Heineken NV 2017 Half Year Results Transcript

Heineken
Half Year Results Presentation

31st July 2017
......
Heineken
Jean-François van Boxmeer, CEO and Chairman of the Executive Board
Laurence Debroux, CFO and Member of the Executive Board
Sonya Ghobrial, Director of Investor Relations
Questions From
Edward Mundy, Jefferies International
Carl Walton, UBS
Trevor Stirling, Sanford C Bernstein
Tristan van Strien, Redburn
Fernando Ferreira, Bank of America
Matthew Webb, Macquarie
Olivier Nicolai, Morgan Stanley
Andrew Holland, Societe Generale
Komal Dhillon, JP Morgan
Richard Withagen, Kepler Cheuvreux
Sanjeet Aujla, Credit Suisse

Introduction
Sonya Ghobrial, Director of Investor Relations

Thank you. Good morning everyone and thank you for joining us today for our 2017 half
year results conference call.
As usual I am joined by Jean-François van Boxmeer our CEO and Laurence Debroux our
CFO for today’s call. Following some prepared remarks on the half year results we will
be happy to take your questions. With that I would like to hand the call over to Jean-
François.
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Key Highlights

Thank you Sonya and good morning everyone.
Turning first to slide 3 let me start by saying that our half year 2017 results were strong,
with all four regions contributing to organic volume, revenue and profit growth.
The benefit of our balanced footprint was very clear, enabling us to deliver broad based
growth across the Group. Premium brands outperformed and our innovation agenda
delivered. And all of this was despite challenging economic conditions in some
developing markets, and significant currency pressure.
Revenue grew 5.7% organically with positive volume and revenue per hectolitre growth.
Heineken volume was up 3.9%.
This top line growth combined with a continued focus on costs, delivered operating profit
(beia) growth of 11.8% organically, with margin up 34 basis points.
Diluted EPS (beia) was up 6% mainly driven by organic growth and partially offset by
currency headwinds and to a lesser extent a negative impact from consolidation.
Our full year 2017 expectations remain unchanged.
Turning to slide 4, our results show that Heineken's unique and diversified geographic
footprint is delivering strong balanced growth again in the first half of 2017. There was
positive organic volume, revenue and profit growth from every region. All regions also
showed accelerated volume growth in the second quarter.
Let me start with Africa Middle East and Eastern Europe, where consolidated beer
volume grew by 1.5% organically. Strong growth in Ethiopia and South Africa more than
offset lower volume in Nigeria, where high inflation, a weak consumer environment and
the economic recession continued to weigh on results.
Revenue per hectolitre increased 11.9% mainly due to pricing in Nigeria. Elsewhere in
the region, Egypt was weaker due to increased taxes, rising inflation, and weak tourism.
The DRC remains a difficult market. Ivory Coast, Ethiopia and South Africa are
performing well. Regional operating profit (beia) was up 12.4% on an organic basis, but
negative currency impact remained significant.
In the Americas consolidated beer volume was up 2.8% organically, driven by strong
growth in Mexico which more than offset volume decline in Brazil, Panama and to a
lesser extent the US.
Revenue per hectolitre was up 2.9% organically. High single digit volume growth in
Mexico was due to strong brands, a good innovation agenda, and effective sales
execution in the market. In Brazil volume declined high single digit, due to the weak
macroeconomic climate and tough trading conditions particularly in the value and
mainstream segment.
However, it is important to highlight, that our premium portfolio led by Heineken,

