Coca-Cola Bottlers Japan Holdings Inc

TSE:2579

Earnings Call Transcript 2018-Q3

[Raymond Shelton, executive]

Good afternoon, everyone. I am Raymond Shelton, Head of Investor Relations for Coca-Cola Bottlers Japan Holdings. I'd like to thank you very much for joining us today on our third quarter year-to-date 2018 earnings presentation for analysts and investors. I'm joined here, at the front of the room, by our senior executive officers, including our newly appointed Head of Finance, Bjorn Ulgenes. Following prepared remarks by President Tamio Yoshimatsu and CFO, Vikas Tiku, we'll 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, which is scheduled separately later today. Simultaneous translation, in both Japanese and English, is being provided for today's presentation and during Q&A. And for those of you in the room, Japanese is on channel 1, and English is on channel 2.

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 ccbjholdings.com. Please look on our website for this information in both Japanese and English.

Now I'd like to turn the presentation over to President Yoshimatsu. Yoshimatsu-san? [Foreign Language]

[Tamio Yoshimatsu, executive]

Good afternoon. Ladies and gentlemen, I'm Yoshimatsu from Coca-Cola Bottlers Japan. Thank you for joining us today at the 2018 quarter 3 earnings presentation. Today, there will be an overview of our business results from myself and Vikas, including the impact of the 2018 July torrential rains, followed by questions from you.

As you'll remember, when we announced our second quarter results in August, we had withdrawn our full year forecast to revise it on October 10. We are of the perception that 2018 has been a particularly difficult year for us. We are putting in our best efforts into restoration and recovering supply so that we can beat the rapid shifts in consumer preference.

Let us begin from the Q3 YTD results and our sales activities. Slide 5 shows the highlights between January to September. We experienced record heat this summer, but the torrential rains and the damage to the Hongo plant, combined with the sudden surge of demand in aseptic products has led to supply constraints, causing a 2% decline in our year-on-year pro forma sales volume.

Regarding market share, as a result of the sales volume decline, volume share was below previous year, but due also to the cancellation of promotional activities and improvement in package mix, value share remained flat. Operating income came down as a result of suppressed revenue due to volume decline. Combined with higher freight and logistics costs, negative channel package mix and goodwill amortization in quarter 1, it was down by 20% in pro forma terms. As a consequence of the natural disasters, we posted an extraordinary loss of JPY 7.9 billion in Q3.

As part of our effort to maximize shareholder value, in addition to a share repurchase exercise worth JPY 55.9 billion in April, we announced last week that shares of up to JPY 25 billion will be bought back by May of next year. The details will be covered by Vikas in his part.

In addition to the plan announced recently to move our Hongo plant to a new location to restart production, there will be 7 new lines added in total by spring of 2020, leading to gradual buildup of our production capacity. We are not only prioritizing recovery from the damages but are continuing with our investment efforts to strengthen our product supply capabilities and to generate further synergies, thereby solidifying the foundation toward our growth in 2020 and beyond.

Slide 6 shows our key mid-term targets and how we evaluate our progress. The volume decline has led to negative sales revenue against PY, previous year. As for market share, despite the negative volume share, loss in value share was minimal with a good balance between the 2 numbers. The synergies are more or less on plan, but the loss in NSR and surge in transportation and logistics costs has led to a tough situation in operating income. When it comes to shareholder value maximization, in addition to the repurchasing shares in April, we announced another buyback plan on Friday of last week, moving steadily along our financial strategy to return value to our shareholders. How the events this year will impact 2019 and the way we are thinking of recovering and investing for growth next year and beyond will be explained later.

On Slide 7, we have summarized our plans for moving and restarting our Hongo plant as well as the progress in recovery. A major step has been the decision to move the facility to Mihara City and start building the new plant, provisionally named the Mihara Plant. We have acquired the land and building, formerly belonging to Sharp, located 4 kilometers to the north of the current site in order to build 2 new lines to be commissioned in the spring of 2020. On November 1, we kicked off the project team for the new plant and construction will start before the end of this year.

On the right-hand side of the slide, we show the progress we have made in recovery efforts. The logistics center in the damaged Hongo plant has already been recovered and is servicing the Chugoku area. As for product supply, in addition to increased production through shift-up efforts at plants in other regions, 2 new production lines are scheduled to be running by spring of 2019. Thus, we are working hard to up our supply capacity. However, the tightness of supply against demand will continue into next year and so will the increase in transportation costs due to the changes in our supply network and other factors. The chirashi, or flier promotions, which we had asked to be suspended after the disaster, are now gradually being resumed, starting from this month.

On Slide 8, we show the results of our year-to-date commercial activities by channel and by category. Volume was down by 2%, but despite the constrained supply as a result of suspension of chirashi promotions and adjustment of SKU numbers, the sales volume of large-size PET declined, resulting in the improvement of revenue per case in supermarkets and drugs and discounters. By channel, our supermarkets and drugs and discounter results were hit by the loss of sales opportunities in the third quarter. However, we grew in convenience stores in all major categories other than water.

