Coca Cola Bottlers Japan

Good afternoon. I am Masaomi Gomi, Investor Relations Department Manager for Coca-Cola Bottles Japan Holdings. Thank you for joining us today for our third quarter 2021 Earnings Call for Analysts and Investors. I'm here with President Colleen Dragan, CFO, Beyond Organis, 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 a media session scheduled separately. Simultaneous translation in both Japanese and English is being provided for today's call and during Q&A. with separate cell phone 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 Kaleen Dragan. Kaleen-san, please go ahead.

Thank you, Gomi-san, and good afternoon, everyone. Kaleen Dragan here. I will begin with an overview of the third quarter and an analysis of the current situation. Please turn to the slide five of our presentation. First, the environment surrounding our company, we have to acknowledge that we continue to be impacted by external factors. While the state of emergency was lifted in October, the third quarter was affected by the continued impact of COVID-19, which delayed the recovery of the consumer traffic. The Olympic Games were held without spectators. Changes in consumer spending behavior impacted the mix, and rainy weather during the critical peak summer season had a negative impact on sales. The competitive environment continued to be intense, and the raising commodity and raw material had an impact. As a result of such an external environment, our business performance was weak. Despite the challenges, our initiatives are delivering results. Our important vending channel continued to grow its value share for 30 consecutive months. We are also seeing signs of market share recovery in supermarkets and drugstore stores and discounters, which was the channel that experienced market share contraction last year. I'm confident that once traffic picks up, we will be better positioned. Also, our new product innovations are contributing to the volume growth. We have been able to leverage our digital platforms such as CokeOn. Our efforts in digitalization is not only in commercial areas, but also in our transformation efforts. Transformation continued to progress in commercial and supply chain. We have put in place action plans to mitigate the impact of these external factors and areas of improvement. And we are focusing on what we can control and continue to implement initiatives to achieve sustainable future growth. Please turn to the slide six, our financial highlights. With new products contributing, sales volume grew by 2% in Q3 year to date. However, COVID-19 driven factors impacting consumer spending patterns and dropping the wholesale revenue per case have resulted in a Q3 year to date revenue decline of minus 2% year on year. For market share, as mentioned earlier, we are seeing Good results in most of the channels. Business income decreased by 18.4 billion yen year on year for quarter three year to date. Marginal profit declined due to the mixed impact from changing consumer purchasing behavior, impact from the rainy summer, and cycling of one-time cost savings achieved last year. We continue to be prudent and selective on marketing spend and investments in human capital while staying conscious of the short-term implications and recognition that is necessary for our long-term growth. The transformation efforts are on track. We have achieved 8 billion yen of recurring cost savings to date. We have also announced our full year earnings forecast for 2021, which was previously not decided. We are assuming the impact of COVID-19 to subside somewhat in quarter four, and I will explain the details later. Now, let me ask our CFO, Bjorn Urganes, to go through the details for the quarter three financial results.

