Coca Cola Bottlers Japan

Good afternoon. I am Raymond Shelton, Head of Investor Relations and Corporate Communications for Coca-Cola Bottler's Japan Holdings. Thank you for joining us today for our first quarter 2020 earnings call for analysts and investors. I'm here today with President Kaleen Dragan, CFO Bjorn Ulgenis, Head of Commercial Kostin Mandrea, and Mr. Takashi Wassa from the 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 today. Simultaneous translation in both Japanese and English is being provided for today's presentation 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 objectives and should be considered together with cautionary statements contained in our supporting presentation deck. Both are posted to the Investors section of our company website at ccbj-holdings.com. Please look on our website for this information in both Japanese and English. Now I'd like to turn the call over to Kaleen Dragan. Kaleen-san?

Thank you, Ray, and good afternoon, everyone. I am Kaleen Dragan. Thank you for dialing into today's earnings call. First and foremost, on behalf of the company, I would like to express our deepest sympathies to all those who have been affected during the COVID-19 outbreak. We are operating in unprecedented times with great challenges for society as a whole and, of course, for our own business. Our company mission is to deliver happy moments to everyone while creating value, even in these challenging times. And we have been working with comprehensive business continuity actions in place to ensure safe and secure product supply. We also sincerely appreciate those who have been working on the front lines in the medical community and elsewhere to keep us all safe. We have seen and experienced these efforts and have agreed a program with a Coca-Cola company in Japan to donate up to 1.3 million beverages to medical professionals in need in cooperation with the Japan Medical Association. This is in addition to our ongoing commitment to supporting local communities through our active food bank donation program. I also applaud the efforts of our employees every day to ensure the health and continuity of our business as we continue to support our consumers and customers with essential beverages and services in challenging times. Today, I would like to share our experience and learnings from this evolving situation and what actions we are taking to not only protect our business, but ensure we are best positioned for the future. We will present our first quarter financial results and current outlook, as well as our initial thoughts about the business post COVID-19. Let's look at slide six. Although we face a serious situation and we are operating in uncertain times, it is important to note that 2020 started with good momentum. and I am pleased with how our transformation work was kicking in before the initial impact of COVID-19. January and February delivered results in line with our plans, and key focus areas such as the vending channel and Lemondo alcohol brand were positive. We have continued to successfully execute our transformation initiatives, and this is a good indication, I believe, that we have been moving in the right direction. However, as the COVID-19 outbreak expanded and the government announced countermeasures, including school closures at the end of February, we started to see pressure on our business. In March, the food service and vending channels declined, which upset some of the positives in our first quarter results. We expect the second quarter to have a bigger impact. The government declared a state of emergency in April with the goal of reducing face-to-face contact by 80%, and it recently extended the emergency declaration until the end of May. At CCBJI, we started work from home, non-peak commuting, and childcare support measures in February. and we have been distributing approximately 200,000 face masks per week to frontline employees. Because of the ongoing uncertainty of the coronavirus situation, including its initial impact on our first quarter results, we have decided to withdraw our full year 2020 forecast until we can appropriately estimate the outlook for the full year. It will be important to evaluate the scale and duration of the pandemic and its impact in the summer, including the delay of the Olympic and Paralympic Games, and how channel and package mix will evolve over the coming months. In the meantime, we are working to protect our business in extraordinary circumstances and to ensure we continue to support our customers as well as employees and communities in need. Given this unprecedented situation, good stewardship of capital and maintaining a solid financial position is essential. We are actively reviewing our capital allocation priorities and investment plans. We can't let up to our key transformation initiative in this tough environment. Rather, we must dig deeper for change as we continue to build on the solid progress we have achieved so far and as we address shorter-term savings to prepare our business for a gradual exit and recovery. I always say business as usual is not an option, and this is truer now than ever before. COVID-19 is having an impact both in general and in our industry, as you can see on slide seven, represented by the worst consumer confidence readings ever and beverage industry volume declines since March. Clearly, the situation is unprecedented, and we must prepare for changes once this initial crisis has passed. Slide eight summarizes our initial assessment of a reaction to outbreak. We are tackling the current impact of COVID-19 and actively finding opportunities to drive deeper transformation. Since March, the beverage business has experienced volume declines and a shift in purchase behavior and channel mix as consumer traffic has fallen off and people stock up at home. We have been actively adjusting supply plans and in-market actions to meet this consumption changes. The work style reforms we started last year have greatly helped to minimize disruption to business operations. We provided smartphones to all employees in 2019, in addition to work from home and flex time policies, which have smoothed the transition to remote working during the COVID-19. And we are protecting our business today while preparing for the future by reviewing discretionary spending, capex appropriately managing liquidity and access to cash, and tracking examples from the global Coca-Cola system as different markets experience different phases of the COVID-19 crisis. On slide nine, I'd like to double-click on the current situation across different channels, which I think provides a good perspective on the various moving pieces impacting the industry and our top-line performance. I call this our navigation slide as we consider various scenarios for the business over the rest of the year. The supermarket and drug and discounter channels have seen sales volumes hold up, although with the shift in product mix and consumers stock up at home. Food traffic has been more stable, though consumers are reducing the frequency of visits in line with government recommendations and we have observed an increase in some promotional pricing of large package size. Convenience stores and vending have experienced declines in traffic as consumers stay at home and avoid gatherings. In convenience stores, this decline has been most evident in urban locations, and our vending business has been most impacted in train stations, schools, leisure facilities, and offices basically any location where food traffic has declined temporarily due to coronavirus countermeasures. Food service has seen the greatest impact of COVID-19 outbreak as outlets have closed or reduced operating hours and moved to takeout or delivery only. The longer this goes on, the greater the risk that some operators will not be able to recover. And finally, online sales have seen a big spike since the outbreak, and the important question will be to what extent this represents a permanent change in consumer preference and behavior. As everyone can understand, this pandemic is affecting personal lives and business deeply, forcing us to challenge ways of thinking, living, and working. Relationships in our industry and the industry landscape itself will likely change, driven by changes in consumer spending habits and purchases choices. We can already see signs of this new direction. While we expect recovery will take time, we need to be flexible to make adjustments now, in real time. On slide 10, let's look at what this situation means for Coca-Cola bottlers in Japan. I've said we have got off to a promising start in 2020, but this crisis hit at the beginning of an important year for us, the first year of our mid-term plan, with strategic investments coming online and transformation initiatives starting to deliver. As the industry is being hit by overall consumption changes, we have been gaining share in both OTC channels and vendings. This gives me comfort that when the market recovers, we'll be in a good competitive place to continue on our journey of growing value to prioritize big bets, brand investments, and an efficient supply chain to produce and supply beverages that meet growing consumer demands. The current pressure on the business makes crystal clear that we can and must drive further transformation to address the heavy fixed cost base inherited from a fragmented bottler landscape in Japan. I believe our current strategy is appropriate and on track, but more is needed. You will see us accelerating our current transformation plan in order to drive deeper and faster results so that we are fit to fight when the market recovers to its new normal. And we also urgently identify what I call one-time savings to help us to get over the hurdle of this year. Let me now ask CFO Bjorn Ulganes to review our first quarter results and year-to-go outlook for 2020. I would like to ask Wasa-san of Coca-Cola Japan to talk about the brand and marketing outlook. Bjorn?

