Earnings Transcript for HEINY - Q2 Fiscal Year 2021

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

Federico Martinez: Good afternoon, everyone. Thank you for joining us for today's live webcast of our 2021 half-year results. Your host will be Dolf van den Brink, our CEO, and Harold van den Broek, our CFO. Following the presentation, we will be happy to take your questions. The presentation includes forward-looking statements and expectations based on management's current views and involve known and unknown risks and uncertainties. And it is possible that the actual results may differ materially. I will now turn the call over to Dolf.

Dolf van den Brink: 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 Harold today, to share with you our first-half of 2021 results. Harold joined the business on the 1st of June this year, and brings a wealth of experience from previous roles as great companies like Unilever and Reckitt, 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. For my very first day we adopted as a mantra that we needed balance. We need to navigate the crisis, but also build a brighter future. This remains true today, as the pandemic continues to impact the world and our business. I would like to thank our teams across the world for their energy, 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 older countries. Our teams have been fast to service our customers and consumers where markets reopen, yet remains agile whenever restrictions were reintroduced. At the same time, we've 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 of 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 looming to meet again, share a beer, and chat with friends, Heineken brands 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 how to close [ph] to support to our customers with back-to-bars and to celebrating the reopening a Europe, an 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 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 Heineken Group, and historic milestone last week that further strengthens our footprint and gives us an even sharper growth responsibly. Second, the growing momentum of the Heineken brands in many parts of the world. And third, we have expanded our portfolio in many of our markets with innovations to better serve our consumers, to name a few examples. To amplify our strong position in premium, we launched Dos Equis Ultra in Mexico, and Birra Moretti Filtrata a Freddo in Italy. To further extend our global leadership in non-alcoholic we complemented our range with Desperados Virgin Mojito and Lagunitas Non-Alcohol IPA. We're stretching beer with low bitterness range in many markets globally, like Tiger in Brazil, and Bintang Crystal in Indonesia, and continue to move beyond beer, with the launch of Inch's Cider in the UK and our experiments with Pura Piraña Seltzer in Mexico, New Zealand and Europe. I will be coming back to illustrate further, we are shaping our future growth, as I walk you through the performance of each of our regions in the first-half. Then, the lower parts of the framework we have two continuous productivity improvements that are needed to accelerate investments to drive future growth. Harold will speak later to these elements. But let me just say, we are building great traction with our productivity broken. For example, with implemented in the first-half the organizational redesign including the head office. This was a difficult process as we saw colleagues leave, but necessary to make sure we come out of the crisis stronger. Then, at the heart of the flywheel, aligned with our values, our sustainability, responsibility and people strategy. You may recall that on Earth Day last April, we launched our Brewing a Better World 2030 ambition, with bold targets on the 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're building towards our EverGreen ambitions. Now, let's jump into our results, touching on a few highlights. We are pleased to report a strong set of results for the first-half here. Net revenue beia grew 14.1% organically, benefiting from both the strong volume growth and revenue per hectolitre growth. Beer volume grew 9.6%, and Heineken up strongly 19.6% with a very broad-based growth. Our operating profit beia more than doubled and the margin was 16.3%, driven by top-line growth leverage, continuous 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 profits 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 AMEE, 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 surge 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 non-alcoholic portfolios grew in the high 20s, driven by Maltina and its extended range of flavors. In South Africa, total volume grew in the 50s, ahead of the market, as Cider volume more than doubled. The market has been impacted by alcohol bans in January, Easter and most recently during July. Moving on to the Americas, net revenue and operating profit beia grew organically by 25.7% and 85.7%, respectively, mainly driven by Mexico and Brazil. Organic beer volumes grew by 16.7% coming close to the volume of 2019. Price mix on the constant geographic basis grew by 9.4%, mainly driven by Brazil. In Mexico, beer fully recovered strongly with growth in the mid-30s, ahead of 2019. Revenue can even further ahead as price mix increased 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-beer categories. In Brazil, we continue 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 markets on July 1, and launch Tiger through the Coca-Cola bottler’s network. HEINEKEN USA grew ahead of the market, driven by Heineken Dos Equis, which benefited from innovations like Dos Equis Ranch Water, and Dos Equis Lime & Salt, and the reopening of the on-trade. We observed strong growth across the majority of our markets in the region, especially Panama, Peru and Ecuador. Next up Asia Pacific, beer volume declined 1% organically, with beer volume down 5.6% versus 2019. Net revenue beia increased 5.4% organically with price mix up 3% on the constant geographic basis. Operating profits increased 15.9% organically, driven by Indonesia and Malaysia and a 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 steep decline following the restrictions to contain COVID to separate 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 Larue 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 Bintang Crystal, a smooth cold brewed rind with low bitterness. Restrictions remain nationwide, including the key regions of Bali and Java. Beer volume grew double digit in Singapore, South Korea, Laos and other markets in the regions driven by the growth of our premium portfolio. Now, as you may have seen last week, United Breweries Limited became part of the Heineken Group, a special moment after 13-years of strategic patience, after we took an initial position as part of the acquisition of Scottish & Newcastle in 2008. My special gratitude to [indiscernible] 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 top five global brands. 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 to 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 goes down circa 50%. And looking at the exit rate of June with around 80% of the on-trades reopened, volume was behind 2019 by high single digit. The off-trade on the other hand is growing ahead of 2019, driven by our premium portfolio and outperforming in markets like Italy, Spain and France. The premium portfolio grew in the low teens versus last year, driven by Heineken Desperados and Birra Moretti. The low- and non-alcoholic grew around 10% led by Heineken 0.0 and Desperados Virgin. The Heineken brands shows continued strong momentum, growing 19.6% versus 2020, and 16.7% versus 2019. The growth came from a very broad base of markets with more than 50 markets growing double digits, including Brazil, China, Vietnam, Nigeria, South Africa, Italy, Mexico, Poland and Colombia. Heineken 0.0 grew close to 40% and is now available in 95 markets. Heineken Silver quadrupled 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 the 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 Heishop 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 markets in the coming months. We've 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 strong strongly. Beerwulf in Europe grew its net revenue by close to 60%, with particularly strong growth in home draught with The Sub and Blade. In Mexico, our D2C activities grew around 90% in volume. Now lastly, I would like to share with you some of our early progress on our sustainability, responsibility ambition. We raised the bar on our environmental, social responsibility actions in April with our refreshed Brew a Better World 2030 commitments. We are further integrating and operationalizing our S&R agenda into our business, improving our data reliability to ultimately allow for more transparent reporting, 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 commitments, 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+ 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 accounted 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. Brand 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 commitment. I'm confident that we're heading in the right direction. And with that, I would like to hand it over to Harold.