delivered double digit volume growth.
In the US, volume declined slightly, with Heineken up slightly but offset by volume
decline in our Mexican portfolio, which underperformed the category. Overall Americas
delivered strong organic operating profit (beia) growth, up 15.9%.
Asia Pacific volume growth accelerated in the second quarter following a slower Q1,
primarily due to Tet timing. Consolidated beer volume was up 6.3% organically for the
first half. Vietnam and Cambodia delivered double digit volume growth, offsetting
weaker volumes in Indonesia and Malaysia. Volume in China declined given headwinds
and the impact of parallel trade there.
Regional revenue per hectolitre was down 1.2%, adversely impacted by negative brand
mix. In Vietnam volume grew double digit driven by strong performance of the Tiger
brand and effective marketing and sales execution. The region delivered strong organic
profit (beia) growth of 8.8% driven by performance in Vietnam and Cambodia.
In Europe consolidated beer volume was up 1.9%. Growth was driven by our premium
portfolio. Heineken was up 7% thanks to successful innovations, brand investment, and
early success of Heineken 0.0.
Revenue per hectolitre was up 1.9% despite deflationary and off-trade pricing pressure.
Adjusting for accounting changes in the UK, revenue per hectolitre growth would have
been 0.9%.
In the UK, volumes declined low single digit on account of a partial delisting by a large
customer. Our premium beer and cider volume performed well. The Star Pubs and Bars
business delivered good results.
In France volume was up high single digit despite lapping tough comparatives, whilst
Spain grew mid single digit benefiting from an acceleration in off trade. Netherlands saw
low single digit volume growth with Heineken growing mid single digit. Poland volumes
decreased mid single digit in a competitive market. Regional operating profit (beia) was
up 16.1% organically, due to good revenue management, disciplined cost control,
innovation and successful premiumisation.
Turning now to slide 5. In the first half of 2017 Heineken volume was up 3.9%
organically, with growth accelerating in the second quarter. Declines in Asia Pacific, due
to Vietnam and China, were offset by growth in all other regions, particularly in Europe
and Americas.
The brand grew double digit in Brazil, South Africa, Russia, Italy, Mexico, South Korea,
Canada, Romania, and Hungary. A number of other important markets including France,
the Netherlands, and Argentina delivered good growth.
Heineken brand equity was supported again by the successful campaign around the
UEFA Champions League sponsorship, which we recently extended until 2021. We also
saw continued success with the Cities, Product Stories and Music platforms. Our new
partnership with Formula 1 provides an opportunity to access new consumers globally
and allows us to launch a powerful responsible drinking campaign ‘When you drive,
never drink’. We have also used this campaign to successfully promote our Heineken
0.0 variant which we launched in the second quarter. Heineken 0.0 is now available in
16 markets, all in Europe, with promising results to date.
As you know complementing our truly global Heineken brand we have an extensive and
strong portfolio of International brands, with high potential to travel across geographies.
Affligem, Tiger, Krušovice, Tecate and Red Stripe all grew volume double digit, with high
single digit growth for Desperados. Sol Premium was up low single digit whilst Amstel
declined slightly due to weakness in Nigeria and Greece.
We continue to be very excited about cider, which I will talk a little more about shortly.
Turning to slide 6. Innovation is firmly embedded in our strategy and how we think at
Heineken. As I have already mentioned we are pleased with the performance so far of
Heineken 0.0 launched in the first half.
We continue to see significant potential in the low and no alcohol category. These
products directly address the theme of moderation, and are creating new drinking
occasions for our brands. In Europe low and no alcohol volume was up double digit,
although this was offset by volume decline in malt products in Nigeria and Egypt. Total
volume was 6.1 million hectolitres in the first half.
We remain the leader in the cider category, which delivered low single digit volume
growth, and reached a total of 2.3 million hectolitres in the first half. Growth was
particularly strong in South Africa where the recent launch of Strongbow was very
successful. Other countries that contributed to the growth included Vietnam, Poland,
Ireland and the Netherlands. The UK, our largest market, cider declined mid single digit,
notably due to a partial delisting in a modern trade retailer. Excluding the UK, cider
volume would have been up double digit.
Our craft and variety beers continue to perform well. Lagunitas, Mort Subite, Birra
Moretti Regionali, and Żywiec variants all delivered particularly good performance.
These brands are meeting consumers’ needs for authenticity, flavour and heritage. With
the acquisition of the remaining stake in Lagunitas, we were pleased to reinforce our ties
with the Lagunitas brands, and to continue to work with Tony Magee and his team.
We continue to innovate around draught. The SUB, our at home draught beer system, is
now in seven markets and continues to show positive trends. As well as SUB sales
continuing to increase, website traffic, click conversions, and average order size are all
showing encouraging growth. Brewlock, our innovative on premise dispense system also
continues to perform well.
Before handing over to Laurence I would like to spend some time talking about the
recently completed Brasil Kirin acquisition, and the proposed acquisition of Punch in the
UK.
Moving then onto slide 7 for that. In February we announced the acquisition of Kirin’s
operations in Brazil, and the transaction closed at the end of May. This transaction
transforms our existing business across Brazil, extending our footprint and increasing
our scale and platform for further premiumisation.
As you know we have taken the decision to leverage Kirin’s existing route to market, and
we are currently in discussions with the Coca-Cola bottlers.
The combined Heineken Brazil business will be a strong player in premium, with a solid
base in economy and mainstream volumes, as well as in non-alcoholic beverages. As
you see on slide 7 this leaves us well positioned in premium beer with just under 25% of
the premium beer segment. This combines the Heineken and Sol Premium volumes with
Eisenbahn and Baden-Baden.
The total consideration paid to Kirin for the shares was €594m, which is a bit lower than
the €664m in the release due to netting of the proceeds from the sale of the Macacu
brewery.
We expect significant synergies from the transaction; from procurement, optimisation of

the existing brewery footprint and logistics, and through selling, general, and
administrative expenses. The transaction will be margin dilutive by around 40 basis
point in 2017, and is expected to cover its cost of capital in Brazil in approximately five
years.
Turning finally to slide 8 we announced in December the acquisition of Punch A. Given

UK Takeover Panel rules I am still very restricted in how much I can say, but I would like
to make a few comments.
Following a recommended cash offer for Punch Taverns plc by Vine Acquisitions Limited,
we announced a back to back deal with Vine to acquire the pubs in Punch Securitisation
A, as it is called. This securitisation comprises around 1,900 pubs. As you may have
noticed we submitted undertakings in response to the points raised by the CMA, and a
few weeks ago the CMA announced that there are reasonable grounds to believe that our
undertakings, or a modified version of them, may be acceptable to remedy their
competition concerns. Our proposed undertaking relates to the disposal of 30 pubs.
We provided guidance at the time of the transaction that it was expected to be earnings
enhancing in the first full year following acquisition. Earlier this year we said that
expected completion would be by the end of August.
With that I would like to hand you over to Laurence to take you through the detail of the
financial results, over to you Laurence.
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Financial Results

Thank you Jean-François and good morning everyone.
Turning first to slide 9, and as explained by Jean-Francois, organic growth of 5.7% this
first half is the result of a positive momentum in volumes combined with growth 3.4% in
revenue per hectolitre. This does reflect a strong first half, with volume skewed towards
the second quarter helped by Easter timing and some good weather particularly in
Europe.
Operating profit (beia) was up 11.8% organically, reflecting growth in revenues, the
benefit from premiumisation, some phasing in advertising and marketing expenses, and
also cost efficiency.
Operating margin increase reached 34 basis points and actually even more if we exclude
the impact of the accounting adjustment in the UK. A few words on that one. As
explained in February with our annual results, we have adjusted the way our UK
operation accounts for the cost of products bought for resale. More precisely, part of
this cost was previously netted between revenue and raw materials, which was not the
correct accounting treatment.
The consequence of the de-netting is more revenue on one hand and more costs, but no
impact on operating profit, and mechanically, with the same operating profit and more
revenue, you get a negative impact on operating margin. Growth of organic revenue,
revenue per hectolitre and operating margin excluding this impact are all shown in the
footnote of this slide and in the press release.
This will not impact our full year numbers as we proceeded with this adjustment for the
first time at the end of 2016, but adjusting the full year 2016 amounts retrospectively.
And to come back to operating margin growth, on a like for like basis, excluding this it
would have been 41 basis points for the first half.
Moving now to net profit (beia), it reached just over €1bn, up 10.5% organically. So
slightly less growth than in the operating profit, the difference being higher tax in the
half year, largely due to the mix of profits skewed to higher tax countries. This included
no significant further benefit from the refinancing of expensive debt, something that had
provided us with extra leverage over the past few years.
The difference of €165m, between net profit (beia) and reported net profit reported
relates almost entirely this half year to amortisation of acquisition related intangible
assets. As you will remember, in 2016 we had a non-tax deductible impairment charge
of €233m for the DRC, included in reported net profit.
Diluted EPS (beia) of €1.82 6% higher than in 2016. The difference between organic
growth in net profit and the growth in EPS is mainly due to translational currency impact
and to a lesser extent consolidation.
Free operating cash flow, which was up 38% or €205m on last year, can be called
robust. At the end of the first half, our net debt to EBITDA ratio was 2.5 times, in line
with our financial policy.
Slide 10 now provides a bit more on revenue growth. Revenue reached €10.5bn, with
an organic growth of 5.7%. I am going to refer to Jean-Francois’ comments on organic
revenue growth.
For the rest, consolidation change added 1.2% or €121m, mainly driven by the
Americas, with the first consolidation of Brasil Kirin for one month and Lagunitas for two
months.
As expected, the negative impact of currency was material, reducing revenue by €320m
or 3.1%, mainly attributable to the Nigerian naira and to a lesser extent the British
pound, the Mexican peso, the Congolese franc in DRC, and the Egyptian pound.
Turning now to slide 11, operating profit (beia) reached €1.8bn. Consolidation change
was negative on growth by €10m or 0.6%, mainly in Asia Pacific our acquisition last year
in the Philippines.
Currency impact was also negative, reducing operating profit by €92m or 5.3%, with the
Nigerian naira being again by far the most impactful and much smaller impacts from the
Egyptian pound, the British pound, and the Mexican peso.
Excluding consolidation changes and currency impacts, operating profit was up by an

