Heineken N.V. (HEIA) Earnings Call Transcript

[Audio Gap] everybody. Thanks a lot for joining us, and we are very pleased to welcome Harold van den Broek, CFO of Heineken. In terms of structure today, we're going to work through a series of questions. If there are any from the audience, you can submit to me via the iPad, and I'll try and bring them in at an appropriate time. So Harold, thank you again for joining us.

Thank you. And it's great to see you all and live here. Long time. So it's been really good. Thank you for coming so early as well.

Great. So I guess, Harold, you joined Heineken last year. You've got 30 years of experience across global FMCG. What are the key things you think you can bring to Heineken based on that experience?

Well, thanks for the question. You do your due diligence when you have been around for such a long time and then change company. So what I was looking for is really is, is Heineken a quality company and are we having the right path to the future? And I can honestly say that also 9 months in now, I do believe that Heineken is a quality company and we have a path to the future. To your point, what do I really look for to bring is actually 3 things. Internally and externally, we still feel that there is a lot to do with what Dolf has labeled as EverGreen and the strategic narrative of how we want to prepare Heineken for the future. And this is such a big change. It is really shifting from organic -- from inorganic to organic growth. It is really what we're trying to get to, is balanced and superior growth by which we mean not only volume focus, but also value focus. And my contribution really is how do we do that in a way that we are capturing that value from the growth so that we are, what I call internally also, improving the shape of the P&L, creating investment space, making sure that we are having enough funding to drive the growth for the future. And that part, together with capital efficiency, is something that I believe that Heineken could have done better off, and that is something that we want to bring to the party. This is also, therefore, what we call the 4 dimensions of our success. It's growth, value and volume. It is also return. So expanding operating leverage from that growth. It is improving capital efficiency or return on net assets, as we call it. And importantly, it's to build sustainability and responsibility into our definition of success. And therefore, I'm hoping to be able to contribute with appropriate resource allocation and a focus on value conversion to that part. Last, I'm very passionate about, so I'm going to take that time to answer that. Heineken has been 158 years company, building success on success. I think we can all acknowledge that. What we're also trying to do, particularly in the light of this new strategy, is to bring more external orientation in. For example, moving a bit more from product-centric to consumer-centric, to understand what digital technologies bring that have already been applied in other industries and that could perhaps serve as Heineken at large. So this whole point about external orientation and making sure that the talent is there to take the future forward after Dolf and myself have moved on is also something that is really dear to us.

Great. And you touched on EverGreen which was announced to the market January last year. As you reflect on the past 14 months, maybe a few words on what's been achieved so far and what's still to do.

Yes. Look, EverGreen was announced in February 2021. It seems like ages ago, particularly what is happening in the world at the moment and in the last years. But also let's reflect that this is just 1 year in the making. So I'm very proud of what has been achieved and I'll come and I'll answer that question, but I also want to really say upfront that this is a longer-term journey. You cannot put EverGreen in place and expect for the switch to flip in a year's time. So we're actually very proud of what has been achieved in what has been extraordinary circumstances. And we knew when EverGreen was launched that we had to deal with those external circumstances. So the mantra that we are applying is we need to do 2 things. We need to navigate the crisis and we need to build the future, either/or is not going to work. So what has been achieved? Well, the first thing that we're super proud of is the fact that Heineken is continuing its growth trajectory. And you saw the results, 17.4% growth. We now have recorded double-digit growth in over 40 markets compared to 2019, so prepandemic. So Heineken is still a fantastic asset for a company that has a lot more potential to go from there. And this is not only the Heineken as most of us know it, it is also the innovation that we put behind it. Heineken Silver, Heineken 0.0, the largest 0.0 brand, much more potential to grow from that. So that's one part. We take pride in Heineken, but we also take pride in the fact that we have got a portfolio that is set up for the future, because we are very happy with the fact that our portfolio is geared towards premium. And when you look at the history, and even in today's reality, premium is outpacing mainstream and economy across multiple sectors. So we're very well positioned and will continue to build not only with Heineken but also with other brands like Amstel, like Eisenbahn in Brazil, like what we call the Y-accelerator brands, which are really local jewels in Europe targeted to younger consumers. Specific needs have grown dramatically in the 30s in 2021 and will continue to do so. So this is an important one. And then we have low and no alcohol. We've got beyond beer, which is going to be an increasingly important part of our strategy. But then there are 2 other components. The first is the digital transformation, which is happening across the industries but is also happening in our industry. And this, therefore, is a key pillar, and we're very pleased with the progress that we're making. I'm sure that, that will come later. So let me not do the full double click here. And last but not least, we are continuing to look at portfolio footprint expansion and also in other domains, in UBL and hopefully, the Distell and Nigerian breweries deal will be a welcome member to our family. So I think a lot has been achieved but much more to do.