Harold van den Broek: Thank you, Dolf. It's a great privilege to join Heineken and succeed Laurence. I'm particularly motivated to contribute to Heineken to fulfill its ambitions with a positive impact for our business, our world, our stakeholders, and our people. That's why I believe the 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 this by putting more focus on profitability, capital efficiency, sustainability and responsibility. I'll do my best and add a bit of my own body 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 beia growth organically by 14.1% or €1.3 billion. 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 my constant geographic basis up 5%. Our business took action to mitigate currency deflation and post inflation with pricing, most notable in Brazil, and with significant pricing steps in Nigeria, Russia and Ethiopia. Consequently, Americas and AMEE 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 as €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 cash under investments and associates and joint ventures. We closed half one just shy of €10 billion net revenue beia, still 13% short of the first-half of 2019. Let's now look at the operating profit beia on Slide 16. Operating profit more than doubled in the first-half year, predominantly driven by our top-line growth. The €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 a 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 two. Let me give some additional color. Input cost beia 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 favorable portfolio mix effect mainly from our growth in premium and growth in returnable packaging versus last year, although, the FX side [ph] mix effect is still negative compared to 2019. Marketing and sales expenses beia came in lower than last year due to phasing, lower credit losses and continued cost mitigation actions in markets under lockdown. Personnel expenses beia increased slightly as labor costs 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 to half one with €1.6 billion operating profit beia, still 9% short over 2019 levels. On Slide 17, I would like to give some additional insights in how we work our growth algorithm, to accelerate investments enabled by productivity gains. As Dolf shared with you earlier, we are substantially stepping up investments behind our digital transformation. The deployment of our B2B platforms continue at pace, more than doubling their reach versus last year, and our B2B footprint now spans 30 operating companies. We also continue the journey to standardize and transform our ERP platforms. We are funding our Brew a Better World ambitions, especially to decarbonize and achieve water balance and circularity. We're equally committed to grow our marketing and sales investments to levels before the pandemic by no later than 2023, to support our growth initiatives 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 units. As a reminder, we have set a target to deliver €2 billion of gross 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 1st 2021. Two days, over half of the targeted FTE reduction has been realized with savings captured, and the remainder will be largely achieved by the end of 2022, quarter one that is. 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 baubles across products and light weighting 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, which is the largest savings in the U.S., while maintaining the same level of effectiveness of over brand investments, reducing non-consumer phasing 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 one results that deserve some attention. First, our share of profits from associates and joint ventures beia, the growth was very strong given the low base from last year, as some of our partners were significantly impacted by lockdowns in their markets. The growth was primarily driven by China Resources Beer in China, CCU in Chile, and UBL in India. Net interest income and expenses beia improved by 9.9%, benefiting from 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 beia was lower than last year, mainly due to the substantial increase in profits. As a reminder, last year, the tax rate was high due to losses for which no deferred tax assets could be recognized, and higher non-deductible interest in the Netherlands. As our business results improve, this is no longer the case. As a result of all these factors, EPS grew almost threefold to €1.56 per share, but still 15% below 2019. A last word on the financing headroom, total net debt increased by €854 million for 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 non-euro debt. The pro forma rolling 12-months net debt EBITDA ratio was 3x on the 30 of June 2021, which was an improvement of 3.4x [ph] versus a closing of 2020 and 0.5x versus the 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 rephasing 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 million 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 freight and other receivables, including the recognized tax benefits in Brazil. Our position on payables, trade receivables, and inventories have largely return 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 government. 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 phasing to 2021. Main projects of this year include the expansion of capacity in our breweries in Ponta Grossa in Brazil, and Vung Tau in Vietnam, and the acquisition of Strongbow in Australia. Interest, dividends 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 differed 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 cost 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 planned plans. As a consequence, we expect operating profit margin beia to be lower in the second-half compared with the second-half of last year. And as indicated before, full year financial results are expected to remain below 2019. Let me close however, by stating that whilst uncertainty remains, we should take confidence from our first-half results, our progress on EverGreen and the commitment of our people. We believe that we are on the right track to deliver on our long-term ambitions. And with that, I would like to hand over the call to the operator so we may take your questions. Thank you.