impressive 11.8%, and this indeed merits some more detail on our costs.
First, marketing and advertising expenses, these decreased organically by 0.6% and
resulted in a marketing to revenue ratio of 13.5% compared to 14.1% last year. This
includes some impact of phasing as our marketing and advertising expenses last year
were skewed to the first half, with Euro 2016 for instance.
Still a very healthy ratio and as you know it is a key element in our strategy to put the
right level of resources behind each and every one of our brands, whether global,
international or local.
Now let’s look at other costs. On an organic basis, input costs, which is raw material and
packaging was up 5.8%, and on a per hectolitre basis it is up 3.3%. So taking out the
impact on volume, this increase is the net of savings achieved through our procurement
policies and of significant transactional currency impacts in our key developing markets.
Personnel costs were up 6.2% organically so slightly ahead of sales growth. Overall,
support costs are increasing far less than revenue, which translates our attention to
costs in general with also a number of targeted programmes initiated in key countries.
All in all an organic increase of 11.8% in operating profit achieved despite heavy
transactional currency headwinds in some of our largest emerging markets.
As Jean-François already mentioned, a positive contribution to organic growth of

operating profit coming from all four regions.
Slide 12 now walks us through the development in diluted EPS (beia) over the half year
period. EPS was up 6% with 18 cents coming from organic growth. The impact from
consolidation was 3 cents at EPS level. Again here, currency translation as you can see
in the chart reduced this by a negative impact of 5 cents.
Let’s now have a look at free operating cash flow on slide 13. We have had a robust
cash flow generation, €746m in the half year compared to €541m last year. The
increase was mainly due to stronger cash generation from our operations in the first half
and by a lower level of capital expenditure. The cash flow generated from the change in
working capital as you see from the slide was comparable to last year.
Capex amounted to €615m, representing 5.9% of revenues, so lower than last year.
Capex investment this year is expected to be skewed to developing markets, investing
for future growth and in particular in markets such as Mexico, Vietnam, Ethiopia,
Cambodia, Haiti and Brazil. And for some of those projects capex will accelerate in the
second half, which is why we have retained our guidance of just below €2bn for the year.
Our net debt to EBITDA a ratio of 2.5 times at the end of the first half compared to 2.4
times in 2016, is in line again with our financial policy.
So strong first half and teams fully motivated of course and geared to continue to please
our consumer and serve our customer at our best.
We continue to expect volatile economic conditions, with consequences on emerging

market currencies.
Actually if you look at the translational update that we have given for the full year
assuming spot rates as they were on the 25th July are maintained for the rest of the
year, so not a guidance, but a pure calculation, you see a much higher impact at
operating and net profit level than the one calculated at the time of our Q1. And that is
without a devaluation of the naira of course. So pretty much in line with our guidance
from the beginning of the year.
Given this, and also the recent strengthening of the euro, we continue to assume that
headwinds from currencies will be indeed in 2017 comparable to what we had to face in
2016.
Bringing all this together, we expect further organic revenue and in profit. And,
excluding major unforeseen macroeconomic and political developments, as well as the
impact of Brasil Kirin, Lagunitas and the proposed Punch acquisition, we also expect
continued margin expansion in line with the medium term guidance of a year on year
improvement of around 40 basis points.
Just quickly touching on some of the more technical financial guidance for 2017 - we
expect an average interest rate broadly in line with 2016. As I have said to you before,
having now completed most of the refinancing of our old more expensive debt there is
no more positive leverage to be expected from this.
As for the effective tax rate, this should also be broadly in line with 2016.
And finally capex again in 2017 should be slightly below €2bn.
With that I would like to hand back to the operator, and we will be happy to take your
questions. Operator.
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Question and Answer
Telephone Operator
Thank you. If you would like to ask a question please signal by pressing *1 on your
telephone keypad. If you are using a speaker phone, please make sure your mute
function is switched off to allow your signal to reach our equipment. Again, please press
*1 to ask a question.
And we will take our first question from Edward Mundy from Jefferies. Please go ahead.
..............................................................

Hi, morning everyone, I've got three questions please. The first is on other financial
results, I was wondering if you could give a little bit of colour on the outlook for other
financial results into the second half?
The second is on Heineken 0.0, early days but as you say in the press release it looks
very promising. Are you able to comment on whether you're seeing any cannibalisation
at all on your existing beer volumes?
And the third question, a pretty good improvement in Africa, do you expect this to
continue into the second half and beyond and how quickly do you think the business can
recover back to peak margins of 20% or so in Africa?
..............................................................

