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

[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 full year 2021 earnings call for analysts and investors. I'm here with President Calin Dragan; CFO Bjorn Ulgenes; and Mr. Takashi Wasa from Coca-Cola (Japan) Company. Following prepared remarks, we will be happy to take your questions. This presentation is intended for analysts and investors, so we ask members of the media listening to today's call to please hold your questions for our media session scheduled separately. Simultaneous translation in both Japanese and English is being provided for today's call and during Q&A with separate telephone lines for Japanese and English. Before we begin, let me remind you that today's presentation contains forward-looking statements, including statements concerning annual and long-term earnings objective and should be considered together with cautionary statements contained in our supporting presentation. Both are posted to the Investors section of our company website. Please look on our website for this information in both Japanese and English. With that, I'd like to turn the call over to President, Calin Dragan. Calin-san?

Good afternoon, everyone. Calin Dragan here. I will begin by sharing an overview of our performance and of the business environment in 2021. Please turn to Slide 5 of the presentation. 2021 was another year we faced challenges. However, we saw performance improve into the year-end. The fourth quarter showed an improvement in traffic with the lifting of the state of emergency, leading to sales volume growth. With this recovery and the additional cost savings, we were able to grow our fourth quarter business income year-on-year and exceed our previous guidance. Business income on a year-over-year basis improved by JPY 3.5 billion, putting us one step closer to improve profitability. These results give us good reasons to believe that transformation has made us ready and well positioned to capture the demand when the traffic returns. Our key initiatives delivered results in 2021. Firstly, our integral vending channel continued to grow value share. You'll recall that our commitment to this channel has been strong throughout the years, and this share growth is the result. Secondly, we continue the transformation as planned and delivered recurring cost savings through operational efficiency improvements. We continue to find ways to reduce fixed costs and improve efficiencies to become the lowest cost operator. Thirdly, we remain good stewards of capital by managing assets, controlling CapEx and returning to a stable dividend payout. We have been pushing forward with these initiatives despite the market headwinds. In 2021, we made strategic marketing investments to build a strong foundation for future growth. While we suspended this investment in the previous year, we now see an improving trend in our market share. We believe in the importance of marketing investments and pricing strategy. As such, for the sustainability of the company, as well as the industry, last Tuesday, we announced our price revision for large PET bottle products. This will help us partially absorb commodity price increases and maintain fair and healthy relationships with our suppliers and customers while keeping the high quality standards of our products. Through most of the 2021, we continued to see slow demand recovery and the shift in consumer spending patterns driven by COVID-19, making it challenging year. Our earnings were also impacted by raising commodity prices and the cycling of onetime cost savings. However, as for the fourth quarter proved that we are confident that we will capture the demand when the traffic returns. Please turn to Page 6 for the financial highlights. Our volume grew by 2% for the full year, thanks to multiple new products and marketing initiatives in every channel. However, changes in consumer spending patterns and identified competition resulted in a lower wholesale revenue per case. As a result, full year revenue declined by minus 1% year-over-year. Value share continue to grow for the vending channel, and we are also seeing good trends in supermarkets, drugstores and discounters. Business income decreased by JPY 14.8 billion year-over-year for the full year. Marginal profit declined due to the COVID-19-led consumer spending pattern changes that impacted the channel and the package mix. Cycling of the extensive onetime cost savings achieved in the previous year had also an impact. However, our positive fourth quarter performance, combined with additional cost savings, enabled us to exceed our earnings forecast announced in November by JPY 1.2 billion. Transformation is on track and delivered JPY 9 billion of recurring cost savings for the full year. Over the past 2 years, we achieved over JPY 22 billion of recurring cost savings despite COVID-19's impact. I believe this is a tremendous result and an example of how our focus on driving value to capture long-term sustainable growth. In 2021, there was a period of improved performance towards the end of the year when the state of emergency was lifted. However, we are now faced with a quasi state of emergency, again, nationwide. With the new uncertainty of Omicron at present, we will not announce earnings guidance for 2022. We do understand the importance of disclosing and communicating guidance and will announce it at the appropriate time when the COVID-19 impact subsides. Now let me ask our CFO, Bjorn Ulgenes, to go through the details for the full year financial results.

