Heineken N V S/Adr

Hello, everyone, and welcome to the Heineken Half Year 2023 Results Call. My name's Daisy, and I'll be coordinating your call today. If you would like to register a question, please press star followed by one on your telephone keypad. Please kindly only ask one question and one follow-up to allow others the chance. And I would now like to hand the call over to your host, Federico Castillo-Martinez, Director of Investor Relations to begin. So, Federico, please go ahead.

Thank you, Daisy. Good afternoon, everyone. Thank you for joining us for today's live webcast of our 2023 half-year results. Your hosts will be Dolph Van Den Brink, our CEO, and Harold Van Den Broeck, 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. For more information, please refer to the disclaimer on the first page of this presentation. I will now turn the call over to Dorf.

Thank you, Federico, and welcome, everyone. I would like to start with a quick reminder of our green diamond. This is how we measure the success of our evergreen strategy. It embodies the balance we aim to attain. We continue to focus on our evergreen priorities and to invest for long-term sustainable value creation, balancing growth, profitability, capital efficiency, and sustainability responsibility. In the first six months of 2023, we prioritized and delivered the front-loaded pricing required to offset unprecedented input to energy cost inflation across all markets. In Europe, the region with the highest inflationary impact, volume declined in line with our expectations, yet demand in APEC was considerably softer than foreseen due to an economic slowdown and our own performance in Vietnam. Our overall financial performance in the first half of the year was below expectations, driven by the challenging results in our most profitable APEC region. At the same time, we increased investments behind our branching capabilities with marketing and sales investments up by 0.2 billion globally to drive future growth. We expect a strong turnaround in operating profit growth in the second half as pricing moderates, volume trends gradually improve, and we accelerate our delivery of cost savings. For the full year, we have updated our outlook, and we now expect stable to amid single-digit operating profit organic growth. Let's take a closer look at the key financial highlights. Net revenue grew 6.6% organically versus last year, benefiting from inflation-led pricing, more than offsetting the volume decline. Revenue per hectolitre grew organically by 12.7%, driven by pricing for inflation and positive mix from premiumization. Total beer volume declined by 5.6% organically, and shortly I will provide more detail across the regions. The Heineken brand grew 3.7%, excluding Russia, significantly outperforming the beer portfolio. Operating profit declined by 8.8%, and the margin was 13.4%, down 260 basis points versus last year. Net profit declined slightly ahead of operating profit organically, and the diluted earnings per share ended at €2.03. Higher financing costs were offset by lower taxes and minority interest and a higher share of profits from associates, with a strong performance of CRB. Harald will speak later in great detail about some of these financial highlights. I will now turn to the regions starting with Europe. Net revenue grew strongly by 8.9% with price mix up 13.5%, primarily driven by pricing ahead of the industry to cover the disproportionate impacts of inflation on our cost base on the back of improving brand power. Beer volume declined organically by 4.8% versus last year, broadly in line with our expectations. The on-trade was up, benefiting from reopening tailwinds in the first quarter, and the off-trade declined, losing share in some markets because of earlier pricing ahead of the industry. The premium portfolio outperformed, led by our next-generation brands, including Galia, Biramoretti, and El Aguila, which grew by a low single-digit. Overall, we gained or held market share in over a third of our markets with improving trends in the second quarter. Operating profit declined marginally, remarkable in the context of the inflationary pressures in the first half and the large increase of our investment in our brands. In addition to the strong pricing, we delivered significant cost savings from our supply chain transformation program. Moving on to the Americas, net revenue grew organically by 8.6%, mainly driven by Mexico and Brazil. Organic beer volume declined by 1.5%. The price mix grew by 11.3%, driven by pricing and the continued premiumization of our portfolio, particularly in Mexico, Brazil, and Ecuador. Operating profit declined by 1.8% as revenue growth was offset by inflationary pressures on our product cost and a significant step up in marketing investment in Brazil, Mexico, and the U.S. In Mexico, net revenue increased organically in the low teens, driven by pricing, partially offset by a low single-digit volume decline due to the mixing of OXO, now complete and in its last year of impact. The premium portfolio outperformed up in volume in the high teens, led by Heineken Silver. Our sixth route to consumer continued expanding to reach more than 16.5 thousand stores in the first half. In Brazil, net revenue grew in the low teens, beer volume was stable, outperforming the industry while pricing ahead of the industry. Heineken continues as the number one beer brand by value in the off-trade and is now also the second largest beer brand in the total market by value. Amstel, the number one brand in the pure malt mainstream segment, continued its strong momentum and grew in the low 30s. Heineken USA shipments were down high single digit, while depletions were down by low single digit, outperforming the market in the second quarter. Heineken grew in depletions, driven by the launch of Heineken Silver, with encouraging early results in distribution buildup and rate of sale. Heineken 00 continues to be the number one non-alcoholic beer brand by value in the US and was up mid-teens. Moving on to Amey. Net revenue grew organically by close to 10%, as the decline in the beer volume of 6.5% organically was more than offset by strong price mixed growth of 16.7%, driven largely by pricing with inflation and further boosted by premiumization. The premium beer portfolio declined in the low teens, driven by the decline in Russia. Excluding Russia, the rest of the region registered low single-digit growth in premiums. Operating profit declined by 5.1%, as strong pricing and productivity gains mostly offset the impact from lower volume inflation and transactional currency effects. In Nigeria, net revenue grew low single digits, driven by pricing to partially mitigate inflation. Total volume declined in the low 20s, with consumers purchasing power and the heavy pressure from inflation, cash shortages, and the effect of structural economic reforms. Although these reforms have short-term impact on business and consumers, we believe they are beneficial to the long-term growth prospects of the country. Despite these challenges, premium beer volume was broadly stable. Important to note that if we were to exclude the impact of Nigeria in the first half, beer volume would have been up low single digit organically in the region, with broadly the same operating profit performance, given the impressive actions of our Nigerian organization to right-size the business to the new reality. We also received positive news that the government has reversed its decision to significantly increase excite duties this year. An Ethiopian volume was up in the low 20s, extending our market leadership with Harar, Bedele and Walia all outperforming. The premium portfolio volume was up close to 40%, led by Heineken and Bedelia Special. In