Bjorn Urganes Thank you, Colleen. Good afternoon, everyone. This is Bjorn. Let me direct your attention to slide eight to talk about our Q3 year-to-date results. Before I start, I would like to preface and remind you that our results this year are compared against numbers that have been adjusted to exclude the health and skin care business due to the sale of the QSI business. While the skincare business impact is excluded from revenues operating income, net income from the previous year includes about 1.8 billion yen of profit from the health and skincare business. As you can see, revenues to date decline by about 9 billion yen, which is a minus 1.5% decrease versus the previous year. While total beverage volume increased by 2% versus the previous year, we continue to incur a loss at the business income and net income level. As Colleen briefly touched upon, there are several factors that impact this performance. We continue to see a cycling impact across the quarters. At the top line, you will recall that Q1 cycled a period that was still largely unaffected by COVID-19, while some of Q2 and all of Q3 cycled higher levels of traffic from the no state of emergency and the benefits of the go-to campaigns in the previous year. At the bottom line, we are cycling one-time cost savings achieved in the first nine months last year of about 17 billion yen. This year, we have achieved about 9 billion yen of one-time cost savings. Also, in net income, the gains of 12.5 billion yen from the sales of our subsidiary QSI in February is included. On slide nine, you can see the primary drivers of our business income. 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 13.1 billion yen decline from volume, price, and mix. While there was a contribution of 2% volume, it was not able to offset the impact of intensified competition leading to pricing pressures, driving increases in rebates, especially in the OTC channels, where we continue to see intense promotional activities. Fixed marketing expense, or DME, increased by 6.2 billion yen versus last year, reflecting a decision to invest in marketing and new products at appropriate levels after we briefly paused our investments last year with the postponement of the Olympic Games due to COVID-19. We believe the appropriate levels of investments are necessary to build a foundation for future growth. Commodity and raw material costs have impacted us compared to the prior year. When looking at this impact in consecutive quarters, the positive impact in Q1 was offset by rising commodity prices in Q2 and then in Q3. In Q3 specifically, we saw 1.8 billion yen negative impact from rising commodities. We continue to implement measures as we foresee rising prices to continue. Manufacturing costs positively impacted us by 1.2 billion yen to date, reflecting production efficiency improvements from higher volumes in Q2 and Q3, offsetting the increase in depreciation from new production lines. In others, costs decreased by 1.6 billion yen compared to the previous year. While the recurring cost savings contributed favorably, we recycled the impact of one-time cost savings in the previous year. By item, overall labor costs has decreased. While we cycle the impact of bonus payment cuts last year, we continue to implement temporary leaves and reduced transformation-related personnel costs. While the challenging environment continues, we also believe in the importance of investing in our people for building a strong foundation for sustainable growth. By a combination of one-time factors, logistic costs saw a rise compared to last year. Increased volume from last year, stronger than expected demand for new products, and extremely volatile demand during the year, all added to an increase in long-distance transportation and additional storage requirements as we try to supply our products in a timely manner. As a result of these drivers, business income for Q3 year-to-date was negative 14 billion yen. which was a decrease of 18.4 billion yen compared to the previous year. Please see slide 10 for our volume performance by major channels of non-alcoholic beverages. Q3 year-to-date volume growth was plus 2% impacted by slow recovery in traffic and rainy weather. Growth in supermarket, drugstores, and discounters was achieved by capturing the at-home demand and grew by 6% and 8% respectively. Initiatives to protect the market share have started to show good results. On the other hand, CVS remains to be an area of improvement. Traffic recovery in CVS remains to be slow, while competition continues to intensify. The vending channel grew 1% year-to-date. This reflects the cycling impact of Q1 last year, when the traffic was not impacted by COVID-19. Also, in the second quarter, when traffic and volume temporarily returned, it was an improvement in volume of 18%. And in the third quarter, compared to the previous year, where the decline in traffic was offset by economic policies such as the GoTo campaign, we were able to keep the volume at a similar level as the previous year, despite this year being mostly under a state of emergency. In addition, as Colleen mentioned, vending has continued to grow its value share for 30 consecutive months. This is a great achievement. Online continues to grow, with volume growing by plus 65% compared to last year. as we capture the at-home demand. Again, we are growing where the growth is. Average wholesale revenue per case continues to be negative to date for most of the channels, primarily driven by intensified competition, package mix with volume growth in large two-litre PET water packages, and decline in small PET and cans. As mentioned in our previous calls, this year's wholesale revenue per case was greatly impacted by changes in configuration of number of bottles per case for the one and a half liter PET package from eight bottles per case to six bottles per case. When adjusting for the case configuration change, supermarkets wholesale revenue per case was about the minus 10 yen decline. and drugstore and discounters was about the 30 yen decline. Please move to