Coca Cola Bottlers Japan

Good afternoon. I am Masao Migomi. I am department manager for Coca-Cola Bottler's Japan Holdings. Thank you for joining us today for our second quarter 2021 earnings call for analysts and investors. I'm here with President Kellyn Dragon, CFO Bjorn Ulganes, and 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. 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 objectives, and should be considered together with cautionary statements contained in our supporting presentation. Both are posted to the investor section of our company website at ccbj-holdings.com. 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 Kalin Dragan. Kalin-san, please.

Thank you, Gomi-san. Good morning, everyone. Kalin Dragan here. Before I talk about the first half results, I want to say thank you to the healthcare professionals for keeping us safe and healthy during these difficult times, and to our employees for their continued hard work. Our mission here at Coca-Cola Bottlers Japan is to deliver happy moments to everyone while creating value, and we are motivated to work every day to provide a safe and secure supply of beverages and services to our customers who are also navigating through these challenging times. Please look at slide five. Looking back at the first half, we see that the market uncertainty has continued and the recovery of consumer traffic remain challenged due to the raising COVID-19 infections and multiple state of emergency declarations. This adverse operating environment continued to impact our mix negatively as consumer spending patterns continue to change amidst the pandemic. We were also cycling strong pre-COVID-19 performance in the first quarter and one-time cost savings achieved in the second quarter of 2020. As a result of these drivers, our business income for the first half was negative. Despite such headwinds, during the second quarter, we have achieved revenue and volume growth, driven by our innovation and growth initiatives. One of the key initiatives that helped us win in the market include new products contributing to volume growth. Our vending value share achieved a record high during the second quarters as we continue to achieve 27 consecutive months of growth. We continue to see strong growth in the online channel as we focus on winning where the growth is. And for alcohol, the new products such as Nomels contributed to the growth of the category. Furthermore, our third domestic alcohol production line is now running in Komatsu Plant. Our transformation efforts are progressing as planned even during the pandemic. We have achieved about 6 billion yen of recurring cost savings through transformation for the first half. And I will give more details later, but we are entering the next phase of transformation in both our commercial and supply chain. Finally, we continue to be both good stewards of the environment and of our capital and plan to pay the interim dividends as planned. Please turn to slide six. We are responding to changes in consumer preferences with innovation and innovation agile way to ensure that we stay ready for the future. While the rapidly changing consumer preference is impacting us, we also see an opportunity to capture this change for future growth. Let me introduce some of the key initiatives that we have implemented. First, our initiatives around new products and packages targeting the changing consumer preferences and consumption occasions. The newly launched Yakan Barley Tea, Sparkling Water, Icy Sparks, and Costa Coffee have been well received by consumers. Our 350 ml and 700 ml packages are just the right size to be consumed in various occasions. Also, our new hard lemonade, Nomels, has been introduced to our alcohol portfolio following the success of Lemondov. The online channel continues to grow strongly by 57% in the second quarter, capturing demand as consumers hydrate at home during the pandemic and hot summer season. Innovations such as label-less and subscription offerings allow us to both contribute to the environment and improve our consumer recycling experience. In vending, leveraging the Coke On app with our strong product lineup has allowed us to gain value market share for 27 consecutive months. In the next page, I will explain in detail why we are successful in our vending channel. And please turn to the next slide. Let me share with you the four key factors behind our strength and success in the vending channel. Firstly, it is our strong product lineup. We have been effective in introducing new attractive products and have implemented strategic pricing and packaging that met the changing consumer needs. Because of our investments, we are able to take it one step further and use artificial intelligence to optimize the product lineup to flexibly meet consumer preferences and maximize sales. Digitalization and promotion. is also very important and is a foundation of our strength. We have been leveraging the Cocon app, which has become one of the industry-leading apps for vending beverages with over 28 million downloads to date. We have also been improving the location of vending placements for many years. This allows us to have presence in high-traffic locations and to be competitive even in a challenging environment such as now. Finally, we have also been taking initiatives to improve the quality of the operations. We have a solid infrastructure foundation that has been built over many years through transformation, which has helped us deliver fresh products to consumers while reducing out-of-stocks. On slide eight, let me share the future progress we are making in the vending channel as we navigate through this challenging environment. We have completed phase one of our vending transformation in 2020 that resulted in a 20% vending route reduction. And we have just recently completed phase two of our vending transformation that has resulted in an additional 7% route reduction. In phase two, We have optimized routes by further leveraging big data and continue to drive cross-functional collaboration between the commercial and supply chain teams to identify further efficiencies. Some examples include the use of digital tools, such as smartphone handheld terminals, and to put more vending machines online to drive future operational efficiencies. We have made good progress in evolving the transformation of our vending channel, and you should expect future progress as we continue to find ways to drive efficiencies. Please turn to slide nine. As you know, our transformation initiatives are both company-wide and ongoing. In addition to vending, I would like to also share our supply chain transformation initiatives that are taking place. In manufacturing, we have been expanding our aseptic capacity, including what we call next-generation aseptic technology at our state-of-the-art new Hiroshima plant. In order to meet the changes in consumer needs and new product pipeline, this new high-speed aseptic manufacturing lines will allow us to be flexible and improve production efficiencies. New innovative products that were achieved by the new aseptic technology has been well received by consumers. We are also expanding our in-house production capacity for our ready-to-drink alcohol businesses. As highlighted before, our third domestic alcohol line is now running in Komatsu plant as of May. We have also been making good progress in logistics as we started the operation of Saitama Mega DC in February. The ramp-up of centralizing inventory to Saitama Mega DC is going as planned as we gradually shift away from holding inventory at the sales and distribution centers. While we do expect temporary cost raises associated with this transition, this is within our expectation. Overall, the process is on track towards achieving improved efficiencies from next year onwards. Finally, in the supply chain back office, we are standardizing operations to drive efficiencies to better support our end-to-end supply chain. I'm proud to note that we continue to make strong progress in the area of ESG, which is at the core of what we do every day in the local communities where we live, work, and serve. Our World Without Waste initiative are on track to deliver on targets of 50% recycled content in new PET plastic packaging by 2022. With the introduction of 100% recycled PET content in brand Coca-Cola, each PET bottle will lead to a 60% CO2 reduction. We are taking initiatives in food loss prevention, and have introduced vending machines to increase consumer awareness of food loss and promote sustainable development goals. We are also improving our reputation as a great place to work and embrace diversity and equality. We have adopted employment regulation, treating same-sex partners of employees as if they are legally recognized spouses. This initiative was introduced across the Coca-Cola system in Japan in May 2021, but we have been an early adopter. During this pandemic, we are also supporting the government's effort to increase the rate of vaccinations by taking proactive steps to keep our employees and their families safe by offering workplace COVID-19 vaccinations. Please move to the slide 11. In February, we provided 2021 targets on key elements of our business that are in our direct control. Let me give you a quick update on our progress. Firstly, we are growing market share, especially in vending, in a market that has been challenged due to the reduced consumer traffic. In the short term, given the uncertainties, we do expect volume share growth to outpace value share growth. We targeted an additional 7 to 9 billion yen in recurring transformational cost savings for this year, on top of the 13 billion yen achieved in 2020. We have already delivered about 6 billion yen of recurring cost savings in the first half, and we are well on track to deliver for the full year. Given the current environment, we continue to reevaluate our capital investment needs, and our target was 45 to 50 billion yen in capex for the year. The Saitama Mega DC was capitalized in the first quarter, and this represents the bulk of this year's capex to date. In this respect, we believe we are on track for the full-year target. Similarly, depreciation is on plan, as we keep tight control on CAPEX spending. Supported by our stable cash position, we plan to pay an interim dividend of 25 yen per share as planned and on track for providing stable dividends with a full-year target of 50 yen per share. And finally, we are very focused on the ESG initiatives and are on track to deliver on our bottle-to-bottle recycling targets. Let me now ask our CFO, Bjorn Ulganes, to take us through the first half results. Bjorn.