South Africa, volume was impacted by a brewery disruption in the first quarter and the impact of power outages on consumer demand. Pricing was ahead of the industry, particularly on Amstel, with impact on our market share that is now being addressed. Heineken continued to drive premiumization and grew volume by a mid-single digit. Finally, we are making good early progress on the integration of Distel and Amemian breweries. Moving on to APEC. We had a very challenging first half in the region. Beer volume decreased organically by 13.2%. Net revenue declined by close to 7%, with price mix up around 5%. Operating profit declined by 34.4% organically, essentially driven by Vietnam. Deep diving in Vietnam. Volume declined by close to 25% for three key reasons. Firstly, the economic slowdown. impacted our strongholds and the premium segment disproportionately. We estimate that the total market was down by a high single digit in the second quarter. Secondly, more than half of the volume decline was a result of the destocking of the TET overhang. Our distributor stock levels have largely normalized, and our volume exit rate of June was close to the overall market decline in the quarter. Thirdly, downtrading, exacerbated by our pricing ahead of the market. particularly for Tiger, which we are currently addressing to restore consumer affordability. Overall, on a sell-out basis, our performance is broadly in line with the market, with stable share and premium, while we gain in mainstream. Mainstream brands like Biafjet and Bivina grew double digits, supported by the expansion into regions outside our strongholds. In India, we have seen the impact of deliberate route-to-market changes in certain states, as we are bringing UBL fully within our control. Excluding those states, beer volume grew by a mid-single digit. Whilst overall disappointing performance in APEC, very positively we continue to make strong progress in China. Heineken volume grew close to 60%, driven by the strong momentum of both Heineken Original and Heineken Silver. Let's now look at progress on our evergreen priorities, starting with premiumization. Overall premium beer volume declined by 6.5%, driven by Vietnam and Russia. However, beyond these markets, premiumization trends remain strong as premium volume grew low single digits ahead of the total beer portfolio in aggregate in the majority of our markets. In this slide, we are showing this view for the regions, and you can see a similar relative outperformance of the premium portfolio when compared to mainstream and economy-consolidated beer volumes. In Europe, premium beer improved 80 basis points in the mix, and our next-generation brands, including Gallia, Biramoretti, and El Aguila, grew volume low single-digit. As previously mentioned, in the Americas, we have impressive momentum on Heineken in Brazil as we continue the portfolio transformation. More than 75% of our volume is now in the premium and mainstream segments. In AME, despite the challenges in Nigeria, we see the biggest contrast with premium gaining 400 basis points in the mix. And remarkably, in Nigeria, Desperados doubled its volume versus last year. Finally, in APEC, excluding Vietnam, other markets grew premium beer high single digits. If we include Vietnam, this figure would be a low 20s decline. However, maybe somewhat surprisingly, In Vietnam, our low bitterness premium beers, Heineken Silver and Tiger Crystal, continue their strong momentum with volume up in the mid-teens and high-teens, respectively. Moving on to Brent Heineken, which continued to lead our portfolio and grew volume by 3.7%, excluding Russia. 1.7% included Russia in the first half. Growth was broad-based across 50 markets, most notably in China, Brazil, Mexico, and Ethiopia. Heineken 00 also grew 5.2%, excluding Russia, further strengthening its leadership position in the non-alcoholic segment. Heineken Silver is now present in 45 markets and grew volume by more than 45%, led by China, Vietnam, and Mexico. And indeed, in China, the momentum is impressive, with 60% volume growth, improving brand power. China is now the second largest market globally for brand Heineken. We're proud that Heineken, Heineken Silver and Heineken 00 are all contributing to the growth of the brand as we celebrate the 150th anniversary of the brand. Once again, our creativity and execution was recognized at Cannes, where Heineken was awarded 12 bronze, 7 silver and 1 gold lion for the closure campaign. Heineken was the third most awarded brand over all categories. Happy birthday indeed. We're also investing behind our ambition to become the best connected brewery. We continue to expand our eB2B platforms and by the end of the first half, we captured 5.2 billion in gross merchandising value, an increase of 36% versus last year. This means we have surpassed over 10 billion over the last 12 months and are well on track to reach our ambition of over 15 billion of gross merchandising value by 2025. We now connect more than 550,000 active customers in fragmented traditional channels, an increase of 31% versus the same period last year. As an example in Brazil, we continue to build skill and now connect over 150,000 active customers, 46% more than at this time last year. This translates into 20,000 customers placing orders per day. We're accelerating our deployments in Brazil beyond our direct customers and into our indirect distribution network of resellers. We continue to migrate our eB2B platforms under a single brand name and identity. Easel, business made easy. Nine of our operations in Europe have already migrated, enabling better features at scale, improved customer experience, and increased efficiency. Finally, let's move to our Brew a Better World strategy to drive progress towards a net zero, fairer, and more balanced world. We're making good progress across all three pillars and are building executional momentum to deliver our ambitions. Please note the results on these graphs for the whole year are illustrative to show our progress as we report progress annually. we continue to reduce our absolute carbon emissions in scope one and two on the way to our ambition to reach net zero carbon emissions in production sites by 2030 with strategic investments in projects including the following. Together with Signify, Nobian, and Philips, we opened an onshore wind farm in Finland in June. The virtual power purchase agreement will generate renewable electricity to power 27 of our European production sites for the next 10 years. We're committed to launch Project Circle, which uses technology that extracts high-quality proteins from spent grain and uses the remaining fibers as biofuel in our breweries. We also announced an investment of £25 million into our Manchester brewery to install heat pumps that will reduce our need to source gas for heating. We continue to focus on healthy watersheds via water efficiency, water circularity and water balancing. We have implemented more than 150 initiatives to reduce water consumption in 2023 across sites with a further 800 plus under execution. Social. We're making good progress when it comes to gender diversity. Our goals are for Heineken to become a more gender-balanced company with 30% of our female males in senior management positions by 2025 and 40% by 2030. In a half year, we continue our good progress towards our 2025 goal with 28% females in senior management. On responsibility, I'm personally delighted with our new partnership between Heineken and double Formula One world champion Max Verstappen in the new global When You Drive, Never Drink campaign to encourage consumers to make the right choice when it comes to selecting a designated driver on a night out. And with that, I would like to hand over to Harald.

