Heineken N.V. (HNK1.DE) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the HEINEKEN to acquire FIFCO's beverage and retail businesses. My name is Ezra, and I will be your coordinator today. [Operator Instructions] I will now hand over to your host, Tristan van Strien, Director of Investor Relations, to begin. Please go ahead.

Thank you, Ezra. Good morning or good afternoon, everyone. Thank you for joining us for today's live webcast on our binding agreement to acquire the multi-category beverage portfolio and proximity retail business of FIFCO. Your host will be our CEO, Dolf van den Brink; and our CFO, Harold van den Broek. Following the presentation, we'll be happy to take your questions. The presentation includes expectations based on management's current views and involve known and unknown risks and uncertainties, and it is possible that the actual results may differ materially. For more information, please refer to the disclaimer on the first page of this presentation. I will now turn the call over to Dolf.

Thanks, Tristan, and good morning, good afternoon, good evening to everyone joining us from around the world. Thank you for making time at shorter notice. We're delighted to announce our intention to acquire 100% of FIFCO's beverage and retail businesses for approximately USD 3.2 billion, a landmark transaction that strengthens HEINEKEN's footprint in Central America. FIFCO has been our trusted partner since 1986 with HEINEKEN holding a 25% stake since 2002. We know this business well with Board representation and an outstanding management team. This acquisition brings FIFCO into the HEINEKEN family, consolidating our leadership in Costa Rica, expanding our footprint at Panama and acquiring the participation of FIFCO in Nicaragua's leading and fast-growing brewer, Compañía Cervecera de Nicaragua. We also gained further presence in Mexico, Guatemala and across the region, leveraging strong brands and distribution networks. At HEINEKEN, superior and balanced growth is our top priority, central to our EverGreen '25 strategy and even more so as we look ahead to EverGreen 2030. This transaction of high-quality assets is compelling for several reasons. It enhances our advantaged footprint for growth, strengthening our position in markets with robust macroeconomic fundamentals and favorable demographics. We acquire full control of Costa Rica's beverage leader with iconic brands like Imperial, an established PepsiCo franchise and strong adjacent businesses in wines, spirits, and proximity retail. We take full ownership of HEINEKEN Panama, star performer within our group that has consistently outperformed the market. We become equal partners in Nicaragua's leading brewer, access a food and beverage platform in Guatemala and add fast-growing beyond beer brands in Mexico. As Harold will expand upon, this transaction is value enhancing for HEINEKEN, driving operating profit margin and earnings per share from day 1. Let us go into a little bit more detail, starting with our footprint. HEINEKEN's growth profile is geographically balanced and advantaged. Over the last 5 years, we have further strengthened that advantage, actively sharpening our footprint, exiting markets and segments where such scale or added complexity or risk, we are focusing on scalable growth opportunities. This includes divesting water-centric businesses in Slovenia and Tunisia and soft drinks in the Netherlands. We exited the Philippines, Sri Lanka and most recently Seville, small and/or complex markets without a clear path to future sustainable and scalable growth. At the same time, we have stepped up our footprint with strong and emerging positions in the growth markets for today and the future. We're making calculated bets in big profit pools such as Peru and Ecuador. We established our very successful asset-light partnership in China, allowing our global brands to thrive. Our leading position in India is now consolidated, taking advantage of its future potential. And with the acquisition of Distell and Namibia Breweries, we're creating a Southern Africa beverage champion by combining it with our premium beer operation. Today's acquisition from FIFCO and Central America adds scale and another leg of growth with profitability ahead of the group average. Costa Rica is a highly attractive market with strong macroeconomic and demographic fundamentals. The population is growing at nearly 1% per year and GDP at around 3%, tourism is a major driver accounting for 10% of GDP, thanks to the country's beautiful beaches and diverse ecosystem. Despite impressive growth, per capita beer consumption remains relatively low at 56 liters. Almost half that of Mexico and Panama, despite higher GDP per capita. External data and our own analysis, project low to mid-single-digit annual volume growth for the beer market. Cost Rica offers exciting growth opportunities in a stable environment. In this attractive market, we are acquiring the clear leader. FIFCO has strong leadership in the beer category with over 2 million hectoliters led by the iconic Imperial brands, a brand over 100 years of deep-rooted local history. Our premium portfolio, including HEINEKEN and Sol's already present in the market. FIFCO also leads in beyond beer with local brands like Adam & Eve, and Bamboo. In soft drinks, we're the #2 player overall, leading in teas and energy drinks complemented by the Pepsi franchise. FIFCO's adjacent businesses supports further system strength, distributing wines and spirits and operating over 300 proximity outlets with room for expansion. This strong system, #1 in Beer and Beyond has consistently delivered. Over the past 5 years, beer and beyond beer volumes have grown at mid-single-digit rates with operating margins comfortably ahead of our group average and accretive to the Americas region. Upon completion, Costa Rica will be one of HEINEKEN's top 5 operating companies by operating profits. And there's more growth to be had as we see the transaction able to generate both revenue and cost synergies. We can increase the capital consumption closer to levels seen in neighboring markets by shaping the category and applying our revenue management systems. We will accelerate our global brands, including HEINEKEN and Sol. We will share global best practices in production and commercial execution, and we will leverage procurement skill and shared services, including our Americas hub in Monterrey. This transaction also gives us full ownership of HEINEKEN Panama. Panama is an exciting market where we delivered 20% annual volume growth per annum over the last 5 years, driven by both market growth and continued market share gains. The economy is U.S. dollar linked with favorable demographics supporting further expansion. With this acquisition, we also deepened our presence in Central America. An equal partnership in Compañía Cervecera de Nicaragua, Nicaragua's leading a fast-growing brewer with a strong Toña brand and approximately 250 proximity retail outlets. The acquisition of a food and beverage platform in Guatemala with iconic regional brands and in Mexico, FIFCO built a strong portfolio of beyond beer brands with superior brand power and consumer pool giving us the opportunity to leverage our route to market for HEINEKEN Mexico. Sustainability is a core strength of FIFCO, complementing HEINEKEN's ambitions. FIFCO is a regional leader in material circularity, mother positivity, carbon neutrality, and zero waste. It's a pioneer in developing women in leadership and a benchmark for corporate governance. Their values align with ours, and together, we will execute our Brewer Better World 2030 ambitions. With that, I will hand over to Harold to discuss the financial parameters.