In vending, in addition to the continuing shift away from the channel, our policy to prioritize customer relationships under restricted supply drove down the sales volume. One focus point in our vending sales improvement efforts is our smartphone application, Coke ON. By continuing to upgrade functionality and compatibility and rolling out various campaigns, we are working to make vending machines more attractive to consumers.

By category, new products such as THE TANSAN contributed to sparkling growth, while nonsugar teas remained flat against previous year. Small PET I LOHAS mineral water grew, while flavored water and Morino mizu dayori declined. In the coffee category, the newly launched Georgia Japan Craftsman helped mitigate the negative trend in SOT cans and bottled cans, but the supply cap meant that we were unable to roll out this product in all channels, resulting in a 5% decline in coffee volume. However, Japan Craftsman itself was a major contributor and did well in the OTC channel for which it was prioritized, increasing coffee volume by 1% in nonvending channels.

Slide 9 shows our OTC share and retail price trends. Market share in OTC between July and September were negative against previous year, both in value and volume, due to torrential rain damage and constraints in supply. However, due to suspension of promotions and other factors, value share decline was minimal.

In sparkling and coffee, due in part to new product contributors such as THE TANSAN and Georgia Japan Craftsman, we were able to grow category shares. Our retail price remains to be positive against the industry average. Large-sized PETs have also shown improvement against previous year, thanks to suspension of promotions and SKU optimization.

On the next slide, I would like to touch on some of our initiatives to transform vending and ongoing marketing activities. Many of our initiatives to recover vending and aim for growth have been explained in the past. Let me update you on 3 of those. The first is the evolution of Coke ON. This smartphone application started from a mileage program, with 1 free product per 15. In April, we added Coke ON Walk, which incorporates a pedometer function, and has reached 2.2 million-plus users. Coke ON is an important pillar of vending channel revitalization, and we now have approximately 40% compatible machines.

In October, we launched a cashless settlement service called Coke ON Pay, which supports major credit card brands. Once your credit card is registered, easy payment and mileage accumulation within the app is enabled, making it far more convenient than using cash or other cashless transactions. We are expanding this function to 20,000 machines by the end of the year and to 300,000 by the end of 2019. The notification is also taking place in the app with invitations sent to users when Coke ON Pay is enabled on the machines in their vicinity. Please try out the Coke ON application on this occasion.

The second initiative to note is our Coke mini service we have introduced for small-scale offices. Up until now, it was difficult to have a presence in such small offices as space and operation efficiency prevented us from placing vending machines. It is said that there are around 880,000 such workplaces in Japan. Coke mini enables us to place compact coolers to such offices. Our customers pay cashless via smartphone applications such as LINE Pay or Rakuten Pay by scanning the QR codes. This frees us and the customers from cash and enables easy management of sales and inventory data per cooler.

And as Coke friends, we will have members of these workplaces to cooperate with us. We will start from 60 coolers in the Tokyo area but gradually expand into other regions starting next year. There's a demo machine displayed by the reception. So please take a look on your way out of the venue. The third initiative is the expansion of a system, which automatically recommends the most optimal assortment for the vending machines, based on sales and location types.

In the Q2 briefing, we mentioned how we were enjoying good results in tests conducted in routes in Tokyo. In addition to these routes, we are applying the system to some routes in Osaka and Fukuoka before the end of the year. The system, by the way, does not require retrofitting with any hardware units. We will continue to optimize the algorithms for the system and fortify the program to take into account hot products as we move into winter season. In 2009 and -- '19 and beyond, we expect to apply the system to all our vending machine routes. Fourth quarter marketing will feature the Ribbon bottle, popular last year, and the Coca-Cola winter campaign. We will aim for even higher sales than last year. There will be other initiatives spread out across Georgia, I LOHAS, FOSHU products and Coke ON, leveraging digital content and supported by solid market execution, stimulating demand and strengthening our bond with consumers.

I would now like to invite our CFO, Vikas Tiku, to join me on stage and take you through the details of Q3 year-to-date results, synergy plan progress and full year outlook. Vikas?

[Vikas Tiku, executive]

Thank you, Yoshimatsu-san. Good afternoon, everyone. I'm Vikas Tiku, the Chief Financial Officer for Coca-Cola Bottlers Japan Holdings. Yoshimatsu-san has taken you through an overview of our third quarter year-to-date operating results and commercial activities. I would like to spend some time discussing our third quarter year-to-date financial results, progress on integration and synergy capture as well as some elements to consider for the rest of the year and into the future. Yoshimatsu-san mentioned earlier in his comments that this has been a tough year and how we are putting forward our best effort to recover from the damage of the flooding with a sense of urgency.

