Heineken N V S/Adr

Ladies and gentlemen, hello and welcome to the Heineken NV 2020 half-year results. My name is Maxine and I'll be coordinating the call today. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypads. I will now hand you over to your host, Heineken, to begin. Please go ahead when you're ready.

Good morning, everyone. Thank you for joining us for our 2020 half-year results conference call. Today's call will be hosted by Dolph Van Den Brink, our CEO, and Laurence Debreu, our CFO. Following the presentation and our results, we will be happy to take your questions. Some of the information provided during today's call contains statements of future expectations and other forward-looking statements. These expectations are based on management's current views and involve known and unknown risks and uncertainties. It is possible that the actual results may differ materially from those expressed in the forward-looking statement. With that, I would like to hand the call over to Dolf.

Thank you, Federico, and welcome everyone. Today is my first time speaking to you as the new CEO of Heineken, and on behalf of all of us at Heineken, I truly hope you and your families are all well and safe. Following in the footsteps of Jean-Francois, I would like to start by paying tribute to him. Jean-Francois has made countless contributions during his 15 years as our CEO, making Heineken the proud and independent brewer it is today. He's not only an incredible leader, but also a very special person. I want to thank him for his many contributions and personally for his support, especially over the transition period. I feel humbled and honored to have assumed this responsibility. It feels like yesterday that I started at Heineken as a commercial management trainee here in the Netherlands. In these 22 years, Heineken took me and my family on an incredible journey all over the world, living and working in all four of our regions. I've enjoyed working in all those different places, and these experiences have shaped me into the person and the leader I am today. I'm now very happy to have returned home. My new role started in the midst of a crisis unlike any other we have faced in our lifetimes. Having witnessed this pandemic and its effects from the very start in Asia, it's clear to me how much our lives and livelihoods are being impacted. Our first priority has been and continues to be the health and safety of all our people, our families and our communities. I'm so proud and impressed by how all at Heineken have taken care of each other and of our customers, suppliers and local communities. We all adapted to new ways of working. We have supported local communities and frontline medical facilities with donations worth 23 million euros, including water, non-alcoholic beverages and hand sanitizers. Throughout, our Heineken values have been our guiding stars like never before. We know that for Heineken to do well, our communities and the environment around us need to do well too. And that's why supporting our customers is and will remain one of our key focus areas. In the slide you see just a small selection of the right range of initiatives to support our customers. We provide advice and tools to safely reopen. helping them set up home delivery and online businesses, and in some cases, providing some financial support, for instance, by waiving rental payments where lease agreements are involved. In more than 20 markets, our Back the Bars initiative has helped more than 50,000 outlets, with 300,000 vouchers raising over 10 million euros. These can be redeemed when the bars open again and the owners receive the monetary value immediately to enable them to continue paying their fixed costs. We are proud to have been able to provide this support. However, it is essential that we don't get lost in just managing the crisis and make sure we also build the future and sustain our growth in a fast-changing world going forward. We're not underestimating the pandemic's impact and are mindful of the material effect it's having on our business. No one knows how long this pandemic will last, nor how large the impact will be. But we are Heineken, and in our 155-year history, we've weathered countless storms. And in moments of profound change in the world, we often have had the courage to act as pioneers. I believe, as such, our best times are still ahead of us. With our entrepreneurial spirit, once again, we can and will be pioneers, continuing our long success story. So today, we would like to do two things. We would like to cover our half-year results and explain how we are navigating the crisis. Throughout the presentations, Laurence and I will be reflecting on our three key focus areas as highlighted on this slide. Focus on people and safety, focus on consumers and customers, and focus on cost. I will come back later to explain what we are doing to build the future. Now let's first cover our results for the first six months of the year. Our markets and businesses were materially impacted by the COVID pandemic. Our top-line performance suffered as multiple countries took far-reaching measures to mitigate the spread of the virus. Beer volume declined organically 11.5%. The low point was definitely in April. Since then, we have seen week-by-week improvements across the majority of our markets, although a slow recovery. June was a strong month, but not a reference to use for the coming months as it was flattered by customers rebuilding inventories after the lockdowns. The situation is still very volatile, and in recent weeks we have seen renewed bans on the sale of alcohol in South Africa and in some states in Mexico, and a resurgence of the pandemic in several countries. However, in this very volatile world, the Heineken brand again demonstrated its strength and declined by only 2.5%. I will come back to talk more about this good performance. Net revenue per hectare was down 3.6% organically due to adverse channel mix, most acute in Europe, and negative product mix effect as consumers shifted to larger packaging formats. Our operating profit buyer declined organically 52.5%, so more than three times our net revenue organic decline of 16.4%. This deleveraging effect was mainly caused by the decline in the on-trade in Europe. We took action in March and initiated a number of cost-mitigating initiatives that drove a net reduction of half a billion euros. Laurence will cover all these in more detail later. Net profit buyer declined organically by 75.8%, leading to a diluted EPS buyer result of 39 cents. And we also booked 548 million euros of impairments, mostly in emerging markets, as exceptional items. I will start a brief review of the performance of each of the regions. And it will start with Africa, Middle East and Eastern Europe, or AME, as we call it. This region was the last to be affected by the COVID-19. Many markets introduced containment measures. As a result, beer volumes declined by nearly 15.9%. with the largest impact in South Africa. Our operations were entirely suspended in April and May, and after resuming in June, a new ban on alcohol sales was implemented since mid-July. In the first half, Heineken 00 grew strongly, placing South Africa just behind the US and Mexico in driving the global growth of the brand extension. Nigeria implemented a ban on the distribution of alcohol in some states. However, we outperformed the market and beer volume declined in the low teens. Maltina, our non-alcoholic malt drink, was broadly stable as we continued to produce and sell our non-alcoholic portfolio. In Ethiopia, our volumes declined in the low 20s as we have reflected in our prices the steep increase in excise duties of mid-February. Across 12 markets, including Nigeria, our premium portfolio also continued to