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

Good afternoon. Everyone. I'm Mitch Collett from Deutsche Bank's Consumer Staples Research team in London. And it is my very great pleasure to be able to welcome Harold van den Broek from Heineken for today's fireside chat. Harold, hello and welcome.

Hello. Thank you very much. And great to see you here also in person. I just heard that 20% only dropped out, but 80% of the people have just got here, and it's great to see you all live and hopefully enjoy a beer or 2 in the evening.

Well, thank you very much for coming.

So Harold, you've been the CFO of Heineken now for slightly over a year. And perhaps just to get us started then, it would be great to get your reflections on what you've learned over that time, what's changing at Heineken and perhaps just as importantly, what's staying the same?

Yes. So indeed, it's my privilege to be with Heineken now just over a year and Dolf, the CEO has been there for slightly longer in succession to help. And in that time period, he really took the time to create a new strategy and trying to preserve what has made Heineken great in the past 158 years, but also to look at what was needed to contemporize Heineken going forward. So one of the things that we really want to change and what I've already starting to see coming into play, is that Heineken has always been known as a fantastic quality beer passion for the beer in its own right. And that's great. We should maintain it. But at the same time, not only product centricity but also consumer centricity needs to come in. And if you look, for example, at one of the lessons learned perhaps is that the growth of Seltzer, the growth of energy drinks were there, but we were very focused on growing beer organically and inorganically. And with more consumer fragmentation and more occasions it is, I think, our job to not only shape the beer category, but also great to look beyond. And this is one of the shifts that we're making. Products, tried of our products, but also really look more at different consumer occasions to tailor our portfolio. That's one. The second, if I may continue on this is that COVID was also sort of a trigger event. And we mobilized the organization because it had a very severe impact on -- we were big in on-trade in Europe. APAC was a fact that people will know in this room. And it was really a call to action to do something about the cost-conscious culture of Heineken, partly because the effect was so dramatic, but partly because the reality was that we wanted to get better at this for a longer period of time, not just to mitigate the impact that Corona brought to our business. And I really applaud the organization of how much effort, passion, commitment that I've seen to really make that institutional. Now I also want to say that I don't want to promise too much too soon, to change our culture and to train a new muscle takes time. So we know we're very happy with the progress that we're making, but this is a journey that we want to continue to move on because what we want to be known to be a growth company as we used to be, but shift to a different type of growth, beer and beyond organic and inorganic. But at the same time from that growth, we need to become a bit better in capturing the value from across. So if you ask me, what are the shifts? Those 2 are big that comes intentional resource allocation to facilitate that. But let me now double-click on that one. But those are the 3 shifts that I see.

That's very clear. Thank you. And you've got -- Heineken got off to a very strong start to 2022 with organic revenue growth of close to 25% on volumes of around 6, and the sun is shining in Paris. It's clear that people are keen to get out and enjoy their lives again. Can you perhaps give us some context on how the rest of the year has been shaping up?

Yes. So obviously, I'm not going to disclose precise numbers because we're not in that period. But I think from publicly available data, I can at least say 2 things. The first one is indeed that people like to go out and enjoy the true togetherness, as we call it, really going out to bars to restaurants and visiting the terraces and the cafes. So we do see actually that in Europe, the on-trade is recovering quite quickly. And what we also see is that the consumption is holding up. This is important for us because as you know, we've also taken pricing for inflation. I'm sure the conversation will go there as well. But so far, we're pretty happy with what we see in the European recovery on the on-trade, which is an important data point for us. And just to temper the expectations a little bit, it is also important to note that not all of the outlets really have opened, right? I think previously, we communicated that in previous periods of crisis, it takes time for the real estate to fully open and recover because, of course, some of the bars had, for example, government support, there is staff shortages. So it still means that in total, we're about 10% according to the April reading below the 2019 numbers. But on the same note, the sun is shining, people enjoy. The second important data point is our recovery in APAC. And in particular, Vietnam, where we have a big business and that business was seriously affected by COVID, and we already see from the beer industry publications that the beer consumption and production is actually ahead of 2019. And yes, it's no surprise that Vietnam is one of our best and most proud businesses. And therefore, a big important proof point for us is how do we navigate that recovery as market leader and certainly as market leader in premium. And we've been capitalizing on that recovery of the growth. I think that's a good way for me to paint what you can expect in Vietnam.