slide 11. This is our category performance to date. In sparkling, although cells of small PETs were negatively affected by the rainy weather in summer and growth in large PETs, the premium priced Fanta Premier series contributed, resulting in us being flat versus last year. Non-sugar tea achieved 8% growth in Q3 and 5% growth in Q3 year-to-date through the contribution of new products such as yak and barley tea and the ayataka matcha latte. Water volume grew in all channels as we were able to capture the at-home demand. On top of growth in large PET in supermarkets, drugstores and discounters and online, New products such as Icy Spark and Small Pet Alohas also contributed. For coffee, new products such as Costa Coffee, Georgia Japan Craftsman, Georgia Shot and Break contribute to small PET volume growth, but not enough to offset the weakness of cans. Can coffee recovery was slow, driven by the vending channel, where the coffee ratio is high. Finally, juice volumes reflect the ongoing soft trends in the on-premise food channel, given store closures and restricted operating hours. Page 12. In vending, despite the challenging environments, we continue to grow value sharing Q3 for 30 consecutive months. Year-to-date market share has increased by 4.3% compared to the previous year. This is an important reflection that our transformation efforts in this channel are delivering results through our transformation efforts. Shared in our last earnings call, initiatives such as product assortment, location improvements, improving the quality of our operation, and digitization using COCON are delivering results. We believe that once traffic picks up, we will begin to see growth as the environment normalizes. In the OTC channel, supermarkets, drugstores, and discounters, value share grew by 0.2%, while volume share also grew by 0.5%, back on a growth trajectory. We have implemented measures to protect our market share and remain competitive. As a result, we are able to grow where the growth is. While challenges remain for the CVS channel, we need to focus not only on short-term strategies but implementing mid- to long-term strategies based on customers. On retail pricing trends in the third quarter, while the overall price trend shows contraction, we have observed a continued price premium versus the market average. We have had to take actions to balance and protect our volume and value market share. We believe that this shows that we are maintaining our pricing policy while limiting our investments to those necessary to maintain market competitiveness. Please turn to slide 13. I would like to give an update on our focus on good stewardship of capital. As CFO of the company, my focus on the shareholder value creation remains unchanged, even during these challenging times. We are always looking for ways to increase our shareholder value and act upon them as necessary. For dividends, we plan to pay a year-end dividend of 25 yen per share, as forecasted, at the beginning of the year and maintain the dividend target of 50 yen per share for the full year. This will be an increase of 25 yen per share from the previous year from when we had no choice but to revoke the interim dividend. We are continuing our efforts to clean up our balance sheets. We maintain a healthy balance sheet with an equity ratio of 57.1%. This year, In addition to the sale of QSI shares in February as part of our efforts to review our business portfolio, we are working to swiftly sell off idle assets that arise in the process of transformation. In addition, we are reviewing the purpose of holding cross-sell shares in line with the corporate governance code and selling them in stages. We have generated 4.5 billion yen in cash for Q3 year-to-date. We will strive to further improve our balance sheets. In the current volatile environment, where the future remains uncertain, it is important to keep a tight control on capital investments. This year, we continue to invest in key transformation initiatives that will serve as the foundation for medium to long-term growth. We have reduced capital investment by approximately 20 billion yen compared to the previous year, mainly in investments for new vending machines as we accounted for the severe business environment. We are making progress as planned for the full year and will continue to monitor the market environment and focus on being selective in our investments. Finally, on slide 14, Let me finish by talking about the progress against our targets at the beginning of the year. As we navigate through these dynamic times, we continue to remain focused, achieving the targets set forth at the beginning of the year that are under our direct control. For market share, as explained before, vending, supermarket, drugstores are on the growth trajectory. In market share, on top of the continued growth in vending, supermarkets, drugstore and discounters are seeing a return to growth. Transformation initiatives are going as planned and our recurring cost savings are on target. We have achieved 8 billion yen of recurring cost savings to date. Our revised target calls for achieving 9 billion yen for the full year, which is at the upper range of the original target. As explained in the previous page, we continue not only remain focused on our P&L, but also on the balance sheet and cash flow. Within that framework, we continue to exercise prudence with our capex and depreciation. We are on track to deliver this within the original range and look to spend 49 billion yen for the year in capex. As a result, depreciation is also expected to be within the original target range of $58 billion for the year. For the dividends, as mentioned previously, we are on track. In the area of recycled PETs, we are on track to achieve 40% renewable packaging in 2021 and are well positioned to achieve 50% in 2022. we are expanding the use of 100% recycled PET. Now, I'd like to introduce Chief Marketing Officer of Coca-Cola Japan, Takashi Wassa, to take you through an update of the marketing initiatives and outlook this year. Wassa-san, please.

