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

Good afternoon. This is Gomi, Head of Investor Relations for Coca-Cola Bottlers Japan Holdings. Thank you for joining us today for the First Quarter 2024 Earnings Presentation for Analysts and Investors. Today, we have President, Calin Dragan; CFO, Bjorn Ulgenes; and Coca-Cola Japan CMO, Su Choi. We are also joined by Executive Officer and the President of the Retail Company, Alex Gonzalez; Executive Officer and President of the Food Service Company, Chief Business Strategy Officer, Maki Kado; Executive Officer and Chief Supply Chain Officer, Andrew Ferrett; and Executive Officer and Chief Human Resource Officer, Yuki Higashi. Following prepared remarks, we will be happy to take your questions. Simultaneous interpretation in both Japanese and English is being provided for both today's call and the Q&A session. Before we begin, let me remind you that today's presentation contains forward-looking statements and should be considered together with cautionary statements contained in our presentation. With that, I'd like to turn the call over to Calin Dragan. Calin-san?

Good afternoon, everyone. This is Calin Dragan. Thank you for joining our earnings briefing today. I will begin by sharing today's highlights. So, please turn to Slide #4. 2024 is an important first year of our strategic business plan, Vision 2028, and we have begun the year in a very good shape. In the first quarter, business income increased by JPY 1.6 billion over the previous year, and we are on schedule to achieve our ambitious full year business income goal of JPY 10 billion for 2024. Especially good was the top line growth. And as was the case last year, it played a significant role in our profit improvement. This confirms the successful implementation of our profitability-focused commercial strategies. Despite the challenges of last October's price revisions and poor weather conditions in March, we maintained our sales volume at the previous year's level. In addition, the series of price revisions and other profitability-focused measures resulted in revenues increasing 2.5% year-on-year Furthermore, transformation initiatives generated benefits of JPY 0.8 billion in the first quarter, enhancing the profit increase. Our efforts are on track to deliver the JPY 6 billion in annual benefits for this year, supporting our goal to establish a solid business foundation that is key to achieving our Vision 2028. In the second quarter, we will sustain the positive trends of the first quarter and position ourselves to maximize benefits during the summer, our peak demand season. Alongside the precise execution of our transformation and profitability-focused commercial activities, we will ensure the successful implementation of the May price revisions and maintain their stable pricing. We have also decided to implement further price revisions starting this October. Efforts are progressing well to achieve sustainable profit growth in the coming years. Now, let me hand over to CFO, Bjorn Ulgenes, to provide you with details of the results.

