IP licensing revenue is on track to hit its FY29 target this year, well ahead of schedule. ORION BREWERIES, LTD. outlines a path to step-change growth through JPY 16B in Orion merchandise GMV and JPY 4B in health beverages.

Summary

An unusual cluster of typhoons in July–September held 1H revenue to 97.8% of plan. Cost discipline still lifted operating income to 102.6% of plan and EBITDA to 101.6% of plan. The full-year plan is unchanged. Despite the October liquor tax revision, the repeal of the Okinawa Special Measures Act liquor tax relief and the loss of Orion Hotel Naha revenue, the company still expects record revenue, operating income and recurring profit. Management disclosed IP multi-brand expansion and moromi vinegar-based health beverages as its first concrete step-change growth initiatives. It also set out a shift toward becoming a platform company that connects Okinawa-born brands with domestic and overseas markets.

Key Points

• Management Strategy and Market View
  • The company is countering the Special Measures Act repeal by raising beer's share of the mix, since the liquor tax revision favors beer.
  • Management expects competitors to ramp up investment from October. It therefore front-loaded The Draft advertising into 1H to secure positioning early.
  • The company aims to bring Okinawa-origin products and services to market. It is targeting step-change growth in four areas: IP, health beverages, tourism experiences and Okinawa brand collaborations.
  • Management is more concerned about inflation-driven shifts in consumer behavior than about a consumption tax cut. It is preparing through product diversification and flexible pricing.
• Current Business Progress and Drivers
  • Nine high-impact typhoons hit in July–September, versus one a year earlier. Three struck in August and two in September, during peak season.
  • Management estimated the typhoon revenue impact at approx. JPY 200M for alcoholic beverages and approx. JPY 100M for hotels.
  • In-prefecture sales missed plan by approx. JPY 410M, for three reasons:
    • typhoons
    • a slower-than-expected recovery in Asahi Breweries-sourced non-beer alcoholic beverages
    • no pre-tax-change stockpiling demand in September
  • Overseas, shipping schedule disruptions pushed approx. JPY 200M in revenue into October and beyond. Full payment is expected in late October.
• Key Strategic Initiatives and Inflection Points
  • Mugi Shokunin and Southern Star were reclassified as beer from October. Shima Chu, a value-priced 7% ABV RTD, has become a hit. Production of the non-alcoholic Clear Free will move in-house within the current fiscal year.
  • Outside Okinawa, the company has begun expanding beyond the roughly 1,600 Okinawan restaurants. In Shonan, a Tabelog partnership and an event near Fujisawa Station drove sales growth ahead of other regions.
  • UK licensed production is now served in roughly 70 pubs. The company invested approx. GBP 1M in its partner and began shipping to Sweden in October.
  • The Nago Brewery plans to grow tour visitors from approx. 60,000 to 200,000. An official store is the first phase, with a restaurant and tours to follow.

Outlook

• Hitting the full-year plan requires 2H revenue of JPY 15,465M (+11.0% YoY) and operating income of JPY 1,898M (+18.9% YoY).
• 2H revenue growth rests on two pillars. The first is a rebound from Asahi's system outage. The second is expected overseas growth of 120%+ in both 3Q and 4Q.
• IP license fees run at 5–10% of GMV. This year's fees are expected to reach approx. JPY 600M, beating the JPY 500M originally assumed for FY29.
• Two health beverage products are in the final stage of development, and the company has begun briefing some trade partners. Other products are also in development.
• The company also plans official stores both inside and outside Okinawa. Management will disclose these, along with the IP and health beverage plans, once they are finalized. It aims to deliver growth above expectations.
• In North America, the company is considering a licensed manufacturing model to reduce freight and tariff costs. A decision will depend on results from US channel development.