grow. In Ethiopia, the growth came from Bedele Especial, our local premium brand, and in the Ivory Coast from Brand Heineken as we started local production last year. For the region, net revenue declined organically by 16.6% and operating profit by 61.7%, with the largest impact coming from South Africa. Moving On to the Americas. In March, the pandemic started to affect our operations, resulting in overall organic decline in beer volume of 15%. Our operations in Mexico were suspended in April and May, and we resumed sales in June when our customers began rebuilding inventories. In July, unfortunately, we observed an increase in market restrictions, including alcohol sales bans in some states and on-trade restrictions. A few bright spots. Heineken 00, introduced only last year, is already one of the main growth drivers globally for the brand extension. And on the e-commerce front, impressive growth of our six-to-go home delivery operations. But I will come back to that later. In Brazil, consumers continue to show strong demand for our premium and mainstream portfolios, which grew double digits, led by the growth of close to 50% of brand Heineken, and the continued momentum of Amstel. During the quarter, we reached our highest market share ever, and we are particularly pleased that our strategy to rebalance the portfolio is working, and our value share is now ahead of our volume share. In the U.S., Brent Heineken had a good relative performance, boosted by the growth of Heineken 00, while the Mexican portfolio was affected by supply chain constraints. Net revenue declined 12.2% organically, with price mix up 5.2% on a constant geographic basis, driven by the low teens' growth in Brazil. Operating profit value declined 31% organically, mainly from the impact in Mexico and higher costs in Brazil. On to Asia-Pacific, where the pandemic started early in the first quarter, impacting our beer volume relatively modestly, with a decline of 4.7% organically. In Vietnam, there was a steady reopening of the on-trade during the second quarter. Our volume grew significantly ahead of the market, driven by our mainstream brands and innovations to expand our total portfolio, like Heineken Silver, Strongbow, and most recently Heineken 00, and In many of our countries, and most notably in Cambodia and Indonesia, lower exports and the absence of tourism had a significant impact on the economies. Consumer income and confidence were under pressure, which resulted in significant volume losses and down-trading. We continued to make progress outside of our core markets in the region. For example, the Heineken brand became the number one brand in the premium segment in South Korea. For the region, net revenue declined 10.4% organically, operating profit by a decrease of 15.7%, showing the lowest operational deleverage effect across our regions due to the strong performance of Vietnam. And finally, moving to Europe, where the pandemic curves stabilized across the continent at the end of the semester. For the first half year, beer volume declined organically by 8.1%, On-trade outlets, which represent 35% of the beer volume, were closed for several months in most countries, and as a consequence, our on-trade volume declined by about 50%, which more than offset the mid-teens growth in the off-trade. Our strong position in on-trade and our vertical integration into wholesale and pubs is a long-term competitive advantage, but there's no doubt that this year it is a drag on our performance. Given the demand shock induced by COVID, a segment with structurally higher variable profits, but also higher fixed costs, causes a disproportionate negative deleveraging effect. These businesses allow us to be close to our consumers and customers, which will serve as well during the recovery. Just to illustrate, towards the end of July, 85% of our own estate of 2,500 pubs in the UK had reopened, within four weeks of the bans being lifted. In contrast, we observed only 51% of licensed pubs to have reopened. More broadly, across the region, we see that close to 90% of our on-trade customers have reopened. However, demand remains subdued as social distancing restrictions continue to limit their capacity to serve. The off-trade performed strongly as consumers adapted and our brands continued to do well. with market share gains across a majority of our key markets, including the UK, France, Italy, and the Netherlands. And premiumization is still there, outperforming in this channel across the region. For example, we had an excellent performance and strong growth on Desperados, Aflichem, Bira Moretti, and Ignusa. All in all, net revenue declined 20.8% for the region, with a negative price mix of 6.4%, on a constant geographic basis due to the channel and product mix effect. Operating profit was down by 87% organically due to the big operational deleveraging effect from the closure of the on-trade. Now, the Heineken brand performed strongly given the circumstances. Excluding South Africa, the brand would have been in positive territory. Consumers are turning towards brands they trust. So it's a good thing that, as measured by Cantor, the Heineken brand stands as the most trusted international beer brand in the world. Brand Heineken is clearly outperforming in the category, and in fact we observed stable or growing share in over 80% of our key markets. The brand even grew double-digit in 14 markets, including Brazil, China, the UK, Poland, Germany, Ivory Coast, and South Korea. Regarding China in particular, we successfully started our partnership with CRB. They completed the integration ahead of schedule and have accelerated the performance of the brand with double-digit growth quarter over quarter. Heineken 00 grew double digits with growth across all regions and particular strength in the US, Mexico and South Africa. The latest line extension of the brand, Heineken Silver, is performing ahead of expectations in Vietnam and was introduced in China in April. Nearly all events linked to our global sponsorship platforms were paused in the first half, but they're starting up again in the second half. Now, let me come back to comment further on e-commerce. Consumers and customers have embraced e-commerce since the start of the crisis, and we have been able to leverage this momentum and be more connected to them through our platforms across many countries. As consumers have created new consumption locations at home, our direct-to-consumer platforms across 17 countries benefited and saw a significant acceleration during the lockdowns. For example, BeerWolf, our online platform in Europe, saw 3.3 million visitors, of which half was new, and compared to last year, sold more than double of our home draft systems like The Sub and Blades. Consumers are also more cautious and not willing or unable to go to the shops, resulting in a significant spike for in-home delivery within the hour. For example, six to-go in Mexico received 10 times the number of orders in the last six months versus the full year of 2019. Regarding our customers, we currently have digital B2B platforms operational in 24 markets, which is seven more since we last updated you. connecting more than 60,000 customers in traditional channels and representing more than 1 billion euros of our revenues last year. We have accelerated their growth and expect to more than double the number of customers connected this year. These platforms have proven to be very effective to engage with customers during the lockdowns, helping increase frequency and size of orders. Overall, we are encouraged by these results and are firmly committed to continue and, where appropriate, accelerate our investments behind these B2C and B2B platforms. And with this, I would like to hand over to Laurence. Over to you.