So you mentioned inflation, and that feels like a good place to go next. I think when you reported full year results, you talked about mid-teens input cost inflation. Clearly, there's been a lot of volatility in the world since then. So perhaps can you just update us on what is a reasonable expectation for input costs in 2022, your level of hedging? And also, if it's possible, I know it's early, perhaps you can talk about 2023 a bit.

Yes. So let me first make it small and stick to 2022. We're also trying to be balanced in the messaging that we give because I'm sure that everybody reads the newspapers or follow the spot prices, things are moving with a pace and with a high degree of volatility. So the way that we started to sense check the markets is that, indeed, this mid-teens inflation that we called out was quite explicit in our full year results 2021. And in our quarterly trading update, we basically signaled because of the Russia-Ukraine conflict -- war that there would be further pressures on input costs for which we would take corresponding actions. And that's exactly what we're doing. So to put a number to it, we really see that the input cost inflation is drifting up from the mid-teens to the high teens, maybe even touching the 20%, but don't pin me on a precise number there. But at the same time, our business is working very hard. For example, with second round of price increases that is happening, but also this cost muscle that I was talking about in order to make sure that we are still having a very healthy P&L and are recovering in absolute profit as quickly as possible the pre-COVID situation.

Okay. So you mentioned pricing. Maybe if we stay on that for a bit. Can you comment on -- I know it's a local decision, but on the price increases you're taking, whether those are aimed at EBIT per hectoliter have been maintained or whether you think about it a different way. And then perhaps, if it's not too much, perhaps on top of that, talk about how those price increases are being received by consumers.

Yes. Sure. I will do. I will also still link back to the second part of your question last time because I think it's relevant for the audience to know as well is what is your expectation into 2023. So we do have a hedging policy, and that hedging policy says that by the end of the year, we will have certainty on about 90% of 2023 volume coverages. So we're still a bit early in the season. We also have big supplier discussions and negotiations, which are about price, but also about availability, which is why we basically said we'll give you some firmer guidance in the half year results. Just to explain that we're not changing our hedging policy. We're going through the process and yes, the way that currently things look, we expect a similar level of input cost pressure in '23 as we have in '22. I think that's an important fact to share. Now then making the bridge to pricing, we have priced indeed on a euro-for-euro basis because with this level of input cost inflation, we felt it was important to also preserve the affordability of beer, certainly in certain markets. Now whilst this is a generic statement and internally, we're trying to be quite disciplined on the expectation to the markets, we do take local considerations into account. So for instance, the pricing that we've seen in the first quarter in Europe was around mid-single digits. It is quite possible that we're going to move to second round of price increasing in Europe. In some other markets, it has been higher because of the input cost inflation. So just to give you a sense. Now the response to that is anecdotal at this moment in time. And I know that this becomes an extremely important topic and saying, well, do you have a read or your price elasticity? And the answer is our volumes currently, as we just discussed, are pretty sound and are holding up, but there is some impact from COVID rebound in these numbers. So too early to call precisely what will happen over time. But so far, so good. The anecdotal evidence that we see, for instance, is that in South Africa, the demand for Heineken, the demand for premium portfolio is still very big. And what people are telling us there is that the pinch which is felt is making people down trade from high spirits to premium affordable beers because that's their level of affordability. In the case of the U.K., where we have a pub of state of about 2,500 pubs where we have really clear read of what's going on. We see people coming back to the bars but particularly in the high consumption later end of the week where people go out to celebrate and enjoy the weekend, less so in the early part of the week. So there, you see a shift of consumption, whether this is here to stay or not, we don't know yet. The second important fact is in that high beer consumption. People love premium beers. So the emerging thing that we see is resilient for now, perhaps some trade-off of where people spend their money. But as we also saw in previous crisis, the trend towards premiumization seems to continue for now. Now maybe to close because I just don't want to be accused of being too bullish and not reading my newspapers carefully. We all know that energy prices, other inflationary pressures are eating into household consumption. So we're really keeping our watch out. And everything that I've just said is with the information that I have today. But going forward, that might change.