We remain committed to executing our strategy, to position this company for longer-term sustainable growth. However, it is clear that some of the impact from this year may overshadow next year and beyond. Let me take you through the financial results of the year-to-date period. Our pro forma revenue declined 3% year-to-date due to loss of production capacity, supply constraints and continued weakness in the profitable vending channel. Pro forma operating income declined 20%, impacted by the revenue decline, negative channel and package mix, higher commodity and distribution costs and goodwill from the 2017 integration. Pro forma net income declined 43% year-on-year. This includes a JPY 7.9 billion loss due to the disaster reported in extraordinary losses.

On Page 12, you can see the key drivers of our year-to-date pro forma operating income of JPY 32 billion. Starting on the left-hand side of the slide. We did experience continued pressure on our top line performance. You can see a net JPY 14.5 billion decline in gross profit from volume, pricing and mix. Volume performance versus prior year declined 2%, with a 5% decline in the third quarter driven by the flooding damage and the supply constraints. Of the JPY 14.5 billion, the impact of volume, including channel mix, was JPY 12 billion, and pricing and mix impact was about JPY 2.5 billion. The majority of the impact was driven by an 8% decline with volume in the vending channel, which as you know tends to be higher revenue per case. DME, or direct marketing expenses, increased JPY 1.9 billion versus prior year. This reflects an increase in the first half of the year with major initiatives related to the Olympics and the World Cup. In the third quarter, however, DME spending declined versus prior year, driven by lower sales volume as well as the suspension of promotional activities and SKU rationalization due to supply constraints.

Raw materials and commodity cost pressures have increased to JPY 3.1 billion versus prior year. This is trending above our initial estimates for the year, and we do expect some additional pressure for the rest of the year and into 2019. We continue to deliver solid net cost of goods sold savings of JPY 6.1 billion versus prior year for manufacturing and procurement, including generation of synergies despite the flooding and supply disruption in third quarter. This was partially offset by increased costs as we had to source products from alternate supply points nationwide. Other operating expenses were positive or a benefit to OI by a net JPY 7.6 billion, mainly from savings in labor costs, facilities and IT-related expenses. This too was partially offset by increase in logistics and distribution expenses in the third quarter due to the disruptions we experienced throughout our nationwide supply network.

In the year-to-date period, integration and related expenses amounted to JPY 1.2 billion, which has trended lower than initially planned as we control spending by reviewing initiatives and cost management opportunities.

Operating income for the health & skincare business grew JPY 3 million as we continue to focus on driving operating efficiency, mainly in sales promotion, which offset a decline in revenues.

Finally, goodwill amortization, including the purchase price allocation relating to last year's integration, was negative JPY 1.4 billion year-to-date. Overall, we continue to make progress on our synergy commitments, and we delivered JPY 6.6 billion in net synergies year-to-date. I would characterize this as putting us on track to achieve approximately JPY 8 billion in net synergies for the full year.

Let me now turn to our full year and rest of the year outlook. As you may remember, we announced a revision to our full year forecast on October 10. On Slide 14, you will find our revised full year forecast compared with 2017 pro forma results. We consider this to be a realistic view of how we will end this year but, of course, continue to urgently evaluate all opportunities to improve this performance.

Just to touch on the current situation. We've been trending roughly in line with our revised full year plan. This includes October sales results that show moderating negative trends and also higher logistics and transportation expenses in the quarter, in line with our current expectations for the year.

Let's move to Slide 15, which details the drivers of our revised operating income plan versus prior year. In the fourth quarter, we expect the impact of volume, pricing and mix to moderate or become less negative and DME spending to decline versus prior year on more muted volume as we cycle investments we made last year for the Winter Olympic Games in PyeongChang.

As mentioned earlier, we expect continued higher commodity pressure in quarter 4, driven by PET resin, aluminum and paperboard. Net cost of goods savings for manufacturing and procurement may be lower in the fourth quarter, which is typically one of our smaller quarters in the year. We expect continued weaker sales volume combined with higher cost of goods, as we look to maintain alternate sources of product supply, including the use of third-party toll packers until internal supply capacity can be expanded.

Other OpEx and integration expenses are also expected to increase in the fourth quarter versus prior year, driven by continued higher transportation expenses as well as early planned onetime integration expenses.

The table on the right -- upper right-hand side of the slide shows our year-to-date CapEx and depreciation as well as the current outlook for 2018. We have reviewed our full year expectations and now expect CapEx of JPY 51.3 billion, a decrease of JPY 14 billion versus our initial plan for the year. The revised plan includes the initial investment related to expanding our manufacturing capacity, including the acquisition cost of land and buildings for the relocation and rebuilding of the Hongo plant to its new Mihara location.

The JPY 8 billion target for net synergies this year remains unchanged even with the added pressure from the flooding and supply disruptions we have experienced. These disruptions will likely require replanning of the composition and timing of expected synergies next year.