Thank you, Colleen. Good afternoon, everyone. I'm Bjorn Ullgenes, CFO of Coca-Cola Bottlers Japan Holdings. Let me discuss our first quarter results and rest of year outlook. Slide 12 is a summary P&L view of our first quarter results. Consolidated revenue was essentially flat with a 2% volume decline in our total beverage business, as core beverage performance helped to offset a decline in the health care and skin care business revenue. Consolidated business income declined year on year, mainly due to the impact of beverage volume and mixed pressure in March, and higher depreciation as we finalized major investments to recover and grow the business. We had an operating loss of 7.9 billion yen in the first quarter, which was a 5 billion yen improvement from the prior year, in spite of the initial COVID-19 impact, as we cycled one-time expenses such as the voluntary employee retirement program in Q1 2019. On slide 13, you can see the main drivers of our first quarter business income. As Colleen said, we had good traction through February with transformation initiatives progressing well and encouraging results in key areas like vending and alcohol. But initial volume and mixed declines in March triggered by COVID-19 put pressure on our overall Q1 results. Starting on the left-hand side of the slide, You can see volume, price, and mix, which shows the year-on-year change in marginal profits from the commercial activities of our beverage business. We experienced a net 1.9 billion yen decline in marginal profits, driven by a 4% volume decline in any RTD beverages and negative channel mix. Of the 1.9 billion yen decline, negative volume and channel mix makes up approximately 2.9 billion yen as vending declined 3% and the drug and discounted channel grew 3%. Price and product mix were also negative as package mix declines offset the benefit of the large PET wholesale price increase in April 2019. A Lemondo alcohol brand sold 1.9 million cases in the quarter after expanding nationwide in October last year. This, and a decline of variable expenses such as vending commissions and promotional discounts, helped to offset some of the volume, price, and mixed pressure in the first quarter. We estimate the volume impact in March from COVID-19 was in the range of 4 million cases, And without this impact, first quarter volume would have delivered in line with plan. Fixed marketing expense, or DME, increased 400 million yen as we focused on big bet brand initiatives like Fanta Premier Grape and Georgia Latinista. And we cycled prior year lower spending. I mentioned in our last earnings presentation that we will look to shift investments away from deductions from revenue into fixed DME investments, and this too is reflected in the decline in DFR and higher DME. Due to the volume decline in March, our DME spend in the first quarter was slightly below plan. Raw materials and commodity cost pressure eased to positive 400 million yen, driven by favorable Forex and commodity trends, including resin. Manufacturing costs increased 600 million yen, reflecting lower sales volume, increased depreciation expense by commissioning four new lines since Q1 2019, and the ongoing response to supply disruptions after the flooding in the second half of 2018. In others, there was a benefit from a reduction in IT outsource consultant fees, and other small cost savings, partially offset by an increase of personnel and logistics expense. Business income for the health and skincare business decreased 200 million yen, which was substantially in line with plan. The business has been less impacted by the COVID-19 outbreak compared with the core beverage business. It is primarily based on telesales, but we continue to experience some ongoing pressure. So all in all, it was a quarter marked by progress in the strategic plan, offset by the initial hit from COVID-19. Let me give some more detail on our first quarter beverage volume performance, excluding alcohol. As you see on slide 14, we started the first quarter with good traction through February, with growth across multiple channels, including the important vending channels. In March, we experienced a 10% volume decline triggered by the COVID-19 situation, mainly in retail, food, and vending channels. As people refrained from going out, more people worked from home, and schools were closed. This decline in immediate consumption package volume was exacerbated by a mixed shift of consumers stocked up for home consumption with growth in the drug and discounted channels. April volume pressure was heavier than March with an NERTD beverage volume decline in excess of 20% as the government announced a nationwide state of emergency and counter measures were more strictly adhered to. We are actively working on scenario planning, but the extent and duration of the COVID-19 impact and outlook for the summer are unclear. We currently expect the second quarter to be under the most pressure. You can find volume performance for non-alcoholic beverages with commentary by channel and category on slide 15. As explained earlier, the retail and food and vending channels were hit with initial impact of COVID-19 in March. Even though vending declined 3% in the first quarter, the channel was positive through February and outdoor per machine performance was less impacted than indoor locations where work from home policies hit harder. Growth in the online channel means that it now represents about 2% of overall volume. Improving revenue per case trends continued in supermarket and drug and discounted channels as the benefit of the wholesale price increase for large PET packages introduced in April 2019 has been maintained. By category, volume performance was positive through February excluding sports, which has been impacted by an overall market