Coca-Cola Bottlers Japan Holdings Inc

TSE:2579

Earnings Call Transcript 2022-Q3

[ゴミ マサオミ, executive]

[Interpreted] Good afternoon, I am Masaomi Gomi, Investor Relations Department Manager for Coca-Cola Bottlers Japan Holdings. Thank you for joining us today for our third quarter 2022 earnings call for analysts and investors.

Today, we have President Calin Dragan; CFO, Bjorn Ulgenes; and Takashi Wasa from the Coca-Cola Japan Company. We also have Executive Officer and Chief Commercial Officer, Costel Mandrea; Executive Officer and Chief Transformation Officer, Maki Kado, and Executive Officer and Chief Supply Chain Officer, Bruce Herbert. Following prepared remarks, we will be happy to take your questions. Simultaneous translation in both Japanese and English is being provided for today's call and during the Q&A.

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 presentation.

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

[Calin Dragan, executive]

Good afternoon, everyone, and thank you for taking the time to join us on our quarter 3 results call, Calin Dragan here. I will begin by sharing the summary of our third quarter 2022 earnings.

Please turn to Slide 5 of the presentation. Sales volume grew strongly for the third quarter year-to-date, increasing by 5% on the previous year. This was achieved by effective commercial activities and an improved S&OP process, which allowed us to successfully capture the demand recovery in traffic and from the heat wave. We achieved steady volume growth despite the negative volume impact of the large PET price revisions implemented ahead of the industry in May.

Wholesale revenue per case is an overall improving trend. Price revisions are showing results in channels with high large PET ratios, such as supermarkets drug stores and discounters, which grew by over JPY 20 compared to the previous year. In Vending, initiatives to improve retail prices enabled us to increase wholesale revenue per case while growing volume.

Through these activities, we achieved sales revenue growth that exceeded volume growth in the third quarter. Total channel value share grew by 0.8 points versus last year. Value share growth in our important Vending channel drove this overall growth. October price revisions for small packages are progressing as planned, with negotiations with customers being completed.

We believe we have made big progress in improving future profitability. Business income grew compared to the previous year. Top-line growth and cost savings from transformation contributed to year-on-year profit growth, despite the continuing pressures of raising commodity prices, a weak yen and ongoing severe competition. I have shared the results of the year-to-date period so far. If we look at the third quarter alone, our peak season that stretches from July to September, we can see improvements in the top line.

Please turn to the next slide. Despite the challenging volume impact of large PET revisions, our third quarter sales volume grew by 7% over the previous year. We are particularly pleased with the 8% volume growth in the highly profitable Vending channel, which exceeded the growth rate of the second quarter. This was achieved by commercial activities that decisively captured the traffic recovery demand, a clear signal that our efforts are showing results.

Vending saw wholesale revenue per case improved by JPY 25 year-on-year, continuing the trends of the second quarter, achieving both volume and wholesale revenue per case growth. With the price revision of large PET implemented in May, wholesale revenue per case for supermarkets, drugstores and discounters increased by JPY 32 from the previous year. Volume growth and profitability improvement efforts have led to an increase in value share as well.

In the third quarter, we believe that we captured growth opportunities from traffic recovery and the heat wave by leveraging the foundations we have built so far. We are pleased to see the results of our investments made over the years and to have built the foundation for growth even in this difficult business environment.

Now let me ask our CFO, Bjorn Ulgenes, to take you through the details of the third quarter year-to-date earnings.

[Bjorn Ulgenes, executive]

Thank you, Calin. Hello, everyone, this is Bjorn Ulgenes. Please look to Slide 7 for the third quarter year-to-date results.

As explained earlier, sales volume grew by 5%, and the revenue growth was 3.9%. Looking at the third quarter alone, volume growth was 7% against the revenue growth of 7.3%, showing contributions from the price revisions being realized. Business income was at a loss of JPY 11.2 billion, but this is an improvement to JPY 2.8 billion on the previous year. Factors behind this change will be explained on the next slide.

Operating income improved by JPY 12.9 billion from the previous year. This includes the continued balance sheet improvement efforts such as the gain from the sale of fixed assets. Net income decreased by JPY 3.7 billion. This was mainly due to the cycling impact of a JPY 12.5 billion gain on the sale of shares of our subsidiary, QSAI being included for 2021.

On Slide 8, you will see our primary business income drivers. For the waterfall chart, we have made changes in the order and classifications. The waterfall chart with the previous classification is though provided in the appendix. From the left-hand side are volume, price and mix. This shows the year-on-year change in marginal profits from commercial activities, an improvement of JPY 8.9 billion from the previous year.

In addition to the significant contributions from volume growth with the traffic recovery and heat wave, improved package mix and improved wholesale revenue per case since the second quarter with price revisions, all contributing. This includes the impact of increased variable costs with volume recovery and increased rebates due to the promotional activities in response to the severe competitive environment. Note that rebates were under control in the third quarter, even when volumes grew.