Operator: [Operator Instructions] Our first question comes from Edward Mundy from Jefferies. Your line is now open.

Edward Mundy: Good afternoon, everyone. Three questions for me, please. Dolf the first is for you perhaps some because still very early days on the EverGreen strategy, but probably EverGreen has to be become more consumer and customer-centric. Can you talk about any early signs that the business is evolving in this direction? Second question perhaps to Harold. You weren't involved in setting up the cost program initially, it’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 meaningful opportunities for productivity that you get for operating leverage beyond 2023 in particular, from leveraging factors such as the global standardized ERP landscape? And then the third question is on India, perhaps to Dolf. 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 what the caps are? Or, is it the opportunity to move to a much more of a portfolio brand company?

Dolf van den Brink: Very good. Thanks, Ed. Let me indeed speak to your first and third parts, and then I hand over to Harold. No, as we set out in February, EverGreen is really about superior profitable growth. It's about balance. And we introduced this concept of the flywheel with 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 footprints. And we believe we have an enviable footprint. This is the legacy that Jean-François my predecessor left us with. We are not taking it for granted, we continue to invest in footprints with the UBL acquisition, a case in point. Then, of course, it's really about our portfolio led by brands Heineken. It's amazing to see the continued momentum this already started before COVID, but that has accelerated rather than slowed down during COVID with the 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, 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 we’re able to launch over the first six months of the year, within premium, within 0.0, within beyond beer, and at the same time, I think it's early days. I think there's much more to be done. There is more to be done to really take ownership of the category, and make sure that that we drive future growth of the category not only in emerging markets, but also in the developed markets. Very happy with James Thompson, 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 the 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 lacquers 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 more in general statement every time in the past, when we were able to integrate these sprouts acquisitions whether it's Sensei 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 the UBL will be kind of multi-dimensional. Short-term, of course, India still grappling with 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 it over to Harold.

Harold van den Broek: 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 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 effected, 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 machines 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 the combination of speed, commitment, and the programmatic approach has delivered the traction that we need, which is why we’ve 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 quarter 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 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.

Edward Mundy: Great. Thank you.

Dolf van den Brink: Thank you, Ed. On to the next question.

Operator: Our next question comes from Simon Hales from Citi. Your line is now open.

Simon Hales: Thanks. Hi, Dolf. Hi, Harold. Three as well, please. Firstly, Harold if you could just talk a little bit more about the scale of the input cost headwinds you think you're facing going forward, I mean you referenced mid-single digit per 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? That's more importantly. And secondly, maybe one for Dolf. Dolf 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 the half 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 do you think 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 delivery. 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?