On Slide 16, I'd like to highlight an important initiative that will help us to truly integrate our business operations in both the back office and the front office. We are rolling out our new Coke One ERP system to replace multiple out-of-date or duplicative IT systems, dating back to legacy bottling companies from the past. Coke One is not simply an IT system but an important platform for us to efficiently and effectively manage our business operations across the company. Coke One is based on a global SAP template used by other major Coca-Cola Bottlers around the world, customized for the unique requirements of the Coca-Cola system here in Japan. We've applied the experience and learnings from the initial rollout of the back office functionality in Coca-Cola East Japan with a smooth deployment and expansion across CCBJI thus far. Actually, just last week, we completed the full Coke One back-office deployment across all of CCBJI, which was a major milestone in our integration road map planning. Back-office includes the core areas of finance, procurement, HR and payroll, production, warehousing and equipment management. We will continue to roll out the front-office application or sales and distribution functionality, which we expect to complete by the second half of next year. With the full rollout of Coke One, we will be able to manage data and decision-making across this growing company with one central source of truth, driven by standardized processes and a granular understanding of the drivers of our business. I'm very pleased and encouraged by the progress our team is making to ensuring a full rollout is a success.

On Slide 18, I'd like to provide an update on what we've been calling our financial framework for value creation. We remain committed to driving shareholder returns, with a focus on improving return on equity. In line with this commitment, we announced last Friday a new JPY 25 billion share buyback program through May 2019. This is in addition to the JPY 55.9 billion share buyback that were completed in April of this year. We believe this new share repurchase program demonstrates our continued commitment to the strategic direction we outlined at the creation of CCBJI last year, in spite of the near-term challenges we are facing and as we invest to recover and set a solid foundation for growth in 2020 and beyond. In addition, we remain committed to paying a stable dividend. Our 2018 dividend forecast is unchanged at JPY 50 per share, an increase of JPY 6 per share versus last year, with an expected payout ratio of 107% in light of our revised full year forecast. Finally, we recognize and appreciate the support and trust placed in this company by investors, and we provide a shareholders benefit program that encourages longer-term holdings. We regularly evaluate initiatives and options within our financial framework to optimize and improve the efficiency of our capital structure, and we will continue to prioritize and make adjustments as appropriate.

Please turn to Slide 19. You may remember that we had made a decision to adopt IFRS, or International Financial Reporting Standards, when we report full year results in February 2019. We believe this enhances the comparability of our financial results in global capital markets, providing useful financial information for investors and shareholders and makes it easier to benchmark results with industry peers and other Coca-Cola Bottlers globally. We've summarized some of the major differences between IFRS and JGAAP reporting in February. And I provided them again here today. I would like to explain the impact of moving to IFRS as well as introduce the concept of business income as a measure of our underlying or recurring business performance after the adoption of IFRS. As you'll see on the left side, major differences include goodwill amortization, accounting treatment for depreciation and pensions as well as reclassification between SG&A in JGAAP and revenue in IFRS. Also, operating income and IFRS includes onetime or extraordinary income and expenses that are reported in nonoperational and extraordinary income and expenses in JGAAP. The idea of business income that we are introducing today deducts cost of goods and SG&A from revenue and includes other income and expenses which we believe are not onetime in nature. An example of recurring items in other income and expenses would be the profit or loss from the routine disposal of fixed assets, such as sales equipment or fleet vehicles, and also property rental income. Extraordinary items, such as this year's impact from the heavy rains and flooding, would not be included in business income.

Slide 20 shows the estimated impact of IFRS adoption on our full year 2018 forecast with a comparison of JGAAP and IFRS, including major drivers of the variances. In IFRS, revenue decreases compared with JGAAP due to the reclassification of sales promotion and some other expenses between SG&A in JGAAP and revenue in IFRS. No amortization of goodwill results in a decrease of SG&A in IFRS. However, accounting treatment for depreciation and pensions will increase both cost of goods sold and SG&A expenses. As a result, business income will be JPY 23.1 billion in 2018 with a 2.5% business income margin, which is lower than the forecast 2.8% operating income margin in JGAAP. Operating income under IFRS includes a net loss of JPY 10.8 billion of other income and expenses. As you can see, the net income remains essentially unchanged between the 2 reporting standards. Total assets in IFRS are expected to increase by JPY 40 billion, mainly driven by the required retroactive adjustment of book value, of fixed assets and goodwill, including franchise intangibles related to the bottler agreements of former Coca-Cola East Japan. We will announce our full year results and any updates to the mid-term plan in IFRS next February.

With that, let me ask Yoshimatsu-san to come back and talk about the mid-term direction and wrap-up for today. Yoshimatsu-san?

[Tamio Yoshimatsu, executive]

Vikas, thank you. So this is Yoshimatsu again. On Slide 22, we give you a directional image of the mid to long-term, taking into account the current situation. The strategic direction will be maintained, but it will take more time and investment before full recovery.

