Heineken's HEINY CEO Jean François Van Boxmeer on Full Year 2019 Results

Thank you, Frederico, and good morning everyone. I know you might have some questions about the press release of yesterday, but for now I'd like to concentrate on our full year 2019 earnings results. Starting immediately on slide two, we delivered another year of superior top-line growth with continued strong performance in the second half. Organic net revenue grew 5.6%, growth was well balanced with beer volume up 3.1% and net revenue per hectoliter up 3.3% due to robust pricing and premiumization in all regions. The Heineken brand drove accelerated 28.3%, the best performance in a decade. The growth was across many geographies with more than 40 markets delivering double-digit growth. We closed the year with operating profit growth of 3.9% and an operating profit margin of 16.8%, down 12 bps in a context of increased input costs. We have continued working on the efficiency of our operations while steadily investing behind our brands, our sustainability agenda, and our digital transformation. Net profit increased 4.3% organically, slightly ahead of operating profit, as lower financing costs partially offset higher taxes. Diluted EPS was 4.38 euro per share, an increase of 5.5% driven by net profit and a positive benefit from currency translation. Looking ahead to 2020, barring major negative macroeconomic and political developments, we expect our operating profit to grow by mid-single digit on an organic basis. Now let me turn to slide three, where you can see an overview of our performance with organic net revenue growth in all regions and double-digit growth in Asia-Pacific. Price mix on a constant geographic basis was up 3.4% driven by share increases and premiumization across all regions. Starting with Africa and Middle East and Eastern Europe, consolidated beer volume grew 4.6% organically and price mix was up 2.9% on a constant geographic basis. The premium portfolio increased double-digit with strong performance of Russia, South Africa, Nigeria, and Ethiopia. Organic net revenue growth was up 8.9% with Nigeria flat despite an increase in excise duties. Regional operating profit was stable as the growth in South Africa, Russia, DRC, Egypt, and Ethiopia was offset by declines in Nigeria and Ivory Coast. In the Americas, consolidated beer volume was up 2.6% organically following a strong fourth quarter with Spain 2% growth. Price mix was strong at 7.1% mainly driven by Brazil with growth in the mid-teens due to premiumization and pricing. In Mexico, pricing was ahead of inflation and beer volume grew low single-digit with double-digit growth of the premium portfolio led by Heineken, the launch of Heineken 0.0, and the successful rollout of Amstel Ultra. The impact of the actual contract renewal continued in line with our expectations and additional locations have begun operating under the new terms from January 2020. In Brazil, the Heineken brand, Amstel, and Devassa grew strong double-digit while the economy portfolio declined high single-digit following two price increases in the year. In the US, beer volume declined mid-single digit, the Heineken brand was slightly down including the benefit from the introduction of Heineken 0.0. Operating profit for the Americas was up 4.6% organically with growth in Mexico and Brazil partially offset by the US. In Asia-Pacific, consolidated beer volume grew 11.8% with double-digit growth in Vietnam, Cambodia, Myanmar, Korea, and Japan. Price mix was up 0.8% on a constant geographic basis. In Vietnam, we grew strongly on the back of favorable beer market conditions and our portfolio expansion strategy driven by Tiger, Larue, and Heineken supplemented by the launch of Heineken Silver. The region delivered organic operating profit growth of 12.1% driven by Vietnam and Cambodia. In Europe, consolidated beer volume was marginally lower on an organic basis with the region back to growth in the second half. The premium and low/no alcohol portfolios grew mid-single digit with Heineken 0.0 growing mid-double digit. Price mix was at 1.8% on a constant geographic basis driven by the growth of Heineken, Desperados, Villemarette, local premium brands, and craft. In the UK, beer volume increased low single-digit driven by the premium portfolio while cider declined high single-digit, partly due to the challenging comparable of last year when we had great weather and the football World Cup. In France, beer volume declined slightly but outperformed the market driven by the growth of our craft and premium