Thank you, Dolf, and good day to you all. I will take you through the main drivers of our half one financial results and our outlook statements with some color on how we see the second half of 2023. Starting with our top line performance on slide 15. We posted an organic growth of 0.9 billion, or 6.6%, reaching 14.5 billion net revenue buyer. As Dolf mentioned, we prioritized and delivered the pricing required to offset inflationary pressures on our cost. This resulted in net revenue per hectolitre increasing by 12.7%. The underlying price mix on a constant geographic basis was 11.8%, driven by pricing of 10.8%, broadly in line with the weighted average inflation of our markets. The mixed component was positive 1% from premiumization held back by Asia-Pacific. The consolidated volume on an organic basis was down 5.4%. The decline was more pronounced in the second quarter, 7.3%, And this was due to a combination of the cumulative effect of front-loaded pricing actions taken and a challenging economic backdrop in some markets affecting consumer demand. Over half of the organic volume decline in the first six months can be attributed to our underperformance in Vietnam and socio-economic volatility in Nigeria affecting consumer purchasing power. Volume in the Americas region were slightly negative in a softer bear market, notably in the second quarter, combined with the continuing impact from OXO mixing in Mexico, now in its last phase. Volume in Europe performed broadly in line with our expectations. The translation of foreign currencies had a negative impact of 91 million or 0.7% for the first six months, driven by the Nigerian Naira, Egyptian Pound and other currencies. partially offset by a stronger Mexican peso. I do want to emphasize that using current spot rates applied to the results of last year, the negative effect of translation will significantly increase to about 800 million for the full year, mainly due to the devaluation of African currencies. Consolidation changes represented 231 million or 1.7%. mainly distilled and Namibian breweries in Africa and Beavertown in the UK. Moving on to slide 16. Operating profit came in at 1.9 billion euro for the first half year. And start with organic growth. This 0.9 million of organic revenue growth on the previous page was more than offset by incremental costs and investments, resulting in a decline of 189 million operating profit organic growth for the half year. Let me first touch upon the cost elements. Importantly, we continue to invest behind our brands and funding our evergreen strategic priorities, also when we face short-term headwinds. To illustrate, the operating profit organic decline is broadly equivalent to the incremental investment in marketing and sales to support future growth. This amounted to an additional $117.8 million or 14% increase organically, a significant step up behind our brands, particularly in America and Europe. Marketing and sales investment as a percentage of revenue reached 10%, despite lower volumes, an increase of 60 basis points versus the same period last year. Input, transport, and energy cost in aggregate grew organically in the mid-teens on a per hectolitre basis, driven by higher commodities and energy prices reflected in our hedge positions. This mid-teen inflation is somewhat lower than what we anticipated at the start of the year, helped by a higher mix of returnable packaging and better structural growth savings. This allowed us to progressively and selectively adjust our pricing plans, still with the aim to cover the inflation on a euro-for-euro basis, whilst remaining competitive. Now turning to regions. Asia Pacific, our most profitable region, was the main driver of our operating profit organic growth decline, down by 219 million, or 34%, and mainly driven by the volume decline in Vietnam. The Africa, Middle East, and Eastern Europe region saw a modest operating profit organic decline of 5.1%, as strong cost and productivity initiatives were taken to streamline our business in Nigeria to adjust to the lower consumer demand and to counter inflation and currency devaluation effects. In the Americas, higher investment in marketing and sales in Mexico, Brazil, and in the USA was the primary reason for the small profit decline. In Europe, operating profit was broadly in line with last year, with a step up in investments behind our brands, and despite very high input and energy costs related to inflation, well above the company average. This strong result was delivered by price-led revenue growth and significant cost savings from our end-to-end supply chain transformation and productivity programs. Our operating profit margin buyer for the first six months was 13.4%, 260 basis points down compared to the comparative period last year, driven by the organic performance and the dilutive effect from the consolidation impacts. Transactional currency effects, currency translation, and consolidation impacts all had a small impact for the results for the first half. Now, let me cover some other key financial data on a BEA basis on slide number 17. First, our share of profits from associates and joint ventures grew 14.6%, primarily from profit growth of CRB in China. Net interest expenses, BEA, increased organically by 33%, to 255 million, reflecting a higher average net debt position and an increase in average effective interest rates to 3.2%. Other net finance expenses, BEA, amounted to 100 million, driven by derivatives related to revaluation of long-term green energy contracts as prices retracted from their peak last year and from revaluation of foreign currency payables. Net profit Bayer declined by 11.6% organically to 1.15 billion. The effective tax rate Bayer was 28%, at about 80 basis points lower than last year. The decrease was mainly driven by a lower amount of losses for which no deferred tax assets were recognized. All in all, this resulted in an EPS decline to 2 euros and 3 cents. In line with our dividend policy, interim dividend is set at 40% of the total dividend of the previous year, and therefore an interim dividend of 69 cents per share will be paid, up 38% versus last year. Finally, our net debt to EBITDA ratio increased temporarily to 2.7 times. In the second half of the year, this will revert to below the company's long-term target of below 2.5 times. Let me now turn to free operating cash flow. We recorded a cash outflow for the first six months of the year of $467 million, a $1.5 billion change from last year. Let me upfront state that I expect a much improved cash delivery in the second half of the year, as there are significant phasing elements in these numbers. And this includes the change from accelerated growth and material scarcity seen last year to slow down and excess inventory in the first half of 2023, also affecting our payables position. Cash flow from operations before working capital changes was lowered by 155 million, driven by the lower operating profit and including a reduction in restructuring provisions of 30 million. The working capital movement was 794 million lower than last year. Aside from the phasing already mentioned, very noticeable in APAC, there was also some impact in Europe as we prepared for the now announced brewery closures. Overall capex in the first six months was close to 1.5 billion, an increase of close to half a billion versus last year. This mainly reflects payables made related to investments from last year. Investments made in the first half of 23 amounted to 0.9 billion, and we expect to remain in line with our guidance of below 9% CAPEX as a percentage revenue payer. Cash for interest, dividends, and tax increased in aggregate by 188 million, mainly from higher income taxes paid. Let me now turn to the outlook for the rest of the year in the next slide. Our Evergreen strategy is a multi-year and multifaceted journey to future-proof the company and deliver superior balance growth for long-term value creation. We have executed our plans in line with our Evergreen priorities, continued investments, and are making clear progress in building a premium portfolio, driving consumer-centric innovation, digitization, sustainability, and improving productivity. In the second half of 23, we expect significant improved operating profits, Bayer growth, inclusive of a lower pressure from inflation, and I will elaborate on this in a moment, pricing starting to moderate with volume trends gradually improving to a low single digit decline, an improved outlook in Vietnam and Nigeria relative to the significant disruption in the first half, a similar absolute level of marketing and sales expenses when compared to the first half, and productivity savings in excess of 300 million, cumulatively bringing us well ahead of the 2 billion gross savings target. Overall, our updated expectations for the full year of 23 is stable to a mid-single-digit operating profit by our organic growth. We also anticipate an average interest rate for the year of around 3.2%, and assumptions on CAPEX and effective tax rates are unchanged. Let me now touch on a few elements that shape the second half financial outlook. First, our variable cost between brackets, because it's a term we don't normally use. But in this definition covers our input, our raw and non-returnable packaging materials, our transport, and our energy and water costs. We incurred mid-teens inflation in these costs on a per hectolitre basis in the first half. In the second half, we expect some lower levels of inflation, mainly due to a lower transportation and energy cost and only a small benefit from lower commodity prices given our hedged positions. In addition, we continue to deliver significant growth savings, including, for instance, reducing imports of glass bottles to Brazil, leveraging supplier partnerships, having brought new dedicated capacity online to support our growth. Our productivity program also remains firmly on track. The graph on the left shows over 200 million gross savings delivered in the first half of 23, enabling increased investment behind marketing and sales. To illustrate, I referred earlier to the streamlining of our business in Nigeria. They have lowered the break-even volume threshold by 20% versus last year, important to mitigate the challenging economic conditions and providing a significant opportunity when growth momentum is restored. All opcos have clear sight of cost savings and productivity initiatives and are driving towards realization in a monthly drumbeat. Next to that, we see an acceleration in Europe driven by our supply network transformation, which will by itself deliver over 200 million growth savings this year. It is focused on boosting operational excellence, taking non-value added complexity out, and transforming our production and logistics footprint in Europe, resulting in the announced closure of seven breweries to date. This put together makes us confident we will deliver more than 300 million gross savings in the second half. By the end of the year, we will then have achieved our 2 billion gross savings target versus the 2019 cost base, as the right side of this slide illustrates. But more importantly, we have well-defined plans and a way of working that secures the committed 400 million cost savings for the years to come. Therefore, let me summarize our outlook for 2023 and glimpse into 2024. We updated our profit growth expectations to stable to emit single-digit operating profit growth in Bayer terms. This means an acceleration of our financial performance in the second half. To start, we will continue to invest in our brands and behind this evergreen strategy. Yet pricing will moderate as we see lower levels of inflation ahead of us and as we frontloaded our pricing actions. We expect volumes to progressively improve towards a single digit decline and see our productivity savings accelerate. Looking further ahead, the unprecedented commodity and energy cost inflation in recent years will be partially reversed next year, easing the pressure on pricing. Together with the structural changes we are making with Evergreen, we are confident this will set us up for a balanced growth delivery in 2024, while we remain cautious about the macroeconomic and geopolitical environment. Our strong cost and productivity efforts will continue and enable further support behind our growth agenda, fund investments behind Evergreen, and contribute to operating profit growth. Therefore, our medium-term guidance of superior balanced growth with operating leverage over time remains unchanged. With that, I would like to hand back to Dolf for a closing comment.

