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Edited Transcript of 2579.T earnings conference call or presentation 8-Nov-19 6:30am GMT

Q3 2019 Coca-Cola Bottlers Japan Holdings Inc Earnings Presentation

Fukuoka Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Coca-Cola Bottlers Japan Holdings Inc earnings conference call or presentation Friday, November 8, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bjorn Ivar Ulgenes

Coca-Cola Bottlers Japan Holdings Inc. - VP, CFO, Head of Finance & Representative Director

* Bruce Herbert

Coca-Cola Bottlers Japan Holdings Inc. - Senior Executive Officer and Head of Supply Chain

* Calin Dragan

Coca-Cola Bottlers Japan Holdings Inc. - President & Representative Director

* Costel Mandrea

Coca-Cola Bottlers Japan Holdings Inc. - Senior Executive Officer, Head of Commercial and Director

* Raymond Shelton

Coca-Cola Bottlers Japan Holdings Inc. - Head of IR and Executive Officer

* Takashi Wasa

Coca-Cola (Japan) Company, Limited - CMO

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Conference Call Participants

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* Hiroshi Saji

Mizuho Securities Co., Ltd., Research Division - Senior Analyst

* Leon Rapp

Macquarie Research - Analyst

* Satoshi Fujiwara

Nomura Securities Co. Ltd., Research Division - Analyst

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Presentation

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Raymond Shelton, Coca-Cola Bottlers Japan Holdings Inc. - Head of IR and Executive Officer [1]

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(foreign language) Good afternoon, everyone. I'm Raymond Shelton, Head of Investor Relations and Corporate Communications for Coca-Cola Bottlers Japan Holdings. Thank you very much for joining us today for our year-to-date third quarter 2019 earnings presentation for analysts and investors.

I'm joined by our leadership team here at the front of the room. Following prepared remarks by President, Calin Dragan; and CFO, Bjorn Ulgenes; as well as a marketing update from Mr. Takashi Wassa from the Coca-Cola (Japan) Company, we will be happy to take your questions.

This presentation is intended for analysts and investors, so we ask members of the media in attendance to please hold your questions for our media session scheduled separately today. Simultaneous translation in both Japanese and English is being provided for today's presentation and today's Q&A.

Finally, before we begin, let me remind you that today's presentation contains forward-looking statements, including statements concerning annual and long-term earnings objectives and should be considered together with cautionary statements contained in our supporting presentation deck. Both are posted to our Investors section of our company website at ccbj-holdings.com. Please look on our website for this information in both Japanese and English.

Now I'd like to turn the presentation over to Calin Dragan. Calin San?

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Calin Dragan, Coca-Cola Bottlers Japan Holdings Inc. - President & Representative Director [2]

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Thank you, Ray, and good afternoon, everyone. I am Calin Dragan. Thank you for joining us today. CFO, Bjorn Ulgenes, and I will be taking you through our year-to-date results as well as an update on the progress we are making in this transition year to set the foundation for our 2024 strategic business plan. I also ask Wasa San, Chief Marketing Officer of Coca-Cola (Japan), to join us to provide the details on some of our big bet marketing priorities that drive value for the combined Coca-Cola system. I think having Wasa san here is a good example of how both Coca-Cola and Coca-Cola Bottlers Japan are working together to drive growth and win in the market. And I will continue to invite Wasa san to future earnings presentations to share updates on our joint system priorities.

Here on Slide 4, let me summarize the key highlights of our year-to-date results that we announced yesterday. Beverage volume declines have moderated through the year, down 3% year-to-date and only 1% in the third quarter. Similarly, third quarter beverage business revenue recovered to even versus previous year as our first wholesale price increase in 27 years gradually settles in. We grew both value and volume share in the third quarter, driven by strong performance in coffee and green tea, despite poor weather and still tight aseptic supply capacity. And we are starting to gain traction in the important vending channel, which grew 1% in the quarter. All of this means that year-to-date business income for our beverage business is trending more or less in line with the revised full year plan that we have announced in May. We are, however, seeing continued top line pressure in our health and skincare segment, which is impacting this year's consolidated business income results.

We recently announced the nation-wide sales expansion of Lemon-dou, the first-ever alcoholic beverage brand developed by Coca-Cola anywhere in the world. We tested this brand successfully in the Kyushu region over the last year and started the sales nationally just last week. At the same time, we have started in-house production of this alcohol or Chu-Hi brand, which is also a first for the global Coca-Cola system. I see this as an opportunity to learn and develop new skills in a new category.

For those of you here today, we have provided some samples of Lemon-dou, manufactured, actually, for the first time at our Saitama plant as well as the new Real Gold Dragon Boost launched in October and Coca-Cola Ribbon Bottle to help kick off the holiday season, and please enjoy.

Also, let me briefly touch on our progress on various strategic initiatives. Our important commercial transformation is picking up pace, both in vending and with the new commercial organization structure that we announced yesterday, reflecting the strategic growth priorities outlined in our midterm plan and an improved role sort with Coca-Cola (Japan). We have added there -- sorry, we have added 3 new aseptic production lines this year, the most recent being Kyoto line in October, all of which will help us to offset the supply constraints we continue to experience. We have also hit important infrastructure milestones to leading transformation and drive cost savings.

In October, we completed the rollout of the CokeOne ERP system across all our territories. So I can finally say we are now running in one integrated IT platform. Our shared services organization, BSO, has been consolidating transactional processes into what we call centers of scale, and we have been expanding operations, an important step in redesigning processes toward lowest-cost operations. Finally, we completed JPY 150 billion bond issuance in September to fund our strategic initiatives and investments for growth. I will provide you more details regarding these strategic initiatives later in the presentation.

