Heineken N.V.

, H1 2021 Earnings Call, Aug 02, 2021 (SpellcheckedCopy)

TEXT version of Transcript

Corporate Participants

* Federico Castillo Martinez

Heineken Holding N.V. - Director of Investor Relations

* Harold P.J.van-den Broek

Heineken N.V. - CFO & Member of Executive Board

* Rudolf Gijsbert Servaas van den Brink

Heineken N.V. - Chairman of the Executive Board & CEO

Conference Call Participants

* Celine A.H. Pannuti

JPMorgan Chase & Co, Research Division - Head of European Food, Home, Personal Care & Tobacco
and Senior Analyst

* Edward Brampton Mundy

Jefferies LLC, Research Division - Equity Analyst

* Raoul-Tristan Van Strien

Redburn (Europe) Limited, Research Division - Partner of Consumer Staples Research

* Sanjeet Aujla

Crédit Suisse AG, Research Division - European Beverages Analyst

* Simon Lynsay Hales

Citigroup Inc., Research Division - Managing Director

* Trevor J. Stirling

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

Presentation

Operator [1]

Ladies and gentlemen, hello, and welcome to the Heineken Half Year Results Call. My name is Maxine, and
I'll be coordinating the call today. [Operator Instructions] I will now hand over to Federico Castillo Martinez,
Director of Investor Relations, to begin. Federico, please go ahead when you're ready.

Federico Castillo Martinez, Heineken Holding N.V. - Director of Investor Relations [2]

Good afternoon, everyone. Thank you for joining us for today's live webcast of our 2021 half year results.
Your host will be Dolf van den Brink, our CEO; and Harold van den Broek, our CFO. Following the
presentation, we will be happy to take your questions.
The presentation includes forward-looking statements and 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. I will now turn the call over to Dolf.

Rudolf Gijsbert Servaas van den Brink, Heineken N.V. - Chairman of the Executive Board & CEO [3]

Thank you, Federico, and welcome, everyone. Good morning, good afternoon, and good evening wherever
you may be. I hope you and your families are well and safe. I'm delighted to be together with Harold today to
share with you our first half 2021 results. Harold joined the business on the 1st of June this year from
previous roles [indiscernible] certain he will contribute enormously to our future success.

I would like to start today with some reflections on my first year in a row. From my very first day, we
adopted as a mantra that we needed balance, we need to navigate the crisis but also build a brighter future.
This remains true today as the pandemic continues to impact the world and our business. I would like to
thank our teams across the world for their energy, confidence and resilience. They make us very proud
working hard every day to deliver for the business whilst taking care of each all our customers and their
communities.

We see positive signs in some countries and regions, but we also see continued or new ways and lockdowns
in other countries. Our teams have been fast to service our customers and consumers where markets reopened
yet remains agile whenever restrictions were reintroduced. At the same time, we have been building the
future on the strong fundamentals of the business. We launched Evergreen, our balanced growth strategy, to
deliver superior and profitable growth in a fast-changing world. We have moved fast into implementation,
and I will come back to that in a moment.

One of these fundamentals is our #1 asset flagship, the iconic Heineken brand. We have incredible
momentum with the brand globally, and a big part of this because Heineken connects meaningfully with our
consumers across time. Over the last year, it has been especially important for the brand to be relevant.
People everywhere have faced the challenges of lockdown, social distancing and longing to meet again, share
a beer and chat with friends. Heineken brand has accompanied them with spot-on communications
[indiscernible] the different [indiscernible] over the last year from showing [indiscernible] as we dealt with
the challenge of social distancing with the commercial [indiscernible] to support to our customers with bars
and to celebrating the reopening of Europe and opportunity to be finally together and to be rivaled again with
our Euro 2020 campaign. Heineken achieved great recognition for this creative work. In addition, we have
and will continue to support hospitality sector and the community where we operate.

Now you may recall that when we introduced Evergreen, we shared with you our balanced growth algorithm.
This slide will show how the different elements of our strategy contribute to long-term value creation for all
stakeholders. At the top of the framework, you find superior growth, our first and foremost intention as a
growth company. Here, we have made exciting progress. First, United Breweries India has joined the
Heineken Group, an historic milestone last week that further strengthens our footprint and gives us an even
sharper growth advantage; second, the growing momentum of the Heineken brand in many parts of the
world; and third, we have expanded our portfolio in many of our markets with innovations to better serve our
consumers, to name a few examples. To amplify our strong position in premium, we launched Dos Equis
Ultra in Mexico and Birra Moretti Alfredo in Italy. To further extend our global leadership in non-alcoholic,
we complemented our range with Desperados in mojito in Lagunitas non-alco IPA. And we're stretching beer
with low business for [indiscernible] in many markets globally like Tiger and Bintang Crystal in Indonesia
and continue to move beyond beer with the launch into cider in the U.K. and our experiments with ESL
Mexico and then Europe [indiscernible] We are shaping our growth as I walk you through performance of
each of our regions in the first half.

Then in the lower part of the framework, we have to continue productivity improvements that are needed to
accelerate investments to drive future growth. Harold will speak later to these elements, but let me just say
we are building great traction with our productivity program. For example, we've implemented in the first
half, the organizational redesign, including the head office. This was a difficult process as we saw colleagues
leave, but necessary to make sure we come out of the crisis stronger.

Then at the heart of the flywheel aligned with our values, our sustainability, responsibility and people
strategy. You may recall that on Earth Day last April, we launched our Brewing a Better World 2030 ambition
with bold targets on environmental and social sustainability and responsible consumption. I will also come
back later to this to share some of the early progress. Overall, I'm very encouraged with the early momentum
we are building towards our Evergreen ambitions.

Now let's jump into our results, touching on a few highlights. We are pleased to report a strong set of results
for the first half year. Net revenue (beia) grew 14.1% organically, benefiting from both a strong volume
growth and revenue per hectoliter. Beer volume grew 9.6% and Heineken a strong 19.6% with a very broad-
based growth. Our operating profit (beia) more than doubled, and the margin was 16.3%, driven by top line
growth leverage, continued [indiscernible] and structural cost savings delivery, further helped by the phasing
of sales expenses into the second half as we are investing behind [indiscernible] given the low profit from last
year, higher profits from our partners and lower financing costs.