Thank you, Calin. Good afternoon, everyone. This is Bjorn. Let me direct your attention to Slide 8 to talk about our 2021 full year results. As you can see, our revenue has exceeded our full year plan but has declined by about JPY 6 billion versus the previous year as our business was impacted by external factors such as COVID-19 and bad weather during the summer. While our total beverage volume showed signs of recovery after the lifting of the state of emergency for the full year, it only increased by 2% versus the previous year. As a result, we incurred a loss at the business income and net income level. We continue to see a cycling impact across the quarters. At the top line, Q1 cycled a period that was still largely unaffected by COVID-19, while some of Q2 and all of Q3 and Q4 cycled higher levels of traffic from no state of emergency and the benefits of go-to campaigns in 2020. At the bottom line, the cycling of onetime cost savings achieved in 2020 of about JPY 22 billion had an impact. In 2021, we achieved about JPY 18 billion of onetime cost savings. At the net income level, the gains of JPY 12.5 billion from the sales of our subsidiary, Q'sai, in February contributed. On Slide 9, you can see the primary drivers of our business income. Starting on the left-hand side, our volume, price and mix, which show the year-on-year change in marginal profit from the commercial activities of our beverage business. We experienced a JPY 10.5 billion decline in volume, price and mix. While volume growth contributed, this was due to the price pressure of intensified competition and increased rebates from promotional activities, especially in the OTC channel. The fourth quarter saw volume, price and mix improve with the volume increase on the back of the traffic recovery, contributing to the JPY 2.7 billion improvements year-over-year. Fixed marketing expense or DME increased by JPY 8.4 billion versus the previous year, reflecting a decision to use appropriate levels of investments in marketing for new products in 2021, after a brief pause in 2020 with the changes in consumer spending patterns and the postponement of the Olympic Games. We continue to believe that appropriate levels of investments are necessary to build a foundation for future growth. We are seeing this translate into market share gains. Commodity and raw material costs have adversely impacted us by JPY 2.4 billion compared to the prior year. We are being impacted by rising prices, especially of sugar and aluminum. We expect a negative impact from commodities to continue. However, we will implement measures to mitigate the impact of rising commodity prices, and we have announced price revisions for large PET to mitigate a part of this. Manufacturing costs positively impacted us by JPY 0.7 billion from previous year, reflecting production efficiency from higher volumes offsetting the increase in depreciation from capital investments needed for future growth. In others, costs improved by JPY 5.7 billion compared to the previous year. While recurring cost savings contributed favorably, we cycle the impact of onetime cost savings but recurring cost savings achieved through transformation, continue onetime cost savings in 2021 to mitigate the COVID-19 impact, all contributed to controlled costs. By item, while we cycle the impact of bonus payment cuts in the previous, temporary leaves, labor cost reduction achieved through the transformation, all helped to reduce the overall labor costs. A combination of onetime factors resulted in logistics costs rising year-on-year. Factors such as increased production volume, strong demand for new products and demand volatility led to an increase in long-distance transportation and additional storage costs as we made our best efforts to secure timely supply of our products. As a result of these drivers, business income for the full year was negative JPY 14.7 billion, a decrease of JPY 14.8 billion compared to the previous year. Please see Slide 10 for our volume performance by major channels for nonalcoholic beverages. Despite signs of trend improvements in Q4, full year volume growth was 2% -- plus 2%, primarily impacted by slow recovery in traffic due to COVID-19 and rainy weather during the peak summer season. Supermarkets, drugstores and discounters grew by capturing the change in consumer behavior that led to at-home and bulk purchase demand. Initiatives to grow where the growth is are showing good results. Initiatives taken to maintain our competitiveness to protect market share has been successful. This is reflected in our market share, which has been a concern before but is now turning positive. The vending channel saw contribution from new products and new packages in the Aquarius brand, but low traffic recovery through the year and bad weather in the summer impacted, resulting in a plus 1% growth for the year. When the state of emergency was lifted, our volumes saw growth, making us confident that volume will grow when traffic returns. Online sales continued to grow and increased by 62% and, compared to the previous year, capturing the at-home demand. Average wholesale revenue per case continues to be negative for most of the channels, primarily driven by intensified competition, volume growth in large 2-liter PET water packages, while small PET and cans decreased. As mentioned on our previous calls, last year's wholesale revenue per case was impacted by changes in configuration of the number of bottles per case for the 1.5-liter PET package from 8 bottles per case to 6 bottles per case. When adjusting for the case configuration change, supermarkets wholesale revenue per case was about an JPY 80 in decrease and, for drugstores and discounters, about JPY 32. We have mostly cycled this impact with the fourth quarter. Please move to Slide 11, which shows our category performance. In sparkling, all the sales of small PET were negatively affected by the rainy weather in summer. Large PET saw growth from changes in consumer trends. The premium-priced Fanta Premiere series has contributed, resulting in us being