Next is manufacturing costs. In manufacturing, the analysis excludes the large impact from utility costs with a rise in commodities. The main contributor to this improvement was from the improved manufacturing efficiency with increased volume, resulting in the JPY 4.5 billion improvement over the previous year. Impact of utility costs are shown as a total in the commodity and utility cost bar on the far right.

In other costs, we saw an improvement of approximately JPY 5.4 billion compared to the previous year. Labor costs increased with the cycling of last year's temporary leave. However, contribution from improved S&OP, lower logistics costs, leveraging the mega distribution centers, and controlled CapEx resulted in a decreased depreciation expense. This also includes a lower depreciation expense of JPY 6.5 billion with a change in the useful life of sales equipment.

Fixed marketing expense, or DME, increased by JPY 2.9 billion from the previous year as volume grew. This was driven by strategic investments to capture traffic recovery demand as well as strengthen marketing activities ahead of the peak season. Marketing investments from the third quarter onwards have been controlled. Overall, it is progressing as planned. Looking at the items explained so far with volume, price and mix to DME, business profits have been steadily increasing from the previous year.

Next is the commodity and utility costs, which were significantly impacted by external factors. Cost increased by JPY 13 billion from the previous year. The impact of commodity prices, including ForEx was JPY 10 billion, impacted by higher prices of materials such as PET resin and aluminum as well as the yen's depreciation. In addition, utility costs increased by JPY 3 billion with higher electricity and natural gas prices alongside the rise in crude oil prices.

We have worked to reduce procurement costs by all possible means and have achieved a certain degree of success. But the impact has been substantial and has offset the factors contributing to earnings growth that I've just explained. These are the main drivers of business income.

Please turn to Slide 9 for volume performance by major channels and categories. For the third quarter year-to-date, sales volume increased by 5% despite being facing negative volume impact from the May price revisions. For the third quarter alone, our peak season, volume growth was 7%.

I will now provide channel details. With the recovery in traffic, immediate consumption channels, such as vending and convenience stores saw volume growth. Especially for vending, we achieved 5% growth for year-to-date volume and 8% increase for the third quarter alone. An increase in the number of vending machines and the use of Coke on smartphone app contributed to the increase in sales per vending machine.

In Retail & Food, volume grew by 25%, benefiting from a recovery in traffic, including an increase in opportunities for dining out. Online also continued its strong growth of a 33% increase in volume. Thanks to label-less products and tie-up promotions with major online customers, while leveraging the convenient features of the channel.

Supermarkets, drug stores and discounters were impacted by large PET price revisions and intensified competition. With such tendencies on an easing trend, drugstores and discounters volume recovered to a 2% growth from the previous year. Generally, the wholesale revenue per case is on an improving trend.

Supermarkets, drugstores and discounters are showing the benefits of the price revisions in the wholesale revenue per case, which has increased by JPY 20. Vending also improved by JPY 15 from the previous year with initiatives to improve retail prices. By category, as shown in the slides, all categories achieved growth.

Sparkling, tea and sports grew while being impacted by the large PET price revisions. Sparkling grew by 2% with volume growth in the median consumption and foodservice channels from the traffic recovery as well as contributions from new products. Tea grew by 1% and with the contribution from Yakan no Mugicha from Hajime that continues to grow its volume since being introduced last year and the new Ayataka Cafe Hojicha Latte.

Sports & Water each grew 10% with a recovery in traffic, the resumption of various events and the effects of the heat wave. Coffee sales increased by 4% due to the launch of new Georgia Black as well as the expansion of the Costa Coffee lineup and increased activities.

Slide 10 highlights market share trends. Total channel value share for the first half grew by 0.8 points from last year. This is a result of continued growth in vending value share that saw 2.6 points growth in value share. Also, while the volume share was impacted in the OTC channel with the price revisions, value share was maintained at an almost flat level compared with last year.

For OTC retail prices, large PET has turned positive from last year with the price revisions and an increased premium. Small PET saw a contraction compared to last year, but maintained a premium price to the market average. We have implemented price revisions in October and expect this to start feeding through to retail price going forward.

On Slide 11 is our volume growth and profitability improvement initiatives. Despite the challenging environment, including significant impact on volume from the large PET price revisions, we were able to achieve 5% volume growth in the third quarter year-to-date. At the same time, we also achieved profitability improvements.

For the volume growth aspects, we have strengthened our product portfolio by introducing new products that meets diversifying consumer needs and purchasing patents. We executed versatile commercial activities to meet both immediate and future consumption needs and steadily capture the increasing demand from the traffic recovery and the heat wave.

While I touched upon this earlier, we captured demand in the immediate function channel in a big way. In Vending, we steadily captured increased demand opportunities through placing vending machines that anticipated renewed economic activity. A digital marketing strategy using the Coke ON app contributed. In addition, we successfully captured sales opportunities at venues, such as restaurants, hotels and leisure facilities, that the increase in occasions to consume beverages when going out. We are well prepared to capture future and at-home consumption demands.

