin-san, would you maybe like to give a little color on kind of how we're thinking about cost savings in vending?

[Costel Mandrea, executive]

Thank you. Let me give the big picture for vending. Calin has explained we have 3 ways of bringing vending back to growth. First one is we need to increase the number of columns. And for the last years, you know we draw a lot of vending machines. We stopped this, and we told you we are not pulling machines in a market. But we'll do different for the midterm plan. We'll go aggressively into placing new machines in profitable location. And we'll also look for potential partnership. We see what's happening in the market. And when we look for potential collaboration with other companies, that will help us to increase the number of columns, so more columns. Then more sales per column, and here, we spoke a lot about the Shinsuna model which showed us is working very well. And another example on RGM, revenue growth management, activities being SOT can, magic price point and the new SKU introduction. We are confident this will continue with the help of Coca-Cola Company will increase the sales per column.

But then what comes very important is how do you extract costs out of this massive operation. We have today more than 6,000 trucks, and we have more than 300 sales centers. But the way we operate these machines is exactly the same like 40 years ago. You have a driver which is loading the truck, doing all the papers and stopping, parking, picking, filling the vending machine, take the money, come back to the warehouse and unloading. This is so outdated. So what we did, we looked at this process step by step, and we say what is really important in order to increase the sales for vending machine and what we can centralize and then extract costs out of it. So imagine the new life in a -- the new day in the life of a vending operator today. You show up 7:00, let's say. You take the key of the truck. The truck is already loaded with everything that you need by machine for your route today. You have a digital route. You go. You start filling the machines. You come back 3:00, let's say, in the sales center. You give the keys. You go home. In 30 minutes, we reload the truck for the next route, and we do a second trip for the day. And this one will help us to reduce the number of trucks and to consolidate our footprint of warehouses. This is something that we are working right now. We see some good initial results for the test, but this is what will be super different going forward. Of course, one vending business unit which we already tested and of course, Calin said about a new culture of performance and accountability.

[Raymond Shelton, executive]

Thank you. Okay. I'm conscious of time, but I know we went a little bit over, so we got a question up here, please.

[Ritsuko Tsunoda, analyst]

[Interpreted] Tsunoda from JPMorgan. Thank you very much for what you have just talked about, about vending machine operation. It's not just about simple cashlessness, so going cashless for the vending machine. It's a fundamental change to your operations, so this was a great insight.

Is there any other countries around the world that you have already implemented something like this? Or is this something that will be first implementing in Japan? Or is this an initiative, a new system that you're developing uniquely here first, originally?

And then the other thing is among the JPY 3,500 billion (sic) [ JPY 350 billion ], the impact on P&L, I think you explained this as net synergies. And through CapEx, you will have increasing depreciation costs. So on a gross basis, and it's plus, minus and net-net, this is JPY 3,500 billion (sic) [ JPY 350 billion ]. So can you give us just the breakdown in how this works, the amount? So I guess that's 2 questions. I'm sorry.

[Raymond Shelton, executive]

Take the first?

[Calin Dragan, executive]

I will just try to answer -- open the question, and then I'm going to pass to Costin for a more concrete answer, Tsunoda-san. But I think that that's a very fair question as well. So for the very first time in Japan, we are going to tackle the entire value chain of vending. And we are doing that because we are the most interested into it. We are the biggest player in vending in Japan, and we are unique in the world of having 1 -- almost 1 million machines in the market. You asked if there's somewhere else -- nobody reengineered completely the vending in the world. However, around the world, there are buckets of excellence in term of online vending machine management, about filling of the vending machine management, about handling the warehouses, which we are going to do what probably the grandfathers of our management in Japan have done. They went 40, 50 years ago abroad. They brought an idea back to Japan, and they made it 10x better. This is what we want to do. We are going basically testing concepts right now that are from around the world, some of them are developed here locally, but we are going to tackle it end to end. And trust me, we are now testing on a sizable area. And if that works, the rollout will not wait. So that's the beginning of the answer.

Costin, any specifics if you want to add?

