Coca-Cola Bottlers Japan Holdings Inc

TSE:2579

Earnings Call Transcript 2020-Q2

[Raymond Shelton, executive]

Thank you for joining us today for our second quarter 2020 earnings call for analysts and investors. I'm here with President, Calin Dragan; CFO, Bjorn Ulgenes; Head of Commercial, Costin Mandrea; and Mr. Takashi Wasa from the Coca-Cola Japan Company. Following prepared remarks, we will be happy to take your questions.

This presentation is intended for analysts and investors, so we ask members of the media listening to today's call to please hold your questions for our media session scheduled separately today. Simultaneous translation for both Japanese and English is being provided for today's presentation and during Q&A with separate telephone lines for Japanese and English.

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

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

[Calin Dragan, executive]

Thank you, Ray, and good afternoon, everyone. I'm Calin Dragan, and thank you so much for joining today's earnings call. Today, we will present our year-to-date second quarter financial results as well as updates on various strategic initiatives and current conditions in Japan market, given the ongoing volatility.

But before we start, I would like to express my sympathy and condolences for those who have been impacted by the coronavirus as well the heavy rains and flooding that many parts of the country experienced in July. Our mission at Coca-Cola Bottlers Japan is to provide happy moments to everyone while creating value. And this is so important during these tough times.

Our first priority has been the health and safety of our employees, our customers and the local communities where we live and work. And we will continue to ensure a safe and stable supply of essential beverages and services to all, including support to our customers and business partners who may be struggling because we are all in this together.

So let's start by looking at an overview of our first half performance on Slide 6. The second quarter reflects the full weight of the government's emergency declaration period and a decision to postpone the Olympic Games, which will impact our marketing plans for the year. Sales volume was down 18% in the quarter and 11% year-to-date. We have continued to target an appropriate balance of value and volume share performance in a tough market this year. While also making a pivot from the original Olympic-heavy 2020 marketing plan.

Though the market has experienced a decline in vending, consumer traffic and sales volume during the COVID-19 outbreak, we are making progress including steady market share gains during the first half of the year. During the second quarter, we were able to quickly start our cost-saving initiatives that are helping to offset the current year top line pressure. In fact, we achieved more than JPY 10 billion in cost savings year-to-date, and these urgent efforts will continue for the rest of the year.

At the same time, we have accelerated important transformation initiatives like the vending channel operations project, which has rolled out nationwide at the end of June. I am pleased to announce we started operation at the new world-class Hiroshima plant in June, just 2 weeks since the flooding disaster in 2018. We have expanded our nationwide supply network with 7 new production lines installed since last year, including 4 new lines in the first half of 2020 during the coronavirus emergency. And finally, we are carefully monitoring conditions during the summer in order to be able to estimate earnings guidance for the year. Given ongoing COVID-19 uncertainty and poor weather in July, full year guidance cannot be reasonably estimated at this time.

Slide 7. You can see a snapshot of the COVID-19 situation in Japan. Clearly, consumer movement has been restricted with high rates of telework and general self-restrain on unnecessary trips out of the houses. Although the emergency declaration has been lifted, we are seeing a renew uptick in the new coronavirus cases this summer, which adds uncertainty to this important period for the beverage industry and for Coca-Cola Bottlers Japan.

On Slide 8. I would like to update a slide I shared with you in the first quarter presentation when we were entering the state of emergency. The industry is experiencing significant top line pressure from volume declines and shifts in channel mix as summarized here. In this tough environment, Coca-Cola Bottlers Japan is operating under clear guiding principles for market execution that help us prioritize what we can do while leaving no stone unturned to identify opportunities for cost savings and optimizing capital allocation.

Please look at Slide 9. So where are we in this unprecedented year of coronavirus? Coca-Cola Bottlers Japan is navigating this critical year with an aggressive cost saving focus. I've been saying business as usual is not an option. And now more than ever, this is true. It reflects our urgent mindset to emerge from this crisis as a more agile player and build on the solid progress we were seeing at the beginning of the year before the pandemic hit. We made a tough call early in the year to withdraw our earnings guidance, and then we were able to quickly ramp up major cost-saving initiatives to help us weather the current storm. We have major programs underway to react to current market realities and to keep on track and even accelerate longer-term transformation initiatives. And we are assessing the outlook for 2020 as well as the assumptions that underpin our midterm strategic business plan.

Let me now ask our CFO, Bjorn Ulgenes, to review our first half results and provide some color on current conditions. Then I would like to ask Wasa-san of Coca-Cola Japan to discuss our marketing approach during this weak corona period. Bjorn?

[Bjorn Ulgenes, executive]

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

Slide 11 is a summary P&L view of our first year first half results. Consolidated revenue declined 11% as core beverage volume declined 11% in the first half of the year. Consolidated business income declined year-on-year, mainly due to the impact of beverage volume and mix pressure. We had an operating loss of JPY 13.1 billion in the first half which was a JPY 52 billion improvement from the prior year as we cycled onetime expenses such as goodwill impairment and a voluntary employee retirement program in the first half of 2019.

On Slide 12, you can see the main drivers of our first half business income. As Calin said, Q2 was impacted by the COVID-19 emergency declaration. Volume and mix declines are putting pressure on our overall first half results and we have rapidly identified and implemented cost savings to mitigate the impact.

