Heineken N.V. (HEIA) Earnings Call Transcript & Summary

Okay. Good morning, everyone. I think we'll make a start now. So Laurence, thank you so much for joining us again. Much appreciated, as always. And in terms of structure, I think, as usual, I'll start with a few prepared questions and then open up to any from the audience, and either just by raising your hand or you can send them remotely as well and to me on the iPad here.

So I guess, Laurence, maybe to start at CEO change, big news alongside the full year results. Jean-François, stepping down after 15 years in the CEO role to be replaced by Dolf van den Brink, current President of the Asia Region. I mean what does the Board think that Dolf can bring to the role?

Well, I'm not sure I can tell you what the Board thinks. I can tell you that what I think and what we see and that Dolf has an impressive experience. He started his career with Heineken. He's worked for 22 years on 4 continents. He's been a general manager. He comes from sales and marketing. He's been a general manager in a number of our operations, some of them turned around, some of them already extremely successful. And he's accelerated the success of Mexico, for instance. And then most recently, the President of the Asia Pacific, of the APAC region. With that -- that has had a very nice, very good year last year. So I would say, a very strong operator to start with. Also someone with a real strategic mind, and a new generation of management where really the combination of sustainability and prosperity is completely natural. So that's something that we look very much towards implementing moving forward.

Okay, great. And now thinking back to the numbers. FY '19, we saw another strong year for top line growth, up 5.6%, with a good balance between volume and price/mix. As we look forward, which markets are you most optimistic about? And for FY '20, where are you more concerned?

So yes, actually, good growth and good balance, 50% coming from volume, 50% coming from revenue per hectoliter. And even within the revenue per hectoliter, you can say 50% coming from mix and 50% coming from price, and these are global numbers. So you would have to dive into every individual country, but this is a good balance. So moving forward, we don't guide individually on market, but what you can -- what we count on and what you can -- really you can see is that we continue to have this diversified footprint where when you look at the expected growth of the market that we are in, we're definitely going to be also helped by the average growth expected by the country than the segment that we're in. We're also always looking at expanding that footprint. So we've gone for some greenfield in the past. We've done for -- some acquisitions, and we will continue to actually look at where we can expand the footprint, the geographic footprint, in places where we see consumption potential, when we see growth potential, top line growth potential. Apart from that, well, premiumization will continue to be the name of the game. And under this premiumization, you have also all the innovation, giving consumer a choice, giving consumer option. And that is about innovation on the product, but that's also about the draft system. And that is also increasingly how we interact, how we engage with the consumers and the customers. So our B2B digital systems, our B2C digital experiments, that will be something that will be bringing growth moving forward. And finally, obviously, continuing to explore adjacent categories, which we have done, starting with cider where we continue to build the segment and the low and no and then -- and going to craft & variety. That will be -- you'll see the same kind of leads continuing to help us moving forward.

Okay, great. And then may be thinking about a few of the bigger markets in more detail. Mexico has been a big success story for Heineken, but growth has moderated slightly recently, I guess given macro and the opening up of the OXXO contract. How do you think about that market medium term? And how much scope is there to further premiumize it?

So absolutely, if you look technically at Mexico, it has been entering -- it has entered recession. If you look at the beer market, it has continued to grow, and we have continued to grow in the beer market even with the start of the mixing. So the end of the exclusivity in the OXXO contract, which, by the way, has been crafted in a way that is an asymmetrical win-win way because we are accepting the loss of exclusivity a bit earlier than the original contract in places and regions where it matters most for OXXO to get the opportunity to open up, and it matters a bit less for us because those are not the places where we are the strongest. And in content, I mean -- and we balance that by going a bit later in places that are, I would say, our stronghold. So this is kind of an engineering of that contract, which is a win-win. And by the way, was crafted by Dolf and his teams when he was the head of the Mexico operation. Now if you look at our growth this year, taking into account the mixing, it's about 15% of the volume that we do with OXXO that has got a mix in the first year. This is going as planned. And I would say we come from high single-digit growth. And we've said, given the country and given the GDP growth, the underlying growth should be more in the mid-single digits. What's very encouraging is double-digit growth of the premium, which has taken a bit of time to actually take off, but you really see that now. Brand Heineken is doing well. It's growing very fast. And that is still 5% of the market in terms of premium volume in Mexico. So there is still a way to go. And that gives us also some good expectation for a country where we still see underlying reasons for growth.

Okay, great. And I guess just one more on Mexico. Heineken's own chain of retail store, SIX, how important is that for the growth model going forward?