Thank you, Calin. Hello, everyone. This is Bjorn. Please turn to Slide 5 for the first quarter P&L. In the first quarter, successful efforts to focus on profitability achieved increases in both revenue and profits. As Calin mentioned earlier, while sales volume was flat compared to the previous year, revenue grew by 2.5% from the series of price revisions and factors such as mix improvements. Gross profit rose strongly by 3.4%, outpacing revenue growth. Improvements in wholesale revenue per case, driven by price revisions led to an overall improvement in the gross profit margin. Business income improved by JPY 1.6 billion from the previous year with top line growth being a major driver. Factors behind the change in business income will be detailed on the following slide. Operating income improved by JPY 6.1 billion from the previous year. This was largely due to the rise in business income and the booking of other income from the sale of fixed assets, part of our effort to optimize the balance sheet. Consequently, with improved operating income, net income improved by JPY 3.6 billion from the previous year. Please turn to Slide 6 for our primary business income drivers. On the left-hand side, you will see volume, price and mix. These represent a year-on-year change in marginal profit from commercial activities of JPY 2.8 billion. This was primarily driven by the series of price revisions, improving wholesale revenue per case, while sales volume was on par with the previous year due to the unseasonable weather in March. Additionally, improvements in channel and package mix had a positive effect on profits. Consequently, our focus on profitability in our commercial activities has made top line growth a consistent driver of profit expansion, continuing the positive trend. Moving to transformation. Initiatives are progressing as planned and have generated benefits of JPY 0.8 billion, primarily from efficiency improvements in supply chain and back office. Marketing expenses achieved JPY 0.5 billion reduction from the previous year. This stems from thoroughly implementing cost-effective marketing activities as we prepare for the peak demand period. Turning to manufacturing. Cost increased by JPY 1.3 billion from the previous year. This increase is attributed to the establishment of a flexible structure of high-mix, small-lot production for the overall optimization of the supply chain as well as a decrease in the manufacturing volume. Other costs rose by JPY 1.5 billion compared to the previous year, driven by rises in IT-related expenses, sales equipment costs and depreciation costs. Next is commodity and utility costs. Despite the continued severe cost environment, we managed to reduce total costs by JPY 0.4 billion, contributing to our profit growth. Effective cost control measures for raw materials and energy helped offset the cost increase impact resulting from the weaker yen. This is the result of procurement strategy that leverages the strength of the Coca-Cola system. Please turn to Slide 7 for volume performance by channels and categories. In the first quarter, sales volume was flat year-on-year, while wholesale revenue per case continued to improve. In Supermarkets, sales volume decreased for large PET bottle products due to a significant impact from the price revisions of last October. However, wholesale revenue per case improved by more than JPY 100 from the previous year. In Convenience Stores, although the competitive environment remained severe, sales volume increased by 8% as core products became a regular item in our customer stores and the effects of leveraging digital in our marketing activities became evident. In Vending, sales volume grew by 1% despite the incremental weather supported by the market share base built to date as well as measures to capture demand through digital initiatives, such as implementing Coke ON app campaigns and expansion of QR payments. Volume growth was achieved while increasing wholesale revenue per case by JPY 68. In Retail and Food Service, volume increased by 7% from the previous year with traffic recovery at restaurants. In Online, volume increased by 23% year-on-year due to successful promotions collaborating with online customers. By category, Sparkling volume was flat year-on-year due to an increase in Coca-Cola at restaurants and Online despite price revision impact, particularly for large PET products. Tea volume increased by 2% due to contributions from Kochakaden and Ayataka. Water volume was down 6%, reflecting a decline in large PET bottle products from price revision impacts. Coffee volume was flat year-on-year with contributions from the renewals of core products such as Georgia and Costa Coffee, despite the impact of price revisions for can products last May. Slide 8 highlights market share and retail price trends. Here, we can see that the results of profitability-focused commercial activities are materializing. In market share, total channel value share grew by 0.2 points from last year. Although, the trend in sales volume and volume share was impacted following the price revisions for large PET products implemented last October. Wholesale revenue per case by channel improved and the value share of convenience stores improved significantly by 0.7 points, all contributing to total value share improvements. Our products continue to maintain a price premium to the industry average. OTC retail prices for small PET remained mostly unchanged from the previous year, maintaining the elevated levels following the price revisions implemented in October 2022. For large PET, the 2 price revisions implemented in May and October of last year resulted in a significant increase in OTC retail prices of JPY 19 from the previous year. Please see Slide 9. This is the status of commercial activities during the first quarter. Under the new commercial structure implemented in January this year, we have executed growth strategies tailored to the 3 channels; Vending, OTC and Food Service with a unified theme to capture sales space, improve mix and leverage digital. First is Vending. We have placed vending machines in prime locations and strengthen our strategic product line up to grow sales and profits. Vending is leading initiatives in adopting digital technology. To further promote DX, we have worked to increase the functionality of the Coke ON app as well as expand QR payment options, which are very popular with inbound tourists. Installation of smart modems in vending machines have been progressing on plan and will lead to further operation optimization. In the OTC channels, such as supermarkets and convenience stores, we introduced core products into regular sales spaces and strategically rolled out double-branded products to meet consumer needs, considering the characteristics of each store. We also worked to improve mix by introducing multipacks and mini-sized packages with a higher unit price per volume. In terms of leveraging digital, we focused on use of digital assets at convenience stores, including the implementation of digital marketing that links retail medium with the creation of sales spaces. In the Food Service channel, where demand is expanding from the traffic recovery and with increasing inbound tourists, we stepped up activities to acquire new businesses, especially in the rapidly growing hotel and other new sectors. To improve mix, we worked on product proposals tailored to business categories and customer characteristics as well as strengthened our offerings in high value-added products such as 100% fruit juice and COSTA Coffee. In the area of digital marketing, we took on the challenge to implementing measures to stimulate demand unique to Food Service, such as a campaign through apps in collaboration with food delivery customers. As described, activities by each channel to date have been progressing well and we are well prepared for the period of highest demand. We will continue to work closely between channels and implement growth strategies tailored to each channel's characteristics. Slide 10 is on building a business foundation to support profitable growth. In the areas of supply chain, back office and IT activities are progressing as planned with a focus on transformation. In the supply chain, we are pursuing various initiatives to optimize the entire end-to-end process. The sales and operational planning, we are working to further improve the accuracy of our planning this year as we prepare for the summer season when demand is at its peak. In addition, we are steadily building a system of high-mix, small-lot production in each area, which is the key to local production for local consumption model, a concept based on manufacturing products at plants closer to the place of consumption. We are also making progress in improving our logistics network by taking advantage of our flexible manufacturing system, which has led to shorter product transportation distances and fewer touches. We are working to optimize product inventories together with the reorganization of our logistics network. Also, we are addressing social issues, such as the logistics 2024 issue. And in early February, we began collaboration with FamilyMart on logistics through the use of delivery trucks. Next, regarding back office and IT functions, various initiatives are progressing as planned and profit contributions are beginning to emerge. NeoArc, joint venture with Accenture commenced full-scale operations in January and a new corporate culture is developing well. Currently, as the first phase of promotion data-driven management, we are undertaking a fundamental review and standardization of operations in the areas of business process operations and information technology operations. For the next slides, I will ask Su from Coca-Cola Japan to share us the marketing update. Su, please?