Thank you, Dorf, and good morning to all. So let's now go to slide 13 for the financial overview of the first half year. starting with a net revenue VEA of 9.2 billion euros, which shows an organic decline of 16.4%. Volume is down 13.4%, and revenue per hectolitre VEA is down 3.6% organically. Now, on a constant geographic basis, you have seen the underlying negative price mix is 1.3%, and that is essentially attributable to the channel in Europe. Operating profit Bayer declined 52.5%. I will provide more context of the deleveraging effect and on cost mitigation in the following slides. Net profit dropped to €227 million, an organic decline of 75.8%. The decline of net profit was more pronounced than the decline in operating profit. What you find between those two lines, is a number of items that accelerate the decrease, and in particular, extra interest expenses from additional net debt. And on tax, the effect of higher operational losses for which no deferred tax assets can be recognized, as well as higher non-deductible interest in the Netherlands. Diluted EPS BEA ended at 39 cents, decreasing in line with net profit BEA. The impact of EAS, so exceptional items and amortization of acquisition-related intangibles, amounted to $742 million. The amount relating to amortization of intangibles is $144 million, pretty much in line with last year. And the rest, which constitutes the bulk of the difference versus last year, is primarily coming from impairments and write-offs of fixed assets. We have considered COVID-19 as a potential trigger to review the carrying value of fixed assets in all our operating companies. And out of that, we have identified around 3 billion that needed to be actually tested, resulting in a total impairment and write-off of 548 million. The impairments themselves were in developing markets, where the cost of capital tends to be much higher, And therefore, a decline in cash flow in the first few years causes significant drops in the overall value based on discounted future cash flow. For example, the largest impairment was in Papua New Guinea, where COVID-19 has drastically impacted the economy and where large liquid natural gas projects are now unlikely to materialize soon. As a result of these impairments, we recorded a net loss of €297 million for the half-year. Free operating cash flow was a negative 809 million euro with a decrease versus last year coming mainly from the lower profit combined with less favorable change in working capital. I will come back to that. And finally, our net debt to CDA ratio reached 3.5 times on a 12-month pro forma basis. Important to say here that we remain committed to our long-term objective of 2.5 times or below in the coming years. Moving now to slide 14. Consolidation changes had a negative impact of 0.5% or 55 million on net revenue. Here, the negative effect coming from the divestment of our own activities in China was partially offset by the positive effect from acquisition, primarily Namyslaw in Poland. Currencies had a negative translational impact, decreasing net revenue by 2.3% or 265 million euros, This was mainly attributable to the Brazilian reais and the Mexican pesos. On an organic basis, our top line declined 1.9 billion euros, and the largest individual declines in beer volume came from Mexico, South Africa, so two countries affected by complete lockdowns, and Spain, a country where the share of on-trade is particularly important. That's for volume, the volume component. Now, the revenue per hectolitre declined 3.6%, and the underlying price mix On a constant geographic basis, 1.3%. Again, Europe contributed more than 100% of that decrease as the most affected channels, on-trade, wholesale, and pubs have a much higher revenue per hectolitre. If you look at APAC, the negative price-mix effect after adjusting for the country mix is due to the faster growth of our mainstream portfolio in Vietnam and significant downtrading in countries impacted by the loss of export and tourism. In the Americas, the price mix was positive, most notably in Brazil. Growth in the teens came from higher prices, as well as a positive portfolio mix, and particularly the strong growth of Heineken. Finally, in AME, the price mix was also positive, coming from pricing in Ethiopia and the DRC, and more premium in the mix in Nigeria. Let's now look at slide 15 and the development of the operating profit layer. starting with consolidation changes and currency translation, which together had a small negative impact of 20 million. Actually, for this half year, consolidation changes were 37 million, mainly from the divestment of China and a small acquisition in Ecuador, and currency had a small positive translational impact of 1% or 17 million. Moving to the organic decline of 52.5% or 935 million euros, 84% of that decline came from Europe, Mexico, and South Africa. In Europe, our strong position in the on-trade and our vertical integration into wholesale and pub created a material deleveraging effect. With such a brutal shock in demand, it is really a double whammy from vertical integration. You lose volume with relatively higher gross profit per hectolitre, and you keep your higher fixed cost base. So what usually makes our strength turns into a short-term drag. And in Mexico and South Africa, we had our operations suspended in April and May, as you know. Digging a little more into expenses, first I will start with input costs, which grew about 10% per hectolitre. Input costs are significantly impacted by the channel and product mix, as we sold more one-way bottles and cans, which have an, in average, much higher cost per hectolitre than the returnable packaging SKUs that we sell in the on-trade, typically the kegs for the draft beer, for instance. Negative transactional currency effects were significant on some of our markets, like Brazil, but in aggregate, they did not impact as much as the mix. Other negatives here came from inventory write-offs from products collected back from customers and onerous contracts which had volume commitments for raw and packaging materials. Talking now about our other costs, fair to say that up to March, they had been higher than last year. During March, we implemented cost mitigation measures that resulted, for the half year, in a net organic reduction of about half a billion euros. Marketing and sales BEA expenses represented 11.1% of net revenue BEA, so around 60 basis points below last year. Here, we adapted our commercial activities to the fast changes in consumer behaviors and consumption patterns. For instance, as on-trade outlets were mostly closed, we could save on visibility and point-of-sale materials and on promotion. Regarding personal costs, while respecting our commitment to no restructuring layoffs in 2020, we have reduced by close to 150 million organically. That includes, among others, hiring freeze, less overtime, cancellation of bonuses for the year, and 35 million of government support, mainly in a few European countries. And then we have cut on all kinds of discretionary spend, starting, of course, with travel, conferences, and the like. That's for the addressable spend. Worth mentioning that at the same time, we have had higher depreciation and amortization, that's not related to COVID, but to past investments. And more related to COVID, we took higher provisions for credit losses, and there were extra costs related to safety and protection equipment, which we don't consider as AAS. Moving now to diluted EPS BEA on slide 16, $0.39 per share and down 78.6% in line with the net profit decrease. We have a negative impact of $0.08 from consolidation changes, mainly the divestment of China and a small positive currency translation. The EPS organic decline was $0.139. In addition to the decline in operating profit, I would again mention here increased interest expenses and a higher effective tax rate, since we have operational losses for which no deferred tax asset can be recognized, and higher non-deductible interest in the Netherlands. And both these effects, by the way, are amplified by the decrease in the base of profit before tax. Finally, the sale of Heineken shares to our Chinese partner CRE resulted in a small residual dilution of one cent. Let's finally go to cash flow on slide 17. We had a cash outflow of €809 million in the first half year. Looking at the €1.4 billion decrease versus last year, the main driver was a lower cash flow from operations. Change in working capital also played a role, mainly coming from payables. Normally, we land the half year with higher payables due to seasonality, which is favorable. However, this time, we had a sharp decrease in goods and services received during the lockdown, while we still needed to pay for those received previously. In the second half, as markets reopened, the comparison should become more favorable. This development in payables was partially offset by a relative stability in receivables in line with a lower revenue than last year. Cash out from CAPEX reached over €1 billion, largely due to projects executed in 2019 and and paid for in the first month of this year. Looking into the addition to purchase plant and equipment in the first half of 2020, they were $484 million, so 36% lower than last year, as we suspended pretty much all capex not related to immediate business continuity or safety starting mid-March. The main projects that we are still investing in at the moment are the completion of the expansion of Citibank in South Africa, and the extension of Ponta Grossa in Brazil and Vung Tau in Vietnam. As a company, we have secured and we maintain an ample buffer of liquidity. In the first half, we issued about 3 billion euro bonds with tranches ranging from 5 to as long as 20 years at an average coupon of 1.75%. As of June 30th, after deducting commercial paper and short-term bank borrowings at central level, we had approximately €4.5 billion in immediately available financing headings. And finally, on the outlook for the full year, last April, we withdrew all guidance for 2020 given the lack of visibility on the end date of the pandemic and the duration of its impact. We have observed a gradual recovery across most markets, but the situation, as you know, continues to be very volatile and uncertain, so we are only able to explain directionally what we see or expect, but we cannot provide you with estimates. We expect channel and product to continue to adversely impact our results, especially in Europe, as the on-trade keeps operating at reduced capacity. And as a consequence, input costs per hectolitre are expected also for the full year to be significantly higher than last year. Strict cost mitigation actions will continue, and there we will balance the reduction of discretionary expenses with providing sufficient support behind our brands and route to market. Uncommitted supply chain capex will continue to be mostly suspended, while commercial capex will resume selectively following the needs of the markets. and we will continue to update you with the intent to provide enhanced clarity and transparency in that very special year. With that, I would like to hand back to Dolf.