Regarding revenue growth, there will be 7 production lines added by the spring of 2020, not only recovering but also strengthening the supply capacity. In parallel, we are closely collaborating with Coca-Cola Japan to build and execute top line growth strategies, accommodating the rapid shifts in consumer preference and channel package mix.

Market share partly reflects the opportunity loss imposed by supply restrictions. But that does not change the value share emphasis in our future activities. Synergies have continued until this year, in line with the plan. But there is a possibility more time will be required for recovery, and the timing for synergy generation will be delayed. We will continue in our quest for new sources to close the gap as much as possible. OI will continue to be impacted by the changes in our supply chain network. With ongoing decline in production efficiency and increase in transportation costs, we foresee the difficult phase to continue until the production capability enhancement is completed in full scope. In 2019, in particular, there is additional investment necessary to solidify the foundation for recovery and for growth. Although this will increase cash spend for investment activities, we have reviewed priorities in our financial framework to decide on a second share buyback program.

Slide 23 wraps up today. This has been a truly challenging year for us, and we are far from satisfied with the results. We are responding quickly to the current situation, however, and tackling the urgent issue of expanding product supply as was seen in the decision to relocate, and we launched the Hongo plant and other initiatives to tackle the urgent need to expand the capacity.

February of next year, we will update our mid-term business plan, in which we will be positioning 2019 as a year of recovery, a year to rebuild the foundation for growth. Initiatives toward problem solutions have started, but the pressure on top line, transportation expense and commodity price trends will continue to impact 2019 negatively. Obstacles lie ahead in the short term, but even as we deal with immediate issues with speed and with a sense of urgency, our strategies remain unchained -- unchanged at the core and in the basic direction. We will continue to strive for long-term sustainable growth. And with this, I would like to close my part.

[Raymond Shelton, executive]

We're ready for Q&A now. Let me remind you that this Q&A session is intended for analysts and investors, so we ask members of the media in attendance to please hold your questions for our media session which is scheduled later today. If possible, please provide your name and company when asking a question, and please try and ask one question at a time as we are translating your questions into English. So we're ready for questions. We got one question here in the front.

[Ritsuko Tsunoda, analyst]

This is Tsunoda from the JPMorgan. So one by one, so my first question is, for the Q3 that just closed, the CVS and vending, the NSR per case is coming down for these 2 channels. I guess it's mainly due to the coffee, due to the PET bottles, I would like to understand the background.

[Raymond Shelton, executive]

So in Q3, convenience store and vending results are showing revenue per case decline, what exactly is driving that? Yes.

[Ritsuko Tsunoda, analyst]

Is it mainly due to the PET bottle coffees or not? Please refer to that point as well.

[Raymond Shelton, executive]

The trend of PET coffee and large PET. Vikas-san, would you?

[Vikas Tiku, executive]

Okay. Certainly, in CVS, the impact from the shift in coffee to the PET format, which is now widely available, had an impact in quarter 3. From a revenue per case standpoint, that is likely to continue until we cycle through the full launch in that particular channel in next year. I think the vending NSR decline is a function of -- largely, a function of the fact that the SOT can volume is declining more rapidly in that channel than we had previously expected. We don't have PET coffee available in vending channel at the moment, except in very small test locations. So that shift has not yet occurred in the vending business. But clearly, given the fact that other competitors have that product available, it's in fact in the SOT can business and the vending channel much faster than what we had previously estimated and versus last year. So that's largely driving the performance in the vending channel. Costin-san, I don't know if you wanted to add anything more to that from a commercial standpoint.

[Costel Mandrea, executive]

This is Costin Mandrea. I'm in charge of commercial. Indeed, we see a significant shift of consumer preference toward aseptic products and more especially, toward PET coffee. We see NSR per case growing in supermarket, drug, discounter and in CVS in Q3. In vending, it's almost flat year-on-year. How we are addressing this shift, first of all, yes, there is a challenge with the consumer demand moving into PET, but it's also an opportunity. So we took the opportunity to reduce our future consumption, large PET promotions in supermarket, drug, discounter. We took the opportunity to reduce the chirashi with our customers in such a way that we see NSR per case growing. Coffee, it is indeed a growing category today and for us, we grow coffee in all the channels excluding vending by 1% here to date. And in Q3, we grow market share in over the counter. So we take all the advantages of this shift in the consumer preference, not only with PET but we activate SOT can, we activate bottle can. So if you remember, we launched in Q3, Georgia Gran Bito which is an amazing product. We executed it very well, and we succeed in a few weeks to gain leadership in Bito segment in the market. So we are operating, having all the variables at hand, and we are looking forward to get the most out of this situation. Thank you.

[Raymond Shelton, executive]

Thanks. And Tsunoda-san, I think, you had a follow-up question.