flat versus the previous year. Nonsugar tea achieved 7% growth for the year through the contribution of new products such as Yakan Barley Tea and Ayataka Matcha Latte. Water volume grew in all channels as we captured the at-home demand, on top of growth in large PET and supermarkets, drugstores and discounters and online. New products such as ICY SPARK and small PET's I LOHAS also contributed. For coffee, new products such as Costa Coffee, Georgia Japan Craftsman, Georgia Shot & Break contributed to small PET volume growth but not enough to offset the weakness in canned coffee, especially in vending. Slide 12 highlights our market share performance and retail price trends. In vending, despite the challenging environment, we continued to grow value share for 33 consecutive months. Value share increased by 4.2 points -- percentage point for the year. This is an important reflection that our transformation in this channel is delivering results. We continue to drive performance by focusing on product assortment, location, improving the quality of our operation and digitization using Coke ON. Again, this makes us confident that we are well positioned to capture the growth when the traffic returns. In the OTC channel, supermarket, drugstores and discounters, value share grew by 0.1 percentage points. Volume share also grew by 0.2 percentage points for the year. We have implemented measures to protect our market share to remain competitive, to focus on where the growth is, and it is delivering results. Challenges remain for the CVS channel, and we continue to focus on both short- and long-term strategies that enable us to grow with our customers. Retail price trends were supported by product innovation and effective market execution. We continue to maintain a premium in the market for both the small PET and large PET. Please turn to Slide 13. I would like to give an update on our focus on being good stewards of capital. Focus on the shareholder value creation remains unchanged despite the challenging environments. We are always looking for ways to increase our shareholder value and act upon them as necessary. For dividend payments, we plan to return to a stable annual dividend of JPY 50 per share in 2021, an increase of JPY 25 per share from the previous year where we had to retract our interim dividends. We continue our efforts to clean up our balance sheet. We maintain a healthy balance sheet with an equity ratio of 56.8%. In 2021, in addition to the sale of Q'sai shares in February as part of our efforts to review our business portfolio, we worked swiftly to sell off idle assets that arose in the process of the transformation. We are reviewing the holdings of cross-held shares in line with the corporate governance code, and selling them in stages and have generated about JPY 7 billion in cash for the full year. We will strive further to improve our balance sheet in 2022. From here, let me discuss about the 2022 outlook. Please turn to Slide 15. Now about the operating environment for this year. While we saw traffic recovery after the state of emergency was lifted, with the recent spread of the Omicron strain, we are seeing record levels of infections resulting in the reintroduction of uncertainty in the markets. If we look at the traffic data in different key locations across Japan, which can be found at the bottom left-hand side of the slide, we are now starting to see sharp traffic downward trends in major Japanese cities. This is a reversal of the recovery trend seen in the fourth quarter, suggesting that the industry is likely to face increasing headwinds. Volume is difficult to forecast given the difficulty in foreseeing the market environment. From a cost aspect, we are expecting commodity prices to continue to impact our business at the upper range of JPY 6 billion to JPY 8 billion as we communicated in our previous earnings calls. We also need to account for the cycling impact of the onetime cost savings of around JPY 18 billion achieved in 2021. These sudden and the regular trends -- trend changes are the basis for uncertainty, and providing guidance has become difficult and effectively brought us back to a similar situation as when we were under the state of emergency. We are not providing a full year guidance at this time. We will disclose our guidance at the appropriate time, assuming a certain level of COVID-19 subsiding. For 2022, in addition to continuing our efforts to mitigate the short-term impact, we will continue to push forward with key measures in areas that we can control to build a foundation for medium- to long-term growth. On Slide 16, you will see our 2022 targets. While the market is uncertain, we will focus on initiatives that we can control. First, we expect to achieve market share growth. In vending, we aim to continue our growth in value share. For OTC, we will implement the pricing and marketing investment strategy that balances competitiveness and profitability. Secondly, we will continue our transformation and continue to find opportunities to become the lowest-cost operator. We have achieved JPY 9 billion of recurring cost savings in 2021. Our 2022 targets calls for achieving an additional JPY 5 billion. Third point is CapEx, and the fourth is depreciation. Based on the principle, the good stewardship of capital explained earlier, we plan to control investments while expanding them in stages according to the business environment. We are targeting annual CapEx of JPY 46 billion and depreciation of JPY 55 billion. Fifth target is dividends. We plan to pay a dividend of JPY 50 per share for the full year, flat versus the previous year as we remain focused on stable shareholder returns. The sixth target is our ESG initiative, which we continue to accelerate. We target sustainable PET ratio of 50%, which will help reduce CO2 emission by 60% per bottle by switching from virgin PET to sustainable. Now I'd like to introduce Chief Marketing Officer of Coca-Cola Japan, Takashi Wasa, to take you through an update on the marketing initiatives and outlook for this year. Wasa-san, please.