Okay, many thanks, Laurence. Now, normally at this point, I understand we would have moved to the Q&A, but I wanted to come back to that first slide and share some thoughts how, apart from navigating the crisis, we will build the future. Whilst the world around us continues to change and we remain agile in our response to the fast-evolving crisis, we have embarked on a journey, together with the executive team, to chart our next growth chapter. Over the last two months, I've started by actively engaging and listening to a wide range of internal and external stakeholders, and will continue to do so. It is clear there is consensus on our key strengths, that we need to continue building on, a diversified global footprint with exposure to many high-growth markets, a portfolio of great brands led by the unequalled Heineken brand, our entrepreneurial operating model with closeness and high adaptability to local market opportunities, and a highly dedicated and talented workforce. But at the same time, there are also areas that we need to improve on. Today, For example, we are reaping rewards of investments behind our brands and consumers made years or even decades ago. To remain a superior growth company in the long term, we will need to step up, once again, our consumer and customer centricity, aiming to pioneer and create new brands and new propositions targeting unmet consumer needs. Secondly, we have a unique company culture with high levels of passion and engagement. But we can operate with more speed and in more agile ways, leveraging best practices much faster across the company. And lastly, we can and have to sharpen our cost mindset. Building on the efforts of the last quarter, we will intensify our focus in this area and become a more nimble company in order to make sure we can continue to invest big behind our brands and consumer and customer needs. Moving forward, And as markets recover, we will leverage these unique strengths as well as address both opportunities and challenges to chart our next growth chapter. I'm very pleased to have a strong executive team with me on this journey, bringing a good balance of experience and fresh perspective. We will introduce the team and our plans for the future in due course. Now, I know it's a bit unusual. But I would really like to use this opportunity before going into the Q&A to show you two recent ads that Heineken has launched over the last few weeks. At Heineken, we like to be great brewers and great marketers. We love connecting with and staying close to our consumers in a unique and meaningful way. And this is especially true during these challenging times. First, we will show Oath to Close, which is a campaign that reflects our deep acknowledgement that we really are in this together. And secondly, as lockdowns start easing, going back to the bars is a long-awaited moment. And we want to support this channel to remain open and have launched a campaign called Socialize Responsibly to remind all our consumers to reflect the new rules. Because after all, there's only one thing better than a night out. And that's another night out. Right after that the floor will be yours for a question. Let's roll the video.

