Coca Cola Bottlers Japan

Masaomi Gomi Good afternoon. I am Masaomi Gomi, Investor Relations Department Manager for Coca-Cola Bottler Japan Holdings. Thank you for joining us today for our third quarter 2022 earnings call for analysts and investors. Today, we have President Karin Dragan, CFO Bjorn Urgenes, and Takashi Wassa from the Coca-Cola Japan Company. We also have Executive Officer and Chief Commercial Officer, Kostin Mandrea, Executive Officer and Chief Transformation Officer, Maki Kado, and Executive Officer and Chief Supply Chain Officer, Bruce Harvard. Following prepared remarks, we will be happy to take your questions. Simultaneous translation in both Japanese and English is being provided for today's call and during the QA. 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 presentation. With that, I'd like to turn the call over to President Kalindrak and Karinsan

Good afternoon, everyone, and thank you for taking the time to join us on our quarter three results call. Kalin Dragan here. I will begin by sharing the summary of our third quarter 2022 earnings. Please turn to slide five of the presentation. Sales volume grew strongly for the third quarter year to date, increasing by 5% on the previous year. This was achieved by effective commercial activities and an improved SNOP process, which allowed us to successfully capture the demand recovery in traffic and from the heat wave. We achieved steady volume growth despite the negative volume impact of the large PET price revisions implemented ahead of the industry in May. Wholesale revenue per case is an overall improving trend. Price revisions are showing results in channels with high large PEP ratios, such as supermarkets, drugstores, and discounters, which grew by over 20 yen compared to the previous year. In vending, initiatives to improve retail prices enabled us to increase wholesale revenue per case while growing volume. Through these activities, we achieved sales revenue growth that exceeded volume growth in the third quarter. Total channel value share grew by 0.8 points versus last year. Value share growth in our important vending channel drove this overall growth. October price revisions for small packages are progressing as planned, with negotiations with customers being completed. We believe we have made big progress in improving future profitability. Business income grew compared to the previous year. Top-line growth and cost savings from transformation contributed to year-on-year profit growth, despite the continuing pressures of raising commodity prices, a weak yen, and ongoing severe competition. I have shared the results of the year-to-date period so far. If we look at the third quarter alone, our peak season that stretches from July to September, we can see improvements in the top line. Please turn to the next slide. Despite the challenging volume impact of large PET revisions, our third quarter sales volume grew by 7% over the previous year. We are particularly pleased with the 8% volume growth in the highly profitable vending channel, which exceeded the growth rate of the second quarter. This was achieved by commercial activities that decisively captured the traffic recovery demand a clear sign that our efforts are showing results. Vending saw wholesale revenue per case improved by 25 yen year on year, continuing the trends of the second quarter, achieving both volume and wholesale revenue per case growth. With the price revision of large P.E.T. implemented in May, wholesale revenue per case for supermarkets, drugstores, and discounters increased by 32 yen from the previous year. Volume growth and profitability improvement efforts have led to an increase in value share as well. In the third quarter, we believe that we captured growth opportunities from traffic recovery and the heat wave by leveraging the foundations we have built so far. We are pleased to see the results of our investments made over the years. and to have built a foundation for growth, even in this difficult business environment. Now, let me ask our CFO, Bjorn Ulganes, to take you through the details of the third quarter year-to-date earnings.