So I would like to provide a quick personal reflection on our progress to date. And for that, I would like to ask you to please turn to Slide 5. In a year of major changes, business income for the core beverage business is progressing with signs of traction in focus areas like vending, coffee and large PET pricing. On the other hand, we are continuing to experience pressure on our health and skincare business with cost savings so far this year not enough to cover the slowdown in sales. Stabilizing this additional business will require additional focus, which has already begun with the recent rebranding of the Q SAI company logo in October. Full renewal of the core, Aojiru (kale juice) product and the launch of a new skincare brand, [Skincare Balancing Lotion].

I'm strongly committed to the need for investing in our people to develop capabilities and build an organization with a learning culture and a solid growth mindset, which I believe we may have changed in our initial focus this past years on getting the merger and integration of the company [done]. In fact, I have convened an extraordinary Board of Directors' meeting in October, to review the organizational structure and culture, fit gap skills analysis, career planning and how we pay for performance. Out of this, we approved a new and simplified company mission, vision and values, all grouped in statement that is guiding us in our organizational design and people planning in order to set a clear path to delivering on our 2024 cause. So the building blocks are in place for a solid start to the strategic plan in 2020, and we continue to balance the need to do the right thing for the long-term health of the business while getting the day-to-day right. These are my reflections on our progress this year, and I'm encouraged at how quickly we are moving as one team to get back on track.

Now I would like to ask our CFO, Bjorn Ulgenes, to review the third quarter results and provide an update to the outlook for the rest of the year. Bjorn?

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Bjorn Ivar Ulgenes, Coca-Cola Bottlers Japan Holdings Inc. - VP, CFO, Head of Finance & Representative Director [3]

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Thank you, Calin. Good afternoon, everyone. I'm Bjorn Ulgenes, CFO of Coca-Cola Bottlers Japan Holdings.

Let me take a few minutes to discuss our year-to-date third quarter results and outlook for the rest of the year. On Slide 7, you can see a summary P&L for the year-to-date period, including a segment breakdown of our beverage business and the health and skincare businesses. Consolidated revenue declined 2% on the 3% volume decline as we cycle the supply disruptions for the second half of last year, and we managed through the initial impact with the large PET wholesale price increase this year as well as the unseasonably cool and rainy summer weather, especially in July. Beverage segment business income is trending roughly in line with plan, in spite of somewhat weaker volume performance in the still capacity-constrained environment this year.

As Calin mentioned, the health and skincare business has been facing ongoing top line pressure as new product launches and other sales initiatives, including expansion into new sales channels, have not offset the decline of mail and web order sales. We had a consolidated operating loss of JPY 52 billion in the year-to-date period. As you may remember, this includes the JPY 62 billion goodwill impairment we announced in the second quarter.

On Slide 8, you can see the main drivers of our year-to-date third quarter business income performance. First, let's look at monthly beverage volumes for the third quarter at the top right-hand side of the slide. Similar to other industry peers, our July volume was impacted by cool and rainy weather, down 13% for our company. In August and September, we cycled the initial severe impact of the supply constraints and flooding damage last year, and we grew 3% in August and 10% in September.

So let's review the individual drivers of our business income. Starting on the left-hand side of the slides, please look at volume, price and mix, which shows the year-on-year change in marginal profit for our beverage business. We experienced a net JPY 8.7 billion decline year-to-date. Beverage volume was down 3% overall. But this has been moderated through the year, down 1% in the third quarter with volume growth in important vending channel as well as in Supermarkets and Drug and Discounters as the impact of April wholesale price increase for large PET packages seems to have settled in. Of the JPY 8.7 billion decline, volume and channel mix reflected approximately JPY 9 billion, mainly due to a 2% decline in vending and a 6% decline in convenience store volume. The net impact of positive price mix and others partly offset this volume and channel mix pressure, which has also been moderating as we move through the year.

Fixed marketing expenses, or DME, decreased JPY 1.1 billion year-to-date. Although DME investments grew in the third quarter, driven by the timing of new launches and cycling of prior year lower spending due to the flooding and supply constraints. We will continue to evaluate our DME spend levels for the balance of the year to reflect full year volume trends and to support achievements of our business income targets.

Raw materials and commodity cost pressure have eased during the year to JPY 200 million. Manufacturing costs, on the other hand, increased JPY 2.8 billion versus last year, reflecting lower volumes and less efficient operations, including higher usage of outsourced toll packers in this year of continued capacity constraints. Manufacturing has been an area of synergy delivery in the past, but our ability to deliver these synergies in 2019 will continue to be limited until supply capacity normalizes by the end of second quarter 2020. In others, although there was a benefit from a reduction in personnel expenses due to the voluntary retirement program effective in May and the consolidation of retirement benefit plans, this was offset by increases in logistics and distribution expenses that are expected to continue into next year. Business income for the health and skincare business decreased JPY 1.5 billion, reflecting continued top line pressure, as mentioned earlier. You can find volume performance with commentary by channel, category and package on Slides 9 and 10.

Year-to-date volume declined 3%, impacted by weaker new launches and renewals in the first half. Large PET volume declines, driven by the wholesale price increase in April and then seasonably rainy and cool weather in July. The wholesale price increase has contributed to continuing price mix improvements in the Supermarket and Drug & Discounter channels. Total volume performance moderated to a 1% decline in the third quarter. Supermarket and Drug & Discounter channels grew in the quarter as the impact of the price increase settled in and recycled the prior year supply disruption.