[Interpreted] This is Wasa from CCJC. I would like to share with you a review of last year and highlights of our marketing initiatives in the first quarter of this year. Page 19. First of all, let me look back at 2021. In the fourth quarter of last year, we, Coca-Cola system, focused on our core, such as Coca-Cola, Georgia, Ayataka, and portfolio marketing initiatives. Then in 2021 full year, we successfully gained our value share in the soft drink market and increased the number of Weekly+ purchases by 690,000 people, bringing the total to 10 million people. Last year's success can be contributed to the following 3 factors: the first factor was the success of new innovations. In April, we launched Yakan Barley Tea. The authentic taste of barley tea as if it were boiled in a kettle was well received by many people as a new type of barley tea that has never been seen before. And within 3 months of this launch, it has captured 13% of the market share. Next, in May, we launched ICY SPARK, the strongest sparkling water in the history of Coca-Cola Japan. In response to the strong stimulus demanded by sparkling water drinkers, we set more than 100 million bottles within 6 months of its launch. From Costa Coffee, our cafe brand that has been loved in Europe, the home of coffee for 50 years, we launched the Costa Coffee series, a new premium coffee that offers a taste of high-quality hand brew coffee in a PET bottle. Costa Coffee series has succeeded in attracting coffee lovers in their 30s to 50s and has contributed to a net increase in the market share among small PET coffee. Next, Ayataka Cafe Matcha Latte was launched. This is a new type of matcha latte that uses 100% domestic matcha tea in a luxurious way and offers an elegant milk flavor that complements the taste of matcha tea. It has received high praise from a wide range of people for its taste and has shipped more than 100 million units in total. And then Fanta Premier series. In addition to the existing grape flavor, orange flavor was newly launched, and the total shipments of the series exceeded 50 million bottles. The series has contributed to the revitalization of the market as the top brand in the fruit to [ SSD ] market. Last year's new innovations were able to achieve balanced growth by successfully entering the mainstream markets of the growing barley tea and nonsugar sparkling water markets as well as by successfully launching highly profitable premium new innovations. The second success factor is the expansion of the Coke ON experience. The number of downloads of Coke ON, the official Coca-Cola application, has exceeded 33 million. The number of VM purchases via Coke ON has also grown significantly, contributing greatly to the increase in the value share of vending machines. The third success factor is the acceleration of cultural leadership. As part of our efforts to realize the Coca-Cola system goal of a World Without Waste, zero-waste society, we have been focusing on reducing the environmental impact of our business activities by providing 100% rPET bottles and strengthening sales of label-less products. In addition, as an initiative to promote diversity and inclusion, which is one of the priorities of our business strategy, we have been involved in the Tokyo 2020 Olympic and Paralympic campaigns and the opening ceremony, which serves to communicate diversity to the world. We have been contributing to the promotion of understanding of diversity and inclusion through initiatives such as the Tokyo 2020 Olympic and Paralympic Games campaign and placard bearers at the opening ceremony, which served to communicate diversity to the world. In recognition of these initiatives, we were able to significantly raise our ranking from 38th to 5th in the second ESG brand survey announced by Nikkei BP in October last year. With these 3 success factors, we were able to grow our value market share and increase the number of Weekly+ shoppers. Next is Slide 20. Next is our marketing strategy for this year. Our marketing strategy continues to be based on 3 major pillars: pivot to core; few, bigger innovations; and capture stay-at-home demand. We will continue to respond flexibly and swiftly to changes in the environment to strengthen our core brands and strongly grow our second year innovations and new innovations to be launched this year. Next, Slide 21. I would like to share with you the key initiative highlights in the first quarter of this year. Under the new global campaign platform Real Magic launched last year, Coca-Cola brand launched a fortune bottle campaign in January this year. By scanning the QR code on the back of the label, Haruka Ayase-san will appear in AR. Depending on the result of the fortune, a total of 100 million -- excuse me, 1 million people will be selected by lottery to win our premium. In February, Coke & Meal campaign will be launched. The concept is find your magic combination of coke and meals. We aim to expand our share of the meal occasion year-round by communicating that simply adding Coca-Cola to ordinary meals, which tend to fall into a rut, can make them more delicious, enjoyable. In February, we will tie up with [indiscernible] and leverage their pasta brand to create new coke and pasta habits, mainly through digital and in-store communications. Next, Georgia and Costa. In January, Georgia new campaign, the coffee that makes you glow, was launched for the first time in 8 years. Releasing in the power of coffee, Georgia will continue to refine the taste and quality of its coffee and provide a delicious and aromatic cup of coffee to help people move forward and encourage them to grow. To embody the new campaign, in February, we will upgrade 3 Georgia black coffee, leveraging its unique aroma technology under the theme of deliciousness as if it was freshly brewed coffee. We will deliver a [indiscernible] link to black office users who would like to enjoy their coffee in a variety of ways by realizing a taste that meets their individual needs. In March, we will launch a new campaign under the theme of "Do like good coffee?" to further establish the Costa Coffee brand. We will drive this campaign by pointing a famous actress as the brand ambassador. As for Ayataka, in February, we will launch the Ayataka cherry blossom design bottle based on the concept of cherry blossom's open deliciousness opens. Ayataka Cafe Matcha Latte, which was popular last year, will be launched in February with a theme based on Japan's 4 seasons to further establish a brand position. The first spring campaign will be launched in February under the theme of cherry blossoms to convey the relaxing coffee time that only Ayataka Cafe can offer in order to stimulate interest in the product and encourage trial. In February, Coca-Cola system will tap into the nonalcoholic beverage market with the launch of Yowanai Lemon-dou, the first nonalcoholic brand with 0% alcohol content that offers an authentic lemon sour taste. Yowanai Lemon-dou is a nonalcoholic lemon sour flavor brand that was clearly based on the knowledge and experience of the Lemon-dou brand, specializing and making them as sours. Recently, the number of people who choose not to drink alcohol is increasing, and we will respond to the needs of such consumers who want to enjoy the same taste and feeling as when they drink alcohol even on such nondrinking days. Next page. This year, we, Coca-Cola system, are aiming to further strengthen our system collaboration to improve our growth opportunities. First of all, we must win in in-store execution to do so. we will further strengthen our system approach to our strategic customers such as OTC channel, online and HORECA. In the vending channel, we will continue and strengthen our initiatives, leveraging Coke ON, aiming to win in-store executions in the market. In addition, we will further accelerate ROI optimization. We are seeking for not only NSR growth but also the mix improvement of channels and portfolios. We will further improve the efficiency of our marketing investments and strongly drive our ROI optimization throughout the entire Coca-Cola system. That's all for today's presentation from me. With our mission of Refresh The World, Make A Difference, we will continue to strive to deliver refreshing moments and positive feelings through our brands. Thank you very much.