portfolio. In Italy, beer volume was mid-single digit driven by Heineken and Messina. Spain declined slightly with our craft and cider portfolios growing double-digit. In Poland, beer volume was down high single-digit mainly driven by our economy portfolio. In the Netherlands, beer volume declined mid-single digit due to a challenging comparable versus the good summer last year. Regional operating profit decreased 0.8% organically impacted by a significant step up in investments to upgrade our technology and digital platforms in the region. Now turning to slide four, the Heineken brand accelerated its growth 28.3% to deliver its best growth in more than a decade. Growth came from many markets led by double-digit growth in Brazil, Mexico, South Africa, Nigeria, the UK, Romania, and Germany. Brazil is now the largest market for the Heineken brand globally, and with the addition of the UK and Nigeria, 12 markets now sell more than 1 million hectoliters of the brand. The successful rollout of Heineken 0.0 continues and is now available in 57 markets. The brand will be the official beer partner of the UEFA Euro 2020 and has extended its partnership with the Champions League until 2024. Turning to slide five, I would like to share some highlights on other drivers of our strong top-line growth. Our portfolio of international brands grew high single-digit driven by the double-digit growth of Tiger in Vietnam and Cambodia and Amstel in Brazil, Mexico, Russia, South Africa, and the UK. Our craft portfolio grew mid-single-digit driven by double-digit growth in Europe more than offsetting lower volume in the Americas. Lagunitas is now available in 35 markets with local production in the Netherlands and Brazil. Volume of our low and no alcohol portfolio increased high single digits to 14.1 million hectoliters. The no alcohol portfolio grew double-digit driven by Heineken 0.0, line extensions of other leading brands, and beer mixes. Cider volume was stable at 5.6 million hectoliters with double-digit growth outside the UK, especially in South Africa and Russia. In the UK, volume declined high single-digit as I said earlier, and we see encouraging results in new cider markets like Vietnam and Mexico. Revenue from our proprietary draught systems grew double-digit. The blade, our countertop draft system, is now available in 32 markets. We continue to deploy our e-commerce platforms to digitally connect with our customers. Today our digital B2B platforms are operational in 17 markets, and beers, our B2C platform in Europe, continues to gain scale. Moving now to slide six on sustainability, brewing a better world is one of our five strategic priorities. It addresses our commitments to promote health and safety in our operations, protect our water resources, reduce CO2 emissions, source sustainably, advocate responsible consumption, and grow with the communities where we operate. Over the past decade, we have lowered our water usage by almost a third to 3.4 hectoliters of water per hectoliter produced and 3.1 hectoliters in water scarce areas, ahead of our 2020 targets. In March 2019, we introduced our 2030 ambition called Every Drop, and next to the continuous improvement in water consumption, we aim to improve the water catchment area surrounding our production sites. Today, 15 of the 24 of our breweries in water scarce areas have started water balancing projects, including nature-based solutions like reforestation and wetland restoration. In 2018, we set out our drop the seed program to reduce CO2 emissions with an ambitious target to power our production facilities with 70% renewable thermal energy and electricity by 2030. Thermal energy accounts for nearly 80% of total energy consumption in a brewery. We are at the beginning of this journey and reached 19% in 2019. In 2019, we increased our local sourcing percentage of agricultural supplies in Africa to 44%. Although we made progress, we have much more to do to reach our ambition of 60% in 2020, but we are far off. We spend over 10% of Heineken media budgets on when you drive, never drink, or other responsible consumption awareness campaigns in more than 60 markets. We aim to reduce our plastic use and contribute to increased collection and recycling of plastic. Where possible, to have the biggest positive impact, we use regional strategies that take into account the maturity of each region, the local use of plastic, and the current availability of recycling infrastructure. And with that, I am finished and I will hand over to Laurence to talk about the hard numbers overview.