Now as far as these results are, there is a reason for caution, too. COVID remains a factor, and we see a rise
in commodity costs. Overall, we expect full year financial results to remain below 2019.

Now allow me to briefly update you on our performance by region. Starting with AME, the Africa, Middle
East region. Net revenue grew organically by 30.4% and operating profit by almost 90.2% with strong growth
in the majority of our operations, particularly South Africa and Nigeria. Beer [indiscernible] improved 16.8%
organically with Nigeria, the DOC, Ivory Coast, Burundi, Rwanda and Lebanon ahead of 2019 volume.
Price/mix was up 9.5%, mainly driven by service pricing in Nigeria, Russia and Ethiopia. Strong recovery in
Nigeria continues, gaining share in the market. The premium portfolio grew close to 60%, driven by
Heineken, Tiger and newly launched Desperados. The low [indiscernible] in the high 20s, driven by Martina
and its expanded range of flavors. In South Africa, total grew in the 50s [indiscernible] more than doubled,
the alcohol bans in January, Easter and more recently, during July.

Moving on to the Americas. Net revenue and operating profit (beia) grew organically by 25.7% and 85.7%,
respectively, mainly driven by Mexico and Brazil. Organic beer volumes grew by 16.7%, coming close to the
volume of 2019. Price/mix on a constant geographic basis grew by 9.4%, mainly driven by Brazil. Mexico,
beer volume recovered strongly with growth in the mid-30s ahead of 2019. Revenue came even further ahead
as price/mix increased by a low single digit this year despite the reinstatement by [indiscernible] activity,
which was suspended last year during the second quarter. The premium portfolio grew in the 50s and we
launched Dos Equis Ultra.

To further [indiscernible] premiumization, [our 6] stores accelerated the expansion of new stores and grew
strongly in the same-store sales, including the development of non-beer categories. In Brazil, we continue to
rebalance our portfolio and gain share in premium and mainstream. Heineken continues its remarkable
momentum and became the #1 brand in value in the off-trade. Price/mix grew in the high 20s following our
price increases last year, lower promotional activity this year and the rebalancing of our portfolio. Early July,
we implemented an additional price increase. We started successfully the transition of our route to market on
July 1 and launched Tiger through the Coca-Cola bottlers network. Heineken U.S.A. grew ahead of the
market, driven by Heineken and Dos Equis, which benefited from innovations like Dos Equis Ranch Water
and Dos Equis Lime and Salt and the reopening of the on-trade. We observed strong growth across the
majority of our markets in the region, especially Panama, Peru and Ecuador.

Next up, Asia Pacific. Beer volume declined 1% organically with beer volume down 5.6% versus 2019. Net
revenue (beia) increased 5.4% organically with price/mix up 3% on a constant geographic basis. Operating
profit increased 15.9% organically, driven by Indonesia and Malaysia and the restructuring of our business in
the Philippines, partly offset by Cambodia. Following a strong start of the year in Vietnam, the last
[indiscernible] we saw steep declines following restrictions to contain several regions, especially in our
strongholds like Ho Chi Minh City and the Mekong Delta. Heineken Silver more than doubled its volume,
and the mainstream portfolio grew in the low teens, led by Bia Viet as we continue our expansion strategy
outside of [indiscernible]

In China, Heineken grew a strong [indiscernible] led by Heineken Silver. The initial volume and coverage
reached by [indiscernible] also in the very first few months of introduction are encouraging. Indonesia partly
recovered, although still significantly behind 2019. We introduced Bintan Cristal, a smooth cold brew for rind
with low bitterness. Restrictions remain nationwide, including the key regions of Bali and Java.
 Beer grew double digits in Singapore, South Korea and Laos and other markets in the region, driven by the
growth of our premium portfolio. Now as you may have seen, last week, United Breweries Limited became
part of the Heineken Group, a special moment after 13 years of strategic patience after we took an initial
position as part of the acquisition of Scottish & Newcastle in 2008. My special gratitude to Jean-Francois and
many others that have helped this happen over so many years. And it is with great delight that we now
welcome all of our colleagues at United Breweries to the Heineken family. We believe India provides
fantastic long-term growth opportunities with a population of 1.4 billion, a strong emerging middle class and
low per capita beer consumption. [indiscernible] has a proud history dating back more than a century. It built
its position as the undisputed market leader in India with a strong network of breweries across the country
and a fantastic brand portfolio, including its iconic Kingfisher brand family.

We are honored to build on this legacy and look forward to work with our colleagues at UBL to continue to
win in the market, delight consumers and customers and unlock future growth. UBL will be a Heineken
operating [indiscernible] and Kingfisher a top 5 global brand. We have initiated procedures to integrate UBL
into our network of operating companies.

Finally, moving to Europe. It grew by 3% with price/mix growing 0.8% with a relative stable channel mix.
Operating profit grew materially from a very low base. Following the beer volume decline of 9.7% in the first
quarter and the second quarter, volume grew 13% to finish with a 3.2% growth for the first half.

On-trade volume was down by a low single digit for the first half despite the easing of restrictions during the
second quarter. Compared to 2019, on-trade volume was down circa 50%. And looking at the exit rate of
June with around 80% of the entree reopened, volume was behind 2019 by a high single digit. The off-trade,
on the other hand, is growing ahead of 2019 driven by our premium portfolio and outperforming in markets
like Italy, Spain and France. The premium portfolio grew in the low teens versus last year, driven by
Heineken Desperados and Birra Moretti. And low NOL portfolio grew around 10% led by Heineken 0.0 and
Desperados Virgin.

The Heineken brand shows continued strong momentum, growing 19.6% versus 2020 and 16.7% versus
2019. The growth came from a very broad base of markets with more than 50 markets growing double digits,
including Brazil, China, Vietnam, Nigeria, South Africa, Italy, Mexico, Poland and Colombia. Heineken 0.0
grew close to 40% and is now available in 95 markets. Heineken Silver quadrupled this volume, driven by
strong growth in Vietnam and China.