Yeah, thanks, Harald. Actually, I'm sure there's many questions, so to preserve the maximum amount of time, let's go straight to the Q&A. Operator.

Thank you. As a reminder, if anyone would like to register a question, please press star followed by one on your telephone keypad. Please kindly only ask one question and one follow-up to allow others the chance. Our first question today comes from Edward Mundy from Jeffrey. Edward, please go ahead. Your line is open.

Afternoon, Dolph. Afternoon, Howard. Thanks for taking the question. The first is on Vietnam. And you've seen over the last decade, per capita consumption in Vietnam really performed very, very well from, I guess, under 30 litres per person at the GFC to sort of mid-60s ahead of COVID. And we saw a big drop off during COVID, but we're only really back to pre-COVID levels today, 66, 67 litres per Euromonitor. Has anything changed Fundamentally changed with regards to Vietnamese beer market for instance around regulation of competition, you know Which would sort of change the medium-term growth picture for you for that market. That's the first question and the second is Sort of the the h2 turnaround in profit probably foot for Harold and it's still quite a wide range You know based on your guidance of a flat to mid single digits. I was wondering if you could help us How do you think about the ups the the upper end of that range or the bottom end of that range? What are the key variables in your mind?

Very good. Hey, thanks Ed. So let me take the question on Vietnam. Yeah, let's be crystal clear. The performance of Vietnam was disappointing. It had a huge impact, as Harold was saying, both on our volume as well as our profit decline. 80% of that was attributable to Vietnam. We remain very confident in the fundamentals of Vietnam. If you look to Vietnam over the last 30 years, if you look to current urbanization levels, economic growth, demographics, all of the fundamentals are and remain strong. We do believe the country is going through a short-term cycle of economic disruption. We have seen this once before in 2008 going into the financial crisis. This is You know, both the manufacturing industry impacted, export jobs being impacted. There's also political crisis simultaneously. So it's kind of a couple of elements coming together, which are impacting the short-term volumes in the industry. Truth be told, on top of that, for us, it was exacerbated by a huge overstocking going into the year. the pivot of very fast growth last year, which was part of the rebound of COVID. And on top of that, we were growing a lot of share. And just to remind ourselves, we were growing 43% volume last year. And we were really kind of, yeah, assuming not necessarily that kind of growth, but for sure we were assuming growth. And then when the market decelerated early in the year, we were caught out And it basically took us to the half-year point to destock and to normalize our stock levels. This has had a huge impact on our relative performance. Over half of the volume declined attributable to that destocking. Then there is a slowdown in the market related to economic circumstances. Again, that we believe to be temporarily and that will recover for sure next year. For this year, we choose to remain cautious. The third element has been down trading, which was also exacerbated by us taking a price increase late last year, which was not followed by competition, which we have reverted by now. So the second half of the year, we are at the price points where we want to be. And as such, we do assume an improvement in the second half versus the first half. but it will not yet be a return to historic levels. If you look to the fundamentals underneath, from a brand portfolio point of view, within premium, we are holding share. Yes, Tiger Original is losing share to mainstream, but Tiger Crystal growing double digits, the Heineken brand doing relatively very well, Heineken Silver still growing in absolute terms. And importantly, five years ago, we started to invest in mainstream. At the time, we were in the mid single-digit share on the mainstream segment. Now in June, we hit a historic high point of almost 20% share in mainstream, still below our fair share, but four or five times higher compared to where we were just five, six years ago. Most of these brands are in growth. We believe we have now a more balanced portfolio than we used to have at the time. The worst kind of one-off of the destocking and missing the price point has been resolved by now. Now it's waiting for the economic circumstances to start normalizing, as they did after 2008, as we remain very confident in the mid- and long-term prospects. Harold, over to you for the second question.