It's very clear. Maybe we should move to EverGreen. So your EverGreen cost-saving program is targeting EUR 2 billion of savings. I think by the end of F '21, you'd achieved EUR 1.3 billion of those potential savings. But at the same time, you talked about increased uncertainty around the 17% margin target that you're hoping to return to by the time you've completed the savings. In the context of that higher cost pressure, that pricing environment, can you maybe comment on EverGreen and how it affects your profitability overall?

For sure. I'd love to take this question in parts, Mitch, because it's a big question, and I really want to make sure that I do justice to it. So first, let's remind ourselves why we put that cost savings program together. This was announced also at the time of COVID, where this had a massive impact on our organization. So it was a call to action to really make sure that we are prudent with cost and investments and we've halted certain things that otherwise we might have been good investment. For example, brand investments were skewed down simply because the markets were not open. The whole organization mobilized, and I think I illustrated that we have now a systematic process of collecting ideas. By the end of the year, there were 7,500 into that big rich database. This year, there are about 9,000 over the period of the past but also on the future. So the organization continues to generate ideas on how to take cost out and really be more efficient. This is good. We really need to make it systematic and codify it so that the organization at large, becomes a learning organization because if one person figures out something good, it is important that, that travels across the Heineken world. So this really is the process that we're going through. And what we're now trying to do is make it a bit more balanced in terms of good practices traveling fast, but also some of the bigger cost interventions are now basically being packaged and that is coming to the forefront as well. So I also said before that, that EUR 1.3 billion was an enormous effort for the whole organization. The next EUR 1 billion is simply more difficult to get because a lot of the low-hanging fruits have been done. For that, you need more transformative programs. We're working on those and are going to disclose one of those in the next couple of months, possibly at Capital Markets Day or whatever, but that is in the making, but we're actually confident therefore, on our path to the EUR 2 billion. It's -- last point that is important is that the use of that funding. Of course, we lived in a COVID reality. And in that COVID reality, it was very difficult to price or manage inflation. We knew that we had about EUR 0.5 billion of transactional foreign exchange impact. It was very difficult to offset. So I also don't want to make apologies for the fact that the part of that EUR 1.3 billion was actually used to pushing inflation and over time, we will use the other investment in order to drive -- sorry, the other savings in order to drive investments in that portfolio. Now coming back to the last part of your question, and that is the 17% margin. This 17% margin was called out by Dolf as a sort of a north star to saying we did 17% margin in 2019. We're going to recover, and therefore, we're going to do 17% margin, somewhere down the line, let's call it, '23, 4 years to recover. Little did we know that COVID was taking 2 years and that inflation would spike and that Russia-Ukraine war was unfolding. So I do believe that with the benefit of hindsight, yes, we should not have really been so bullish about margins, but really contextualize it between what is the revenue growth, what is the operating profit that we want to restore and what is the investment that we want to put into the business. Now earlier in this year, I still said we continue to ambition 17%, but it is increasingly unlikely. We are working through our processes right now because we're talking '23, what is hedging, what is the pricing that we see? What is the portfolio mix that we're doing, and we'll update with the guidance in the midyear results. That's what we're going to do. So reading the newspaper, given the input cost pressures that I just highlighted, it's increasingly challenging, but we're going to make that call officially when it's time to make that call, which is in a few weeks' time.

Understood. One of the areas of investment has been e-com and your B2B platforms. I think they're now in 30 markets, representing 75% of sales. Can you comment about how those platforms help your business? Do you think they are a driver of sustainable competitive advantage? And do they give you both the revenue and the cost opportunity? Or is it more revenue? Or is it more cost?