Bjorn Ulganes Thank you, Colleen. Good morning, everyone. This is Bjorn Ulganes here. Let me direct your attention to slide 13. Before I start, I would like to preface and remind you our first half results this year. are compared against numbers that have been adjusted to exclude the health and skincare business due to the sale of the QSI business. Revenues in the first half declined by about 5.3 billion yen, which is a minus 1.4 decrease versus the previous year. Our total beverage volume increased by 3% versus the previous year, incurred a loss at the business income and at the income level. As Colleen briefly touched upon, there are several factors that impact this performance. Firstly, there is the cycling impact. At the top line, Q1 is cycling a period that was still largely unaffected by COVID-19. And remember that January and February last year were relatively strong months for us. At the bottom line, you may recall that there were significant one-time cost savings last year in Q2. Also, there is an ongoing impact of uncertainty driven by COVID-19. As you are well aware, we are recently seeing record numbers of infections in Japan. Consequently, with multiple states of emergency declarations, consumer behavior and traffic has been harder to predict. Finally, since COVID-19 cases started increasing from March last year, consumer behavior has changed both temporarily and permanently, for better or for worse. These changes have clearly impacted us from a price and mix perspective. I will share more on the drivers, including mix, in the further slides. On slide 14, you can see the primary drivers of our first half business income, which continues to be largely impacted by COVID-19. Starting on the left-hand side of the slide are volume, price, and mix, which show the year-on-year change in marginal profits from the commercial activities of our beverage business. We experienced a net 7.7 billion yen decline in marginal profits on the 5.3 billion yen in lower revenues in the first half, driven by a 3% increase in beverage volume, not able to offset the impact of revenue per case decline and package mix deterioration. Second quarter sales volume increased by 15% and 3% growth for the first half. Profit contribution from the increased volume in the first half was 4.4 billion yen. On the other hand, the price mix impact was negative 7.5 billion yen due to a decrease in revenue per case and from the package mix impact, reflecting an increase in large PETs due to consumer trend shifts. In addition, alcohol contribution was positive in the second quarter due to new product introductions, resulting in a positive contribution of 100 million yen in the first half. On the other hand, other variable cost elements such as promotional discount and sales commission for vending contributed negatively to profits. These variable cost increases have sales volume increased and were due to the significant recovery in volume in the second quarter. Fixed marketing expense for DME in the first half increased by 3.2 billion yen versus last year, reflecting an increased investment in marketing a new product after we briefly paused our investments in Q2 and Q3 last year with the postponed Olympic Games and COVID-19 situation at the time. We expect these investments to help drive growth in the rest of 2021 and onwards. Commodity costs resulted in the net neutral impact on the P&L in the first half versus the prior year. However, when looking at the impact in consecutive quarters, the positive commodity impact in Q1 has been offset by rising commodity prices in Q2. We continue to deploy plans to mitigate or minimize these risks as we foresee commodity inflation, especially in sweeteners and metals, to continue. Manufacturing costs positively impacted us by 600 million yen, reflecting cost reduction achieved from higher production volumes and absorbing the increase in depreciation from new production lines. Depending on how sales volume trend, especially in Q3 this year, we could expect further benefits from efficiency from scale. However, we feel it's still early today to tell how volumes of mixed-world trend, given the rising cases of infections and uncertainty around when the state of emergency will be lifted. Other costs decreased by 2.9 billion yen from the previous year. This was due to the contribution of recurring cost savings from transformation. In particular, the decrease in labor costs due to the reduction in workforce as a result of the transformation production in overtime pay, and implementation of temporary leave contributed significantly. On the other hand, logistic costs increased. This was due to an increase in manufacturing volume with rapid changes in volume triggered by sudden changes in consumer traffic. The scope of reduction in other costs has decreased compared to Q1, but this is largely due to the summer bonuses that we cut last year were paid out in Q2 this year. We believe that this is a necessary investment for our future growth. These were main factors driving the business profits. As a result of these drivers, business income for the first half was negative 14.8 billion yen, an increased loss of 7.4 billion yen from last year. Although the results reflect cost reductions through transformation, cost control, and investment for future growth, they were affected by the cycling of pre-COVID performance in the first quarter last year and the temporary cost reductions achieved in the second