Let me first start, because your question is what makes the range. And let me first start with explaining the most important thing that we want to bring across in this call. It was for us super important to get the prices in to cover this unprecedented inflation that we saw. And we very deliberately went into this year knowing that that had to be done. And you will have noticed that in Europe, the pricing was 14%. This is unprecedented. And therefore, the fact that our volumes are in line with expectations in Europe is a very, very important signal to us. We also therefore see now a slightly easing of the pressures, as I just tried to explain, and that will bring some balance back between volume and pricing in the second half of the year. The second thing is that our growth savings projections are very, very clear. We talked about the 200 million in the first half of the year, but these are not ideas. These are concrete projects that have been put in motions, decisions have been taken, and therefore we got extremely good visibility about what is to land in the second half of the year. And that's why we were also very confident to call out that we see a significant acceleration on top of this 200 million savings. The third is what is the impact of the incidental events, as we may call them. For example, this destocking in a slowing market, as Dolf has just clearly articulated, that was a big overhang that we needed to remove from that market. And the financial impact thereof will not repeat itself in the second half of the year. These are the things that we control and very much are on top of. To your point on what is the range, It really is about the volume that we see in the second half of the year. This is demand, our relative performance, and weather. And that is effectively what we cannot control, but all the controllables are in place to deliver that step up in the second half.

Yeah, maybe if I may add to what Harald is saying, one of the key things we want to do is to preserve our ability to invest in the business, to invest in our marketing and selling expenses in our evergreen priorities. As you may have seen, we have invested almost 200 million euro incremental in the first half in future growth. And one of the key things that we're doing with this range is setting ourselves up to continue to invest and not to be cornered towards the end of the year where we would have to cut marketing and selling expenses to hit the number. You're used to us being a mid- and long-term oriented company, and that's what we really want to be.

Very clear. Thank you.

Thank you. Our next question is from Trevor Sterling from Bernstein. Trevor, please go ahead. Your line is open.

Hi, Dolph and Harold. There's two questions on my side, please. The first one, I appreciate that in this half that's just passed, there's a lot of externalities and things that weren't expected. But I wonder if any learnings from the organization about how to monitor these things and to react faster to them to maybe have not quite the same scale of impact. And the second question, Looking forward to 2024, Harold, you talked about the commodity pressures partially reversing, a return to balanced growth. Does that imply that you would expect some margin expansion in 2024?

Let me take the first one, Trevor. Your question on externalities and what can we learn. Well, first, let's be brutally honest. We are not pleased with the performance in the first half year. It's below our own expectations. And in a way, I know you guys like us to be consistent and boring. And we were not consistent and we were also not boring, I think. So there's indeed a couple of these externalities that are affecting us disproportionately. Vietnam, 80% of the profit decline. We didn't see that coming. Did we move fast enough? In some extent, we did. But when you're sitting on that kind of volume overhang that takes time to wash out, it took us probably longer than we like to course correct on the pricing. So there we are a bit self-critical. When you look to Nigeria, Nigeria is another very important externality with a brutal impact on volume. Vietnam and Nigeria together represent more than half the volume decline. Without it, we would have been low single digit down. The amazing thing in Nigeria, as I said in my script, is that the local team moved super fast and very agile, offsetting a 25% volume decline and almost coming in at flat operating profits. So I think it's not one picture. In general, we are quite pleased with the agility that we have been building over the last few years. But we like to maintain it. And in a couple of instances, particularly on price points where we are a bit slow to adapt, you're never going to get them all right. And we need to continue to up our game. I think that is fair. Overall, we have no regrets on the pricing. We did what we said we would do. We knew we needed that pricing. Between the pricing and the volume, the volume is impacted, but we'll come back with a delay of one or two quarters. The margin would never come back if we would not have taken the pricing, particularly in Europe. And we were able to be disciplined and look in the pricing and get it. was the key priority at the beginning of the year. So it's a balanced picture overall, Trevor, and for sure with a couple of learnings that we are for sure picking up with the team.

Let me take the second one, Trevor. Your question is quite pointed to do you expect operating margin in 2024, but I still would like to give the context of what we're trying to achieve. The first thing is that we really are aiming for balanced growth for long-term sustained value creation. You know that, but I need to say it because we don't want to just point out to an operating profit margin in 2024. What is the case is that we do continue to invest in our business, as both just also outlined, also in the second half of this year, and this will not go away in 2024. We believe that Evergreen needs to have that space to really change this business from a portfolio, a digital, a sustainability point of view, and therefore investments will continue also into 2024. Having said all of that, we're also looking at spot market trends and commodity trends, and we also see that they are coming off recent heights, and we started already to hedge proportionately into 2024. So part of that lower cost base or less high cost base, if you take a little bit of a long term, is already starting to be covered in our hedge policies. The second thing that we notice is that transport cost, particularly intercontinental sea freight, is starting to return to pre-COVID levels. And the third, very important for us, is that the self-help by really zooming in on productivity and growth savings to continue that will continue also in 2024. Now, all of these elements together would give us some confidence that we achieve balanced growth and a healthier financial profile into 2024. It would be too early to point to a number.

Understood. Thank you very much, Harold, and thank you, Jules.

Thank you. Our next question today comes from Simon Hales from Citi. Simon, please go ahead. Your line is open.