[Ritsuko Tsunoda, analyst]

In order to follow up on that, meaning the supply constraint, once the supply constraint is eliminated, and you're going to be able to freely fill the products, let's say, in the latter half of 2019, there's going to be a downward pressure even more on the pricings, is that the right way to understand? Meaning, for example, the chirashi promotions constraints, if you don't need to keep them down, then in the supermarket, drug and discounters, the NSR per case, I'm assuming that there's going to be a downward pressure. And also, the PET bottle coffees, everybody seems to be increasing the production, including yourselves, which means more than what we've seen in the Q3, there is -- a risk of a downward pressure is going to increase. That will be the additional question that I would like to ask.

[Raymond Shelton, executive]

So we got it. So it's a follow-up question. Just as we recover capacity through the back half of next year, what does that mean in terms of the environment on pricing, specifically with PET aseptic packaging and the trends around chirashi or the need to reintroduce chirashi promotions as well as competitive environment?

[Vikas Tiku, executive]

The shift to PET packaging format and coffee is driven by consumers. It is certainly now a more preferred format or it appears to be a more preferred format for coffee compared to the other packages of small cans and bottle can. We will participate in that trend as well as we possibly can. It does have a slightly dilutive effect on us in the short term, but I think that will moderate over time because there is growth in that segment. There's growth in that package segment. And so while it might put a little bit more pressure on NSR per case, I think there is still more value to be created in participating in that trend, and that's what we are focused on, and providing products that our consumers would love in a format that they would want. When it comes to chirashi promotions, recognize that, that was a Coca-Cola-only phenomenon this year. So chirashis did not go away from the market. It's just that we didn't participate as much as we would have otherwise because of our supply constraints. I think what we are talking about is returning back to a normalized promotional activity calendar and not necessarily increasing it well beyond. It's just a question of recovering from the impact this year and making sure that we can take our leadership position and moderate that in the right way in the market. So will it have year-on-year slightly negative impact because of, obviously, the reduction in chirashi promotions this year? Yes. But again, I don't see that as a long-term issue. I just see that as a cycling issue and us getting back to what I would call normal business operations next year.

[Ritsuko Tsunoda, analyst]

Is it okay if I could go to the second question? Actually, it's probably a third question by now. So I have a question to Vikas. So thank you very much for the share repurchase announcement. How are you going to finance this? And plus, this term, it seems that the amount is quite high. How are you going to -- what are your policies going into next year and beyond?

[Vikas Tiku, executive]

You will recall that we had talked about last year that we have -- at that time, we had substantial cash reserves as well as significant capacity on our balance sheet to take on more debt if we had to figure out the right capital structure for the business. It's undeniable that at this point in time, our short-term capital needs in the business are higher than what we had thought at this time last year because there is manufacturing capacity that we have to invest in well ahead of what we had previously thought. And on top of that, we lost a plant that we have to recover. So versus last year, our capital needs, certainly in the short to medium term are higher. The amount of share buyback that we've announced, we thought, was prudent and appropriate from a size standpoint, given our expectations of cash flows and investment needs for the business for the next 18 to 24 months. It can be financed in short term, it will just be financed with short-term borrowings. We will look at -- amongst other things, we will look at our overall capital needs as part of the mid-term plan revision and come back with a more appropriate capital structure definition for us going forward in the mid-term. So please look for that maybe in 2019 February when we come out with our business plan. But in the short term, we can finance it easily through short-term borrowings. My perspective on something like this is, it's not -- it's very consistent with the framework that we had established last year. And from a timing standpoint, given what we had done already this year, given our capital investment needs and where we are as a business, we thought that the amount and the timing was appropriate at this time and then we will continue to look at all opportunities. As you know share buybacks is just one of the elements of how you can optimize your capital structure. We will continue to look at all those options and take appropriate measures as and well necessary.

[Raymond Shelton, executive]

Ready for the next question, over here.

[Nobuyoshi Miura, analyst]

So this is Miura from the Citi. I have 2 questions. First, the Coke ON implementation initiative. I understand that this is a strength for you and I think, it's a great idea. But looking at the data, despite the fact that you are having this Coke ON, this special initiative, the vending performance is 8% down. So I don't know if this is really effective with your consumers, the shoppers. So despite this good initiative, why is the volume coming down by 8%? And also how is this going to turn around in a positive manner?

[Raymond Shelton, executive]

Thank you. I'll just repeat the question real quick, and then I want to go straight to Costin, I think, yes. So the question is, with the rollout of Coke ON and the different initiatives building on Coke ON, how does that relate to the current performance in the vending channel? And how should we be thinking about that going forward? Miura-san, did I get it right?