Thank you, Bjorn. Hello. This is Su Choi from CCJC. Please turn to Page 12. I Allow me to take you through a review of 2024 first quarter and the key highlights of our marketing initiatives in the second quarter of this year. Starting with the first quarter performance of 2024, the business grew ahead of the market. Our value share in the soft drink market grew, driven by strong renewals and new innovation. First, we continue to strengthen the core brands through renewals and improvements. On the coffee category, we are continuing to grow Georgia through renewing PET lineups by enhanced coffee aroma and taste. And Lemon Dou was renewed with new campaign to expand user base with more relevant insights and occasion with the slogan of Better Lemon, Better Time, Better Me. Moving on to innovation. In March, we launched Coca-Cola Zero Creation K-wave in collaboration with JYP, one of the most renowned K-Pop entertainment company. This initiative aims to recruit Gen Z users into the Coke trademark by devotion to K-Pop artists and their fans, providing exciting experiences. Along with the product launch, the collaboration song Like Magic was released as a music video and reached over 5 million views. Furthermore, the promotions that offered winners a chance to attend the K-wave concert in Korea was also exceptionally well received, successfully building strong engagement with our core users. In February, we relaunched a new campaign for Coca-Cola Zero with the message Choose Your Great Taste of Coke Zero. To coincide with the new campaign, Living Marked by Coca-Cola Zero, a pop-up store designed to appear alive, where Coca-Cola Zero engages with you just as it does in the new TVC was opening Harajuku for a limited time. This initiative successfully provided consumers with great taste experiences through an iconic and unique way of sampling. Next page, please. I would like to also share with you key highlights of the second quarter of this year. In Green Tea, we relaunched Ayataka in April with a new taste, design and [ amount ], making its first major revamp in 7 years as one of the key priorities of 2024. Ayataka now focuses on replicating the taste of very first brewed tea to meet modern consumer needs while maintaining the authentic tea taste that it's been known for. The new flavor evolves into new balanced taste, which has authentic Umami yet light after taste, relevant to the current consumer taste pallet. Additionally, the main package size has been increased to 650 milliliter, fit for various occasions throughout the day. Beyond the product relaunch, we've also introduced a new brand campaign with a message of Live To Your Own Rhythm, aimed at encouraging people who aspire to live smartly and maintain their pace amidst daily routines. To embody this message under new Ayataka, Hikaru Utada has been named the new brand ambassador. In innovation, we launched Yakan Koi Barley Tea in April as foods with functional claims, product for daily hydration with added ingredient of body fat reduction efficacy. This launch aims to cater to expanding preferences for richer taste among users aged 50 and above, while also addressing the consistent need for metabolism improvements for health benefits. Lastly, we're Gold Partners of Osaka Kansai Expo, and we plan to leverage this opportunity to grow our consumers, customers and coverages. To commemorate the 1-year count down to the expo scheduled for 2025, we launched a new portfolio promotion in April to award a total of 200,000 winners with Coke ON Dream tickets and Osaka Kansai Expo tickets by drinking Coca-Cola products. The campaign fully leverages the Coke ON platform, one of our unique assets, enabling shoppers to accumulate the points necessary for entry by making purchases at vending machines as well as at the supermarkets and convenience stores. That's it from my end. Thank you for listening. And now over to Calin.