Thank you. Hi, Dolph. Hi, Harold. A couple for me then as well, please. Harold, can I just come back to your comments on the key variables that drive that H2 organic profit growth range at the moment? You mentioned the easing of pricing and how that will help volumes through the second half, the efficiencies accelerating, the absence of the Vietnam D stock. I suppose my question is I mean all of those factors you know I would assume were known to you you know sort of two or three months ago when you were reiterating that mid to high single digit guidance range through May and June that you previously had I just wonder what's changed in the last few weeks therefore perhaps in terms of how you think about volumes in the second half that means you are a little bit more cautious now and that's prompted you to introduce that stable potential profit uh you know sort of growth element for the year so that was the first one and then maybe secondly i wonder if you could just talk a little bit more about the performance of mexico uh in the period clearly q2 uh you know saw you know a weaker performance than we saw in q1 i wonder how you're performing against the market there is all of the slowdown or the relative share under performance driven by the OXO mixing, or are you seeing some more aggressive competitive behavior there in the market with things like Bud Light that we've heard about?

Very good. So I take Mexico, and if you then speak to the first question. So on Mexico, we're actually where we want and need to be. Performance in the first half year was solid with that kind of double-digit revenue growth. low single-digit volume, purely driven by the Oxo mixing, so underlying our market share stable. By the way, we aspire to more, so we like to be growing going forward. The good thing is the mixing in Oxo is now complete. All regions have been mixed. So until beginning of next year, we of course still have the cycle, but this event that has been with us for four long years, has now come to completion. And as of beginning of next year, we have a normal base. And yeah, we don't have this drag that we have had for such a long time. Underlying from a portfolio point of view, the premiumization, Brent Heineken, Ultra, the development of the six retail formats, adding a lot of 500 stores now to 16.5 thousand. All the fundamentals are heading in the right direction. And yeah, we don't reveal profitability market by market, but the profitability is really heading in the right direction in Mexico. So we're happy where we are, and we are in particular happy that the oxo mixing will now soon be behind us.

And Simon, if we can take it from there. Yeah, I think it's a super fair question, to be honest. And therefore, let me just illustrate what has happened, but mostly in the recent weeks. This is not something that we've seen evolving over time. The first one is that when we last spoke in quarter one, we were articulating this overstock from debt very clearly, but we were still led to believe that the Vietnam economy was going to recover very quickly because all signs were there that there was going to be a short intervention in order to bring that back to growth. What you will have seen over the last couple of months is that every time measures have been taken, but they've also pushed out the time it will take for a more balanced recovery of the Vietnam economy. given also the global slowdown and the dependency of imports and exports. And for instance, tourism in Vietnam is still a third lower than what it was before COVID. So just to point out that this is also evolving insight, even for the policymakers in Vietnam. The second event was really the Nigeria interventions. Previously, we spoke about presidential elections and the absence of banknotes, but since then, Petrol prices have tripled because subsidies have been canceled. Diesel subsidies have been canceled. And at this moment in time, a couple of weeks ago, we saw a 65% devaluation also taking effect. As Dolph indicated, all of this is good for long-term health. but it's short-term pain for long-term gain. And as a result of that, despite the fact that our Nigeria business is adjusting, this does have consequence for short-term consumer spendable income in Nigeria. Thirdly, weather. I hate to blame weather, so I'm not going to spend too much time on it. But too hot is not good. Too cold and rainy is also not good. And this is a little bit the reality that we've seen unfolding in the last couple of weeks. And as importantly as the first three, it's what Dolph just said. We really do not want to box ourselves in too tightly, compromising the investments and the pace of evergreen. And all of this together has made us realize that it's better to be safe now rather than to compromise the long term of evergreen.

That's really helpful, Harold. Thank you. And can I just clarify one more thing? You said in response to Trevor's question, you talked about hedging into next year for commodities, etc. Where are those hedges sitting, H1 and H1? Are they lower year on year where you're signing contracts now?

Yeah, so we usually say we contract out about 12 months, and we do have, let's call it a corridor of hedging that we take. So sometimes that's related to the first half. Sometimes we slice that in pieces across the year. That depends a little bit on the forward premiums that we see. But by and large, you should assume that half of the commodities have now been locked in.

Thank you, Simon. Thank you.

Thank you. Our next question is from Richard Witt again from Kepler. Richard, please go ahead. Your line is open.

Yes, good afternoon. Thanks for the question. On marketing spending, I mean, you said you increase spending, especially in Europe and in the Americas. Can you also maybe mention which kind of products that spending was? Was that predominantly Heineken silver or are there some other specific products that you spend behind. And, and also can you, I mean, is there, uh, yeah, your thoughts on, on your increased marketing spending in order to justify the price increases or, or would that be too, too skeptical? Uh, those are my questions. Thanks.

Very good. Thanks. Uh, thanks Richard. On the marketing spending, in the first stage of Evergreen, let's say in 21-22, we spent a lot of time working with the markets on more focus, clearer priorities, spending your money against fewer brands, fewer priorities. That has really helped in increasing the punch on the key priorities at the time. But now we felt the need to really make sure that we invest in future growth. There's always a delay between marketing spend and seeing a back-end brand power and seeing brand power convert to volume. So the key thing is to be consistent and to consistently increase over time. With COVID, there was, of course, a huge disruption to marketing spend levels in the industry, not just with us. And we really want to get back on track with consistent, ever-increasing marketing and selling expense investments going up, smartly spent. So not just spending for spending sake, but after two years, we feel we're in a good place in that regard. We're starting to leverage AI and other kind of tech tools to continuously improve our game in that regard. On the link to pricing... Well, this 200 million won't help us this year, but we do believe that brand power today is pricing power tomorrow. And if there's one priority behind the whole marketing spending, it's our premium portfolio. That is the overarching number one. There's multiple priorities of Evergreen, but scaling of premium has been, is, and will always be our number one priority. And as you have seen in our results across the regions, consistently premium is outperforming. Whereby in the past, the company was, we felt, Harold and I, too volume obsessed. We want to be more balanced in that regard with also paying more attention to value. And premiumization is a key vehicle to do that. And again, the marketing investments are a key point. Let me give one example of a market. In the US, we have significantly ramped up our marketing stance. even though the market P&L was heavily affected because our local pricing is basically determined by the other local domestic companies, while our input costs are determined by international ocean freight and our international transfer price coming out of Europe. So you can imagine there was a huge short-term impact in the P&L of our U.S. business. But rather than cutting ATL, BTL, we have actually significantly ramped up a short-term pain for long-term gain. But we really believe with the momentum we're having on Heineken 00, the momentum that we're now gaining on silver, this was the moment to up our investments. So hopefully that gives you a bit of further context on your question, Richard. Thank you. Yeah, very good.

