Heineken N V S/Adr

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. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to Federico Castillo-Martinez, Director of Investor Relations, to begin. Federico, please go ahead when you're ready.

Good afternoon, everyone. Thank you for joining us for today's live webcast of our 2021 half-year results. Your hosts will be Dolph Vandenbrink, our CEO, and Harold Vandenbroek, 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 Don.

Thank you, Federico. And welcome, everyone. Good morning, good afternoon, and good evening, wherever you may be. I hope you and your families are all well and safe. I'm delighted to be here together with Harald today to share with you our first half 2021 results. Harold joined the business on the 1st of June this year and brings a wealth of experience from previous roles at great companies like Unilever and Racket. And I'm certain he will continue enormously to our future success. I would like to start today with some reflections on my first year in the role. From my very first day, we adopted as a mantra that we need a 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, commitment, and resilience. They make us very proud, working hard every day to deliver for the business whilst taking care of each other, our customers, and their communities. We see positive signs in some countries and regions, but we also see continued or new waves and lockdowns in other countries. Our teams have been fast to service our customers and consumers where markets reopened, yet remained 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 number one asset and 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 lockdowns, social distancing, and have been longing to meet again. share a beer and chat a lot with friends. Heineken Brand has accompanied them with spot-on communications through this journey. I'm proud of the different commercials we have aired over the last year, from showing empathy at the start of the crisis as we dealt with the challenge of social distancing with the commercial O2 Close, to support to our customers with Back to Bars, and to celebrating the reopening in Europe and the opportunity to be finally together and to be rivals again with our Euro 2020 campaign. Heineken achieved great recognition for this creative work. In addition, we have and will continue to support the hospitality sector and the communities where we operate. Now, you may recall that when we introduced Evergreen, we shared with you our balanced growth algorithm. This flywheel shows 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 in 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 Bira Moretti Filtrada Alfredo in Italy. To further extend our global leadership in non-alcoholic, we complemented our range with Desperados Virgin Mojito. and Lagunitas Non-Alcohol IPA. And we're stretching beer with low bitterness variants in many markets globally, like Tiger in Brazil and Bintang Cristal in Indonesia, and continue to move beyond beer with the launch of Inches Cider in the UK and our experiments with Pure Peranya Seltzer in Mexico, New Zealand, and Europe. I will be coming back to illustrate further how we are shaping our future growth as I walk you through the performance of each of our regions in the first half. Then in the lower part of the framework, we have the continuous productivity improvements that are needed to accelerate investments to drive future growth. Hagel will speak later to these elements, but let me just say we are building great traction with our productivity programs. 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 ambitions. 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 ambition. 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 buyer grew 14.1% organically, benefiting from both a strong volume growth and revenue per hectolitre growth. Beer volume grew 9.6%, and Heineken up strongly, 19.6%, with very broad-based growth. Our operating profit buyer more than doubled, and the margin was 16.3%, driven by top-line growth leverage, continued cost mitigation actions, and structural cost-saving delivery. further helped by the phasing of marketing and sales expenses into the second half as per our original brand plans, investing behind growth. The net profit increased even faster given the low profit from last year, higher profits from our JV partners and lower financing costs. Now, as strong as these results are, there's 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 190.2%, with strong growth in the majority of our operations, particularly South Africa and Nigeria. Beer volume grew 16.8% organically, with Nigeria, the DRC, Ivory Coast, Burundi, Rwanda, and Lebanon ahead of 2019 volume. Price mix was up 9.5%, mainly driven by assertive pricing in Nigeria, Russia, and Ethiopia. The 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 and no alcohol portfolio grew in the high 20s, driven by Maltina and its expanded range of flavors. In South Africa, total volume grew in the 50s, ahead of the market, and