Thank you, Su for your presentation. This is Calin again. Before I take you through the outlook, let me once again touch on our positioning of 2024. 2024 will be the important first year of our Strategic Business Plan, Vision 2028 and is an important period for us to build momentum towards achieving it. I want to reiterate that our commitment to both the 2024 plan and to Vision 2028 has not changed. Slide 16 is on the outlook. In the second quarter, we will further accelerate our efforts to maximize activity benefits during our peak demand period, building on the results achieved to date. In commercial activities to maximize summer season demand, we will take measures, including launching new products such as the full renewal of Ayataka in April and expanding sales space with a focus on profitability. For price revisions, we have revised the prices of certain small packages products from May 1 shipments. We will work to appropriately reflect pricing and maintain shipping prices following these revisions. In addition, we have announced further price revisions for PET bottles and cans scheduled for this October. This will be the sixth price revision since 2022. As shown on the slide, we will revise the manufacturer's suggested retail price of 141 SKUs by JPY 20 per bottle across all channels. These price revisions are one of the key measures to enhance profitability and serve as the foundation for sustainable profit growth. We are committed to ensuring the success of these revisions as we have achieved in the past. We are already in the second quarter and performance so far has been good. April sales volume grew by 1% year-on-year despite the continued impact of volume declines from last year's price revisions. The price revisions continue to show steady progress with improved wholesale revenue per case and revenue growth exceeding volume growth. To build a solid foundation, we will continue to accelerate transformation efforts, particularly in the areas of supply chain, back office and IT. Please see Slide 17 for a summary of today's presentation. I am very pleased with our first quarter. Our commercial activities and efforts to strengthen the business foundation are progressing well, leading to a JPY 1.6 billion increase in business income compared to the previous year. In particular, the continuation of last year's positive trends and profit growth driven by top line growth is the result of our steady focus on profitability. We see this as a strong progress towards maximizing performance for our peak demand season in the summer. From the second quarter onwards, we will further accelerate this positive trend. We will execute measures that have proven successful to date to a greater degree. And with strong marketing plans and profitability improvement measures, we will aim for further growth. As I shared at the beginning of the year, 2024 is the year of strong profit buildup. For business income, we have an ambitious target of JPY 10 billion, which is an increase of JPY 8 billion over last year's strong JPY 16.5 billion profit growth. Our progress to date gives us every reason to believe that we will achieve this. This year also marks the crucial first year of our Strategic Business Plan, Vision 2028. The price revisions announced to begin in October, along with transformation that leverages technology are important initiatives that will lead to mid- to long-term sustainable profit growth. By promoting this initiative this year, we will not only achieve 2024's performance targets, but also make a significant leap forward towards achieving the overall target of Vision 2028. That concludes our presentation today. Thank you very much. Now, let me invite back Gomi-san to take us through the question-and-answer session.

Thank you, Calin. This Q&A session is for analysts and investors. For members from the media, please refrain from asking questions at this time as we will have a separate time provided today. Simultaneous interpretation will be used. So, please be sure to ask question in the language of your participating line and please ask one question at a time. Now, I would like to start the Q&A session. Operator, please begin.

[Operator Instructions] We would like to move on to the first question. I will call your name. So before you ask a question, please mention your name and your company. I will unmute the first question. From UBS, this is Ihara-san.