Positive Factors

• IP revenue converts almost entirely into gross profit. Collaboration inquiries are strong, and some companies have asked Orion to manage their licensing.
• Collaborations with GAP and New Era are presenting the Orion brand in the way partners want. They are opening new touchpoints with consumers who had little connection to beer.
• Shelf distribution of The Draft cans, sold by Asahi Breweries, is expanding steadily. Sales are at record levels this year.
• In the US, distribution has expanded beyond New York, California and Hawaii to Florida, Houston and Seattle. Orders are secured through December.
• Main dining saw higher customer counts and average spend after its May 1 reopening following renovation. 1H alcoholic beverage EBITDA margin beat plan by 1.1pt.
• JUNGLIA's attendance plan for this year is approx. 630,000 visitors, versus approx. 960,000 in its first year.

Concerns

• The Special Measures Act repeal will hit this year's EBITDA by -JPY 443M. The cumulative impact over the mid-term plan period is estimated at approx. -JPY 925M.
• The plan is 2H-weighted. Once retailers switch from Asahi non-beer products to competitors' products, winning them back is difficult. This leaves in-prefecture growth uncertain.
• Earnings are exposed to typhoons and other weather events. At the Motobu hotel, typhoons coincided with high-ADR August, pushing 1H RevPAR below the prior year.
• Net financial debt stood at JPY 7,010M, up JPY 1,155M from the prior fiscal year-end. Net Debt/EBITDA of 2.16x is well above the mid-term plan target of 0.9x.
• Alcohol is excluded from the proposed consumption tax cut on food. Disposable income in Okinawa is relatively low, so inflation may reduce dining-out frequency.
• An analyst asked what drove the July–September gross margin decline. Management did not answer during the call and will respond at a later date.

Performance Highlights

1H revenue was JPY 15,654M (-0.8% YoY), operating income JPY 2,454M (-9.7% YoY) and recurring profit JPY 2,465M (-5.7% YoY). The profit decline was in line with plan, which front-loaded strategic investment into 1H. Interim net income attributable to owners of parent was JPY 1,688M (-33.6% YoY). Excluding prior-year extraordinary gains, it declined 10.2% YoY. Operating income progress against the full-year plan stood at 56.4%.

Segment Results

• In-Prefecture Revenue: JPY 8,062M (+4.4% YoY)
• Out-of-Prefecture Revenue (Incl. EC): JPY 3,012M (+7.3% YoY)
• Overseas Revenue: JPY 1,125M (-15.7% YoY)
• IP Business Revenue: JPY 359M (+138.1% YoY)
• Official Store and Related Revenue: JPY 250M (+67.7% YoY)
• Consolidated EBITDA: JPY 3,241M (-7.6% YoY)
• Alcoholic Beverages & Soft Drinks EBITDA: JPY 2,359M (-5.0% YoY)
• Tourism & Hotels EBITDA: JPY 882M (-13.8% YoY)
• Orion Hotel Motobu RevPAR: JPY 34,915 (-3.6% YoY, estimated by this report)

Q&A List

• Q

  Regarding the Tourism & Hotels business on page 4 of the materials, Orion Hotel Motobu's RevPAR declined YoY. Is it fair to read this simply as a top-line decline?

  A

  Our full-year scenario still calls for higher RevPAR, but RevPAR fell in 1H this year. The main reason was the August typhoons. August is a very high-ADR month, and three high-impact typhoons hit then. Two more came in September. Put simply, five typhoons hit Okinawa during our highest-rate months. Once airlines decided early to cancel flights, our bookings dropped. There were no typhoons in August or September last year. The cause is therefore straightforward: typhoons arrived in peak season. RevPAR exceeded the prior year in every normal month. We plan to recover ground toward fiscal year-end.

• Q

  This relates to next April onward, but how do you view the consumption tax cut under discussion in the current Diet session? The general expectation is that the rate on food will fall from 8% to 1%, possibly under a two-year temporary measure. As top management, where do you think the freed-up money will go? Will it flow into tourism? Please also explain the basis for your view.