Thank you, Wasa-san. Calin here again. Next, I would like to talk about our strategies. On Slide 24, let me share our commercial strategies that will drive our growth in 2022. We have 4 major pillars. The first pillar is to expand our portfolio edge. As Wasa-san has shared with us, in 2022, we have various new marketing programs in place with a focus on our core brands. We also have exciting new products that will lead us into the white space. As we did so in 2021, we continue to capture the needs of the consumers and social trends. A great example of this is our expanded label-less packaging that captured the increased environmental awareness. We will continue to find opportunities to leverage our product innovation to drive added value and premium pricing. The second pillar is on margin-focused pricing. The 2 major initiatives are pricing strategy centered around the recently announced price revision of large PET bottles and the marketing investment strategy based on a balance of competitiveness and profitability. This will be explained in detail on the next page. The third pillar is growth through our vending channel. We remain committed to the vending channel, and our presence is stronger than ever with the value market share continuing to grow for 33 consecutive months. We will leverage our vending channel for future growth. These 2, I will talk about it in more details later. The fourth pillar is customer management and execution excellence. We are strengthening our customer relationship with proposal-type sales providing solutions and working together with Coca-Cola Japan to enhance such capabilities. A key element on the transformation is applying DX in all levels of our business, including analysis, planning, operation and execution. An example of this is our sales force automation system used daily by our field sales. The system is designed to increase and improve sales productivity by adopting digital technologies such as augmented reality helping make proposals to install sales equipment more effective. Please turn to Page 25. I will now talk in detail about our pricing and marketing investment strategies for 2022. Last week, on February 8, we announced our price revision for large PET products. By taking leadership in the industry, we hope to pave the way for rational, healthy and sustainable growth for ourselves and for the industry. If you recall, 3 years ago we made the decision to revise our prices ahead of the industry, and we did it with a strong will. It was a very difficult decision under the severe competitive environment, but it was necessary for sustainable growth and, we made a decision with a strong desire to take leadership. Although we are making company-wide efforts to reduce costs in response to the cost increase caused by the rising commodity prices, the impact is expected to be substantial. We hope to offset some of the cost increases through price revisions. These price revisions will help us maintain fair and healthy relationship with our suppliers and customers as well as maintain a high-quality standard and provide a safe and secure supply of products and services. This price revision alone will not solve everything. To strengthen our revenue base, we need to work on setting appropriate prices, and it's important to make marketing investments with profitability in mind. At the same time, we are growing our market share to build a foundation for growth. To achieve both goals from a medium- to long-term perspective, we will leverage the lessons learned in 2021 to strengthen our earning base for sustainable growth by focusing on return on investment, balancing competitiveness and profitability and controlling sales promotion accordingly to demand. Please turn to Page 26. Now vending, it's a very important channel for our company in terms of both growth and profitability. Although the market has been contracting under the severe COVID-19 environment, we have been able to continue to grow our value share, supported by the strong foundation built through transformation. We believe that our presence has been greatly enhanced. In addition, as we saw good results during the period following the state of emergency was lifted and traffic return, we believe that we are positioned well for when the market normalizes. We are confident that vending will be an important driver for the return of our business to a growth trajectory in the future. In 2022, we will focus on growth initiatives, leverage Coke ON and further optimize operations. For growth initiatives, we have an attractive product lineup for consumers in both products and prices and will expand our sales pace by increasing vending machines. Due to COVID-19, we have been taking measures to align with the market situation and have been controlling investment on new vending machines. While we will continue to do so in 2022, we are looking for opportunities to gradually install new machines accounting for the market environment. Coke ON app continues to solidify its position as one of the most well-recognized digital platforms for vending. We will increase the engagement with our customers and provide new services and functions. Downloads of the Coke ON app and purchases through Coke ON continues to increase, and we will further improve these indicators that will contribute to sales. To our pursuit to further optimization, we will work to stabilize the operation of the new operating model. For DX, we will be putting more vending machines online and apply various digital tools. In addition, work with supply chain to improve our operations by leveraging the mega DCs. Please turn to the Page 27. In 2022, we continue our efforts to establish a strong supply chain network for sustainable growth and low-cost operations. For manufacturing, we continue to strive for a stable supply of products and improved manufacturing efficiency by increasing manufacturing capacity by being agile. As mentioned during our third quarter earnings call, we faced increased logistic costs during summer season in 2021 as we attempted to meet high volume and volatile demand. We have been taking actions to deepen collaboration between the commercial and supply chain with digital technology. And our agility to meet future demand volatility in a timely manner while saving low cost is improving. Saitama Mega DC, which started this -- its operation in 2021, is on schedule. We will work towards a smooth start of Akashi Mega DC, which is due to start its operation ahead of schedule in July 2022. Streamlining of sales centers, reduction of optimal allocation of inventories synchronizing with operations of these mega DCs continues. Since its launch, the Saitama Mega DC has experienced a drastic change in its logistics model on a large scale and is making steady progress towards stable operations while accumulating lessons and improvements. For the Akashi Mega DC, we aim for a smooth start-up by leveraging the knowledge learned from the Saitama Mega DC. I will now talk about our initiatives in ESG on Page 28. As part of our initiative to create shared value, we continue to implement various measures towards realizing a world without waste, and our ratio of sustainable PET materials has reached 40%, including the bottle-to-bottle initiative, an industry first. We will accelerate this initiative by targeting a 50% ratio of sustainable PET by the end of 2022. We are being recognized for our ESG initiatives. We are proud to be selected for the DJSI Asia Pacific Index for 4 consecutive years and receiving an A- rating for the first time on water security conducted by CDP. Please turn to Slide 29. Alongside our commitment to ESG initiatives, we stay true to our mission, vision and values. Our mission at Coca-Cola Bottlers Japan is to deliver happy moments to everyone while creating value. Especially in these times of continued public health concerns, we will continue to provide a safe and stable supply of products and services in the belief that our work can help brighten the society. I would like to summarize my presentation on Page 31. For 2021, despite the business environment being very challenging, key initiatives on what we can control delivered good results. New products contributing value share that are showing growth and JPY 9 billion of recurring cost savings through the transformation, lowering our cost base are just a few examples. In the fourth quarter, when the market showed demands, even improvement, as traffic recovered post state of emergency, sales volume and revenue grew as did business income. This make us believe that we have built a foundation to grow once the market normalizes. However, we are now faced with uncertainty with the spread of Omicron. In addition to this, we also expect to face severe cost pressures and must continue to manage our business carefully to protect our business. At present, we will not announce earnings guidance for 2022. Our focus remains unchanged to build on the results we delivered in 2021 and look ahead to market normalization. We will work to deliver the 6 targets that we have set forth, including increasing our market share and continuing our transformation. As for improving profitability, the recently announced price revision is one example of our ability to execute. The decision to revise our prices in this challenging environment was not an easy one, but we believe it will lead to rational, healthy and sustainable growth of our company and the industry. Although we continue to remain in a challenging environment, I believe that we are making steady progress in our important initiatives. While keeping a close eye on the short-term business situation, we will continue to push forward with initiatives that will lead to sustainable future growth. That concludes my today's presentation. Thank you very much for your kind attention. And let me now ask Gomi-san to come back and take us to questions and answers.