It is very important. We've continued to expand that store. We have more than 10,000 stores. We have -- because OXXO remains our #1 customer, but SIX has been growing as a share of the pie in our business. So those are our stores with a slightly different model, like a smaller store. It's beer and snacks more or less, and this has helped a lot in terms of reducing our dependency towards the OXXO contract, of course.

Okay, great. And on to another big market. Vietnam, another success story. Volume is up double digits. Last year, given I guess -- both, I guess, a good market and also the expansion strategy pursued by Heineken. How are you preparing for the eventual step-up in competition in the Vietnamese market?

So we have seen a step-up in competition since Sabeco was acquired by ThaiBev about 2 years ago. We have also stepped up our game in terms of strategy, both by expanding the portfolio with more brands, and also expanding our reach outside of the large cities and using also some brands like Larue, which is more of an entry brand, to go more into rural areas. That has been working quite nicely. And I must say that we -- and we finished 2019, and we entered 2020 in a very strong position and with a very strong performance.

Okay, great. And what do you think is a sustainable run rate for volumes in that market over the medium term, just thinking about legal drinking age population, some share gains, I guess, from local wines?

While I wouldn't risk a growth rate, what I would say is that we continue to see about 1 million net entry into a legal drinking age every year. And that in Vietnam, you also still have quite a bit of alcohol, which is kind of like in the unformal market and is being converted. So it is -- so that there is -- the underlying growth elements are still there.

Okay. Thanks. And any short-term changes in strategy given the tighter drink-driving laws that came into force at the start of the year?

So we've continued to deploy the extension of the portfolio, the extension of the distribution network outside of the city. We -- talking about the traffic laws and the implementation decrees that came out at the beginning of the year, we always welcome measures that are here to actually curb the excess drinking. And there is -- there was an issue that Vietnam wanted to tackle. Now it's going to take time. And of course, it was first implemented at the moment where you still have the sales running up towards that, so the Vietnamese New Year. And then since then, with coronavirus, it's very difficult to see the actual impact. Absolutely far less than what was said in one article. There were also some analyst reports that were providing tentative figures that were much lower, too early to say. But let's say that in any given country, when government take measures and implement them, then country find -- I mean the consumption find also a way to actually adapt to those measures. So consumers will adapt, and you'll have to see over time what the impact is.

Okay. Thank you. At that point, any from the room? Okay. I'll keep going for now then. One market that gets a lot of attention is Brazil, clearly been another success story recently, with volumes up mid-single digits last year, driven by both premium, mainstream at the expense of the economy segment. I mean how much scope again there is to further premiumize that market?

Well, it's still a limited part of the market. It's still below what you find on average in the world. It's probably around 15%, which is still quite low. What you see is that if we look at our own portfolio, when we combine the 2 portfolio, it was about 20% of our volumes that were in premium, and today it's already about 40%. So this has been going very fast. And this is really the name of the game and the trend, and that's about brand. Heineken has become the beer of choice in Brazil and in a sustainable way. It's been now a number of years that this equity has been strengthening year after year. And it's about pricing as well. It's about pricing your brands with -- that have quality and have wonderful activation as premium brands.

Yes. Great. And I guess with Brazil now being the biggest market for the Heineken brand globally. I mean how big can Heineken can be in the market before there's a danger it loses its kind of premium cachet?

There is a way to go because if you look at penetration, there is still -- we're still not where we would like to be in the future. Of course, acquiring the Kirin network of breweries helped us very much because one of the things that was limited -- were limiting us in Brazil was the fact that this is such a huge country. And that you cannot just transport everywhere in the country if you don't produce close to the places where your brand is consumed. So that has been -- that cap has been actually taken off. But yes, there is still a way to go in terms of distribution and hopefully, at some point, when we unify the distribution network system, we'll also be able to cater with retail and that will be really centered around the beer.

Okay. Thanks. And maybe a few words on margin evolution in Brazil. I know a lot of work has been done already to improve margins, which obviously got hit when you took on the Kirin assets. Is there scope for further cost saving? Or is it more of a mixed portfolio driver now for margins?

So we implemented very quickly after the acquisition a first set, a first series of synergy measures. So reopening all the procurement contract, renegotiating terms, putting together all the administration, merging the ERP systems, looking at the brewery footprint and network, and then closing actually 2 breweries. That has been done. I would say, the next step of synergies will come when we are bringing together the distribution network and that will be about logistics. But even more importantly, that will be about being able to really play with a full portfolio of brands and position the brands, one towards another, in a much more agile way. So there, there will be synergies at that moment. So I will expect ramp up as well, starting from that point.