Volume impact from large PET price revisions are gradually easing and even during phases of traffic recovery. Online contributed greatly by continuing to capture and expand at-home demand. Prior to COVID, we were focusing on these channels as a new convenient sales channel. And through such efforts, strong volume growth continues.

For profitability improvements, we have previously explained that this year, we have set profitability-focused pricing as one of the pillars of our commercial strategy. As part of this strategy, we will work to revise prices and implement promotions at appropriate levels. The initiatives are progressing as planned and the effects of the profitability improvements are becoming apparent. We implemented price revisions for large PET in May ahead of the industry and for small packages in October despite the severe competitive environment.

On the next slide, I will share the progress on this. In Vending, we are leveraging the strong market share we have built to date. We are launching premium products with high unit prices and revisiting promotional pricing. In the third quarter, we improved wholesale revenue per case by JPY 25 from the previous year, while volume grew at 8%.

Marketing investments are being prioritized and used by focusing on growth channels and categories. In the third quarter, we were able to control sales promotion expenses and rebates. The key to these efforts is a strong supply chain foundation. This year, the revamped S&OP process and the improvements of our company-wide logistics network including the use of Mega DCs, contribute to achieve stable supply and low-cost operations.

While experiencing volatility in demand with the rapid fluctuations of traffic during COVID, we revamped the S&OP process to ensure stable supply at a low cost. As a result, we were able to supply products without major disruptions this year, even though we experienced many demand spikes with the heat wave on top of the traffic recovery. We feel that our agility has greatly improved compared to the past.

In addition, utilization of our Mega DC automated logistic centers are now in full swing. And the company-wide logistics network is being approved, including efforts to achieve stable operations at the Saitama Mega DC and the early operation of the Akashi Mega DC, which is also making significant contributions to both growth and profitability improvements.

Slide 12 is the updates on the price revisions. Price revisions of large PET products implemented in May are progressing as planned. With the price revisions, wholesale revenue per case for the third quarter year-to-date grew JPY 28 at supermarkets and JPY 20 at drug stores and discounters. Large PET volume declined significantly immediately after the price revisions, but volume improved towards the summer season. And in the third quarter, the negative impact narrowed compared to the second quarter.

Additionally, OTC retail prices have increased together with shipment prices. The graph on the left-hand side showed changes in retail prices for large PET, excluding water at supermarkets, drugstores and discounters. The retail prices of our products rose more in the third quarter than in the second quarter, allowing us to realize the benefits of the price revisions. The price premium of our products has increased by 3x compared to the same period in the previous year.

Negotiations with customers for the October price revisions for small packages have been completed. Vending machine price revisions are also progressing as planned. We will continue to carefully monitor the situation after the price revisions and work to generate the planned benefits.

Please look at Slide 13 for updates on our ESG initiatives. With creating shared value as the foundation of our business, we are promoting various initiatives to achieve this. In August, we received a Silver rating from the internationally organized EcoVadis sustainability survey. This is the second consecutive year that we have received such high recognition. We are one of the first companies among the Japanese beverage industry to participate in this survey, which covers more than 100,000 companies globally. We believe that this recognition is the result of our activities on a global level.

Our efforts to achieve a world without waste are progressing well. This year, we have set the goal of using 50% of sustainable materials in PET bottles. And in addition to our package design efforts, we have been working with local governments and partner companies to establish a scheme for the stable collection of good quality used PET bottles.

In addition, we are engaged in various initiatives to contribute to local communities through our business. These include implementing water conservation activities, providing beverages through food banks and revitalizing local communities through vending machines. Also, just yesterday, we received a Gold certification for PRIDE Index 2022. We are pleased that our efforts to raise awareness of LGBTQ+ and create a comfortable work environment have been recognized. We will continue to focus on ESG initiatives that contributes to the health of our business over the medium to long term, while we work to return our business to a growth trajectory.

Now I'd like to ask Takashi Wasa from Coca-Cola Japan to take you through the marketing update initiatives, PLEASE. Wasa-san, please.

[Takashi Wasa, executive]

[Interpreted] This is Takashi Wasa from CCJC. Let me update you on the 2022 quarter 3 initiative reviews as well as highlights for our Q4 initiatives. Looking at quarter 3. In August, the Coca-Cola brand launched Coca-Cola Zero plus ENHYPEN campaign across all channels. The campaign contributed to sales growth and featured ENHYPEN, a rising K-pop group with a huge fan base. Marshmello's limited addition, Coca-Cola Zero Sugar, a sparkling beverage inspired by the artist Marshmello was launched in July for a limited period, further solidifying our engagement between the Coca-Cola brand and Gen Z.

Moving on to Georgia and Costa Coffee. In September, we launched an autumn campaign and our first collaboration with Tiny TAN, the globally popular animated charters inspired by K-Pop superstars BTS. In addition to the limited launch of Georgia Japan plus Tiny TAN design bottles, the campaign will also feature new functionality of the Coke ON Coca-Cola official app, whereby a Tiny TAN can be seen working at Cafe Georgia.