In addition, the negative trend in vending has been moderating over the last 4 quarters. We returned to 1% volume growth in the third quarter, supported by the rollout of strategic price points and package sizes to bring consumers back to the vending channel as well as expanding coverage of Georgia Japan Craftsman coffee and other aseptic products, which were not available in the vending channel last year. In vending, coffee volume grew a strong 9% in the quarter. Total coffee volume grew 1% year-to-date and 7% in the third quarter as we continued to progressively recover and expand supply capacity for aseptic products. Again, detailed volume information is provided here on Slides 9 and 10.

On Slide 10, we have provided third quarter volume performance by channel and category, together with year-to-date and third quarter packaged data. The one thing I would add here is a word on bottle can performance. Volume for this package is down 15% year-to-date as demand has shifted to other package formats. We will look at opportunities to utilize this available bottle can manufacturing capacity for new products and packages as we consider our current overall capacity situation. In a time when aseptic PET capacity remains tight, and we are leveraging existing sparkling can production capacity with in-house production of the new Lemon-dou alcohol brand, it makes sense to actively consider options for the bottle can, which consumers continue to evaluate highly for its sealability and portability.

On Slide 11, we have provided an update to market share and retail pricing trends based on scanning data. In the third quarter, value and volume share turned positive with value share outpacing volume share, as we see a continued improvement in retail pricing for large PET packages since the April wholesale price increase. Third quarter market share growth was driven by strong results in coffee and nonsugar tea and new launches such as Coca-Cola Energy and the full renewal of Kochakaden Royal Milk Tea helped to drive value share growth.

On Slide 12, let me provide an update on our balance sheet and outlook for CapEx and depreciation this year. We completed JPY 150 billion bond offering in September with very favorable rates in order to secure funds for the various investments for growth we have discussed as part of our 5-year strategic business plan. Our bond credit ratings remain unchanged. We have also been steadily looking at opportunities to clean up our balance sheet by selling nonessential real estate assets and cross-held investment securities. Finally, on the right side of the slide, you will see an update on the progress of our CapEx and depreciation year-to-date, which is generally trending in line with plan. Although we expect a slight shift of CapEx from December 2019 to January 2020 for the startup of the new production line. The fourth quarter is a heavy quarter from a CapEx perspective with new aseptic manufacturing line in Kyoto, 2 new automated warehouses in Hakushu and Kumamoto and a completed rollout of the CokeOne ERP system. You can see our latest estimate for 2019 CapEx and depreciation in the table at the bottom right of the slide.

On Slide 13, you can see a reminder of our full year 2019 forecast announced on August 7. As mentioned, the year-to-date beverage business income is trending roughly in line with the revised plan, and results for the health and skincare business continue to reflect top line pressure. Although year-to-date beverage volume and revenue performance are trending below initial expectations for the year, driven by factors we have outlined today such as the impact of the price increase, unseasonable summer weather and continued tight production capacity, we have not changed our full year business income outlook. Our current expectation is that volume growth will be slightly positive in Q4.

Now Calin and Chief Marketing Officer of Coca-Cola (Japan), Takashi Wasa will take you through an update of what to expect for the rest of the year. First, Wasa san will discuss brand and marketing strategy. And then Calin will be back to update some specific strategic initiatives that are setting the foundation to deliver the 2024 strategic business plan.

Wasa san, please.

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Takashi Wasa, Coca-Cola (Japan) Company, Limited - CMO [4]

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[Interpreted] Bjorn san, thank you very much. My name is Wasa from CCJC, as introduced from Bjorn. I will briefly explain our key activities in the fourth quarter. I would like to mention 5 activities, as indicated on Slide 16.

First, I would like to mention about the coffee and tea category, as shown on Slide 17. In coffee, we are now deploying hot version of Georgia Japan Craftsman. Since its launch in 2018, Japan Craftsman has been performing extremely well and is expanding its market share in the PET bottle coffee segment. We have newly introduced Japan Craftsman Bito in June this year. We have been responding to the voices from consumers that Bito black is too bitter and latte is too sweet and accelerating the momentum of Japan Craftsman. We offer all 3 flavors in hot with TV commercial support.

Now I would like to speak about the tea category. Royal Milk Tea has been the flagship product under the Kochakaden brand, celebrating its 25th anniversary since its launch. This is the largest ever full renewal. This time, we have completely renewed everything from taste package to communications. We focused especially on the product design by using 100% domestic produced milk, which contributed to bringing a more smooth high-quality milk taste. We have evolved package -- evolved the package while maintaining its highly quality impression by using white as the base color to evoke the high-quality milk with modern and simple design.

In our marketing communications, we are using Kentaro Ito, one of the hottest young actor for the TV commercial and emphasize the quality of milk. The market reaction of the new renewal was significant, and we had gained 4.5 million viewers since our online PR. The initial week sales in the convenience store was far better than what we anticipated, and we have stopped shipment from the second week after the renewal. We have reviewed our supply capacity and have planned to relaunch in the convenience store on the week of December 9. We are truly sorry for the inconveniences caused to our consumers and customers.

Slide 18 explains about the Dragon Boost. Coca-Cola system has been offering energy portfolio centered on casual energy segment. We launched Coca-Cola Energy in July and entered into the Energy Boost segment where growth is identified. Following the launch of Coca-Cola Energy, we have introduced Real Gold Dragon Boost on October 7, emphasizing the different value proposition compared with the existing energy drink options. The concept of Dragon Boost is power from [inner] and boosting enduring strength, using Asian ingredients in addition to the ingredients contained in the standard energy drink. To include the Asian ingredients, we have asked cooperation from (inaudible), a Chinese medicine distributor to select and blend the ingredients. This collaboration helped establish a unique formula no other energy drink can deliver. The sales results after 2 weeks of launch are in line with our plan and contributing to the growth of the Coca-Cola system's market share in the energy segment.