Thank you, Calin-san. Let me remind you this Q&A session is intended for analysts and investors. So we ask members of the media on the call to please hold your questions until our media session, scheduled separately today. We are using simultaneous interpretation, so please make sure to ask your questions in the language you are joining: Japanese on the Japanese phone line and English on the English phone line. Please try to ask one question at a time as we are translating your questions. Please state your name and company. Now I would like to begin the Q&A. Operator, please put through the first question.

[Operator Instructions] The question is from Credit Suisse, Ihara-san.

[Interpreted] This is Ihara from Credit Suisse. I have 2 questions. My first question is about your price revision. I want to know your strategy or your thoughts behind the revision. So you have -- you mentioned that you will not be able to offset all the commodity with this price raise. But why is it just for the large-sized PET bottles? Why didn't you raise the price for the small-sized PET bottles? And what is the situation for you to go into the price raise of the small PET bottles? So I just want to kind of know your thoughts behind the overall price revision strategy. That's my first question. And my second question is, so you are in red, you're in deficits. And when are you able to come back and gain profit? So even though we go back to the post -- pre-COVID situation, and I don't think that will be the case anyway, but I want to know when you're able to gain profit. You have the same dividend level that you're planning to give out. So what is going to be the change for you to come on the black side? And when would that be timing-wise? I want to understand your future view. What is the timing that you're going to be in profit? And when -- what are you going to do?

We'll take the questions one at a time. The first question was related to the price revision. The L PET price increase cannot offset the commodity price -- commodity impact alone. What would you -- what would be needed to consider price hikes on S PET ? I will have Costin-san answer this question.

Thank you, Ihara-san. This is Costin Mandrea. As you know, last week, we announced price revision for large PET products. And this is significant and delicate decision for us, but some things that we had to do in order to sustain the health of our business and the health of industry. Today, in the market, our products are premium versus competition, and this is happening for many years. Our prices are higher. Still, we decided to increase prices this year. As well, you remember that 3 years ago, we were the first company to increase prices in the market, which, again, it shows our commitment to improve the health of our business and the health of industry. We decided to increase prices for large PET because of 2 reasons. First of all, large PET have the lowest profitability, and we saw during COVID, and because of changes in consumer behaviors, we saw large PET growing disproportionately, but also the impact of all the costs we are facing and the impact of logistic cost is greater for the large PET. So for the next period, we'll monitor how the market will react, and we'll decide later what will be our next steps. Thank you for your question.

Ihara-san we hope that answered your question. We would like to now go to the second question. The second question was when will you turn to profit? What is the condition for the recovery and the time line for this? I will have Bjorn-san take this question.

Thank you, Ihara-san, for the question. So I'll address your second question. So as we said in the prepared remarks, you heard from Calin and myself that we will not provide guidance at this point in time. But to your more specifics in the question, you asked about the conditions. So first of all, we need to see a normalization of the market coming from the COVID pandemic, in other words, that the impact of this is settling down and traffic starts returning again. And you also have to remember the conditions we call out in the 6 KPIs last year and also this year. And a significant part of us returning to profitability and getting on the recovery path is to continue our transformation efforts. And you heard last year, we completed a good JPY 22 billion of recurring cost savings. And this year, we put another JPY 5 billion on top of that, and when you put that together, that means we're close to 80% of the 5-year transformation destination we set out in 2019. So the conditions, therefore, are clearly normality in the markets and the impact from the COVID and that we continue to push our transformation significantly. I hope that, that answer your question. Thank you.

Ihara-san, we hope that answered your question.

[Interpreted] So I have additional question. So the large PET price revision, I do understand the background. But for the small PET, if you're going to make a decision that you are going to increase the price for that, what will be the conditions? What will be the background for you to make a final decision that you're going to raise the price for the small size, too? I think just raising the price for a large size is not enough. So I want to know the conditions and your thoughts on raising the price for the small PETs.