Okay, perfect. And actually a couple have come in actually remotely on Brazil, so I'll take those now. Can you just talk about current utilization rates and planned capacity expansion for that market?

So we have invested in Brazil specifically to cater for the production of the Heineken brand. So not to get technical, it takes some specific tanks to produce the Heineken brand. So whenever we wanted to expand, we upgraded breweries to be able to do that, and we will continue to do so.

Okay. Thanks. And the final one on Brazil. Can you just touch on the current pricing environment? Is it more or less competitive than you've seen previously?

Well, it's always competitive. We are a follower. We're #2 in that market. So I think when it comes to premium, you have to be very careful about pricing and you have to position your brand both from an image equity point of view, but pricing is a very important part of that premium image. You cannot discount permanently a premium brand wherever you are in the world, Europe, that's the same, and continue to call it premium. So the premium positioning of the brand is something very important. When it comes to value, when it comes to the bulk of -- to what is still the bulk of that market in volume, here, we are really a follower. This year, we took 2 price increases on our value portfolio, so more than we usually take. And actually, we paid for that in volume, but that was quite -- that was quite an intentional move that we did because also we wanted to really free up the capacity for the rest of the portfolio in terms of production.

Okay. Thanks. And I guess now moving on to more of a challenged market. In Nigeria, the profit pool has been under pressure there for a number of years now, but both Heineken and the wider market did see positive volumes in FY '19. Just talk about your outlook for that market, both industry, how competitive it is right now?

So cautiously optimistic. The fact that we've now seen a full quarter of growth on a brand like Star which is premium, while it had been decreasing in volumes for 3 years before that, is starting to be something that we'd like to call a trend. Still the beginning, very competitive. We were not able to actually translate into price the increase in excise tax that took place in 2019. There was a moderate increase in VAT at the beginning of 2020 and that has been translated into price. This being said, the economy, GDP, still in a recovery mode, so being careful, but positive signs.

Okay, great. And is that a market where you think margins can ever return to their former levels? Or does that just need a big move in the currency just given the sort of transactional FX pressures that you see in Nigeria?

So I do expect -- hope and expect that margin can move up again and as the transactional currency impact eases, and also as people trade up again, but I would not expect that the margin go back up to where they were. Any market where you have a dominant player that has 70% of market share command the type of margin which probably are not of this world anymore.

Yes. Okay, sure. And final sort of market-level question for me. Here in the U.S., again, being a bit more of a challenged market, and particularly on the Mexican portfolio, but there was a change in management with Maggie Timoney taking over. Can you talk about some of the steps that you're putting in place to improve performance here in the U.S.?

So if you look at it brand by brand, we see positive signs. This is definitely the first objective, is an objective of stabilization. Will the U.S. ever be the source of a massive growth for us, probably also given our market share and given the structure of our portfolio? Probably not. This is the market where innovation is very important. And the fact that we launched Heineken 0.0 this year, which is working, the signs that we have are very positive. We're always careful because this is such a big country. You really need to wait a bit before you are confident that the repeat orders are really there. But what we see is very positive. So we see some elements of stabilization in the brand, and we will continue on the innovation track.

Okay, great. And one question I get quite a lot from investors on the U.S. is the kind of wholesale relationship. Does -- do the Heineken brands get the attention they deserve, just given Heineken's relative size versus the other players?

Well, what you can say is that with the 4% market share, we would not have such a national presence if it were not for the specific U.S. system. So -- and we represent more than 4% with some distributors. So of course, you have to accept that you're not the biggest supplier of a number of your distributors, but this is still a system that enables you to be everywhere. And if you have the right pool on your brands, you can be on the shelf.

Okay. Great. And then moving on to one segment that I find quite exciting anyway, low- and no-alcohol. That's been another growth driver. I think Heineken 0.0 is now in 57 markets. And where is that growth being sourced from? Is that cannibalizing alcoholic beer? Or is it pulling pieces from others?

So we did, from the beginning, hope and expect that the cannibalization would exist, but be lower than what it has been, for instance, for Heineken Light. Actually, I think we did say -- we did guide towards it's going to be like 20% it's going to come from. In the end, it is much less than that. So what you really see is a new occasion for people who would drink beer. It is actually a new consumer in occasion where other people are drinking beer, but those consumers didn't want to drink alcohol, and you see that we can develop also our presence in nonbeer outlets. So that has been extremely successful. If you look at the performance of the Heineken brand in 2019, so plus 8.3% in volume, it's the strongest performance in over a decade. It is still a very, very strong performance, about equivalent to last year where we did say already, it was the best performance of our decade if you take out the Heineken 0.0. So this -- not only does it not capitalize a lot -- cannibalize a lot, but it actually accelerates the mother brand. And we've seen that in a number of European countries and not only in Russia as well, for instance.