[Costel Mandrea, executive]

No. Thank you, Calin. You conveyed the message.

[Raymond Shelton, executive]

Briefly in terms of the specifics.

[Costel Mandrea, executive]

Just one example what's unique in Japan, it's Coke ON. We have 350,000 machines that are equipped. We are growing the number. We have more than 15 million downloads, and we have millions of consumers using it. That's an incredible platform that we have. It's reliable. We integrated -- we made it easier to pay with it recently. And we have together with Coca-Cola Company great plans to exploit this across the channel. So -- and we have many, many examples, but as Calin said, the entire world is looking to Japan to understand how to operate vending, and we'll take it to the next level.

[Raymond Shelton, executive]

Thank you. And Bjorn, that last bit of that question was around the net savings of 350 -- JPY 35 billion, sorry, that we have announced.

[Bjorn Ulgenes, executive]

Yes. So as I said earlier, the JPY 35 billion synergies we plan to create over the planned period, about 40% of that relates to the commercial area. And inside there, we have vending. So inside the synergies, we have included the depreciation, for instance, on installing extra vending machines, so that's included. Thank you.

[Raymond Shelton, executive]

Thank you. Any other questions?

[Leon Rapp, analyst]

Leon Rapp at Macquarie. Just to want to get a bit more sort of on vending in particular. How close are you to the holy grail of understanding real-time inventory situations in the vending machines? I mean do you sort of take a forecasted expectation what sales will be based upon weather, cloud cover? And how much do you think you can extract that with the implementation of IT? Do you think there's a lot more to come out in terms of lowering the cost base upon those implementations?

[Raymond Shelton, executive]

Thank you. Costin, do you want to take that?

[Costel Mandrea, executive]

Yes. Thank you for the question. Very good question and very big challenge that we have. Currently, 30% of our machines are online. So for this 30% of the machines, we are using very smart algorithms that are helping us to predict what will be sold depending on traffic, if it's a matsuri or not, if the weather is going in this direction or that direction. Our problem is with the rest of 70%. So we decided to take a different approach during this midterm plan. We moved to pre-sell. So basically, I segregate the role of the filler into 2 roles. I have one person which is doing every morning going and checking every machine, downloading the sales data, uploading in the central server. And suddenly, I have 100% of my machines online. And then the algorithms are going and telling this product we expect to sell more and so on and so forth is linked with my route planning. So very simple way of doing, different type of car or even motorbike for doing this, and then I can focus the truck driver only on filling and managing the customer relationship. So a bigger area of interest, we're working here with best names in the world. You know most of them. And we are super excited that it's a hybrid between technology but also a very simple process decomposition.

[Calin Dragan, executive]

But ideally -- if I may jump into this, ideally, this is where we want to go for all the machines, so a big chunk of investment that we are going to make in vending will go behind online vending.

[Leon Rapp, analyst]

And how far down that process do you think you are currently? Is this a project that you are fairly much now, would you say, 30% through? And how fast can you roll this out, do you think? Is this a thing that will take quarters or years?

[Calin Dragan, executive]

Will take years. It will take years. This is not a matter of just buying the technology and deploying it. Sorry, this is a matter of capability building. It will be naïve of us to believe that after we have operated this business just with trucks and with truck drivers, that overnight, in a couple of quarters, by placing a couple of billions of dollars -- sorry...

[Raymond Shelton, executive]

Yen.

[Calin Dragan, executive]

Billions of yens behind the online vending machines, suddenly we have a sea of information, ocean of information, and we are going to be able to manage that. That's not going to be the case. It requires a certain set of capabilities behind an entire brain power and technology to process that data. And this is what we build as we speak. So to buy technology, it's easy. To run it, that's the challenge. So -- and probably that's what's slowing the entire industry down.

[Raymond Shelton, executive]

All right. Thank you very much. We have certainly gone over our time. I appreciate everyone's attention and your patience. Please do follow up with the IR team for any additional questions. We look forward to speaking with you. Thank you very much.

[Calin Dragan, executive]

Thank you so much. Appreciate it.

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