Starting on the left-hand side of the slide. You can see volume price and mix, which shows the year-on-year change in marginal profits from the commercial activities of our beverage business. We experienced a net JPY 20.4 billion decline in marginal profits, driven by a 12% volume decline in nonalcoholic ready-to-drink beverages and negative channel mix. The marginal profit decline in the stand-alone quarter was JPY 18.5 billion.

Of the JPY 20.4 billion decline, negative volume and channel mix makes up approximately JPY 24.5 billion as the vending declined 15% and the drug and discounter channel grew 6%. Price and product mix were also negative as package mix declines offset the ongoing benefits of the large PET wholesale price increase in April 2019.

Our Lemon-dou alcohol brand sold 4.2 million cases in the first half after expanding nationwide in October last year. This and a decline of variable expenses, such as vending commissions and promotional discounts helped to offset some of the volume price and mix pressures.

Fixed marketing expense or DME decreased JPY 2.8 billion as we cut back on marketing spend, given the coronavirus-led volume decline and as we look to revise our marketing plan to reflect the delay of the Olympic Games and stay relevant with changes in consumer behavior.

Raw materials and commodity costs continued to ease with a JPY 600 million benefit, driven by favorable foreign exchange and commodity trends, including PET resin. Manufacturing costs increased JPY 2.7 billion, reflecting lower-than-planned production volume and higher depreciation expenses from the investments we have made in new production capacity.

In others, there was a benefit from significant cost savings in labor, IT, travel and entertainment and other areas which we have implemented since the COVID-19 outbreak. We are also seeing a benefit from lower logistics and distribution expenses.

Business income for the health and skincare business increased slightly as the business has been less impacted by the COVID-19 outbreak compared with the core beverage business, and we are focusing on promotional cost savings.

The story of the second quarter is really all about top line pressure and aggressive cost management. Let me double-click on these drivers on Slide 13. Sales volumes were really depressed during the period of the government's emergency declaration, with the biggest decline in April and May. As the state of emergency was lifted, we saw some moderation in the volume decline in June. But with very wet and cool weather in July and the number of new coronavirus cases starting to tick up again, there is a lot of uncertainty in the outlook for the summer.

We made a call to withdraw earnings guidance in May and have since then worked very hard to take out costs in a comprehensive way. We have achieved over JPY 10 billion in cost savings so far this year with more to come in the areas of labor, marketing, logistics and depreciation.

Slide 14 explains our market share performance and retail pricing trends. So far in the year, despite the volume pressure, we have stayed disciplined on pricing, and we have observed that the benefit from last year's wholesale price increase on large PET packages continues to hold. In addition, the delay of the Olympics announced at the end of the first quarter has meant that we need to course correct our marketing plans that were originally highly Olympic focused in the second and third quarters. This takes time to be reflected in the marketplace. And as a result, we have seen some decline in market share in the second quarter.

In vending, we are seeing underlying progress as we transform the business, and we are encouraged that our market share is growing despite the volume declines. Vending is and will continue to be an important channel catering to consumers' preferences for convenience. As the biggest vending player in the industry, we believe these share gains and structural reforms will position us well for the future. You can find volume performance for nonalcoholic beverages with commentary by channel and category on Slide 15.

As explained previously, the retail and food, vending and convenience store channels have been significantly hit by COVID-19 since March. Conversely, the online channel continues to grow in the double digits and now represents about 2% of the overall volume.

Average revenue per case declines in supermarkets and drug and discounters was driven by cycling the prior year wholesale price increase for large PET packages introduced in April 2019, and the package mix shift in these channels as consumers look for larger size and case offerings to increase at home consumption. Convenience store revenue per case improved through premium new product launches like Fanta Premier Grape and Latte Nista coffee. You can find second quarter volume data as well as by package information on Slide 16.

Given the high uncertainty we face this year, it is imperative to be what I call good stewards of capital. We are maintaining our solid financial position and ensuring liquidity while reevaluating priorities for capital allocation, including CapEx. We now expect CapEx for the full year to be about JPY 21 billion lower than our initial CapEx plan for 2020 that we announced in February. This includes temporary suspension of new vending machine purchases given the slowdown this year and reducing other discretionary CapEx.

With the revised CapEx outlook, we expect depreciation for this year will decline JPY 2 billion against the initial plan to JPY 60 billion. Actual CapEx in the first half was approximately JPY 39 billion, with depreciation of JPY 29 billion. And we reinstated the year-end dividend forecast of JPY 25 per share, given a more stable cash flow outlook, reflecting the aggressive cost-saving programs and efforts to clean up the balance sheet.

Now let me move to our rest of year outlook. Even though we did see some initial signs of recovery in June, many uncertainties remain for the balance of the year and especially for the summer. The beverage sales volume contraction in July has continued into August as COVID-19 cases are growing again. The volume declines in foodservice, vending and convenience store channels is continuing, and this is expected to drive negative channel mix pressure. We are evaluating multiple scenarios for the 2020 plan as well as potential impacts to our mid-term strategic business plan assumptions. While at the same time, urgently implementing mitigation plans to help protect the top line and aggressively looking at cost-saving opportunities.

Now Chief Marketing Officer of Coca-Cola Japan, Takashi Wasa, will take you through an update from our partners at the Coca-Cola Company here in Japan. And then Calin will rejoin the call to wrap up. Wasa-san, please.

[Takashi Wasa, executive]

[Interpreted] Good afternoon, everyone. I'm Wasa, Chief Marketing Officer of Coca-Cola Japan. Today, I would like to talk to you about the changing consumer trends caused by COVID-19 and marketing efforts to address the various challenges facing the softdrink industry by using a few examples.