Again, I think it's one of the big topics of today, and many businesses are talking about this. Let me first give you a few data points because I'm actually quite confident where we are with our eB2B conversion because we now have 400,000 active customers connected. Last year, we were giving you a full year number on digital sales, not an IFRS term, but in the footnote, you can see what it is. Of EUR 2.8 billion, in the first quarter, we achieved EUR 1.3 billion of sales. So if you look at the acceleration that we see, we're very happy with the conversion to digital sales. When internally, we do the comparison between some of the other very big brewers who are leading in this space and ourselves, we believe that we're at par with conversion and service offering. This is really important because it's about digital order capture, it's about 24/7 availability. It's about recommended order taking. It's about the layout of the shelf or the layout of the store in order to drive sales. All of that, including Fintech visibility is also in our platform. So I know that we're keeping up with the customer requirements. I know that we're piloting at pace and acquiring the customer at base -- at pace, and therefore -- and I see the results coming in. So I'm actually quite confident. And also looking ahead, we put that EUR 10 billion marker out there. We are well on track to deliver that. So if anything, I'm confident in our trajectory, but not complacent because the space is happening very quickly. So we're really, really are focused on making sure that we are not falling behind, but really in the race. If I may, because I think this is something that I'd like to articulate. We're very often looking at digital sales and then having the whole full value like we just discussed to the customer at the forefront of our minds. But that is one particular spectrum of the customer space. The fully digitally equipped customer, if you like, who wants to have the full suite of those solutions. But I was also in Nigeria and Rumba just a few weeks ago. And there, what people really want, first and foremost, is visibility about when can I place there? When is my order coming in because service levels are relatively not so reliable as in the West. Can I see my -- the credit that I still have. And basically, can you tell me what the right price point is for the beer to serve. If you look at the environment that I'm competing in, it's this level of relatively basic information sharing that is doing a lot of good for other places in the world. And the fact that we have there apps, call centers, 24/7 services to help people with these original questions, I think, is also providing a competitive advantage in that space. So it's not always the full suite. It really depends on the market maturity and we're playing the full spectrum.

Understood. Maybe then if we move to direct-to-consumer. So you've got a few different platforms. I think it's 6 to go now Glup.

Glup.

There you go. And you have Beerwulf in Europe and the rollout of those platforms, where do you think you are in terms of how far you can go geographically? And what do those platforms tell you about your customers in terms of data.

Yes, I think for us, this is an emerging field, to be honest, because we really want to create platforms where people can exchange and buy products. It gives us a lot of first-party data and consumer and customer understanding. But it's also -- and it gives 24/7 delivery service like the Glup platform indeed serviced around 6 stores. But this is something that we see is really scaling if and when needed to learn. I think the big play is at the moment in the digital B2B space, the digital D2C is a service offering that complements it. But it's not our -- let's call it, it's not at the same focus of us. It's doing really well. So we're learning. We're growing, we're scaling. And even in the post-COVID era, I think Beerwulf has still got a customer base and revenue, which is far ahead of 2019. So it is gaining traction, but it's still relative to the other part that I was talking about of modest scale.

So we talked about group-wide issues. And maybe we should dive into a couple of your more important markets. You mentioned Vietnam earlier, and that has been a market that has had more persistent COVID headwinds in some of your other geographies. Can you talk about your confidence in the medium term for growing that business as it comes out of those COVID headwinds? And specifically, perhaps can you talk about where you think the growth is going to come from? Is it from geographic expansion within Vietnam? Or is it penetrating the cities you're already in and getting higher per capita consumption within your strongholds?

Mitch, I think it's a great question. And I need to think about how I answer that without making too much and competitively sensitive disclosures, but what is the case is that maybe for the audience to know is Vietnam is one of our stronghold markets. As I said, we have, let's call it, 50% -- 47% to 50% market share. And in the premium segment, which is about 1/3 of the total market, we hold about 87% to 90% market share. So we're a big player in Vietnam, but it is indeed concentrated on Ho Chi Minh City, the South and some pockets there which -- but relevant, very big population. The way forward, and as I just illustrated, the recovery in the grip due to market the portfolio, I think our Vietnamese business has done an awesome job to demonstrate that they can navigate and really come back in full force. The future growth, I think out of the total beverage occasions in Vietnam, 90% is beer occasion. 9-0. So that means that what is important is to continuously acquire people that come into the legal drinking age and to look at usage occasions because clearly, beer is the preferred beverage of choice. So we're looking at different usage occasions. Heineken Silver is a really good example of that. where the traditional Heineken was a little bit better if you compare it with -- if you partner -- paired with Asian foods and Heineken Silver originally cannibalized on the total Heineken franchise, and after a period, Heineken recovered and Heineken Silver continue to grow. So it's a really good example about how you can initiate something and actually make the total pie bigger because you're defining not only new people coming in, but also different usage occasions for beer, which is the preferred drink in Vietnam. So one thing to expect is more innovation. The second thing to expect, if you have already 87% share of the premium segment, how are you going to make sure that you conquer more in the upper mainstream. And that's where Bia Viet comes in, our upper mainstream brand and is doing very well. It's growing share. . And then you have got your stronghold expansions, indeed, including to the north, where we're going to be very targeted of how we go city by city and really find the right offerings and the right route to consumer because we know we have the portfolio to win. That's basically how we see expansion in Vietnam taking place in the next couple of years.