Very clear. Thanks, all.

Thank you. Our next question is from Rob Ottenstein from Evercore. Rob, please go ahead. Your line is open.

Great. Thank you very much. I'd like to circle back to Vietnam and just a few follow-ups here. Could you give us a sense of what your business mix looks like now in terms of you know, premium, mainstream, or even better, you know, what percentage is Heineken, what percentage is Tiger, what percentage is mainstream, any sort of mix like that. So that's number one. Second, can you talk a little bit more about the competitive environment? I think if I heard you right that the competition didn't match or delayed matching on pricing, what's the status of that now? And then I know in the past... Demand had been hurt, I believe, because of stricter driving while consuming alcohol laws. Is that still a factor? And what sort of impact is there there? Thank you very much.

Fantastic. Thanks, Rob. So on the price segments, until, let's say, five years ago, 95% of our... business our portfolio where premium brands was basically tiger and and Heineken and right now premium is down to 64 percent of the mix and the remaining being our mainstream brands like LaRue, Befina and BF yet which is now a national brand so you see already a much you know better mix our overall market share is 40 percent our market share within premium over 90 and and our share within mainstream now up to 20, but still ways to go. So we keep investing in diversifying our portfolio. On the pricing, that was particularly in relation to Tiger original, where with the benefit of hindsight, we took a price step that left us outside of the historical price corridors on the gap between premium and mainstream. and we have since corrected that, especially since June, July. We are now where we need to be in that regard. On your question on the alcohol laws, indeed, that was launched just before COVID, and that was having some impact at the time. Then, of course, COVID disrupted all of this, and we have seen since the beginning of the year a renewed focus on compliance with those driver's laws, which has some impact. But we wouldn't want to point that out as a major factor in terms of what's going on right now. For us, it's more driven by the overall economic reset, which may last through the end of the year. Again, we have seen something similar back in 2008, but we remain very confident in the midst of long-term prospects of the Vietnamese market. Thank you very much.

Thank you. Our next question is from Carlos Lavoie from HSBC. Carlos, please go ahead. Your line is open.

Yes, thank you. Hello, everyone. Well, at the other end of the spectrum of Vietnam is Brazil. And I was hoping you could talk a little bit about Brazil. It looks like you're getting pricing, you're getting market share. But you mentioned Amstel's up 30%. How are you set for capacity to keep pace with demand growth? for Amstel over the next couple of years. Are you holding the brand back at all, given all the resets that are happening in mainstream by your competitor? And what's your vision of Amstel's potential here?

Maybe, Harald, you can take this one. I've been taking yours. It's good to hear you.

We continue to be quite determined to create the portfolio that sets us up for long-term success. So you know that we've talked quite some time about converting the total portfolio to a premium and upper mainstream. And we do see continued double-digit revenue growth in Heineken in Amstel that is now growing into the 30s. So we're very pleased with the composition of the portfolio. Now, we are making sure that we are keeping pace with our investments to support that growth. Partly it's in our own brewery facilities, so you will see that there's about two to three million hectolitre coming on stream every year. And that is something that we will continue to do. And then we've just started the construction of a very big new brewery Uh, that will become operational in 2025. so we do have our growth mapped out between now and then and that new brewery facility and apostles will give us quite a lot of volume for the years to come. So, we do think that we have have got this under control. What is also important is that it's not only our own brewery, but the whole ecosystem and footprint around this. So we're also very pleased, as I just tried to articulate, that more and more of our preferred suppliers are actually with us. So that not only do we create capacity, but we also don't need any longer to import huge amounts of bottle volumes and barleys, but really are starting to create an ecosystem that can sustain that growth. and therefore increasing profitability on the path to come. So we're actually feeling very good about our Brazil plans, but also the momentum that we have.

Maybe on the profitability, one thing to mention is that actually by the end of this year, Brazil will be our third largest profit generator in the group. And we're still not... where we want to be on the margins. But actually, this is starting to become in absolute terms a very meaningful and critical, important strategic asset for the company. And we will continue to push for the margins. And so on that capacity expansion, Carlos, it's all about not too slow, but also not too fast. It's really getting the rhythm right. And I think, you know, yeah, we more or less are where we want to be in that regard.

Thank you.

Thank you. Our next question is from Sanjit Azula from Credit Suisse. Sanjit, please go ahead. Your line is open.

Yeah, hi, Dolph, Harold. A couple from me as well, please. Firstly, I'd just like to come back to Brazil. And particularly around Q2, there seems to be quite a bit of a slowdown there, also in the premium portfolios. which we haven't really seen in recent years. So can you just talk a little bit about the Heineken volume momentum you're seeing there and anything on pricing you can talk to us about? And then just more higher level as we go into 2024, there's been some instances in the first half where you've taken a lot of pricing and perhaps you're having to roll it back now. And as you go into a period of perhaps easier commodity costs, I'd just love to explore your pricing philosophy in that environment. Do you see other markets and brands where maybe you've taken it a little bit too far and you need to address and you're trying to fund that with low input costs next year? Thanks.

Thanks, Sanjit. So maybe Harald can speak to the pricing for the second half of the year. Let me speak to the first part of your question on Brazil. First of all, we continue to consistently outperform the market. What's true that's underlying, and we have also seen it, is that the market went into a slowdown in the second quarter. But again, we have continuously outperformed and we were overall flat on the first half. And basically, we're continuing a bit with our strategy that we are willing to let go some of that super low margin economy volume but that we continuously grow our premium volumes, which were up again in our Amstel mainstream volume. On top of that, it's not just volume for volume's sake by segment, it's also the conversion to returnable. So one of the key things, and this was the key rationale for us to take brand Heineken Amstel back into our own direct distribution, was to really drive returnability, which we know is going to be critical for further market penetration into the on-trade, but also for the margins as we aspire to. So, yeah, overall for us, for market share from segment premium, Heineken, Amstel, it all looks good, but we did see a bit of a market slowdown in the second quarter.