Now we are also making big strides in our ambition to be less connected [indiscernible] Our business-to-
business or B2B platform continued the strong momentum and capture more than EUR 1 billion in digital
sales in the first half of this year, [indiscernible] We're now connecting more than 200,000 customers in
traditional channels. That is more than 4x the number we had last year with the biggest expansion coming
from Mexico and Brazil. In Mexico, in particular, we accelerated the deployment of our high shop B2B
platform. And in June, we captured orders representing 58% of the net value from traditional channels. In
Brazil, we expect growth to accelerate as part of our plans to transition and expand our own market in the
coming months. We have also expanded our B2B markets to new markets, so now we cover 30 operating
companies in total. Our direct-to-consumer platforms, D2C, also continued to grow strongly. Beer roof in
Europe grew its net revenue by close to 60% with particular strong growth in home [indiscernible] and
[indiscernible] In Mexico, our D2C activities grew around 90% in volume.

Now lastly, I would like to share with you some of our early progress on our sustainability responsibility
ambition. We raised the bar on our environmental social responsibility actions in April with our refreshed
Brew a Better World 2030 commitments. We are further integrating our operationalizing our S&R agenda
into our business, improving our data reliability to ultimately allow for more transparent reporting. On our
path to zero environmental impact, Several of our markets have already committed to reaching carbon
neutrality in their production ahead of our global commitment, such as Brazil by 2023 and Indonesia by
2025. You might have noticed that the recent Formula E Race hosted in the U.K., we also launched the
greener bar showcasing innovative ways to reduce waste by using only recycled materials. To show our
commitment to an inclusive fair and equitable world, we will leverage the strength of our brand awareness
and support business. One recent example in Brazil, what I am [indiscernible] campaign with a commitment
to spend 10% of the brand's Brazilian media budget to raise awareness and support the LGBT+ community.
On the path to moderation and no harmful use, we will ensure a zero alcohol line [indiscernible] for at least 2
strategic brands across the majority of our operating companies accounting for 90% of our business, of which
1/3 is already in place.

So to summarize, there's very momentum building towards Evergreen with initiatives kicked off in all parts
of the flywheel. Brand Heineken shows strong momentum. We're strengthening our ability to drive
consumer-centric innovation, building traction on our productivity program and shaping our path to meet our
Brew A Better World commitment. I'm confident that we're heading in the right direction. And with that, I
would like to hand over to Harold.

Harold P.J.van-den Broek, Heineken N.V. - CFO & Member of Executive Board [4]

Thank you, Dolf. It's a great privilege to join Heineken and succeed Laurence. I'm particularly motivated to
contribute to Heineken to fulfill its ambitions with a positive impact for our business. our world, our
stakeholders and our people. That's why I believe the goal set with Evergreen are the right ones. It starts with
growth very much at the heart of Heineken and what we are known for. And we now build on it by putting
more focus on profitability, capital efficiency, sustainability and responsibility. I'll do my best and add a bit of
my own in this exciting journey. I'm looking forward to meeting you all in person when conditions allow.

Looking now at our top line performance on Slide 15. Our team demonstrated great agility to capture the
partial recovery seen in the first half of the year, and this is reflected in our net revenue [indiscernible]
organically 5% [indiscernible] Total consolidated volume on an organic basis grew 8.2% with quarter 2
recording a consolidated volume growth of 19.3% as more markets reopened for business. About 3/4 of the
half 1 volume growth came from Mexico, South Africa and Nigeria, where, in particular, the first 2 markets
were affected by significant lockdowns in the first half of 2020. Spain, Italy and the U.S.A. also saw
significant volume increases.

In Asia Pacific, we saw a slowdown in the second quarter due to the increase in COVID-19 cases in the
region and consequent government-imposed restrictions in many countries. Net revenue per hectoliter was up
5.5% with price/mix on a constant geographic basis up 5%. Our business took action to mitigate currency
deflation and cost inflation with pricing most notable in Brazil and with significant pricing steps in Nigeria,
Russia and Ethiopia. Consequently, Americas and AME recorded close to double-digit price/mix growth. In
Europe, our price/mix was positive in the low single digits with U.K., Spain and Italy leading the way despite
the negative channel mix from lower on-trade revenue. Price/mix in APAC was in the low mid-single digits,
driven by Malaysia, with the region impacted by the recent restrictions as I just mentioned.

The currency trading was significant at EUR 567 million, decreasing our net revenue by 6.1%. This is
attributable mostly to the devaluation of the Brazilian real, the Nigerian naira and the [indiscernible] The
consolidation impact in half 1 was not material with a net impact of just negative EUR 5 million in revenue
and no major [indiscernible] to report. As a reminder, we acquired [indiscernible] raising our shareholding
from 26.5% to 61.5%. However, as we did not have management control until last Thursday, we recorded the
acquisition of shares and investments in associates and joint ventures. We closed half 1 just shy of EUR 10
billion net revenue (beia), still 13% short of the first half of 2019.

Let's now look at the operating profit (beia) on Slide 16. Operating profit more than doubled in the first half
year, predominantly driven by our top line growth. The EUR 1.3 billion organic revenue growth I called out
on the previous slide converted in EUR 904 million organic operating profit growth versus the first half of
2020, a conversion rate of almost 17%. The operating profit growth was very broad-based with the majority
of our operations contributing but in particular, in Mexico, South Africa, Brazil, Spain and France. Clearly,
revenue was the main driver of growth, and this was further boosted by structural growth savings, continued
cost mitigations and the phasing of marketing and sales expenses into half 2.

Let me give some additional color. Input cost (beia) grew by mid-single digit on a per hectoliter basis with a
significant impact from transactional currency effects. Prices of commodities had a small negative effect as
we benefited from our hedge positions last year. Given higher commodity prices currently, we will see this
impacting more in the coming quarters. We had a favorable portfolio mix effects, mainly from our growth in
premium and growth in returnable packaging versus last year, so the pack-type mix effect is still negative
compared to 2019. Marketing and sales expenses (beia) came in on last year due to phasing lower credit
[indiscernible] actions in markets in lockdown. Personnel expenses (beia) increased slightly as labor cost
inflation and the reinstatement of variable pay were largely offset by savings from our organizational
redesign. Other expenses also reduced with lower travel, depreciation and savings in general expenses. The
currency translation impact on operating profit was EUR 101 million, principally driven by the same
currency group I called out on the net revenue bridge. And as I just mentioned, there was no material
consolidation impact on operating profit this half year. We therefore closed half 1 with EUR 1.6 billion
operating profit (beia), still 9% short over 2019 levels.

