cocokara fine Inc. · 2018-12-14 · Support Japan 03.4405.3160 North America 1.800.674.8375...

cocokara fine Inc. Q2 Financial Results Briefing for the Fiscal Year Ending March 2019

November 22, 2018

Support Japan 03.4405.3160 North America 1.800.674.8375

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Event Summary

[Company Name] cocokara fine Inc.

[Event Type] Earnings Announcement

[Event Name] Q2 Financial Results Briefing for the Fiscal Year Ending March 2019

[Fiscal Period] FY2018 Q2

[Date] November 22, 2018

[Number of Pages] 18

[Time] 16:00 – 16:58

(Total: 58 minutes, Presentation: 35 minutes, Q&A: 23 minutes)

[Venue] Sapia Tower 5F, 1-7-12 Marunouchi, Chiyoda-ku, Tokyo

[Participants] 80

[Number of Speakers] 2

Atsushi Tsukamoto President

Shunichi Mori Senior Corporate Officer General Manager of

Corporate Relations Department

Tsukamoto: Thank you very much for attending cocokara fine’s 2Q FY2019 earnings brief. I’d like to talk about the direction of our business. First of all, I will briefly touch upon the results of our second quarter, which has just been closed.



Starting with the drugstore business, due to factors including numerous natural disasters and unfavorable weather, net sales y-o-y was 100.9% but fell short of the plan by 5.2 billion yen. Meanwhile, in the dispensing business, we had the expected impact from revisions in drug price and medical service fees. However, as a result of strengthening the dispensing business in the last several years, so far net sales was at 106.4% y-o-y, 1.6 billion yen above our planned target.

Regarding the overall results, high performance of the dispensing business positively contributed to total net sales, which was 102.6% y-o-y. Though it fell short of the plan, we are expecting to deliver in the 2H to achieve the full-year plan we set at the beginning of the fiscal year. We will steadily keep executing our strategies, which Mori will talk more in detail about later on.

The first point is to step up IT utilization in our customer strategy and efforts to improve productivity. The second point is to address revisions in drug prices and medical service fees as a priority issue. These are the two main initiatives we will work on in order to achieve our plan.



About the direction of our business going forward: we recognize our social mission to foster talent needed by society, and to create healthcare networks at the local level to help our customers treat as well as prevent diseases, maintain health, and lead active and more comfortable lives.

One of our core efforts is to strengthen the “cure” area: meeting customer needs to cure health issues. More specifically, our policy is to strengthen our dispensing business.

As results in 1H, we have a format called “health support pharmacies” that clearly state the function of supporting health of customers and patients. Increasing the number of these health support pharmacies is a way to provide quick and safe service to our customers in the cure area. Our target is to expand this network and open 100 health support pharmacies by 2022.

In the first half we opened four, so we now have 10 health support pharmacies. In terms of the total number of pharmacies, we added 10. We also have pharmacy functions in existing drugstores. Including the conversion to health support pharmacies, the net effect is minus 2, but actually it was an increase because the conversion to health support pharmacies is done within this number. We believe that our way to contribute to society is to create health support pharmacies that are a one-stop provider of “cure”, “care”, and “fine”: being involved in prevention and improving conditions that lead to diseases as well as treatment.



Next, I’d like to talk about our cocokara health campaign to give you an idea on how we are helping with cure, care and fine. We have been working on the cocokara health campaign since last year. As shown here, we carry out activities in stores and pharmacies to promote prevention of infectious diseases, as well as ways to address risk of diabetes: there are many people whose blood sugar levels shoot up after meals, and they are considered potential diabetes patients, so we offer solutions targeting such people.

Also, we have promoted detox, quitting smoking, mouth care, and warming the body. We started these last year and already running some campaigns this year already. We are planning to be even more active in these activities, at a larger scale and higher quality going forward.

This health campaign has two objectives. The first is to make our employees healthy. The idea is that in order to engage in activities that support the active lives of customers and patients, the employees themselves have to be brimming with health. That is the concept of our healthy management. As an objective measurement of cocokara fine, we are working on the White500 certification. By applying the same health campaign to our employees, they also become active and healthy. They can engage in activities to create a healthy local community based on the knowledge they earned. The direction of our business is to deepen our involvement in this area.