Bjorn Ulganes Thank you, Colleen. Hello, everyone. This is Bjorn Ulganes. Please look to slide seven for the third quarter year-to-date results. As explained earlier, Sales volume grew by 5% and the revenue growth was 3.9%. Looking at the third quarter alone, volume growth was 7% against the revenue growth of 7.3%, showing contributions from the price revisions being realized. Business income was at the loss of 11.2 billion yen but this is an improvement to 2.8 billion yen on the previous year. Factors behind this change will be explained on the next slide. Operating income improved by 12.9 billion yen from the previous year. This includes the continued balance sheet improvement efforts, such as the gain from the sale of fixed assets. Net income decreased by 3.7 billion yen. This was mainly due to the cycling impact of a 12.5 billion yen gain on the sale of shares of our subsidiary QSI being included for 2021. On slide eight, you will see our primary business income drivers. For the waterfall chart, we have made changes in the order and classifications. The waterfall chart with the previous classification is still provided in the appendix. From the left-hand side are volume, price, and mix. This shows the year-on-year change in marginal profits from commercial activities, an improvement of 8.9 billion yen from the previous year. In addition to the significant contributions from volume growth with the traffic recovery and heat wave, improved package mix and improved wholesale revenue per case since the second quarter with price revisions all contributing. This includes the impact of increased variable costs with volume recovery and increased rebates due to the promotional activities in response to the severe competitive environment. Note that rebates were under control in the third quarter, even when volumes grew. Next is manufacturing costs. In manufacturing, the analysis excludes the large impact from utility costs with the rising commodities. The main contributor to this improvement was from the improved manufacturing efficiency with increased volume, resulting in a 4.5 billion yen improvement over the previous year. Impact of utility costs are shown as a total in the commodity and utility cost bar on the far right. In other costs, we saw an improvement of approximately 5.4 billion yen compared to the previous year. Labor costs increased with the cycling of last year's temporary leave. However, contribution from improved SNOP, lower logistics costs leveraging the mega distribution centers, and controlled CapEx resulted in a decreased depreciation expense. This also includes a lower depreciation expense of 6.5 billion yen with a change in the useful life of sales equipment. Fixed marketing expense, or DME, increased by 2.9 billion yen from the previous year as volume grew. This was driven by strategic investments to capture traffic recovery demand as well as strengthen marketing activities ahead of the peak season. Marketing investments from the third quarter onward have been controlled. Overall, it is progressing as planned. Looking at the items explained so far with volume, price, and mix to DME, business profits have been steadily increasing from the previous year. Next is the commodity and utility costs. which were significantly impacted by external factors. Cost increased by 13 billion from the previous year. The impact of commodity prices, including forex, was 10 billion yen, impacted by higher prices of materials, such as PET resin and aluminum, as well as the yen's depreciation. In addition, utility costs increased by 3 billion yen with higher electricity and natural gas prices alongside the rise in crude oil prices. We have worked to reduce procurement costs by all possible means and have achieved a certain degree of success, but the impact has been substantial and has offset the factors contributing to earnings growth that I have just explained. These are the main drivers of business income. Please turn to slide nine for volume performance by major channels and categories. For the third quarter year to date, sales volume increased by 5% despite being facing negative volume impact from the May price revisions. For the third quarter alone, our peak season, volume growth was 7%. I will now provide channel details. With the recovery in traffic, immediate consumption channels such as vending and convenience stores, so volume growth. Especially for vending, we achieved 5% growth for year-to-date volume and 8% increase for the third quarter alone. An increase in the number of vending machines and the use of Coke on smartphone app contributed to the increase in sales per vending machine. In retail food, volume grew by 25%, benefiting from a recovery in traffic, including an increase in opportunities for dining out. Online also continued its strong growth of a 33% increase in volume, thanks to label-less products and tire promotions with major online customers. while leveraging the convenient futures of the channel. Supermarkets, drugstores and discounters were impacted by large PET price revisions and intensified competition. With such tendencies on an easing trend, drugstores and discounters volume recovered to a 2% growth from the previous year. Generally, The wholesale revenue per case is on an improving trend. Supermarkets, drugstores, and discounters are showing the benefits of the price revisions in the wholesale revenue per case, which has increased by 20 yen. Vending also improved by 15 yen from the previous year, with initiatives to improve retail prices. Buy category, as shown in the slides, all categories achieved growth. Sparkling, tea, and sports grew while being impacted by the large PET price revisions. Sparkling grew by 2% with volume growth in the median consumption and food service channels from the traffic recovery, as well as contributions from new products. Tea grew by 1% with a contribution from Yaka no Migucha from Hajime, that continues to grow its volume since being introduced last year, and the new Ayataka Café, Hojicha Latte. Sports and water each grew 10% with the recovery in traffic, the resumption of various events, and the effects of the heat wave. Coffee sales increased by 4% due to the launch of New Georgia Black, as well as the expansion of the Costa Coffee lineup and increased activities. Slide 10 highlights market share trends. Total channel value share for the first half grew by 0.8 points from last year. This is a result of continued growth in vending value share that saw 2.6 points growth in value share. Also, while the volume share was impacted in the OTC channel with the price revisions, value share was maintained at an almost flat level compared with last year. For OTC retail prices, large P&T has turned positive from last year with the price revisions and an increased premium. Small PET saw a contraction