The heart shakes, the back slaps, the team breaks, the happy claps, the bear hugs, the holding, the love taps, the hugging. With a million ways of being together, now it's staying apart that brings us closer than ever.

That's life That's what all the people say You're riding high in April You're shot down in May

And if I didn't think it was worth one try, I'm gonna roll myself up in a big ball and fly.

Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypads now. If you do change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted. We have a question from Trevor Sterling from Bernstein. Your line is now open.

Good morning, Dolph and Laurence. Three questions for me, please. First one is, what do you think, Dolph, was the biggest negative surprise over the last three months? And second, what was the biggest positive surprise you saw? The third thing is you've talked a little bit about your priorities moving forward, which I guess was part of the journey Heineken was on anyway. Are there any areas where you think you need to step up a real intensity in terms of the change agenda as you move forward?

Very good. Thanks, Trevor, and good morning. I wouldn't say, per se, a negative surprise, but I would call it something we are concerned about, and that's, of course, the impact the crisis is having on the on-trade channel, and on-trade channel being about 35% to 40% of our business that has a material impact. You have seen, and I think we have shared the numbers, for example, in Europe, on-trade is down 50% as a consequence of Going forward, we do expect a gradual recovery, but it will be very much two steps forward, one step backwards, as we're seeing renewed flares of the crisis, renewed constraints in the on-trade across a couple of markets. But yeah, I would also like to emphasize what we are particularly proud of, And I can't tell you how proud I am of our people scattered across the globe into the most far-flung places. We have people leading our organizations and working in our organizations in over 80 operating companies. And the way people have adapted and the way people are taking care of each other, taking care of our customers and the local communities is really amazing. we have a very decentralized model where we empower our people to take responsibility. And I think during this kind of crisis, where there was so much volatility, so much happening at the same time, I think we really benefited from it. The other thing I'm really proud of is the Heineken brand. Our flagship brand, just down 2.5%. Without South Africa, it would have been up growing double digits in 14 markets, China looking very promising at the start with the CRB platform. We see very strong market share results across a couple of important markets like Vietnam, like in Brazil, like in the off-trade in Europe. So for all the challenges, there's equally a lot of momentum in particular parts of our portfolio and our channels. Yeah, your second question, part of your question, Trevor, around areas where we feel we have to step up. So first of all, this is something that I'm really taking a step back to deeply listen and engage with the organization as well as with stakeholders outside to see what's truly needed. Going into the crisis, the company had a lot of momentum. I feel the fundaments were and are very strong, our global footprint, our exposure to fast growth markets, our much more diversified portfolio than it was 10 years ago, the strength of Bent Heineken and so forth. Having said that, as we have shown over our 155 years history, it's a process of continuous renewal, of continuous revitalization, and we're living such a period once again. And yes, there are a couple of things that are on my mind, and we will come back on those later in due course. In terms of our culture, I really like the passion, the engagement, how people take responsibility. But at the same time, I feel at times we can move faster, we can be more agile and be more deliberate about learning from each other. very important in the end of the day. And that's also why I wanted to share the commercials. We are a consumer company. It is all about, you know, meeting unmet consumer needs and being very creative and entrepreneurial in this regard. And I would love to, yeah, continuously renew and revitalize this muscle in the company as consumer habits and behaviors are changing very rapidly at this moment. And then, of course, cost. We have said that in my quote and in the release, we can do more in this regard. I feel in the second quarter, we took out half a billion in cost in a relatively short timeframe. So cost control is very important, will be very important going forward. And what's particularly of concern to me is to make sure that we will be able to always invest big and bigger behind our brands and behind our customers. So those would be a couple of first thoughts in this regard, Trevor.

Thank you very much. That was very helpful, Connor.

We have a question from Edward Mundy from Jefferies. Your line is now open.

Hi, Dolph. Hello. Two questions for me. The first is on your good market share performance in a number of markets. I was hoping you could provide a bit more colour on what is driving that, and do you expect this momentum to continue beyond the crisis? The second question is around, as I mentioned, this increasing need to step up on consumer and customer centricity. I was wondering whether you could provide any examples of where Heineken is doing that particularly well, and therefore, where is the gap for the rest of the business? And then the third question is, around this point, adapting fast to new realities. I appreciate there's going to be a big step up on being a more nimble company, focusing on cost. And it's very hard to make structural changes to the business until you know what the world looks like on the other side. But at what stage do you start to consider making potential structural changes, in particular to Europe, where you're more vertically integrated and your business is very skewed towards the entree there? At what stage do you start to think about making changes, given it's very hard to know at this stage what it's going to look like on the other side?