This is Wassa from Coca-Cola Japan. I would like to share with you a review for the period of January to September 2021 and highlights of our marketing activities in the fourth quarter. Let's look back at the new products we introduced this year. In April, we launched Yakan no Mugicha. It is a new type of barley tea that tastes like it was made in a kettle that uses 100% carefully selected barley and is made by adding barley extract to Coca-Cola's original high temperature boiling process. In the six months since its launch, it has shipped more than 200 million bottles, contributing greatly to the revitalization of the barley tea market. Next, in May, Coca-Cola Japan launched its strongest ever sparkling water, Icy Spark. Generally speaking, the lower the temperature of water, the easier it is for gases to dissolve in water. Focusing on such characteristics, Icy Spark is the strongest carbonated water in the history of Coca-Cola Japan, made possible by cooling spark technology. By responding to the stimulation technology, Demanded by consumers drinking sparkling water, Icy Spark has contributed to a net increase in sales and value share in the growing sugar-free carbonated water market. Costa Coffee, a cafe brand that has been loved for 50 years in Europe, the home of coffee, has launched new premium coffees, Costa Black and Costa Caffe Latte, that offers the taste of high-quality hand-brewed coffee in PT bottles. When the product was first launched, the sales volume was much stronger than expected, and the product became in short supply, resulting in a temporary suspension of shipments. But it was relaunched in June and succeeded in attracting coffee lovers in their 30s to 50s. It is contributing to a net increase in the value share of the small PT coffee market. Next is Ayataka Cafe Matcha Latte. When released in March, it was well received, especially by consumers in their 20s and 30s. The sales exceeded expectations and shipments were temporarily suspended immediately after its release. It is a new type of matcha latte that uses 100% domestic matcha in a luxurious way and offers an elegant milk flavor that complements the taste of matcha. It has received high praise from a wide range of consumers for its taste, and has now surpassed 100 million unit shipment. As I have explained, the new products introduced this year has successfully entered the growing market of barley tea and sugar-free carbonated water, and by introducing highly profitable new products, we have been able to contribute to the growth of our sales and value share. Also, the expansion of the Coke On experience contributed to the increase in the value share. The number of downloads of the official Coca-Cola app, Coke On, exceeded 30 million as of September 2nd, and purchase through Coke On at vending machines through January to September saw a strong growth of plus 49% year-on-year. It has grown into an app used by many consumers. The Tokyo 2020 Olympic and Paralympic campaigns have utilized this Coke On app to provide an exciting new marketing experience. Haruka Ayase appeared in a TV commercial immediately after a game in which Japanese players participated. As she congratulates the players and calls for a toast to them, a two-dimensional code appears on the TV screen. as Ayase Haruka pours Coca-Cola on the screen. Coca-Cola is poured on the screen on the mobile phone in virtual reality, and everyone toasts together. This was followed by a new real-time marketing campaign in which users were entered into a drawing to win drink tickets that could be used at Coke On!, which attracted a total of 750,000 participants. In addition, for every medal won by the Tokyo 2020 Japan National Team, A campaign was conducted in which 2,020 people won Coke on drink tickets, and a total of 1.26 million sampling tickets were distributed. For future growth, further opportunity lies in core brands, especially for brand Coca-Cola. Cycling of large PET bottles due to last year's stay-at-home demand and intense competitive environment caused us to lose value share. In addition, the Georgia brand also experienced a decline in its value share due to intense competition. We see these as opportunities for growth, which we hope will lead to improvements in the fourth quarter of this year and next year onward. Next, I would like to introduce the key activities of our core brands in the fourth quarter. From September, the Coca-Cola brand launched a new global campaign, Real Magic. The campaign message is, the magic happens in ordinary everyday, conveying that the best moments of magic, real magic, exist in ordinary everyday life. At the same time, the Coca-Cola logo in the familiar Spencerian font is emphasized, and the package design was redesigned to make the Coca-Cola brand color red to stand out. From November, Coca-Cola will launch a Christmas version of the Real Magic campaign with the message, In time together, magic happens. Coca-Cola will bring excitement to the moment we share with our loved ones and bring about a special winter. For the coming chilly season, Georgia has expanded its lineup of hot products that warm up the body and make you feel relieved and launched the Georgia Hot campaign to convey the deliciousness of its hot products. Costa Coffee, Europe's number one cafe brand, will also launch Costa Latte Espresso, a high-quality PT bottle of coffee that offers bitterness, a bittersweet flavor and richness of espresso with just the right amount of sweetness and 100% domestic milk. At the same time, Costa Black Hot and Costa Cafe Latte Hot will be launched for the first time in autumn and winter seasons. In October, Lemon Dough, a brand specializing in lemon sours, celebrated the second anniversary of its nationwide launch and launched a campaign to commemorate the second anniversary. In addition, Lemon Dough Home Run Size Oni Lemon, a 500-milliliter can with plenty of lemon juice and a powerful drinking experience, will be launched in October, aiming to attract heavy users. For the coming year, The direction of our marketing activities is to further leverage our strengths and improve our growth opportunities. First of all, let's talk about our portfolio. In addition to further strengthening our core brands, we will strengthen our portfolio by introducing a well-balanced mix of new core and premium products. The next step is to optimize our ROI. In addition to sales growth, we will improve the mix of our channels and portfolio. We will also aim to further improve the efficiency of our marketing investments. Lastly, we will further strengthen our collaboration as a Coca-Cola system in Japan by further expanding the areas of collaboration, such as collaboration in creating annual plans and collaboration in customer planning. With these major guidelines, we will continue to respond flexibly and swiftly to changes in the environment next year. That concludes my part of the presentation today. Our marketing plan is based on our mission, refresh the world, make a difference. We will continue to strive to deliver refreshing moments and positive feelings through our soft drinks. Thank you very much for your attention.