Now moving to Slide 19. This slide explains the nationwide launch of Lemon-dou, the first-ever alcoholic product in the Coca-Cola system. We have started piloting in Kyushu since May 2018, thanks to the strong support from consumers in Kyushu and strong requests from consumers other than Kyushu, we have decided to expand our sales footprint. We gained many attention from the media, including 6 nationwide TV networks and over 400 print medias for its nationwide kickoff event held last month. It is still early since its launch, but the shipments are as planned to fully meet the strong demand from consumers and customers.

I'd like to now show you our TV commercial that is currently on air.

(presentation)

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Takashi Wasa, Coca-Cola (Japan) Company, Limited - CMO [5]

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[Interpreted] The final part of my presentation today is about our holistic vending machine campaign on Page 21. This is a holistic marketing program [hero in] vending machines. This program has been developed through an integrated approach of marketing ideas from communication product lineup to promotion. The objective is to invite new consumers into this channel and also increase the transactions amongst the existing consumers.

Currently, the Coca-Cola system operates approximately 880,000 vending machines nationally. In this program, we define unique value propositions of our vending machines. We count the emotional stories with the various generations and drinking occasions, using messages that convey how Coca-Cola's vending machines make everybody's small moments enjoyable. We will also communicate 4 key value propositions of Coca-Cola's vending machines, cashless, affordable price offering, hot products and quick transaction together with the message.

Our vending channel supports everybody's smiles and the special moment nationwide through each and every product we sell.

Now I would like to show you 3 TV commercials we have been airing since November 4.

(presentation)

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Takashi Wasa, Coca-Cola (Japan) Company, Limited - CMO [6]

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[Interpreted] How are all the plans? That would be all for the brief update on our key Q4 activities. Thank you very much for your attention. And now I would like to hand the microphone over to Calin.

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Calin Dragan, Coca-Cola Bottlers Japan Holdings Inc. - President & Representative Director [7]

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Thank you so much, Wasa san. Calin Dragan here again. I hope you will agree that Coca-Cola (Japan) Company has an exciting lineup of activities for the balance of the year. And I'm particularly excited at the marketing focus on the important vending channel with a fully integrated campaign, including TV commercials, print media and activation. Just as CCJC is responsible for the value creation and innovation, Coca-Cola Bottlers Japan is accountable for execution of our transformation and value delivery.

Let's talk about how we are progressing on our transformation journey, starting with a new and simplified company mission, vision and values statement. I mentioned earlier that I am strongly committed to the need for investing in our people to develop capabilities and build an organization with a learning culture and a solid growth mindset. The new mission, vision and values you see here are grounded in our strategic business plan announced in August and reflect the results of organizational health index surveys and my conversation with many employees through the Town Halls and small group meetings over the past months. Employees want to understand how their work supports the company's objectives. They are proud of our brands, our heritage and our local connections. And they understand that business as usual is not an option, which they have certainly heard me say more than a few times.

Here, we have a clearly highlighted learning as a key element in both our vision and values and this reflects my strong commitment to build a culture of constant learning to develop capabilities, to focus on results not just effort and to create value as a preferred partner for our stakeholders. The organizational changes we announced yesterday are an important building block of the new mission, vision and values. And I believe it will enhance our ability, not only to accelerate the transformation, but also to deliver on our 2024 strategic business plan.

Let me briefly review these changes. In August, I said that both Coca-Cola Japan and Coca-Cola Bottlers Japan are aligned in their commitment to grow based on a plan for fundamental processes, systems and structural transformation with a clear role sort and emphasis on delivering results and accountability. CCJC is responsible for creating value with strong innovation and great consumer marketing. And CCBJH is responsible for delivering value as the lowest cost operator and preferred partner. To help deliver on this commitment, we have newly established a business transformation function under the leadership of Mrs. Maki Kado, reporting directly to me. Kado san's team will ensure that we are making progress in our transformation with quick decision-making, strong project management and enhanced governance and tracking of our key strategic initiatives.

On Slide 26, I have summarized our new commercial organization announced yesterday. We have benchmarked our commercial organization activities and planning against industry and Coca-Cola best practices, and we have identified opportunities to improve. I've said before, business as usual is not an option. And this is true for our commercial organization as it is for other parts of our business as well.

In many ways, our current commercial function reflects the continuation of the organizational structures, priorities and best practices of the legacy bottling companies from our past. This new commercial organization though is focused on delivering growth efficiently and effectively by strengthening 4 focus areas: vending, customer partnership, market activation and portfolio execution. These focus areas are critical for us to get right as a bottler operating on a national scale. Effective January 2020, the key account management will be renamed customer development and integrate it into the commercial function. We expect this group to further strengthen customer relationship with management and work closely with a new sales execution function. And this all links back to our company vision of being a preferred partner and winning in the market.

The sales planning function will be newly established to translate portfolio strategies from Coca-Cola Japan into actionable and strong channel and customer plans that we will execute in the market. Also, our new capability development function will be created to identify and introduce best practices from across the Coca-Cola system. This function will develop and deliver capability plans to help our sales force to be successful in the market and to build that learning culture I talked about. The vending organization will continue to report into the commercial and Costel Mandrea, current Head of Commercial, will lead this new enhanced organization.

Finally, we are already making good progress this year with the start of our first commercial execution transformation project in the Tokyo area. Another pilot project that is finally getting some traction is our vending transformation project outlined here on Slide 27. We are seeing initial signs of improvement in top line and market share in vending at the same time that we are testing the reengineering of our vending service model in the Kinki region. There maybe still be bumps, but both our vending volume and market share have improved, supported by initiatives to drive purchase transactions, for example, the growth of the JPY 100 small packaged coffee and the expanded coverage of Georgia Japan Craftsman.