Firstly, we would like to introduce the donation program for the Japan National Team for Olympic and Paralympic Games. And I would like to also give you the report on the recent results. Next topic, what we are focusing on marketing activities in the second half of this year amid uncertainty of COVID-19.

Please refer yourself to Slide 21. I would like to introduce the donation program for the Japan National Teams for Olympic and Paralympic Games and report on the interim results of the program. In the midst of postponement of the Olympic and Paralympic Games and the mood of self-restrain due to the spread of COVID-19, the posts on the SNS -- social media and news from the athletes, Olympians and Paralympians have become a source of hope and encouragement to the people of Japan.

The other day, at 8:00 p.m. on July 24, at the new National Stadium, the same place where the opening ceremony for the Olympics would have held, a swimmer, Rikako Ikee, sent out a message. I suppose her message has touched many heart. But on the other hand, the postponement of Olympics and Paralympics for 1 year has left some amateur athletes and organizations struggling financially, and the Coca-Cola has launched this as an athlete support campaign to help these athletes. During the campaign period of June 15 to September 4, team Coca-Cola Olympics Cheer Points can be accumulated through the Coca-Cola official app, Coke ON. You can donate your points to either the Japan National Team for Tokyo 2020 Olympics or the Paralympics team.

As of August 9, 630,000 consumers have already participated in this donation program and approximately JPY 14 million has been raised in total. The campaign also aims to raise awareness and sales of Coca-Cola's core products.

Please look at Slide 22. Now I would like to continue by talking about our marketing activities during the COVID-19 pandemic. We are reviewing our plan based on 3 main guiding principles: Fewer, bigger in innovation; pivot to the core; and capture a stay at home demand.

Please look at Slide 23. The first guiding principle is to focus fewer, bigger in innovation. The goal is to now down the number of new products and instead focus our marketing investments so that each product has more of an impact of the market.

Please look at Slide 24. Here are 3 big bets, new product and initiatives for the first half of 2020. Fanta Premier was introduced with the goal of rerecruiting adult consumers who have graduated from Fanta and flavored combinations. It is the most successful Fanta flavor of the past decade, thanks to its focus on the fruit juice and its high limitation in terms of taste. The new Georgia Latte Nista blend which focuses on milkiness, has been successful in attracting new users, especially young adults and women. In addition, Georgia Japan Craftsman, a message portal designed by the popular young Japanese creator was a big hit with consumers. Together with Latte Nista, we are expanding our share of the growing market for PET bottled coffee.

Please move on to Slide 25. The second principle is pivot to the core. We believe that trust and a sense of security are sought after more than ever under these circumstances. And that long selling core brands are becoming increasingly important in consumer goods as well. This year, our flagship Coca-Cola trademark began pilot launch of packages tailored to consumer needs. Our supermarket and drugstore and discounter channels in Tokyo, Kanagawa, Chiba and Saitama prefectures. To meet the needs of a decline in both late and aging population as well as small household, we have introduced a 350 milliliter PET bottle that can be consumed by 1 person and 700 milliliter PET bottle that is perfect for 2 people. Launching packages and sizes that best meet consumers' needs has contributed to overall sales performance to Coca-Cola trademark.

Now on Slide 27. On August 31, Coca-Cola Zero will be fully relaunched. Consumers are spending more time at home and their need for refreshment is increasing. Many consumers are feeling lack of exercise, and they are also looking for a 0-calorie product. In this relaunch, we have succeeded in improving the after taste, in particular. Allowing consumers to enjoy the unique Coca-Cola flavor and refreshing taste. We hope you enjoy this new version of Coca-Cola Zero.

Next slide. The third principle is to capture a stay at home demand. Please go on to Slide 29. Let me introduce you what we are doing for rapidly growing e-commerce and online channels. With more and more people staying at home, there has been a surge in purchase of PET bottled beverages through e-commerce channel. To address this, we are expanding our labelless products, which do not have labels for PET bottles. In addition to I LOHAS, we are now selling 3 products that are Ayataka, Sokenbicha, Canada Dry THE TANSAN STRONG through e-commerce channel. These products are labelless, environmentally friendly and have the advantage of being easy to separate the trash at home.

On Slide 30. Lastly, I would like to introduce is Ayataka's rich dining experience campaign. As people are eating out less and less, and becoming more and more conscious of cooking for themselves, they are also becoming more efficient and time-saving in their eating. The Ayataka campaign, which aims to enrich eating time with the deliciousness of a teapot will be comprehensively rolled out through a series of TV commercials and in-store activities.

To summarize my presentation, the impact of COVID-19 is causing unprecedented changes in consumer mindset and behavior. We're responding flexibly to these changes to our marketing plan in line with our business purpose. Our marketing plan also should be flexible so that we can accommodate these changes and needs. And we will stick with our business purpose of Refresh the World, Make a Difference. In order for us to provide these refreshing moments and forward-looking attitude, we will continue to deliver refreshing moments and positive feelings through our beverages and provide the activities needed by local communities.

Thank you very much for your attention.

[Calin Dragan, executive]

Thank you, Wasa-san, Calin here again. So let me provide an update on our ongoing transformation work before we wrap up today.

Please look at Slide 33. We are facing a fair amount of uncertainty now and into the summer in terms of expected volume performance, consumer behaviors, and of course, the progression of the COVID-19. We are addressing the situation with a sense of urgency, quickly ramping up cost savings, replanning marketing activities, and being prudent about how we balance necessary investments against short-term market reality. For the balance of the year, we will continue to focus on what we can control. I think we are positioning ourselves well in terms of -- in the near-term with cost savings and for the longer-term with a stronger foundation in vending, sales force capabilities, digitalization and work style reform from the transformation work we are doing now.