On Slide 17, I would like to give some additional insights in how we work our growth algorithm to
accelerate investments enabled by productivity gains. As Dolf shared with you earlier, we are substantially
stepping up investments behind our digital transformation. The deployment of our B2B platforms continue at
pace, more than doubling their reach versus last year, and our B2B footprint now spans 30 operating
companies. We also continue the journey to standardize and transform our ERP platforms. We are funding
our Brew a Better World ambitions, especially to decarbonize and achieve water balance and circularity.
We're equally committed to grow our marketing and sales investments to levels before the pandemic by no
later than 2023. To support our growth initiatives, focus on premiumization and expansion of [indiscernible]
For the first half, these have moved in the other direction, but this is mainly driven by phasing, and we will
see an acceleration in the second half as we remain committed to our original [indiscernible] plans. All these
investments will be enabled by our productivity program, and we are pleased with the traction we see in our
operating units. As a reminder, we have set a target to deliver EUR 2 billion of gross cost savings by 2023
compared to the 2019 cost base. We expect that by the end of this year, we will have captured more than EUR
1 billion of these savings. You may recall from the introduction of the program that it is mainly focused on 3
areas: first, the organizational redesign, which is about rightsizing our cost base and streamlining our
organization. Most of the changes have been effectuated with appropriate phasing to ensure minimal
disruption to our operations. For example, the new head office redesign became effective fully on April 1,
2021. To date, over half of the targeted FTE reduction has been realized with savings captured and the
remainder will be largely achieved by the end of 2022, quarter 1, that is. Close to 1/3 of the headcount
savings realized is in Europe. Secondly, our supply chain efficiency program, which tackles complexity and
optimizes conversion and logistics costs. We have started to selectively streamline our portfolio. For example,
in the Netherlands, we cut about 30% of SKUs. We are harmonizing bottles across products and
lightweighting where possible. Regarding logistics, we achieved great cost savings in the U.K., introducing a
modern and flexible primary distribution network and improved our demand planning systems. And as you
know, making big transition and expanding our route to market in Brazil, thereby achieving better coverage
with greater efficiency.

Our commercial effectiveness programs significant progress across many of our operations. We achieved the
largest savings in the U.S. while maintaining the same level of effectiveness for our brand investments,
reducing nonconsumer-facing spend and improving the ROI. As you might also recall, we indicated our
intent to reinvest these savings.

Now I would like to cover other key financial metrics from our half 1 results that deserve some attention.
First, our share of profit from associates and joint ventures (beia). The growth was very strong given the low
base from last year as some of our partners were significantly impacted by lockdowns in their markets. The
growth was primarily driven by China Resources Beer in China, CCU in Chile and UBL in India. Net interest
income and expenses (beia) improved by 9.9%, benefiting from lower interest rates and the repayment of
bond loans. We have lowered the expected interest in our outlook to around 2.7%. Net profit tripled versus
last year, with a higher relative increase due to the low base in 2020. The effective tax rate (beia) was lower
than last year, mainly due to the substantial increase in profits. As a reminder, last year, the tax rate was high
due to losses for which no deferred tax assets could be recognized and higher nondeductible interest in the
Netherlands. As our business results improved, this is no longer the case. As a result of all these factors, EPS
grew almost threefold to 1 56 per share, but still 15% below 2019.

A last word on the financing headroom. Total net debt increased by EUR 854 million for the 30th of June
2021 versus the 31st of December [2020 ] as the cash outflow acquisition exceeded the positive free
operating cash flow. Furthermore, net debt increased due to a negative foreign currency impact on our non-
euro debt. The pro forma rolling 12 months net debt-to-EBITDA ratio was 3 on the 30th of June 2021 and,
which was an improvement of 0.4 versus a closing of 2020 and 0.5% versus the half year. Heineken remains
commit d to return to the company's long-term net debt-to-EBITDA target of below 2.5x.
 Let us now turn to free operating cash flow on Slide #19. In the first half of 2021, the cash flow was EUR
650 million, an increase of rounded EUR 1.5 billion. You will recall last year, that the cash flow declined by
close to EUR 1.4 billion to an outflow of EUR 809 million for the first half of 2020, impacted both by the
operating profit decline and a further working capital impact despite measures taken, such as the reduction in
the rephasing of capital spend. You will now see this reversing into 2021. Cash flow from operations before
working capital changes improved by EUR 848 million, including a EUR 151 million reduction in provisions
mainly related to the utilization of provisions as we progressed with our organizational redesign. Working
capital improved by EUR 384 million as business partially recovered with positive payables offset by higher
inventories and increased trade and other receivables, including the recognized tax benefits in Brazil. Our
position on payables, trade receivables and inventories have largely returned to their normal level considering
the seasonality in the middle of the year. Additionally, we benefited from delayed payments of value-added
taxes granted by governments. These have been paid this year, and the total difference in cash amounts to
EUR 200 million and is reflected in working capital. Cash out from CapEx was EUR 932 million or 9.3% of
revenue, which was EUR 230 million lower than the first half of 2020. In part, this is prudency related to
COVID uncertainty, in part caused by 2020 planned investments that were phased into 2021. main projects of
this year include the expansion of capacity in our breweries in Ponta Grossa in Brazil and on [indiscernible]
in Vietnam and the acquisition of Strongbow in Australia. Interest, dividend and tax were in aggregate
roughly flat versus last year, with slightly lower income taxes paid in 2021 due to the lower profit base in
2020 and the payment of deferred taxes last year.

Before wrapping up and handing the call back to the operator to open for questions, I would like to share the
outlook for the year. Our theme continues, cautious on the outlook and agile on the recovery. The COVID-19
pandemic continues to present challenges for the world with the biggest impact for our business currently in
Asia. Vietnam is severely impacted and is one of our largest and most profitable businesses. We believe the
rest of the year to continue to be [indiscernible] with some markets gradually reopening while others continue
to implement restrictions until vaccinations are more broadly rolled out. Furthermore, we expect headwinds
and input costs in the second half of 2021 have a material effect from commodity costs in 2022. We will be
assertive on pricing and drive revenue and cost management to face this challenge. However, [indiscernible]
to intensify in the second [indiscernible] In addition, we will increase our marketing and sales expenses
investment behind growth initiatives versus last year, fully in line with our full year original plans. As a
consequence, we expect operating profit margin (beia) to be lower in the second half compared with the
second half of last year. And as indicated before, full year financial results are expected to remain below
2019.