Okay, good morning Ed, I'll start with the first question. On financial results I think the
colour we're giving for H2 is to tell you that in light of the good performance of H1 and
the expected volatility of emerging currency we're maintaining our guidance for full year.
So that would be, I would say, the colour we're giving you on H2.
What you can see is the performance of our market for H1 and you also know what kind
of comparable we're up against in H2 depending on the region. For instance in Vietnam,
it's a pretty high comparable because we had early TET as you remember, so the Q4 was
pretty strong, it's more moderate in all the region, so that is what you can derive from
following our result quarter after quarter. But definitely we feel confident delivering the
guidance for full year.
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As to 0.0 no cannibalisation, that is not the issue, it's about going after new occasion of
consumption and one has to realise it's early days. It's a good start 0.0, but it's not
really very, very big volumes yet.
Africa margins, it's hoping for - Africa, Middle East and Eastern Europe is a very big
region and knows also a lot of contrast, so putting all together in one region would not
do justice to its diversity. What I can say is that we see slight improvement in Nigeria,
but the macroeconomic trends will continue to be adverse in countries like Nigeria, in a
country like the DRC, in Egypt and also in Russia.
On the other hand - in a contrasting way, the business is on fire in countries like
Ethiopia, or Côte d'Ivoire where we've just started a year ago and we are gaining share
and doing an excellent development in the Republic of South Africa. So it's contrasted,
but overall the region is doing slightly better, but one has to recognise that in that vast
region we still have a number of economies that have to cope with headwinds and they
won't go over just as of tomorrow.
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Thank you, sorry Laurence, just to follow up on my first question; I probably didn’t make
it clear enough. The question was more around the other net finance income or
expenses which was I think €68m in the first half, I know you've given some pretty good
guidance on the overall Group coupon for the year and also the tax rate for the year,
where there are some phasing issues between H1 and H2, but were you able to
comment a little bit on the other net finance income or expenses of €68m and the
outlook for the second half?
..............................................................

Oh sorry Ed, so what you see in the other net financing expenses and obviously now
we've talk a new to that one, which is basically when emerging countries have payables
in hard currencies and their currency is devaluating then you get a higher expense on
that line which is below operating profit.
You see a little bit of a difference mix this year, this half year than you had last year,
with definitely Nigeria being less impacting than the rest. But you see an impact on the
DRC point is coming up here. So we're not giving you guidance for the second half
because it really depends what individual currencies are going to be doing on whether
there will be a devaluation or not in Nigeria. It is quite difficult to anticipate, but you
should not expect it to fade away.
..............................................................

Thank you.
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Telephone Operator
We will take our next question from Carl Walton from UBS. Please go ahead.
..............................................................
Carl Walton, UBS

Thank you for the questions. Again on the Africa region just on Nigeria in terms of - I
mean the profit growth you flagged as a key driver and obviously pricing and cost
cutting efforts into that. Can you remind us where you are now on local sourcing of raw
materials there?
And on the naira devaluation, just to confirm you are still expecting that, if so when, if
you have any view on how that's changed for this year?
And then switching to South Africa, post the JV unwind obviously a very strong run rate
of growth so far, what is your expected run rate of growth into the medium term? And I
think last time you said you didn't want to commit to necessarily reaching profitability or
breakeven in 2017, is that still the case and you can say you would expect profitability in
2018 from this stage? Thank you.
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So I'll take the first one on Nigeria. As you know we have a commitment to be sourcing
60% of our raw agricultural material from local sources by 2020. I can tell you that
we're very close to that already in Nigeria. And actually on another type of supply which
is packaging, we are higher than this 60% already in the country. So we are
progressing well here. And yes, this is definitely one part of the mitigation.
One thing that we've done since the beginning of the crisis on the naira is make sure
that we need as little hard currency as possible by minimising import. And I must say
the local team has done a great job at significantly decreasing our needs in the country.
Then of course if you are going to sell cans, then you are dependent on the aluminium
market which is an international market in dollars, so even if you source this nationally it
is quite international anyway. But that does help and that does help in the profitability
of the market.
This being said, a lot of it is due to the very healthy and necessary price increase that we
had to take on several occasions last year and the global impact you feel this year.
..............................................................

Yes, to South Africa indeed the business is doing well both in beer, premium end, but
also in cider which is also growing quite fast, the Strong Bow brand is developing really
well. Most probably we did in the statement that we're working towards a better
utilisation of our capacity in South Africa. And as you can imagine, if you use your
capacities well you start to have better returns.
But we are not going to give precise guidance of when and with margins and all these
details by geography. You have to realise that in South Africa we are the challenger in
the market, we have a relatively modest market share and we are more of a niche
operator. And we focus more on the premium side of the market because the market is
big enough to do so. But you will also understand why we are not giving too much
details about our operations in South Africa.
..............................................................

And coming back to your question on the timing of devaluation of the naira, of course no
idea. But I would say the one comforting thing and it's little comfort, but it's a bit less
difficult to get hard currency, so liquidity is a bit better, definitely better than just before
the first devaluation in June 2016. And the gap between the official rate and the market
rate is nowhere as big as it was at the time.
So when we say we see small signs of improving in the underlying situation in Nigeria
that is what we see. And I call that small signs because we all hope it's predictive of the
situation becoming better, but you still have high inflation and you still have a country in
recession over there and still low output in terms of oil. So the underlying issues of
Nigeria have not been solved yet.
..............................................................
Carl Walton, UBS

Great thank you very much.
..............................................................
Telephone Operator
And our next question is from Trevor Sterling from Bernstein. Please go ahead.
..............................................................

Good morning Laurence and Jean-François, two questions from my side please. The first
one relating to Kirin Brasil, Jean-François I appreciate you're limited in what you can say
because negotiations are underway with the Coke bottlers in Brazil, but once you have
reached agreement presumably there's still a pretty massive operational challenge
integrating those two distribution platforms, so any colour you are able to give would be
great?
And the same thing for Laurence, Laurence there was a bit of a step up in the head office
charges, is that the new norm or should we be expecting the run rate now more around
50 rather than the 20 that it was in the prior year?
......................................................... .....