side of volume more than doubled. The market has been impacted by alcohol bans in January, Easter, and more recently during July. Moving on to the Americas. Net revenue and operating profit buyer 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 the 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 makes an increase by a low single digit this year, despite the reinstatement of our promotional activity, which was suspended last year during the second quarter. The premium portfolio grew in the 50s, and we launched Dos Equis Ultra, the first Mexican ultra to further accelerate premiumization. Our six stores accelerated the expansion of new stores and grew strongly in the same store sales, including the development of non-bear categories. In Brazil, we continued to rebalance our portfolio and gain share in premium and mainstream. Heineken continued its remarkable momentum and became the number one 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 1st and launched Tiger through the Coca-Cola Bottles Network. Heineken USA grew ahead of the markets, 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 Entree. 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 by increase 5.4% organically, with price mix up 3% on a constant geographic basis. Operating profits increased 15.9% organically, driven by Indonesia, Malaysia, and restructuring of our business in the Philippines, partly offset by Cambodia. Following a strong start of the year in Vietnam, the last two months we saw a steep decline following restrictions to contain COVID to 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 Leroux and Bia Viet, as we continue our expansion strategy outside of main cities. In China, Heineken grew by strong double digits, led by Heineken Silver. The initial volume and coverage reached by Amstel in the very first few months of introduction are encouraging. Indonesia partly recovered, although still significantly behind 2019. We introduced Bentang Kristal, a smooth cold-brewed variety with low bitterness. Restrictions remain nationwide, including the key regions of Bali and Java. Beer volume 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 New Council 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. UBL 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 top Heineken operating company and Kingfisher a top five global brand. We have initiated procedures to integrate UBL into our network of operating companies. Finally, moving to Europe, Net revenue grew by 3% with price mix growing 0.8% with a relative stable channel mix. Operating profits grew materially from a very low base. Following the beer volume decline of 9.7% in the first quarter, in 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 on-trade 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 Biramariti. The low and no L 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 00 grew close to 40% and is now available in 95 markets. Heineken Silver quadrupled its volume, driven by strong growth in Vietnam and China. Now, we are also making big strides in our ambition to become the best connected brewer. Our business-to-business or B2B digital platforms continued their strong momentum and captured more than $1 billion in digital sales value in the first half of this year, more than double versus last year. We're now connecting more than 200,000 customers in traditional channels. That is more than four times 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 route to 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 continue to grow strongly. BeerWolf in Europe grew its net revenue by close to 60%. with particular strong growth in home draft with the sub and blade. In Mexico, our D2C activities grew around 90% of the 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 Refresh Brew a Better World 2030 commitment. We are further integrating and operationalizing our SNR 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 at the recent Formula E race hosted in the UK, we also launched the Greener Bar, showcasing innovative ways to reduce waste and carbon by using only recycled materials. To show our commitment to an inclusive, fair and equitable world, we will leverage the strength of our brands to raise awareness and support on social issues. One recent example in Brazil was the I Am What I Am Amstel campaign, with a commitment to spend 10% of the brand's Brazilian media budget to raise awareness and support the LGBT plus community. On the path to moderation and no harmful use, we will ensure a zero alcohol line extension for at least two strategic brands across the majority of our operating companies, accounting for 90% of our business, of which a third is already in place. So to summarize, there's early momentum building towards Evergreen with initiatives kicked off in all parts of the flywheel. Brent Heineken shows strong momentum for 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 commitments. I'm confident that we're heading in the right direction. And with that, I would like to hand over to Harold.