The growth of coffee in the third quarter was especially strong with 9% growth in vending. So together with the integrated marketing campaign that Wasa san has just mentioned, we are continuing our effort to stabilize and recover the important vending business. Reengineering the operational processes in vending is key to drive cost savings and building a sustainable vending business model. I think of it as a day in the life of a vending filler. And as you can see on the right of the slide, how are we going to streamline and optimize the role sort between warehouse-related functions like planning and product picking versus field operation like machine servicing and finally, route settlement, which should ultimately be digitized and automatic.

We have started piloting an interim model of this new operational process in the Kinki area this year. This will led the way -- this will lead the way towards a fully automated and digitized model with clearly defined role sorts by function. The deployment of online vending machines that can communicate in real-time their inventory status will enable efficient picking and pre-loading of the delivery trucks in advance of the next day vending servicing. Not a simple change, but one that will be fundamental to the future of our business. I look forward to keeping you updated on our progress here.

Now let's move to Slide 28. We continued to see significant opportunities to improve and streamline our infrastructure to drive cost savings. We started in-house production of the first-in-the-world alcohol brand Lemon-dou, an exciting move into a new beverage category, an opportunity for us all to learn and also a good way to utilize our existing sparkling manufacturing capacity in our Saitama factory. We are on track to add 4 new aseptic manufacturing lines to second quarter of 2020, in addition to the 3 new lines commissioned already this year.

Our Shinsei project is also making progress with the expected completion of 2 automated warehouses by the end of this year. In addition, we have closed a total of 16 sales centers since the creation of Coca-Cola Bottlers Japan Holdings. We are also making good progress on integrating and standardizing our business support infrastructure. After starting in Coca-Cola East Japan 5 years ago, we completed, in October, the rollout of the CokeOne ERP System across our full business. Our shared service function, our BSO, Business Services Organization, has expanded outsourcing of many transactional processes by leveraging scale and standardization through a partnership with Genpact Corporation, one of the world's largest professional services firm.

You may remember that I said in August, we will not be successful without an equal investment and emphasis on people capabilities. We held an extraordinary Board of Directors' meeting in October to review our people strategy grounded in the new mission, vision and values. And we are now driving forward this people strategy, supported by clear observable behaviors in the core values of learning, agility, results orientation and integrity in order to guide us in our organizational design and people planning. We have already started new programs to help develop and grow our people, such as Coca-Cola University Japan with development courses for leadership, front-line negotiation, global mindset and governance. And we are implementing, what we call, a career path model to provide guidance and options to employees to support their individual career priorities and design. We will expand new initiatives to other pillars, and I look forward to providing you updates in the future.

On Slide 30, let me remind you that we have incorporated our CSD or creating shared value goals into all aspects of our strategic business plan, including ambitious targets toward a world without waste, our 2030 packaging vision for the Coca-Cola system in Japan. Recently, the United Nations and the Japan Ministry of Agriculture, Forestry and Fisheries selected this initiative as an example of SDG Goal 12 and show sustainable consumption and production patterns. We, at Coca-Cola Bottlers Japan, are committed to delivering on these goals and to reporting our progress in a timely and transparent manner.

So let me quickly summarize what we have discussed today. You may remember I have said, we face a call to action to modernize and lead to move from all the ways of doing things to new and show a strong presence in this industry with a growth-based transformation. You can see various milestones we have achieved so far this year, starting from the Annual Shareholders' meeting in March to our October Board of Directors' meeting focused on people planning.

In a year of major change, business income for the core beverage business is progressing, and I'm encouraged by signs of traction in important areas like vending and coffee. As I said earlier, we continued to experience pressure on our health and skincare business this year. We announced changes in branding and product launches in October, and we will continue to look at options to stabilize this business on longer term. We -- finally, we are making steady progress on our strategic initiatives this year with a new mission, vision and values, commercial and vending transformation, supply chain capacity and business support infrastructure. The building blocks are in place for a solid start to the strategic plan in 2020, and I look forward to the meeting -- to meeting you again in February next year and over the coming years to provide updates on our progress towards 2024.

Let me now ask Ray Shelton san to come back on stage for questions and answers.

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Questions and Answers

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Raymond Shelton, Coca-Cola Bottlers Japan Holdings Inc. - Head of IR and Executive Officer [1]

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Thank you, Calin. Let me remind you this Q&A session is intended for analysts and investors, so we ask members of the media in attendance to please hold your questions for our media session scheduled separately today.

(Operator Instructions) So we're now ready for questions, please.

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Satoshi Fujiwara, Nomura Securities Co. Ltd., Research Division - Analyst [2]

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[Interpreted] I'm Fujiwara from Nomura Securities. My first question, the vending is very important for your revenues, so my question is related to vending. In the third quarter, you have plus 1% in volume. It looks like it has improved. But compared to last year, it's like a 10% drop. So I guess compared to last year, the hurdles were set low. And also, you have expanded the JPY 100 coffee, Georgia Japan Craftsman, you have introduced these new products. So if you're done with all these introductions, we need to question once again if this uptrend is going to continue or not? So talking about the vending strategy, I would like to know what the future strategies you have in mind. I'm sure that CCJC is going to be related to the strategy, but I would like to know your future vending strategies.

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Raymond Shelton, Coca-Cola Bottlers Japan Holdings Inc. - Head of IR and Executive Officer [3]

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Looking at the improvement we've seen in the third quarter compared with performance in the prior year with some additional questions on -- some color on the vending strategy going forward. Costin, do you want to take that?