I'll start then with Kirin Brasil, yes you're right I cannot say we are in the middle of such
an integration it's only the first month. As we have said we have declared that we would
rather integrate our business around the distribution platform dedicated to beer, which
the Kirin Brasil operation is going to be the backbone of. And we have the difficult task
to unwind with the Coca-Cola Bottler's distribution system.
Now it's out there in the public that we're busy doing that, but on the other hand it is
also not the intention to give details about these negotiations as they go on.
It's a huge task to integrate that, but rest assured that our teams are busy with it. A
company like Heineken has lived from integration, has grown through integrations, so
we are up and running doing that. But you're absolutely right to point out that I would
say the biggest challenge in the whole operation will be the lift and shift of the
distribution from one focal point to another. And we will work for an as smooth as
possible transition because it has to work for us, but it has also to work for the Coca-
Cola Bottlers in a certain way and that is what we are working for.
..............................................................

And coming to your question on head office, the main difference is a step up in some
investment behind our brands and in particular the F1 platform here. You know the
head office is made of many different things, so there is also a bit of one offs here and
there, but that is really the main explanation. And without any more details you can
actually multiply it more or less by two to get to full year in your models.
..............................................................

Okay, thank you very much Laurence and Jean-François.
..............................................................

You're welcome.
..............................................................
Telephone Operator
Our next question is from Tristen van Strien from Redburn. Please go ahead.
..............................................................

Good morning guys, two questions if I may. One just on the Netherlands, you're doing a
deal with Sligro and I'm just curious to find out are you totally getting out of wholesale,
a bit of colour on that one?
And then the second bit on South Africa, it appears that the consumers is under pressure
there if you look at the retail data and you look at the country is basically almost in a
recession and yet beer seems to continue to grow, it's the fastest growth rate for over a
decade. So maybe a bit of consumer insight on that market, what is driving the beer
consumption from your perspective? Thank you.
......................................................... .....

Tristan, for the Netherlands Sligro it is not heralding that we are stepping out of
wholesale activities all together across Europe or where we do that. As I always said the
wholesale activities or vertical integration activities are looked after market by market
and as circumstances in landscape and competition situations and demand can change
we can change our point of view. And you will remember that we have divested our
wholesale business and sold it in Poland in the previous year.
The Sligro deal is announced, it's currently being worked out, but basically it's lifting out
the physical distribution of all our portfolio of beers and non-beer products, so the
current assortment that we are bringing to the market of non-alcoholic brands, and
juices, and waters, and wines, and spirits, to the on-trade and exclusively to the on-
trade to Sligro.
Sligro has been growing and thriving in the Dutch market by being the reference
wholesaler for food. And the landscape of on-trade has changed in the Netherlands over
the last, let's say two decades, from essentially beer outlets to more food outlets where
beer plays a role, but doesn't play any more the dominant role. And if you take that
evolving landscape into account for us the winning combination is to work together.
We will continue to do ourselves the direct deliveries of what we call tanker beers, so for
big outlets to get their beer delivered with tanker systems that are refilled. That is the
distribution feature that we will keep. And for the rest Sligro will carry our products as a
logistical provider.
But we will keep commercial contacts with the outlets, as well as that the billing will go
through Heineken going forward. That is how we have structured more or less the deal.
It's now worked out for an implementation in the coming months, but we think this is a
win-win situation for us going forward in the Netherlands.
As to South Africa - do you want me to do it or you want to do it?
..............................................................

So definitely not the easiest economic situation in South Africa, but we are extremely
happy about the development of our volumes and particularly on the Heineken brand.
Of course in that kind of case of recession what you see is you have limited possibility to
take pricing, but we've been really going for activation of the brand. We've been playing
the premiumisation game and actually our penetration is really up, it's really up in the
country.
..............................................................

Just to follow up on the Netherlands, obviously you have some strong mid single digit
with the Heineken brand, which is kind of a recovery of that, is that very on or off
premise driven, or what's driving that?
..............................................................

Both.
..............................................................

Thanks.
..............................................................
Telephone Operator
Our next question is from Fernando Ferreira, from Bank of America. Please go ahead.
..............................................................

Morning Jean-François and Laurence, thanks for the questions. I have a few questions
on Brazil please. I appreciate that you're still in the middle of the discussions with the
Coke Bottlers, but if you could please comment on how much are you planning to
support the Kirin distributors after this change, given that most of their distribution is
done by third party distributors, right?
And then on timing FEMSA announced the termination date for the contract should be
October 31st, which seems a bit early given the complexity of this change. If you could
comment on that as well?
And then lastly your portfolio will still miss a mainstream brand in Brazil, so I wanted to
understand if the plan will be to push Amstel to become your key mainstream brand
there or the plan is to improve either the Kirin or the Schin brands? Thank you.
..............................................................

I try to answer - on the first one the distribution, basically we want to articulate the
system which is geared to beer, where the attention of the last miles, which is
distribution, order taking and merchandising is focused to a portfolio of beer products.
One has to understand that if you would add all the range of the Coca-Cola Company
that is currently with the Coke Bottlers, plus the range of Heineken Brazil, plus the range
of Kirin Brazil, it starts to be a portfolio which is so large that it's going to be difficult to
create the kind of focus we demand on the beer products to boost our competitive
position in Brazil. That is the main reason why strategically we think that the moment
has come to concentrate on the beer dedicated system or beer - let's say a distribution
system where beer is the main item and not a secondary item. That is what you have to
do.
Now the way going forward and the balance between direct distribution, how we work
with Coke Bottlers and how we work with independent distributors that is exactly what
we have to do in the coming months. The sooner the better, because the enemy is
uncertainty in all operations when you do integration. We have some experience with
that.
Now this leads me to your question about the date, the date is set rather earlier than
later to keep the pressure on all teams to work to a solution that works for everybody.
Uncertainty is not good for us but it's also not good for the Coke bottlers so therefore
that date has been kind of put forward in order for the teams to advance the course.
For the rest these are commercial negotiations, and so I will not make any comment
further on these commercial negotiations which are currently taking place.
Finally your last question is about the brands, I would argue that Schin is a mainstream
brand, it's perhaps a regional mainstream brand; it doesn't have the national coverage
of our larger competitor obviously. It might be a little bit less good in pricing than the
mainstream brands of the competitors, but nevertheless it remains in essence a brand
that in its character is mainstream and that we have to build on and that is what we are
committed to.
But also what is the big driver of the business case is that we can also develop our
premium end, not only the brands we acquired, but also the brands we have already.
And thanks to the Kirin production and distribution network we can roll it out in regions
where previously we were doing it to a lesser degree, or at least with a lot less
profitability than we will be able to do it with the Kirin infrastructure, both in brewing and
distribution.
..............................................................
Understood, thanks Jean-François.
..............................................................