Let me close, however, by stating that whilst uncertainty remains, we should take confidence from our first
half results, our progress on Evergreen and the commitment of our people. We believe that we are on the right
track to deliver on our long-term ambitions. And with that, I would like to hand over the call to the operator
so we may take your questions. Thank you.

Question And Answer

Operator [1]

[Operator Instructions] our first question comes from Edward Mundy from Jefferies.

Edward Brampton Mundy, Jefferies LLC, Research Division - Equity Analyst [2]

Two questions from me, please. Dolf, the first is for you perhaps. It's still very early days on the Evergreen
strategy, but Evergreen has become more consumer and customer-centric. Can you talk about any early signs
that the business is evolving in this direction?

Second question perhaps for Harold. You weren't involved in the setting of the cost program initially. That's
a key component of Evergreen. From what you've seen in the business so far, what's your degree of
confidence in delivering the EUR 2 billion? And how do you think about medium-term opportunities to
activity that you give for operating leverage beyond 2023, in particular from leveraging such as the global
ERP landscape?

And then the third question is on India for Dolf. [indiscernible] is ongoing. It's still very as excited about
which is India given what the caps are? Or is this much of a portfolio brand company?
Rudolf Gijsbert Servaas van den Brink, Heineken N.V. - Chairman of the Executive Board & CEO [3]

Very good. Thanks, Ed. Let me indeed speak to your first and third part, and then I hand over to Harold. Yes.
No, as we set out in February, Evergreen is really about superior, profitable growth. It's about balance. And
we introduced this concept of the flywheel with 4 components: delivering superior growth, continuous
productivity improvements, accelerated investments for the future and sustainability and responsibility step-
up at the heart in order to drive long-term value creation. But indeed, it starts by superior growth, which is
something that we are proud of that the company has been delivering over the years and, for sure, something
we want to assure we are to continue, if not accelerate. And there's a couple of components, still starting with
footprint. And we believe we have a viable footprint. This is the legacy that Jean-Francois, my predecessor,
left us with. We are not taking it for granted. We continue to invest in footprint with the UBL acquisition, a
case in point. Then of course, it's really about our portfolio, led by brand Heineken. It's amazing to see the
continued momentum. This already started before COVID. But it has accelerated rather than slowed down
during COVD with almost 20% growth now. And then indeed, we feel the need to further strengthen our
ability to drive consumer-centric innovation. And that starts by really being more fully focused, by really
strengthening our CMI, our data and data analytics capabilities in order to bring things to market faster and
faster [indiscernible] number of innovations that were able to launch over the first 6 months of the year
within premium, within 0.0, within Beyond Beer. And at the same time, I think it's early days. I think there's
much more to be done. There's more to be done to really take ownership of the category and make sure that
we drive future growth of the category, not only emerging markets, but also in the developed markets. Very
happy with James Thompson, our new Chief Commerce, coming onboard with fresh ideas and fresh energy.
So I hope we will be able to continue to update you on developments in this direction.

Now on to your question on India. Indeed, we are very excited about the long-term potential. Just looking at
the sheer numbers, 1.4 billion people, 10s of millions of people entering legal drinking a year, 10s of millions
of people entering the middle class a year, so the fundamentals, the demographics are very favorable. At the
same time, we all know per capita consumption is still very low. This has regulatory structural issues, which
we will have to address going forward. And in that sense, it is really an opportunity with a mid- and long-
term perspective on it. The Kingfisher brand is a phenomenal brand with incredible brand power with a lot of
powerful line extensions into premium, into lagers and what have you. But now that we have full control of
the company, we believe that we can further accelerate the international portfolio. And also more in general
statement, every time in the past, when we were able to integrate these proud acquisitions, whether APB in
Southeast Asia, simply by applying our global standards, by applying our global best practices, we're able to
unlock a lot of revenue and cost synergies. So we believe the story around UBL will be kind of
multidimensional. So short term, of course, India is still grappling with, yes, the turbulence related to
COVID, although the recent couple of months have been a bit better than the preceding months. Now on that,
let me hand over to Harold.

Harold P.J.van-den Broek, Heineken N.V. - CFO & Member of Executive Board [4]

Yes. So just a few words from what I've seen on the cost program, as you call it. Well, firstly, EUR 2 billion
is a bold ambition for Heineken. And it was kicked off a year ago. And I want to compliment the entire
organization on the speed and, let's call it, the commitment that has been shown in order to do this at pace.
And one of the examples that you can see therefore is that the organizational redesign has been, in a way,
already affected mostly this year and will be finalized in quarter 1 2022. I also have seen a very
programmatic approach. This is not like a cost squeeze everywhere on the budget. There has been a whole
machine stood up. And I think this is really very well done so that we really know where the cost savings are
coming from and how to replicate them across the business. And then the combination of speed commitment
and the programmatic approach has delivered the traction that we need, which is why we've been comfortable
to call out the EUR 1 billion that will be realized this year. But EUR 2 billion is twice as much as EUR 1
billion. So there is still much more to come there. And we shouldn't get ahead of ourselves [indiscernible]
awarded beyond 2023.

I want to close with one final thing. I think this initiative was done in a very timely manner. In the middle of
the COVID crisis that was on [indiscernible] was set up. Now a year later, COVID is still with us. And
therefore, it was absolutely the right thing to do to go in and really take a good look at the cost structure. We
also commented in February last year -- February this year that this was going to be used to counter inflation
and ForEx. And guess what is happening now? Foreign exchange inflation was already part of the real Life
now and now commodity inflation is coming. So I think it has been a very timely intervention, and I'm very
pleased with the progress that we're making.

Operator [5]

Our next question comes from Simon Hales from Citi.

Simon Lynsay Hales, Citigroup Inc., Research Division - Managing Director [6]

Dolf, Harold, 3 as well, please. Firstly, if you could just talk a little bit more about the scale of the input cost
headwinds you think you're facing going forward? I mean you referenced mid-single-digit per hectoliter
inflation in the first half. I mean, Harold, how do we think about that in H2? And what is your thinking at this
point for 2022, perhaps more importantly.