That was a brief overview of this fiscal term and the direction of our business. The details of this term will be reported from Mori, Senior Corporate Officer General Manager of Corporate Relations Department. Thank you very much.



Mori: I’m Mori at the Corporate Relations Department of cocokara fine. Thank you very much for attending our earnings brief. I’d like to start now. I will talk about the financial highlights, core initiatives, and full-year forecast, in that order.

First are the financial highlights. In 1H, as already mentioned, net sales significantly fell short of the target due to numerous natural disasters and unfavorable weather. But in terms of other factors, we are mostly progressing as planned: the concerned impact of the revision in drug price and medical service fees was in line with our assumptions, and we have been able to expand in scale.

Net sales in the drugstore business fell short of the plan by 5.2 billion yen, as a result of an unprecedented succession of natural disasters. But we accelerated new store openings despite this situation, with a net increase of 11 stores. In the dispensing business, we opened new stores in addition to last year’s M&A which boosted our store count. Even with the impact of revised drug prices, net sales in the dispensing business was up 6.4% y-o-y to reach 28 billion yen.

Next about gross profit: the gross profit margin in the drugstore business was greatly improved by 0.6% points y-o-y to reach 27.7%. However, as sales fell short by 5.2 billion yen, the actual gross profit was 1.45 billion yen below the plan. In the dispensing business, the impact of revision in drug price and medical service fees was mostly in line with our assumptions. In terms of the overall pharmacy business including new stores, we maintained the gross profit at 10.7 billion yen.



We were able to reduce SG&A expenses by over 700 million yen against the plan. While labor costs are rising, we further proceeded with consolidation of store information terminals, which have improved efficiency of in-store operations. We are also almost over with a round of renovations to activate existing stores. In terms of expenses, we have been able to reduce the number of store renovations as well as investment per store.

As a result, while gross profit fell short of plan by nearly 1.5 billion yen due to decreased net sales, due to the reduction of expenses by over 700 million yen, both operating income and ordinary income managed to keep the gap from the plan at less than 700 million yen.

Those were the financial highlights. Environmental factors that had a large impact on net sales are listed on page 12, so please take a look afterwards. Today I’d like to elaborate on the breakdown of the gross profit and SG&A expenses.



Please turn to page 14. In the consolidated results, due to the sales composition, the improvement in gross margin seems a bit worse, but we are making steady improvement here. The graph shows the changes in gross profit in all stores in the drugstore business, as well as the quarterly y-o-y comparison. As a result of promotion of high-value-added products and standardization of retail prices, we are steadily improving our gross margin. As you can see on the right, the 1H gross margin improved by 0.6% points y-o-y to 27.7%. Sales were really struggling in this period, with only 0.9% growth including new stores, but with the improvement in gross margin, gross profit was able to grow by 3.1%.



Next is the dispensing business. The gross margin has changed significantly. This is due not only to the impact of revision in drug prices and medical service fees, but also to M&A conducted last year: including this, our store count has increased by 23 stores in the past year. They handle different items, which caused a change in the sales composition. I’d like you to see the actual amount of gross profit. There was negative impact from the revision in drug prices and medical service fees, but we were able to exceed last year’s results. The figure is mostly in line with our plan, at 10.77 billion yen. But this is the total of all dispensing pharmacies, and actually we have increased expenses for the new stores, so we have not yet exceeded last year’s results in operating income.



This time, we have additional material about SG&A expenses. First on the left side, the figure increased on a total basis due to the addition of new stores. Also, we were struggling with sales, which caused an increase in the SG&A ratio. I’d like you to look at the same-store figure for the total of our drugstore and dispensing businesses. While labor costs are on an upward trend, we have been able to improve efficiency in in-store operations, so the SG&A expenses on a same-store basis was controlled to the same level as that of last year.

And although we do not have information here, looking at the same-store sales in the drugstore business excluding dispensing pharmacies, net sales fell by 1.5%. Gross margin was up by 0.7% points. And SG&A expenses settled down from the previous year, so on a same-store basis in the drugstore business, we were able to increase the operating income.