Very good. Thank you, Edmund. On your first question on these consistent share gains, I think it's really the fruits of many years of deliberate investments and very intentional strategies. Probably one of the most spectacular market share gains we are seeing in Vietnam. We have been seeing them for many, many years, and it's accelerating rather than slowing down. I think it's a combination. There's multiple drivers there. We have continued to invest in our route to market in the urban areas, in the more rural areas. In more recent time, we're strengthening the route to market in the north. On the portfolio, premium has always been our strength, and we're not taking anything for granted there. We keep revitalizing that portfolio. with Tiger Crystal behind the all-important Tiger brand, the Tiger brand only being down a low single digit. The Heineken brand, where we launched as the first market globally Heineken Silver as a more sessionable extension on Heineken, doing extremely well, doubling its size in the first half of the year. But then I think what's particularly relevant at this moment in time, that about a year and a half, two years ago, we made a very conscious decision to also extend our portfolio more intentionally into mainstream. And in his insight, that was absolutely the right thing to do. At the time, we didn't realize how relevant it would be right now. But we see very fast gains in our mainstream portfolio. We also launched a new national mainstream brand, BFJ. So we really see at this route to market, this portfolio, it's premium, it's mainstream. I think in Brazil, it's a similar case. For many years, we have seen quite spectacular growth on Brent Heineken. That's continuing even in the middle of this crisis, Brent Heineken growing almost 50% year to date. Also, they're extending into mainstream with the Amstel brand continuing its very positive momentum. We keep investing there in rebalancing the portfolio to the more mainstream and higher end, resulting in very positive mix effects around double-digit price mix effects as a consequence. In Europe, in the off-trade, the on-trade is hard to see because that has been so disrupted, but if you look to the off-trade in Europe, We are gaining share in the majority of our markets, and we are doing it with the key premium brands. Brands like Desperados up significantly. We are seeing Aflichem. We see Moretti, for example, in the UK. We see Ignusa in Italy. So we keep leaning into building those brands, building our premium positions, and we like to believe that that's one of the key reasons why we're seeing these persistent share gains and moves. On consumer and customer centricity, that's something that is and should be priority at any moment in time, but I do believe it goes a little bit in waves up and down. At times, I find we can become a bit too centric on our own brands and our own products, and it's important to really have that outward in perspective, really understanding where our consumers are going. I think we can do better in this regard. That's a muscle we can strengthen further. But we're also doing it quite spectacularly, I would say, on, for example, 00, where a couple of years ago we made a very big bet on Heineken 00, on the biggest brand. 25% of the brand budget is going there. And we have seen the fruits with, I think now, almost 60 operating companies who have rolled out the brand and with continued double-digit growth even in the middle of this crisis. Now, on to your third part of the question, adapting to new realities. That's not something we're postponing. We're actually really doing that in this moment. As said before, we took out half a billion in cost. Apart ATL, BTL, where you need to be cautious that you don't overdo it. So we're quite deliberate in assuring that we maintain our share of voice levels in key markets. But there are efficiencies. There is media deflation that we can take advantage of. And we're really looking at our other fixed costs. Yes, we made a firm commitment of no restructurants linked to COVID, and we will stay true to that commitment through the end of the year. And going forward, it will be really finding the right balance between assuring the health of the business, protecting the business while minimizing the impact on our people. And we are in the middle of really figuring that out together with the team. But I'm quite confident that we will find that balance in the right way. Thanks, Edmund.

Thank you.

We have a question from Sanjit Ulia from Credit Suisse. Your line is now open.

Morning, Dolph and Laurent. A couple of questions, please. Firstly, just on the on-trade business in Europe, Can you just talk a bit about what you've seen in June and July in particular as many of these outlets have started to reopen? And if you can, point us to where you think trading is relative to the down 50% in the first half of the year. And secondly, just coming back to the point on intensifying the focus on costs, Dolph, where do you think are the biggest opportunities? If you can highlight two or three, please. Thanks.

Yeah, on the on-trade, I think we have commented that we have seen a sequential improvement as the on-trade reopened. At this moment in time, around 90% of the on-trade outlets across Europe are open again. Critically for us in the UK, we reopened later. We already have about 85% of our puppet states in the UK is open. but we do realize that a good portion of the improved volume performance in June was related to refilling the pipelines in the channel. So we want to be cautious, and maybe we're a bit more cautious than the market expected, but we feel it's important to realize that there will be volatility as consumer behavior is still adapting itself to perceived risk levels, There are still many restraints, even in a reopened horeca, that is constraining the ability to serve. So, yeah, I think it will be really a tale of two steps forward, one step backwards in this regard. I'm not the first one to comment. I think James Quincy made the same comment. Until there will be a vaccine or any other structural solution to the virus, we don't see the on-trade coming back to its exact pre-COVID level. So in the meantime, we need to maintain agility and adapt up and down. As I'm very proud to say, our supply chain and customer service organizations have been able to do quite effectively. Maybe, Laurence, can you take the question on cost?

In many respects, yes. The problems that we're in provide us with some kind of zero-based view on discretionary costs. And we're going to be, of course, very careful in how we add back those costs. Now, more structurally, cost savings moving forward will come from automation. In a way, we worked a lot on our productivity in the supply chain domain, and we are increasingly doing so in other aspects, including the support function, for instance. And in terms of automation, we have accelerated in the past few years. What you see as well is that the way we do things, the way we even deploy all these programs is changing radically. During the lockdown, we were able to continue to deploy. We made the choice actually not to stop that part of our investment, to continue to deploy our system, our ERP system changes. in a number of countries, and we did the go-live completely remote, something we would not even have imagined. Closing the book remote is something we didn't imagine and we did it, but deploying a new ERP system with no one on the ground is something we would not have thought possible. We did that, and we didn't do that in Germany, France, or Italy. We did that in Burundi, in Ethiopia, and in St. Lucia. So that is opening up a whole new way of working, and that's something that we've been realizing, and those are benefits that we want to keep moving forward. Again, there will be no stones unturned. It's also, I would say, the beauty of a new collective as an executive team coming together, asking each other the questions, and then looking at it together because the plan and the ambition is to be able, through more focus on cost, and a sharper resource allocation process to really fund the big battles of growth, because that will remain the essence of this company.