On Slide 34, we highlight the accelerated pace of the important transformation work across our routes to market in both vending and over the counter. We doubled the speed of the intended rollout of these programs and finished nationwide deployment at the end of June. These initiatives are important now as they bring cost savings in a tough year, but they are also the foundation for our strategic mid- to long-term outlook.

We completed the expansion of our national supply network. The final piece of the puzzle being the commissioning of our state of the art new Hiroshima plant, which will provide flexible capacity and room for future growth to serve evolving consumer demands. In total, we have introduced 7 new manufacturing lines since last year, including 4 new lines in the first half of this year, while we have been managing through COVID-19. The simultaneous upgrading of our logistic infrastructure also continues on plan. We have introduced 3 new automated warehouses. And the Saitama Mega DC construction is on track for completion at the beginning of 2021.

During life with COVID-19, it is even more important to step up investing in our people and workplace. And as shown in Slide 36, we have launched Coca-Cola University Japan to offer comprehensive programs to develop future leaders with a clear focus on investing to make our work environment more accommodating to flexible work styles and to foster a more diverse and inclusive workplace. This is also a key part of our initiatives to create value share that we call our CSD goals, which focus on inclusion resources and local communities.

In the area of sustainable resources, on Slide 37, we recently announced a joint project with Far Eastern New Century Corporation to pilot test commercialization of chemically-recycled PET to advance our World Without Waste packaging commitments. The goal is to build this at a commercial scale in the next few years. And our community efforts this year have been focused on providing support to frontline medical workers, sanitation staff, food banks and other in need.

As a full Coca-Cola system, we have been very active with Coca-Cola Japan in identifying areas of need and quickly deploying resources while continuing to provide consumers with a safe and stable supply of essential goods and services.

Please look at Slide 39. The second quarter has certainly seen the full impact of the government emergency declaration and restrictions on people movement and business operations. The outlook for the rest of the year is still uncertain, given the uptick in the new COVID-19 cases and the cool and rainy start of the summer. The third quarter is historically our peak season and the most important quarter in the year in terms of delivering profit. We are carefully calibrating our actions in the market and watching our performance during this time.

Through rapid cost savings and various mitigating actions, we are making our best efforts to partially offset the current year top line pressure, while continuing to do the right thing for the health of our business, long term. We will announce an update to our full earnings guidance once we have better visibility on third quarter results. And we remain committed to the challenge we have set for ourselves by driving fundamental transformation to sustain and recover our business into the future.

Let me now ask Ray Shelton to come back for questions and answers.

[Raymond Shelton, executive]

Thank you, Calin. Let me remind you this Q&A session is intended for analysts and investors. So we ask members of the media on the call to please hold your questions until our media session is scheduled separately today. [Operator Instructions] Operator, we're now ready for questions.

[Operator]

[Operator Instructions] We have a question from Nomura-san, Nomura Securities.

[Satoshi Fujiwara, analyst]

[Interpreted] This is Fujiwara from Nomura Securities. And I would like to ask one question at once, one by one. So talking about the Japanese beverage market, what is your view on the future? This is my first question. Of course, we are going to experience an impact from COVID-19, but I'm especially interested in the vending machine market. From next year on, what is your view on the vending market?

[Raymond Shelton, executive]

I'm just going to make sure we got your question over. The question is on the future of Japan NARTD, nonalcoholic ready-to-drink beverages market and how we are looking to that future, especially the vending channel. How do we see that going forward? I think I'm going to send this first to Calin, and then we'll open it up to Costin after that, please.

[Calin Dragan, executive]

Thank you so much for the question. Calin Dragan speaking. Well, I have to start by saying that I'm extremely confident in the Japanese beverage market. And I think it's the right place to be in. We have observed the Japanese market for a number of years right now. We are operating here for decades. But when we are comparing it with other developed markets, we are happy to realize the fact that Japanese market is growing. And it's growing in a healthy way -- in a way more diversified way in a number of categories. And that's a great news for our business because we are participating in almost all the NARTD beverages categories. So from that perspective, we are expressing our optimism. And hence, through our investment in the Japanese market, we prove our commitment to it as leaders of this NARTD market.

So having said that, we were always looking at the Japanese market with worries because of the aging population, for example, as being one of the main threat, and that was a hot topic over the last years. But I would like to say that through our own evaluation, we realized that actually, all this aging population, the aging society, it's actually -- it can turn out on a benefit for us because one of the big things that is happening with the current population by aging, they are bringing with them by age group as they are aging on, their habits of drinking packaged goods hence -- which the current generation, for example, in advanced ages doesn't have it. So that's a great news for us because basically, they will continue to be our customers at way later age stages.

Not only that, we are observing a new trend. Our people who are aging are actually more health-conscious. As well, they are having more money to spend for packaged goods as well. So it's the right place to be, and we believe in the growth of this market.

Now turning specifically onto the vending channel and the perspectives of it. Let me start with another observation that we are having from our market analysis and our consumer studies that we are doing. No matter the times if it was before COVID-19 or after the COVID-19, what we learned about our consumers is they will definitely prefer convenience. And they were willing even to pay for that convenience. And that might be reflected in all the aspects of their life, including shopping behaviors. So if I would be to evaluate which channels in the market are actually serving the convenience occasion, convenient consumption occasion, there are the, of course, the convenience store channel, there is the online channel and as well is definitely the vending channel.