Thank you, Dolf. It's a great privilege to join Heineken and succeed Laurent. 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 goals 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 barley 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 teams demonstrated great agility to capture the partial recovery seen in the first half of the year, and this is reflected in our net revenue by our growth organically by 14.1%, or 1.3 billion euro. Total consolidated volume on an organic basis grew 8.2%. with quarter two recording a consolidated volume growth of 19.3% as more markets reopened for business. About three quarters of the half one volume growth came from Mexico, South Africa, and Nigeria, where in particular the first two markets were affected by significant lockdowns in the first half of 2020. Spain, Italy, and the USA 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 hectolitre 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 UK, 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 translation was significant, at 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 Vietnamese dong. The consolidation impact in half one was not material. with a net impact of just negative $5 million on net revenue and no major transactions to report. As a reminder, we acquired UBL shares, increasing our shareholding from 46.5% to 61.5%. However, as we did not have management control until last Thursday, we recorded the acquisition of shares under investments and associates and joint ventures. We closed half one, just shy of $10 billion net revenue Bayer, still 13% short, of the first half of 2019. Let's now look at the operating profit buyer on slide 16. Operating profit more than doubled in the first half year, predominantly driven by our top-line growth. The 1.3 billion organic revenue growth I called out on the previous slide converted in 904 million organic operating profit growth versus the first half of 2020, a conversion rate of almost 70%. The operating profit growth was very broad-based, with the majority of our operations contributing, but in particular 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 too. Let me give some additional color. Input cost buyer, grew by mid single digit on a per hectolitre 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 favourable portfolio mix effect, mainly from our growth in premium and growth in returnable packaging versus last year, although the pack-type mix effect is still negative compared to 2019. Marketing and sales expenses Bayer came in lower than last year due to phasing, lower credit losses, and continued cost mitigation actions in markets under lockdown. Personnel expenses Bayer 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 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 one with 1.6 billion operating profit BEA still 9% short of our 2019 level. 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 Dole 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 brewer 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 focused on premiumization and expansion of our portfolio. 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 full-year brand support plans. All these investments will be enabled by our productivity program, and we are pleased with the traction we see in our operating unit. As a reminder, we have set a target to deliver 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 1 billion of these savings. You may recall from the introduction of the program that it is mainly focused on three 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. Close to one-third 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 UK, introducing a modern and flexible primary distribution network, and improved our demand planning systems. And as you know, we are making a big transition and expanding our route to market in Brazil, thereby achieving better coverage with greater efficiency. Finally, our commercial effectiveness programs, where we see significant progress across many of our operations. We achieved the largest savings in the US while maintaining the same level of effectiveness of our brand investments, reducing non-consumer facing spend and improving media 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-won results that deserve some attention. First, our share of profit from Associates and Joint Ventures, BEA. 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 buyer improved by 9.9%, benefiting from a lower interest rate 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 high relative increase due to the low base in 2020. The effective tax rate buyer 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 asset could be recognized and higher non-deductible 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 156 per share, but still 15% below 2019. A last word on the financing headroom. Total net debt increased by 854 million per the 30th of June 2021 versus the 31st of December 2020, as the cash outflow for acquisitions and dividends exceeded the positive free operating cash flow. Furthermore, net debt increased due to a negative foreign currency impact on our non-euro debts. The pro forma rolling 12-month net debt EBITDA ratio was 3 on the 30th of June 2021, which was an improvement of 0.4 versus a closing of 2020 and 0.5 versus a half year. Heineken remains committed 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 number 19. In the first half of 2021, the cash flow was 650 million, an increase of rounded 1.5 billion. You will recall last year that the cash flow declined by close to 1.4 billion to an outflow of 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 and the re-facing of capital spent. You will now see this reversing into 2021. Cash flow from operations before working capital changes improved by 848 million, including a 151 reduction in provisions, mainly related to the utilization of provisions as we progressed with our organizational redesign. Working capital improved by 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 effects of the middle of the year. Additionally, last year 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 200 million and is reflected in working capital. Cash out from CapEx was 932 million, or 9.3% of revenue, which was 213 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 we're now phased into 2021. Main projects of this year include the expansion of capacity in our breweries in Ponta Grossa in Brazil and Vong Thao 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 volatile with some markets gradually reopening while others continue to implement restrictions until vaccinations are more broadly rolled out. Furthermore, we expect headwinds in input costs in the second half of 2021 and a material impact from commodity costs in 2022. we will be assertive on pricing and drive revenue and cost management to face this challenge. However, we expect margin pressure to intensify in the second half year. 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 plan plans. As a consequence, we expect operating profit margin 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 while 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.