Thank you, Dolf, and good to see you all. Very happy to announce this transaction today that will contribute to sustainable, profitable growth and strong cash generation. I will take you through the financial impacts. But before I do, let me remind you of our capital allocation priorities, which remain unchanged. In our value creation model, we prioritize capital allocation towards organic growth and do so within a disciplined financial framework with a prudent approach to debt. We remain committed to our long term below 2.5x net debt-to-EBITDA ratio. We maintain a consistent dividend policy as we have had for decades paying out 30% to 40% of net profit beia. We also prioritize value-enhancing acquisition to boost our long-term profitable growth. This transaction will provide us with an enhanced growth platform and scale in an environment with favorable economics and further value-enhancing synergies. And as previously indicated, we consider additional capital returns such as share buybacks, which we commenced earlier this year. I am pleased to confirm that we have headroom to do both the transaction announced today and continue our previously enhanced EUR 1.5 billion share buyback program. For today's acquisition of FIFCO stakes, we do not currently own, the cash consideration will be approximately USD 3.2 billion. This implies an acquisition multiple of 11.6x EV/EBITDA based on '24 results, and excludes any synergy benefit. Our net debt is expected to increase by EUR 3.2 billion with a net debt-to-EBITDA ratio to increase modestly. As I mentioned earlier, we remain committed to return to below 2.5x net debt over EBITDA, and we'll continue to make progress on our previously announced share buyback -- share buyback programs. The financial impact as it stands today, can be seen on the slide. With expected additional revenue in excess of $1.1 billion and operating profit close to $300 million being consolidated. The transaction will also support our operating profit to net profit conversion with increased profit from associates and joint ventures from the Nicaraguan operations offsetting the loss of associate income from Costa Rica. We will also have reduced noncontrolling interest income as we take 100% control of HEINEKEN Panama. We furthermore expect a run-rate cost savings of about $50 million through the application of HEINEKEN's proven best practices, which corresponds to a high single digit as a percentage of the cost base. This transaction is expected to be immediately accretive to our operating margin and earnings per share upon completion, with the latter to be low to mid-single-digit range. And as Dolf mentioned, Costa Rica will be our top 5 operating company in HEINEKEN based on the operating profit contribution. On the next steps, Completion of the transaction between HEINEKEN and FIFCO is subject to customary regulatory approvals and the approval by the General Shareholders Meeting of FIFCO, which will take place in October 2025. Closing of the transaction is expected in the first half of 2026. The deal has already been improved unanimously by the Board of Directors of FIFCO, which includes representatives of FIFCO key shareholders. And with that, Dolf and I will be happy to take your questions.