Vending, by definition, offers convenience to the customers and to the consumers, and they like that. Hence, we believe that consumers will continue to shop in the vending channel. They will use the vending machines. Now of course, I can be challenged and continue the discussion around this topic in way more details by asking ourselves, for example, would the vending of the future would look exactly the same like the vending today? Well, probably not. Probably the vending machine per se will evolve into a more digitalized tool, in a more different ways of payment, offering continuously convenience and excitement through it.

So we are confident in this channel. Hence, we made a commitment to expand horizontally in this channel, but in a very healthy business way going on, either through new machine placements or through partnership with other players in the market, getting columns maybe in other vending machines or through merger and acquisitions in the future. Nevertheless, our primary focus is to make sure that our current vending machines are going to grow vertically their volumes. So we are going to sell more and more every day from the current machine universe.

So I hope that answers the question, both in terms of the NARTD market view for Japan as well about the vending channel.

[Raymond Shelton, executive]

Thank you, Calin. We hope that answered your question. Did you have a second one?

[Satoshi Fujiwara, analyst]

[Interpreted] Yes. But I have another question, and this is about vending again. So you have transformed your operation model for vending, and you said that you have accelerated the schedule for the project. And due to that, what is the cost reduction impact that you are seeing? I would like to have some quantitative details on that.

[Raymond Shelton, executive]

The vending transformation that we've been working on and have accelerated during this COVID-19 year. And the question is around what are the impacts, what are the benefits that we're looking to achieve from a more numerical perspective this year? We'll pass it over to Bjorn, I think.

[Bjorn Ulgenes, executive]

Thank you, Fujiwara-san. This is Bjorn. When it comes to the vending savings, these were part of the fundamental strategic business plan we went out late last year. And you recall inside that JPY 35 billion of savings we promised, vending of course had a central spot. What the commercial team now has done is accelerating some of these changes in how we operate, as you call it, leading to double-digit reductions in the routes and therefore, less over time and therefore, reducing the costs per case basically. And for 2020 specifically, by accelerating these activities, we are able, as of, in beginning of Q3 to start changing how we work, changing how we operate. And therefore, significantly improving efficiency of our business.

And as Calin spoke about earlier, we have had significant cost savings, of course, in the first half. And as we move into the second half, we will pivot from hopefully managing short-term and onetime revenue contractions into more going after the transformational savings, as we call them. And you also recall from our February ABP presentation for 2020, we promised JPY 5 billion savings on a full year basis. And I would say in the second half and the first half, we are good on track to deliver that. And therefore, the relentless pressures to transform the business and go off the details in this one will continue. Thank you.

[Raymond Shelton, executive]

Thank you, Bjorn. Fujiwara-san, I hope this answers your question.

[Operator]

Question from Morita-san from Daiwa Securities.

[Makoto Morita, analyst]

[Interpreted] This is Morita speaking. Talking about the stay at home demand. Like are there other assumption? I know the vending is a very important channel. But then probably you might be looking at enhancing your positioning in online and the supermarkets, I would like to see what's your plan on this. Be it supermarket or the online channel share, I suppose Wasa-san has already mentioned about the business plan. But the question is whether are you confident of gaining the share with that campaign or because I just felt that this is a little -- this is too little campaign for you to gain the share. So I would like to know which kind of promotion you will believe that you need to gain the shares in online and the supermarket going forward.

[Raymond Shelton, executive]

There are English-speaking audience here in the room. Your question is, given the shift in channel mix that we're seeing with stay at home demand rising, wanted to understand how are we thinking about positioning our brands and our marketing campaigns around other channels, supermarkets, online, and our plans for recovering market share across the market. I'm going to send this over to Costin-san first, and we'll follow-up after that. Thank you.

[Costel Mandrea, executive]

This is Costin Mandrea. Thank you for the question. So as you -- as you said, we see significant consumer and customer trend triggered by this crisis. And what we did in order to address these new trends was to replan our marketing calendar. I'll give you some examples about online business. And we saw a great number of new users going online and shopping online. The importance of the channel for us increased to about 2% of the total volume, which is -- it's a significant increase. We did online dedicated promotions, and we boosted our resources of people working in online as a team. As all -- as well, we launched dedicated SKUs for online. For example, I LOHAS labelless in Q1. And recently, we just launched 2 weeks ago, another batch of labelless products, Ayataka, Sokenbicha and TANSAN to meet this channel-specific demand.

But beyond that, what we see, we see also home deliveries increasing. We see people taking out and using Demae-can or using Uber Eats. So what we did, we repurposed our marketing plans, and we repurposed our sales teams to be able to address this new consumer demand.

Going forward, obviously, we are following closely what's happening in the market, and we are adapting our marketing plans. You saw already in Wasa-san some examples, what we are doing to stimulate at home consumptions with Ayataka. And moving forward in Q4, we'll have new innovations to serve the consumer demand. I hope this answers your question. Thank you.

[Raymond Shelton, executive]

Thank you, Costin. Morita-san, did you have a follow-up?

[Makoto Morita, analyst]

[Interpreted] I'm fine. I have second point I would like to ask about the cost reduction and also transformation for the vending. I understand the content, I understand what you're trying to say. But there might be a risk of losing opportunity in the mid to long term. Because now you're saying that you are drastically reducing the OT. So there might be a risk of you not retaining a good talent. So do you have any worries over this kind of risk? Because some of the magazines and articles are reporting about this. So when it comes to labor environment, I would like to see what's your view on this? And whether you are very confident about having the discipline in-house?