compared to last year, but maintained a premium price to the market average. We have implemented price revisions in October and expect this to start feeding through to retail price going forward. On slide 11 is our volume growth and profitability improvement initiatives. Despite the challenging environment, including significant impact on volume from the large P&T price revisions, we were able to achieve 5% volume growth in the third quarter year to date. At the same time, we also achieved profitability improvements. For the volume growth aspect, We have strengthened our product portfolio by introducing new products that meet diversifying consumer needs and purchasing patents. We executed versatile commercial activities to meet both immediate and future consumption needs and steadily captured increasing demand from the traffic recovery and the heat wave. While I touched upon this earlier, we captured demand in the immediate consumption channel in a big way. In vending, we steadily captured increased demand opportunities through placing vending machines that anticipated renewed economic activity. A digital marketing strategy using the Coke On app contributed. In addition, we successfully captured sales opportunities at venues such as restaurants, hotels, and leisure facilities that increase in occasions to consume beverages when going out. We are well prepared to capture future and at-home consumption demands. Volume impact from large PET price submissions are gradually easing, and even during phases of traffic recovery, online contributed greatly by continuing to capture and expand at-home demand. Prior to COVID, we were focusing on these channels as a new convenient sales channel, and through such efforts, strong volume growth continues. For profitability improvements, we have previously explained that this year we have set profitability-focused pricing as one of the pillars of our commercial strategy. As part of this strategy, we will work to revise prices and implement promotions at appropriate levels. The initiatives are progressing as planned, and the effects of the profitability improvements are becoming apparent. We implemented price revisions for large PET in May, ahead of the industry, and for small packages in October, despite the severe competitive environment. On the next slide, I will share the progress on this. In vending, we are leveraging the strong market share we have built to date. We are launching premium products with high unit prices and revisiting promotional pricing. In the third quarter, we improved wholesale revenue per case by 25 yen from the previous year, while volume grew at 8%. Marketing investments are being prioritized. and used by focusing on growth channels and categories. In the third quarter, we were able to control sales promotion expenses and rebates. The key to these efforts is a strong supply chain foundation. This year, the revamped S&OP process and the improvements of our company-wide logistics network, including the use of mega DCs, contribute to achieve stable supply and low-cost operations. While experiencing volatility in demand with the rapid fluctuations of traffic during COVID, we revamped the S&OP process to ensure stable supply at a low cost. As a result, we were able to supply products without major disruptions this year, even though we experienced many demand spikes with the heat wave on top of the traffic recovery. We feel that our agility has greatly improved compared to the past. In addition, utilization of our MegaDC automated logistics centers are now in full swing. And the company-wide logistics network is being approved, including efforts to achieve stable operations at the Saitama Mega DC and the early operation of the Akashi Mega DC, which is also making significant contributions to both growth and profitability improvements. Slide 12 is the updates on the price revisions. Price revisions of large PET products implemented in May are progressing as planned. With the price revisions, wholesale revenue per case for the third quarter year to date grew 28 yen at supermarkets and 20 yen at drugstores and discounters. Large PET volume declined significantly immediately after the price revisions. but volume improved towards the summer season. And in the third quarter, the negative impact narrowed compared to the second quarter. Additionally, OTC retail prices have increased together with shipment prices. The graph on the left-hand side showed changes in retail prices for large PET, excluding water at supermarkets, drugstores, and discounters. The retail prices of our products rose more in the third quarter than in the second quarter, allowing us to realize the benefits of the price revisions. The price premium of our products has increased by three times compared to the same period in the previous year. Negotiations with customers for the October price revisions for small packages have been completed. Vending machine price revisions are also progressing as planned. We will continue to carefully monitor the situation after the price revisions and work to generate the planned benefits. Please look at slide 13 for updates on our ESG initiatives. With creating shared value as the foundation of our business, we are promoting various initiatives to achieve this. In August, we received a silver rating from the internationally recognized Eco Vadis Sustainability Survey. This is the second consecutive year that we have received such high recognition. We are one of the first companies among the Japanese beverage industry to participate in this survey, which covers more than 100,000 companies globally. We believe that this recognition is the result of our activities on a global level. Our efforts to achieve a world without waste are progressing well. This year we have set the goal of using 50% of sustainable materials in PET bottles. And in addition to our package design efforts, we have been working with local governments and partner companies to establish a scheme for the stable collection of good quality used PET bottles. In addition, we are engaged in various initiatives to contribute to local communities through our business. These include implementing water conservation activities, providing beverages through food banks, and revitalizing local communities through vending machines. Also, just yesterday, we received a gold certification for Pride Index 2022. We are pleased that our efforts to raise awareness of LGBTQ plus and create a comfortable work environment have been recognized. We will continue to focus on ESG initiatives that contribute to the health of our business over the medium to long term. while we work to return our business to a growth trajectory. Now, I'd like to ask Takashi Wassa from Coca-Cola Japan to take you through the marketing update initiatives, please. Wassa-san, please.

