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

Right. I think we're live and our 5-minute clock has just started. My name is Rupert Trotter, I'm the consumer specialist here at Barclays. I am standing in for Laurence, who seems to be yet further delayed in Gatwick, somewhere over the Atlantic. So I'm afraid you still have to suffer in silence with me. I'm delighted to welcome Heineken back to Boston in particular, Harold sitting here with me on the stage and Tristan for trusting me. Before we start, I did also want to highlight there will be a breakout session after this around the corner. For those -- for the question. Yes. we're out to the right and right, but we'll be going back [indiscernible] delight to the kitchen. So we get there without you being stopped and tested on the way. We got 35 minutes. So I'll jump straight in, if that's all right, Harold? Look, H1 was, I think, sort of an important point. We've transitioned from EverGreen '25 to 2030. Actually with strong delivery. And we had strong delivery at the bottom line cash flow improvement as well. What allowed that to come to the fore, particularly in this period? And how do you see that evolving from here?

Well, first, Rupert, thanks for having us, Heineken here. Always good to talk and indeed may be good to start with a complement to the organization because we're in the middle of a CEO transition, as we know. And one thing that we were very clear on as an executive team is the best thing that we can do is keep our heads down and keep working on our strategy. And it's super nice to see in the first half of the year that there was volume growth across the world 1.5%, that we had measured but still revenue growth, and maybe we can talk about that a bit later. But that there's a lot of proof points of the acceleration of EverGreen starting to come to life. We've brought multi-market organizations to life. We've grown our global brands. We have prioritized our local brand portfolio, we saw productivity coming in. We have implemented Freddie AI across more and more of our markets. So the organization is actually moving. It's accelerating. And the results that came are bearing the fruit of that. So that was super happy to see. Now I don't want to come across as complacent because there's a lot more work to be done in order to really unlock that potential, but it's a good start.

And I don't want to put the cart before the horse, it's [indiscernible] question because [indiscernible] enters the house 1st of October, I think. But very much when the announcement was made, it's like his commentary was I buy into EverGreen and I want to build on it. And I think I don't want to over extrapolate that. Incrementalism from here, how -- what are you looking for from a new CEO internally message-wise, internally?

So internally, we had the conversation about, look, EverGreen '25 for the necessary foundation for EverGreen 2030. And for those of you who don't know, but we have sharpened our strategy quite considerably, to be -- put more focus on the growth engines, and more focus on global brands, more focus on priority markets, more focused on driving the productivity to the next level. And the first thing that we need to do is prove that we can do that. So what I'm very much looking forward to is not Rafa arriving on the 1st of October, but to actually do the continuation of the strategy happening. Then secondly, I think this is only year 1 of EverGreen 2030. So the whole point is about how can we mobilize the organization to do this over and over again to deliver this consistent set of results and to start to see a bigger impact as we drive it, both on top line on bottom line, but also to your point on capital productivity and conversion of cash flows into shareholder value creation.

I think we're going to touch on a little of that later on a bit more debt. But I suppose when when one looks in the consumer staples from the outside, and we always originally start with its top line and the EBIT conversion. And actually, you [indiscernible] there during the first half I mean this delivery of sort of mid-single-digit top line growth and profit growing faster seems to be, like you say, it's fair for [indiscernible] to walk away to getting a bit more embedded about that?

Yes, I think so. And although I'm a CFO and actually a charted accountant, I do want to make a point here, because if you include the growth that we get from China and the growth that we get from our contract brewing business in India, our revenue growth would be well over 4%. And I think it's an important point because if you would just look at our stated financials, you would potentially miss that. But actually, therefore, that mid-single-digit revenue growth is actually within reach. And the conversion of operating leverage, the cash productivity that we see coming into the business, we start to see it happening, but more to be done, as I said earlier.

You mentioned Freddie AI, scaling automation, connect data across sort of commerce. How are you seeing this? And how can we sort of see this at Winston and how this is closing maybe the performance gap against [indiscernible] you obviously going to bring up these.

