Coca-Cola Bottlers Japan Holdings Inc. (2579) Earnings Call Transcript & Summary

Good evening. I am Kaneko from Investor Relations team at Coca-Cola Bottlers Holdings Japan. Thank you for joining updated full Year 2020 earnings forecast conference call for sell-side analysts. Following the prepared remarks by Raymond Shelton, Head of Investor Relations and Corporate Communications for Coca-Cola Bottlers Japan Holdings, we will open the floor for questions and answer. We are only accepting the question from the sell-side analysts, but the contents of this call will be made available via the webcast for anyone. Simultaneous interpretation in Japanese and English is being provided. And we are planning for 30 minutes for this conference call. Before we begin, let me remind you that this presentation contains forward-looking statements, including that of annual and long-term earnings objectives. Now I would like to pass the floor to Raymond Shelton. Before we jump on, please make sure that your line is on mute during the presentation. Ray, please go ahead.

Thank you, Kaneko-san. Good evening, everyone. Thank you for joining us for this update call. I am Raymond Shelton, Head of Investor Relations and Corporate Communications at Coca-Cola Bottlers Japan. As you know, we announced an updated full year 2020 earnings forecast today, which was previously withdrawn on May 13, amid the ongoing impact of the COVID-19 outbreak. Now that we are substantially through the peak summer season, we believe we have better information with which to make an estimation about full year earnings based on current year-to-date performance and assuming no significant change in trends for the rest of year period. In our updated full year forecast, we expect consolidated revenue of JPY 819.7 billion in 2020 or a 10% decline versus the prior year, and business income is expected to be flat as an impact of negative channel mix is likely to continue for the rest of the year, primarily due to volume declines in the vending and convenience store channels. Cost savings in the second half should be at a similar level to the approximately JPY 10 billion or more we achieved in the first half. We expect an operating loss of JPY 9.7 billion, reflecting various nonrecurring expenses as we accelerate structural transformation initiatives in our core beverage business, including the impact of voluntary retirements announced separately today and implemented over the course of this year as part of our strategic business plan announced in August 2019. Net income is expected to reflect a loss of JPY 7 billion for the full year. Our full year year-end dividend plans remain unchanged at JPY 25 per share, as we announced in our August earnings update. Our core beverage business performance in the third quarter has improved versus the second quarter, which thus far has been the most impacted quarter during the coronavirus pandemic. However, third quarter results still reflect ongoing top line pressure due to negative mix as vending and convenience store channel volumes remain depressed. The third quarter started off with unseasonably rainy and cool weather in July, and people continue to work from home and exercise restraint in leaving the house due to the resurgence of COVID-19 cases. We have revised our second half marketing plans, and we are executing new programs to mitigate volume and market share pressure with a continuing focus on core brands, at-home consumption occasions, and delivering value to consumers, as we outlined in our second quarter earnings presentation. We expect full year beverage volume to decline 9% versus the prior year. And revenue is expected to decline about 11%. For the Healthcare and skincare business, we expect full year revenue will be slightly up versus prior year to JPY 25.2 billion. And business income is expected to be JPY 3.6 billion, offsetting an expected decline in the beverage business. We have been actively pursuing structural transformation in line with the direction of our mid-term strategic business plan announced in August 2019, and we have accelerated various strategic initiatives this year in order to navigate a challenging situation. As I said earlier, we announced a series of voluntary employee retirements and outplacement support as part of this broader strategic transformation and the initiatives we have been detailing for you over the last year. The onetime cost for these programs as well as expected income from our continuing efforts to optimize the balance sheet, are included in the updated full year forecast. Finally, let me note that the updated forecast assumes no significant change in trends for the rest of year period. Specifically, we assume the COVID-19 situation does not materially worsen, and therefore, gradual recovery of consumer traffic can be expected with no further intensification of the competitive environment in the market. Of course, any changes to these assumptions could result in further impact to our top line outlook. We look forward to providing details of our year-to-date third quarter results and continuing business outlook in our earnings release scheduled on November 12 of this year. Now I'm happy to take any questions.

[Foreign Language]

If you have any question please give us your name and your company.