This is Takashi Wassa from CCJC. Let me update you on the 2022 Q3 initiative reviews as well as highlights for our Q4 initiatives. Looking at quarter three, in August, the Coca-Cola brand launched the Coca-Cola Zero plus and hyphen campaign across all channels. The campaign contributed to sales, growth, and featured and hyphen, a rising K-pop group with a huge fan base. Marshmello's limited edition Coca-Cola Zero Sugar, a sparkling beverage inspired by the artist Marshmello, was launched in July for a limited period, further solidifying our engagement between the Coca-Cola brand and Gen Z. Moving on to Georgia and Costa Coffee. In September, we launched an autumn campaign and our first collaboration with Tiny Town, the globally popular animated characters inspired by K-pop superstars BDS. In addition to the limited launch of JoJo Japan Class Mountain Tiny Town design bottles, the campaign will also feature new functionality of the Coke on Coca-Cola official app, whereby Tiny Town can be seen working at Cafe JoJo. Up users can interact with Tiny Town and enter a promotion to win a digital prize and original item from Tiny Town. And in September, we collaborated for the first time with premium chocolate brand Godiva to launch the Georgia Taste of Cacao. With a rich cocoa taste, the new product is perfect to treat yourself and has screened in attracting new can drinkers. Costa Coffee launched Costa Coffee caramel latte, a high-quality latte made with rich espresso, domestic milk, and rich caramel in September. The number of Costa Coffee fans who are particular about the hand-brewed quality of Costa Coffee has been steadily increasing. By effectively leveraging the dual-blancs, Georgia and Costa Coffee, we have succeeded in expanding our market share in the coffee category. A summer campaign for Ayataka Cafe was launched in July that employed television, digital, and outdoor advertising. The campaign conveyed a pill of delicious chilled Ayataka Cafe beverages and increased the number of summer drinkers. The Ayataka Cold Blend launched its second campaign based on the concept of aromatic umami tea leaf brewed until fully open at the end of August. The campaign has been promoting drinking occasion with food in the fall season. This summer, in the second year since its launch, Yakan Barley Tea, which provides the authentic taste of barley tea boiled in a kettle, launched a massive campaign in the peak season for barley tea, including television and other advertising activities, as well as mileage promotion, in which customers are guaranteed to receive original goods when they purchase the products. The campaign successfully expanded the number of tea drinkers to a wider range of generations. These activities contributed to the growth of sales in the tea category. Last but not least, in Coke On, the official Coca-Cola app, the number of downloads reached 40 million as of September 15th. This is the fastest increase of 10 million new downloads in one year since the 30 million downloads in September of last year and the first in the history of the Coke On app. The Coke On app continues to grow and is used by many people. Next, let me share with you fourth quarter initiative highlights. Coca-Cola launched FIFA World Cup design packages in October. In addition, Coca-Cola implements a promotion in which consumer can participate through QR codes on the label to win line points and original goods. Coca-Cola aims to strengthen drinking habits by fully leveraging FIFA World Cup assets At the same time, a win good to watch the World Cup at home instant win campaign, which is targeting all KO products except alcohol, was launched in October. Leveraging the FIFA World Cup assets, we will strengthen purchasing intention for the entire portfolio. Next, Georgia and Costa Coffee. In October, Georgia launched Georgia-Japan Class 1-0, the first zero series of PT bottled coffee with zero sugar and zero circles. and Georgia Luxury Cream Cafe Zero, which has a creamy, rich taste. The initiative aims to capture the growing health conscious needs amidst the COVID-19 pandemic. So next, I would like to talk about a kocha kaden. The new craft tea, white grape fruit tea, will be launched. We are using the Nagano grown shine muscat extract, to brands with six different fruit flavors. We aim to strengthen its value as a high-quality black tea brand and further increase the number of tea drinkers. Next is Coke On. On November 1, a collaboration campaign was launched with Dragon Quest Orc, a location-based role-playing game for the smartphone provided by Square Enix. At the end of November, Kokon Wallet, an electronic currency with unique points and e-money functions, will be launched as a new feature. Kokon Wallet can be used as a means of payment for Kokon Pay, which is offered through Kokon, and will be available at 420,000 vending machines nationwide that support Kokon Pay. With the expansion of the new features, we aim to enhance the beverage experience to make it even more affordable and convenient. This is a summary of my presentation today. On page 17, our marketing strategy for this year continues to have three main pillars, pivot to core, fuel bigger innovations, and capture stay-at-home demand. We will continue to respond flexibly and rapidly to change in the market and further grow sales and revenues by strengthening our core plans and strongly accelerating the growth of second-year innovations launched last year and new innovation this year. Our marketing plan underlies our company purpose, refresh the world, make a difference. We will continuously strive to deliver refreshing moments and the positive feelings through our beverages. That's it for my presentation today. Thank you very much.