You're welcome.
..............................................................
Telephone Operator
And we will take our next question from Matthew Webb from Macquarie. Please go
ahead.
..............................................................

Thanks very much, two questions please. Firstly, on the marketing and selling
expenses, I appreciate you don't guide on that line, but just in terms of the right way to
think about it. I mean it sounds like there's no change in your fundamental approach
there, so should we therefore expect the full year spend as a percentage of sales to be
broadly similar to last year or even slightly higher, and therefore a much higher level of
spend on the second half? Or do you consider the spend that you put behind the Euro
2016 last year to be sort of exceptional and therefore maybe look at the spend in the
second half being more similar to last year? That's my first question.
And then the second question is on Brazil, I was wondering and I appreciate it's early
days, but have you been in control of the Kirin asset for long enough to come to any
view on the suitability of their pricing policy and perhaps even make some changes to
that and obviously behind that is the very heavy promotional activity that they are
widely seen as having engaged in over the last year or so? Thank you.
..............................................................

Okay, so I'll take your first question Matthew on marketing and advertising expenses.
Again there is phasing in there, last year was really skewed towards the first half and we
will not guide for the full year. So we'll take that along in our guidance of operating
margin. So I'm not going to give more granularity on that one.
Again, if you look at percentage to revenue we support the brand, you compared to
previous years and actually two or three years back and then we actually put behind the
brand what needs to be put depending on also the moment in the year and events and
so that does fluctuate.
..............................................................

And I think for Brazil you will allow me on pricing policy to say absolutely nothing.
..............................................................
Fair enough, it was only if there was something that had already taken place that was
out there in the market that I might have missed, I appreciate you're not going to give
any more. Fair enough. Thank you.
..............................................................
Telephone Operator
And our next question is from Olivier Nicolai, from Morgan Stanley. Please go ahead.
..............................................................

Good morning Jean-François and Laurence, three questions please. First of all in
Europe, what's driving the strong margin progression you have there, is there some
marketing phasing too?
Second question about France, you're up high single digit against some very tough
comps, is the market really strong or are you just gaining share in the on and off trade
as well there?
And the last question about the US, could you just give us a bit more detail about your
performance of Dos Equis and Tecate in the US and how do you explain the relatively
weakness of those two brands against the other Mexican imports? Thank you.

So I’ll take the first one on Europe margin and yes definitely when we talked about
phasing in marketing and advertising the main example I gave you is definitely Euro
2016. So in a country like France for instance it had a significant impact, but not only on
France. But definitely that played a role for the margin improvement in Europe.
I would say also good weather that plays on the top line. And also what you see in
Europe is the result of a number of programmes I would say not also cost because cost
that we reinvest behind the product for our key programme but significant programme
that has been initiated in a number of key countries whether it’s France or Spain for
instance but other countries as well. So that plays a role into that profitability.
And then all in all what you see if you look for instance our revenue per hectolitre you
see we don’t get that much pricing in Europe, that’s very clear. But mix is working and
mix means premiumisation and means also something that is skewed towards higher
margins. So in markets that are developing better than in past years that does hold
back well the operating margin growth.
..............................................................

You did France?
..............................................................

I gave France as an example.
..............................................................

Very good. And so it remains the US, yes the performance it increased, quarter two was
already better than quarter one, we had a very weak one. Tecate Light is still growing
and so the whole franchise of Tecate is Tecate Light plus the Regular so we’re still
optimistic. And then we have to fine tune also, a big part of our business is in California
with Tecate and we have to gear up with the pack side, we have to change the focus on
the pack side where promotion goes to have better distribution.
So we had a lack lustre performance and we are addressing that in America with our
Mexican brand but we stay tuned to make Tecate grow in the US.
..............................................................

Thank you very much.
..............................................................
Telephone Operator
And we will take our next question from Andrew Holland from Soc Gen. Please go
ahead?
..............................................................

Hi, can I just ask you, you refer in the statement to your price increase in Nigeria at the
end of last year, have you had any price increases since then and do you expect to get
them if you haven’t yet had any, when might we expect to see further price increases in
Nigeria?
..............................................................

So yes we’ve taken most of the pricing last year and you see the cumulative effect of
this pricing above 20%. We’ve taken a bigger pricing in this first half, I would say far
less than last year to date.
..............................................................

And if I can add Andrew pricing is trailing very much what the currency exchange is
doing so we have to recognise that. And the inflation you have in Nigeria is essentially
currency driven, that is what it is, it’s not because you have an overheated economy or
cheap credit, it is just devaluation of the naira which drives prices increases. And trying
to keep our business afloat because in Nigeria the naira in the business is progressing
quite nicely but that doesn’t mean a lot, we have to fight currency devaluation and that
is the most difficult. And we can do that only in steep and irregular incremental steps
rather than in regular smaller steps in that country due to the way that the foreign
exchange market is organised if that makes sense?
..............................................................
It does, so you might be aiming for a similar level of price increases you got last year so
in excess of 20%?
..............................................................

Again it’s very depending on how the naira evolves how the foreign exchange does and
you have you wait for these things to evolve when you take your price increases. And
we live also in the competitive market over there so we have to take that also into
account.
..............................................................

And to complement on that the whole market took some price increase in July also after
the first half.
..............................................................

Okay thank you.
..............................................................
Telephone Operator
We will take our next question from Komal Dhillon from JP Morgan, please go ahead.
..............................................................

Hi good morning, just two from me please. The first one on Lagunitas I mean it looks
like you acquired the remaining 50% for around €200m or €300m, it seems a bit low
relative to the over €500m spend in 2015. So could you comment on why this is the
case?
And then secondly on Brazil I mean your comments on returns from the Kirin Brasil
acquisition you seem to imply very strong synergies of around the high teens of acquired
sales. So can we assume this is backend loaded given you talked about previously the
immediate challenges in integrating the distribution network? Thank you.
..............................................................