quarter last year and the challenging mix. You can find our first half-volume performance by major channels for non-alcoholic beverages on slide 15. Growth in supermarkets, drug and discounter, vending, and online channels reflect where consumers are shopping during this pandemic. The competitive environment, especially in CVS, continues to intensify. Nevertheless, we need to ensure that we are winning where the growth is. Although the vending channels saw temporary reductions in consumer traffic in Q1, we have seen the traffic recover in Q2. resulting in volume growth of plus 2% in the first half versus the prior year. Furthermore, we continue to grow value share in this channel. Average wholesale revenue per case continues to be negative in the first half, primarily driven by changes in package mix, with volume growth more in large PET packages than in small PET and declines in CANs. As mentioned in our last call, starting in Q4 of 2020, average wholesale revenue per case showed a sharper decline than previous quarters in retail channels. This is mainly driven by a change in configuration of the number of bottles per case for the one and a half liter PET package from eight bottles per case to six bottles per case and does not reflect the major change in trend from the previous quarter. On slide 16, you can find first half volume performance by beverage category. In general, the volume growth has been positive in all categories except coffee and juices. While we continue to feel the impact of COVID-19, our new products are starting to contribute in certain categories. Sparkling tea and sports categories reflect increased consumer traffic at supermarkets, drug and discounter, online, and vending. This is also supported by new product launches such as Fanta Premier Orange, Yakan Barley Tea, and Ayataka Matcha Latte. Water volume grew strongly by 29%, reflecting growth in the supermarket, drug and discounter, and online channels. This was also partly supported by new products such as Icy Spark. For coffee, ongoing weakness of can and bottle can volumes were partially offset by the PET bottle growth supported by the introduction of Costa Coffee. Finally, juice volumes reflect the ongoing soft trends in the on-premise food channel, given store closures and restricted operating hours. On slide 17, you can find the Q2 volume and revenue per case on the buy channel and buy category basis on the left side. On the buy channel basis, we can see the volume in Q2 has experienced balanced growth versus the prior year across all channels. Wholesale revenue per case in Q2 reflects the impact of case configuration to retail channels, as well as intensity competition in some of the channels. On the buy category basis, we can see that the second quarter growth across all categories was not only balanced across the portfolio, but also played a significant role in the first half volume growth being positive. On the right side, you can find the first half and second quarter buy package performance. WE CAN SEE THE SECOND QUARTER VOLUME PLAYED A FAVORABLE ROLE IN CONTRIBUTING TO FIRST HALF RESULTS. HOWEVER, THE VOLUME COMPOSITION OF THE LESS PROFITABLE LARGE PET WAS SLIGHTLY LARGER IN THE SECOND QUARTER. THIS IS IN LINE WITH THE GROWTH IN SUPERMARKET AND DRUG AND DISCOUNTER CHANNELS, AGAIN REFLECTING THE CHANGE IN CONSUMER BEHAVIOR AND CHOICES DRIVEN BY THE IMPACT OF COVID-19. SLIDE 18. highlights our market share performance. Second quarter retail, or OTC, volume share increased by plus 0.1 points, while value share declined by minus 0.3 points. This contributed to first half volume share to increase by plus 0.2, while value share declined by minus 0.2. This is a reflection of the increased competitive market environment, especially ahead of the summer months and continued COVID-19 impact. While value market share is growing in supermarket and drug and discounters, CVS remains as an area of improvement. In vending, as Colleen mentioned, we have achieved value share at record high levels during the second quarter. This is an important reflection that our consummation efforts in this channel are delivering results even during this depressed period of traffic during COVID-19. Fundamentally, we believe we will be well-positioned to grow when consumer traffic and sales volumes return. Finally, on retail pricing, in the second quarter, we have observed a continued price premium versus the market average. which show that we have held the line against intensifying competition in the marketplace. We continue to focus on profitability and not to engage in outright price discounts. Finally, on slide 19, let me finish by talking about being good stewards of capital. As we navigate through these challenging and uncertain times, we continue to remain focused on shareholder value creation. Firstly, we are on track to pay out 25 yen interim dividend out of the 50 yen per share planned for the full year annual dividends. This reflects our commitment as we return to stable dividend payments. Also, we continue not only remain focused on our P&L, but also the relative balance to the balance sheet and cash flow. Having said that, we continue to exercise prudence with our Catholics and depreciation. We are on track to deliver this within the expected range. I would like to introduce Chief Marketing Officer of Coca-Cola Japan, Takashi Wassa, to take you through an update of marketing initiatives and outlook this year. Wassa-san, please.