Thank you, Wasa-san. Kalin here again. Next, I would like to talk about our areas of focus and strategies. Now, let me share our channel strategies, which are showing results even during these times. First, in the supermarket, drugstores, and discounters channels, despite the intense competition, we are starting to see market share recovery. This was due to the new product innovations and effective marketing efforts based on our strategy to grow where the growth is. Although there may be instances where growth in volume share exceeds the growth of value share, we are focused on protecting volume share in the short term while also focusing on value in the mid to long term. We understand the importance of mix control measures by strengthening our small PET products and deployment of premium products. The online channel continues to record strong volume growth as we continue to capture the changing consumer spending patterns, such as the expansion of laborless products. We are also working closely with our online partners to offer attractive promotions and drive loyalty by introducing a subscription model. Next, the vending channel. And as Bjorn mentioned earlier, With the improvement of product and assortment, location improvement has led to the growth of value share for 30 consecutive months. And as Wasassan just explained, CocoaOn app has now reached over 30 million downloads and has grown into a strong digital platform. Transactions through CocoaOn apps are also growing as a result. While the volume growth to date is 1%, During the months when the state of emergency was lifted, monthly volume recovered by double digits. We remain confident that we are building a strong foundation to capture demand with the traffic recovers. On slide 22, I will share our areas of focus for building a stronger foundation. And firstly, agility to sales volatility. Looking back, it has been a very difficult year for forecast demand. Volatile monthly sales shipments, rainy weather in summer impacting demand, stronger than expected demand for our new products, changing consumer spending patterns combined led to an increase in production and transportation costs as we made best efforts to supply our products in a timely manner. We will take this opportunity to leverage these learnings and more effectively use digital technologies to improve seamless collaboration between sales and supply chain. To optimize our supply network, the transformation in supply chain leveraging Saitama MegaDC is critical. In this regard, we are moving forward with the transfer of inventory from each sales office as planned, and we expect to start seeing the effects of increased efficiency around the second half of next year. Second, it's around our new product innovation capabilities. While we were able to introduce new product innovations, stronger than expected sales of our new products have resulted in temporary out of stocks. We were able to confirm that our strategic direction in innovation was correct, and this experience has allowed us to identify areas of improvement to drive efficiency in meeting consumer needs. Going forward, we will build our capabilities to supply premium products and improve efficiency to ensure a stable supply. The third point is on the raising commodity costs. The global raising commodity and energy prices are having a material impact on manufacturing and logistic costs. To minimize this impact, we are leveraging our strength as a system through communication and collaboration, such as leveraging our economies of scale with centralized raw material procurement and improving our packaging to reduce the use of raw materials such as PET. To minimize the impact, our efforts in transformation is important now more than ever. We will continue our transformation efforts and review all costs through the business. Finally, the need for us to be the most efficient in low-cost operation. To achieve this, we are making efforts to optimize our fixed costs, and this is progressing well. We have achieved over 20 billion yen in recurring cost savings since 2020, and our efforts will not stop here. We will continue to find ways to improve both our processes and our cost structures. On slide 23, I will explain our initiatives in ESG. We continue to implement various initiatives in realizing our CSV goals. In the last quarter, I introduced our initiatives towards our world without waste and how we are implementing bottle-to-bottle recycling initiatives. Today I want to introduce our new target announced at the end of last month for the reduction of greenhouse gas emission by 2030. This is a Japan Coca-Cola system wide target across the entire value chain. We as a system aim to reduce scope one and two emissions by 50% and scope three emissions by 30% against 2015 levels. We will continue to work hard to achieve our goals and will also actively contribute to the Japanese government's greenhouse gas reduction targets as well. You can also see our recognition around our human resources initiatives, which was recently won the excellent HR award, which has hosted by the Nihon no Jinjibu, the largest HR network in Japan. I'm extremely proud of this achievement. And we continue to support our local communities in various ways, including product donations to medical staff that is helping us fight the COVID-19 pandemic. Please turn to slide 24 for how we are trying to stay true to our mission, vision, and values along with our initiatives in ESG. Our mission at Coca-Cola Bottlers Japan is to deliver happy moments to everyone while creating value. Especially in these times of public health concerns and uncertainty, we will continue to provide the safe and stable supply of products and services in the belief that our work can help brighten the society. From here, let me talk about 2021 full year outlook that we have announced. Please turn to page 26. First, I would like to talk about the operating environment and the key assumptions underlying our earning forecast. As you can see on the left-hand side, new cases of COVID-19 in Japan, it's on a declining trend and it's roughly slowly recovering. Our guidance assumes no additional state of emergency declarations, and the gradual recovery in the market as traffic recovers. We are assuming the competitive environment to remain intense, cycling the one-time cost savings achieved last year, and the raising commodity costs while we continue our efforts in transformation. On page 27, it shows the new full-year guidance that we have announced. For volume growth, We expect 1% growth in Q4 and 2% growth for the full year. Due to the continued competitive environment and changing consumer purchasing behaviors impacting the mix, we estimate a minus 1.2% drop in revenues versus the previous year. Business income is expected to grow year on year, growth for the quarter, but for the full year, we are forecasting a 15.9 billion yen loss. The details of the drivers of the business income will be explained in the next page. Please turn to slide 28, which shows the drivers of the business income for 2021. Since Bjorn has already explained about the earning drivers up to quarter three, I will focus on the quarter four business income drivers that you can see on the right-hand side. In quarter four, we are forecasting a plus one volume growth, and this volume growth will not be enough to offset the continued headwinds from intense competition and the impact from consumer behavior change. We are assuming the current trends of increased rebates to continue So for DME, with quarter four last year already resumed marketing spend, 100 million yen increase is expected year on year. This reflects our initiatives to protect our market share and strengthening our brands. For commodities, we expect the impact to continue to put pressure mainly coming from sweeteners and metals. For PET, we are expected to be able to keep the impact under control, but we need to monitor the trend going forward. We hold the view that the commodity price impact will also continue into next year. In others, implementation of temporary leaves, labor cost decrease through transformation and control of investment in sales equipment are contributing to earnings. In quarter four, we are expecting about 1 billion yen of recurring cost savings, which have been reflected in this forecast. The drivers of the business income for the full year are included in the next page for your reference. I would like to conclude my presentation on page 31. With less than two months left in the year, we have been forced to navigate through a challenging environment throughout the year. Our employees on the front lines have had a very challenging time, but they have worked hard to do what had to be done. Although the operating environment is showing some signs of improvement, looking at the situation in the rest of the world, the COVID-19 impact still looks unpredictable. We will need to spend time to determine whether the pace of recovery will continue. We continue to focus on what we can control. And as I have explained, our key initiatives are showing results. A great example of this can be found in vending, where we continue to grow our value share for 30 consecutive months, which is a good trend. Channels that have faced challenges in the past, such as supermarkets, drugstores, and discounters, are now showing value share growth. our initiatives to protect our market share in the challenging market is working. In the short term, such initiatives may impact profitability, but securing market share now will be important for our future growth and believe that the benefit of this will materialize. In addition, even during COVID-19, we have not slowed down the speed of our transformation. In fact, we are accelerating our initiatives. We continue to achieve reduction in fixed costs in all areas of commercial, supply chain, and back office. And this will lead to a strong foundation for the future. We have been faced with challenges, but have implemented action plans, aiming for sustainable growth and a strong foundation that enables us to grow when the market normalizes. As was mentioned in his remarks, we are working together closely with Coca-Cola Japan Company to leverage our strength as a system. We will work together more than ever to ensure that the entire Coca-Cola system in Japan can operate its business at a higher level and that we, as a bottler, can grow within that system. That concludes my presentation. Thank you very much for your kind attention. Now let me ask Gomi-san now to come back and take us to question and answer.