[Operator Instructions] Our first question comes from Sanjeet with UBS.

Three questions for me, please. Firstly, why now? You've had a long-standing relationship with a 25% stake. What was the catalyst to take control now? Secondly, does this constrain you at all from doing other potentially similar sized transactions in the next 12, 24 months? And thirdly, just on the retail outlet piece, why keep that part of the business? Why is it core? And how much of the beer volumes in Costa Rica going through those retail outlets versus the channels?

Sanjeet, thanks for your question. On your first question, yes, this has been a partner of us for over the last 20, 25 years. A quality business, which we know well, which we really like and respect. And this was the right next step for all involved, both for the families. FIFCO was a family control business. It was the right moment for them. It's the right moment for us to increase our exposure to this high-quality business and in particular, these high-growth profit pools in Central America. On your second question, Harold, do you want to quickly comment on that?

Yes. I think as we indicated, our net debt-to-EBITDA ratio will increase only moderately because of this transactional size. So our intent is to, over time, indeed go back to that 2.5x that we are actually quite precious about, but it does not constrain us from participating in the 12, 24 months' time window, of course, depending on the deal size. But we don't believe that this is in any way impeding us to continue on our capital allocation strategy, including reviewing M&A opportunities as they come along.

Very good. Let me then take on your question on the retail. We actually find that a very attractive part, Sanjeet. As you know, our 6 retail proximity format in Mexico is a very strategic important part of our business model in Mexico, over 17,000 stores, one of the largest proximity change in the world. And therefore, we really like both in Costa Rica and Nicaragua, this emerging proximity store format. And there might be good synergies between our experience and expertise in Mexico and these retail businesses in these two markets. So for us, it's actually, yes, explicitly part of the scope and perimeter that we really value. Thank you, Sanjeet.

Our next question comes from Chris with Rothschild & Co.

A quick question on the HEINEKEN brand potential across these regions, because they're good economies, as you say. Can you give us a sense of the HEINEKEN brand mix in each of the different countries and where you see the potential it could get to? And then a follow-up in terms of any CapEx required in the business that you're acquiring, are these well-invested assets? Are they able to produce HEINEKEN to the volume and standard that you'd like? Or do you think it will be -- need some incremental capital post completion?

Thank you, Chris. We believe there is a meaningful upside on the HEINEKEN brand. It's still a very relatively small brand certainly, if you compare it to some of our other key Latin American markets, whether it's Brazil or the emerging positions in places like Peru, Ecuador, Colombia, so we, for sure, see upside on brand HEINEKEN. Harold if you take...

Let me take the capital expenditure piece. So these are -- this is a very well-run, high-quality company. So we're actually very pleased with the footprint that they built and the quality of the assets that we have. There is still space to grow further in the existing asset base, although, of course, we do hope that over time, our growth potential that we see will make it necessary to continue to invest in the business. But we don't see any immediate need to spend a disproportionate amount of capital to upgrade the facilities, if that's the background to the question.