[Interpreted] This is Fujiwara from Nomura Securities. So my question is about the early retirement program that you had made announcement today. Well, I remember you had this huge program for the retirement program last year as well. And then you have a second wave this time around? So I was just wondering is there any risk of you having a weaker organization, which will, in turn, give you a negative impact for our coming years' top line growth? So that's one question. Another question, I will come back to you after listening to your answer first.

Thank you very much Fujiwara-san. With regard to the early retirement program impact, we would like to answer to your question.

So if I understand the question, it's regarding the VRP, the voluntary employee separation program that we announced and a general question about looking forward, how this might relate to how we think about our positioning or competitiveness in the market. I think what's important to remember is this retirement program is actually a series of initiatives that have been ongoing throughout this year. All very closely linked to the various transformation initiatives that we have highlighted as part of our strategic business plan announced last year in August. So as you start to see the results from these various transformational initiatives becoming realized, there are opportunities to offer early retirement programs for employees who may be impacted. So what we're announcing today is a combination of logical legacy impacts from the transformation initiatives that have been ongoing for the bulk of this year. So we believe that there is no major concern around competitive positioning on the -- to the contrary, we think that this is reflecting the fact that we've been able to put in place the various transformation initiatives that we have targeted, in some cases, having accelerated them, and this is a logical outcome of the implementation or completion of some of these transformation programs thus far.

So I hope that answers your first question, Fujiwara-san.

[Interpreted] So the second question with regard to this early retirement program is targeted for about 900 people. So if you are really going to have these 900 people taking this package, what would be the size of reduction in labor costs or human resource costs in coming years?

Thank you very much. So your question is about the reduction in human costs for next year.

Thanks, Fujiwara-san. This is Ray speaking. We estimate the contribution in this period in 2020 related to the employee retirement program will probably be somewhere in the range of JPY 2.5 billion to JPY 3 billion in 2020. And on an annualized basis, we believe that should come somewhere around JPY 6 billion.

I hope that answers your question, Fujiwara-san.

[Interpreted] So you said about JPY 2.5 billion to JPY 3 billion. And in annual base, it's like JPY 6 billion, you said. So what is the calculation behind this?

This is the cost reduction impact of the employee retirement program that I think you were asking about. So I gave you for the rest of this year. Which would essentially be for the second half, JPY 2.7 billion about, let's call it, JPY 2.5 billion to JPY 3 billion and on an annualized basis. So a 12-month period would be JPY 6.1 billion cost savings.

[Interpreted] So I was -- I was assuming that everybody is having the same end date, but now I realize that you're having a phase approach in retirement date.

Well, just for your information, in this current term, it's going to be JPY 2.5 billion to JPY 3 billion cost of action, and the remaining will be generated in the coming term. So when you make it into as a total of full year, that's going to be JPY 6.1 million. So in this current term, we are going to generate JPY 2.5 billion to JPY 3 billion. The remaining part will be generated in next term.

[Interpreted] All right, so now I understand your cost reduction impact will be realized even in current term too

Yes, exactly, this term and the coming terms.

[Interpreted] All right. My apologies that I thought everybody is going to determine whether or not to leave the company by the end of this year. So that was my bad, sorry.

All right. Thank you, Fujiwara-san. Is there any other questions from anybody else? Please state your name and company. Sorry, I think we had overlap here.

[Interpreted] This is Tsunoyama from Mitsubishi UFJ. So I have 2 questions. One is with regard to the early retirement program, I believe this is a strategic plan. So I would like you to elaborate on that point as well. For example, in -- you said about the streamlining the vending operation or making vending machine online to streamline the headcounts in operation. So I would like to understand whether this is more proactive way approach or -- whether this is a proactive way of approaching to this strategy. So I would like you to elaborate on the strategic part a little bit more on this program?

Thanks, Tsunoyama-san. Sorry for the gap in sound. I'm listening to translation as well. This is Raymond speaking. Yes, so I think this program is very much considered to be strategic and part of our overall transformational plans that we have announced originally as part of our strategic business plan, the 3- to 5-year plan announced last year in August. And so what you're seeing now is the outcome, for example, of the work to accelerate the vending transformation program. You're seeing the benefits as we have fully rolled out the ERP systems across the full nation of Japan, you're seeing the impact of utilizing in a more comprehensive way our shared services or what we call business support organization. You're also seeing organizational alignment in general across our commercial teams as we work around sales force transformation and vending. So very much this series of early retirement offers are a sum up of these various initiatives coming from the transformational plan. And some of the numbers will have come from programs that have been initiated earlier in this year, Q1 and Q2. And then, I'd say, a larger portion coming in Q3 as you start to see the benefits from the vending transformation as well as sales force transformation work, commercial selling team, reorganizations, et cetera. So very much strategic, very much linked to the midterm plan announced last year in August. I hope that answers your question.