[Costel Mandrea, executive]

Thank you, Miura-san, for the question. So yes, we've seen third quarter significant underperformance of vending. And inside the company, we are operating with supply restrictions here. We didn't have enough product mainly, so we decided to prioritize customer relationship, different channels, and we did not fill enough the vending. This is the first thing. And we stand by this decision. In the meantime, what we did still for the vending, we saw significant improvements for Coke ON. We have, as we speak, 280,000 machines with Coke ON. They perform better than the machines without Coke ON. We added new functionalities, which is the Coke ON steps, 2.2 million users who are counting their steps every day, and they get rewards. And we just launched the Coke ON Pay, which is supporting major credit card, and we have 20,000 machines. This is something that we did during the summer. Now you remember we presented in front of you, Yoshimatsu-san presented strategic transformation project for vending, and we are progressing well with this one. You remember, we said we have a test area in Tokyo, where we saw very encouraging results. And basically, we see results, much better results in terms of sales promotion. We see much better results in terms of number of trips per day. So we can reduce the cost of filling. We decided to take this result, the same concept. And from 1st of November, we implemented in Osaka and in Fukuoka. We believe this is very good for the future of vending. And of course, we presented to you all the efforts we are doing in getting smarter algorithm. We have machine-learning algorithms right now, which is getting smarter with every iteration in terms of doing demand forecast and also in terms of suggesting what kind of SKUs I should have in the vending machine. These are also going well. Yes, this year, it's a tough year for vending because of the decisions we made, and yes, we want to have more supply to be able to fill vending. However, with all the actions that we are doing, we are very committed and very convinced, vending, it's -- it'll continue to be an important channel for CCBJI. I hope this answer your question.

[Nobuyoshi Miura, analyst]

And by the way, the vending machines compatible with Coke ON and the difference between in VPN with those that don't have Coke ON, what is the difference? I'm sure, that Coke ON VPN is high.

[Costel Mandrea, executive]

Yes. And of course, this, I'm giving you average. Because when you see different channels, indoor, outdoor, you see variances. For example, when I have outdoor roadsides, so the machines that are on the big streets in Tokyo or in Japan, we see up to 5 percentage point increase versus between non-Coke ON and Coke ON. So yes, 5%.

[Nobuyoshi Miura, analyst]

So I'm looking forward for more Coke ON to be covering our -- your vending machines. But this may be a difficult question, but your share versus the #2 industry player share is becoming closer. So the #2 is catching up. As a result of this kind of environmental change for you, are you going to change your strategy? Or when it comes to your customers, convenience stores, supermarkets, what do you expect in the way they will start behaving towards you?

[Raymond Shelton, executive]

So the question is on share trends and how are we thinking about volume and value share and our own strategies related to that going forward. Yes. Yoshimatsu-san, you want to take that?

[Tamio Yoshimatsu, executive]

Thank you very much for your very difficult question. I think we have answered this in various forms in the past as well. So I think that you may look like -- we may look like we are boiling frog in water -- in lukewarm water. And so the difference has been becoming smaller and smaller. But our issues are in vending and in coffee, really the share differences, that battle is going to be played out in coffee and vending especially, that's the way we see it. So in vending, as Costin has explained, it's really up to what kind of investments we are making and whether we can truly reposition and see our own vending machine business as our own retail business. So in the past decade, the entire industry has been declining in vending. We have been losing share as well. But I think we are here at the crossroads where we can make some fundamental changes, and we are looking forward to the next big news that we can share with you on vending. For Georgia, I think we need to take a more mid-term look, and I would like to invite you to take that kind of look with us. Right now, when we compare price and volume, coffee PET is truly growing at an accelerated pace. So 5 million cases, we have sold between April and September. Had we been able to load this into our vending machines, of course, it is quite exciting and almost scary to think about how much the volume will be. Now one of the reasons why this pie is becoming much larger is because there are so many people who are not the traditional can coffee users, the conventional can coffee users, and these are usually young people. They like it because the price per ml is attractive for them. But when the pie becomes larger, there's always something that will happen, and that is related to the revenue-rich products, products which are higher in price, and there will be a new innovation that will cut into that category. So even those people, who are not just taking long -- taking sips with these larger drinks across a long period of time, there will be other new kind of users with new kind of expectations. Now of course, we still have the supply issues in -- looming and lingering in 2019. So for the short term, it's really us recovering and coming up with solutions for this kind of tight supply. But at the same time, we would like to create a good foundation and be prepared for the new changes in the market that will come along. That's our thinking around how we are going to stop share from being eroded for us and in fact, growing it. But there's nothing specifically new that I would like to share with you right now at this moment on that point.

[Raymond Shelton, executive]

Ready for the next question. Please, right up front.

[Satoshi Fujiwara, analyst]

This is Fujiwara from the Nomura Securities. Just one question from myself. Sales volume for 2019 onwards, I understand that there's going to be production lines and gradually, recovery will be in place. However, there is a supply constraint from the past. So I guess you're already considering how you're going to leverage the toll packers. So not just by increasing the internal capacity but also using the external packers, 2019 and also the year after next, how much volume are you planning to increase?

[Raymond Shelton, executive]

So the question was 2019 volume. Given the investments we're making in additional capacity right now, both internal and outsourced third-party total packers, given both of those impacts, how are we thinking about volume capacity next year versus this year?