Our next question comes from Olivier with Goldman Sachs.

First of all, I was looking at the current trading of FIFCO. Looking at the H1 results, it appears that there was some weakness on sales being down 6% in H1 and even if I look at the H1 presentation, it was showing that beer volumes were down 7%. So I don't know if my -- maybe my Spanish is not great, but am I looking at the right accounts? And perhaps could you comment on current trading? That's the first question. And then as part of the transaction, you're going to inherit a small food and juice business in Guatemala. I was just wondering what was the plan there? Is there an opportunity to combine it with beer ultimately? In the country. And I believe that you are already produced under license by one of the local player.

Very good. Thanks, Olivier. And impressed by your Spanish, for sure, we do see some weakness in the current trading. What's really important, and this is mostly written by the U.S. business which is not the parts that we are interested in. FIFCO is assessing opportunities for that part. We -- our strategy in the U.S. is focused on premium, and we have no interest in getting exposure to the mainstream segment in the U.S. That part has been the biggest impact on the softness that you see in those first half results. On the underlying Costa Rica and Nicaragua business, also there, we do see some softness, but to a much smaller extent. We believe driven by what we are seeing across Latin America with consumer sentiment impacted by economic uncertainty, and mid, long term, we are very, very confident in the growth profile of this business. The underlying drivers of demographics, middle class income increase and the track record of this business, which has been extremely strong over the long term, but including the last 5 years. When it comes to the food and juice business in Guatemala, that normally would not be core to us, but these are very strong consumer brands with fast growth and good margins. And this is something we'll -- which we will focus to learn more about before we make up our minds what could be next.

Our next question comes from Sarah Simon with Morgan Stanley.

Just a question about the soft drinks business. You've obviously been not particularly enthusiastic about bottling in other geographies. So I'm just wondering if the bottling business is going to remain core or if that's another business that will be under review, as you were saying to Olivier about the other business?

Thank you, Sarah. Let me be very clear. There is no systemic position on soft drinks. This is something that we really look at market by market. It is true that we have been divesting some of it. For example, the water portfolio in Slovenia and Tunisia, which, as you know, is a very low-margin business that we didn't want to deploy capital against the soft drink business in the Netherlands because we saw very limited synergies with our beer business in that particular market, while the capital injection need was high. So these were very important local circumstances. On a more global scale, we are very proud bottler of both Pepsi and Coca-Cola in different parts. There's many markets where combining beer soft drinks makes a lot of sense from a logistics, route to market, the system strength point of view. And so in this particular case, both the own soft drink portfolio, which is of significant scale as well as the Pepsi franchise in Cost Rica is actually a very important part of the business and absolutely considered core. And we are proud to extend our long-term partnership with Pepsi in this regard. And they are fully supportive of this transaction.

Our next question comes from Carlos with HSBC.

Dolf, what do you attribute the low per capita consumption of beer versus Mexico that you can increase? And can you expand on what Mexican brands you think have the best potential in this market?

Thanks, Carlos. I think the low per capita is probably mostly driven by the relative price level. So we do see an opportunity of balancing that. And that's always a strategic thing to get right. But we do believe that through price pack architecture, through applying our revenue margin growth playbooks that we can accelerate beer volume and beer per capita volume. Nothing dramatic, short, short term, but mid-long term, we really believe that we can at least partly close the per capita gap with some of the surrounding countries. On the Mexican brands, at this point in time, also for competitive reasons, I don't want to go into the specifics, but we do believe that across our markets, there are cross-fertilization opportunities of the -- for the Costa Rican brands in our footprint and vice versa. But yes, we'll take that a step at a time and focus on that after closing.

Our next question comes from Rob Ottenstein with Evercore.

Congratulations. The Americas are becoming an increasingly important part of your portfolio. I was wondering if with this acquisition, you can talk a little bit about management changes there, management and organizational structure so that you can best optimize results, both locally as well as part of the global company.