Secondly, maybe one for Dolf. historically talked about slow recovery of the on-premise channel,
particularly in Europe. And I think back in February, you were sort of talking about perhaps the on-premise
not fully coming back until 2023, if ever. In the meantime, I think the more recently, given the reopening, the
statement some of your peers have noted that some rebound than they initially thought. What are you seeing
in your business? So are you still sort of very conservative over that medium-term time frame? Or do you
think it is a bit stronger now than perhaps you were [indiscernible]

And then just finally, clarification around the savings delivery. The EUR 1 billion that's coming through in
2021, will that be the gross number that will have been delivered as it were to the bottom line by the end of
the year? Or is that the annualized run rate that you'll be looking at by the end of 2021?

Rudolf Gijsbert Servaas van den Brink, Heineken N.V. - Chairman of the Executive Board & CEO [7]

Okay. Thanks, Simon. Let me speak to the on-premise question and then over to Harold on input costs and
the gross savings. So on the on-premise, you indeed see different patterns depending on where you are
geographically. I think the bounce back in the U.S. is much commented on where we and others in D.C., the
on-trade bouncing back to at or even above 2019 levels in big parts of the U.S. Europe, it's more recent. And
let's not forget that the European on-trade opened only early June, so that's not even 2 months ago. Basically,
until the end of May, we were in lockdowns.

For the second -- the first -- for the first half the on-trade is still 50% down than 2019. Even in the second
quarter, the on-trade is still 30% down. And we -- I think we put it in the press release in June, the exit rate.
So in June, with most of the on-trade reopened across Europe, we were still high single digit below 2019.
That's an absolute volume. At the same time, at that time, only 80%, 85% of the outlets was back. So on per
outlet, it looks more close to 2019 levels. But we all may know or fear when the extended support in Europe,
and so there will be an impact or fallout, we don't know. Most expect around 5% to 10% of the outlets to not
make it make it back. So we still don't see the on-trade coming back fully yet in the short term. Mid-, long
term, we remain confident as we have said before. The universal desire to socialize overall beer in a bar
restaurant has intensified rather than slowed down. Now what was great to see in the second quarter that even
though the on-trade started bouncing back, that we retained good trends in the off-trade, somewhat of a
slowdown versus prior quarters, but still positive and delivering altogether around a 13% growth in the
second quarter. And as we may think that the on-trade short term may be a bit compromised, not fully
bouncing back, the flip side may be that in the off-trade, some of the increases may be retained post-COVID
as consumers may have discovered new occasions for beer consumption in around the house. And only time
will tell how that will shake out. So yes, we do think there's a somewhat different more nuance pattern in
Europe visible at this moment in time. Now on that, let me hand over to Harold for your questions.

Harold P.J.van-den Broek, Heineken N.V. - CFO & Member of Executive Board [8]

Let me start with the last one, which is an easy point of clarification. When we're talking about EUR 1
billion of gross savings in the context of the EUR 2 billion that we have committed to by 2023, this is really
an annualized saving that we're talking about. So that, I think, is that point. Then on input cost headwinds,
maybe to decomponentize it into half 1, half 2 and then looking into 2022. Input costs in the first half in
[indiscernible] it's in a mid-single-digit. This was primarily driven by transactional, for example, related to
the Brazilian real. We've hedged that last year. But of course, these hedges are actually starting to translate
into input cost pressures in the first half of the year. This transactional ForEx will -- you will have seen the
translation difference also in our first half year results. So unfortunately, we're not out of the woods yet with
currency volatility. And this is the main driver why we expect pressures to continue into second half of the
year. We've also observed like, frankly, the whole market that input commodity costs have really risen very,
very materially in the last couple of months to the tune of 20%, 30% even sometimes 50% on commodities
like barley, like plastics, like aluminum. And this is currently not going to hit us significantly in the second
half of the year because we take commodity hedges out over a 12 to 18 month time horizon, but they will
start to impact 2022. So this is how it decomposes. And we are talking about a material inflation. So that is
significantly higher than the input cost that we saw in half 1.

Operator [9]

Our next question comes from Sanjeet Aujla from Credit Suisse.

Sanjeet Aujla, Crédit Suisse AG, Research Division - European Beverages Analyst [10]

Dolf and Harold, a couple of questions from me. So a lot of talk about input cost pressure, but our outlook on
revenue paid to meet almost there in H1, particularly as we think about the European trade sequentially
improving in H2, is it logical to assume revenue to accelerate in the back half of the year? And tied to that, as
you're thinking about 2022 and the input cost pressures, can you just talk a little bit about what sort of pricing
actions you're taking in the market at the moment. You talked about price increases in Brazil in June, July, but
I'd love to get your take on other markets perhaps where pricing is to come.

Rudolf Gijsbert Servaas van den Brink, Heineken N.V. - Chairman of the Executive Board & CEO [11]

Very good. Thank you, Sanjeet. Yes. And I think we have spoken about this at full year and a year ago as
well, that revenue management is a very important part of the business, that when we talk about superior
profitable growth and we need to make sure that we drive our growth through both volume and revenue per
hectoliter. I think we have shown over the last year to be, yes, assertive on pricing in the key markets,
especially in markets where we were facing inflationary pressures, case in point being Brazil. And year-to-
date, we are delivering high 20, which is a combination of 3 price increases in a row and a massive mix
effect. As you may recall -- and we're out of capacity in Brazil, so we're letting go of significant amounts of
economy brand volume, but we're growing our premium and mainstream portfolio in the 20s, which
generating a very positive mix effect on top of these price increases and -- Sorry, guys, we are getting a
feedback sound here. So you can please -- thank you. So first on pricing in across the Americas, it was almost
double digit across the Americas. The Africa, Middle East region, [indiscernible] driven by South Africa and
[indiscernible] which will see us continue [indiscernible] In environments like Europe, of course, that is more
challenging. We had about 0.8% pricing in the first half. Given the input cost commodity price heading our
way, we will have to be alert on that and, yes, be agile in taking the pricing as we see fit. You will see an
acceleration somewhat of our revenue per hectoliter in the second half of the year. And at this moment of
time, I find it premature to speak about next year other than the intent as we have expressed that in our press
release. What is important, we continue to invest not only in getting these outcomes, but also invest in the
capability, in really creating that revenue growth management capability and muscle in the operating
companies across the different regions. So I think some of these results are the early outcomes of that -- those
efforts. Thank you, Sanjeet.