Thank you, Kalyn-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 you ask your questions in the language you are joining, Japanese on the Japanese phone line and English on the English phone line. Please try to ask one question at a time as we are translating your questions. Please state your name and company. Now, I would like to begin the Q&A. Operator, please put through the first question.

If you have a question, please press 01. We are accepting questions from both Japanese and English lines. The question is from Credit Suisse Ihara-san. Ihara-san, please. Hello. This is Credit Suisse Ihara speaking. Can you hear me?

Hear you.

So I have one question for you. This is about the commodity price and also the commodity prices relation with the price increase. So looking at the beverage companies, I'm sure that next year you are going to face a critical challenge, which is the competition and also the hike in the commodity price. you continue to be on the negative side and you're not making profit. And if you go after volume, I do understand that volume is important for you, but in order for you to bring up the profit pool as the leading manufacturer, I think a price hike might be one option that you can take. So what is your view on that?

I think there was two questions. The first question was around the raw materials, which are increasing across the industry. We'll take that first question first. I will have Bjornsan answer that.

Thank you, Johan. Let me start with the commodity aspect of your question. So you have seen the impact of the rising commodity prices in our earnings. And we expect a significant impact also in our earnings for 2022, assuming that the current commodity price trend continues. For 2022, we are currently estimating about six to eight billion impact from commodities. And of course, this depends on volume for next year. I remind you that we saw an impact of close to three billion for this year.

The second part of your question... Ihara-san, does that answer your questions on commodities?

Yes, thank you. But this year, you said it's like $3 billion impact, and next year it's $6 to $8 billion impact, which means that next year it's going to go up by like 3 to 5 billion yen, which means that if you combine like two years, it's like 10 billion. Is that correct understanding?

We are expecting about a 3 billion increase in commodities. So for next year, you mentioned about 6 to 8 billion. So is that additional to this year, or is it just for next year standalone? Additional.

Additional.

So, Ihara-san, the answer for the question is that... Okay, I saw so.

Thank you very much for the answer.

I believe your question was around the potential about price links. I'll have Colleen-san answer that.

Thank you so much, Ihara-san, for your question. And let me start trying to answer that by reminding everyone on this call that we as a company were the first one to implement the first price hike in almost three decades, not only about two years ago. And that was a significant price increase in the future consumption packages. The second thing that I would like to remind all of us here is that Most of our products right now in the market are commanding a premium versus the market average. Having said that, as we speak, we are currently building our plan to say so for 2022. And in this circumstances, for us, all options are on the table. So we are looking at all the aspects of the business, and we are keeping our options open for decisions in next year. I hope that answered the question. Thank you so much.

Thank you very much for the response. And sorry, one more additional question, if I may. So if your company, is there any reason that you do not want to do the price hike?

and why we would not want to raise prices. I'll have Colleen answer that.

Let me follow up on this. I said earlier that we are having right now in place the process for building the business plan for 2022. During this business plan process, we are exploring all the sides of our business and we are looking at this plan's through many lenses. These days, we are trying to estimate the market recovery trends, which will have an impact. We are looking at competitors' activity, which will determine certain decisions. We are definitely looking to continue our fundamental transformation and how much that impact will have for the immediate future. As well, we are taking into consideration the impact of commodities cost. With all this plus many others, we are going to create a business plan which is going to determine our direction and respectively the results for next year.

Ihara-san, we hope that answers your question, and we would like to proceed to the next question. Thank you very much. Thank you very much. Thank you very much.

Next question is Saji-san from Mizuho Securities. Thank you very much. I would like to ask about cost. particularly the raw material part, I understood. But with regard to the cost up for the next year, I just wanted to understand a little bit further. One aspect is that you just explained about the temporary leave. I believe that you have significantly reduced the cost on this aspect. So from quarter three to quarter four, I would like to understand what will be the total cost reduction in this end. And also for next year, If you are going to normalize in the situation, what is your prospect in your human resource cost? How much will it be increasing? And also for the cost for the sales, particularly debate for the convenience stores, probably a campaign like one buy get free is pretty common in the market right now. How long would you say that this kind of campaign will Continue. What's your view on this? So it's most of the cost-related matters for your next year business.