The main reason for the change in the balance sheet is the bank holiday falling on September 30, causing all payments to be made in October. That caused changes in the cash and deposits balance and trades payables, which increased by over 20 billion yen. Although not shown here, the capital equity ratio also decreased significantly from 55.5% to 49.3%, but this is a temporary swing, not a fundamental change. The cash flow was also affected by the same reason, with an increase in trades payables.

Next, I’d like to talk about our key measures based on these results. I will walk you through our progress in measures to utilize IT in our customer strategy and productivity improvement, as well as measures to address the revision in drug prices and medical service fees.



First regarding the progress in customer data, the number of active users was 7.12 million, and the ratio of sales from members was 74%, both maintaining high levels. As shown in the graph on the lower left, the ratio of prepaid payments exceeded 20%, and overall cashless transactions including other e-payments and credit cards exceeded 40%, showing increased convenience. The growth in prepaid payments seems to be slowing down a little, but we have slightly modified our in-store approach from this fiscal year.

Before, we were encouraging all types of customers to charge their prepaid cards, but now having five years’ worth of data accumulation, we have a better understanding of how to approach customers, or which customers to approach, to create loyal customers. This means we have become able to prioritize our approach to potential loyal customers. As a result, as shown in the right-hand graph, the prepaid balance has surged this fiscal year. Growth of this balance means that customers will purchase more at our stores in the future. Expanding the wallet share in our customers leads to more loyal customers. It is just six months since starting this approach, so it is too early to analyze further purchasing behavior, but we’d like to keep on this highly effective approach.



Our second customer strategy is 1to1 marketing. This involves the progress of two apps. In terms of the drugstore app membership, we had 600,000 downloads by the end of September, and getting close to 800,000 as of November. Our initial plan was to reach 700,000 by the end of next March. We have already exceeded that target, and due to achieve 1 million users by next March. Moreover, the number of “my store” registrations, which allow users to receive original promotions by the store and check the inventory of items they are looking for and reduce the emotional distance between the store and the customer, has reached 440,000.

Regarding the drug handbook app, the monthly number of prescription information sent through this app exceeded 10,000. When a patient leaves a medical institution, they take a picture of the prescription and send the image in advance, so they don’t have to wait when they arrive at the pharmacy. This also helps improve efficiency at the pharmacy side. Currently, 2.4% of all prescriptions utilize this function. The app operation is still small, and we are still in the phase of growing it, but we are hoping that it will help create loyal customers and patients.



Our third customer strategy is a new initiative I’d like to share the progress of. Currently, at all 317 stores in the Kanto region, we provide a service in which the customer purchases goods online and receives them at the store. We correctly captured the customers’ need to buy necessary things all at once, even at stores with relatively small floor space in the Kanto region. The scale of this operation is still small, but looking at shopping trends, nearly 90% of the purchases are health & beauty products, so we can say that high-value-added products are selling well.

Moreover, nearly 60% of the customers purchase items that are not placed in the store. Especially at stores that do not carry category-1 OTC drugs, customers can purchase them through this scheme, and we are getting very positive feedback for this. Also, when the customers come to the store to receive purchased items, 30-40% of them buy something in addition at the store. Customers are now coming to receive one week’s worth of purchases at once, while the payment is already complete online. Due to this way of shopping, we are seeing results that show the average spending is more than 20% higher than regular e-commerce.

The customer feedback survey shown below is an activity representative of cocokara fine’s aim to become the no.1 hospitality company. We built a system in the app for member customers to provide quick feedback on the service of the store after making a visit.

We were surprised after actually collecting the data – the store review, with about four stars, is based on over 100,000 monthly feedback, and we are receiving over 10,000 comments from our customers each month. We were able to collect more response than we expected, and in turn, we are considering how to further organize the data and establish the system. Before this, we have been receiving customer feedback at cocokara fine’s customer center via phone calls, e-mails, and letters: counting 25,000 a year, and we have reflected the



feedback in our business operations. Typically, we get phone calls when the customer wants to say something or ask something right away, so over 90% of them are inquiries. The remaining 10% are opinions like complaints or praises.

