Heineken Holding N.V. (HEIO) Earnings Call Transcript & Summary

Well, that's a bit of a difficult question to answer. And I think first and foremost, because all the nuances that are very important are not yet fully known. So I know that the tax is very much up for discussion at this moment in time, but there is no formal fully fledged proposal that we can discuss and already start thinking about. And secondly, because we have also learned that surprises will keep happening in the world. And therefore, what we call scenario thinking is very much what we do. So if route A happens, what is then our response? If plan B happens, what would be our response? Suffice to say that we believe that Brazil will continue to be a very important and attractive market going forward, and I'm sure we'll be ready to deal with whatever comes.

Whatever comes, brilliant. Moving to our domestic market here, the USA. It's been a challenging alcohol market for Heineken. You've had success with Heineken 0.0. You talked about Ultimate. Can you just talk about the sort of portfolio development and perhaps anything that we need to think about sort of more strategically for Heineken to deliver that sort of profitability that can move towards sort of group level over what period?

So again, maybe just to bring the group in, just dimensionalizing the U.S. for us is a relatively small market. It's a strategically important market, but it's 3% to 4% of our global revenue. And we're actually making a profit despite an import model that we have there. So whilst it's a strategic opportunity, it's not really making or breaking our current strategic momentum. So just as a context, that's important to know. You're right that we are there with Tecate, with Dos Equis, and particularly with Heineken and Heineken 0.0. It's a bit difficult for me to read what is going on in the U.S. market. And I know to the audience, I've said this already in the past 18 months. So it's like, hey, shouldn't you study that better in order to get to some answers more quickly? But for me, the U.S. is a bit of a let's-wait-and-see market at this moment in time, stick to our guns, know what we do best, bring innovation to market, focus on 0.0 and the brands that we have, look at velocity, points of distribution. And this is one where I think we need to probably have time with the new CEO to really think strategically about what to do to unlock the strategic importance of the U.S.

Well, let's come back to one of your absolute core markets in Europe. I mean, again, much commentary in Europe about sort of alcohol per capita, although beer does seem to be gaining share. Can you talk about sort of the volume opportunities you have in Europe? And I suppose actually also want to tie into this the sort of capital efficiency opportunities as well because it seems to go hand in hand.

Yes, indeed, because Europe is a market where population is not really growing and per capita consumption is already high. So what Glenn would say, our Regional President in Europe, is that the name of the game in Europe is 2 things. The first one is how do we acquire new consumers into the category as older consumers are leaving the category or are moderating. And secondly, how do we tap into new markets potentially outside of beer that can bring us that new growth opportunity. So this is where the role of innovation really becomes quite important. And whether this is Texelse in the U.S. or Texelse in the Netherlands or Stëlz in the Netherlands, or converting, like we see happening now in France, where beer has now overtaken wine as the first alcohol of choice for the consumer, there are opportunities of growth, but we really need to tap into them. And one of the things that Glenn, rightly so, has been most proud about is create the moments. And we have done an amazing job in the second quarter to win the summer in Europe. And that is with quality innovation, quality execution, and the right investment behind it, we saw accelerated momentum and that is building. That's important for the category, but that's also important for our own belief that actually Europe can be a growth market. Now then to your point, we need to do so efficiently because Europe will not be high growth. It will be modest growth. And therefore, capital productivity and cost scrutiny will be a part of how we create value in Europe.

And can I ask, I mean, with the U.K. hat on, how does the sort of pub -- managed pub portfolio looks fit into that?

Well, maybe good to know, but pub is actually one of the best value-creating opportunities that we have because we know how to run a fantastic pub estate. And it's partly because of the premium mix that we can bring there, but it's also partly the role that it plays in portfolio conversion. This is the place where we can test innovation. This is the place where we can bring quality food, quality outlets, quality premium beer experiences to the market, which then has also a transversal impact into the off-trade. This is, for example, where we can test and scale Cruzcampo, for instance. So for us, that pub estate is a very efficient, including on return on invested capital, way of actually how to grow profitably in Europe.