Thank you. This is Wasa from Coca-Cola Japan. I would like to share with you a review of the second quarter 2021 and highlights of our marketing activities planned for the third quarter. First, the review of key activities for the second quarter of 2021. First, as an activity to strengthen our core brand, we launched Coca-Cola 350ml PET and 700ml PET in the Tokyo metropolitan area in January last year. In March this year, Coca-Cola Zero and Coca-Cola Zero Caffeine were added to the lineup, expanding the sales area nationwide. In April, we launched 350 PET and 700 PET versions of Fanta, Sprite, and Canada Dry at supermarkets, drugstores, and discount stores nationwide. We are driving the expansion of the sparkling beverage market by supporting the take-home demand and offering ways to enjoy the drinks at home. Next, in April, the Coca-Cola official app, Coke On, launched its largest campaign as an activity to revitalize vending machines. We launched the large campaign on Coke On app, offering a free bottle of your favorite Coca-Cola product when you buy one for the first time or for the first time in a long time using our app. In addition, the campaign Double Coke On Stamp for Cashless Payment was also launched. We also launched a new advertising campaign, Casually, It's the Future, based on the concept of an exciting future has actually already begun in your neighborhood. We aired a series of TV commercials depicting exciting moments in daily life related to vending machines. As a result, the number of downloads of the Coke On app exceeded 28 million, and it continues to grow into an app that is used by many people. And from May... we will expand the use of 100% recycled PET bottles for brand Coca-Cola, Georgia Japan Craftsman, and other products. This is expected to reduce CO2 emissions by approximately 60% per bottle or about 35,000 tons per year for the entire Coca-Cola system. The Coca-Cola system in Japan will continue to contribute to the promotion of recycling of plastic resources in Japan based on the global vision, World Without Waste. Next, I will introduce the new product launch in the second quarter. Costa Coffee, a cafe brand that has been loved for 50 years in Europe, the home of coffee, has released new premium coffees, Costa Black and Costa Cafe Latte, which allow you to enjoy the taste of high-quality hand-brewed coffee in PET bottles. We apologize to our customers and consumers for the inconvenience caused by the shortage of the products. when they were first launched as the sales volume far exceeded our expectations, and we had to temporarily suspend shipments. We relaunched the product in June and have been successfully attracting coffee lovers in the 30s to 50s. And in April, we launched Yakan no Mugicha. It tastes like barley tea made in a kettle. It is a new type of barley tea that uses 100% carefully selected barley and is made by adding barley extract to Coca-Cola's original high-temperature boiling process. In the two months since its release, it has shipped more than 50 million bottles. This is the fastest time for a new Coca-Cola product to reach that volume in the past three years. And in May, Coca-Cola Japan launched its strongest ever sparkling water, Icy Spark. Generally, the lower the temperature of water, the easier it is for gases to dissolve in water. Icy Spark is the strongest sparkling water in the history of Coca-Cola Japan. made possible by the cooling spark technology that focuses on this property. By responding to the stimulation demanded by sparkling water drinkers, IC Spark has contributed to a net increase in sales and value share in the sugar-free sparkling water market. The following are the major activities of the core brands and new Big Bet products for July and beyond. The Tokyo 2020 Olympics Games recently came to a close with much excitement. The Coca-Cola Company is working together with customers, athletes, local governments, and Olympic partners as Team Coca-Cola to ensure the success of the Tokyo 2020 Olympics and Paralympic Games. Team Coca-Cola has launched the Enjoy Plus One campaign with the idea of taking a positive approach to the Tokyo 2020 Olympics and Paralympic Games which have been postponed for one year. The Enjoy Plus One campaign has been developed to provide a special experience to the Tokyo 2020 Olympic and Paralympic Games with promotions to win spectacular goods and other prizes, as well as a special website with digital content for everyone involved in the Games to enjoy. More than 2.16 million people have already participated in the Team Coca-Cola Tokyo 2020 campaign, which started in June. In the TV commercial immediately after the game, Haruka Ayase congratulates the players, offers words of encouragement, and calls for views to make a toast. And the QR code appears on the TV screen, and she pours Coca-Cola. Then in virtual reality, Coca-Cola was poured on the screen of the smartphone, and everyone toasted. After that, we concluded a real-time marketing campaign in which people could win drink tickets that could be used at Coke-On!, A total of 1.57 million people participated in this event, which became a very popular topic. In July, we launched Georgia Shot and Break, a shot coffee in a PET bottle that offers a new form of short break. This is a new style of coffee that offers the rich flavor that can coffee drinkers seek in a small PET bottle. Not only does it provide an easy change of pace with its compact, ready-to-drink size comparable to canned coffee, but the PET bottle container with a lid allows you to carry it in your bag and enjoy it while on the move or at your desk without worrying about spilling the contents. This is a new proposal that allows you to enjoy a coffee break in any situation. Next slide. In July, we resumed sales of Ayataka Cafe Matcha Latte, 440ml PET, which had been temporarily suspended immediately after its launch in March due to higher-than-expected sales, especially among people in their 20s and 30s. This is a new type of matcha latte that uses 100% Japanese matcha tea in a luxurious way and offers an elegant milk taste that complements the matcha flavor. It has received high praise from a wide range of people for its taste, including comments such as strong matcha flavor, refreshing and easy to drink, and just delicious, and is offering enjoyment during a short break. Next, I will introduce the activities of alcohol products. In July, Lemon Dough, a brand specializing in specialty lemon sours, launched the Lemon Dough de Hitosusumi campaign to promote its deliciousness as a summer drink. Lemondo offers a wide range of drinks with different alcohol content and juice content. Among them, the main flavors promoted are shio lemon, which is perfect for the hot season and has a salt-enhanced taste, and kamisori lemon, a dry top that is sweetened without sweeteners and is perfect for meals, and we aim to capture the hot summer drinking occasions. In June, we launched Nomero's Hard Lemonade, a new alcoholic brand, Thank you very much. and is characterized by the fruitiness of lemons and the aroma of juniper berries. Nomad's Heart Lemonade will offer a new way to enjoy alcoholic beverages to many people, including existing low-alcohol drinkers and those who like alcohol but do not usually drink low-alcohol beverages. And Topo Chico Heart Seltzer is a new brand of alcohol sparkling beverage with a new sensation. In July, we offer some limiting sampling in certain areas, Topo Chico hard seltzer is a new type of sparkling water with alcohol, and it is the first global alcohol brand to be launched by Coca-Cola worldwide. What is required by young consumers for alcohol is changing, and this is also true in Japan. With Topo Chico hard seltzer, Coca-Cola proposes a different way to enjoy alcohol through a new category of alcohol beverages called hard seltzer, mainly to young people. The guiding principles of our marketing activities are continued from last year, fewer bigger innovations, pivot to core, and capture stay-at-home demand. With these as our major guidelines, we will respond in an agile way and swiftly change following the environment. This is my presentation for today. As consumer attitudes and behaviors change, our marketing plan will respond immediately to these changes, and with the mission of Refresher World Make a Difference, we will continue to strive to provide refreshing moments and positive feelings through our software. Thank you very much for your kind attention.