decline. All categories turned negative in March. Coffee declined in the quarter as growth in vending driven by Georgia Japan Craftsman was upset by declines in the bottle can package. Water growth in the quarter was led by Aloha's brand plain water in supermarkets and drug in discounters. First quarter volume data by package can be found in the appendix of today's presentation material. We maintain positive value share momentum in Q1, even as overall market volumes contracted as shown on slide 16. This positive value share momentum in Q1 can be observed in both over-the-counter and vending channels, and the trend continued into April. Although we are starting to see more discounting in the market, we continue to exercise restraint in promotional discounting and deductions from revenue. The growth in vending market share is encouraging as we continue to push fundamental transformation of this important channel, even when the channel itself is pressured during this COVID-19 pandemic. OTC value share growth was driven by the sparkling and coffee categories as premium-priced big-bet brands such as Fanta Premier Grape and Georgia Latinista were launched. We also continue to observe positive retail pricing in large PET packages in Q1, influenced by the wholesale price increase introduced in April 2019. You can find data on retail price trends in the appendix. Now let me move to our rest-of-year outlook on slide 17. As Colleen mentioned, we have withdrawn our full-year forecast given the expected strong impact from COVID-19 in the second quarter and uncertainty regarding the rest of the year. The beverage sales volume contraction in March and April has continued into May. The volume decline in food service vending and convenience store channels is continuing, and this is expected to drive negative channel mix pressure. In addition, as a result of the postponement of the Tokyo 2020 Olympics and Paralympic Games, We are revisiting our product launch and promotional plans to match the new circumstances. We are evaluating multiple scenarios for the 2020 plan, as well as potential impacts to a mid-term strategic business plan assumptions, while at the same time urgently implementing mitigation plans to help protect the top line and aggressively looking at cost-saving opportunities. Cost-saving opportunities are in two major buckets. ongoing savings that will continue to deliver over the mid-term plan period and savings that are more one-time in nature in order to help us get through the immediate impact of the COVID-19 crisis. Ongoing savings will come primarily from accelerating and deepening the transformation work that is already successfully underway. Examples of one-time savings this year includes cutting or postponing planned CAPEX and marketing investments. We have introduced a paid temporary leave program for all employees during the second quarter and reduced shifts at manufacturing plants or sales centers as volumes have declined and customer outlets have reduced operations. We are also carefully monitoring production plans and inventory levels to ensure we are in line with volume trends and can minimize the risk of inventory write-offs or excessive discounting. Now, more than ever, driving key transformation initiatives is critical, while we also quickly shift gear with more tactical responses. On slide 18, you can see examples of how we have reacted quickly with initiatives in vending and retail channels. In vending, we introduced direct sale of cases from the delivery truck to workplaces, and we have expanded promotions using the Coke On app. In retail, we have ramped up availability of case sales with additional coverage in front of store displays, and we accelerated the planning launch of the 950 milliliters size PET package at convenience stores. Colleen and I have mentioned accelerating ongoing transformation initiatives. You have heard us talk a lot about the vending pilot work we started late last year in the Kinky region. and the Salesforce Transformation Pilots we have started in Tokyo. Both have demonstrated good initial progress and we have quickly decided to expand them from pilots to nationwide by the end of the second quarter. Finally, given the high uncertainty we've faced this year, it is imperative to be what I call good stewards of capital by maintaining our solid financial position and ensuring liquidity while reevaluating priorities for capital allocation, including capex and dividends. Let me provide an update on slide 20. We borrowed 50 billion yen in short-term bank loans in April to provide appropriate flexibility and liquidity to respond to the short-term pressure on our business from COVID-19. Also, we are re-evaluating our capex plan and dividend outlook for the year and have identified 10 to 15 billion yen in saving opportunities versus the initial capex plan for 2020. This includes temporary suspension of new vending machine purchases and cutting other discretionary capex. As for dividends, we have made a decision not to pay an interim dividend in 2020 which will be the period most impacted by the COVID-19 situation. And we have withdrawn our full year dividend outlook pending announcement of an update to our 2020 earnings guidance. We are continuing with our strategic investments in supply capacity at the new Hiroshima and Sao plants, as we expect continued growth of the septic product demand. And this capacity is key for the short term as well as in preparation for what we call the new normal once this crisis have eased. Actual capex in the first quarter was approximately 16 billion yen, with depreciation of 14.7 billion yen. Now, Chief Marketing Officer of Coca-Cola Japan, Takashi Waza, will take you through an update of our work at the Coca-Cola Company here in Japan, and then Colleen will rejoin