App users can interact with Tiny TAN and enter a promotion to win additional prize and original item from Tiny TAN. And in September, we collaborated for the first time with premium chocolate brand, GODIVA, to launch the Georgia Taste of Cacao. With a rich cacao taste, the new product is perfect to treating yourself and has [ streamed ] in, attracting new can drinkers.

Costa Coffee launched Costa Coffee Caramel Latte, a high-quality latte made with rich espresso, domestic milk and rich caramel in September. The number of Costa Coffee fans, who are particular about the hand brewed quality of Costa Coffee has been steadily increasing. By effectively leveraging the dual brands, Georgia and Costa Coffee, we have succeeded in expanding our market share in the coffee category.

A summer campaign for Ayataka Café was launched in July that the employed television, digital and outdoor advertising. The campaign conveyed appeal of delicious chilled Ayataka Café beverages and the increased number of summer drinkers. The Ayataka core brand launched its second campaign based on the concept of aromatic umami tea leaf brewed until fully opened at the end of August. The campaign has been promoting drinking occasion with food in the fall season.

This summer, in the second year since its launch, Yakan Barley Tea, which provides the authentic taste of Barley Tea boiled in a kettle, launched a massive campaign in the peak season for barley tea, including television and other advertising activities as well as mileage promotion in which customers are guaranteed to receive additional goods when they purchase the products. The campaign successfully expanded the number of tea drinkers to a wider range of generations. These activities contributed to the growth of sales in the tea category.

Last but not least, in Coke ON, the official Coca-Cola app, the number of downloads reached 40 million as of September 15. This is the fastest increase of 10 million new downloads in 1 year since the 30 million download in September of last year, and the first test in the history of the Coke ON app. The Coke ON app continues to grow and is used by many people.

Next, let me share with you fourth quarter initiative highlights. Coca-Cola launched FIFA World Cup design packages in October. In addition, Coca-Cola implements a promotion in which consumers can participate through QR codes on the label to win [ LINE ]points and original goods. Coca-Cola aims to strengthen drinking habits by fully leveraging FIFA World Cup assets.

At the same time, a "win goods to watch the World Cup at home, instant win campaign," which is targeting all KO products except alcohol was launched in October. Leveraging the FIFA World Cup assets, we will strengthen purchasing intention for the entire portfolio.

Next, Georgia and Costa Coffee. In October, Georgia launched Georgia Japan Craftsman Zero, the first zero series of PET bottled coffee with zero sugar and zero [ circles ] and Georgia Luxury Creamy Café Cafe Zero, which has a creamy rich taste. The initiative aims to capture the growing health conscious needs amidst the COVID-19 pandemic.

To capture demand during the peak hot season, Costa coffee will increase instant win type promotions such as those in which customers scan the barcode on the products to win a prize on the spot. So in the mid- to long-term health of the business, we would like to focus on the ESG initiatives, too.

Excuse me, let me go back to the next page. Next, let me share with you the Q4 activities. Just before I talk about the FIFA World Cup in Georgia, so next, I would like to talk about Kochakaden, the new tea white grapefruit tea will be launched. We are using the Nagano-grown shine muscat extract to brand with 6 different fruit flavors. We aim to strengthen its value as a high-quality black tea brand and further increase the number of tea drinkers.

Next is Coke ON. On November 1, a collaboration campaign was launched with DRAGONQUEST WALK, a location-based role-playing game for smartphone provided by Square Enix. At the end of November, Coke ON Wallet, an electronic currency with unique points and eMoney functions will be launched as a new feature.

Coke ON Wallet can be used as a means of payment for Coke ON Pay, which is offered through Coke ON and will be available at 420,000 vending machines nationwide that support Coke ON Pay. With the expansion of the new features, we aim to enhance the beverage experience to make it even more affordable and convenient.

This is the summary of my presentation today. On Page 17. Our marketing strategy for this year continues to have three main pillars: pivot to core; fewer, bigger innovations; and capture stay-at-home demand. We will continue to respond flexibly and rapidly to change in the market and further grow sales and revenues by strengthening our core brands and strongly accelerating the growth of second-year innovations launched last year and new innovation this year. Our marketing plan underlies our company purpose, Refresh the World. Make a Difference. We will continuously strive to deliver refreshing moments and the positive feelings through our beverages.

That's it for my presentation today. Thank you very much.

[Calin Dragan, executive]

Thank you, Wasa-san. Calin here again. Please turn to Slide 19 for the outlook for the fourth quarter. This year, up to September, the beverage market is estimated to have grown by about 5% from the previous year by volume. This was the seventh consecutive month of growth for the market since March.

We expect the current recovery trend in traffic to continue with the lifting of border restrictions and the support of the government's economic policies. However, given that beverage companies, including ourselves, have raised prices since October and the impact of inflation on consumer sentiments, we need to keep a close eye on beverage demand trends.