Got it. And just a quick follow-up on that, Laurence. As you think about the new normal and whenever the business might go back towards previous levels of sales, as you think about balancing cost and investment, do you think the business can go back to a higher margin level? or at least in line with pre-COVID levels?

The primary focus is really to get more margin of maneuver in order to fund the big battles of growth. And moving forward, that's what really enables us to have a sustainable way of profitable growth. So the first worry, the first concern is to really make sure that we free up resources in order to be able to work on resource allocation. Now, absolutely, sliding margin is not something that we're happy about and it's not something that we want to see. This year is not the right year to talk about margin, but definitely we want to balance what goes down to the profit, net profit, and what gets reinvested in the business.

Got it. Thank you. Thanks, Sanjit. Next question.

We have a question from Simon Hales from Citi. Your line is now open.

Thank you. Morning, Dolph. Morning, Laura. I've got two or three questions, if I can, please. Dolph, you talked about the need to look at and target unmet consumer needs. Does that mean that you would perhaps consider at this point pursuing opportunities beyond beer and beyond low and no alcohol, or are you talking specifically about unmet needs within the portfolio, sort of broadly as it stands? Secondly, I wonder if you could just talk a little bit more about the moving revenue per hectolitre in Europe through the first half. You're clearly still cautious on the outlook into H2. I know you don't want to talk about volume exit run rates in June and into July, but how do we think about sequentially perhaps how revenue per hectolitre has moved in somewhere like Europe from perhaps the April lows through to the end of the quarter? And then finally, just a quick one around the tax rate. Clearly a number of issues impacting the tax rate in the first half. Do all of those issues remain structurally in the second half as well, Ron?

Okay. I will take those first two, and then maybe, Laurence, any comments you may have on revenue per hectolitre, but then particularly on the tax rate. Thanks, Simon. Regarding... consumer and customer centricity and focus on unmet needs and whether that would take us beyond beer. For me, what is really key is it's all about the consumer and it's being much more deliberate about servicing our consumers. Why is beer still so underrepresented with female consumers? What's happening with consumer penetration with younger generations? That's something that really concerns me. That's something that's very top of mind. And we really want to take responsibility and make sure that first and foremost, the beer category stays relevant and becomes more relevant and drives consumer penetration with all these relevant consumer targets. And that may mean that it looks and smells like beer today. It may look I think we're already tapping into certain trends, whether it's zero-zero beer, whether it's much more sessionable beers that we're seeing in some markets, much less sessionable beers, more on the craft spectrum in others. And yeah, for me, it's to be much more open-minded and not be caught in a fixed mental model or to be too inward focused on the portfolio as we have it. but really deeply understand what's going on with our consumers and make sure we satisfy their current and future needs. And again, I can name many great examples where we are already doing it. And at the same time, I know and I'm convinced that there is much more we can do in that regard. Now, revenue per hectolitre. First and foremost, it is always important and our intention to make sure we get the pricing in respect to the cost. The wool disruption in the channel mix is really upsetting this picture in a major way, because in the shift from on-trade to off-trade, the revenue per hectolitre is significantly lower, but your input costs are also much higher. So it's a very difficult situation we are facing there. I think in the release, we are signalling that some of these effects, that we still expect them for the remainder of the year. But, Laurence, maybe you want to comment on that before addressing the tax rate question.

Absolutely. We do expect that the shift will remain twisted toward off-rate in the second half of the year. Even though we've seen gradual reopening, we're not at 100%, and the ones that reopened are not at 100% of the previous volume. So that will continue to have an impact in the second half. And answering to your question on the tax rate, definitely the fixed part of the tax becomes much heavier in terms of tax rate when you have a lower profit before tax. And that fixed part can be things like withholding tax on goods and services provided internationally. We also have, indeed, the non-deductibility of certain parts of interest or some losses for which we cannot book the deferred tax asset. Those three elements will remain a factor in the second half. So not guiding on the tax rate, but you should expect that the tax rate in the second half will be probably closer than what you see in the first half than on the normal year tax rate. That will still upset quite massively.

Brilliant. Thank you ever so much.

We have a question from Pina Ergen from Morgan Stanley. Your line is now open.

Hi, thank you. Good morning. My first question is, would the COVID crisis change your long-term views about your integrated business model in Europe if lockdowns were to take longer to ease fully or if the footfall remains lighter for longer? And the second one is, you've called out Europe, Mexico, and South Africa, explaining about 84% of the H1 EBIT decline. It appears that these regions are likely to face ongoing challenges in the near term. Would that be a fair assessment? And are you planning to change anything in the way you run the business to counter these headwinds in the second half? Thank you.

Thank you, Pinar. Regarding our long-term view on the integrated business model, I'm a firm believer that in the end of the day, human beings are social beings. And they love to connect. They love to come together. enjoy life and often over beers and often in these kind of on-trade environments. So long-term, I absolutely am convinced this will remain a significant and important and profitable part of our business. Short-term outlook, very volatile. Long-term, we remain committed. The question is to what extent we would have adapted to our cost structure in, let's say, the mid-term. And this is something that Suriname, our new regional president of Europe, is tasked to look into. He has mobilized his team to assess this. So this is very much something that is top of mind. But once again, let me reiterate, long term, we really believe in the strategic value of our integrated business model as it has served us so well also in the past. Your comment on Europe, Mexico, South Africa representing 84% of the profit decline, it's impossible to say anything meaningful on the future, Pinar. I think things may improve there, but they may deteriorate in other places. It may continue as is. I think in the end of the day, the only wise thing we can do is, one, to remain very realistic about what we are facing, Two, to be very transparent about it. And three, to really make sure that the agility and adaptability that we have seen across the business, that we really maintain that. As I said, I'm very, very impressed by our supply chain. We have a complex Opco footprint considered how widespread it is. And it has been amazing how efficient and effective the supply chain organization has been in ramping very quickly down, but also ramping up very quickly. Now, one thing we haven't spoken about yet, but something that is really taking and showing a big acceleration is our e-commerce business. And where, for example, in Mexico, also in places where we were in the lockdown, the six to go B2C platform really helped us in reaching consumers whereby the traditional channels were not able to do so. As I said, I think the number we shared is that we had 10 times the orders in the first six months of the year compared to the full year of 2019. The same thing for BeerWolf, our pan-Europe platform, almost doubling the revenue, doubling the number of consumers we have there. So I think it will be really a tale of two stories where in some places we will accelerate and we will have to scramble to make sure we are able to satisfy demand. and in other places where very unexpectedly things may roll the opposite way. But I'm confident in our organization in managing to do both. Thank you, Pinar.