Thank you. Kaleen here again. Please turn to slide 19 for the outlook for the fourth quarter. This year, up to September, the beverage market is estimated to have grown by about 5% from the previous year by volume. This was the seventh consecutive month of growth for the market since March. We expect the current recovery trend in traffic to continue. with the lifting of border restrictions and the support of the government's economic policies. However, given that beverage companies, including ourselves, have raised prices since October and the impact of inflation on consumer sentiments, we need to keep a close eye on beverage demand trends. In addition, cost pressures from external factors such as commodity and yen depreciation have not shown major improvements, and are expected to continue to significantly impact the profitability of beverage companies. Even under current and such circumstances, there is no change in our strategic direction. Particularly, we will accomplish the price revision with determination, focusing on monitoring and maintaining prices after the price revision. There is no change to the full-year business income forecast, In the fourth quarter, we expect a certain level of volume impact from price revisions, as well as the negative impact from commodity prices and Forex, as well as the cycling of the one-time cost savings implemented last year. Please turn to page 20. I will share how external factors such as commodity prices and the weak yen that are affecting our business and the potential need for additional mitigation measures. Commodity prices have been on an upward trend worldwide since 2021, and as we all know, the speed further accelerated this year, partly due to geopolitical risks. The yen has depreciated to its weakest level in 32 years, and the beverage industry in Japan continues to face very difficult conditions. We estimate that the impact of the cost increase will amount to more than 100 billion yen for the beverage industry in 2022. For our company, the impact of commodity prices and yen depreciation this year is expected to reach about 18 billion yen for the year, which includes the increase in energy costs with raising commodity prices. Under these circumstances, we have implemented various mitigation measures. In addition to the initiatives for volume growth and profitability improvements that I share today, we have been pushing forward with fundamental transformation of our business model with a focus on the future. For cost savings through transformation, we are on track to generate savings of 6 billion yen this year, which is above our original target, and the accumulated benefit over the three years since the 2020 has improved our cost base by about 28 billion yen. For procurement, we have worked to mitigate the impact of cost increases through hedging strategies and procurement activities that leverage the scale and expertise of the global Coca-Cola system. We implemented two rounds of price revisions. These initiatives are very important to establishing a future revenue base. However, we expect this high-cost environment to continue for next year onwards, and in some situations, the risk of additional cost increases must be considered. Under these circumstances, we will continue to implement initiatives for both growth and profitability improvements. In addition, we will closely monitor commodity prices, the Forex situation, and develop business strategies accordingly. We will seriously consider further price revisions depending on the situation. For today's summary, please see slide 21. For the third quarter year-to-date period, despite the large PET price revision impact, volume growth continued by implementing measures that effectively captured the traffic recovery and heat wave demand. Continued efforts to build a foundation for growth during the difficult business environment and adapting to change in an agile way are showing results. Efforts, including prior price revisions to improve profitability, are steadily moving forward. Price revisions for large PTE has led to an improvement in the wholesale revenue per case since the second quarter and continued this trend in the third quarter. Price revisions for small packages were just implemented last month, and we believe that it will lead to a positive impact over the medium to long term. We will continue to monitor market trends closely to ensure that its progress as planned. For profitability, the beverage industry was significantly impacted by cost pressures with raising commodity prices and the yen depreciation. We were also impacted by such external factors. However, our business income significantly improved from the previous year by achieving results in areas that we can control. Such areas include growth through commercial activities, profitability improvements, and transformation of the cost-based supply chain. All contributed to a strongly improved business income from the previous year. I believe that our strategic direction is the right one. We were able to grow steadily this year during a phase of traffic recovery, pushed forward with price revisions for the future, And the effects are showing even in an extremely competitive environment, all of which give us confidence. We expect the business environment to remain challenging for the next year onwards for cost and competition. But we will evaluate the situation, consider and implement further mitigation plans as needed. That concludes my presentation today. Thank you very much for your attention. And I would now like to ask Gomi-san to open the question and answers.