Brilliant. Well, let's move on to some more growthy markets. Let's start with South Africa. Distell regulatory process took a little bit longer. The integration seems to have taken a little bit longer. But actually, South Africa seems to be remarkably resilient in its growth. How do you see it developing from here under Distell, elevating the overall experience for you in...?

Well, first of all, let's recognize indeed that South Africa, despite all of the pressures maybe that the economy are under, continues to be a growth market for total alcoholic beverages. And this is good not only for the category, but also for our portfolio because we are also there operating a multi-category portfolio, as you know. And we're very pleased, in particular, with the fact that our beer category is starting to accelerate and are driving momentum whilst learning how to operate a multi-beverage business. We're not yet fully there with wine. But for example, in our RTDs part of the business, in the Bernini's of this world, we're actually doing a fantastic job. So I think that our South Africa business is now in a stable platform and conducive to growth also as we now start to unlock the opportunities that we see in the route to market that is conducive to our portfolio.

And looking to sort of what were perceived as some of the more growthy economies, sort of Nigeria, Ethiopia, delivering strong volume growth. I mean that's just one of the key things here is the volume growth is very strong. How do you manage the volume growth and profitability hand in hand? How should we be thinking about that sort of almost a holistic level?

I think this is where the lesson of Nigeria a few years ago was really learned by the Africa team. And I really have to give them a compliment as well. We've learned that low -- structurally lowering the cost base in more volatile markets is extremely important. How do you make sure that you're not getting into trouble the moment that some volume falls away? We've learned that painfully in Nigeria, have corrected that, but this is now becoming commonplace in many of the African markets. The second one is balance sheet health. That the moment your currency goes a bit wonky, that you're not ending up into hard currency problems because you cannot afford to actually import the product or import the ingredients. And I do think that the cost and cash control of our African business is fantastic at the moment. The second important thing that we've changed is hard currency mindset. So that, I think, is part of the proof point of success. Now when you got these basics in place, it's so much easier to then focus on growth and really about maximizing the mix for all the consumer cohorts, whether they can afford or can afford less, because you basically got your cost and cash base under control. So that actually gives us the opportunity to actually start scaling new products, new more affordable formats simply because you can afford to do that now.

And then you've exited the DRC. What signal is that to the market? Is this -- was this a one-off? Or is this a sort of we're assessing some markets or...?

No, I don't think that we should see this as a one-off. I think it's an important one to start realizing that also in Heineken, we are becoming a more focused growth company with this return on invested capital very much embedded in our way of thinking. And the China model is a fantastic example of that, right, where we really have this partnership model. So we are growing in our brands, but not deploying the full asset base. That is what China Resources Beer is doing for us. And we start to see more and more opportunities across more and more of our geographies in order to consider that. And DRC was a great example where we can license the brand but offload the asset base and still get an economic return for growing the business.

You mentioned China. It's a top 3 sort of profit market for you. I mean, sort of a couple of questions within this. One, how do you see the top line continuing to evolve? I think as we see it year-on-year, you're effectively being rolled out within the CR Snow network. But how do we see that progressing? And then sort of longer term, how do you see the sort of economics and top line bearing out in China?

Well, first of all, let's recognize that this is now the eighth consecutive year of strong double-digit growth. So this is not a blip. This is a trajectory of fast and relevant growth that we have in China because of this partnership. Important to also realize that in Heineken, with Heineken brand, we're only at 30% of the addressable outlets from CRB. And Amstel has just got started and is already reaching 1 million hectoliters in one province only. So we are quite confident that in the next 5 years, just to put a time dimension to it, we continue to see these levels of growth. And this is also what we've agreed in the joint business plan with CRB. So financials are very helpful to us, not always reported in revenue, as I said before, but certainly a very big contributor to our net profit, and that will only go bigger.

Final market I really want to touch on was Vietnam. Obviously, a real success story in H1, had some challenges in '23, '24. I was going to say what were the learnings from that period that allowed us to see the sort of superb figures we saw in H1? And I suppose the question I've also got as a follow-on is that we're going to see some tax changes there as well. Is there anything we need to think about as we sort of -- I don't want to get the rule out and extrapolate forward in Laurence's model, what's going to happen. So if you could just share on that a little bit, that would be wonderful.