May be good for the audience to first explain what is this Freddy AI. Of course, no [indiscernible] a very important person in our business, Mr. Freddy Heineken, who we believe is the best market here that the Heineken company has ever seen. But the notion that [indiscernible] put behind this is how can we leverage digital in order to learn and scale across Heineken. And there are three components to that. First one is how do we get access to consumer research studies and best practice sharing, and we call that Freddy Connect -- sorry, My Freddy AI. The second one is how do we build innovation and content creation through a digital ecosystem so that new advertising campaigns don't take 6 months, but take 6 days. And that is the second one. And the third one is as we start to put resources into that, how do we measure ROI optimization the digital means. And all three parts are the connection that we put in, in terms of Freddy AI. We've seen that working on the Heineken brand, and we're now scaling this across. Now to your point, is this a competitive advantage? I don't think that we're at that stage yet. But certainly, what we are is at competitive levels at this moment in time. That's already a big step up. And this is partly to do on efficiency, but it's very importantly parting to do is how do we get from consumer insight to product relevant consumer offerings in a much faster time scale because the world is not waiting. And this is the beauty about the unlock that the commercial team is trying to get.

Meeting more occasions, live time.

Absolutely and faster.

So I'm almost going to go back to sort of big picture question. We've had long discussions about the changing alcohol-consumption landscape. Heineken's organization have made sort of things of decline and consumption is overdated. It feels like a lot more of the top line is in your own hands now rather than would be perceived themes that there's a lot more to go for. There's a sort of performance gap to close.

Yes, I think the way that we look at it and we were very explicitly making the case for beer in our Capital Markets Day in October 2025. Because at that moment in time, we felt that the world was somehow giving up on beer as a relevant consumer occasion. And that is not right. The way that we are thinking about this is three different market architypes. In markets where consumers are entering the alcohol, the industrialized alcohol category, the value markets, as we call them, beer is a very relevant category because it's affordable, it's accessible, and it's actually industrialized quality, which is better than home-growing alcohol. If you then go to advancing markets, where is premiumization on top, and this is in markets like Vietnam and Mexico and Brazil, where it's happening. There is a trading opportunity. And then you've got the last part, which is developed markets where there is a fragmentation of choice. But what we often forget is that the world's population is sitting to a large extent, the value in advancing the markets. You see that India, for instance, you see that in the growth of Vietnam. And we have a role to play to shape the [indiscernible]. And that's why we wanted to really make the case for beer. And you also see that with new flavors, new variants, there is an opportunity to create new growth through new segments. And 0.0 category is only starting at that moment. Now what we also know is that there are new consumer occasions to be unlocked. So when we look, for example, at our acquisition, our most recent acquisition in Middle America or Central Americas, we acquired a full beverage portfolio including RTDs. So I also think that the Heineken community is more and more looking at the total landscape of consumer needs rather than beer only. And those acquisitions are a proof point of that.

I had a question penciled in for that further down the page. So I'm going to go off script but stay on the question degree, Tristan, you don't worry. But on the Central American acquisition like you say, you bought a bigger portfolio, but a different skill base in there as well. We've got incremental retail route to market. What's the learning that is going to come out of that? And how should we see that being transferred around the organization?

Well, I think already what you see is that [ Alex Carretero ], our new President of the Heineken Americas business, is really getting very excited about the skill base that we acquired with FIFCO in Middle America. And this is about the RTD category, but also about how you manage multi-category play and how we start leveraging with our 6 stores but learning actually for the Central Americas, what more we can do with the 6 stores in Mexico in order to really amplify the route to market and make that a more shopper-based occasion rather than the bear case location.

So let's talk a little bit about the Americas, and that's to go on to talk about Mexico. I mean, Mexico, we've seen some volume decline, what has been historically a strong market for you. We know that Mexico is a market as yet to properly [indiscernible] in a significant manner. What -- how -- what is the catalyst for the development now getting back to sort of volume growth and actually the medium-term premiumization of the market.