Thank you, Karin-san. As the following Q&A session is for analysts and investors only, members of the media are asked to refrain from asking questions at this time. We will hold a separate media Q&A session later today. Simultaneous interpretation is provided, so please ask your question in the corresponding language of the participating phone line. Please speak Japanese on the Japanese line, and likewise, English on the English line. Due to the constraints of simultaneous interpretation, please limit your question to one at a time. Now I'd like to start the Q&A session. Operator, please begin.

Due to changes to our conference call system, the procedure for asking questions has been changed. We will now be allocating time to take question requests prior to answering. During this question request time, we ask that you please put through your questions requests during this time. After receiving requests, we will call upon those with questions in the order received. Depending on the amount of questions and available time, we intend to allow for one or two periods of question requests. Please note that due to system restrictions, we cannot accept requests for questions outside of these times. Background music will begin playing shortly. If you'd like to ask a question, please press sharp 1 when the background music starts. Please do not press sharp 1 more than once. If you press sharp 1 again, your question request will be canceled, followed by the guidance line muted. We will be taking question requests for about 60 seconds. Please wait until the background music starts playing.

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The conference is now in presentation mode. Your line is muted.

Thank you for waiting. We have now ended the question request period. We have received requests for questions from six participants. We will now call the names of those who wish to ask a question. When speaking, please state your company name and your name before asking your question. We will now welcome the first person with a question. The first question is from Daiwa Securities, Morita-san. Hello, this is Moita from Daiwa Securities. Can you hear us? Can you hear me? Yes, we hear you. Thank you. So I have two questions. My first question is you mentioned that you will be considering seriously about the price revision for next year. And I want to check the intention or your plan for next year. If the cost situation continues into next year, do you have to raise the price once again? Are you at that point? Or is it just like a possibility that might happen? I want to know the possibilities of the price revision to happen. If the market situation really continues, what's going to happen? I would like to know a little bit more details around the price revision possibility. Thank you, Morita-san. The first question is about the price revision possibility next year. So I would like to ask Kostin-san to answer this question.

Good afternoon, Morita-san. This is Kostin. Thank you for the question. I will start by reminding everyone that this year we took two price increases, one in May for large PET and one in October for small PET. We executed this very disciplined in the market, and what we are seeing, and you saw today in the report, we see an increase of retail price in the stores. Now, for the price increase in immediate consumption, it's still early. We are assessing the results and we evaluate the impact. Moving into 2023, obviously, we see that the entire industry is suffering from rising costs and from deteriorating foreign exchange. And right now we are considering the possibility to rise the price next year. And, of course, everything depends on market situation and, like I said, on external factors like commodities. We are going to keep you informed of our decisions. Thank you.

Thank you very much. And the second question, please, Morita-san. Yes. My second question is about the dividends. So here, based on the profitability, you have a deficit, but you still are going to provide dividends. But what is your healthiness from the finance perspective? What is your view? And how long are you able to keep the dividend payouts? So I want to ask about the... good stewardship of the financial area. Thank you, Morita-san. So you want to ask about the financial healthiness and also dividends. So Byun-san would like to answer.

Thank you, Morita-san, for the question. Let me give a little bit of background. As you know, in 2021, we paid 50 yen per share in dividends, or two times 25 yen. And for this year, 2022, we have maintained exactly the same policy of 50 yen per share. How we're financing this, as you have picked up from prior quarterly reports, we are going through a significant review of all our assets and therefore our balance sheet. and we have been selling off non-productive underutilized assets, partially with the aim to make sure we always maintain our 50 yen per share dividend policy. Going forward, our aim, of course, and top priority is to return to profitability. And in our policies or bylaws for the company, we aim over time to return to a 30% dividend policy. But as we all know, at the moment, that is not possible. So therefore, we envision to continue the policy for now with the aim of returning to profitability and therefore the long-term dividend payout ratio. I hope that answered your question. Thank you.

Thank you very much. Thank you. Thank you, Morita-san, for your question. Operator, next question, please.

The next question, I'm going to unmute the next person. We have Ihara-san from Credit Suisse Securities. Ihara-san, please go ahead. Hi, this is Ihara from Credit Suisse. I hope you can hear me. Yes, we can hear you, Ihara-san. Thank you. I have two questions. First question, I think it's going to be an overlap with Morita-san. For the next price division, what will be the trigger for you to decide and go ahead with the next price division? Of course, the first one and the small package price division. will not be enough to absorb the cost inflation of the commodity. But when you look at the KPI, are you looking at the unit price of the small package? If your competition exacerbates, and if you can highlight the risk in that competition, if you think that you can actually see the intention to improve the profitability for the entire industry, then you will actually start seriously moving forward to the price division. What will be the trigger and what will be the motivation for you? Thank you, Ihara-san. I think the question is about the reason and the motivation for the next price division. I would like Kostin to pick it up.

We know, and it's very visible in the market, is the entire industry suffering from rising costs. And also what we know is this impact of the rising costs, it cannot be absorbed only through our efforts alone. So price increase is one of the tools that we are doing. And in CCBGI, we are referring to this as smart pricings. Basically, it's a combination of taking price, it's a combination of managing our discounts, but also all our efforts that we are doing in revenue growth management. As we move to next year and as we evaluate fully the results of the latest price increase, we have a set of scenarios, we consider different options, and If the situation continues to deteriorate in terms of cost and in terms of foreign exchange, we are also considering to raise prices again next year. Right now, we didn't take a situation. We have all the options on the table. And like I said, we'll come back to you with information when necessary. I hope this answers your question.