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Costel Mandrea, Coca-Cola Bottlers Japan Holdings Inc. - Senior Executive Officer, Head of Commercial and Director [4]

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Thank you for the question. My name is Costin Mandrea. And as you know, and I came in front of you many times, vending, it's a strategic channel for CCBJI. And this year, we started to see some initial signs of recovery in vending, of course, after a very tough year in 2018. And we see these signs of improvement both in top line and in share. Vending for us is the channel where we have the highest market share. So with any investments that we're doing in vending, we get disproportionate return in terms of benefit. So it will stay for the next years as a top priority in terms of investment. So some things that we are doing this year and will continue to do also next year.

First of all, as you said, where we are -- we'll continue to increase the footprint, placing new vending machines and placing profitable vending machines. We said in the beginning of the year that over the last years, we decreased placements, and this will stop. We'll keep the promise, we see this year a positive increase in terms of vending machine. Second, we want to bring consumers back to vending machine, and you mentioned some of the activities that we are doing. First of all, recruiting new consumers and providing a very simple one-coin point for coffee, but also increasing coverage of our very successful Georgia Craftsman offering. In terms of activating and engaging the consumers, you saw this campaign developed together with the Coca-Cola Company, which, for the first time, we communicated about vending in an integrated way and in an emotional way. On the other hand, we will continue to look for better efficiency in vending. And Calin shared with you that we see initial signs of our vending strategic projects that we are doing in Kinki area, where we redesign the end-to-end route-to-market process for vending. So overall, there are many things that we are doing for vending because this is the most profitable channel for us. And it's a channel where if we invest, we get significant returns. And for the years to come, we are committed to continue to invest and to focus on the vending areas. I hope this answered your question.

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Satoshi Fujiwara, Nomura Securities Co. Ltd., Research Division - Analyst [5]

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[Interpreted] Another question on vending machine. So with CCJC, you mentioned that you are one team. And from January, you're going to change your commercial structure as well. But what are the collaborations that you're planning for around the vending machine business? What are some examples? Can you elaborate on that?

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Raymond Shelton, Coca-Cola Bottlers Japan Holdings Inc. - Head of IR and Executive Officer [6]

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Examples on our working together with CCJC.

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Costel Mandrea, Coca-Cola Bottlers Japan Holdings Inc. - Senior Executive Officer, Head of Commercial and Director [7]

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Thank you. And I apologize I forgot to mention that. As you know, from 1st of January, we have a joint business unit between CCBJI and CCJC. And everything that I presented to you in terms of early results are the results of this collaboration. But what other things we are doing together with CCJC apart from working together, launching new products and putting focus on Coke ON digital platform, it's this communication integrated campaign. And if you allow me, I would like to ask Wasa san to give us a bit of context, what was behind this campaign.

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Takashi Wasa, Coca-Cola (Japan) Company, Limited - CMO [8]

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[Interpreted] Well, thank you very much for the question. So vending machine, in short, we want to raise the brand love for the vending machines, not just our products, all the -- it's our shop in a way. We have 880,000 machines. So we need to increase the love we have for all these machines. And as Costin mentioned, we want to make sure that we have a certain number of placements because we were experiencing a decrease in the placements, but we want to add more machines to our lineup and also the assortments. Before I talked about the campaign, I talked about the assortment a little bit. But depending on the location, indoor, outdoor, our customers -- consumers are looking for different assortments. And maybe they're looking for like a vending machine exclusive soup when it's during the winter season and, of course, they're looking for like a long coin, easy-to-buy product in some of the cases. So we need to think about the suitable profile portfolio. And you have seen the vending machine commercial. So you have probably got the hint, but there are these moments that we need to really smile or those small moments that the vending machine can provide to us, like special moments. The supermarket shoppers, the convenience shoppers, they just buy it and take it home. For the vending machines, most of our consumers drink it at the spot, right there. Maybe alone, maybe with your friend, maybe with your family, but you can drink it, enjoy the drink, and you can have a great conversation. So our vending machines are kind of looking at that moment or they're kind of supporting that moment. They have that kind of role as being there. So that's what we have focused in the campaign. And we want to emphasize, once again, that this is the vending machine role. And we want everyone to love the vending machines more through our campaign. And as a result, we want more shoppers, consumers to come back to our vending machines. And that is the intention of the campaign that we have. Thank you for the question.

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Hiroshi Saji, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [9]

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[Interpreted] My name is Saji from Mizuho. And I would like to ask about the coffee, Japan Craftsman filling in the vending machines. At the end of the day, you have shifted from can coffee to PET coffee, but that just deteriorates the product mix. And right now, by filling a Japan Craftsman into the vending machines, when you compare that with the traditional can coffee users, what type of new users have you been able to bring and what are the trigger points to bring these new people into this segment? If you can give us that information, please? So if you can give us a bigger future vision, so by having higher coverage of Japan Craftsman, how will that contribute to the vending machines overall? That was my first question.

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Raymond Shelton, Coca-Cola Bottlers Japan Holdings Inc. - Head of IR and Executive Officer [10]

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Craftsman, the impact in the vending machine channel, what consumers are moving -- being attracted by Georgia Japan Craftsman and a little bit more color on the future, how we're thinking about coffee, Georgia Japan Craftsman and vending channel? Costin, would you like to start?