I am Ihara from UBS. I have 2 questions. My first question is, Slide 17, it's about the summary page. And you mentioned about the additional announcement you have made for the price revision and it's for the future sustainability and profitability, you're convinced that it will be the case. So, the sustainable profitability and you are seeing that you're convinced that it will be part of it. So, can you be more specific why you are so sure that this will be a strong measure for profitability? For example, the price will be revised. From that, you will have a source of profitability. Are you going to reinvest that to some other area? Or are you saying that you have a steady like background to increase the price contingency. So, do you mean that 2025, you have further options to increase the price even more? So, which is it? This is my first question.

Thank you, Ihara-san, for the first question. So in the summary, we do mention that this price revision is going to lead towards the profitability for the future. And this will be answered by Calin-san.

Calin speaking. Thank you very much, Ihara-san for breaking the ice and asking the very first question. Let me try and answer to this very first opening of the discussion regarding pricing. We are actually behind driving pricing in the industry for the last number of years performing and announcing right now the sixth price increase to be implemented in the market. I think that demonstrate leadership and demonstrate commitments on behalf of our company on leading this journey. We believe that this is the right thing for the company. And as well, we firmly believe this is extremely important element for the industry future outlook. Historically, we believe -- we know that we were competing as an industry, mostly on volume and on improving our mix in order to be able to build revenue. For the last number of years, I think we opened another opportunity which is pricing. And the only 3 elements that drive revenue in the industry are volume, mix and pricing. We were like an engine with 3 pistons, but actually, we were operating only on 2. Right now, we have the opportunity to leverage the third piston of the engine and really drive revenue growth and help within the industry. Having said that, the benefits that are going to come from the pricing, but not only mix and volume growth this year, definitely, we are going to use them wisely. We are going, definitely going to invest back in the market part of them. Part of them we are going to use them to drive value for our shareholders. But nevertheless, we need as well to acknowledge that it's important to think over the years and the next years are critical for the industry and as well implicitly for our business. We believe that there is pricing opportunity going on in the following years and that's for a number of reasons. The volume declines in the industry over 6 waves of price increases are not big which gives us the confidence that consumers are willing to purchase bottled beverages, which are -- where they perceive value. That's a very good news. In the meantime, Japan is targeting an inflationary environment going on, hence, pricing should be part of the way how we manage and we execute our strategies in the market in such environment. It's true that that's not necessarily the habit of our regular consumer scene in Japan over 2 or 3 decades, but we are leaving new times right now in Japan and these new realities might require new actions. And pricing will be one of them. It's our belief. I hope that answers your question, and we are very happy to take the following one. Thank you so much.

So my second question is, again, related to price revision. 2022-2023, so compared with those price revisions, this 2024 October price revision, that's going to happen. So, what are the positive factors? What are the negative factors that we have in mind? Can you kind of call out the negatives and the positives of the falling price increase?

Well, Ihara-san thank you for the second question. So, we have announced the next price revision in October. So, what are going to be the negative and positive factors for the next one. So, this question will be answered by Bjorn-san.

Thank you, Ihara-san for the question. And let me give you some perspective. And if required, Alex Gonzalez can give more of the commercial aspect. So correct, we are aiming to increase prices in October this year with the effects on our P&L between JPY 7 billion to JPY 10 billion. And when you look to the past price revision, so this is -- we have 5 price revisions now in the market. This is going to be the sixth one. So from a scale and the scope, this price revision we're aiming for now in October is up there among the biggest ones similar to what we did in 2022. And you also have to account for, we are already, as of last week, executing large PET price increases in the market effective 1st of May. So trying to be specific to your question, the positive side, of course, is, again, we're focusing on profitability, which is the key driver for everything we do as management for the company. And pricing, as we have repeatedly said, is one of the levers we're pulling to improve profitability. So, all of this is again driven to make sure that we get a fair price of our products in the markets. Negatives is more on all price revisions will have an impact on volume. And as we go forward, we are measuring very closely the impact, in other words, the price elasticity. We are not making any statements about the price elasticity impacts of the October price increases. But again, that's something we will have to measure and value as we go forward. So, I hope that addressed your question. And if I forgot anything, Alex is okay. Then, thank you.

So, may I additionally ask. So 2024, the October price revision, so compared to the past ones, the impact that you're looking at is smaller for the benefit part. So you probably are assuming there's going to be a major drop in the volume, I guess. But the -- else other than that, is there other negative factors that will kind of minimize your impact from price revision?