If you would like to ask a question, please press star followed by one on your telephone keypad now. If you do change your mind, please press star followed by two. When preparing to ask your question, please ensure your line is unmuted. Our first question comes from Edward Mundy from Jefferies. Your line is now open.

Good afternoon, everyone. A few questions for me, please. Dolph, the first is for you, perhaps. It's still very early days on the Evergreen strategy, but part of Evergreen is to 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 $2 billion, and how do you think about medium-term opportunities for productivity as you gear for operating leverage beyond Evergreen? 2023, in particular from leveraging factors such as the global standardized ERP landscape. And the third question is on India, perhaps for Dolph. I appreciate the integration is ongoing. It's still very early days. But what are you most excited about with India? Is it the long-term volume opportunity, given where the caps are, or is it the opportunity to move to much more of a portfolio brand company?

Very good. Thanks, Ed. Let me indeed speak to your first and third part, and then I hand over to Harold. Yeah, so 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 four 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 able to continue, if not accelerate, And there's a couple of components, still starting with footprint. We believe we have an enviable 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 case in point. Then, of course, it's really about our portfolio led by Brent Heineken. It's amazing to see the continued momentum. This already started before COVID-19. but it has accelerated rather than slowed down during COVID 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 externally focused, by really, you know, strengthening our CMI, our data and data analytics capabilities, in order to bring innovations to market faster and faster. And I am happy if I see the number of innovations that were able to launch over the first six months of the year within premium, within zero-zero, within beyond beer. And at the same time, I think it's early days. I think there's much more to be done. There is more to be done to really take ownership of the category and make sure that we drive future growth of the category, not only in emerging markets, but also in the developed markets. Very happy with James Thomson, our new chief commerce, coming on board 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, tens of millions of people entering legal drinking age a year, tens 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 development of the international portfolio. And also, a more general statement, every time in the past when we were able to integrate these proud companies acquisitions, whether it's FEMSA in Mexico, Kirin in Brazil, 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. Short term, of course, India is still grappling with the Yeah, 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.

Yeah. So just a few words from what I've seen on the cost program, as you call it. Well, firstly, $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 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 one 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 that's 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 1 billion that will be realized this year. But 2 billion is twice as much as 1 billion, so there is still much more to come there, and we shouldn't get ahead of ourselves by talking it up of what is beyond 2023. I want to close with one final thing. I think this initiative was done in a very timely manner. It was in the middle of a COVID crisis that was brewing at that moment in time, and within a quarter, this 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, or 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.

Great. Thank you.

Thank you, Eb. On to the next question.

Our next question comes from Simon Hills from Citi. Your line is now open.

Thanks. Hi, Dolph. Hi, Harold. Three as well, please. Firstly, I wish 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 digits. per hectolitre 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 Dolph. Dolph, you've historically talked about a 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 more recently, given the reopening, we've seen some of your peers have noted perhaps a stronger rebound than they initially thought. What are you seeing in your business? Are you still sort of very conservative over that medium-term timeframe for recovery, or do you think it is a bit stronger now than perhaps you thought it might be? And then just finally, just a point of clarification around the cost-saving or the evergreen savings deliveries. The €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?

Okay, thanks, Simon. Let me speak to the on-premise question and then over to Harald on input cost 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, you know, bouncing back to at or even above 2019 levels in big parts of the U.S., And Europe, it's more recent. Let's not forget that the European on-trade opened only early June. So that's not even two months ago. Basically, until the end of May, we were in lockdowns. For the first half, the on-trade is still 50% down in 2019. Even in the second quarter, the on-trade is still 30% down. And 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 in absolute volume. At the same time, you know, at that time, only 80%, 85% of the outlets was back. So from a throughput per outlet standpoint, it looks more close to 2019 levels. But we all may know or fear that, you know, when the extensive government support in Europe ends over the next weeks and months, you know, there will be an impact and somewhat of a fallout. We don't know. You know, most expect around 5% to 10% of the outlets to not make it back. So we still don't see the on-trade coming back fully yet in the short term. mid-long term remain confident, as we have said before. The universal desire to socialize over a beer in a bar or 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 trends. and delivering altogether around 13% growth in the second quarter. And as we may think, you know, 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 and around the house. And only time will tell how that will shake out. So, yeah, we do think there's a somewhat different, more nuanced pattern in Europe visible at this moment in time. Now, on that, let me hand over to Harold for the other two questions.

Let me start with the last one, which is an easy point of clarification. When we're talking about $1 billion of gross savings in the context of the $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 the input cost headwinds, maybe to decompartmentalize it into half one, half two, and then looking into 2022. So our input cost in the first half, as I indicated, has increased by about mid-single digits. This was primarily driven by transactional forex, 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, 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 one.