[Vikas Tiku, executive]

Let me take that on for now and then if appropriate, maybe our supply chain head, Bruce, can comment on it as well. I think you're absolutely right. When you are in a capacity-constrained environment, you look for all options. For us, clearly the preferred option is to have in-house capacity because then we have better margins on our products when we do that, we have more control over our products when we do that. But clearly, there is a time line associated with making those investments. It takes time to get those lines installed and have them functioning and productive. And as we've talked about today, beginning now through spring of 2020, we are progressively going to invest in that capacity wherever appropriate to make sure that we have enough in-house capacity to meet what we think is the demand out there. In the short term, we will clearly need to supplement that with additional volume that we will procure from toll packers. I'm not going to go into the specific numbers as to how many cases will we procure or not procure because that's an internal discussion. But whatever capacity is out there that we can source that is outside our system, we are looking at that aggressively as part of our 2019 plan. Despite that, we believe that the demand will still be higher than what we think our capacity constraints might look like in 2019. And it's only by spring of 2020 when essentially all 7 of our lines will be fully operational that we think we'll catch up with where the demand is right now in aseptic PET products. Bruce, anything you feel like adding to that? No? You don't have a -- Costin, can you pass the mic?

[Raymond Shelton, executive]

Can you pass a mic back? Yes. Thank you.

[Bruce Herbert, executive]

Thank you. My name is Bruce Herbert, I'm Head of Supply Chain. Just to reemphasize Vikas comments, we are working actively with a number of contract packers, and we are significantly increasing our capacity, not just next year but into future years for contract packers supply right across a range of different products. So it's a very active part of our strategy in the short term but also in the medium term to stay engaged with contract packers.

[Raymond Shelton, executive]

Thank you. We have another question here in the front.

[Naomi Takagi, analyst]

My name is Takagi from SMBC, and I have just one question. I know we're running out of time so I absolutely want to ask this question to Yoshimatsu-san. So as we move forward, obviously, you're going to come to -- want to come to a start line to try to increase profitability again. And you are saying that you're going to make it happen through supply capacity recovery. But do you need to do just that? Or is there some other operational solutions that are necessary? Maybe I'm taking a somewhat cynical look, but you've gone through a number of troubles. And is it because after the integration you have been too focused to profitability generating? So maybe, there needs to be some kind of solutions applied on the operation overall, not just the recovery of supply capacity.

[Tamio Yoshimatsu, executive]

What your concern is that perhaps there's some kind of a warping or some kind of issues that came out of the integration. Let me answer that. So as a result of the integration, 2 companies came together, one that was truly speedily moving forward with reform and another company called CCW, which had taken this at its own stride. Now these are completely different organizations that came together. But now we have truly been in certain times at attention because we wanted to come up with what's best for CCBJI. Right now, we are trying to overcome very high obstacles and on the other hand, to become a global level -- world-level bottler. On one hand, we don't have enough capacity on the supply side. At the same time, there is SNOP. And SNOP obviously needs accuracy on the financial systems side. And without that, it is difficult to make judgments on what is the best option, but once Coke One is fully deployed, we will be able to make such decisions. However, the phenomenon that is happening today is before we were able to bring to completion our infrastructure to the full and the foundation to the full. So right now, this is restraining us from satisfying our customers completely. So that's what we are prioritizing right now. We are part of the community, and we must prioritize at all cost to continue supplying to the communities that we serve. Sometimes that means that we need to sacrifice efficiency for this purpose. Even though the distance might have been quite long, we decided to provide -- continue providing to the Chugoku area, so I would like to assure you that your concern does not apply in this case, and it is really the birth pains that we are going through. So once we built -- have built up this foundation for growth, once we go to 2020, we will be ready to go back on the growth trajectory, where we are very confident to make that happen. I would like you to feel assured.

[Vikas Tiku, executive]

If I can just add something to that. You can't go back in time, obviously, but as a leadership team, we are absolutely sure that if we were not together as CCBJI in this difficult year, and we were 2 separate companies, or worse, even smaller companies, we would be in a much, much more difficult position than we are today. Yes, the numbers and the results don't look great for BJI, but our ability to respond to customers, our ability to respond to ensure we protect our market share position, our ability to invest, to drive the capacity that we need to drive is all significantly enhanced because we are together as a company. The challenges we've had for this year are unrelated to the integration. We would've had those challenges, whether we had integrated or not. My belief, very strongly, is that our ability to respond to it is actually significantly enhanced because we are together.

[Raymond Shelton, executive]

All right. Well, thank you very much. I think we've run up against our time limits for today. So I'd like to thank you all again for your interest in our business. And we do look forward to having more opportunities to interact with you. Please, we invite you to reach out to us and our team in Investor Relations department if you have any questions, feedback or follow-up. Thank you very much.