[Interpreted] One more question. In the lease, you mentioned about the vending and the commercial function and indirect back office streamlining. So do you have any breakdown of 900 people? Or you want to understand the breakdown of 900 targeted people?

Yes. So, so I understand the question is a little bit more detail on the 900. We have not broken out the specific detail of the 900. And this is a target audience. So we'll see what it actually comes out to. I would tell you, just directionally, the larger numbers are going to be on the vending and the commercial side as part of the fundamental transformational work that's been ongoing. And a smaller proportion would be coming from the back office business support, shared services that kind of function. So the larger piece of this program would be coming more from our commercial side as part of the reorganization that's ongoing.

[Interpreted] One more thing, in -- well the Global Coca-Cola has announced in August that they are going to streamline drastically about the headcount. So is your early retirement program in line with that global program? Or -- that's one question. And you're also back to streamlining your operation and digitization I know you are going to accelerate this kind of streamlining and rationalization, but do you have any intention on the strategy behind this?

So your question is about, is there any relation with the Coca-Cola's Global streamlining process and our early retirement program? And also the strategy behind our streamlining in operation in a strategic way?

Tsunoyama-san, no. What we have announced here and what we have been implementing over this full year has no relation to what the Coca-Cola Company recently announced, I believe they also announced some kind of streamlining program. So no relation. This voluntary early retirement program is entirely linked to the strategic initiatives, the transformation programs that we have been undertaking for this past 12 to 18 months. And so entirely linked to those CCBJH transformation initiatives. You're absolutely right that we are on a journey related to transforming streamlining. And to your question, digitizing, and that will continue. There are a series of programs and projects that we have highlighted and been highlighting for you over these last months. And you can continue to expect that we will look for new opportunities and accelerate where possible some of the work that we have ongoing. So no letup in transformation rather, we will continue to push to make sure that we are a well-founded, strong foundation for future cost-optimized organization as opposed to a combination of multiple bottlers that have come together, with just the resultant inherited systems and processes at the time of merger. So this will continue going forward. And you will continue to hear us talking about optimization of our logistics and distribution network as part of the project Shinsei work that we have talked to you about previously. Clearly, there will be focus and efforts on digital whether that be in the vending machine space or whether that be on understanding and managing big data as it comes to better optimizing our supply chain network as well as consumer-facing information. So continued the transformation ongoing. And the VRP program that has been announced this year is related to the programs that we have been talking to you throughout this last year. I hope this answers your question.

Thank you very much, Tsunoyama-san. I hope that answers your question. Thank you very much. I think we have some female participants who wanted to ask.

[Interpreted] This is Miyake from Morgan Stanley. I have 2 questions. One is about the human costs. Just before you mentioned that JPY 2.7 billion for this term. And then in annualized basis, it's going to be JPY 6.1 billion. Are you talking only about the early retirement program or just the entire human labor cost reduction? And also, you mentioned that this is a part of the strategic fund announced in 2019 August, but you have this synergy effect that you already announced. So is this JPY 2.7 billion or JPY 6.1 billion has already incorporated into that initial plan or separately?

So I suppose this -- there are 2 questions. One is the human labor cost reduction, is that only coming from the early retirement program or anything else included in that? And also for the synergy effect, is this human resource cost reduction included in the initial plan of our synergy effects that we announced in previous time?

[Interpreted] Yes, and I have another question.

Well, let me -- let us answer 2 questions first.