Okay. Thanks, Simon. On to the next question.

Our next question comes from Sanjit Adula from Credit Suisse. Your line is now open.

Afternoon, Dolphin and Harold. A couple of questions from me, please. So lots of talk about input cost pressure, but I'd just love to get your outlook on revenue-paid services. Quite a strong performance there in H1. Particularly as we think about the European on-trade sequentially improving in H2, is it logical to assume revenue potentially accelerates 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. Thank you.

Very good. Thank you, Sanjit. 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, we need to make sure that we drive our growth through both volume and revenue per hectolitre. I think we have shown over the last year to be assertive on pricing and in the key markets, especially in markets where we were facing inflationary pressures. Case in point being Brazil. Year-to-date, we are delivering high 20s, which is a combination of three price increases in a row and a massive mix effect. As you may recall, we're out of capacity in Brazil today. So we're letting go of significant amounts of economy brand volume. So we're growing our premium and mainstream portfolio in the 20s, which is generating a very positive mix effect on top of these price increases. And sorry, guys, we are getting feedback sound here. So you can please. Thank you. So very strong pricing in Brazil. Across the Americas, it was almost double-digit. Across the Africa Middle East region, almost double-digit, driven by South Africa and Nigeria. So that you will see us continue to pursue. In environments like Europe, of course, that is more challenging. We had about 0.8% pricing in the first half. given the inputs post-commodity price heading our way, we will have to be alert on that and be agile in taking the pricing as we see fit. You will see an acceleration somewhat of our revenue per hectolitre 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 those efforts. Thank you, Sanjeev. On to the next question.

Our next question comes from Kristen Van Strien from Redburn Partners. Your line is now open.

Thank you very much. Good morning, Harold and Dolph. I just wanted to follow up on India and then a question on Africa, if you don't mind. So on India, well done on getting that done. I've seen that two liter per capita consumption figure for the last 30 years, I think. I don't think it's really changed. So I guess, can India really grow as long as there's a strong beer market? Do you need to turn it into a mild beer market at lower alcohol? And what can you do differently now? And is it just a portfolio plan or does something else need to happen in India to really unlock that 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 H117. 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? Just a bit more insight of what's happening, particularly outside of South Africa. That would be great. Fantastic.

Thank you, Tristan. Your question, your remark on India is very astute. Ed, that per capita 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 is that these relative shares between beer and spirits evolve over time. And we have seen across the world that the per capita alcohol consumption also evolves over time. If it was easy, it would have been done. So, you know, this will take concerted action over time. But, yeah, we believe it can be done. And therefore, I also emphasize that this is really a long-term opportunity that will take a deliberate turn. 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 are now not reaching. It implies reaching locations we are not reaching today. One of the stunning facts I always recall, there's only 80,000 people alcohol and beer selling outlets on a population of 1.4 billion. That's something we will have to work on, which is related to the cultural role of beer in society. So, yeah, a lot to do, but I'm absolutely convinced it can be done, but it will take a long-term commitment to that market, which is something we take pride at Heineken of being able to do. With respect to Africa, I appreciate the remark. This was a lot of hard work by the team, and that really had to do with transforming our Nigeria operations. 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 had to completely rebuild our cost structure. And a lot of credit to the management team on the ground, Jordi Beirut and his team, who really have addressed the cost structure, who 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 strengthening our mainstream brands, but then also really investing in premiums. And we are looking in now growth rates of 60% on premium, not only with Brent Heineken, the Tiger brand. Nigeria is now the largest Tiger market outside of Asia. Desperados, we just launched local production. And now you start seeing all these different elements starting to click and compound into significant improvement in trends. That's 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, investing in the route to market. Brand power, brand equity is something that is very high on our list. Ultimately, your pricing power directly correlates with the strength of your brand, with your brand equity. And I commend Roland Pirmes, the regional president, and his team of really making 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. Last one being South Africa. South Africa being badly impacted last year. Still this year, and we are just coming off another crisis, a third lockdown just this year in South Africa. But nevertheless, we were able to grow 50%. We doubled our cider 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 three large markets, you know, really coming back strongly, Yeah, that kind of lifts the boat across the region. But also we see in the kind of new frontier markets where we're investing, like Cote d'Ivoire developing very well, some of the legacy markets like Rwanda 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 Roland and team are prioritizing the right levers for the near and long term.