Thank you very much. My second question, well, right now you have started the price revision starting from October. So what's your evaluation? I know it's too short for you to come to the conclusion, but was the impact as expected from your initial expectation for the second price rise? Do you think that you have achieved the target and expectation that you set forth for yourself for this second price revision? Thank you. Thank you for your question. So your question is about the evaluation of the results of the October's price revision. I'll ask Christine to pick it up.

I'll start with the fact that we raised prices this year two times, and the large PET price increase in May helped us to understand what's the impact on the market. When we raised the price, we were the only one in the industry for five months. So in the beginning, we saw a deterioration of volume. But then, helped by the traffic recovery and by the heat wave over the summer, we were able to see an improvement of the sales. Overall, the large PET price increase was largely in line with our expectations. From 1st of October, entire industry raised prices. And our focus and our sales team's focus was again to execute this disciplinary, to spend time with our customers, to make sure we have complete agreement. We succeed to successfully negotiate and implement this second price increase this year. We see initial results positive. We see prices on the shelf going up across all channels. But again, this is only six months after, so we are evaluating carefully, and we will act accordingly.

Thank you. Thank you very much. Thank you, Mihara-san. Since the time constraints, I would really like to limit our question, one question per person. So operator, please go ahead for the next question.

We will unmute the next questioner. from Numerous Securities. Thank you. This is Fujiwara from Nomura Securities. Hello. So one question I heard. So I would like to ask about the cost structure. So you have the recurring cost reductions, which is like 6 billion yen for this year. And in the past two years, you did like 13 billion plus nine. So that's lots of cost reduction. So in the cost structure that you have from now on, what are you going to do? What are you going to be your next steps? Are there still room to reduce costs even more? That's my question. Thank you, Fujiwara-san, for the question. So you want to ask about the cost reduction. So this will be answered by Byun-san.

Thank you, Fujiwara-san, for the question. The cost structures, let me just give a little bit of background, and then I will talk about what are we going to do going forward. So in summary, as we work through the impacts of COVID, we did effectively two sets of cost measure activities. One was the transformation activities that you remember we laid out in a strategic business plan back in late 2019. That is all about making supply chain, commercial and back office more efficient. That is progressing well on track. The second part during COVID, we also did what we call temporary or one-time cost measures. For instance, the temporary leave was one of them. In Q4 last year, we, for instance, executed a lot of these activities, adapting to the external environment that was still heavily impacted by COVID. For next year, we will continue all the transformation activities. That train is not stopping. And we continue to look for opportunities in commercial, in supply chain, and in back office. You have heard, for instance, in the prepared remarks, how we have talked about the mega distribution centers and what we're doing, for instance, on therefore logistics costs. Those activities are well on track and continue to be stepped up for next year. We are also looking at opportunities in other parts of the business to continuously become simplified, optimized, and therefore run the business better every day we operate. So the cost measures will continue, Fujiwara-san, and we're looking forward to talking more about that when we come back in February.

Thank you. Thank you.

Thank you very much. And thank you to Fujiwara-san for the question. Operator, next question, please.

I am going to unmute the next person. Next, we have Morgan Stanley, MUSJ, Miyake-san on the line. Please go ahead. Thank you. This is Miyake from Morgan Stanley. I have to repeat this question about the price division question. Back in October, you did the second one. So in the store, when you look at convenience stores, maybe some prices are not yet reflected. I was just wondering, what will be the reason? Because I myself guessed that probably in September, had the announcement and the wholesaler had the stock. That is why the reflection of the price hike was a bit slow. But when I heard the story from the IL team, your IL team said that you didn't make that pre-announcement much. So I was just wondering then why the actual prices in the store is not yet upgraded or I know that you are the number one, you have many number one brand SKUs in the industry. So I was just thinking that maybe even for these kind of SKUs, there might be a last minute shopping spree and stuff. So I was just wondering, what will be the reason of delay in the reflection of the price in the stores? Thank you, Miyake-san. I think your question was about the price revision in October and the trend. So, Kostin, would you like to pick it up?

With the stocking in September you mentioned, in CCBGI and in our beverage category, we did not observe pre-stocking before the price increase. Yes, we know it happened for other categories, but for beverages we didn't see anything significant. We went as planned with price increase on 1st of October, and for us this was very important, and you talk about CVS. Our teams spent a great amount of time with our customers to make sure this price increase is reflected. I see after six weeks since the price increase, in the CVS, I'm having a daily report, I see an increase for coffee, tea, Aquarius, and Coca-Cola, these are my main SKUs, an increase anywhere between 8 to 12 yen. So this is translated from wholesale price to retail price. It may happen that... I'm not sure what exactly you are, what prices you are referring to, but we see the competitive environment in CVS continuing to be very aggressive, and I still see competitors implementing aggressive discount promotions. For us, our approach is disciplined execution of price increase, and all the activities with focus on profitable growth. I hope this is answering your questions.