Yeah. And maybe just because that was the second point about Heineken. Despite this market slowdown, which is indeed dipping into the negative, Heineken continued to grow. So I think that's an important substance to why we're still very pleased with our premium portfolio. And on the point on the pricing in half two, I think we have been very clear and articulate about the fact that we really front-loaded pricing this year. So it had to be done also because we knew what the cost base was going to be and that the momentum of that inflation, that energy-led inflation, was really happening at the start of this year. And therefore, we went quite bold and took the pricing that we needed in the first half of the year. Now when, therefore, the input costs are going to be less high in the second half of the year, from mid-teens to low-teens, that also means that the pricing for that by and large has been taken. Thanks.

Thanks, Sanjit. Great. We can still take a couple of questions? Yes. Let's continue.

Thank you. Our next question is from Nick Oliver from UBS. Nick, please go ahead. Your line is open.

Thank you for the questions. So two quick ones. Firstly, on the phasing of profits, just so I'm clear, the rebound in H2, it's mainly comp issues, so Nigeria, Vietnam, and the other things that you talked about, just to give the markets some confidence that we can meet the new guidance on profits. And then secondly, looking into next year, when we think about Brazil, I think the last time it was commented publicly, that was the 8%, maybe a high single-digit margin market. How should we think about Brazil margins going forward, if that's okay?

Shall I for once answer a financial question? By all means. You can take the role of Brazil. Let me just say it in my own words, Nick, on the facing of products. I think there's a couple of things that we feel very confident about. We got the pricing that we needed. And that was the big uncertainty was whether we were able to get the pricing that we needed. And largely, we have been able to do this, and we did it early in the year. So we have high predictability on the pricing. We have clarity on the input cost. And as Harald showed, that will move from mid-double-digit to low-double-digit. We have high confidence on the productivity, the growth savings accelerating from 200 to at least 300 in the second half. We do know that there were a couple of disruptions that won't repeat in the second half. A good part of the Nigeria related to the elections, the cash shortage, etc., and the whole destocking of Vietnam. The large unknown is a little bit how the volumes will evolve. We think they will moderate. We think they will move from that mid-single digit to low single digit. But that is the only part that is not fully predictable. We are currently in the summer in Europe. These months matter. Months like July, August do matter, and we know the weather does matter as well. So I would say four out of five, key metrics, we have very high predictability and we're happy where we are. The volume equation is a little bit less predictable. At this point in time, we have managed the price points to where we want them to be. And yeah, for us, and that's why we have set the expectation for the second half, as we said, we wanted to make sure that we didn't lose our ability to continue to invest for this year and the coming years. So, yeah, maybe a bit in my own words, but it's the same as what Harald said earlier. That all together gives us confidence in our guidance for the second half and that the profit delivery will be significantly better. And it's all about setting ourselves up for a strong 2024. We don't want to do anything this year that would start jeopardizing or impacting one way or another next year. Only second question. I think it was related to Brazil, right?

Indeed. And then in particular to the profit margin. Yeah, yeah, yeah. That's right. Yeah, yeah. Brazil, yeah.

Right, Nick? And then in particular to the profit margins in Brazil, also with a perspective to the future. Now, you will understand that that is information that I need to be a little bit careful about for a variety of reasons. But let me answer it in the following way. Firstly, we're extremely happy to see Brazil continuing to grow And this is no longer a, let's call it an incident. This is really a pattern of growth that you see happening. And that means that the brands like Heineken, the brands like Amstel are starting to get to scale, but they also have a very high consumer appeal. Heineken is the number one brand in the off trade. It has the highest brand power of all the brands there. And there is still, you know, this is still a value share that we think can grow beyond what it currently is today because it has yet to reach the 10% threshold. So there is a lot more momentum to create in Brazil. Now, with that, with the right portfolio comes also the right profitability structure because we're building the right mix in that growth. And when you have the right growth momentum with the right profitability structure, suddenly scale becomes quite appealing, not only for us, but also for our partners. And that ecosystem of growth behind sustained momentum, large scale, the right portfolio so that it can sustain actually gives us confidence that the path to that company average profitability that we've been talking about is fully mapped out, but also very doable. Maybe what also Dolf is articulating in his own way, this is already becoming a very important profit contributor to the Heineken Group. And of course, the license income from that, from Amstel and Heineken, I'm sure that the Brazil team will be pleased to hear, is also very welcome here. So all in all, there's a lot of good things happening in Brazil for many years to come.

I guess there's nothing to think that maybe the Brazil margins couldn't get to group average over time. Is that the right way for us to model?

Let's agree not to speculate when overtime means at the moment. But we have a very clear roadmap on how we're continuing to grow profit, but also profitability in Brazil.

Thanks, Nick. I think I'm allowed one more question by Federico. So one more question. Thank you. The last.

Thank you. We will take our final question from Chris Pitcher from Redburn. Chris, please kindly only ask one question. Your line is open. Please go ahead. Our next question is from Chris Pitcher. Please go ahead. Your line is open.

Either constant mute or he drops off by now. Chris, are you there? Now, let's jump to, is there any other question remaining?

Yes, we can take a final question from Lawrence Wyatt from Berkeley. Lawrence, please go ahead. Your line is open.

Hi, thanks very much for the question. A relatively quick one, I think, just in terms of your volume visibility into next year. You mentioned that the pricing will moderate as a result of the easier pricing. commodity environment, but you also believe that volumes will decline slightly next year as well. Just wondering which markets do you think would be under the most pressure with regards to volumes? Is there anywhere in particular that we should be calling out as slightly weaker on that volume front? Thank you.

Hi, Lawrence. Volume and pricing. To be clear, we are not aiming of having declining volumes next year in 2024. It's too soon to tell where they will land, but we are not assuming declining volumes for next year. And we do hope to see a sequential improvement from mid-single digit to low-single digit to hopefully growth in next year. But again, too soon to say anything definite on it. As said, we have taken the largest price increase in the recent history, particularly in Europe, with that 13-40% pricing that will take a couple of quarters to kind of settle. For us, it's key now to, you know, also in that sense, drive consistency on the price points and consistency on the investment level, the activity level, and make sure that indeed we start seeing that sequential improvement starting to move through. And for sure, we do believe that some of these one-off disruptions will be behind us because our aim is, as I said at the beginning, to be a bit more boring. So hopefully next year will be balanced growth and bringing consistency back and a little bit more boring. Hey, on that note, probably people need to start jumping off. Thanks all for being with us and wishing you all a good summer. Take care. Bye-bye. Bye-bye.

Thank you, everyone, for joining today's call. You may now disconnect your lines and have a lovely day.