Good afternoon, everyone.

I'm Masa of Coca-Cola Japan. Today, I would like to talk to you about three topics. Firstly, the Coca-Cola system's response to the COVID-19. Second, what are our marketing activities in this situation? And lastly, I would like to talk about portfolio communication in response to the postponement of the Tokyo 2020 Olympics to 2021. Next page, please. First, I would like to express my condolences to the people who have been affected by the COVID-19. I would like to reiterate my respect and gratitude to the medical professionals who are working hard to treat and prevent the spread of infection, to the government, municipalities, and public institutions, and to all those who are involved in the distribution of daily necessities, even in this difficult situation. As a beverage manufacturer, we have been searching for ways to contribute to the local community, even if only in a small way. Japan Coca-Cola System has launched the Refresh Japan program to donate approximately 1.3 million bottles of soft drinks to medical institutions to support healthcare professionals who are dealing with the COVID-19, starting in mid-May through the Japan Medical Association. In addition to emergency product support, In the second quarter, the Coca-Cola system is looking to provide products to the front line of medical community throughout this year. In addition, as a part of its support for the prevention of the COVID-19 outbreak, Moriyama Plant of Coca-Cola Japan manufactures ethanol preparations that can be used as hand sanitizer alcohol and provided free of charge to medical institutions and other organizations that are in need. We also are pleased to inform you about our Refresh at Home program conducted through the official Coca-Cola smartphone app, COCOM. The campaign closed on May 10th, and over the course of five weeks, more than one million participants and more than 600,000 drinks tickets have been delivered. Finally, there is the social distance awareness campaign. The photo on the top right is an outdoor ad for Times Square in New York. In Japan, we will also be rolling out our outdoor media with the message of staying apart is the best way to stay united. Next, let me talk about flexibility in our marketing plans. In the time of COVID-19 outbreak, consumers are spending more time at home due to the widespread use of work from home and following the guidance to refrain from going out. And this has led to significant changes in consumer awareness and behavior. In particular, nesting consumption and growth of online shopping have been particularly noticeable. We are as flexible as possible when it comes to our marketing. Implementing a plan to respond to the changing behavior of consumers with household consumption rises Our core brand activities are also switching to campaign to enhance time in the home. From April, trademark Coca-Cola has launched its Screen Time campaign to show that screen time brings an even more exciting and special moment to enjoy movies, dramas, sports, and online videos in the comfort at home. In addition, Ayataka is running the Relax at Home campaign to provide time to relax at home with the umami learned from the Kyushu view. Next is about how to tackle the fast-growing e-commerce online channel. The first is expansion of our portfolio. This year, we are also focusing on mineral water and sparkling water. And in addition to our cobalt products and and functional needs, we are going to treat them importantly online. We launched label-less natural water from Elohas Nationwide in April 2020, and it's performing particularly well in the online channel. The product is label-less, environmentally friendly, and has the advantage of being able to easily separate the waste at home. In addition, the containers are made from 100% recycled PET, making the product environmentally friendly. This product is sold in case only and the legal indications such as the name of raw materials normally printed on the label are printed on the outer cardboard to enable the sale of label-less products. In addition, we have implemented regular deals on our online customer site and enhanced loyalty programs to increase the frequency of purchases. Finally, here are our thoughts on new product launches. In 2020, we continue to focus on the new Big Bet products. In particular, the new Big Bet products, Fanta, Premier Grape, Latinista, and Georgia Crossmas will be firmly nurtured. The last part of my presentation will be about portfolio communication in response to the decision to postpone the 2020 Tokyo Olympics to 2021. First of all, As the longest-running sponsors of the Olympic Games, we will continue to work with the IOC and the Tokyo Olympic Committee to ensure the safety and success of the Games. This year's activities include the Hope Will Bring Us Together campaign, a positive message that leads to next year's Olympics. A comprehensive program is planned, including television advertising, with a positive message for the future. I would like to finish my part by saying that our mission is refresh the world, make a difference. That is, enrich and refresh the world and to bring about positive changes. We will continue to provide activities that are necessary for the local community by providing refreshing moments, and positive feelings through our soft strings. Thank you very much for your attention.