Thank you, Wasa-san. Kaleen here again. Before ending, let me discuss some elements of our 2021 outlook. Please turn to page 27. As we have presented today, I feel that the outlook for the full-year operating environment still remains both challenging and unpredictable at the current time. The number of COVID-19 cases are rapidly raising again, and most recently, we are reaching a record level of infections per day. Japan's vaccination progress is still relatively lower than other developed countries. and people traffic at major railway stations also remain very volatile and difficult to predict depending on the rate of infections. The impact of the state of emergency declaration, infection cases, and consumer traffic are all making it extremely hard for us to share an outlook for the performance in the second half. First half operating environment was challenging. and looking at this various data, we expect that the second half will continue to see uncertainty and challenging conditions to continue. Rapid changes in the people traffic, shifting consumer trends, intensified competition, which are all factors that will be headwind for our operating environment. In this environment, our principles remain unchanged to deliver beverages, that has become a daily necessity to consumer based on safety and security, agility and resilience, and to respond rapidly to changing consumer needs and to solidify the foundation for our sustainable growth through transformation. Despite the challenges we face, we will continue to fulfill these missions by focusing on areas where we can control At the base of this idea, it's business as usual is not an option. And as I always tell to our employees to conduct their activities based on this idea. It is precisely because we are in this difficult environment that it is important to go back to basic in our activities. For today, I will conclude my presentation on slide 29. This year, we are having to operate our business in an uncertain environment. While we expect a certain level of recovery in the market from last year, the impact on our business will continue to be difficult to predict due to the slow recovery and changing consumer trends. In terms of profit, we expect a cycling impact from last year's temporary cost reductions, which is expected to also affect our full year results. In this environment, as I explained earlier, We will do our absolute best to do what needs to be done and focus on what we can control while keeping a close eye on the market situation. We have observed that when the number of infected people settles down and the people traffic recovers, as it did in April, for example, our volume will recover and contribute to profits. I believe this is the result of our steady efforts. The uncertain environment continues. We have refrained from providing our full-year earning forecast at this time, but we stay committed to the targets we set at the beginning of the year as we continue to focus on areas we can control. We will continue to take commercial activities to win in the market, to increase market share, which is the foundation for growth, and continue our transformation efforts to bring down our cost structure and and we will take all possible measures to mitigate the COVID-19 impact. We are confident that these efforts will lead to a more profitable structure when the market returns to normal state. This would conclude my explanation. Thank you very much for your kind attention today. Let me now ask Gomi-san to come back for the question and answer.