[Raymond Shelton, executive]

The question is around cost reductions and transformation. Given the high cost reductions that we have been able to achieve so far, your question, is there any risk around retention of talent and a more general question on how we would characterize the labor environment during this year. I'm going to pass this question over to Calin, please.

[Calin Dragan, executive]

Thank you so much for the question. And let me try to pick it a little bit from your very early ask, which was about our cost savings. I just want to remind the fact that we were explaining loud and clear the fact that we have type of savings that were like onetime cost savings for the year, which we were able to capture because we have reacted with a sense of urgency, and we were capturing the benefits early enough. And we are very happy that we were able to do so.

But one big decision that we made, it was that we are not going to stop the transformation that we have embarked because in our last year communication to all of you, we said loud and clear that this year, we are going to start the transformation of our business with the mindset of change, agility and learning culture as we are moving on, while our main focus there, it was on people development, retaining talent and growing talent in the company.

Now some of our initiatives in this very first half of the year cannot be called very popular, of course. And of course, we are not necessarily happy to the fact that we had to reduce the bonuses. But a big chunk of our bonuses were related to performance. Hence, since performance of this year is at an obvious threat and is not going to come, we had to hold back onto that as well to a part of the fixed policies. And that was valid for all people in the company without any discrimination, and that was very clearly communicated to our organization.

I said earlier, of course, this is not a happy moment and we are the first one to acknowledge it, but it's an absolute must for the situation of our company, and we were not hesitating to take that action.

Now looking to the future, speaking about our transformation, all our transformation efforts were focused on to processes reengineering, systems implementation and transforming the way how we operate. We never started in this transformation with the mindset of we must cut headcount. I just want to be very clear and specific that we have a mandate, the functions to reduce the headcount. What have we started with, it was an explicit task to optimize and set up the business for the future reality here, best-in-class in Japan and best-in-class in the world.

Simplifying the processes, cut the unnecessary work, make everything easier. Now if with that optimization and increased efficiency will be some labor reduction as well. Well, that's a consequence of that transformation efforts that we're going to make, but not a purpose on its own.

In the meantime, I think I mentioned in one of my slides in the presentation, our focus was on developing our people and leadership. And actually, in the middle of the COVID-19 crisis, we have launched the Coca-Cola University Program for our young leaders. We have launched our new English program, GET, we launched training programs for capability building in relation with our customers. So a lot of efforts on retaining and growing our people have happened simultaneously.

I hope this will give you some confidence on our initiatives and our strategy for the future, while we are convinced that this is well understood by our organization and are going to deliver results on medium to long term.

[Raymond Shelton, executive]

Thank you, Calin. I hope that answers your question.

[Operator]

A question from Yoshida-san from JPMorgan Securities.

[Ami Yoshida, analyst]

[Interpreted] This is Yoshida from JPMorgan. You talked about your initiatives on off line channels. And in OTC channel, you have several commercial activities, which you will proceed with and digitization. What is your digitization differentiation? What places you on a competitive advantage against others in digitization?

[Raymond Shelton, executive]

The question is around how we are leveraging digitization, digitalization and transformation to differentiate ourselves against our peers. I think we'll pass that off to Costin-san to start with.

[Costel Mandrea, executive]

Thank you for the question. This is Costin. Digital and digitization of our company has a very high place on the agenda. And when we talk about activities to engage digitally the consumers, I'll give you a few examples from online. And obviously, we are very proud of continuous success of Coke ON platform. Today, we have more than 20 million users. And we are running some very successful promotions for Coke ON and for very important vending channel.

But I would like, if you allow me for 2 minutes to discuss about digitization of our sales force, which is a massive shift and it is indeed building a competitive advantage. And as you know, we have now one platform across CCBJI, which is CokeOne, and we are exploiting this platform day in, day out for increased transparency and for better management decisions.

You heard Calin earlier that today, all our sales force have mobile device. This year, we distributed 17,000 phones and 14,000 laptops. But how are we using this? For our sales force transformation, we moved all the activities into digital, into online. From the way we build the routes, the visit routes, to the customer selling stories, introducing new products, but also to the day-to-day meetings. So right now, our sales force the -- it is not needed for them to come to the office. They have all these activities run in the online, and they have the latest tool implemented there. All the coaching and trainings that Calin again spoke earlier, for the last 6 months, we run them online with great success. And we are also very proud from the -- from Q1, we introduced a tool that is new on Japanese market is the photo recognition. So our sales force, our sales rep is coming into a store, taking photos. And then in real time, we can understand what's the situation in the store. We can recognize if there is an out of stock, and we can improve this. We can see execution opportunities or price situation. This is in real time, and this is real digitization of our sales force.

When we discuss about vending transformation, also, this is enabled by digitization. From the way we build the routes right now, all of our routes are now GPS tracked, and we are able, in real time, to guide a truck towards a vending machine based on traffic. This is bringing us additional efficiency.

As well, we invested in capabilities. We have new positions in vending, route planners that are totally digital. And we are using technology to help with assortment and promotion decisions. We see clear deliverables for all these initiatives in the digital arena and there are significant additional ideas that we have going forward. So this, I hope, is giving you a bit of context what we are doing to build digital into a competitive advantage for us. And I would like to ask Bjorn also to add a bit of context. Thank you.