Operator [12]

The next question comes from Tristan Van Strien from Redburn Partners.

Raoul-Tristan Van Strien, Redburn (Europe) Limited, Research Division - Partner of Consumer Staples
Research [13]

Harold, Dolf, I just wanted to follow up on India and a question on Africa, if you don't mind. So on India,
well done on getting that done. I've seen that 2-liter per capita consumption figure for the last 30 years. I
think things changed. So I guess can India really grow as long as the stays -- as long as there's a strong beer
market? Do you need to [indiscernible] alcohol? I think you do [indiscernible] something that else needs to
happen in India to really unlock the potential on the per capita side of things. And the second question on
Africa. I mean it looks like this is the best performance you've had in Africa since H1 '17. Can you maybe
just give a bit more insight what's happening in Africa? Obviously, I don't expect everybody to be vaccinated
there in the next few years. But what is happening there? This ability to take price, does that continue because
a bit more inside of what's happening, particularly outside of South Africa, that would be great.

Rudolf Gijsbert Servaas van den Brink, Heineken N.V. - Chairman of the Executive Board & CEO [14]

Fantastic. Thank you, Tristan. Your question, your remark on India is very astute. Add that the capital
consumption is low, has been low for a long time, we know that the share of total alcohol of beer is also very
low. But what we have seen across the world that these relative shares between beer and spirits evolve over
time. And we have seen across the world that the per capita alco consumption also evolves over time. If it
was easy, it would have been done. So this will take concerted to action over time. But yes, we believe it can
be done. And therefore, I also emphasize that this is really a long-term opportunity that will take a deliberate
strategy of not only fighting for your market share today, but also to really building and expanding the
category over time. And that will imply innovation, that will imply reaching new consumers that we're now
not reaching, it implies reaching occasions we are not reaching today. And one of the stunning facts I always
recall, there's only 80,000 alcohol selling outlets on a population of 1.4 billion. That's something we have to
work on, which is related to the cultural role of [indiscernible] So yes, a lot to do. Absolutely convinced it
can be done, but it's going to take a long-term commitment to that market, which is something we take price
at Heineken of being able to do.

With respect to Africa, I appreciate the remark. This was a little of hard work by the team. And that really
had to do with transforming our Nigeria operations. And we got into trouble back, what was it, 2015, '16.
Where arguably, with the benefit of hindsight, we were over earning. We were taking things for granted. And
we had to completely rebuild our portfolio, and we have to completely rebuild our cost structure. And a lot of
credit to the management team on the ground, Jordi [indiscernible] and his team really have addressed the
cost structure. We have really addressed the route to market, getting much more grip on the route to market
and importantly, on the portfolio. Now one of the things was really made strengthening our mainstream
brands but then also really investing in premium. And we are looking in now growth rates of 60% on
premium, not only with brand Heineken, the Tiger brand. Nigeria is now the largest Tiger market outside of
Asia. This [indiscernible] we just launched local production. And now you start seeing all these different
elements starting to click and compound into significant improvement in trends. But that wasn't an overnight
success, a couple of years in the making. Ethiopia, we are getting traction back in the market in general. But
also for us continue to invest the same drivers, investing in the brand portfolio, invest in that market. Brand
power, brand equity is something that is very high on our list. But ultimately, your pricing power directly
correlate strength of your brands, which is your brand equity. The regional President and his team
[indiscernible] building brand equity, brand power, a key priority for the region. And I think, again, these are
some of the early fruits of those efforts, although those things take time. You don't see the results over the
short term.

The last one being South Africa. South Africa being badly impacted last year, still this year, and we are just
coming off another a third lockdown just this year in South Africa. But nevertheless, we are able to grow
50%. We doubled our side of volumes. We grew our beer portfolio by, from the top of my head, in the 50s,
gaining share back in the market. So when you have the 3 large markets really coming back strongly, yes, that
kind of lifts the both across the region. But also we see in the kind of new [indiscernible] markets where
we're investing like Cote d'Ivoire developing very well. Some of the legacy markets like Landa doing well.
So yes, pleased with what we're seeing. Yes, we know from a profitability, et cetera, there's still a lot of work
to be done in the region. And confident that [indiscernible] and team are, yes, prioritizing the right levers for
the near and long term.

Raoul-Tristan Van Strien, Redburn (Europe) Limited, Research Division - Partner of Consumer Staples
Research [15]

Could I just speak check-in, just ask if you can make any comment on the potential the Stella acquisition?

Rudolf Gijsbert Servaas van den Brink, Heineken N.V. - Chairman of the Executive Board & CEO [16]

I knew that question would be coming cause you also know my answer that, unfortunately, we cannot speak
to that. Other than saying that South Africa is a key market with or without that transaction as our growth
rates, as our commitments to that market show.
Operator [17]

Our next question comes from Celine Pannuti from JPMorgan.

Celine A.H. Pannuti, JPMorgan Chase & Co, Research Division - Head of European Food, Home, Personal
Care & Tobacco and Senior Analyst [18]

My first one is on the recovery that we've seen profitability, yet you said that on-trade was still very much
impacted. Is it possible to understand the building block in terms of the margin expansion between the off-
trade and on-trade and whether cost savings already helped in the first half? And then my second question is
on Brazil where you seem to have a lot of initiative in terms of route to market and the launch of Tiger, if you
can talk to that. But also how do you see the market demand looking and whether the consumer is going to
behave with continuous pricing increase?

Rudolf Gijsbert Servaas van den Brink, Heineken N.V. - Chairman of the Executive Board & CEO [19]

Thank you, Celine. Well, you have been listening to me too long already. So let me hand over to Harold on
that question on Europe, and then I will take the question on Brazil.

Harold P.J.van-den Broek, Heineken N.V. - CFO & Member of Executive Board [20]

Okay. So indeed, the channel mix impact in Europe was not a meaningful part in the profit expansion. Now
maybe because percentages look huge, but of course, the profit in Europe in absolute terms last year was
from a relatively low base given the fact that it was severely impacted and still is if you compare to a normal
year 2019. So we need to be a little bit careful with looking at the percentages. But still, the profit growth in
Europe was solid. This was really driven by cost mitigate still when the markets were under pressure. The
initial gross savings from our EUR 1 billion program, soon to be EUR 2 billion program, hopefully, coming
through. And thirdly, you would have also noted that largely, we've commented on commercial spend phasing
towards the second half of the year. This was also predominantly impacting Europe, albeit not only. So
factors all play the role. But again, let's change it. A lot of the recovery in Europe still needs to happen.