I think we can go immediately to that. So I'd like to open the floor to your questions. I think this is a good idea.

Thank you. I will do my best for the last time then. So three questions, please, as ever. The first one: as you reflect on the results from the individual countries, which country gives you the greatest pleasure? You say that's a really good job and which countries do you think are still work in progress? And the second question, a bit more technical: Laurence, you've highlighted the 37 million incremental IT expenses in Europe. Is that something that we should expect to be ongoing as you roll out the systems and eventually fall out? Some color there would be helpful. And final question: the drink-driving legislation in Vietnam. I appreciate it's very early days. I note that industry volumes were down 4% in the first month, but can you give us any color about how things are working out and how you expect things to evolve?

On the first one, we could hold the floor for another hour giving you color by my favorite ranking, but I think that would not be very useful. I think you have three types of important businesses: you have businesses that you run for steady slow growth, others where you have to do a turnaround, and third ones which are really in the making, in the building. So you have all categories of these kinds of businesses around the globe in all geographies. And you always have somewhere countries which are doing more than expected, and you have a few countries who suddenly have a fallout. That has been my experience in these 15 years: you have to deal with reality, but the strategy behind is that we have been placing bets on new countries year after year, in mature but also in developing markets, and more in developing markets. Those who are still in the building and where I watch them very closely are of course Brazil in the first place, it's going to be China through the CRV, it continues to be India, and a couple of countries in Africa to come, because those are markets where we still have a lot of potential. When you go to European markets, it's more about how you can engineer a steady slow growth in markets which otherwise are saturated in our categories and not fueled by demographic growth. That takes a different approach. But if we look at the world today, we have covered geographies pretty well. Then you have countries where you need to do a turnaround, where you had better fortunes in the past and you have to re-engineer another business model. I think particularly about Nigeria as an example of that. That is just to give color. For anyone at the helm of a portfolio company like us, you have to look at these things and place every operation in its cycle in the lifetime and run it accordingly. Overall, you have to continue to engineer the sum of the parts in order to give the profile of growth that we try to achieve year after year, which is superior top-line growth with improving operating results. The latter part is a bit more volatile. What I am pleased with is that we can sustain the top-line growth through managing our geographies on the one hand and also managing our product portfolio, our offerings, and our investment in distribution and digitalization to make our business grow. Thank you.

On the legislation in Vietnam, it on itself is a welcome legislation. We take the view worldwide: when you drive, you never drink, so you have to be very coherent. We believe that is the only sustainable policy going forward, so that is not a discussion. The impact we will see. I know that everybody has pounced on one article published with a very high number. It seems to me rather at the high side. It would imply that half the population is basically driving not in a state of being capable of driving in Vietnam. I don't think that kind of number would be reality. It will have an impact for sure, but it has to be seen over a longer period of time. In January we didn't see anything because we had depth and a very good Tet. You also have the unfolding coronavirus which mainly affects China but will have ripple effects in surrounding countries, and there also you can't make any prediction. But bear in mind that Vietnam stays a growth country, so you have conjuncture things going up and down and structural things which are the growth of the market and tougher drinking and driving laws that will be enforced. I hope it should be, and that will net out. But I keep pointing out the fact that Vietnam is intrinsically still a growing beer market. Thank you very much.

I'm already so grateful for the questions. I will answer with pleasure, though I'm not giving you margin guidance. The leading factor behind organic EBIT growth is superior top-line growth, driven by premiumization, which is continuing. For example, in Brazil, a large part of the strong double-digit growth comes from our premium and mainstream upper mainstream portfolio, including Heineken, Amstel, and others. That helps EBIT growth and will ultimately tilt the margin in Brazil as well. We continue to work relentlessly on productivity, especially in supply chain, where we have a decentralized production footprint. We are already looking at the next stage of productivity through digital, connecting our breweries, using AI and augmented reality. We constantly revisit the size and cost base of our operations across all dimensions, including commerce, advertising, marketing, and support costs. There are plans implemented in the past and announced in several European countries. Regarding the outlook for the next 10 years, I think our strategies are in continuum. We are not in an industry expecting brutal disruption, but strong evolutions. A company that does not grow will die. We must evolve constantly. The strategy will be more differentiated region by region. We will offer more choice, go for premiumization as core beer demand declines, and look at value chain integrations. The volume growth of core beer is decelerating globally, but with market differences. Some geographies like India and Africa still have huge potential. I have to stop now. Edward, and then a question of Western Europe.

Well, last year was very bad. We hope that with the Champions League sponsorship and the Euro Cup, and if we have better weather, it will be better. The programs in place in Europe for the first half are good. So I leave it at that.