No, indeed, Rupert. And let me close indeed with that last point. But importantly, what happened in '22, '23 is 3 things came together. The first one is the economic situation in Vietnam was deteriorating, not massively so, but it came down from 6% GDP growth to 3% to 4% GDP growth. There was also not economic stability or political stability. And the consequence of also drink-driving regulation was also very prominent. So we had consumers who are feeling less confident, channel mix that was starting to happen because of these policies, there was a shift from on to the off-trade, and mainstream brands became acceptable socially. Those were the macro changes that were basically in those years, putting a very strategic frame around the dynamics that we were facing because we were a premium business and really very much skewed towards the on-trade. So it was quite existential what happened. What the team has really done is basically went back to the roots and saying, how do we unlock the off-trade channel? How do we build a more versatile portfolio, not only in premium, but also in mainstream? And how do I get deep consumer understanding to unlock that potential? All of that has now been in place. And I think that the results in the second half of last year and the first half of this year show that we can turn around these situations quite quickly, adapt portfolio and route-to-market models quite quickly, and we're very pleased to see the results. And actually, we're getting now to record market share levels. So a big call out to the Vietnam team there as well. I don't think that this is a one-off. But to your last point, we see now market growth between 6% and 7%, and we are growing far above that. Let's be a bit modest about that. I'm not sure that with excise changes, we should bank on a 6% to 7% market growth. Let's halve that. And I also believe that our acceleration of outperformance is something that we should take humbly. And therefore, I don't think that we should indeed pencil in these growth rates going forward, but be proud of what we have been achieving.

And will the tax change cause any sort of fluctuation is something we need to overly worry about?

So we don't think so. We have had very good dialogues with the government about how to phase these tax changes over the years. So they are coming in the phase of the next 7 years, and we believe that this is quite manageable.

I wanted to move on to actually sort of appreciate in the last sort of 3 minutes, talk a little bit about cash, but also sort of COGS margins. We're in a sort of volatile world. But actually, I'm sort of really interested to hear your views around -- it feels like almost the -- I don't always call them emerging markets, but actually these developing markets are actually a bit more sort of adaptable to inflation than actually -- Europe is, the real wage growth catches up a little bit more. So I'd love your observations on that. And then just how we think about COGS, whether it's sort of barley and the sort of not left field, but diesel and things which often get -- got to look at the oil price and draw a straight line, but diesel and things like how do we think about that in the context of Heineken over the next 12, 24 months?

Yes. So the way that we are thinking about it is what is happening in the world of raw materials and packaging materials, which is inflationary driven because of energy and in particular, aluminum at this moment in time. And secondly, about what is happening to currencies because ultimately, we are pricing for devaluating currencies as well. And to your latter point, I think the developing markets have done an awesome job at the moment to look at the world -- the state of the world and manage their macroeconomic finances in a quite responsible way, whether this is the African markets or the Asian markets, temporary subsidies on diesel in order to get the machine going of their economic infrastructure. So a very responsible government policy that has helped contain that. And therefore, as a result, we have had a more benign foreign exchange environment in the context of what is still an inflationary environment from a commodity and energy point of view. And hopefully, that will set us up for a less disruptive effect, but still inflationary impact, we believe, in 2027.

But it seems the demand backdrop again compared to previous cycles, therefore, as well is I mean, there will be volatility. There will be an impact, but it just seems to be a more moderated impact.

Consumer confidence does a lot because in many markets, when there is consumer confidence, people go out and enjoy a beer. And this is good for our category.

Well, coming back to cash and things like that. Again, you're delivering. You've been -- the share buybacks announced and things. Net debt to EBITDA is only slightly ahead of target. What is the plans for cash from here when you think about your capital allocation policies?

Rupert, it's a fantastic question with 20 seconds on the clock. Cash gives us optionality. And one of the things that we really wanted to get right in Heineken is to really be focused much more on shareholder value creation and economic returns. Return on invested capital does that and cash gives us optionality for share buybacks, organic growth or inorganic growth. Let's see what it brings.

Thank you for that. Thank you very much for your time, Heineken team, hugely appreciated, and thanks for everyone's attendance.

Thank you very much.