The follow-up question is, what is needed to consider an S PET price hike?

Thank you, Ihara-san. This is Costin again. Like I said, taking price increase as first in the market for large PET, it's showing our focus on health of the industry. And also, as I said, for large PET, for small PET, our prices have premium in the market versus the competition. So the first step is to increase large PET. We will monitor for the next period. And then if there is any other option that we need to do, we'll come back and let you know. Thank you.

Ihara-san, thank you for the question.

The question from Mitsubishi UFJ Morgan Stanley, Tsunoyama-san.

[Interpreted] This is Tsunoyama from Mitsubishi UFJ. I have 2 questions. One, I know you are in red for 4 consecutive quarters. So I would like to see which kind of sense of urgency that the management feels in your company because for myself, as Ihara-san pointed out, the normalization of the market and the price revision itself doesn't get you back to a recovery trend. So other than that, maybe you need to pursue another -- yet another additional cost reduction and whatnot. So within the Coca-Cola system, is there any way that you can reduce the cost for the bottlers? [ Mike ], maybe you can negotiate for the cost of the purchasing of the concentrate from the company. Maybe that might be the kind of option, but I would like to understand whether you have any kind of thought on this. That's my question.

Tsunoyama-san, thank you very much for your question. Your first question was we are in a 4 consecutive year of loss-making state, what is the management view and urgency related to this? I will have Calin-san take that question.

Thank you so much for the question. Calin Dragan here Tsunoyama-san. Well, I find your question very fair related with the sense of urgency felt by the leadership team. I can tell you firsthand from the leadership team here in Tokyo office that the sense of urgency, it's extremely strong. And this is not just backed up by words, but it's backed up by actions. Throughout the year, I have to say, if you look at our numbers, we were experiencing a big drop in revenue generated by the COVID, almost $1 billion we said in the very first year of COVID. And you might want to remember that this organization, it was able to save almost $1 billion in cost in order to end up the first year of COVID at breakeven. So if that doesn't send out an enormous sign of strength of -- and sense of urgency from the leadership team, I have a hard time to understand what else can prove that. Following in the second year of 2021, second year of COVID, I think you have heard us saying loud and clear that we're focusing all the elements that we can control, and our business gained tremendous market positioning. We gained for 33 months consecutively market share in vending. And as well, we gained share back in supermarket, drugstore, discounters. We have reduced in these 2 years JPY 22 billion worth of recurring savings. And we have transformed the way how we operate in the business. I think all of these are positioning us very well for future, and there is an obvious tough situation out there in the market. And that situation in the market is generated by COVID with reduced traffic. And since we are dependent even more than our competitors on vending, of course, we are more affected in terms of profitability on short term, but quarter 4 proved that once the traffic is back, we are able to perform, and we are optimistic that we are on the right track for the years to come once the market normalizes. The last point that I want to touch about the sense of urgency and the leadership that this team is displaying in the Japanese industry, it is the latest price increase. 3 years ago, after 27 years, this team decided to put the prices up for future consumption packages, and we did it for the health of our business and for the health of the industry, while now we are doing it again, first in the market. We are putting the prices up for an important part of our business, all the future consumption packages, again, first. I think Costin-san have earlier mentioned, and I want to loud and clear repeat. Please, when you evaluate our decision to increase the price in the market, always remember that we are the market leader. We are the first one to put the prices up twice in a row. And we are selling the prices -- the products already at a premium. You understand that this is an enormous risk that our company takes it by leading the way for the entire industry on putting the prices up exposing our volumes, exposing our share position just for the health of the industry. And I hope that, that gives you enough comfort behind the determination of us getting the industry on the right track but as well working for the health of our business. Thank you so much.

Tsunoyama-san, we hope that answered your question. Please proceed to the second question.

[Interpreted] So with regard to the sense of urgency, as a leadership for the bottlers within the Japanese Coca-Cola system, the bottles are including significant costs. I'm not sure whether you feel the same way as I feel. Do you think that you are bearing too much cost?

The question was, as a bottler, do you feel that you are taking a lot of more cost burden? I will have Calin-san take that question.

Well, first, we are -- as a business and as a public company, we are a bottler, and we are having our all value chain built to operate as a bottler within the current Coca-Cola system. Well, I refuse to speculate on this. Of course, we are carrying the cost burden of the value chain because we are operators. And of course, we are disproportionately affected about the variations in the market. But that doesn't mean that the backbone, if you want, the principle of operating as a bottler and as a Coca-Cola company here in Japan are not in a good shape. I just want to remind everyone that we are operating on a so-called concentrate incidence model, which by definition, it's a model that enable the so-called share the pain, share the gain in the sense that when things go well, we are sharing a percentage of the revenue with the Coca-Cola Company. When things go bad, we are losing proportionately, both parts of the system. So we believe that we are having the right dynamic as a system to deliver the results, but we are heavily affected right now about this current situation. And the traffic is basically affecting us disproportionately because of the vending weight within the total business.

Tsunoyama-san, we hope that answered your question. Thank you for your questions. I do understand [indiscernible] planned time. But given that we have a few more questions in the queue, we will extend this session for another 10 more minutes.

The question is from Morita-san Daiwa Securities.