However, with the survey using this new scheme, we get a completely different sort of comments. Over 80% of them praise or appreciate our operation, whether it be the store staff’s interaction with the customer or placing a certain product in the store. The second largest category is requests to the store, such as asking for a certain size of a certain product or suggesting an improvement in the store display because it’s hard to find products in the skincare section. This means we have been able to build a scheme in which 120,000 comments are directly gathered from regular users of our stores every year.

One strength of cocokara fine is its established cycle of listening to the customers’ voice and taking action and making improvements. We are hoping to utilize this new powerful asset to step up this strength by capturing new needs of the customers and using their feedback in our store evaluation.

I’d also like to share our progress on the already disclosed initiatives to utilize IT to raise productivity. In our effort to simplify the handling of customer information, we have implemented measures in all stores in August. To maintain over 7 million active users, we acquire 100,000 new members a month, so for the store staff, it was tremendous work to handle the analog personal information. So, we drastically simplified the process with a system in which they just have to take a picture of the application form and send it. This amounts to tens of thousands of hours saved each year, and most importantly, we think there was the enormous benefit of reducing the stress of the store staff handling personal information.



And as a measure to counter inventory losses, we introduced a counter loss app in information terminals at all stores and are installing network cameras inside the stores. Using this network camera, the sales floors can be seen in video at the headquarter office. The cameras are now being installed and due to be placed in all stores by the end of this fiscal year. We are taking such strong steps this fiscal year to address the loss of products. I just mentioned that the gross profit margin of the drugstore business improved by 0.6 points, out of which nearly 100 million yen for the six months is the result of these measures to strengthen management.

Towards next fiscal year, we are going to replace POS registers, as well as introduce tablet devices, in all stores. After completing the pilot operation in this fiscal year, we are due to launch the operation in all stores in the 1H of next fiscal year. The current large-scale POS registers will become compact in size, and the register itself will allow for agile store operation. Apart from that, as the cash-less payment ratio has exceeded 40%, this tablet device will be able to complete the payment procedure unless it is cash payment. It will become possible for the store staff to carry the register around the store. And in this environment, all kinds of schemes and functions will become easier to implement.

Next fiscal year as we install these new registers, Alipay will become usable in all stores. This also means that it would become much easier to add new packaged payment functions, promotional functions, and tools. Since 2016, we have been standardizing in-store work by consolidating the staff’s information terminals and establishing a wireless LAN environment in all stores. This time, with the full replacement of POS registers and introduction of tablet devices, we will achieve the full standardization of all devices used in our stores. We are hoping to link this with further improvement in the efficiency of store operations, as well as the launch of new services.



In terms of the impact of the revision in drug prices and medical services in the dispensing business, it is mostly in line with our assumptions. Our response to this situation is also moving forward as planned. The two main measures are for no.2: premiums for regional support, and no.3: premiums for generics dispensing systems.



Based on what I described, I’d like to talk about our full-year forecast. First about store openings/closures: against the plan of opening 66 stores, our forecast is 70-80 stores. For closures, against the plan of 25 stores, we are expecting 30-40 stores. The net effect is not different from the plan, but it’s likely that a faster cycle of scrap-and-build will take place. And we are nearly done with a round of store renovations, with our forecast at 70-80 stores including small-scale renovations. Regarding capex, both the number of renovated stores and renovation cost per store decreased. Therefore, while capex was initially planned at 11 billion yen, our forecast is 9-10 billion.



With these factors, looking at the full-year forecast: in the 1H, mainly due to a decline in sales from environmental factors, progress was slow, but the other factors have kept in line with the plan. The improvement of gross profit margin continues to be significant, and response to the revision in medical service fees in the dispensing business has also progressed according to plan. Regarding SG&A expenses, we have been able to make a reduction of more than 700 million yen against the plan. The progress of these measures will keep contributing through the 2H, and we are keeping our efforts towards achieving planned targets. With this, I’d like to end my presentation. Thank you for your attention.

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cocokara fine Inc. · 2018-12-14 · Support Japan 03.4405.3160 North America 1.800.674.8375...

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