Thank you, Colleen-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. Operator, please put through the first question, please.

If you have a question, press 01. We are accepting questions from both Japanese and English lines. The question is from Nomura Securities, Fujiwara-san. Can you hear me? Thank you. I have two questions. So I will ask one by one. So my first question is, the second quarter, looking at your performance, I do understand that it was very tough because you had a very competitive environment. It's showing in your numbers. And supermarket, drugstores, I do understand that continuously the competition is very harsh. And also on top of that, the convenience store competition is becoming more intensified. And the price competition, so what are the conditions for the price competition to become normal or to be back to the normal situation? That's my first question. Should I say my second question, or should I stop here?

The first question was related to commercial, so I will have Kostin San answer that, please.

Thank you, Fujiwara-san. This is Kostin Mandrea. Your question is about what's happening in general in the markets. And here is – I will start, first of all, by saying the overall consumption and shopping behaviors are changing dramatically in 2021 versus the years before. And under this pressure, the competition is reacting differently by improving, increasing the price discounts in the market. What CCBGI is doing, I remind you that we keep higher prices than the rest of market with an average of 5 yen for immediate consumption packages and 20 yen for future consumption packages. However, we are observing the competition environment and we made a very clear decision to fight where the battle is. to protect our share and win in the market. And our results, both in launching new products but also in executing targeted promotions, are showing good results in terms of market share in supermarket drug discounter, where we are growing in the second quarter. And in CVS, the competition is very intense, so here we start to increase our promotional activities, we are going selectively in order to protect share. And I will close when we discuss about pricing to say that moving forward toward the rest of the year, all the activities you will see in the market will be a combination of new launches and executing profitable activities. marketing programs, but in the same time, acting very decisively where the battle is in order to protect our share. Thank you.

Jonathan, we hope that answered your question.

Thank you. Then I would like to move on to my second question then. So looking at your performance, it's negative. So you have a drop in the revenue per case, et cetera. But comparing your performance with Asahi or Kirin, they have already announced their Q2 results. But, you know, looking at their performance, it's not that damaged compared to your performance. So I'm just wondering, you know, comparing your performance with Asahi and Kirin, what is the difference? Because their performance is not that damaged compared to yours.

Thank you so much for the question, Fujiwara-san. I will have Kaleen-san answer that question.

Konnichiwa, Fujiwara-san, Kaleen-desu. I just want to thank you so much for the question. I will try to be very concise on to this, and as always I said before, we are going to refrain on commenting about the results of our competitors. What we can share with you, assessment of the very first half of the year. I just want to remind everyone that first half of the year, we performed like the rest of the market under the and the effects of the COVID-19 this year as well. Now, we are very happy, and if you follow our results, that in quarter two this year, we had a significant volume growth of about 15% year on year, which proves clear improving trends and gives us confidence for the future. In the meantime, I just want to remind the fact that we are cycling. There is an element of cycling in the results of this year, and we are cycling this year a very good quarter one for our company in 2020, a quarter which was not affected by COVID-19, and the effects of our transformation were significant. contributing to our very good results. Nevertheless, in quarter two financials that you have analyzed these days, you have to note the fact that we have made some very cautious decisions, but decisive in going and paying the bonuses to our employees, which have not happened last year. So we consider that the motivation of our employees It is an investment for the future, and that contributed to the results of this year, if you compare them directly with last year. I hope that clarified or put in the perspective a little bit the results. Thank you so much for the interest in our business.

Yes, thank you very much.

Operator, please put through the next question, please.

Next question is from Takagi-san from SMBC Nikko Securities. Takagi-san, please go ahead. Hi, this is Takagi speaking. Can you hear me? Thank you. So going back to the vending business, For your fixed costs, I believe that you are reducing it vigorously, but then the gross profit is going down. That means that your profitability is not improving much. So when you look at 2019, like the revenue level that you enjoyed before the COVID-19, like how much revenue do you need to get back to that kind of status? So what is your current structure that you have with the cost and the revenue, and how are you going to improve that?

I'll hand this over to Bjorn-san.