Well, thank you very much for the additional question. So, the October price revision, the impact seems to be smaller than the past revisions. So, is it only volume? Or is there any other element that is impacting the scale of benefit? Bjorn, please.

Thank you, Ihara-san. Let's continue. So, yes, the impact of volume, of course, will be, as part of what I said in my earlier reply to you, the function of price elasticity. To us, given that we're executing these price increases, I think, flawlessly in the market with our customers and our consumers, the price elasticity will be the big key that we will have to continue to monitor and manage as we put the price into play as of October 1. So, we believe volume is the prime function, yes. Thank you.

Thank you very much, Ihara-san. Operator, we would like to move on to the next question.

Next question. I will unmute next person. Saji-san from Mizuho Securities.

I have one question about our private brand impact. When you look at the market, about 1% of the total market is -- 10% of the total market will be a private brand. I think that's where we stand right now. But at this point in time how do you look at the situation? And how do you manage the situation with the private brand? Since you are going to revise the price from October and how the private brand will come into competition against your products in that situation? And what's your view on this?

Thank you very much. I would like Alex to pick up on this question.

Certainly, the dynamics that we're monitoring as Bjorn has alluded to, well, there is consumers taking hold and taking routes and been adopting the price increase. There is also the rise of private brands that we're seeing in the market, particularly on some of the categories that are more price sensitive and there is price sensitivity with the consumers. And that's sort of the underlying dynamic that we will need to continue to monitor. The way we're seeing this obviously is working on driving and earning the right to price and working and giving the differentiation from a brand standpoint and working very closely with our partners from CCJC. And at the same time, leveraging all the levers behind a flexible RGM algorithm and looking at our pack mix, driving more profitable immediate consumption packs that are very relevant in some of the occasions like multi-packs, et cetera, and leveraging further our pack and pricing architecture to address potential sensitivity on shoppers on absolute price points. And that's the way we are approaching and driving our response to create value for consumers and create value for customers. I hope that answers your question.

By the way, by increasing the price for large PET, how PE goes up by that? And I know that you are already factored in the climate in back in March as a negative factor. But I would like to understand what will be the actual impact coming from PE price elasticity.

Thank you, Saji-san for your question. This is about the PE impact coming from the large PET price hike. So Alex, can you pick it up?

We don't -- we will -- we don't comment on specific price elasticity. We're looking in the overall integrated approach behind evidently price impact and weather. I'll just try to make sure that from a focus standpoint, we're focused on expanding our relevance of execution and space to sell and controlling for all the different variables and metrics into our consumption.

Calin would follow up.

Saji-san, thank you so much. This is Calin Dragan speaking again. And I'm just intervening to this question because I saw a certain level of the interest regarding the private brands. Now, private brands in Japan had a slower start than in other developed markets in the world. And they are growing right now. But if we are -- if it would be to look at the learnings from other markets in the world, yes, of course, on this phase of expansion of the private brands, there is an accelerated rhythm of growth. However, over the years and after a number of years of growth, it is demonstrated in many, many markets around the world, that the private brand's growth, it stabilizes, basically, or in some places, even declines because the consumer would prefer high-quality, high brands to purchase. That's one element. The second element is pricing per se. What we learned in other markets in the world when the prices are going up, well, there is already existing price gap now between us and the private brands in the market. Having said that, that price gap enlarging, at a point in time, any price increase will have less and less impact because the gap is already there. The consumer already sees it. So, it's not anymore a surprise that serious stand-alone brand, it's more expensive than a private brand. So, there are a couple of elements that are affecting this dynamic. And as the price gap, it's enlarging between us and the private brands at a point in time, that's not necessarily going to be a [ bad tech ]. It's going to position us very differentiated out in the market and it's going to have a different dynamic in the future. And all what I'm sharing with you right now is based on our international experience of stand-alone brands versus private brands. I hope that helps with the overall picture that we have experienced it somewhere else.

Thank you, Saji-san for your questions. Operator, please put through the next question.

Unmuting the next person. From Morgan Stanley, MUFJ Miyake-san.