In addition, cost pressures from external factors such as commodity and yen depreciation have not shown major improvements and are expected to continue to significantly impact the profitability of beverage companies. Even under current and such circumstances, there is no change in our strategic direction.

Particularly, we will accomplish the price revision with determination, focusing on monitoring and maintaining prices after the price revision. There is no change to the full year business income forecast. In the fourth quarter, we expect a certain level of volume impact from price revisions as well as the negative impact from commodity prices and ForEx as well as the cycling of the onetime cost savings implemented last year.

Please turn to Page 20. I will share how external factors such as commodity prices and the weak yen not affecting our business and the potential need for additional mitigation measures. Commodity prices have been on an upward trend worldwide since 2021. And thus, we all know the speed further accelerated this year, partly due to geopolitical risks. The yen has depreciated to its weakest level in 32 years, and the beverage industry in Japan continues to face very difficult conditions.

We estimate that the impact of the cost increase will amount to more than JPY 100 billion for the beverage industry in 2022. For our company, the impact of commodity prices and yen depreciation this year is expected to reach about JPY 18 billion for the year, which includes the increase in energy costs with raising commodity prices.

Under these circumstances, we have implemented various mitigation measures. In addition to the initiatives for volume growth and profitability improvements that I shared today, we have been pushing forward with fundamental transformation of our business model with a focus on the future.

For cost savings through transformation, we are on track to generate savings of JPY 6 billion this year, which is above our original target and the accumulated benefit over the 3 years since the 2020 has improved our cost base by about JPY 28 billion. For procurement, we have worked to mitigate the impact of cost increases through hedging strategies and procurement activities that leverage the scale and the expertise of the global Coca-Cola system.

We implemented 2 rounds of price revisions. These initiatives are very important to establishing a future revenue base. However, we expect this high cost environment to continue for next year onwards. And in some situations, the risk of additional cost increases must be considered. Under these circumstances, we will continue to implement initiatives for both growth and profitability improvements. And in addition, we will closely monitor commodity prices, the ForEx situation and develop business strategies accordingly. We will seriously consider further price revisions depending on the situation.

For today's summary, please see Slide 21. For the third quarter year-to-date period, despite the large PET price revision impact, volume growth continued by implementing measures that effectively capture the traffic recovery and heat wave demand. Continued efforts to build the foundation for growth during the difficult business environment and adapting to change in an agile way are showing results.

Efforts, including price revisions to improve profitability are steadily moving forward. Price revisions for large PET has led to an improvement in the wholesale revenue per case since the second quarter and continued this trend in the third quarter. Price revisions for small packages were just implemented last month, and we believe that it will lead to a positive impact over the medium to long term. We will continue to monitor market trends closely to ensure that it progresses as planned.

For profitability, the beverage industry was significantly impacted by cost pressures with raising commodity prices and the yen depreciation. We were also impacted by such external factors. However, our business income significantly improved from the previous year by achieving results in areas that we can control. Such areas include growth through commercial activities, profitability improvements and transformation of the cost base in supply chain, all contributed to a strongly improved business income from the previous year.

I believe that our strategic direction is the right one. We were able to grow steadily this year during a phase of traffic recovery pushed forward with price revisions for the future and the effects are showing even in an extremely competitive environment, all of which give us confidence. We expect the business environment to remain challenging for the next year onwards for cost and competition, but we will evaluate the situation, consider and implement further mitigation plans as needed.

That concludes my presentation today. Thank you very much for your attention. And I would now like to ask Gomi-san to open the question and answers.

[ゴミ マサオミ, executive]

[Interpreted] Thank you, Calin-san. As the following Q&A session is for analysts and investors only. Members of the media are asked to refrain from asking questions at this time. Maybe we will hold a separate media Q&A session later today. Simultaneous interpretation is provided, so please ask your question in the corresponding language of the participating phone line. Please speak Japanese on the Japanese line, and likewise, English on the English line. Due to the constraints of simultaneous interpretation, please limit your question to 1 at a time. Now I'd like to start the Q&A session. Operator, please begin.

[Operator]

[Operator Instructions] The first question is from Daiwa Securities, Morita-san.

[Makoto Morita, analyst]

[Interpreted] This is Morita from Daiwa Securities. Can you hear us? Can you hear me?

[ゴミ マサオミ, executive]

[Interpreted] Yes, we hear you.

[Makoto Morita, analyst]

[Interpreted] So I have two questions. My first question is, you mentioned that you will be considering seriously about the price revision for next year. And I want to check the intention or your plan for next year. If the cost situation continues into next year, do you have to raise the price once again? Are you at that point? Or is it just, like, a possibility that might happen? I want to know the possibilities of the price revision happen. If the market situation really continues, what's going to happen? I would like to know a little bit more details around the price revision's possibility.

[ゴミ マサオミ, executive]

[Interpreted] Thank you, Morita-san. The first question is about the price revision possibility next year. So I would like to ask Costin-san to answer this question.