Thank you, Wasa-san. Kaleen here. So let me quickly summarize what we have discussed today and how we are thinking towards a post-COVID-19 world. There is still much uncertainty around the trajectory towards a post-COVID-19 recovery and what it looks like, but what we have heard from other Coca-Cola markets and their experiences is that we can expect three distinct phases. Let's have a look at slide 26. We started the year on the right track. with good initial signs of traction in our results before the COVID-19 outbreak. We are currently in what I'd call the high-impact phase, starting from the government's emergency declaration with impact across society, our business, and the macroeconomy. I don't know how long this high-impact period would last, but we expect the second quarter to represent the peak And we have discussed today how we are working on immediate actions to mitigate the worst outcomes while doubling down on cost savings and transformational change to prepare us for the future post-COVID-19. We should expect conditions to be different in each phase, from high impact to initial recovery and to recovery, and the timing will depend on how soon and how widely the country is able to exit from the current coronavirus countermeasures. Currently, the emergency declaration has been extended until end of May with regional easing. Our scenario planning must reflect this phasing as we evaluate investments, market execution priorities, and make decision on capital allocation to prepare us to win in a further in a future that looks different than many of us planned for. Please look at slide 27 to wrap up today's presentation. We started this first year of our strategic transformation plan with good progress through February. In a time of high uncertainty, we are making decisions to protect the business in the present while accelerating the transformational initiatives already underway. We expect heavy pressure in the second quarter with uncertainty for how the rest of the year will develop. We have withdrawn our guidance for the year and are reviewing our 2020 plan under various scenarios with the goal of ultimately emerging from this COVID-19 period stronger and more agile. we will look to provide an update on our 2020 earnings and dividend outlook once we have more clarity on what to expect in this summer. I have often said business as usual is not an option, and now more than ever this is true, but I believe we have been moving on the right track and driving more fundamental strategic change will be key to how we emerge from this crisis. Finally, times like this are a good reminder that we are all in this together. At Coca-Cola Bottlers Japan, we are proud to deliver essential goods and services to society, and our employees are working hard every day to ensure we can fulfill our social obligations to provide a safe and secure supply of beverages and be successful in our mission to deliver Happy moments to everyone while creating value. Last Friday was the 134th birthday of Coca-Cola, a brand that has endured through many ups and downs. During this COVID-19 pandemic, the safety of our employees, customers, and consumers is our top priority. And we will continue to make decisions with their safety, and the powerful legacy of the Coca-Cola business in mind to help fuel us through these challenges. And let me now ask Ray Sheldon to come back for the question and answer session.

Ray Sheldon Thank you, Colleen. 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 questions in the language of the phone line you are joining, Japanese on the Japanese line and English on the English line. Please provide your name and company when asking a question, and please try to ask one question at a time as we are translating your questions. I'll now pass the call over to the operator. Operator, please.

You are now in a Q&A session. Press 01 to join the queue to ask a question. Press 02 to cancel your request at any time during the session.

Thank you. Your question, we're ready for your question.

Thank you for waiting. The first question is from Saji-san from Mizuho Security. Saji-san, please. So I heard that I'm only allowed to ask one question, so I have a question. This is about the online business. What is the status of online? Do you think there will be more potential in the post-coronavirus world? And with that, I believe that in the first quarter, your online was growing by like 2%. Other companies have grew their online by like 10%. So I think you are far behind the other businesses in terms of online. So the question is, Why are you behind in the growth of online business? And another question is in the future to expand this online business, do you have a strategy? This is my question. And also in e-commerce, if you sell the same product online versus the regular business, how does your margin look like? And my question is overall relying on the post-coronavirus role in terms of the online business. Thank you.

I'm just going to double check that we got your call, your question correctly. The question is on online business and what the potential for that online business is post-coronavirus and comparisons with the online business versus other channels. And before I pass this off to Kostine, Head of Commercial, I'm just going to correct The 2% number for online is a percentage of total. So the 2% for online is percent total. So it's been growing quite fast. Kostin?