[Bjorn Ulgenes, executive]

Thank you, Costin. This is Bjorn. So Yoshida-san, this is a very key question. And I'd just like to add a few seconds on what we're doing outside commercial because this is not really about digitizing the front end of the people that touches consumers and customers. This is how we digitize, what we call the enterprise. And we're taking the approach of optimizing processes, as you heard Calin talk about earlier, and then we optimize how we use systems and therefore, digital solutions to help us optimize the whole business. So this is about how we draw all the connections between commercial into supply chain, where we automate the planning systems and all the way to our back office and optimization in our shared services. This is really a comprehensive strategy on making our enterprise as digital as we can. Thank you.

[Raymond Shelton, executive]

Thank you very much. I hope this answers your question.

[Operator]

[Foreign Language]

[Ami Yoshida, analyst]

[Interpreted] And this is regarding the vending business. And I heard that you have accelerated your so-called Kinki project. And I'm sure that the environment is changing around the vending operation. But is there a possibility for you to restructure the industry? I mean the softdrink players, is there going to be a change? And what is going to be the profitability forecast for the future?

[Raymond Shelton, executive]

Miyake-san, let me just repeat real quick. The question is on -- this is Yoshida-san, sorry. I'm very sorry about that. Yoshida-san, second question. This was a question on the restructuring and vending, and if there's any additional opportunity around further restructuring, not just amongst ourselves but in the industry. We'll hand it over to Calin, please.

[Calin Dragan, executive]

Yoshida-san, thank you so much for the interest in our business and for the question. Well, what we can say about the current situation of the vending business. Of course, as we mentioned earlier, it's suffering because also this decrease of traffic as all the channels that are serving convenience and serving are influenced by the traffic like HORECA, like CVS like the vending, all of them are suffering in these tough times, but with different percentages.

What I have to say I'm happy on our progress that we are making with the transformation, it is because we are aggressively adapting our cost structure to match these new realities, as well creating the flexibility for any opportunity on the future growth. So it's not enough to stay and contemplate the decline in the revenue by doing nothing in the way how we operate and how we run the operations in the specific channels. And that's valid for all the channels, not only for the vending.

Having said that, I declared earlier to the previous question that yes, of course, we are looking in the market to any possible opportunities in the vending area, especially now that there are tough times for many of the players in the market. We are open to any possible collaborations in a way that will be a mutual benefit for all of us, and everybody will win into it.

Now I will refrain myself from speculating on what can happen in the future in terms of integration. But we are definitely doing everything, what's necessary to shape our business for the future because as described earlier, we believe in it.

[Raymond Shelton, executive]

Thank you, Calin. Yoshida-san, I hope that answers your question.

[Operator]

From Morgan Stanley, this is Miyake-san.

[Haruka Miyake, analyst]

[Interpreted] This is Miyake from Morgan Stanley. So I want to ask about cost and also the current sales situation in July. So firstly, really regarding costs. It was impressive that you have achieved a great cost reduction in the first half, and it was encouraging to hear that you're going to continue our efforts in the second half, too. And I was looking at Page 12 and you have JPY 9.9 billion. And I think the major bucket is labor cost in that JPY 9.9 billion. And so which is by JPY 2 billion in 1Q. So excluding that, I'm sure that you were able to cut like JPY 4 billion or so in labor costs. I'm sure that if the breakdown is like overtime, et cetera.

But can we believe that this will be kept next year on? How much of it will be realized next year on, because I would like to understand the portion that's onetime and the ones that is going to recur. And I don't know what your annual cost saving is, but let's say it's going to be JPY 115 billion or so. But if it's JPY 15 billion, how much of it will be realized next year again, is my question. And next year, I'm sure is it going to be more than the JPY 50 billion that we can expect next year as synergy costs? But I just want to know the perspective you have on cost reduction for next year on.

[Raymond Shelton, executive]

Because that was a lot in one question. I think at the end of the day, the question is around the announced savings that we've managed to achieve this year, outlook for the rest of the year and then next year. So essentially, how are we thinking about onetime versus more recurring? If I -- Miyake-san, is that -- that's kind of the basic part of the question, right?

[Haruka Miyake, analyst]

[Interpreted] Yes, that's my question.

[Raymond Shelton, executive]

So over to Bjorn.

[Bjorn Ulgenes, executive]

Thank you, Ray, and thank you, Miyake-san, for the question. This is Bjorn. So as you rightly said, in the first 6 months of the year, we have saved a good JPY 10 billion. And to give you a little bit of detail on these savings, I would say about 50%, 60% of that is coming from miscellaneous labor activities. And you heard Calin earlier said, we have had temporary leave savings. We have reduced the fixed bonuses and definitely the variable bonuses. And you're also seeing significant reductions in our overtime as both volumes go down, but also how we change the way we work, which is very fundamental to our transformation. The other 40% of the savings year-to-date comes in logistics, travel, other -- all other types of savings that we have in the business.

When it comes to the remainder of the year, I think it's important that we still continue to focus on onetime savings to mitigate revenue contractions as much as possible while we're dialing up, as I said earlier, the transformation savings now starting to focus on the vending that Costin has talked about and the sales force transformation and also continuing the focus on our logistics costs.

How much of this will be onetime, how much will be transformational is, of course, something we keep on monitoring and trying to manage. And we will, of course, come back in the full year announcements when we have a better visibility, especially how the summer will come through. So because of time, I think I'll hold my answer here. Thank you.