[Costel Mandrea, executive]

This is Costin. Thank you for the question. I will start by reminding everyone that this year, we took 2 price increases. One in May for large PET and one in October for small PET. We executed this very disciplined in the market. And what we are seeing, and you saw today in the report, we see an increase of retail price in the stores. Now for the price increase in immediate consumption, it's still early, we are assessing the results and we evaluate the impact.

Moving into 2023. Obviously, we see that the entire industry is suffering from rising costs and from deteriorating foreign exchange. And right now, we are considering the possibility to raise the price next year. And of course, everything depends on market situation. And like I said, on external factors like commodities. We are going to keep you informed of our decisions.

[ゴミ マサオミ, executive]

[Interpreted] And the second question, please, Morita-san.

[Makoto Morita, analyst]

[Interpreted] Yes. My second question is about the dividends. So here, based on the profitability, you have a deficit, but you still are going to provide dividends. But what is your healthiness for the -- from the finance perspective? What is your view? And how long are you able to keep the dividend payouts? So I want to ask about the stewardship of the financial area.

[ゴミ マサオミ, executive]

[Interpreted] Thank you, Morita-san. So you want to ask about the financial healthiness and also dividends. So Bjorn-san would like to answer.

[Bjorn Ulgenes, executive]

Thank you, Morita-san, for the question. Let me give a little bit of background. As you know, in 2021, we paid JPY 50 per share in dividends or 2x JPY 25. And for this year, 2022, we have maintained exactly the same policy of JPY 50 per share. How we're financing this as you have picked up from prior quarterly reports, we are going through a significant review of all our assets and therefore, our balance sheet. And we have been selling off nonproductive underutilized assets, partially with the aim to make sure we always maintain our JPY 50 per share dividend policy.

Going forward, our aim, of course, and top priority is to return to profitability. And in our policies or bylaws for the company, we aim, over time, to return to a 30% dividend policy. But as we all know, at the moment, that is not possible. So therefore, we envision to continue the policy for now with the aim of returning to profitability and therefore, the long-term dividend payout ratio. I hope that answered your question.

[ゴミ マサオミ, executive]

[Interpreted] Thank you, Morita-san, for your question. Operator, next question, please.

[Operator]

[Operator Instructions] We have Ihara-san from Credit Suisse Securities.

[Rei Ihara, analyst]

[Interpreted] This is Ihara from Credit Suisse. I hope you can hear me.

[ゴミ マサオミ, executive]

[Interpreted] Yes, we can year you, Ihara-san.

[Rei Ihara, analyst]

[Interpreted] I have two questions. First question, I think it's going to be an [ over-all ] with Morita-san. For the next price revision, what will be the trigger for you to decide and go ahead with the next price revision? Of course, the first one and the small package price revision will not be enough to absorb the cost inflation of the commodity.

But when you look at the KPI, are you looking at the unit price of the small package? If your competition exacerbate and if you can highlight the risk in that competition, if you think that you can actually see the intention to improve the profitability for the entire industry, then you will actually start seriously moving forward to the price revision. What will be the trigger? And what would be the motivation for you?

[ゴミ マサオミ, executive]

[Interpreted] Thank you, Ihara-san. I think the question is about the reason and the motivation for the next price revision, I would like Costin to pick it up.

[Costel Mandrea, executive]

We know and we -- it's very visible in the market, the entire industry is suffering from rising costs. And also what we know is this impact of the rising cost, it cannot be absorbed through -- only through our efforts alone. So price increase is one of the tools that we are doing. And in CCBJI, we are referring to this as smart pricing. Basically, it's a combination of taking price. It's a combination of managing our discounts, but also all our efforts that we are doing in revenue growth management.

As we move to next year and as we evaluate fully the results of the latest price increase, we have a set of scenarios we consider different options. And if the situation continues to deteriorate in terms of cost and in terms of foreign exchange, we are also considering to raise prices again next year. Right now, we didn't take a situation. We have all the options on the table. And like I said, we'll come back to you with information when necessary. I hope this answers your question.

[Rei Ihara, analyst]

[Interpreted] My second question. Well, right now, you have started the price revision, starting from October. So what's your evaluation? I know it's too short for you to come to the conclusion, but was the impact as expected from your initial expectation? For the second price line, do you think that you have achieved the target and expectation that you set forth for yourself for the second price revision?

[ゴミ マサオミ, executive]

[Interpreted] Thank you for your question. So your question is about the evaluation of the results of the October price revision. I'll ask Costin to pick it up.

[Costel Mandrea, executive]

I'll start with the fact that we raised prices this year 2x and the large PET price increase in May helped us to understand what's the impact on the market. When we raised the price, we were the only 1 in the industry for 5 months. So in the beginning, we saw deterioration of volume, but then helped by the traffic recovery and by the heat wave over the summer, we were to see an improvement of the sales. Overall, the large PET price increase was largely in line with our expectations.