Great. And you touched on some of the other brands aside from Heineken that maybe don't get as much attention as maybe they should with people like me given how well they're doing. But just talk about your strategy across international premium and the local champions. I think, in total, there's about 300 brands, aren't there?

Yes. I think it's really good. And it's one of the elements that we want to carefully shift within Heineken. One thing that struck me when I arrived 9 months ago is how proud, how passionately proud people were about the products. And admittedly, I also enjoy beer now and again. So I can acknowledge the quality, I can acknowledge the passion that we have. Yet what we're trying to do is shift a little bit more towards what does the consumer want, because we do know that younger consumers have different taste palates, that people in Asia, the combination with food want to have a little bit less alcohol and more drinkable beers with lower bitterness. And therefore, one of the key elements that we're focusing on is how do we keep pride in our product and at the same time really make sure that we think consumer first. And I think some of the innovations that you see, Amstel Ultra is a good example, but also the example that I just gave of the European scale brands, are really targeted to make sure that we are shaping beer and that we're not only thinking about the traditional bottle that all of us have grown up with, but that we're really looking at different usage occasions and then finding the right product proposition in beer or beyond for that drinking occasion. And that is a very deliberate shift that we want to make as a company.

Great. And you touched earlier on Heineken 0.0. And I think in the past, Heineken said that the nonalcoholic category could grow roughly 5x that of beer. So just how are you planning to tap into that, not just with Heineken 0, but scaling other brands? And any markets that have proved less susceptible to that category than you might have thought?

So many questions within that. So let's unpack that. First, we're very happy with the performance of Heineken 0.0. It's now in over 100 markets. It's rapidly growing. And we're also seeing that in markets, for example, like Brazil, but also U.S., Mexico even, it really is taking hold. What we really want to make sure is that this is built over time because it requires a position, consumer acceptance, consumer usage, and then we have seen it slowly built. If you take Spain, for instance, Heineken 0.0 is already 10% of that total portfolio. So we do see that there's probably 5x more potential in that market than what we're currently accessing. But we have to build it. We have to build it according to consumer acceptance, palate and then repeat purchase to really make sure that this franchise is built over time. At this moment, we believe that it is logical to use Heineken 0.0 and to launch that in markets which have an existing beer culture because it is still an acquired taste. And therefore, that is the sequencing that we're thinking about. So whether some markets are more susceptible or not, I don't know. We're trying to find the right portfolio. We've got 300 brands. Right portfolio, alcohol and nonalcoholic or low alcoholic for each of the markets in order to drive our growth strategy there.

Great. And maybe if we now touch on some of the bigger markets. So starting with Vietnam. Clearly, very disrupted last year. But encouragingly, we saw a strong end to the year. As we look forward this year, should we think about a V-shaped recovery in that market given the strong progress on vaccination rates?

Yes. It would really be remiss of me to not just spend 10 seconds on complimenting the Vietnam team. I've seen pictures of the resilience of the people in those markets were on the shutdown and how do we then continue to operate, of course, within the necessary regulatory constraints. But to maintain business connectivity and operations when the market is such high hit, that really asked a lot from management and the people there. And I think they've done an absolutely fantastic job. The one thing that we also said is, look, Vietnam is super important for us, and you're one of the best quality companies that we have out there in the world. So we are going to look at how you drive and capitalize the recovery as an assessment of our own success. And I'm very pleased to report that already we saw an acceleration despite the fact that there was still partial closures, but we saw an acceleration in quarter 4 of last year, of 2021. We've regained market share at the end of 2021, which was also a very important principle for us. And we did that with the right portfolio, which is also very important. So we're very happy with the early recovery, the V-shaped recovery as you see it. Now I cannot disclose how things are going in this start of the year because that would be not appropriate. But I can say that we're very happy with how that momentum continues at this moment in time.

Great. And I guess, historically, Vietnam was one of the highest-margin markets in the Heineken Group, which I guess saw some compression last year. What's more important short term? Is it volume and market share? Or is it bringing the margins back up to close to where they were before?

Yes. It was very deliberate that I referred to that just now. We really believe in long-term sustainability of a market. And that means that when a market is like high 90s beer consumption of total alcohol, the race to the bottom is very tempting but is actually destroying future growth potential and future innovation potential. So one thing that we're really trying to do is to balance that, is to balance that with the right portfolio, with the right investment, and that's also why in the opening of the questions, I was talking about balance of volume and value growth. So that is very deliberate what we're doing in Vietnam to make sure that we're designing the right portfolio for a V-shaped recovery, but to meet the consumer needs that we know are there today and in the future. Now what is also relevant is, I flagged it also before in an earlier fireside chat, you saw it in our results, is that input cost and inflation is there. So what we're also very cognizant of to this Vietnam question is that we're not outpricing ourselves, but they were really taking euro for euro, I called it across the portfolio. And as a result of that, you will also see in Vietnam or in APAC a slight margin dilution but a fuller recovery of operating profit, because we believe in the long term in that market.