Rudolf Gijsbert Servaas van den Brink, Heineken N.V. - Chairman of the Executive Board & CEO [21]

Very good. Then, Celine, let me answer your question on Brazil. Indeed, a lot going on. And I think there's 2
big shifts happening. One is a portfolio shift. One is a route to market shift. Now on the portfolio shift, we
have spoken about this before, back in 2017, when we did a clear in transaction, over 80% of the portfolio
was low margin, sometimes even negative margin. Economy volume, only 20% was premium mainstream.
Year-to-date, we crossed the 60% of volume is now premium and mainstream. This is one of the largest
rebalances I've ever seen in my career, let alone at this scale. That's also because we, yes, are making some
bold and courageous choices there, also forced by a limit on capacity. So we are really letting go of a lot of
very low-margin soft drink volume or letting go of low margin, even negative margin economy volume to the
tune of minus 20% year-to-date on the economy beer and even over 40%, 50% on the soft drinks. And we are
focusing all our resources, all our efforts on growing premium and mainstream. In mainstream, we do that
through the [indiscernible] brand. [indiscernible] was the innovator in the pure malt segment. We do it
through the [indiscernible] and now 1/3 new brand and priority, the Tiger brand, which we have launched
with the Coca-Cola bottler network, a very unique proposition the first brand in that segment sitting in a
transparent bottle with a unique flavor and kind official identity of the brand. And of course, a lot of action in
premium brand, became the #1 brand in value in the off-trade, still growing strong double digits. But it's not
only Heineken. We are also growing very fast with [indiscernible] And we're growing very fast with the craft
portfolio in the super-premium segment. So both choices that is really starting to strong results, resulting that
we now have one of the best revenue per hectoliter in the market and gross profit per hectoliter. So we're very
happy to see that rebalance. But we really need to get the additional capacity. We get a couple million
hectoliters out of Ponta Grossa in the second half of this year, a couple of million next year. We will know
that still will be insufficient to absorb the growth. And then we are a full steam ahead with the greenfield that
we're building, which needs to be up and running by the end of 2023. so that is kind of on the shift and
rebalancing in the portfolio.

And then indeed, we're shifting in the route to market. We are proud and very happy with the new agreement
with the Coke Bottler system. We believe we're really getting the best of both worlds. As of 1st of July, we're
transitioning the Amston Heineken brand to our own direct distribution platform. And we see there's a lot of
opportunity, particularly in the on-trade with returnable packaging where we have historically been
underdeveloped because the cold system is a bit less focused on that. And at the same time, we are
completely committed in building and growing and strengthening the portfolio we have with the Coke
bottlers. I just mentioned the Tiger brand that we're launching in the mainstream segment. We're transitioning
[indiscernible] brand there as well. And on top of that, we are building a strong -- yes, digital B2B for the
market [indiscernible] very fast. But [indiscernible] results, yes, the kind of pricing that we're getting is
extraordinary. And that's really helping in building profitability, building margins in the important Brazilian
market. So let me leave it at that.

Operator [22]

Our final question comes from Trevor Stirling from Bernstein. SP14 Dunton Harold.

Trevor J. Stirling, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [23]

Two questions from my side, please. The first one mentioned the input cost inflation, 2 of the things that
could offset to be price and also the savings from Evergreen coming through. Is channel mix should be a
headwind, I guess, as well, Dolf? Because if the on-trade is still depressed, and hopefully, it does come back,
that should be a boost to margin, gross margins. And I guess also some countries it looks at the currency is
actually going to run your favor next year. Is that -- am I misreading the FX charts?

Rudolf Gijsbert Servaas van den Brink, Heineken N.V. - Chairman of the Executive Board & CEO [24]

Yes. And your second question, Trevor?

Trevor J. Stirling, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [25]

Sorry, second question was around tax. I think if I'm right, you guided that this year's full year tax rate will
be higher than last versus 2019. In the first half, the tax rate was 3 percentage points higher than 2019. Is that
roughly the right way to think about the second half as well?

Rudolf Gijsbert Servaas van den Brink, Heineken N.V. - Chairman of the Executive Board & CEO [26]

Harold?

Harold P.J.van-den Broek, Heineken N.V. - CFO & Member of Executive Board [27]

Yes. So let me take the input costs first. Indeed, we've spoken in this call about the input cost pressures that
we see falling. Indeed, pricing as well as cost savings or revenue growth management are going to be playing
a part there. When the channel mix works in our favor and reverts back to 2019 next year as we will see a
benefit from that. But at the same time, we need to be cognizant that there is still a portfolio mix. And like,
for example, we don't know what has happened to Asia at this moment in time. It's one of our most and most
profitable businesses. So at this moment in time, we really do not want to speculate on channel mix because
in a way, that needs to balance each other out and should be reverting to 2019. It should not really be used to
offset input costs, which are generic is our view. The ForEx currency in our favor, I mean, in the short term, if
you look at our translation effects, as I said, the currency is not working in our favor, and effect will be the
biggest pressure on our input costs in the second half of the year. It is true that if you look at our current spot
rate, that impact on currency is much more benign next year. But it won't be in any way or form giving us
enough to offset commodity cost. In fact, it is largely neutral at this point in time. Then on the tax rate, I think
the tax rate, you should assume that this year's tax rate is going to be roughly in line with the guidance that
we've given for previous years. The abnormality that you saw, as as I called out, was because of had the
impact of nondeductible items and a very low operating profit base last year, but we expect this to be
normalized by the end of this year. So I do not recognize the full 3% guidance that you were calling about --
that you were calling out.

Rudolf Gijsbert Servaas van den Brink, Heineken N.V. - Chairman of the Executive Board & CEO [28]
 Sure. Very good. Thanks, Trevor. Thanks everybody. And yes, looking forward to speak with many of you
over the next coming days. Wish you all a good remainder of the day. Take care. Bye-bye.

Harold P.J.van-den Broek, Heineken N.V. - CFO & Member of Executive Board [29]

Bye-bye.

Operator [30]

Ladies and gentlemen, this concludes today's call. You may disconnect your lines.