That's very clear. Maybe we could go to Mexico next. So you've had strong premiumization within Mexico. Can you comment on how you think that trend can be and which brands that you own, do you think are most suited to capitalize on that premiumization?

Now the interesting thing about the Mexican market is that actually the premium percentage is relatively low. So the Mexican market has great beers, but premium, high quality is just 5% of the Mexican market. So one of the jobs to do of all the beer players in Mexico is how do we take the consumer and basically migrate them to different tastes and different offerings partly because the Mexico consumer actually quite likes flavors and quite like different experimentation. So this is where Amstel Ultra comes in, different flavor of beers. We're going to go different with Tecate, for example, different innovation. Heineken 0.0 is doing really very well for different usage occasions, but there is a whole premiumization that is still waiting to happen. Now that comes with quality, but it also comes with innovation and communication. And that is what we really are starting to drive. We want to do this gradual because we really know that there is a competitive set out there and that we really don't want to lose the franchise that we've currently got, but it's definitely happening, and it's grown [Technical Difficulty].

That's great. Maybe staying in Mexico. Can you just comment on how much of a headwind the OXXO mixing has been? And therefore, how much of a tailwind should it create once that's gone?

Yes, yes, yes. For sure. So we are losing the exclusivity in the OXXO retail chain as people may know, and we have agreed to do that in steps. And in total, there are 9 steps, all related to different regions in Mexico. We're currently in wave #7, and we need to move to wave #9. So there are 2 more to go. We will finish the end of 2023. So then that we will be out of that and it's important to note that, that mixing effect because competition is coming in, has a share impact of anywhere between 100 and 200 basis points. So our definition of success for our Mexican business also is if we deliver the revenue growth and we keep share constant whilst the mixing is going on, we believe that we're doing a really good job in this market with such a big competitor to take into account. So that is really our definition of success. But that's the impact, and it will be '24 before we're out of it.

Okay. Staying in LatAm but moving to Brazil. You have grown that business significantly since you expanded it with the acquisition of Kirin Brazil. But you've made the decision last year to keep both routes to market. Can you comment on the decision to operate a dual route to market in Brazil? Is that the right way to compete?

Well, we believe so. And the reason why we believe so is our local team in Brazil, as Brazil is a success 40 years in the making. I think the core of our success is the strength of the Heineken brand. And not making comparators to Ambev because I really want to stay to our own strategic narrative. But I think what is really important is that Brazil is now by far the largest market for Heineken, and we still have underserved demand. . So obviously, on those occasions, we've talked about capacity constraints and how these capacity constraints in a way we're enabling us to rightsize the portfolio because we don't have the scale that Ambev has, but we can create a portfolio that is sustainably profitable going forward. And that is what we've done. So we've shifted from a 70% economy and low-margin portfolio to now a 70% premium and upper mainstream portfolio. And that, I think, is an important aspect for the future sustainability of our success in Brazil. It is all driven by the right portfolio and the power of the Heineken brand, but we also saw that when we put a lot of capacity on the ground, and we see the brand pool of our international portfolio that it was really important to access all those consumers as well. And that's where a duplicate split of the route to market is coming in. And as Federico often remind us, it also gives us access to returnable bottles, the on-trade market, which is, by far, the most profitable part of the business. So it really made sense to not only create more distribution points, both with the premium portfolio, but also to make sure that we earn a lot more value in that market.

Let's move to Nigeria. So growth in Nigeria has been very strong, but per capital consumption in a global context remains very, very low. You've also suffered from capacity constraints. So I think you're expanding your brewery at Ama. I might have mispronounced that, and so forgive me if I did. Can you talk about how you plan to keep investing ahead of that growth and make sure that the capacity constraints don't slow your business now?