Thank you so much.

We have a question from Tristan Van Strien from Redburn Partners. Your line is now open.

Good morning. Three for me, please. The first one, Laurent. Just a question on impairment testing. When I look at your WAC rates, which are 20% and higher, it seems much higher than what I'm calculating as simply a country-based premium, and also much higher than when I look at your competitors doing 10% to 12% WAC rates in similar geographies. So I guess the question is, are you perhaps being too conservative in what drives that? Then the second one, you're very much a federated organization that drives agility. And you're doing this great IT investment in your infrastructure. What are the opportunities to leverage that skill better on the back of that? What are the things that allow you to get a bit better cost control and a bit better agility on the back of that infrastructure investment, which has been quite large? And then the third point, Toph, you mentioned obviously one of the opportunities in terms of Beyond Beer was really to target women better, which is something I think I've been hearing for the last 25 years. But it also seems to be the problem that often, particularly in beer, management is still very much male-dominated. So perhaps where do you see the opportunity there? I think the first one was for you.

I thought it was the third one that was for me, though.

You can take that one as well.

I'm very happy. So, no, I will pick up the one about the WAC of Papua New Guinea. So we can have a further discussion on this. We take our WACs from external sources, and we look at it country by country. They might be a pre-tax, post-tax way to look at it in the world. Happy to answer your question in detail. Frankly, I don't think we're particularly conservative. We have long discussions with our auditors, again, country by country, and external sources can give different things. But as a matter of general statement, we're not considered neither too optimistic nor too negative on those. Now you say work is a country risk, and sometimes it's very uncertain, so it just reflects the external source you're picking.

Yeah? That's all you wanted to share on the internet?

Well, I can actually go down on the whack of Sierra Leone or Colorado Island.

I'm happy to take the second part of Tristan's question. On our federated model, which both is a huge strategic asset as well may complicate leveraging scale. I think that's how I understood your question, Tristan, and What are our intentions going forward? Now, as I said before, I'm a big believer in our Opco-centric model where we are putting the accountability and the P&Ls with local management as close to local consumers, local customers as possible. That gives us the agility, the adaptability, the entrepreneurial spirit And we will continue to do so. What is true that, and I've been as much part of this as anybody else, that we have not yet been very, not as effective, I would say, as we like to be in leveraging our skill across all dimensions. We have done so, for example, in procurement. That is an area where we really centralize and we have reaped the benefits. In other areas, for example, the management of the Heineken brand, which 10, 15 years ago was extremely federated with 23 different agencies and really harmonized that and drove a much more globalized strategy. And I think that's one of the primary reasons why we are seeing these very strong results on the brand Heineken. So I think we are on a continuous journey of finding that perfect balance between between local entrepreneurial spirit, local empowerment, while driving commonalities, driving global strategies where it's relevant and where it matters. And with the major digital and technology investments that we're facing, it is a moment in time where we will further nuance our operating model and it will be further elements in our operating model where we will push for common standards, common systems, rather than allow opcos to each go their individual way. And again, this is not something new, this is something that we have done over the years, and it's just one of those moments in time where we probably see an intensification, an acceleration in this regard. And it's not just for cost control. It is also really important, if you truly want to become a digital-enabled company, you need common data systems. In order to have common data systems, you need standardized transactional processes. You need standardized IT systems. And we are firmly committed to be heading in that way and accelerate our efforts in this regard. Now, your last question on Beyond Beer and how you've heard that for over 20 years, and that's a point well taken. And it's embarrassing, to be honest, and it's bad business because half the consumers out there, half the potential consumers happen to be female. And I really feel we need to do a better job at that. And I do believe adjacent categories have done a better job than beer in this regard. And you're also fully right to point out that there may be a correlation with the internal diversity in beer companies and the diversity of our consumer base. So this is something that's high in my agenda. With 85,000 people, there's no quick wins where you certainly dramatically transform it. But it is something that Laurence and I, the whole executive team, are really committed to move the needle on. Not just because it's the right thing and it fits our value of respect for people, but also because it's good and important for business. Thank you, Tristan. I think, are there any more questions or not? That was our last question.

Delph, I will hand it back to you.

Okay. Yes. Now, just a short final word. And thank you all for your questions. Now, as I wrap up, I would just like to again thank all our people, all the 85,000 men and women from Heineken around the world for their relentless commitment to our Heineken values by taking care of each other and the customers and our communities. while at the same time we're adapting swiftly to the changing business environment and fast-evolving consumer and customer needs. Despite the current challenges we are facing, I am and remain very confident that while navigating the crisis, we will build a bright future and continue Heineken's growth journey. We will emerge stronger and once again be the pioneer in leading and shaping the global beer industry. I thank you all for joining the call. And I look forward to meet in person and to have a beer together as soon as circumstances allow. We wish you a very good day. Bye-bye.

Goodbye. Thank you.