[Raymond Shelton, executive]

Thank you, Bjorn. I hope this answered your question.

[Operator]

The question from Saji-san from Mizuho Securities.

[Hiroshi Saji, analyst]

[Interpreted] My question is about the negative volume. Up until July, maybe your decrease is about double the average of the industry. So probably, you have great contribution -- negative contribution coming from vending. So going forward, given that this COVID-19 is here to stay, what will be your channel strategy to recover your share? What do you think will be the optimal channel strategy to recover your share and improve the performance in the market. I would like to hear about your view on this.

[Raymond Shelton, executive]

The call -- the question is here in the room. Your question is on the volume performance, the decline that we saw in July, there was some share loss in the period. And so your question is, as we look forward, what is the strategy, a channel or otherwise on share? And how are we looking at share going forward? I'm going to send this over to Calin, please. And then we'll ask Costin to weigh in as well. Thank you.

[Calin Dragan, executive]

Thank you so much, Saji-san, for the question. Let me quickly try to clarify a little bit the volume trend, as you mentioned it, if I can. I would like to remind everyone that we started the year extremely well in quarter 1 in January and February, and we were very happy that our transformation efforts that we started last year has started delivering. However, then later on, the coronavirus impacts start. And in effect, the full effect of the emergency declaration of the government impacted the traffic. But as well, a big impact that we -- of our business, it was the cancellation of the Olympics. So we had a very good start. And then we have started being affected by this reality.

Now the way how I look at the numbers are the following: on one hand, we are having a big hit that we are taking from the vending channel in terms of volume. But that's nothing wrong with the vending channel per se. It's a pure decline in traffic, which is generating that shortfall. And I am delighted to realize that year-to-date, we are getting significant market share in the vending channel. So we are not having there any particular issue to address at this moment in time, other than the traffic, I would say, that it's affecting vending, CVS channel as well, HORECA in primary.

Now in the OTC channel, in the last months, when we were planning actually to enter with a major Olympics campaign, as you might remember, we have shared with you that we are going to massively activate top 5 category brands, all of them billion-dollar brands. They would be activated during our big games, and we were expecting significant results out of it. Now once the Olympics were canceled, we had to stop all that initiatives. Of course, that stop have been immediately have affected. And because the main channels where we were planning to activate were actually the OTC channels, where the interaction with the consumer is more frequent. During that phase, we were, of course, not fully prepared, so we had to shift gears and replace the programs. And probably because of that delay in reaction and because of that impact of the new programs that we have put in place, we were not able to hold the market share for the time being.

All our competitors in the market in the meantime, they were not having the Olympics in their programs. Olympics, it's an important asset of the Coca-Cola system every 4 years, and we are fully exploiting it. But not being able to use this asset by our competition, they have prepared the summer with probably aggressivity to balance our Olympic campaign. Hence right now, we are in impossibility to act on our Olympic programs while they are able to execute their programs with a certainty balance for the time being. I'm confident that with the programs that we are putting them in place, that issue is going to be resolved on the second part of the year, I'm saying more towards quarter 4.

Now another element that I want to drive your attention, and then I'm going to pass it to Costin, it's somewhere in the presentation, in the pricing chart. Last year, I would like to remind everyone, we made a historic move. For the first time in 27 years, we made the decision to put the prices up on the future consumption packages, which are sold primarily in the OTC channels. We put the prices up. And now we are 1 year and a quarter later and we are very proud to draw your attention to the fact that we are still trending in terms of pricing for future consumption packages ahead of the market and well ahead of our competition.

Now we have kept our promise to keep the prices up and to continue to drive value in the industry for the time being. Of course, we are keeping all our options open for the future in order to be able to react to the market development and the realities in Japan.

Now I would like to pass it back to Costin, if is there anything more specific to add to this. Thank you.

[Costel Mandrea, executive]

No, thank you. This is Costin. Just -- thank you, Calin. Just to add on this, obviously, together with our partners in CCJC, we had to course correct the marketing plans, and we'll see the results of the new plans in the marketing Q3 and Q4. And I want to give you 3 examples of activities that are addressing the new consumer and customer demand. First of all, coffee, we saw Georgia performing very well in terms of share, and we see now a very good combination between Georgia Japan Craftsman, SOT and bottled can. And the latest addition this year, Latte Nista, also performed in line with our expectations.

In September, we have an integrated campaign across all channels to grow even more the coffee and to build on this positive moment. Second one is Ayataka. You heard from Wasa-san that we are building on this new trend of eating at home and we'll start a new improved campaign for older consumers.

The third activity that we have, and it's again across all channels, you heard us talking a lot about RGM initiatives. We launched at the end of last year, the 350, 700 packages in supermarket, replacing our 500 ml Coke, performing very well. So we decided to expand gradually this across the country. In the meantime, we launched in CVS, 950 ml, Ayataka, Sokenbicha, Aquarius. Again, we see very good performance. So going forward, we'll accelerate what we see is working, and we are building on the new consumer needs and customer demands.

And I'll wrap up, if you allow me, just with the lesson from the COVID time, we learned that delivering beverages is a critical service for society. And I want to send the message of appreciation for all our customers who kept running their stores, who kept serving their customers, as well to our sales force who kept serving our consumers with increased safety measures. Thank you.

[Raymond Shelton, executive]

Thank you very much. I think we've hit the well past the end of our scheduled call time. I'd like to thank everyone for your active participation and interest. We look forward to following up with you among the IR team and with our management team here. Operator, this concludes our call. Thank you very much.

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