Thank you, Takagi-san, for the question. So if I understand your question, it's about how are we preparing the vending channel for the future. First of all, let's step back and put the current performance into perspective. As Kalin-san mentioned earlier, we are cycling a very good period in Q1 2020. And also, we're seeing a recovery in the channel performance for Q2 this year. And vending, of course, plays a key role in our overall performance. While the COVID pandemic is still impacting, especially vending and consumer traffic, the consumers are not going out as much and moving as much as they used to pre-COVID, we are focusing on what we can control. And as you heard also in the prepared remarks from the presentation, the vending team is focusing on improving the placement of the machines, improving the revenue per machine, And we are taking out significant costs in the channel. And by doing that, first 20% of the routes were cut in 2020, and now we're focusing to target about 7% additional routes for this year. That is a significant change in how we work. So in other words, as we observe and manage through the revenue challenges for the vending channel, we are focusing on what we can control, and that is changing how we work and taking out fixed expenses. So therefore, we believe that the vending channel is poised for growth when then normality comes back again in the consumer traffic. Thank you.

Thank you very much. Well, in the past, I've heard all your explanations, so I understand your point. So my question is maybe with regard to the fixed cost. You have implemented a lot of initiatives, so probably you have reduced briefly about 5%, but your marginal profit goes down as well. That is why your break-even point hasn't been improved as in against the revenue that you have right now. You really have to improve the revenue so that you can get back to the pre-COVID-19 level. So can you give me a brief number or target as in when you reach revenue, who make your business into black once again? Do you have any idea or you don't have any idea?

As we said also in the prepared remarks, we are not giving full year guidance at this moment because we believe the continued impact of the pandemic makes the business unpredictable at the moment. While this is therefore important that what we're doing, especially in vending, to address your question, is about finding these revenue opportunities coming through new product innovations but also using, for instance, the CoCon application for better promotions and activations. The fixed costs will continue to be managed out in Venmo. That's an ongoing transformation.

Thank you. So, I have a second question. So, I would like to ask you about the price structure You said that you are not going to simply go for the discount, but you are vigorously putting the new launch. But is your new launch reducing your price? Because when you launch a new product, it's natural for you to go for a little bit of discount. But then if you always said that you are looking at the value, but then probably now you just have no choice but to go for the volume strategy. But how long are you going to continue with the volume strategy?

Thank you, Takashi. Sanji, this is Kostin. So that's a very good question in terms of how we manage the NSR from the new launches. And here we see two big things happening in the market. First of all, the total market is shifting toward more future consumption packages. Consumers are buying more in supermarket. They are buying more 2 liter or 1.5. So obviously, we play there, and with the new launches, I think we have very good traction. The best example here is Yakan Barleti, which continues to perform very well. When it comes to increasing the revenue per case of the new launches, we have good experience since the beginning of the year. $350, $700 for Coca-Cola, Fanta, Sprite, and Canada Dry. They are performing very good. They continue to add revenue and recover market share for total. And the price per milliliter for these packages, obviously it's superior versus the market. Then as we move to Ayataka Cafe, to Costa, they are both high price per milliliter product and you saw we just launched right now the we just launched right now the georgia short and break which it's again very good price per escape so moving forward obviously we are staying consistent with our strategy not to do price cuts But we are launching, we continue to launch profitable SKUs, and we are acting targeted whenever there is need, like in CVS, for example, in order to protect our market share. Thank you for your question.

Thank you very much.

We have achieved our original time, but we will continue to take a few more questions. Operator, please put us through the next question.

So Mizuho Securities Sachi-san is the people who asked the question. Thank you very much. So I just have one question. So about the CVS store channel, So the channel strategy is the question. So buy one and get one free. Buy one and get one free campaign or promotion happening across the industry, and this is ongoing. And the price that you have no control of, the competitive environment is ongoing. And together with the vending, so profit-wise, the convenience store is very important, but the profitability is declining at convenience store. So this is a very significant point for your business, I guess. And especially going forward, the coffee and other tea categories. So what kind of channel strategy you would like to implement to improve the profitability? So together with the vending, but I would like to ask specifically about the convenience store for the channel strategy.

This is Costin. So let me first of all give you the full picture of how Our channels are working. Vending is the biggest contributor to our revenue and profit with more than 40% importance. In vending, we continue to win market share for 27 straight months. Supermarket, we are making here around 30% of our revenue. And as you saw in supermarket drug discounter, we start recovering revenue. market share. CVS, it is around 20% for us. And what we saw here for the last two years was a significant competitive pressure. Because of COVID, our competition decided to go very aggressive in price and running one plus one promotions. We said always that we stay committed to our profitability approach. However, When we looked at what's happening in CVS, we decided to play and to fight where the battle is. So what you saw selectively during this year, and you'll continue to see during the rest of the year, you'll see also from us activities in terms of one plus one in CVS. In the same time, you will see continuous new launches of high revenue per case product. So it is a balanced strategy moving forward. Thank you.

Sajisan, we hope that answered your question.

Just one point about the convenience store. Georgia is struggling severely, and so for that, so I would like to understand your improvement strategy.

The question was, Georgia is having competition intensify in CVS. What is your measures to counter that?

Thank you. So for Georgia, what we see, it's, again, a big difference in first quarter versus second quarter, because in first quarter we're cycling a much better 2020. But moving into Q2, we see improving results. This is helped by our programs that we're running in CVS, by the launch of Georgia Shot and Break, and by the successful relaunch of Georgia Latinista. Moving forward, we work with each of our three key customers in CVS to make sure we grow our portfolio not only across Georgia, but also as premium, which is Costa. You see already Costa performing very well in CVS. Thank you.