  A

  We have both concerns and hopes. First, our core products, beer and alcohol, are excluded from the food consumption tax cut. The tax gap versus food will be one key factor. The other point, which we must not overlook and which I am watching closely, is inflation. Prices are still rising. Consumer behavior has shifted from across-the-board saving to selective spending. For example, people are cutting restaurant visits from four to three. They are reducing spend per visit from JPY 10,000 to JPY 8,000, or drinking at home instead. We hold a high share in Okinawa, and a large portion of our sales come from there. Our response is to diversify products and price flexibly in restaurants. Mass retail also faces pricing pressure. We will be flexible on price at key times to make purchases easier for consumers. In short, our strategy is designed to ensure we come out ahead whichever way things go. Disposable income in Okinawa is not particularly high. I am therefore more concerned about overall inflation than about the consumption tax cut, and we are taking our response seriously. One example is RTD. We launched Shima Chu at a more affordable price point than competitors, and it became a major hit. We operate on the view that customers want good-quality everyday products at somewhat more reasonable prices.

• Q

  The company plan for the Alcoholic Beverages & Soft Drinks business in 2H implies revenue growth of more than 10% YoY. Should we expect growth to accelerate into January–March? If possible, please explain why 2H revenue will grow so strongly. Which months will contribute most by beverage category, and which new or renewed products are you counting on?

  A

  One major driver is Asahi Breweries products other than Super Dry. We also sold Super Dry last year. The flip side is that the recovery from the system outage, which halted shipments, will contribute significantly YoY. By category, this covers beer excluding Super Dry and other non-beer alcoholic beverages. On our side, Orion-brand cans outside Okinawa will also grow very strongly. In both 3Q and 4Q, the rebound from Asahi Breweries' system outage is one key factor. The second driver is by channel: overseas is performing very well. Channel development in the US and elsewhere is going well, and we expect growth of 120%+ in both 3Q and 4Q. Broadly speaking, these are the two growth drivers. In addition, the IP business is performing exceptionally well in both 1H and 2H, which adds further revenue.

• Q

  I would like to ask about your branding strategy. Conventional wisdom holds that collaboration-based branding can erode a brand's core value. You currently appear to be using collaborations to build awareness. Ultimately, do you intend to consolidate around a standalone Orion brand and make it your main sales driver? Please share your thinking, including what you may lose through collaborations.

  A

  I initially had that same concern, but I have since completely changed my view. US brand GAP has collaborated with Orion in Okinawa. Many Orion x GAP T-shirts are now on display at outlets and other stores. New Era sports products, Billabong and other brands that we regard as highly distinctive are also asking to carry the Orion logo. Customers who liked Billabong or GAP but had little connection to beer have become familiar with the Orion logo. They now want it because it is an icon of Okinawa. Walk down Kokusai Street today and you will see both Orion T-shirts and T-shirts from collaborations with other brands. To answer your question, your concern would be valid if a collaboration diluted the Orion brand. However, our current collaborations are ones in which partners value, respect and come to like the Orion brand. As a result, they create new touchpoints with new customers and also generate revenue. We think this puts us in a very interesting position.

• Q

  I interpret collaborations as having a primary and a secondary party. One could argue that GAP adopted your brand because adding it would enhance the value of the GAP brand. On that view, GAP is the primary party and you are merely secondary. Is it fair to say you ultimately aim for a relationship in which the Orion brand is primary?

  A

  If you frame it as one corporate brand versus another, that is correct. However, Orion is almost synonymous with Okinawa and embodies its image. As you note, partners approach us wanting to use the Orion logo. I believe they do so because they want to capture the atmosphere, image and appeal of Okinawa. A logo reading "Okinawa" or "Ryukyu" might also work. But Orion looks cooler and resonates better, so they ask to use it. In other words, Orion is equated with Okinawa and enhances its image. We therefore see Orion as Okinawa's logo, and we have a model that generates income from it. I think this is a somewhat different positioning from one corporate logo paired with another. We asked people, including young consumers, why they buy Orion T-shirts or collaboration T-shirts with the Orion logo. They said the logo makes the item look better on social media. Posts with it get more likes, so the Orion brand makes the item more photogenic. For our part, we hope partners will carry the Orion brand and that it helps their products stand out.