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Costel Mandrea, Coca-Cola Bottlers Japan Holdings Inc. - Senior Executive Officer, Head of Commercial and Director [11]

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Yes. Thank you for the question. Indeed, as you know, last year, we did not fill Georgia Craftsman in the vending machine. We prioritized it for other channels. So we see this year, gradually from the second quarter, a big increase in coverage. So virtually now Georgia Craftsman is available in all the vending machines. This is providing a great alternative to our consumers because we observed this over the last year, there is a gradual move outside of the canned coffee. So if we look 10 years ago, canned coffee was decreasing. Everybody was moving to bottle can. Then 5 years ago, we invested into bottle can, and it started again to gradually phase-out. And today, people are -- consumers are looking into PET coffee. However, apart from the fact that we are able by offering Georgia Craftsman to bring consumers back into the vending channel. We also address a new category, which is very sensitive to PET coffee, which is women and young office workers. So this is working. It's delivering us very good growth in coffee. For second -- for third quarter, we're selling plus 9% in terms of coffee, and we are winning significant market share.

Your question is, what we are doing in the future with coffee and vending? Well, vending appeared 40 years ago to serve basically coffee. So what our strategy is to go with the [tiered] offering, having an entry pack and an entry price and then evolving this for different consumption occasions. And if you look, for example, now we have SOT can, we have bottle can, and we have Georgia Craftsman. Now looking into NSR per case, always we look how we can increase the NSR per case. So one of the steps that we are taking. Hot Georgia Craftsman, it's not in 500 ml, but it's in 380 ml in vending and it's in 440 in CVS. So basically, we are increasing NSR per case by taking -- we call them OBPPC actions. So we believe coffee has a good runway in vending machine. We prepared, together with CCJC, some great novelties for next year. And we are looking forward to share with you.

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Takashi Wasa, Coca-Cola (Japan) Company, Limited - CMO [12]

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[Interpreted] If I may add to that a little bit, please. Georgia Japan Craftsman, 500 ml product. We have the -- on-the-go drinking while you do something else culture has penetrated even by looking at the people around us. Even if it's an ambient temperature, they still continue to sip the product. So the point is or the key is how we can deliver tasty products at any time. And we call it the cold brew process in our production plant, and we have devised the way we manufacture the product. If you usually brew the coffee at a lower temperature, it's difficult to get that flavor out. But in this plant, we have this very big espresso machine. And this hot pressure, this pressure, this regular water temperature under this very strong pressure, high pressure would allow this flavor to come out. And we control it in the optimal way so that, that mouth fill can be achieved at any time you drink the product, whether it's hot. It's this sipping occasion that we have addressed through this technology. That's for black and caffè Latte and Bito. The best taste is provided for that sipping occasion, for that on-the-go and doing-while-drinking culture. So as a Coca-Cola company, we want to make sure that we provide tasty products so that we can attract new users into the segment. We want them to be satisfied with our taste so that it would link to the next users. So we're hoping that we can capture this trend. And at the same time, provide tasty products. So that would be our thought from a brand perspective.

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Hiroshi Saji, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [13]

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[Interpreted] Another question regarding Lemon-dou. If you can give us some quantitative pictures like what's the target and target volume? You are creating this in the Saitama plant. So what are some production effectiveness or benefits that you have been able to generate? And is there any target figure that you are targeting towards in the too high market? We want to know some metrics behind your plan.

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Raymond Shelton, Coca-Cola Bottlers Japan Holdings Inc. - Head of IR and Executive Officer [14]

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And some quantitative metrics to look for in terms of our self-production, in-house production at the Saitama plant and how it is reflected going forward in our business plan. Bjorn, would you like to start with that?

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Bjorn Ivar Ulgenes, Coca-Cola Bottlers Japan Holdings Inc. - VP, CFO, Head of Finance & Representative Director [15]

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Thank you for the question, Saji san. Alcohol, as you recall from the strategic midterm plan, is one of the growth drivers that we laid out over the next 5-year period. The -- entering into that white space is one of the important elements of the building blocks of growing the core and what we call the adjacent businesses. And for this year, the impact on our targets and our performance will be rather small because we have just launched a product. And for next year, I think it's fair to say, to add some color to it, that it will be below 1% of our total volumes. And for the production part, I can leave to Bruce.

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Raymond Shelton, Coca-Cola Bottlers Japan Holdings Inc. - Head of IR and Executive Officer [16]

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This is Bruce Herbert, Head of Supply Chain.

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Bruce Herbert, Coca-Cola Bottlers Japan Holdings Inc. - Senior Executive Officer and Head of Supply Chain [17]

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Thank you. I'm Bruce Herbert, I'm Head of Supply Chain. Just on the alcohol production side, we have -- we are utilizing spare capacity, so there is only minimal investment required. And we foresee sufficient capacity, certainly in the short, medium-term to be able to meet all of the requirements for alcohol in our existing facilities.

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Raymond Shelton, Coca-Cola Bottlers Japan Holdings Inc. - Head of IR and Executive Officer [18]

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Thanks, Bruce. Calin, anything you want to add?

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Calin Dragan, Coca-Cola Bottlers Japan Holdings Inc. - President & Representative Director [19]

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It's just a couple of things. Let me start with Lemon-dou because it's the novelty of the day. So first, it's a new category. We are learning as we are doing it. And we had a 1-year pilot in one of our regions, but we don't want this product to become just a regional product. We want it to be a national category, exploiting and leveraging in a white space, as we call it. It brings benefits. Basically, as you know very well, the canned volumes are declining. So it's a perfect fit because we start the production in can. It's adding value. And as well, I would say, it's strategic importance since revenue-wise, this is a product with a higher revenue than most of the other products out there in the market. That's about Lemon-dou.

But I would like just to -- I cannot say that we will close the discussions ever in vending. That is wrong. I just want to make one point. You asked questions about vending, and you got answers pretty much from the entire value chain of our vending operation. And that makes me very proud. Because it proves, again, to you the fact that there is no stone not turned to find solutions to improve. Basically, we are relooking at the entire vending value chain from the moment when the pallets with products arrive from the factory in the warehouses to the moment when the product arrives in the hand of the consumer from the vending machine. And we are reengineering the entire processes. Now have we solved it? Not yet. But I can guarantee you, right now, we are looking at every piece. Some of them will deliver results quickly, and we have some quick wins. In terms of OBPPC, we spot opportunities in [term] of coffee-tier approach.