Thank you for the question. This is Kostin Mandrea. What we see during this period is that the online channel indeed is growing very fast, and it's a high double-digit in terms of percentages. It's already 2% of our total sales. And we see a great number of new users going online and shopping online. And this is important because the new users, we estimate they will change their behavior and they will stay, continue to shop online. We see growth both in exclusive online channels, but also in customers that have websites. and we are working now with all these customers to deliver on the extra demand. We are running consumer promotions for Aquarius, for Aloha and so on. As well, we are growing online sales via dedicated channel teams. We have dedicated plans. We have online exclusive SKUs and we have online exclusive marketing plans. As you said, In the online, the value chain looks different, and it's a good opportunity both for the customers and for the consumers to shift to a more different way of selling. What Hassan presented earlier, we have a new portfolio for online. We have label-less water. We are launching different sizes for our SKUs. and we continue to innovate. So looking forward, we see a continuous growth, and we expect this growth to continue also in the later phases. And with our plans, we are capitalizing and we'll continue to capitalize on this. Thank you. Thank you, Costin.

So the e-commerce industry, What is the margin versus the other channels? Is it positive or negative versus the other channel?

Imagine in e-commerce, we have a different structure, so the margins are a bit better versus the other channels. And that's why our interest right now is to continue to grow this. I hope this answers your question.

Thank you very much.

The next question, please.

So the second person asking the question is from JP Morgan, Mr. Tsunoda. I invite you, Mr. Tsunoda. Hello. This is Tsunoda from JP Morgan. So I have two questions. First question, so your cell situation in Q1, vending is minus 3%. And if you look at it by category, only water was positive. But you are still growing your value share in light of the situation. The 3% in vending, if you look at it by category, how does it look within vending channel or vending category itself? So can I get an update on that? So that's my first question.

This is specifically around a breakdown Of our volume performance in Q1, with vending having been down 3%, the question was to provide some additional color related to our value share performance, our growth in value share.

Thank you for the question. This is Costa. So I would like to reinforce the importance of vending for our consumers during this period, and therefore our commitment for vending. What we saw since the beginning of the year, we deployed the new strategic business plan, and we saw January and February performing in line with our expectations. We were positive year on year. And then, of course, in March, as people started to work from home and the traffic decreased, we saw a decrease in revenue. In terms of categories, Sunoda-san, Vending is a significant coffee channel for us, and for the last weeks, what we see is decrease across all categories. However, coffee has the lowest decrease in vending. We are getting market share in coffee, and as you remember, Latinista, our big bet, was executed in the middle of March with very good results. Also, when we look in categories performance, we are glad to see also our sparkling is performing very well and is getting market share in vending. So looking forward, we are flexible with our plans and we are with our launch plan, and obviously vending will be very important to execute all these marketing plans. I hope this answers your question.

Notice on your second question?

Thank you for that. The second question again is related to vending machines. So post-April, the sales trend of vending machines have been declining significantly And of course, that's industry consensus as well. Now, your company, you know, you are committed to vending. But some of your competitors are seeing less appeal in the vending channel, especially in light of this corona situation. So your strategy in vending, would that remain unchanged? I believe that it remains unchanged, but in post-corona, what would you see the industry consolidation in vending business? What is the risk you see? What opportunities do you see?

Thank you, Tsunoda-san. Just to repeat the question, make sure we got it. The question is, this company, CCBGH, is maintaining its commitment to the important vending channel while other players are making comments around how much they continue to look there. Can we speak a little bit about the commitment to the vending channel going forward and how that might change how we see that evolving post-corona? Costin, I'm going to send this over your way as well, please.

Thank you. This is Costin. And, yes, we mentioned a few times our commitment to vending because it's a very important channel for our consumers. We have a vending transformation plan, and we presented this to you. And, like I said, January, February, we saw very good results. We observe consumer shift, and we are investigating. We are watching very carefully the situation to understand exactly what the new needs will be. But let me provide to you from two angles how we look at vending today. Long term, our strategic plan for vending stays strong because we started with so good results, so obviously we need to execute what we put in the plan. We are indeed a bit more careful in terms of expansion. We are more focused in what kind of machines we are planning And during this period, we are evaluating every single opportunity. Longer term, of course, it's still very important to grow selling space in vending. However, during this period, we took this crisis as a way for us to double down, to focus deeper, and to put extra focus on efficiencies. The Kinky project that we share with you a few times, delivering great results, we decided that we will accelerate and we'll expand the Kinky project nationally during 2020. I remind you this is delivering extra efficiency because we are looking at the operating model, the end-to-end process for vending, and we see significant results. Also, we are looking carefully in the way we invest, how we bring extra efficiency for vending. And this is what the efforts that are going right now in terms of transformation. Overall, we know people will go back to offices. They will start commuting again, traveling, and going to entertainment spots. We are getting ready to operate vending more efficient than before. I hope this answers your question.