Operator, please put through the next question.

The question is from BOA, Kaneko-san. Hello. Thank you. So this might be a slightly different question, but in the OTC, your share, you have improved your volume share, but value share, it has not improved yet for OTC. And of course, I do understand that you might be getting impact from the CVS channel, but thinking about your industry from last year, you're using the TRAX marketing tool in the OTC channel nationwide, I think. That's what I heard. And what is the impact from implementing tracks? Are you seeing the positive impacts already from implementing these kind of marketing tools? Or what is your prospect on share in the future by using this, you know, tool effectively?

I'll have Kostin-san take that question.

Thank you, Kaneko-san. So as you saw in the presentation, in supermarket drug discounter. We are recovering share, and this is through a combination of launches, improving our DME investment, but also execution. And we believe the execution in SMDD is playing a very important part. I shared with you in previous updates all the efforts that we are doing in Salesforce transformation, in digitizing our Salesforce, and photo recognition. or so-called tracks, it's a very simple tool. Basically, it allows our sales force to take a snapshot of what's happening in the store. Year-to-date, we see significant increase in the execution indicators in the store in case of share of visible inventory, number of displays, but also the speed to market. All the new launches are executed fast, And together with the customers, we take the full benefit of this trucks innovation that only CCBGI Salesforce is having. Thank you.

Thank you. Hope that answered your question, Kaneko-san.

Thank you very much.

Final question. Operator, please put through the question, please.

Questions from Ihara-san from Credit Suisse. Ihara-san, please go ahead. Hi, this is Ihara from Credit Suisse. I have one question. The balance between top line and the profit. I would like to ask your view on this because from my point of view, I thought that you are not really good at balancing up your top line and the profit. Right now, you mentioned that you have resumed your investment in marketing and you have invested in the CVS and also you ensure that you gain the volume so that your plant will up and run. you have a damage or the reduction in the profit, and you also didn't capture the revenue. So that's why I thought that you are not good at balancing the top line and the profit. But what are the root cause? What is that you need to improve? What's your view on this? Do you need to improve any balance between your business lines?

Thank you, Yara-san. I'll answer that. This is Bjorn. So, to answer your question, I think we need to look a little bit on two aspects. First of all, as you heard Karin-san mention in the prepared remarks, we are still cycling out the top-line effects of a very strong Q1 last year. And this year, in Q1, we were fully impacted by the changes in consumer traffic and therefore in the market contractions. This is manifesting itself, as you also heard in the prepared marks, in what we call negative mix. As the channels change, consumers shock more in lower value channels like supermarkets instead of vending. And in some cases, they're also trading up, buying larger packages. and smaller packages. This has a value element to it. So as we get impacted from the COVID, which also seems to continue, that is something we're managing, as you heard Costin San talk about, through innovations and also focusing on the core. The second part we have to think about is we're also cycling 10 billion one-off cost savings in the first half last year. And in there, for instance, we have made very conscious choices this year to invest for the future. And inside that $10 billion cycling, we had about $3 billion in marketing expense, or DME as we call it, that we have decided again consciously to reinvest back into the market to grow Topline. And secondly, we're also cycling the bonus cuts last year which have a similar amount impact. So this has to also be covered when you think about what needs to improve. So to round up my answer to your question, what needs to change in the future? First of all, we need to control what we can control. So the focus on transformation costs and costs will continue. Just as we said in the six KBIs we launched in the beginning of the year. And secondly, as the market stabilizes and comes back to normality, we will see a return of consumers and therefore improvements, hopefully, in the channel mix as we move forward. So both items will have to be focused in the future, and we will continue controlling what we can control and, of course, grow where the growth is, as you heard earlier. I hope that answers your question, Yara-san. Thank you.

Thank you very much. One more thing that I would like to say. So you mean that the volume growth will eventually add to your revenue top line, but how long does it take to have that positive impact? Because if you are to keep the volume growth, but then you wouldn't be able to have the top line growth. So how long would be the timeline that you're briefly thinking about?

When would the volume recover and at which point would it hit our profitability improvement? Can you take that question, please?

Yeah. So first of all, let's think about the seasonality of our business. So given how this market functions, we make a substantial part of our profits in the third quarter. Secondly, when it comes to when the volume will come back again, we saw significant volume recovery, as we said, in the second quarter. Going into the third quarter, fourth quarter onwards, of course, we will have to observe how the pandemic impacts our business and how that will manifest itself in volume impacts. And as you heard Christine Sam say, it's very important that we balance the initiatives between new products or innovation, as we call it, but also selling where the growth is in these new channels. So at the moment, we are still observing this, and we will, of course, come back with new guidance when we see more clearly where this consumption happens are going. Thank you.

Thank you for the question, and Ihara-san, I hope that answers your question. Thank you again for your interest in our business.

Thank you very much. So maybe you are saying that you are going to ensure that you will capture the growth in the third quarter. From then onwards, you will have more visibility. Thank you.

That concludes our Q&A. Thank you again for your interest in our business. The replay webcast of this call will be available on our investor relationship website soon after finishing the call. We invite you to reach out to our investor relations team with questions or feedback. Thank you very much for joining and your interest in our company.