Dolf van den Brink: Okay. Thanks, Simon. Let me speak to the on-premise question and then over to Harold 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 the common tone where we and others in DC the on-trade bouncing back to at or even above 2019 levels in big parts of the U.S. And Europe, it's more recent. And 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 the in lockdowns. For the first-half, the on-trade is still 50% down 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 reopens across Europe, we were still high single digit below 2019. That's an absolute volume. At the same time, at that time, only 80%, 85% of the outlets was back. So from a throughput per outlet, it looks more close to 2019 levels. But we all may know or feared that when the extensive government's report in Europe ends over the next weeks and months, there will be an impact and somewhat of an fallout. We don't know, most expect around 5% to 10% of the outlets to not make it back. So we still don't see the on-trade to coming back fully yet in the short-term. Mid long-term remain confident as we have said before as the universal desire to socialize over a beer in the bar restaurant has intensified that rather than slow down. Now what was great to see in the second quarter that even though the on-trade started bouncing back, that we retained good friends in the off-trade and somewhat of a slowdown versus prior quarters, but still positive and delivering all together around 13% growth in the second quarter. And as we may think that the on-trade short-term maybe this compromise 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 locations for beer consumption in 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 your two questions.

Harold van den Broek: Yeah. 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 costs in the first-half, as I indicated have 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. So to June 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 costs that we saw in half one.

Simon Hales: Got it. Thank you very much, Harold and Dolf.

Dolf van den Brink: Cheers.

Dolf van den Brink: Okay. Thanks, Simon. Onto the next question.

Operator: Our next question comes from Sanjeet Aujla from Credit Suisse. Your line is now open.

Sanjeet Aujla: Good afternoon, Dolf and Harold. Couple of questions from me, please. So lots of talk about input costs pressure. But I’d just love to get your outlook on revenue per hectolitre, 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 path to be accelerating 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've taken in the market at the moment? You talked about price increases in Brazil in June July, but love to get your take on other markets, perhaps where pricing is to come? Thank you.

Dolf van den Brink: Very good. Thank you, Sanjeet. Yes, and I think we have spoken about this at full year and a year ago as well, as revenue management is a very important part of the business, that when we talk about superior profitable growth, and we need to make sure that we drive our growth through both volume and review period per hectolitre, I think we have shown over last year as to be the services on pricing in the key markets, especially in markets where we were facing inflationary pressures. Case important being Brazil, as year-to-date we are delivering high 20s, which is a combination of pre price increases in a row and massive mix effect. As you may recall, we are out of capacity in Brazil. So we're letting go of significant amounts of economy brands volume, the regrowing 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 have also almost double digits, across the Americas -- the Africa Middle East region, almost double digit driven by South Africa and Nigeria. So that you will see us continue pursue. In environment like Europe, of course, that is the more challenging. We had about 0.8% pricing in the first-half. Given the input forced commodity price heading our way, we will have to be alert on that. And yeah, be agile in taking the pricing as we see fit. You will see an acceleration somewhat for 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, Sanjeet. On to the next question.

Operator: Our next question comes from Tristan Van Strien from Redburn Partners. Your line is now open.

Tristan Van Strien: Thank you very much. Good morning, Harold and Dolf. 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 last 30-years, I think. I don't think it's really changed. So I guess, can India really grow as long as a strong beer market? Do you need to get into a mall bear market and low alcohol? And what can you do differently now? And this is just a portfolio plan or is there something else needs 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 H1 ‘17. Can you maybe just give a bit more insight what's happening in Africa? Obviously, I don't expect everybody to be vaccinated there in the next few years. But what is happening there? This ability to take price does that continue to spread way inside of what's happening particularly outside of South Africa? That'd be great.