From 1st of October, entire industry raise prices. And our focus and our sales team's focus was, again, to execute this discipline-ly, to spend time with our customers to make sure we have complete agreement. We succeed to successfully negotiate and implement this second price increase this year. We see initial results positive. We see prices on the shelf going up across all channels. But again, this is only 6 months after. So we are evaluating carefully, and we will act accordingly.

[ゴミ マサオミ, executive]

[Interpreted] Since the time constraints, I would really like to limit a question -- 1 question per person. Operator, please go ahead for the next question.

[Operator]

[Operator Instructions] Fujiwara-san from Nomura Securities.

[Satoshi Fujiwara, analyst]

[Interpreted] This is Fujiwara from Nomura Securities. So one question I had. So I would like to ask about the cost structure. So you have the recurring cost reductions, which is like JPY 6 billion for this year. And in the past 2 years, you did, like, JPY 13 billion plus JPY 9 billion. So that's a lot of cost reduction. So in the cost structure that you have from now on, what are you going to do? What are going to be your next steps? Are there still room to reduce costs even more? That's my question.

[ゴミ マサオミ, executive]

[Interpreted] Thank you, Fujiwara-san for the question. So you want to talk about -- you want to ask about the cost reduction. So this will be answered by Bjorn-san.

[Bjorn Ulgenes, executive]

Thank you Fujiwara-san for the question. The cost structures, let me just give a little bit of background, and then I will talk about what are we going to do going forward. So in summary, as we work through the impacts of COVID, we did effectively 2 sets of cost measure activities. One was the transformation activities that you remember, we laid out in our strategic business plan back in late 2019. That is all about making supply chain, commercial and back office more efficient. That is progressing well on track.

The second part, during COVID, we also did what we call temporary or onetime cost measures. For instance, the temporary leave was one of them. In Q4 last year, we, for instance, executed a lot of these activities, adapting to the external environment that was still heavily impacted by COVID. For next year, we will continue all the transformation activities. That train is not stopping. And we continue to look for opportunities in commercial, in supply chain and in back office.

You have heard, for instance, in the prepared remarks, how we have talked about the mega distribution centers and what we're doing, for instance, on therefore, logistics costs. Those activities are well on track and continue to be stepped up for next year. We are also looking at opportunities in other parts of the business to continuously become simplified, optimized and therefore, run the business better every day we operate. So the cost measures will continue, Fujiwara-san, and we're looking forward to talking more about that when we come back in February.

[ゴミ マサオミ, executive]

[Interpreted] And thank you to Fujiwara-san for the question. Operator, next question, please.

[Operator]

Next, we have Morgan Stanley MUFG, Miyake-san, on the line.

[Haruka Miyake, analyst]

[Interpreted] This is Miyake from Morgan Stanley. I have to repeat this question about the price revision question. Back in October, you did the second one. So in the store, when you look at convenience stores, maybe some prices are not yet there or not yet reflected. I was just wondering what will be the reason, because I myself guessed that probably in September, we had the announcement and the wholesaler had the stock. Now this is why the reflection of the price hike was a bit slow.

But when I heard the story from the IR team, your IR team said that you didn't make that pre-announcement much so I was just wondering then why the actual prices in the store is not yet upgraded? I know that you are the #1 -- you have many #1 brand SKUs in the industry. So I was just thinking that maybe even for these kind of SKUs, there might be a last shopping spree and stuff. So I was just wondering, what will be the reason of a delay in the reflection of the price in the stores.

[ゴミ マサオミ, executive]

[Interpreted] Thank you, Miyake-san. I think your question was about the price revision in October and the trend. So Costin, would you like to pick it up?

[Costel Mandrea, executive]

With the stocking in September, you mentioned. In CCBJI and in our beverage category, we did not observe prestocking before the price increase. Yes, we know it happened for other categories. But for beverages, we didn't see anything significant. We went as planned with price increase on 1st of October. And for us, this was very important, and you talk about CVS, our teams spent a great amount of time with our customers to make sure this price increase is reflected.

What I see after 6 weeks since the price increase, in the CVS, I'm having a daily report. I see an increase for coffee, tea, Aquarius these are the -- and Coca-Cola, these are my main SKUs, an increase anywhere between JPY 8 to JPY 12, so this is translated from wholesale price to retail price. It may happen that -- I'm not sure what exactly you are -- what prices you are referring to.

But we see the competitive environment in CVS continuing to be very aggressive, and I still see competitors implementing aggressive discount promotions. For us, our approach is disciplined execution of price increase. And all the activities with focus on profitable growth. I hope this is answering your questions. Thank you.

[ゴミ マサオミ, executive]

[Interpreted] thank you, Miyake-san, for question. Since we are over-running the time, but we have 2 more questions on the queue. So operator, please proceed to the next question.

[Operator]

Saji-san from Mizuho Securities.

[Hiroshi Saji, analyst]

[Interpreted] So a quick question, because the other presentations already started for a different company, from the vending channel question. So July to September, it seems that the revenue per case has really improved. This was before the price revision. But what is the background? Why did this happen before the price revision?