[Interpreted] This is Morita from Daiwa Securities. I have 1 question. So this is a question for Wasa-san. This year, Coca-Cola Bottlers Japan versus competitors, I think they were in a tough situation. The performance is not that well. So Wasa-san from CCJC marketing point of view, so last year's initiatives, can you say that you succeeded? This is my question.

The question was addressed towards Wasa-san. This year's CCBJI performance was severe. What is -- as a marketer, how do you evaluate the performance of -- and its success. Wasa-san, please?

[Interpreted] Thank you very much for your question. And as I explained in my part of the presentation, we have various KPIs, indicators that we track to check our performance in the market. But last year, the market performance, the weekly users that I talked about, now we're at the 10 million benchmark. So therefore, in terms of the marketing that we're doing for consumers, I think we're doing pretty well because our innovations were strong as well. So overall, as a marketer, I can say that we have succeeded. But of course, in the future, CCJC and CCBJI, we are going to collaborate to make sure that we can take further steps. There are more opportunities out there for sure. So I would like to make sure that I will further collaborate with BJI closely. And we will make sure that we will collaborate in all the areas possible. And also, we will pursue cost reductions together as well. So these are the initiatives that we would like to continue into the future.

Thank you, Wasa-san. Just to add on this. If we look at Q4, when we didn't have state of emergency and we saw the traffic increasing and coming a bit better, we saw our marketing initiatives performing better. We saw coffee. We saw the Coca-Cola Christmas promotion and Yakan Barley Tea and the Ayataka Cafe performing better. That's why we are encouraged with the current investment. And with the current plan of marketing launches in 2022, we are encouraged we'll see a gradual recovery of our top line. Thank you.

[Interpreted] Sorry, one more thing. The investment in marketing, are you able to collect all the returns? Versus competitors, it seems that your returns are pretty low. So it's great that you have gained a share. But I think the investment that you had to pay to get that share was enormous. And your deficits are growing versus the competitors. I'm wondering if you're happy with the return that you have right now.

Was on return on marketing investment seems to be low. What are your views on this?

Thank you. This is Costin. So in terms of investment for 2021, we saw that COVID challenges put a lot of pressure on the overall beverage market. And we saw some of our competitors going aggressively into price promotions. I remember you -- the buy one get one free campaigns. So we made, last year, a conscious decision to invest DME as much as necessary to protect our position and to support our brands. I think we were moving the needle in the right direction. And for 2022, we are looking to get better return on our investment. In the same time, you -- as a bottler, you know our investments are going also toward execution toward sales force. And what we saw last year, we see -- we saw a significant improvement in execution in the market and the significant improvement in customer activation, one great example being Olympic and Paralympic Games. So this is a focus area, and we are on top of it. Thank you.

Thank you, Morita-san, for the question.

Next question is from SMBC Nikko Securities, Takagi-san.

[Interpreted] This is Takagi speaking. All right. Let me make it quick. This might be overlap with Tsunoyama-san. I also would like to understand the Japan Coca-Cola system and the view from the management on this system and the mechanism. Now you are -- I don't think that bottlers and the CCJC is in a win-win situation because JC is enjoying a great profit but not the bottlers. But in long term, I see the picture as in the bottler will be -- get -- become weaker and weaker. So I think you have to form more win-win relationship with the JC and the bottlers. So Calin-san, what's your view on which part of the improvement you see within the system or relationship with you and the JC to be more sustainable and to gain the growth in the Japanese market?

The question was, as a top bottler, the bottler is in a currently loss-making state. What is needed to fix this condition? And this question was addressed towards Calin-san.

Thank you so much, Takagi-san for the question. Nice to hear from you. Well, I'm not going to repeat my answer in every detail that I made it earlier. But again, I just want to remind that it's my belief that we are having a mechanism in place right now in which we are sharing the pain, sharing the gain within the Coca-Cola system. At the moment in time, the gains and the pains might be different from one of the other side of the system, but that's part of the way how we are operating in a franchise or franchisee relationship. If you ask me how do I see the future development of relationship, I personally believe, and I'm of the principle that all our focus should be on eliminating duplication within the system on -- from the cost perspective. But the most important thing is to find ways, work through collaboration, to grow the overall revenue of the system. Basically, I call that we want to grow the pie, not so much to discuss about how are we going to share the pie. So at the end of the day, if we want to win in this equation, we need to grow the revenue pool, and we will need to win in the market. And this is what we are up to. First, as a bottler, our all primary focus is related with the execution of the sales execution and, of course, an impeccable lowest cost operator structure in Japan, making the best products arriving on the shelves impeccably executed. That can be reflected in market share gains, and you can see that year after year, and with vending, you have the example of 33 months in a row of winning in the market. We were as well being able as a bottler to drive pricing in the market twice in 27 years of no move. And then now, again, after 30 years, we are able to move the prices. And that kind of initiatives, together with the marketing initiatives that Wasa-san presented today, and of course, he's going to share later on further plans for the medium, long term, that will drive revenue growth and a healthy mix. I am convinced that, that will drive an increased pie, as I call it, that later will be driving better financial performance for both parts of the system.

Takagi-san, thank you very much for the question and hope that answers your question. With that, we would like to conclude our Q&A session. Thank you again for your interest in our business. The replay webcast of this call will be available on our Investor Relations website soon after finishing the call. We invite you to reach out to our Investor Relation teams with questions or feedback. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]