So I'll break it down to two parts. One is about the cost related to labor. We have been implementing a lot of one-time cost savings through temporary leave. What will be the impact as we cycle that next year? Byun-sun?

If I understand your question, first you want to know about Q4. In Q4, we are assuming the recurring or transformation impact to continue valued about 1 billion yen. The other are one-time savings related to, for instance, temporary leave and other ongoing cost reductions. For next year, I will not be giving guidance for now. You heard from Kaleen San's earlier question. We are working on the 2022 plans and different scenarios based on that. So we will come back with 2022 guidance at the appropriate time. I hope that answers your question.

And going to the second part of your question, the second part of the question was, the competitive environment, and the rising rebates in the space? What is the outlook for next year? I will have Costin San answer that question.

Good afternoon, Sajisan. This is Costin Mandrea. Let me take this question. During the COVID times, we saw a lot of challenges in the market that put pressure on the overall beverage market and all the players. And due to this pandemic, pressure since the second half of 2020, some of our competitors started to introduce in the market extreme value activities. And buy one, get one free, it is one of them. The competition environment stayed very tough during 2021. And for CCBGI, we made a conscious decision to invest as much as necessary to protect our position in the market and to support our brands. On short term, we'll continue to invest and protect. For long term, our focus, as we always said, our focus will stay on value and nothing is changed long term. And we are doing this in order to protect the health, and protect the future growth of our business and the beverage industry as a whole. I hope this answers your question. Thank you.

One more follow-up question. So do you think this kind of campaign will continue next year?

The follow-up was that will it continue next year.

Thank you. What we are seeing for Q3, as we enter Q4, we see that these type of campaigns are staying there. And like I said, our position long-term is value, but if on short-term we are forced to protect our shares, we will not hesitate to do this. Thank you.

Thank you.

Thank you very much.

Planned time, but we still have a few questions in the queue, and we will continue to take more questions. Operator, please put through the next question.

The question is from Nomura Securities, Fujiwara-san. Fujiwara-san, please. Hello. This is Nomura Securities, Fujiwara. I have a question, and this is related to Ihara-san's question. Your company, in the OTC channel, you are increasing your volume share, and due to that, the rebate is growing and the profit is damaged. And to be honest, in your commercial activities, what is your first priority, I'm wondering? because the marginal profit or the revenue per case, I can't really see if you really, you know, if you have full control of those, you know, numbers. So I want to know what you are prioritizing in your activities.

To restate your question, it's about what are we focusing on in our OTC strategies? And it seems to be And what kind of metrics are we using when we actually monitor the effectiveness of our strategies?

Costin again. So our commercial strategy stays unchanged. We are focusing on winning in the market and growing where the growth is. And short term this year, we are investing consciously We are investing to protect our position across the channels. And as you heard, vending is at a record high value share levels. As you heard as well in SMDD, after a tough 2020, we recovered in terms of value shares. And we will stay committed to winning in market and growing where the growth is. Like I said, I hope this answers your question.

Sorry, one additional question then. So next year, you probably are going to continue to try to win the market, which means that you need to increase volume, right? Would that be your focus or not?

To follow volume share next year.

Right. Thank you. So what we are focused, it's on value share. And as you saw in Bjorn's slides, we are growing value shares this year. And of course, in order to obtain this, we need additional transactions. We need a good mix of products of innovation versus core. And also we need to manage very carefully the investment in the market. So the focus is on value share. Thank you.

Thank you. Thank you very much.

The next question is from Mitsubishi UFJ Morgan Stanley, Tsunoyama-san. Tsunoyama-san, please go ahead. Hi, this is Tsunoyama from Mitsubishi. I have two questions. One question might be same as the Fujiwara-san's question. You believe that your efforts will pay off to gain the share. So I suppose the volume and the price mix effect should be taking the upward trend is the sign that you assume that you have an effect. So when will you expect yourself to observe this? Because in the fourth quarter, I suppose your assumption is that even though the market is slightly going into the recovery, but you are still waiting to, you are not going to be seeing this result in the near future. Hi.

Share increase. When can we see the benefits of our activities? I will have Kostin San answer this question.

Thank you. In our presentation, we share with you all the work that we are doing to gain value share in OTC, in supermarket drug and discounter. And this is a combination, like I said, of launching new products and having tactical actions. We see the results going in the right direction, and we are encouraged that this combination of launching new products and investing selectively are delivering results in line with our targets.

Amazon, we hope that answered your question. Can we move to your second part of your question, please?

All right, thank you. With regard to the coffee, You mentioned that Costa Coffee is well-received, but when you look at Q3YTD, the coffee is minus 3%, and probably I would say that comes from the downtrend of the Georgia. So given that background, do you think there is any cannibalization? That is why you are struggling in overall coffee performance. What's your view on this?