Okay, great. And I guess in -- of those 57 markets, are there any that really surprised positively in terms of momentum and any that have disappointed so far?

I would -- I cannot point to one that has disappointed. So that's overwhelmingly been a success. And it's a matter of execution, but it's been repeatedly successful, pretty much everywhere where we launched.

Okay, great. And what about on-premise penetration? Because I guess that's going to be a big opportunity given your drink-driving laws and everything else. Is that gaining traction now in the on-premise?

Absolutely. That helps you in the on-premise as well when people go out and know that they have to drive afterwards. And then the Heineken 0.0 is something nice to have in your hand and to drink with your friend who are having beer.

Okay. And how should we think about margins for that category over time? Because I guess you're capturing the benefit of lower excise, but you are building a category as well.

Very fondly. Basically, no excise tax. A price positioning which is at or slightly below but really close to the Heineken and to the traditional -- to the mother brand. And yes, one more step in terms of dealcoholization, so a bit more expensive to produce, but definitely once you've passed the launch and the investment for the launch, really nice margins. So -- and that's true for Heineken, but that is true -- we're really working on the whole segment. So we have more than 120 brands that have 0% options, line extensions. And in Europe, for instance, we are -- we've launched what we call The Zero Zone. So it's dedicated shelf space, dedicated space in modern retail with the whole range. So you've got the Heineken 0.0. and usually that is a brand that we use to actually launch The Zero Zone, but you also have Amstel Zero in a number of places, and you can have a local version of your brand Zywiec in Poland. You name it. You take the mainstream popular brand of that country and you offer a 0% version, which works very well. And it's both in terms of level of alcohol, of course, 0 alcohol, but it's also, very importantly, in terms of calories.

Yes. Okay, great. I guess slightly linked question that's just come in remotely in hard seltzer space. Always get a lot of questions on that here in North America. I think -- and some people expect the category to double or triple again this year. And I've noticed, we are seeing some of the brands popping up in Europe now. What's Heineken strategy for that segment? Is that something that it could play in, medium term?

It's a market where -- the U.S. market is a market where innovation is very important. And as we see it now, the category of the seltzer is really an American category, and it's -- it will take time to see if it's an innovation that will be successful and pass, or which is -- if it's a sustainable trend. What is true is that this market has invented and reinvented itself. And I think you can say that Continental Europe, for instance, is a little bit less receptive or is far less receptive to testing that kind of innovation in terms of consumer goods. U.K. may be, so we've seen that probably a bit in the U.K. So that is -- but that's -- that's an interesting space, particularly in the U.S.

Yes, sure. And just actually one link to that again. Do you have a view in the U.S. where the demand for seltzers is being sourced from? Is that hurting mainly beer? Or is it coming from wines and spirits?

I think it's also coming from wine and spirits, it's coming from -- yes, from everywhere. So it's...

Okay. Fine. And then moving down the P&L, margin's always a topic. And a couple of years ago, Heineken moved away from explicit margin guidance towards an EBIT growth algorithm. Can you just talk about the thinking behind that decision? And as we look forward, what are kind of the upward and downward pressures on margins we should be aware of?

So first of all, to say that when you look at the way we manage the operations individually, we always manage them using that triangle of top line growth, market share, return on sales or margin and return on invested assets, return on net assets. And depending on where you are, what stage of maturity your market is at and your operation is at, then you actually push more one than another. So margin are still a very important element of how we look at our individual operations. Now average margin, this is something that is quite complicated in a company like ours with more than 80 markets, and you take into account, of course, foreign exchange impact as well. So this average was important for us to look at because we felt that we had a gap to bridge. We did have a gap to bridge with the then-existing SAB. So we worked on that, and we wanted to put that star on the horizon, that dot on the horizon. But we also made a number of choices like stepping up our game in South Africa, like investing in Brazil, in places where we knew that the margin was lower than the average margin. And actually, those places growing faster, they weigh on the average margin for a number of years but where we feel that the future of consumption might be. So driving by the average could also prevent you from making those choices which are very important for us to build the future. So we did feel that, yes, operating leverage is important. And it's extremely important that we look at operating leverage operation by operation and that we ensure that, overall, in the long run, the train is towards operating leverage, but that the right way to guide is to guide to increase in profit and to a very healthy top line.

Yes. Okay, great. And when we think about margins, which of the markets we should be wary of transactional FX when you think about modeling the big exposures you have there?