Thank you, Christine. We're now ready for the next question, please.

Yes.

One supplementary question or comment. Thank you. Your vending strategy, is it something that's conclusive within your company, or would there be some sort of impact on your competitors? Is there a possibility of collaboration with your competitors or other industry players? So, for example, in terms of water, maybe there's excess and maybe there's needs for outsourcing operations. I think that if there's that kind of needs arising from your competitors, then with that, maybe have a coal ride or coal operations joint operation with competitors, would that be some sort of opportunity for you? What is your view on this?

Thank you. This is Costin. So like we shared a few times, we are open and we are watching every opportunity on the market. We'll explore if anything interesting appears. Thank you.

Thank you, I hope that answers your question. We're now ready for the next question, please, operator.

Sorry for keep you waiting. We are still trying to identify who will be asking the questions, so please hold on for a second.

Good afternoon.

I'm from Mitsubishi UFJ Bank. I have one question. About the domestic beverage industry, In terms of the volume, I would like to seek your opinion about it. When you look in the past, the volume has been growing in the Japanese market, but then we have been having a lot of changes over the past course of two years. So during the course of operating in this changing market, What's your view on volume strategy in your industry? Do you change any strategy within yourself because of all these situations surrounding you?

Just rephrase the question to make sure we got it. So it's a question on the volume outlook in the industry here in Japan, where we have been coming from growth. Any change in outlook or strategy as we've moved forward in terms of a volume outlook? I think we'll hand it over to Kostin-san, please.

Thank you. This is Costin. So what we know this year is we saw the first two months performing well in terms of total beverage market. And then we saw the market contracting due to COVID. So going beyond second quarter, it's pretty difficult to assess at this point in time. But what we also know in CCBGI is We have a full beverage portfolio, so starting from hydration to coffee to tea, energy. So whenever the demand is coming back, we are ready to supply and we are ready to provide beverages to our consumers. You mentioned about our volume strategy. I would just fine-tune it to say we have a value strategy. So everything that we sell, it's focused on NSR and it's focused on value-added portfolio. So our innovations going forward, we are confident it will help us to serve the needs of our consumers. I hope this answers your question.

Thank you, Christine. We're now ready for the next question, please.

Thank you very much for your questions. Next. The next question will be from Morgan Stanley Miyake-san. Miyake-san, go ahead. Thank you very much. I'm Morgan Stanley. My name is Miyake. I have two quick questions. My first question is you had mentioned about you are getting ready for the new normal, but what is the new normal you have in mind? What is it? What is the definition? It might be too early to explain, but we want to get your image of the new normal. And secondly, to prepare for the new normal after 2021, do you need additional capex? Are you going to experience more depreciation because you're going to face the new normal? Or are you going to have additional cost reductions? The midterm, I want to know how you're going to build up the profit in this new normal world. So that's question number one. Question number two, is there any possibility for you to sell the healthcare skincare business in the future? I think there were some possibilities earlier that Mike mentioned. I would like to know the possibility of selling the business.

To summarize the two questions you had, one was a reference to the so-called new normal, how we're thinking about that and preparing for that, and especially 2021 and beyond. Do we have any initial early thoughts around does that require additional investments, additional cost reductions? How does that tap into the midterm plan, if I heard that correctly? And the second question was around the health and skin care business and the future of that business. I'm going to send this question over to Colleen-san.

Thank you so much. Colleen speaking. Thank you so much for the interest in our business. And let me try to answer to the best of my current knowledge this question related with the new norma. For us, what we are doing right now, we are assessing the current reality that we are into. And we have presented that in the slide number nine of our deck, where we are looking at the current trends in supermarket with volume growth, but as well with the shift in basket composition and size with the convenience stores which are suffering from the traffic and volume declines in urban territories, vending as well suffering because of traffic, and with a completely shutdown almost in the food service. In these current conditions, it's pretty hard to assess how the future would look like going on. What we are doing currently, we are focusing on assessing our strategic priorities. We are trying to observe this new consumer demand trend and as well address them with the portfolio and promotional initiatives on short term while preparing for the future. We are looking at our core SKU strengthening in this environment because consumers know for sure that these are so-called safe bets for them to consume. There are winners in this competition and that There are winning channels, and, of course, our focus is to boost capabilities in the growing channel and the growing categories. Nevertheless, we are part of the Coca-Cola system, and we are looking to learn from around the world parts of the world which are more advanced, if I can call it with respective inverted commas, in terms of this COVID-19 outbreak progression and to try to learn how the life after looks like. And this is what we have presented as well. We are looking for the future with a quite decent level of optimism, I would say, in the sense that Although this might not dramatically transform our world, it's going to accelerate certain trends from before, like working from home, digitalization, and a number of similar trends, like mentioned before, online shopping, and probably on-the-go consumption. Having said that, there is still a lot of new to be explored, and our plan is to re-look at it once we are out of this stage, which is the peak of the crisis, as I call it, quarter two. And as soon as we're going to come out, we're going to re-evaluate towards what we are trending. But we were flexible, we adjusted our plans, and we immediately responded to the market realities to the current situations, and that's, I think, a characteristic of our company.