I'll get these first, and then we'll get you to interpret as well. Yes, the cost that we referenced, the JPY 2.5 billion to JPY 3 billion in this period in 2020, and the annualized cost of JPY 6.1 million is specifically related to the employee retirement program, to the voluntary retirement program that was announced today. As it comes to how we're thinking about these cost savings across the bigger, broader strategic business plan. These are, as I said, a part of the deeper fundamental programs that we have outlined as part of the initially announced strategic business plan. So in that sense, yes, they are a part of how we have tracked out the opportunity from 2020 out through 2024. So included where possible. As we have said, we are accelerating implementation of some programs and looking for additional opportunities. So you may see some differences as we move through the years. But in general, I think the logical and easiest answer for you is that yes, these are considered a part of the program that we've announced.

And Miyake-san, what was your next question?

[Interpreted] Well, just before, you mentioned that you're expecting to have a cost reduction effect, which is to go into that of the first half. So it's going to be about JPY 20 billion in total. So I suppose there will be a permanent effect to it or in -- onetime in nature. So what will be the breakdown of permanent effect and a onetime effect within this JPY 20 billion?

Got it. Thank you, Miyake-san. So the question is really around recurring versus onetime cost savings, I believe. I would say that given the unique nature of this year and the urgent sort of work that we have undergone to identify cost savings to mitigate this year, you can understand that a big portion of the cost savings that we're looking at for this year are going to be more onetime in nature. Now having said that, you'll remember, at the beginning of this year, before we had any indication of COVID-19. The plan for this year was to achieve about JPY 5 billion in net cost savings that were strategic in nature, right, as part of the initial plan. And as we indicated in Q2, and I think I can say at this point as well, we're certainly tracking online or maybe even a little bit ahead of that initial strategic cost savings plan for this year. So those numbers are within the overall cost numbers for this year, but the majority of the cost savings that you will see that we'll be achieving as we go for the rest of this year as well are going to weigh more heavily on the onetime side in order to navigate this specific challenges of this year. I hope this answers your question.

Thank you, Miyake-san. I hope that answers your question. Yes. Any other question from anybody else?

[Interpreted] This is Morita from Daiwa Securities. My first question is about the business plan for this year I would like to understand the profit driver for this year.

Morita-san, just to clarify, this is about the updated forecast profit drivers that you're asking?

[Interpreted] Yes, exactly after the update.

This is Ray speaking. We'll obviously be able to give you more details when we're able to talk about the results of Q3 on November 12. So please understand. I may be a little bit more general in terms of discussing the drivers on tonight's call. But as you can imagine, this year, is really an unprecedented year not just for Coca-Cola Bottlers Japan, but really any companies, and certainly, this industry, the beverage industry in Japan. And we've seen a tremendous pressure on the top line. Partly because there are fewer people out and about consuming beverage products and partly because in the volume that we are selling, you're seeing a market impact on the mix of sales, especially because you're seeing a bigger impact because of reduced traffic in immediate consumption channels, like vending, and like convenience stores. So as you talk about the profit drivers, and remember, our business income outlook for this year is now expected to be flat, breakeven. So the first driver will be the unprecedented pressure and declines that we're seeing at the top line because of reduced traffic and more challenging mix during this year. To offset that, as we've talked about throughout this year, we're really achieving unprecedented cost savings, I think it's fair to say. You'll remember as of the Q2 earnings announcement, we were able to achieve over JPY 10 billion. The bulk of that coming in the second quarter when COVID-19 was at its peak. When the emergency declaration was enacted. And we were able to do that because we took a hard call to withdraw our earnings guidance at a fairly early stage in the year when we knew this was going to be a tough year. So a tremendous amount of focus on where we can achieve cost savings, both in the underlying strategic cost savings that we have been outlining already, and we think we are on track or ahead of plan for those strategic cost savings. Remember, the initial plan for this year was JPY 5 billion in net savings, but even more so, identifying additional cost savings to help us manage this tough year which, in total, gets us to the guidance that we've talked about, a pace of cost savings in the second half, which is probably in line with the level of cost savings that we saw in the first year. That gets you to business income. And then as we look at operating income, as we discussed briefly in our releases today and on the call this evening, we are expecting to see a number of onetime costs, which you will see the impact of below business income in operating income. And those will primarily come from early entire -- employee retirement programs that we've discussed. Transformation costs that have been ongoing throughout this year and maybe a couple of other small things, but primarily from the retirement program and from transformation cost. And that is essentially the sort of high-level drivers that gets you from revenue, top line to business income with very high cost savings unprecedented certainly in the bottling industry here combined with some onetime costs related to specific initiatives, transformation costs, early retirement that get us to operating income. And I hope this answers your question.