Great. And maybe now moving on to Mexico. We saw a very strong 2021 with growth ahead of the market despite another wave of the OXXO [indiscernible] opening up. Can you remind us just where we are in this OXXO phasings now? This is the last year, I think, of store opening.

Yes. So for perhaps for the people who don't know, but OXXO, we call it OXXO mixing, is something where we had exclusivity and that exclusivity is, in phase, is disappearing. And as a result of that, we need to adjust because you lose numerical distribution in a very, very important part of the retail market in Mexico. To answer your question, we are now at wave 7 that has started. And there are 2 more waves to come, which will happen indeed both in this year in 2 ways. Now for comparison, therefore, 2023 will be the last year of comparative impact. And after that, we're out. We're also very pleased therefore with our performance in Mexico because despite this OXXO mixing that we just talked about, we actually saw volume recovering to pre '19 and we were actually growing share. And we did that also because we invested in our SIX chains. We now have over 15,000 own retail stores. And this really is accelerating our success in that market, both with like-for-like store sales up, but also with increasing to drive more SIX expansion in the Mexico market. So that's really the fundamentals of the success.

Great. I'm thinking sort of medium term on Mexico, what do you think will be a bigger driver of the top line, volume growth or improved mix? Because I guess premium is still quite underdeveloped by LatAm standards.

Yes, indeed. So the premium size of the market is still single digit. It's relatively small. And if you look at it over a longer period of time, then actually the growth of the beer category in aggregate, so I'm not talking about our own Heineken business here, is basically pretty much in par with GDP growth. We do believe that there is, in the recent years, we saw a little bit of an acceleration because you see innovation, both from ourselves, but also from the entire competitive set really addressing that need, as you were just talking about. So we do believe that there is still space to grow from a consumption point of view, but there is also more value to be had from basically more bespoke offerings, more premium propositions. And that could be both in terms of the premium, but also in terms of light or perhaps different than our own thinking about what we believe core beer to be could also play a role. So we're actually also there, very upbeat about what the future of Mexico holds.

Excellent. And staying in the region, Brazil, very strong end to the year, Q4 up 10%. And that's a market where there's been some capacity constraints for Heineken in recent years, but I guess that has accelerated the shift towards premium. So I guess two questions in there. One, if you could just outline the new capacity coming online over the next 2 years. And secondly, the share of premium within the portfolio in Brazil at the moment.

Yes. So let me first say, look, we are carefully but still quietly very happy with our performance in Brazil. We're not naive because we know that we have a long way to go to close the gap to ABI, who is much bigger than we are there. But we are very encouraged with the consumer pull that our product portfolio has. So Heineken now is the most desirable beer in Brazil, and that is something that we are feeling extraordinarily proud of. And the Heineken volume is now twice what it was in 2019, so prepandemic. So there is a lot of pull there, but it's not only about Heineken. And indeed, therefore, as a result of that, we have been capacity constrained for some time. And because, again, for the audience, it takes longer and more capacity to brew a hectoliter of premium beer than it takes to brew a liter of economy beer, for example. So capacity, when you convert is not a one-for-one factor. And as a result of that, we've been investing in Ponta Grossa. 2 million hectoliter came on stream in quarter 4 last year. There is another 2 million coming in, in quarter 4 this year. And then we have got also more capacity coming on stream in '23 and probably in '24, a big greenfield brewery. But more for that later. So we are actually extending the capacity in order to fuel that growth going forward. Now to your last point, because of this situation, but also because of the consumer pull, the portfolio has dramatically shifted. And 70%, 7-0, of our total portfolio is now in premium or upper mainstream. And that, I think, is a remarkable achievement, and kudos to the Brazil team to have been able to do that. Our dual market go-to-market setup now with the Coca-Cola system, the Coca-Cola FEMSA system is another avenue of growth, and we're very happy on how that is growing.

Great. And then a few more country or regional-level questions. Firstly, China, the joint venture there appears to be very successful with the Heineken brand 2x the size it was pre COVID-19. Can you talk about your aspirations for that market over the medium term?

Yes. So the -- well, the aspirations are huge because we -- I think when we announced the partnership with China Resources brewery, we said this might be, in the not-too-distant future, the #1 of Heineken in the world. Brazil is making that very difficult for them to do, I have to say. But -- so it's now #4. But the growth of Heineken in China has been absolutely phenomenal. And it is also the case that in China, there is a lot more to do in terms of penetration of outlets, but also in terms of scaling innovation, so Heineken, Heineken Silver, and we do see that there is potential for more brands. But also here, we want to do it over time in order to make sure that we gradually build and that we're really maximizing the opportunity of Heineken first and foremost before we actually start levering on the next one. I also have to say that the partnership with CRB is going extremely well. So there's good collaboration, and that makes all the difference.