Thank you, Rob. Yes, indeed, the Americas region, it's incredibly important. For decades, our legacy European business was the largest region. With this acquisition now the Americas region is still similar in size to Europe, but it's actually, it will be our largest region. At this point in time, we don't foresee any major structure changes in that regard. We feel this can and will be managed within the confines of the current scope of the Americas region. In terms of number of markets, it's still below the number of markets that we are managing, for example, in Europe. In terms of leadership, maybe good to highlight that the current incumbent, [ Rolando ] who has been managing FIFCO for the last 2 years, who have been 20 years in the company has agreed to stay on and lead the company going forward under a HEINEKEN ownership. And we're very excited about that. We see [ Rolando ] as a very strong leader with further potential for the business, and it will also really reduce any integration risk either way, we deem an integration list on the relative low side as this is a business we know well, incumbent leadership will continue. And there's no complex local integration happening. So yes, that's all I can say at this point in time on management.

Our next question comes from Celine with JPMorgan. This will be our final question.

So my question is on the growth in Costa Rica. You said mid- to high -- low to mid-single-digit market growth. What do you think is your -- I mean, your playbook given the acquisition you've made in terms of -- you mentioned increasing per capita consumption. And I presume as well some top line synergies. You also mentioned a $50 million synergy, to which extent you would need to reinvest in the market? I think in an earlier question, you mentioned that you probably needed to expand a bit the price positioning. So I was wondering whether margin at the current level maybe will not increase given the investment you need to make? And then lastly, Panama has been fantastic. What is your market share there? And what's the outlook for this market, please?

Fantastic. Thanks Celine. First of all, growth in Costa Rica, the key core reason why we were so excited about this acquisition is for growth in very attractive profit pools driven by underlying demographics, income, 3% GDP CAGR, stable macroeconomics, stable currencies, this is really multi-category. So we do see that low single digit to mid-single digit on beer, driven by both demographics and the per capita there's solid growth on the soft drinks portfolio. There's good growth on adjacencies, whether it's the retail business or the wine and spirits distribution. So across categories and formats, we believe there, yes, there is a lot of further growth to be had. Let me speak to Panama and then maybe you take the synergy question. So on Panama, we are now just below 50%, around 44%, 45% has been an incredible success story over the last 5, 6 years, combining both structural market growth and on top of that significant market share. So we are quite excited about Panama and yes, now being able to consolidate 100% of that value. Harold, over to you?

Yes. Let me just give you a bit of insight into the synergies that we currently see in the business. This is really the $50 million roughly that we're talking about are primarily or actually exclusively cost synergies that we're talking about. So revenue synergies from best practices and R&D are outside of this number quoted, particularly because of the reasons, Celine, that you said, that we intend to reinvest and really make sure that affordability and key price points are being hit. And that also may include a wider range of pack size variants than we currently see in the market. These cost synergies are really related to brewery processes. You've heard us speak both Dolf and myself extensively in the past couple of years about our connected brewery network about how we really are starting to optimize brewery processes for more output and lower cost. And this is a very significant part of the synergies that we see after the due diligence. The second one is transport management and optimizing that with our protocols and our processes, and there are a very big part of the savings also related to, let's call it, back-office synergies as we start to leveraging a bit more of our shared services network also for the benefit of Costa Rica and this fantastic business. So the synergies are pretty well defined and clear to your point of reinvestment. I think, Dolf has already alluded to it. We really see that the profitability levels of this company is already extremely accretive to the HEINEKEN average. And therefore, the focus will be about how to sustain and accelerate growth where we can do it. But at the same time, we've also got a business case to deliver. So that's a bit the balance that we're trying to fight.

Thank you, Dolf and Harold, and thank you all for your questions. Just as a reminder, of course, we will see most of you for our Capital Markets event on the 23rd of October. And we will look forward to seeing you in Seville next month. Thank you.

Bye-bye. Thank you.

Thank you very much, Tristan, and thank you to all our speakers on today's line. That concludes today's conference call. Thank you, everyone, for joining. You may now disconnect your lines.