[Interpreted] One more -- second question, just before Raymond said, the assumption for the second half, one of which was that you don't have a huge change in ongoing trend. But do you have any sign of the risk of drastically changing environment in coming months?

So the follow-up question was around the competitive environment and any color or indications we might have in that area? I think that's the question. I think it's pretty clear that we are seeing a higher level of competitive pressure, especially around large pack 1.5 liter, 2.2 liter type business. I think that's driven because of consumer demand. With COVID-19 and the circumstances that we continue to see, it is a fact of life that we are seeing somewhat higher growth in future consumption channels like supermarkets, and drug and discounter. And therefore, it's also a fact of life that that's where you're seeing various players in the industry, focusing a lot of their efforts in the marketplace. I think as we look to the second half of the year, it's quite logical that you will continue to see a more robust area of our business in that channel, future consumption. And therefore, in packages, which are probably a little bit larger, more future consumption in nature. And therefore, in general, it's logical that you may see some mix pressure because of that business. We are seeing some competitive efforts in the marketplace, but I don't think that I would characterize it at this point as a sudden or hugely different direction than what we have been seeing in this year so far. But it's a year of great uncertainty. And we do need to kind of keep a watch on how the rest of the year progresses from a consumer demand perspective and certainly from a marketplace execution perspective as well. I hope this answers your question.

[Interpreted] And the last question is about your forecast on costs. Just before Miyake-san has asked about JPY 20 million cost reduction for this year. And you mentioned that large part is on onetime costs. But when you think about the cost reduction benefit for the coming years, maybe you meet above the scale of a JPY 15 billion cost reduction in terms of securing the profit, is that the kind of level of cost action scale that you should be -- we should be expecting you to generate?

I honestly think it's a little bit too early to be talking about the cost plans for 2021. I think first, we need to make sure that we understand how the rest of this year will play out, given some of the remaining uncertainty we feel pretty solid about the guidance that we've provided here, including the sort of unique cost savings opportunities that we have had to identify as part of this year. So it is true, as I said, a number of the cost savings initiatives and benefits that we're seeing this year are going to be more onetime in nature, but we still have the ongoing and underlying strategic initiatives and cost savings programs that are underway and will continue to deliver. And given where we are and the experience we've seen this year, I think we'll continue to have to look to what new opportunities, additional opportunities from a transformational ongoing cost savings benefits perspective that we can identify going forward as well. For now, though, I think we need to stick to what the outlook is for the rest of this year and make sure that we land it in an appropriate way and communicate those results to you for the rest of this year. I hope this answers your question.

[Interpreted] One more question. Should we expect the uplift in cost next year? Or because of the additional cost reduction initiative, which will start from here onwards, you wouldn't be having any additional cost to be expected in next year. So what would be the likely scenario? Would that be additional costs or not the additional costs?

I think in so far as we are seeing onetime cost savings in this year, certainly, that means that, that is something that we'll need to cycle, that we'll need to be able to deliver against in the following periods. Again, I think it's probably too early for us to be providing update on 2021 business plan, which we'll certainly look forward to coming back to you and discussing as part of our normal earnings announcements and guidance, so likely in February. But I think -- I think what you're asking is onetime costs this year are onetime costs. We will have a number of ongoing cost savings as part of the longer-term strategic plan. As we announced it last year in August, there was an outlook of at least JPY 35 billion in net savings related to that strategic program of which we had been initially planning for JPY 5 billion this year before COVID and before updates. So at least that's a reminder that there are ongoing cost savings as part of the initial plan announced last year that we'll continue to deliver and we'll need to look at delivering, accelerating, looking for additional opportunities as necessary. But let us come back to you with an update on those plans and for 2021, when we come to you in February. I hope this answers your question. I think we've hit our time period. So I think...

Thank you very much. Time is actually all spent. So thank you very much for your participation. We would like to close our conference call and thank you very much for your continuous interest in our company and the business. This webcast will be -- replay of this webcast can be watched over -- will be posted on our website. If you have any questions or feedbacks, please feel free to reach out our Investor Relations team. Thank you very much for participation today. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]