Dolf van den Brink: That's it. Thank you for, Tristan. Your question, your remark on India is very true. The 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 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, this will take conservative action over time. But yeah, we believe it can be done. And therefore I also emphasized that this is really a long-term opportunity that will take a deliberate strategy of not only fighting for your market share today, but also to rebuilding and expanding the category over time. And that will imply innovation, that will imply reaching new consumers that we now not reaching. It implies reaching locations we are not reaching today. And one of the stunning facts, I always recall, there's only 80,000 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 the 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 operation, 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 credits to the management team on the ground, [indiscernible] and his team who really have addressed the cost structure, 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 premium. And we are locking in now growth rates of 60% on premium, not only with Brand Heineken, the Tiger, 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 compounds into significant improvement in trends. That's an overnight success, a couple of years in the making. Ethiopia, we are getting a traction back in the markets in general, but also for us continue to invest the same drivers investing in the brand portfolio, investing into route to market. Brands power, brands equity is something that is very high on our list that ultimately, your pricing power directly correlates with the strength of your brands, with your brands equity. And I commented on Pirmez [ph] the Regional President and his team of really making building brand equity, brand power, a key priority for the region. 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 from being South Africa, South Africa being badly impacted last year, still this year. And we are just coming off another a third lock down just this year in South Africa. But nevertheless, we are able to grow 50%. We doubled our signup 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 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 are 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 is still lot of to be done in the region. I’m confident that Roland and team are prioritizing the right levers for the near and long-term.

Tristan Van Strien: Thank you, Dolf. Can I just be kicking this off, if you can make any comment on the potential of the Stella acquisition?

Dolf van den Brink: I knew that question would be coming. But you also know my answer that unfortunately we cannot speak to that other than saying the South Africa is a key market with or without that transaction, as our growth rates, as our commitments to that market to show.

Tristan Van Strien: Thank you.

Dolf van den Brink: Thanks, Tristan. Next question, please.

Operator: Our next question comes from Celine Pannuti from JP Morgan. Your line is now open.

Celine Pannuti: Yes. Good afternoon. Thank you for taking my question. My first one is on Europe and the recovery that we've seen profitability. Yet, you said that on-trade was still very much impacted. Is it possible to understand the building block in terms of the margin expansion between the off-trade and on-trade? And whether 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 route to market and the launch of Tiger, if you can talk to that, but also, how do you see the market demand looking whether the consumer is going to behave with a continuous pricing increase? Thank you.

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

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

Dolf van den Brink: Very good. Then, Celine, let me answer your question on Brazil. Indeed, a lot going on there. And I think there's two big shifts happening. One is a portfolio shift, one is your route to market shift. Now on the portfolio shift, we have spoken about this before and back in 2017 when we did to clear in the 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 softer in volume and we're 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 obstacle brands which was the innovator in the pure malt segment. We do it through [indiscernible] and now a third new brand and priority Tiger brands which we have launched with the Coca-Cola bottler networks, a very unique proposition. The first brands, in that segment sitting in a transparent bottle with a unique flavor and kind of visual identity of the Tiger brands. And of course, a lot of action in premium Heineken brands became the number one brand in value in the off-trade still growing strong double digit, but it's not only Heineken. We're also growing very fast with Ice and Bomb [ph]. And we're growing very fast with the craft 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 markets and gross profit per hectolitre. So we're very happy to see that that rebalance, but we really need to get the additional capacity. We get a couple million hectoliters out of Ponta Grossa in the second-half of this year, a couple million next year, so we will know that still will be insufficient to absorb the growth, and then we are full steam ahead with the green fields that we're building, which needs to be up and running by the end of 2023. So that is kind of on the shift and rebalancing in the portfolio. And then indeed, we're shifting in the route to market. We are proud and very happy with the newer 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 Heineken brands to our own direct distribution platform. And we see there's a lot of opportunity, particularly in the on-trade with returnable packaging where we have historically been underdeveloped, because the Coke Bottler system is a bit less focused on that. And at the same time, we are completely committed in building and growing and strengthening the portfolio we have with Coke Bottler. I just mentioned the Tiger brand that we're launching in the mainstream segment, we're transitioning the ice and bomb brands there as well. And on top of that, we are building a strong digital B2B platform in the market that is scaling very fast as we speak. But yeah, overall, happy with the results. The kind of pricing that we're getting is extraordinary, and that's really helping in building profitability, building margins in the important Brazilian markets. So let me leave it at that.

Celine Pannuti: Thank you.

Dolf van den Brink: Thank you, Celine. Next question, please.

Operator: Our final question comes from Trevor Stirling from Bernstein. Your line is now open.

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

Dolf van den Brink: Your second questions, Trevor?

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

Dolf van den Brink: Harold?

Harold van den Broek: Yeah. So let me take the input costs 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. And 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 effect will be the biggest pressure on our input costs in the second-half of the year. It is true that if you look at our current spot rate, that impact on currency is much more benign next year. But it won't be in any way or form giving us enough to offset commodity 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 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 days 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.

Trevor Stirling: Super. Thank you very much, Harold.

Dolf van den Brink: 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.

Harold van den Broek: Bye-bye.

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