Thank you, Joel. Can I just be cheeky and just ask if you can make any comment on the potential distal acquisition?

I knew that question would be coming, but 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. Thank you. Thanks, Tristan. Next question, please.

Our next question comes from Celine Panuti from J.P. Morgan. Your line is now open.

Yes. Good afternoon. Thank you for taking my question. My first one is on Europe and the recovery that we see in 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 extension between the off trade and on trade, and would a the 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 goods 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 a continuous pricing increase? Thank you.

Thank you, Celine. Well, you've 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. 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, you know, 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 mitigation still when the markets were under pressure. The initial gross savings from our 1 billion program, soon to be 2 billion program, hopefully, coming through. And thirdly, you will 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 Europe. So those three factors all play the role. But again, let's not read too much into it. A lot of the recovery in Europe still needs to happen.

Very good. Then, Celine, let me answer your question on Brazil. Indeed, a lot going on. And I think there's two 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 the clearing 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 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, and we are 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 Upstool brand, which was the innovator in the pure malt segment. We do it through Devasa. And now a third new brand and priority, the Tiger brand, which we have launched with the Coca-Cola bottler network. A very unique proposition. The first brand, you know, in that segment sitting in a transparent bottle is with the unique flavor and kind of visual identity of the Tiger brand. And, of course, a lot of action in premium. Heineken brand became the number one brand in value in the off-trade, still growing, you know, strong double digits. But it's not only Heineken. We're also growing very fast with Eisenbaum, and we're growing very fast with the Kraft portfolio in the super premium segment. So bold choices. that is really starting to reap strong results, resulting that we now have one of the best revenue per hectolitre in the market and gross profit per hectolitre. So we're very happy to see that rebalance, but we really need to get the additional capacity. We get a couple million hectolitres out of Ponta Grossa in the second half of this year, a couple million next year. We will know that still will be insufficient to absorb the growth, And then we are full steam ahead with the green field that we are 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 Amstel and Heineken brands to our own direct distribution platform. And we see there's a lot of opportunity, particularly in the on-trade with the returnable packaging, where we have historically been underdeveloped because the Coke bottler system is a bit less focused on that. And at the same time, we're 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 the Eisenbahn brand there as well. And on top of that, we're building a strong digital B2B platform in the market that is scaling very fast as we speak. But, yeah, overall, happy with the results. Yeah, 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.

Thank you.

Thank you, Celine. Next question, please.

Our final question comes from Trevor Sterling from Bernstein. Your line is now open.

Hi, Dolph and Harold. Two questions on my side, please. The first one... You mentioned the input cost inflation and that two of the things that could offset it would be price and also the savings from Evergreen coming through. Is channel mixed? It should be a headwind, I guess, as well, Dolph, because if the entree is still depressed and hopefully it does come back, that should be a boost to gross margins. And I guess also some countries, it looks as if currency is actually going to run in your favor next year. Am I misreading the FX charts? And your second question, Trevor? Oh, sorry, second question was around tax. I think if I'm right, you've guided that this year's full-year tax rate will be higher than last, that of 2019. In the first half, the tax rate was three percentage points higher than 2019. Is that roughly the right way to think about the second half as well?

Yeah, so let me take the input cost first. Indeed, we've spoken in this call about the input cost pressures that we see unfolding. 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, yes, we will see a benefit from that. But at the same time, we need to be cognizant that there is still a portfolio mix, like, for example, We don't know what is going to happen to Asia at this moment in time, which is one of our most bigger 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 in fact, will be the biggest pressure on our input cost in the second half of the year. It is true that if you look at our current spot rate, that 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 costs. 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 I called out, was because of the impact of non-deductible 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 out. Super.

Thank you very much, Harold.

Sure. Very good. Thanks, Trevor. Thanks, everybody. And, yeah, looking forward to speak with many of you over the next coming days. Wish you all a good remainder of today. Take care. Bye-bye. Bye-bye.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.