So I’m going to start with your Lagunitas questions. Well definitely it’s part of the global
negotiation you know and you have premium - control premium playing also in both
cases. So it yes it’s a bit lower for the second 50% than for the first 50%.
What is important is that we felt it was the right time; IPA is still growing and within IPA
Lagunitas is growing high single digits to double digits in the US which is quite an
exception in the craft beer market right now. We feel by removing the complexity of the
JV at this moment we can actually strengthen our links and give a lot to the Lagunitas
brand faster on international markets and that’s what we’ve been looking for, more than
a price that is a bit lower or a bit higher than last time.
Your second question was on synergies in Brazil. Definitely we expect synergies to be

significant and to be concentrated on - top line synergies of course being able not only to
have a full portfolio, to play with a full portfolio and it’s a much stronger footprint in
Brazil. But also to accelerate premiumisation we were able to bring Heineken to a two
million hectolitre brands in Brazil, but we felt that there was a little bit of a ceiling to that
if we didn’t have more access to this very vast country which is Brazil, that is going to be
the case.
There are also going to be a number of cost synergies coming from procurement
policies, coming from supply chain, we have five breweries, it’s a very good network,
high quality of 11 breweries that we are acquiring so we are optimising our global
footprint and of course our DNA.
Not particularly back ended loaded, we just close the transaction, it’s only one month of
consultation in the first half. And then of course all the teams are working now on
portfolio strategy and on implementing the synergies and route to market is a significant
part of that but I would say not all of this at the same time.
..............................................................

Thank you. Just a follow up on the cost synergies in Brazil is that right in terms of high
teens of sales?
..............................................................

We’re not going to give any indication of that, we definitely feel that there is a lot of
potential in Brazil. And the main reason why we go there is because it’s a great market,
number three beer market in the world, potential to grow, potential to premiumise far
more than what it is right now. And definitely what we’d say in the press realise is that
the transaction is expected to repay its cost of capital within five years. So that’s the
kind of indication we also gave at the time of our previous acquisitions and we’re going
to leave it there.
..............................................................

Thank you very much.
..............................................................
Telephone Operator
We will take our next question from Richard Withagen from Kepler Cheuvreux. Please go
ahead.
..............................................................

Good morning, two questions for me please. First of all in Mexico can you give an
update on where you stand with the Heineken brand currently, have you rolled it out
everywhere you were active or how is the distribution of the Heineken brand in the big
cities?
And then the second question is to come back on Heineken 0.0, appreciating as you said
it is early days but can you say whether 0.0 attracts new types of consumers to the
brand and which one would that be? And also how you roll it out in other regions in the
next 12 months?
..............................................................

I’ll start with 0.0, as I said it’s mainly due to going for new occasions where normally
you would not drink alcoholic beer and it’s very much a free choice, I think about the
lunch occasion, or just after sport, or when you have to drive.
We learned very much from Spain where 0.0 beer was introduced decades ago because
Spain has a tapas culture, people go out and they eat tapas after work with their
colleagues and then they have to drive their car home. And as the Spanish authorities
were having a very strict policy on don’t drink and drive people switched quite easily to
non-alcoholic beer because let’s say the bitter taste of beer goes very well with those
tapas, it’s as easy as that. And you can think about these types of occasions in other
countries too.
It is not only for Heineken but we do it with Heineken because Heineken being our
flagship brand it also signals to the entire Heineken Group that going into and promoting
more non-alcoholic products and variants of our existing brands is a good business case.
It is premium and it opens market segment where we are not with alcoholic beer. And
to show and lead by example we put our money where our mouth is and we have
launched Heineken 0.0 for that.
But again it’s early days, it had a good start, we received a lot of good critique about the
taste essentially and that is what matters and we’ll see how it evolves. But we think
there are a lot of new drinking opportunities to sell it through.
..............................................................

Heineken brand in Mexico, so as you know premium is only about 5% of the total market
in Mexico, what we are seeing for Heineken brand and not only seeing because we’re
working hard for that is very, very strong growth so strong acceleration in this first half,
strong double digit growth of the Heineken brand. Of course because it is not a
completely developing a premium market yet you will see it concentrated in larger cities
and where premium brands get consumed. So there is still a large potential for
deployment of the Heineken brand and it’s actually going quite fast.
..............................................................

And we don’t want by design a penetration rate which is to be compared with
mainstream brands, that would be wrong. So it’s a journey of a decade, of increasing
distribution if you will. And if you want to build an aspirational brand you have to have a
pricing point which is affordable but yet making clearly the statement that it is premium,
that’s how also you have to look at competition in Mexico.
The second thing is that your brand image should be aspirational, people should engage
with your brand in a way that they are willing to pay that extra for your brand.
And finally you should not go into a full penetration in the beginning because by making
it too widely available you also diminish the premium so that is the gradation in which
you have to operate.
And so it start with seeding and then accelerating and then going to something which is,
let me put it this way, Brazil is already years ahead of where Mexico is with the Heineken
brand. So we’re at different stages of maturity with the Heineken brand in different
countries, Mexico is only at the beginning of the curve and now accelerating.
..............................................................

Thank you.
..............................................................
Telephone Operator
And we will take our last question from Sanjeet Aujla from Credit Suisse.
..............................................................

Hi, most of my questions have been asked but just a couple. Firstly in Europe it’s the
fourth consecutive year of volume growth now, how do you see the outlook for per
capita consumption in some of those markets, do you think given the demographics we
can get to peak levels?
And then just a couple of follow ups just on Kirin, can you just confirm what cost per
capital assumption you’re using. And also what are the plans for the soft drink business
is that core to your operations there? Thanks.
..............................................................