Yes. Exactly those 2 words, Rupert. Maybe going back about half a year when we started looking at the outlook for 2026. I just want to caveat it. Because I'm still relatively concerned is maybe a too big a word, but I'm not very optimistic about the short-term nature of the markets in the Americas. And I know that I'm maybe a different voice that you hear somewhere out there. But I'm looking at macroeconomic uncertainty, consumer proliferation, less income, heightened competition, you do see that the Americas at the moment is a market that needs a lot of investment in order to bring the consumer back to the franchise. Now to your point, what's the recipe for success is, we will keep on investing in building a better infrastructure for our brands to flourish. First, so we will continue to expand the route to market in Brazil. We will continue to expand the 6 stores. We will continue to leverage the Middle Americas, as we just talked about. But what needs to come on top is consumer-relevant brand portfolio. And what we do see happening in both of the markets is that healthier choices, more flavors and premiumization are still key category growth drivers, and that's what we will be investing in.

Can you talk a little bit, at just about Six. I mean, clearly, in Mexico, actually we've been through, firstly, the [indiscernible] transition, but how Six is growing. And actually, any other incremental plans, where you think that model could be relevant in Latin America?

Yes. So the solution might be different. So first of all, we are now the second largest proximity retailer in Mexico with all 17,000 stores. So this is a very, very important route-to-market asset that the team has developed there. What we are starting to see is more and more based on what I just said is that this is not only a bear outlet, but this could be a consumer proximity retail outlet with a broader franchise than we are currently offering. And what we're seeing is that there is at least consumer appeal to develop it into that. So we do see more opportunity to leverage our Six franchise further. And what we see happening in Middle Americas is that actually, FIFCO has done exactly that. So what we are looking for is market by market, what are systematic ways to actually build a sustainable route to market for our products. Sometimes this is digital with our ESL system, and sometimes this is physical with our Six stores.

Brazil, I think we alluded to has also faced some sort of volume declines with the market share challenges. Lawrence, I've got to say, [indiscernible] written about sort of increased structural challenges in Brazil. Volume growth becoming potentially more challenged at the market level. How do you see the market evolving then from here sort of volume versus price mix? If premiumization fills the [indiscernible] for premiumization.

So I've read Lawrence's piece, and I'm sure that he will listen to this recording with a great degree of pleasure and interest, and I thought it was a good piece. But what basically depicted is that in the 2005 to 2015, late teens there was an acceleration of income growth and population growth, particularly the younger consumer, which was conducive to the beer category, together with some advertising loss specificities there. And I think he's right. This was the growth and flourish period of beer. Frankly speaking, we built a fantastic trajectory of growth in Brazil on the back of that. And we are very pleased, not only with a route-to-market model but also with our brand portfolio that we built as a result of that or back on that momentum. We really look towards both Brazil and Mexico is as attractive, sustained growth markets going forward. So where are back to differ is that volume growth is no longer possible. I think volume growth is possible. But what will happen is more consumer innovation and more consumer need state that needs to be tapped into in order to get that growth going. Now for example, the launch of Heineken Ultimate, 3.5% ABV gluten-free, which we've just done is off to a flying start. Amstel is still growing very, very fast, and we're experimenting and launching new brands in Brazil as well. So the name there will be about quality of growth, not necessarily capital consumption inclination as what we've seen in the previous [indiscernible].

So it's more nuanced, its more premium, but yes meeting the occasions to consumer demand.

And we've got a fantastic platform to do that.

And again, in Brazil, we're seeing OXXO sort of move into Brazil as well, I think I might say, is that an incremental opportunity or just...

Look, we know OXXO well. We know FEMSA well. We think that this is indeed, a good opportunity for the further development of that market. But we're embracing the change as we see it.

And then finally, on Brazil, there are a few changes going on there. One is clearly the tax changes towards the end of the year, both in sort of terms of VAT in U.K. parlance, but also we've got the introduction potential syntax in the new year. What should we -- this is happening at a sort of peak demand period for you how should we sort of think about this? I know a lot of people will try and get worked up about phasing. But in terms of medium-term demand, how do you see this and how do you manage it?

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 in 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.