And after October, when you have executed the price revision, what's happening in the vending channel? So I want to know about the vending channel overall. And how much risk do you have in the drop in volume? Is there going to be any risk? So I guess I want to know about the price and volume before and after the price revision for the vending channel.

[ゴミ マサオミ, executive]

[Interpreted] Thank you, Saji-san. So you want to ask about, like, the situation before and after the price revision. So from Costin-san, please.

[Costel Mandrea, executive]

Indeed, Vending has a very good recovery in this year. We see significant performance year-to-date. And especially in the third quarter, we have an 8% growth in volume. On top of this, since the beginning of the year, we continued to grow market share with 2.6 points. Before summer, we took the decision to adjust prices for the most in-demand SKUs, like water, Yakan Barley Tea and Aquarius. So when we look at Q3, we'll see an increase in NSR per case even before the national price increase. And this was, again, done in order to increase profitability and to capture the peak selling season.

From 1st of October, we increased prices for all the SKUs in vending. We see the performance of vending, continuing to be positive. Of course, there is -- it's still very early. There are only 6 weeks since the prime increase. We are measuring this. But what is important, because you know, vending is a very important channel for us, we keep a lot of extra activities in order to stimulate the demand in terms of innovation, in terms of new products, and we just finished to deploy the hot portfolio product. And in Vending, we are very happy to see Coke ON reaching another milestone of 40 million downloads. So overall, executed disciplines increase. We see NSR per case and Vending continues to be positive.

[Hiroshi Saji, analyst]

[Interpreted] So the volume after price revision, what is your assumption?

[Costel Mandrea, executive]

I will tell you that October was slightly positive versus last year despite the price increase. So overall, it's a positive profit equation. And we continue to grow share.

[Hiroshi Saji, analyst]

[Interpreted] So it's minus 6% overall, but just as ending, it was positive for October, you're saying?

[Costel Mandrea, executive]

I'm saying, Saji-san, you're right.

[ゴミ マサオミ, executive]

[Interpreted] Operator, the last question, please.

[Operator]

[Operator Instructions] BOFA Securities, Kaneko-san.

[金子 駿兵, analyst]

[Interpreted] This is Kaneko from BOA. My question is about the convenience channel. In second quarter, you said that you have increased the share. But when you look at our third quarter, it looks a little slowing down. So can you give me a little ground to this?

[ゴミ マサオミ, executive]

[Interpreted] Thank you, Kaneko-san. Your question is about the convenience stores' performance in Q3.

[Costel Mandrea, executive]

CVS is a very important channel for us. And during pandemic, it was affected. But we see in 2022, the channel is gradually recovering. And we are doing activities to capture the extra demand, to capture the traffic and the return to office element. Year-to-date, CVS is performing positive with plus 2% year-on-year, and we see good performance across all three customers. What we also see in vending is the competitive environment remaining to be intense.

And we are responding with -- to a certain degree, to these activities. Our focus is on making sure we strengthen our innovation and making sure we transform some of our activations in CVS from the typical discount to more digital activations. Overall, it's very encouraging to see CVS gradually recovering. It will take a while before it will be at the same level with 2019, of course.

[ゴミ マサオミ, executive]

[Interpreted] Thank you very much, Kaneko-san. So lastly, Calin would like to send a message.

[Calin Dragan, executive]

Do want -- thank you, Gomi-san, for passing me the mic just for 30 seconds. I just want to take this opportunity since it's our last interaction before the year-end to say a very big thank you for your interest in our business, for your questions, for your challenges, but as well for your support, during this 2022, a very tough year still marked by COVID at the beginning of the year significantly.

So as you can -- highlighted throughout these discussions into the questions that you posed to us, you understand that the entire industry, it's going through tough times in Japan, but not only. We are in a particular situation here with all the challenges driven by the commodities increase and as well the yen devaluation. All this are probably, in a way, hiding and maybe not necessarily doing a fair service to the transformation that happens in the industry, but in particular, in our company.

So I want to remind everyone that we have made some significant transformation in approaches in the market. We were able to put -- to go out with rational pricing throughout the year, either by ourselves in May or later on, together with the industry that happened, but these are significant changes and progress for the entire industry that we are observing. And we hope that the same rational approach will continue to be taken by the whole industry going on.

Besides that, our company have performed the fundamental transformations without stopping during the tough times, which puts us, in a way, better position now to capture growth. We look forward to continue that transformation, and we hope that this is going to be a serious platform for our growth in the future.

I just want to end by saying a warm thank you and [Foreign Language] as well, best wishes for this year-end. And of course, we are going to greet for the 2023 later on, but I wish you as well a relaxing end of the year. Thank you so much.

[ゴミ マサオミ, executive]

[Interpreted] Thank you, Calin-san. That will be the end of today's session. The contents of today's presentation will be available on our website following this presentation. If you have any questions or feedback, please contact our IR team. Thank you very much for joining the call today.

[Portions of this transcript that are marked

[Interpreted] were spoken by an interpreter present on the live call.]