I get let Laurence time to prepare for your questions about Kirin and I will take the easy
one on Europe.
There are two elements in Europe; the market has matured essentially because you
don’t have steep population growth any more. The phenomenon of the baby boomers
post war created a reservoir of beer drinkers for the 1970s and 1980s which was huge.
And at the same time the generation X and Y, which followed the baby boomers were 15
to 20% less numerous.
So if you look at demographic curves they were declining. So the beer market declined
essentially because of demographics. And the intake of beer diminished with age. So
the peak of your drinking beer is your legal drinking age until you’re 35 and then it kind
of slows down until you’re 50 very quietly. And when you cross the 50s it suddenly
drops down because it seems that your liver function is doing a bit less so you have to
accommodate for that.
But those are just physics and when you look at these big numbers, well that’s led the
whole beer market in Europe to decline steeply over the last 10 to 15 years. We reckon
that all baby boomers now crossed the 50s, so they are marginal beer drinkers today.
The good news is that the X, the Y, the millennials they are in balance, so there is not
any more a steep population decrease to be expected in the future.
Now there are some differences, some countries are demographically more dynamic like
the Netherlands or the UK and there are some counties which are demographically not
dynamic at all like Germany or Italy. So it’s not that Europe fits one picture. But overall
it’s a country which benefited a decade ago still or 15 years ago from the peak of the
baby boomer consumption and we have to fade that out.
Now there is a second phenomenon in Europe going on, it is the consumption of alcoholic
beverage as a whole. If you would take the absolute, you would take it as a pure alcohol
intake has also diminished quite a bit, it is has been measured in Western Europe for a
long way and I think it went down more than 25% over the last 30 years per capita so
people drink less alcohol. For all good reasons, you don’t drink at lunch any more, you
don’t drink when you drive any more and you are more health conscious. This is all
good news for society but it has a business consequence.
I think we have digested that and we will continue to digest that. And that’s also the
reason why we invest a little more into non-alcoholic and low alcoholic variants to offer
the choice to our consumers. But if you look at the whole of Europe that has been the
forces at play.
And the final leg of it is competition; you compete with other drinks alcoholic and non-
alcoholic. The beer category over the last let’s say few decades has been very much
focusing to big brands, lager beer you know kind of gregarious marketing and that was
very successful. Today people want choice and the good news is that through the
movement of craft brewing and us following suit and offering much more diversity in
taste as we did before. We make people rediscover the richness and the variety of the
taste that beer can offer when you use different yeasts, different hops and different
brewing and fermentation processes.
And that leads if you will to stabilisation of the demand on the one hand due to
demographics which tend to stabilise and us as brewers doing a better job to make our
category more attractive. And that is why I think that even if Europe is a mature market
and you do not have to expect a category growth which will be explosive, obviously you
can still engineer for some positive momentum in the years ahead.
..............................................................

The work of Brazil at the time …
..............................................................

I left you a lot of time to think about it.
..............................................................

I’ve had a lot of time to think about Brazil in the past few months. So at the time of
studying the acquisition we calculated that 12.5%, now depending on the assumption
will take it’s closer to 12% today but yes you can say 12.5%.
..............................................................

And soft drinks in Brazil, the soft drinks business?
..............................................................

We reserve our response. It’s very much a regional player one has to reckon. But we
reserve very much our response of how we are going to develop that going forward or
not. It’s part of the considerations that now we are busy with integration and we are
getting traction with Kirin and which point of view we will take on that.
..............................................................

Very good. Thanks.
..............................................................
Telephone Operator
If there are no further questions I will hand back to the speakers for any closing or
additional remarks.
..............................................................

Well thank you operator and thank you all of you for joining us this morning and having
the comments on our strong growth in the first half of 2017. And of course as ever if
you have further queries please contact the investor relation team and Sonya Ghobrial,
stands by to take your questions on the phone. Thank you all and have a good day,
bye-bye.
..............................................................

Thank you goodbye.
..............................................................
END
DISCLAIMER
This transcription has been derived from a recording of the event. Every
possible effort has been made to transcribe this event accurately; however,
neither World Television nor the applicable company shall be liable for any
inaccuracies, errors or omissions.
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Heineken

Half Year Results Presentation

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Laurence Debroux, CFO and Member of the Executive Board

Sonya Ghobrial, Director of Investor Relations

Edward Mundy, Jefferies International

Carl Walton, UBS

Trevor Stirling, Sanford C Bernstein

Tristan van Strien, Redburn

Fernando Ferreira, Bank of America

Matthew Webb, Macquarie

Olivier Nicolai, Morgan Stanley

Andrew Holland, Societe Generale

Komal Dhillon, JP Morgan

Richard Withagen, Kepler Cheuvreux

Sanjeet Aujla, Credit Suisse

Sonya Ghobrial, Director of Investor Relations

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Our full year 2017 expectations remain unchanged.

However, it is important to highlight, that our premium portfolio led by Heineken,

We expect significant synergies from the transaction; from procurement, optimisation of

Turning finally to slide 8 we announced in December the acquisition of Punch A. Given

Laurence Debroux, CFO and Member of the Executive Board

Excluding consolidation changes and currency impacts, operating profit was up by an

As Jean-François already mentioned, a positive contribution to organic growth of

We continue to expect volatile economic conditions, with consequences on emerging

And finally capex again in 2017 should be slightly below €2bn.

Question and Answer

Edward Mundy, Jefferies International

Laurence Debroux, CFO and Member of the Executive Board

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Edward Mundy, Jefferies International

Laurence Debroux, CFO and Member of the Executive Board

Edward Mundy, Jefferies International

Carl Walton, UBS

Laurence Debroux, CFO and Member of the Executive Board

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Laurence Debroux, CFO and Member of the Executive Board

Carl Walton, UBS

Trevor Stirling, Sanford C Bernstein

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Laurence Debroux, CFO and Member of the Executive Board

Trevor Stirling, Sanford C Bernstein

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Tristan van Strien, Redburn

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

As to South Africa - do you want me to do it or you want to do it?

Laurence Debroux, CFO and Member of the Executive Board

Tristan van Strien, Redburn

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Tristan van Strien, Redburn

Fernando Ferreira, Bank of America

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Matthew Webb, Macquarie

Laurence Debroux, CFO and Member of the Executive Board

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Olivier Nicolai, Morgan Stanley

Laurence Debroux, CFO and Member of the Executive Board

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Laurence Debroux, CFO and Member of the Executive Board

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Olivier Nicolai, Morgan Stanley