We have spot opportunities, some immediate opportunities in Coke ON, how we are operating it. And there are a number of others that will deliver quick results. Some of them will take longer. Shutting down warehouses, it's not so simple, it will take years. But all of them will reengineer the value chain for vending because there was an important point raised by Costin san earlier, vending channel, we have a disproportionate higher market share. Every percentage point gained there represents far more than a gain in any of other channels, hence, our priority. And I will close, again, by saying I'm delighted with this campaign. And I just want to share a bit of insights, to be honest, with you, if I may, without disclosing too much into it. The whole idea of activating this time, probably for the first time that I'm aware, in Japan, in the industry to say so, to activate one channel, not one brand or one product via TV commercial, prints and all the media vehicles came actually from Spain, the most recent example within Coca-Cola system. And the idea was that in Spain, we were selling a lot of volume, and we were making a lot of money in the bar channels. Probably almost all of you traveled to Spain and enjoyed the bar in Tabernas, there in Spain. And a lot of volumes and revenues generated then by the glass bottle of coke in that channel. Now it's not secret to everyone that there was a big recession in Europe about 10, 15 years back. And that channel -- especially in Spain, that channel was declining. What Coke was doing there, they did a dedicated campaign for the channel, the bar channel, how bar channel is part of the Spanish people life. And they succeeded to turn the trend big time. And we said, okay, why not in Japan? Vending, it is actually one big, big thing for us for Japan. There is no such density in the world of vending machines in Japan, why not using that? It's a first attempt. You saw only 3 TV commercials, we are going to tune if this is going to work. And we are going to see how can we address the challenges that we have ahead of us through this strategy as well.

Sorry, I was speaking more than normal in question -- session of question and answers, but sorry for that.

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Raymond Shelton, Coca-Cola Bottlers Japan Holdings Inc. - Head of IR and Executive Officer [20]

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Do we have any other questions?

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Leon Rapp, Macquarie Research - Analyst [21]

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It's Leon Rapp from Macquarie. Sorry, just to go back again on vending because it is such a critical channel for you. Are we to assume with these numbers that are being posted recently, the recovery that sales per vending ending machine is increasing. And just to get a bit of a better idea of how the vending machine numbers in the field has been trending as well? So that's my first question.

The second is on the vending transformation, in particular, the pilot program that you have in Kinki region. It's very interesting, I think. Could you provide perhaps some early feedback on how that's trending? I mean what exactly are you looking at? What are the amount of costs that could be extracted and where are these extractions actually from? I think this is obviously a key area that you'll be focused on going forward. So any color on that would be appreciated.

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Raymond Shelton, Coca-Cola Bottlers Japan Holdings Inc. - Head of IR and Executive Officer [22]

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Who would like to take that? Should I send it over to Costin, please.

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Costel Mandrea, Coca-Cola Bottlers Japan Holdings Inc. - Senior Executive Officer, Head of Commercial and Director [23]

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So we see the beginning of recovery in vending, as Calin said, this is just the start here. But we have all the cylinders fired up, and some of them are starting to deliver results, some of them are still -- we need to fine tune. The first question was, what do we see? The second question was what do we see in Kinki? Basically, we redesigned a day in the life of a filler, of a salesman. And some areas, which we improved. First of all, the way we do the selection of vending machine for the daily routing. It was done mostly on experience, on 40 years' experience. I'm visiting today this machine, that machine, that machine. Now with more machines getting online and with a better algorithm to select what machines should be in priority, we are able to direct our trucks in a better way. This is impact directly into efficiency. Then you heard me talking about Shinsuna model, which we piloted last year. Now we deployed, what is Shinsuna? It's a much smarter way based on data and based on machine learning, what to put in the vending machine according to specifics of the areas. And we are doing some other things, some of them together with our colleagues from supply chain. The way we fill vending machine, the way we deploy them, the way we fill the trucks, when they leave, when they come back, we start using the fully implemented CokeOne system to extract data and to get smarter. So a lot of things in the same time. The first question was, what do we see in terms of numbers of any machine? In CCBJI, I'm giving you round numbers, we have around 700,000 machines. And for the last 5, 6 years, we lost around 100,000. However, this year is the first year we see a positive. And for our strategic midterm plan, Calin presented here a few months ago, we want to increase the number of columns. So profitable placements of vending machine will continue to be a priority for us.

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Leon Rapp, Macquarie Research - Analyst [24]

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Sorry, so sales per machine are increasing?

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Calin Dragan, Coca-Cola Bottlers Japan Holdings Inc. - President & Representative Director [25]

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Just to give you a bit of comfort, vast majority on almost all the new placement vending machines, the criteria for placing was to be above average. So we have not -- at least for the beginning of the journey, we don't want to place machines that are selling below the average, just to have them out there. Then we try to keep this as a guidance going on but, of course, it's (inaudible) so we want to win in the market. So some of them will be profitable, some of them no. So I hope that answers.

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Raymond Shelton, Coca-Cola Bottlers Japan Holdings Inc. - Head of IR and Executive Officer [26]

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Okay. Thank you very much. I think we've hit the end of our time. I'd like to thank everyone very much for your interest in our business. And we invite you to reach out to our team here in the Investor Relations department with questions or feedback going forward. Thank you very much and have a good weekend.

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Calin Dragan, Coca-Cola Bottlers Japan Holdings Inc. - President & Representative Director [27]

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Thank you.