Second question was on healthcare and skincare business, please. I'll send that over to Bjorn, please.

Thank you, Ray and Colleen. This is Bjorn speaking. QSI, or the healthcare and skincare business, is a part of the Coca-Cola beverage holdings portfolio. And we're working very diligently now to improve the business, again, looking for opportunities across both the health care part and the skin care part. And for now, there's no plans to change this. And, of course, we will update the market if anything should come on that front. Thank you.

Thank you very much, Bjorn. I think on the next question, we've got someone waiting on the English line. Would you please go ahead and say your name and your company on the English line, and we'll go ahead and take the question there, please.

Yeah, hi. It's Leon from Macquarie. Hi, Leon. Please go ahead. Thank you. So could you provide a little bit more of an update on what's happening with Le Mondeur? I thought it was quite interesting in the presentation where, you know, if you look at NARTD, beverage volume was 106 million cases, whereas beverage business was 108. So I think that's largely taken, that difference is largely due to Limandol, but just to get a better picture of what's happening with demand, with sales as well, and how you're essentially looking to potentially grow that business further. Are there any capacity constraints there? For example, is there any issue with pricing? Because it is a price at a premium point to competitors as well, and general sort of profitability for that business going forward. And strategically, are the results of the initial rollout as you were expecting? Are they better than expected? Or just to give us a bit more clarity on that, please.

Thanks, Leon. So the question was on Lemondo, progress, future, growth prospects, capacity, et cetera. I'm going to start with Kostin, and then I'll probably hand it off to Bjorn if there's anything to add. Kostin, please.

Thank you, Leon. This is Kostin. That's a very, very good category, which we see selling very well even during the crisis. So since we expanded Lemon Door nationwide, it was very well received and it was loved by our consumers. We see the sales volume exceeding the forecast. Also, we see market share being on the positive side, continue to grow slightly. And as you mentioned, it's important to remind here it's a premium product. Going forward, we are just, our plans are to complete the first year since the national launch, learn from every single activity that we are doing, and we are working together with our partners from Coca-Cola Company to decide which are our next steps into this area. So overall, very pleased with the evolution of Le Mondeau. Bjorn, you want to add anything on this?

You want to comment on the capacity? Yes. Okay. So thanks, Leon, for the question. This is Bjorn speaking. So overall, LeMondo, first of all, is a profitable product for us, and it follows the general profitability trends we have in the channels where it's selling basically our convenience, supermarkets, and drug and discounters. And remind again that we do not sell LeMondo in vendings. But what we also have to remember when it comes to Le Monde is that even though it has a premium pricing, you also have to pay or we have to pay alcohol taxes for this product, which, again, equalizes some of the margin. But on average, profitable products for us, and we're looking forward to see it grow and prosper in the future. Thank you.

Thank you very much. We've got one more question in the line, I think. Please go ahead.

Hi. Thank you. The next question is from Miura from Citigroup. Miura, please go ahead.

Hi, this is Miura from Citigroup Security. My question is about Japanese beverage industry's consumption itself. I think like your company, starting from March, the market has been shrinking. But then soft drinks and beverages are living necessities. So I wasn't really convinced with the declining trend. I'm not really sure, maybe in Japan, does it mean that people are drinking more and more of the tap water? Or is that because of less exercise that people don't really feel thirsty? Like how do you analyze the situation of declining volume of the beverage in the market?

This is an area where we look every single day. We try to understand. how the behavior of the consumers is changing. Indeed, for example, as you said, the parks were closed, exercising less. So, of course, we see a significant impact to the hydration category. We see offices being closed, so we see less coffee being sold. I remind everybody, our business, we operate in the beverage market, which is highly... and impulse category. So the moment you commute, you see a vending machine, you feel the need to have a coffee to refresh yourself. Overall, we remain optimistic for the future of the beverage market after we pass this stage of the crisis. We are looking for solutions to adapt our marketing plans to the new consumer needs. And I will close by saying, you know, when the government said refrain from going out and avoid contacts, we in CCBGI, we committed to continue serving beverages to our customers and to our shoppers. So we kept all the... We kept the field force with extra protection going there and continuing to deliver these beverages. Going forward, we are pretty optimistic we'll see a revival at some point in time, so we'll adapt our plans. I hope this answers your question.

Thank you very much. We've now reached our time. I'd like to thank everyone for your interest in the business and for dialing into this conference call for Coca-Cola Bottlers Japan. We apologize for some of the line quality issues that you may have heard, and if you have any questions, please get back in touch with the investor relations team at a later date. Thank you very much, and we'll talk to you again in our next earnings announcement.