I'll start with your question on profit delivery. Yes, the weather played a role. Also, our balanced footprint, for instance in Brazil, the high season is different from traditional markets, and since Brazil contributed highly to profit increase in recent years, that also played a role. We don't guide half by half, but the first half of 2019 was marked by more difficult comps for some commerce expenses and technology upgrades, a bad June weather, and increased competitive environment in Europe. For the rest, we'll see. Regarding marketing expenses, it's a pretty stable line as a percentage of revenue. Marketing and selling was 11.8% versus 11.1% last year. The proof is in the pudding: with superior top-line growth balanced between volume and revenue per hectoliter, we are doing something right for the brand. We also invest in technology upgrades that serve the brand. I wouldn't be too worried about the ratio. We think about efficiency of ATL and BTL investments like we do in productivity. Over time, we expect to engineer good top-line growth with better resource allocation, which explains the slight improvement in the ratio while maintaining superior top-line growth. On the Oxxo stores, I don't have a very detailed overview province by province, but it has been engineered by our local team to minimize the impact for us and maximize the impact for Oxxo. Starting in regions where the competitor was strong gave us opportunities. We lose mechanical volume, but that volume is at a much lower margin for us and a very high margin for Oxxo. Overall, the team is managing it well. The Mexican operation is not in danger, and we expect to continue to grow overall in Mexico over the transition period, based on good underlying trends and the performance of the premium and Heineken brand.

So we are not reaching the Heineken run between zero and the mother run also because what you're seeing is less cannibalization than when we launched Heineken 0.0 in a number of markets. Heineken 0.0 gets into new occasions where people don't drink alcohol, like lunch, and appeals to people who cannot drink alcohol. Heineken had its strongest performance in over a decade. Even excluding Heineken 0.0, the growth is pretty much the same as last year. We don't split it. On Brazil, the midterm guidance is that the return on net assets will be above WACC within five years, and that is definitely the case. Margins will move up as a factor of premiumization. We continue to work on margin. We started from a low base and acquired a business that was losing money. Some synergies are delayed in distribution, but back office and brewery synergies are being extracted. We are building for the future. On Nigeria, that is the most difficult thing for the moment. The market is going better, which is good news. Pricing is not going anywhere; we increased prices in November and again in January due to a VAT increase. Our bigger competitor announced it will not increase prices before March, so it remains a tense competitive environment. We hold our share and are still market leader. The premium end of the portfolio is tilting up, but overall pricing is lagging. The profit pool of that market has tumbled quite a bit over the last few years. It is high on our radar screen.

For the last one, we understand you usually have your numbers right. Look at them: 2019 is pretty much 50/50 price and mix, but it's very different from one place to another. With input costs higher this year, we'll have to be intentional. We said internally that there needs to be a very good reason not to take price. But we operate in places where affordability is key, and in Europe there is deflationary pressure, so it will be a lot of mix and premiumization. I wish we could run the company on a philosophy, but it's run on being intentional towards premium and taking pricing while keeping products an affordable luxury. We do it on a case-by-case basis. On JOHANNA, I carefully say this is the first phase of soft capabilities, starting with data and unified data management in 2020. We will standardize and normalize at our shared service center in Africa. We are starting with the core financial processes for all 20 markets centralized in Krakow. The first step is about unified data model, so hopefully that doesn't bring disruption because we are not transferring the transactional part yet. When you merge systems, there can be a cutoff moment, but we have contingency plans. If I had to put a philosophy behind the price and mix thing, it would be mix always, price wherever you can. As you heard about my Nigeria story, the latter part is more difficult. I have framed above my desk: 'See nothing, yes you're right.' Thank you, that's very clear.

Well, it has been a pleasure as ever to have you this morning for an hour. Thank you for the good collaboration during the past year. I'm looking forward to seeing you maybe in an older capacity. Thank you very much, all of you. And thank you, operator, for having the thing. For every further question, please defer to the people who will stay behind me and will be competent to answer all your questions when I sneak up. Thank you so much. Over to you. Thank you. Bye bye. All good bye.