Coca Cola Bottlers Japan

I am Masaomi Gomi, Investor Relations Department Manager for Coca-Cola Bottles Japan Holdings. Thank you for joining us today for our full-year 2021 earnings call for analysts and investors. I'm here with President Colleen Dragan, CFO Beyond Organics, and Mr. Takashi Wassa from Coca-Cola Japan Company. Following prepared remarks, We will be happy to take your questions. This presentation is intended for analysts and investors, so we ask members of the media listening to today's call to please hold your questions for our media sessions 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 Investors section of our company website. Please look on our website for this information in both Japanese and English. With that, I'd like to turn the call over to President Kaleen Dragan. Kaleen-san.

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

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

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

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

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

If you have a question, please press 01. We are accepting questions from both Japanese and English lines. The question is from Quedi Suisse, Ihara-san. Ihara-san, please. Hello, this is Ihara from Quedi Suisse. I have two questions. My first question is about your price revision. I want to know your strategy or your thoughts behind the revision. So you mentioned that you will not be able to offset all the commodity with this price raise. Why is it just for the large-sized PET bottles? Why didn't you raise the price for the small-sized PET bottles? And what is the situation for you to go into the price raise of the small PET bottles? So I just want to kind of know your thoughts behind the overall price revision strategy. That's my first question. And my second question is, So you are in red. You're in deficits. And when are you able to come back and gain profit? So even though we go back to the post-pre-COVID situation, and I don't think that will be the case anyway, but... I want to know when you're able to gain profit. You have the same dividend level that you were planning to give out, so what is going to be the situation for you to come on the black side, and when will that be timing-wise? I want to understand your future view. What is the timing that you're going to be in profit, and what are you going to do?

We'll take the questions one at a time. The first question was related to the price revision. The LPET price increase cannot offset the commodity price, commodity impact alone. What would you, what would be needed to consider price hikes on SPET? I will have Kostin San answer this question.

Thank you, Ihara-san. This is Kostin Mandrea. As you know, last week we announced price revision for large PET products, and this is significant. and delicate decision for us, but some things that we had to do in order to sustain the health of our business and the health of industry. Today, in the market, our products are premium versus competition, and this is happening for many years. Our prices are higher. Still, we decided to increase prices this year. As well, You remember that three years ago, we were the first company to increase prices in the market, which again, it shows our commitment to improve the health of our business and the health of industry. We decided to increase prices for large PET because of two reasons. First of all, large PET have the lowest profitability, and we saw during COVID-19 And because of changes in consumer behaviors, we saw large PET growing disproportionately. But also, the impact of all the costs we are facing and the impact of logistic cost is greater for the large PET. So for the next period, we'll monitor how the market will react. and we'll decide later what will be our next steps. Thank you for your question.

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

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

Yara-san, we hope that answers your question.

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

The follow-up question is what is needed to consider an SPAC price hike?

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

Thank you for the question. Operator, please put through the next question, please.

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

Thank you very much for your question. Your first question was We are in a four consecutive year of loss-making state. What is the management view and urgency related to this? I'll have Kaleen Phan take that question.

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

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

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

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

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

Sunayama-san, we hope that answered your question. Thank you for your questions. I do understand that... Thank you very much. ...plan time, but given that we have a few more questions in the queue, we will extend this session for another 10 more minutes. Operator, please put through the next question.

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

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

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

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

Morita-san.

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

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

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

Thank you very much. Thank you. Question. Operator, please put through the last question, please.

Next question is from SMBC NICO Securities, Takagi-san. Hi, good afternoon. This is Takagi speaking. Yoshi, can I, can you hear? All right, let me make it quick. This might be overlapped with the Tsunoyama-san. I also would like to understand the Japan Coca-Cola system and the view from the management on this system and the mechanism. Now, you are I don't think that bottlers and CCJC is in a win-win situation because JC is enjoying a great profit, but not the bottlers. But in long term, I see the picture as in the bottler will become weaker and weaker. So I think you have to form more win-win relationship with the JC and the bottlers. So, Karin-san? What's your view on which part of the improvement you see within the system or relationship with you and the JC to be more sustainable and to gain the growth in the Japanese market?

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

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

Takagi-san, thank you very much for the question and hope that answers your question. With that, we would like to conclude our Q&A session. Thank you again for your interest in our business. The replay webcast of this call will be available on our investor relations website soon after finishing the call. We invite you to reach out to our investor relations teams with questions or feedback. Thank you very much.