Yes. It's an interesting discussion, Mitch, because I'm now speaking a bit as the CFO here. But the dialogue we had with Nigeria and some of the other markets, this is what I also meant with intentional capacity allocation -- or intentional resource allocation is that actually, we really want to see some emerging evidence of profitable growth before we put more capacity on the ground. Because once the brewery is there, it's there. It costs hundreds of millions and an unfilled brewery capacity is a drag on your P&L. So really, what we said to Nigeria, and I think we were very successful in restoring the profit pool there after years of ramping that down. We are now through premiumization and pricing seeing a profitable business emerge in Nigeria, and this is the time to invest. But we're actually becoming quite disciplined in saying, show me the money first, how sustainable is that growth and then we give you capacity. The fact that, that gives an incubation -- that needs an incubation time means that we sometimes need to take or 2 years later, and that's when you operate on the capacity constraints. But you're right, the AMA extra capacity is coming on stream somewhere this year. and we will continue to deploy because Nigeria is now profitable for us. But it's important that I also illustrate that it's not just a volume-led decision. It really is also about do we earn a return and is the shape of the P&L, as I call it, healthy for the foreseeable future so that we can actually deliver it [ lead ] make that capital investment.

Staying in Africa. You talked about category convergence earlier and how you -- one of the changes is thinking more holistically about your consumer. So you obviously acquired Distell, which gives you greater category exposure within Africa. Can you talk about the progress without acquisition. Your plans for it. And then perhaps, if it's not too much to talk about whether there's opportunities for similar acquisitions in other parts of the world.

So let's first make sure that we have the timing right. So indeed, we've got shareholder approval, but we now need regulatory approval, and we're expecting this to come into play, hopefully, in quarter 4. Dolf just went to South Africa. And we're very excited with what we see in that business. But it's still subject to all the necessary approvals. What it gives us is a completely new look at new categories. At the same time, we're really creating the #2 beverage champion in Southern Africa. It gives us access to really boost Heineken in South Africa, for example, but we're also acquiring the leader Savanna in cider. And we have access to a fantastic new innovation stream including, for example, 4th STREET wines. Distell has done a great job, we believe, in making wines accessible rather than just for dinner occasions or social eventing for a select group. It is much more used as a refreshing cocktail with ice and fresh fruits and therefore, has put a very different spin on target audiences. Now there's a lot of excitement across Africa to partner with Distell to learn, but we first need to get the necessary permits and then we need to really understand the business. Last but not least, Distell was also a very good partnership in the making because we really see cost synergies at the same. Those are the strength of the go-to-market. So all in all, we're extremely exciting -- excited to see this acquisition mature. There are many other opportunities across the world. And we're keeping our eyes open, whether it's brewers or whether it's adjacent categories. We've -- whilst we stay with the capital discipline, we've got plenty of firepower to -- well, to continue organic but also inorganic growth. But it would be too speculative to say what that would be.

Understood. We're almost out of time. I would like to ask you a final question about your Brewing a Better World program, which contains ambitious targets. But how does it sit next to EverGreen. Is there any tension between those 2 initiatives? Or do they actually work together synergistic?

So one of the deliberate shifts that we're making is that we define success these days as multidimensional success and very deliberately. We want growth and we want value conversion from that growth. We want capital efficiency, but we also want sustainability and responsibility. We really want to balance all sides of that success model and therefore, is there an inherent conflict. Of course, there is inherent conflict because if we want to put heat pumps in, then maybe need to spend something less on something else. But the good thing about the Brew a Better World commitments to 2030, 2040 and beyond is that we have time and that we really want to make use of that time to learn, to do, but then also to scale. So for instance, I think we are really planning out what the cost of in action is in terms of carbon tax, for example, versus what we're already and laddering that in, in order to get to carbon neutrality in our own production sites. And we've got plenty of visibility and plenty of money allocated to achieve that. And last but not least, this is also the reason why we put it in our long-term management objectives because we really believe that it's important to have that balance.

Feels like a great place to leave it. So Harold, thank you very much for your time. And thank you to everyone for listening.

Thanks for the audience.