This question is related to the coffee segment. Costa Coffee seems to be doing quite well, but it seems that volume at Georgia seems to be weak. I will have Basasan take this question.

Thank you very much for your question. Well, after we launched Costa Coffee, we are having this strategy called Geo Coffee Strategy to be more specific. The main ready to drink as a mainstream, which is Georgia, we will set that as a core or the baseline. and then to implement Costa, but positioning them as a premium ready-to-drink coffee. But then going forward, we are thinking about more of the white space, like beans and the machines are included in here in this dual strategy. So you asked whether we are assuming that there's a cannibalization because of the launch of the Costa coffee. When you look at the value share of the Costa, it's about the 1%. Against that, I've been following up the metrics about the cannibalization against Georgia, and we believe it's a minuscule impact. The pricing is different. Target is different. So those coffee lovers in the OTC channel should be the buyer of the Costa coffee. That's my assumption. So this year's coffee challenges that we are facing is that Georgia Blend has been challenged by a very aggressive competition from the competitors. To be more specific, full renewal of the competitors' portfolio, also expansion of their portfolio in number of in and out products that they have launched. So throughout the year, this channel has faced a fierce competition. That is why we lost shares with Georgia Brand. In order for us to overcome and recover from this downtrend, we are throwing the instant win campaign with Georgia. And also, there are a couple of campaigns to beef up the channel. On the vending, we are throwing a double point campaign for the COCOM and the lack of support for the install execution. So there are a couple of initiatives that we are going to take on. So for next year, Georgia program will be refurbished completely. But at this point in time, unfortunately, I can't share the details with you. So please look up for our update on this. Thank you very much.

We will take one last question. Operators, please do the next question.

The question is from Daiwa Securities, Morita-san. Morita-san, please. Hello, this is Daiwa Shoken Morita speaking. I have one question about the business income. and it seems that you have an unclear future. I'm just wondering about the continuity of your business. I am pretty worried, and I have a question for Kaling-san. So when are you going to be on the profit side for business income? What is your forecast? And what do you need to do to turn the BI to a profitable level? Do you have any measures in your mind? I would like to know. And how confident would you be? That's my question.

The question was around business continuity. How do we think about the sustainability? And when will we return to a profitable state? I will have answer that question.

Thank you so much, for the question. And thank you for the interest in the business, as always. So let me try to give you a couple of ways on how we look to the next year perspective of the year. We are currently building our plans for 2022. And as I said, we look to this plan to many lenses, market recovery, trends, competitors, activities, continuation of the transformation and other cost trends such as commodities. The operating environment expects to remain uncertain, in our opinion, expecting the market to recover, assuming the COVID condition to be and to don't have any more state of emergencies declared in the future. We are not expecting a V-shaped so-called recovery, but rather a gradual return of traffic volumes and implicitly revenues. We are going to have some challenges going on with cycling the impact of the one-time cost savings It's about 15 to 16 billion yen, as Bjorn was just highlighting earlier. And as well, the commodity prices raises that are expected to put pressure on earnings. That's possibly 6 to 8 billion yen of an impact. So from the market strategies perspective, we are balancing a long-term approach, long-term strategies of value share focus, but as well with some a short-term measure to protect our position as a company and to gain market share for the moment when the market will recover. All this will happen while we are going to continue to transform fundamentally the business. And at the appropriate moment in time, we are going to come back with the guidance for the results for 2022. I hope that answer to your question

So I'm just wondering about the business continuity. If you are not profitable, if you're in the red, it's a crisis. And I don't need detailed numbers for next year, but I want to know if you are going to turn the business into a profitable state or not.

From the standpoint of business continuity, what do you think about a loss-making state and when will it return?

Thank you, Ms. Han. I'll answer this one then. So, first of all, in the essence of what Colleen is saying, we are entering into the planning parts for 2022. But in its essence, what you also heard from Costin San about the marketing initiatives, we strongly believe we're doing the right thing for the future of this company, even though currently we find ourselves in the position of significant challenges. And it's important to tie this back to what we have said in our long-term strategies. We aim to create value, we aim to grow revenues, and we continue to transform our company. That will always be at the essence of what we're doing. Thank you.

And Moira-san, and for all the audience, I just want to conclude probably the session right now, stating very clear the fact that we here at Coca-Cola, Bottler's Japan, we are strongly believing in the future of this company since we have engaged on a fundamental transformation on the way how we're operating and we believe we are on the right track for extraordinary shaped business here in Japan and whatever this will bring us in the future. There are challenging times right now And I think strong businesses are preparing in these tough times for the recovery and as well for the moments when the business is going to normalize. I hope that gives the confidence that we are working on the right path for the future, and we are very much believing on what we are doing here.

Thank you very much.

Thank you again for your interest in our business. The replay webcast of this call will be available on our investor relation website soon after finishing the call. We invite you to reach out to our investor relation team with questions or feedback. Thank you very much.