Well, moving into 2020 -- looking back at 2019 and moving into 2020 when we planned the year -- and of course, things never happen as planned but basically, the largest transactional impact is Brazilian reais. And that is really linked to the way you source. In emerging country, there are a number of things that you do buy in dollars or even if you buy them in local currency, the underlying market is actually a dollar market. Starting with aluminum for the cans, this is an international U.S. dollar market, so you're going to be exposed anyway. So I would say the main individual negative outlook that I could point at, and it's been verified in the beginning -- in the first few weeks and months of the year, is definitely the Brazilian reais.

And that's typically hedged rolling 12 months, is it? Or...

You can hedge, yes. It's not always economic to hedge in a very, very volatile environment.

Okay, sure. And just checking if any have come in remotely. Yes. So just -- actually this is linked to margins. And in Europe, you've got a large wholesale business. Just remind us the rationale for maintaining that business and how dilutive that is to margins in Europe.

So you definitely have a large business, which has a low -- if you look at it individually, it has a low single-digit margin. We do not look at this business as a European or a global business unit. You look at countries. And wherever you need to have that access to the customer, the direct access to the customer to actually maintain your leadership, then we do that. And wherever -- to give you an example, in France, we feel it's extremely important to distribute to these tens of thousands of horeca in every town and village. And so we will bring to them our beer, but also other brands, and we will be distributing to them. And that is something that is very important for our business in France. In other countries, it could be less important. So we have a very good business in Italy, which we've been actually growing in terms of wholesale. In Poland, we made other choices, and we divested part of that distribution -- that wholesale distribution a few years ago. So this is really managed on a country-by-country basis and how important it is to have that direct link with the final -- with the customer.

Okay, perfect. And actually, just while we're in Europe, the U.K. is a unique market where Heineken is vertically integrated downstream. I think the second-largest owner of pubs in the U.K. Can you just talk about the rationale for that and whether that's a model that could be applied to any other markets?

It's a very specific model. So it's not to say that it cannot be applied to any market, but the way that in the U.K. the value is concentrated in that pub part of the market, it's quite unique. And the way the pubs are a part of social life in the U.K. that is quite unique. Today, I would say our U.K. operation is almost a pub operation that happens to make beer and cider. And of course, my U.K. friends wouldn't like to do this because -- to hear me say this because they are making wonderful beers and ciders. But the profitability is really very much in the pubs. And it's about profitability, but it's also about the capacity to test innovation. If you're bringing Lagunitas or a craft line extension, you can actually test it in your pub and you have data points that you can actually use when you go and sell it to all the pubs afterwards.

Okay, great. Any final ones from the audience? Okay. Well, I'll wrap up with one for me. Capital allocation -- so sorry, yes.

So I just wanted to talk a bit more about alcohol-free zone. I Understand that you have the advantage of the excise tax on the margin but increased processing and marketing that you talked about. If you just remove marketing and you can consider those 2 factors, where would margins kind of shake out? Just trying to understand where it's [ right now ]? And the other part of it is I understand you can produce it in the same factories as the regular beer. Is that correct? Producing the raw material...

Yes, you absolutely produce in the same factories. You have one element of the production that you -- but it's not massive incremental investments that's -- and in terms of margin, it's very comparable to you -- it's usually positioned as premium. It's very comparable to your premium margin. So once you take away all these start-up costs and then launch costs, it's a very healthy margin that's comparable to the premium part of our portfolio.

Great. Any more from the audience? Okay. Maybe one final one for me. Capital allocation. We finished 2019 with net debt-to-EBITDA at 2.6x, so close to the target range of 2.5x. Historically, Heineken has deployed capital to invest from the organic growth. We've seen quite a lot of M&A. How should we think about capital priorities going forward?

So the 2.6, if you take away the 0.1 that's brought by the implementation of IFRS 16, we are actually quite close to the target. It's quite a conservative financial policy. And the reason for that is that we want to retain our room to maneuver. Whether it is about organic growth or maybe even more acquisitions, you're not the master of the timing. You need to have the room to maneuver and you need to be able to actually leverage your company in order to acquire at the moment where the interesting targets become available. So you don't -- especially in this world, you still have quite a lot of family-controlled businesses, and it belongs to those families to know when they want to actually sell or let you enter the capital through a partnership. So we will continue to be quite a conservative company in terms of capital allocation. As you know, we have a dividend policy between 30% and 40% of our net earnings, and we're close to 40% these days. So this is a percentage that we're going to maintain, but we want to retain that capital allocation freedom.

Okay, fantastic. So unless there's any final ones from the audience, I think we can wrap up there.

Thank you.

Great. Laurence, thanks so much.

Thank you.