Thank you. Thank you, Miyake-san, for your question. Since we are overrunning the time, but we have two more questions on the queue, so operator, please put through to the next question.

I will unmute the next questioner. Sajisan from Mizuho Securities. So a quick question because the other presentation has already started for a different company from the vending channel question. So July to September, it seems that the revenue per case has really improved. This was before the price revision. But what is the background? Why did this happen before the price revision? And after October, when you have executed the price revision, what's happening in the vending channel? So I want to know. about the vending channel overall and the how much risk do you have in the drop in volume? Is there going to be any risk? So I guess I want to know about the price and volume before and after the price revision for the vending channel. Thank you, Sachi-san. So you want to ask about like the situation before and after the price revision. So from Kostin-san, please.

indeed funding has a very good recovery this year we see significant performance here today and especially in the third quarter we have an eight percent growth in volume on top of this since the beginning of the year we continue to grow market share with 2.6 points before summer we took the decision to adjust prices for the most in demand skus like water Yakan Barleti and Aquarius. So when we look at Q3, we'll see an increase in NSR per case even before the national price increase. And this was again done in order to increase profitability and to capture the pig selling season. From 1st of October, we increased prices for all the SKUs in vending. We see the performance of vending continuing to be positive. Of course, there is still very early. There are only six weeks since the prime increase. We are measuring this. But what is important, because you know vending is a very important channel for us, we keep a lot of extra activities in order to stimulate the demand in terms of innovation, in terms of new products, and we just finished to deploy the HOT portfolio product. And in vending, we are very happy to see COCON reaching another milestone of 40 million downloads. So overall, executed discipline increase, we see NSR per case, and vending continues to be positive. Thank you.

So the volume after price revision, what is your assumption?

I will tell you that October was slightly positive versus last year, despite the price increase. So overall, it's a positive profit equation. And we continue to grow share.

So it's minus 6% overall, but just the vending, it was positive for October, you're saying?

I'm saying, Sajisan, you're right.

Thank you very much. Thank you. Operator, the last question, please.

I'm going to unmute the next person. BOA Securities, Kaneko-san. Hi, this is Kaneko from BOA. My question is about the convenience channel. In second quarter, you said that you have increased the share. But when you look at third quarter, it looks a little slowing down. So can you give me a little background to this? Thank you, Kaneko-san. Your question is about the convenience stores performance in Q3.

CBS is a very important channel for us. And during pandemic, it was affected. But we see in 2022, the channel is... gradually recovering. And we are doing activities to capture the extra demand, to capture the traffic, and the return to office element. Year to date, CVS is performing positive with the plus 2% year on year. And we see good performance across all three customers. What we also see in vending is the competitive environment remaining to be intense. And we are responding to a certain degree to these activities. Our focus is on making sure we strengthen our innovation and making sure we transform some of our activations in CVS from the typical discount to more digital activations. Overall, it's very encouraging to see CVS gradually recovering. It will take a while before it will be at the same level with 2019, of course. Thank you.

Thank you very much. Thank you very much, Kaneko-san. So lastly, the colleague would like to send a message.

Thank you, Gomisan, for passing me the mic just for 30 seconds. I just want to take this opportunity, since it's our last interaction before the year end, to say a very big thank you for your interest in our business, for your questions, for your challenges, but as well for your support. during this 2022, a very tough year, still marked by COVID at the beginning of the year significantly. So as you can highlight it throughout these discussions and through the questions that you posed to us, you understand that the entire industry, it's going through tough times in Japan, but not only. We are in a particular situation here with all the challenges driven by the commodities increase and as well the yen devaluation. All this are probably in a way hiding and maybe not necessarily doing a fair service to the transformation that happens in the industry, but in particular in our company. So I want to remind everyone that we have made some significant transformation in approaches in the market. We were able to go out with rational pricing throughout the year, either by ourselves in May or later on together with the industry that happened. But these are significant changes and progress for the entire industry that we are observing. And we hope that the same rational approach will continue to be taken by the whole industry going on. Beside that, our company have performed fundamental transformations without stopping during these tough times, which puts us in a way better position now to capture growth. We look forward to continue that transformation, and we hope that this is going to be a serious platform for our growth in the future. I just want to end by saying a warm thank you and otsukaresama deshita. As well, best wishes for this year end. And of course, we are going to greet for the 2023 later on. But I wish you as well a relaxing end of the year. Thank you so much.

Karin-san, arigatou gozaimashita.

Thank you, Kalin-san. That will be the end of today's session. The contents of today's presentation will be available on our website following this presentation. If you have any questions or feedback, please contact our IR team. Thank you very much for joining the call today.