Earnings Transcript for HEINY - Q4 Fiscal Year 2020

Dolf van den Brink: Thank you, Federico, and welcome to you all. Very happy to host you together with Laurence for today's teleconference here in sunny and wintry Amsterdam. Now we truly hope you and your families are all well and safe and that you're all managing through these very challenging times. Today, Laurence and I will first share some prepared remarks with you on our performance in 2020. After that, I'm looking forward to share more detail on our strategic review and what to expect from Heineken going forward. 2020 was a year defined by unprecedented challenges and profound change for many across the globe. In response to the pandemic, as Heineken, we stayed true to our values and kept people at the heart of our response. I applaud the dedication and resilience of our employees and their commitment to not only support each other, but also our customers and communities over this past year. Our latest employee survey show even in this challenging year that our organizational health further strengthened and is in the top decile of ranking among the best global organizations. To our consumers, we brought the message of #SocialiseResponsibly. Leveraging the strength of Heineken brand to address the challenges we all faced with the lockdowns to our customers, we provided support with tools for reopening, stock returns and helping them set up online delivery. We provided financial support by raising over €10 million with our Back the Bars initiatives and waiving a total of €50 million in rental payments to our pubs and bars. We supported local communities and frontline medical workers with donations worth more than €23 million, including water, nonalcoholic beverages and hand sanitizer. Our most recent effort is the donation of 55 tons of dry ice to help safely transport vaccines in Mexico. As 2021 continues to unfold, people will continue to be our primary focus. Let's touch on a few 2020 highlights. In this year of unprecedented disruption and transition, our teams rose to the occasion and quickly adapted while not losing sight of the need to continue investing for the future. The impact of the pandemic on our business was amplified by our on-trade and geographical exposure. Net revenue declined by 11.9%. Net revenue per hectoliter was down 2.4% organically due to country mix and lower nonvolume-related revenues as the underlying price/mix effect was broadly flat. Beer volume declined organically by 8.1%, a better result than the first half of the year. We had a good third quarter as restrictions eased over the summer months and consumers return to the on-trade, but a challenging fourth quarter as lockdowns were reintroduced. We gained share in most of our key operations, a testimony to our ability to adapt and stay close to our customers and consumers in these turbulent times. The Heineken brand continued to be a shining star and only marginally declined by 0.4%, with an outstanding performance in Brazil. Our operating profit (beia) declined organically by 35.6%, with over 90% of the decline coming from Europe, Mexico, South Africa and Indonesia. We took diligent cost mitigation actions with a net reduction of fixed cost of €800 million in 2020, and we upheld our commitment to no structural layoffs. In 2021, we will implement an organizational restructuring, a difficult but sadly, necessary decision. Operating margins (beia) ended the year at 12.3%. Net profit (beia) declined organically by 49.4% with a corresponding EPS of €2 per share. Now allow me to briefly update you on our performance by region, starting with AMEE. Net revenue declined organically by 9.5% and operating profit by 33.8%, with the largest impact coming from South Africa, followed by Russia and Egypt. Beer volumes declined by 9.2%. We had a strong recovery in Nigeria in the second half, growing volume low single digit for the full year. We grew ahead of the market with double-digit growth in premium, driven by Heineken and Tiger. Our low- and no-alcohol portfolio outperformed with strong growth of Maltina and the launch of 2 new flavor variants. In South Africa, our strong momentum of recent years was disrupted by the alcohol bans and impacts to the various supply chain expansion projects that constrained our capacity in the second half. Despite this, Heineken 0.0 grew double digits and is now the market-leading nonalcoholic beer brand. The premium portfolio outperformed not only in Nigeria, but also in Ethiopia, Russia, the DRC, Ivory Coast, Burundi and Mozambique. We continue to invest to unlock growth in Africa with local production of Desperados in Ivory Coast and Heineken in DRC and Mozambique. Moving on to the Americas. Net revenue and operating profit declined organically by 2.9% and 4.8%, respectively. Organic beer volumes declined by 7.5%. Underlying price/mix was up 6.8%, mainly coming from Brazil, Mexico and the U.S. Our operations in Mexico were suspended for most of the second quarter and resumed full production capacity late in the third quarter. We focused on driving value and grew price/mix close to 2x inflation. Amstel Ultra, Heineken 0.0 and cider grew strongly. We launched Pure Piraña in September, the first hard seltzer brand available across all channels nationwide. In Brazil, the Heineken brand had an outstanding performance, growing more than 40% during the year. On-store and Devassa continued their great momentum. Our premium and mainstream brands now represent 50% of the beer portfolio as we continue to rebalance. Price/mix grew in the low teens, driven by portfolio mix and 2 price increases ahead of competition. We hit maximum capacity though in the fourth quarter, and we will complete the expansion of Ponta Grossa in the second quarter of 2021. The U.S.A. volume decline of mid-single digits resulted from the on-trade restrictions and supply chain disruptions from Mexico. Brand Heineken had its best performance in over a decade, delivering low single-digit growth. The growth came from both original and 0.0, which is now the #1 nonalcoholic beer market in the -- beer brand in the market. Throughout the crisis, we continue to keep our eyes on the long term as we entered Peru in November, launched Heineken Amstel in Ecuador and extended our partnership with Molson Coors in Canada. Next up, Asia Pacific. Net revenue contracted by 11.5% organically, translating to a 16.4% decline in operating profit (beia), mainly driven by Indonesia, Malaysia and Colombia. Our beer volumes declined by 7.9% organically. The second half of the year was slower as Vietnam was impacted by a heavy typhoon season and the later timing of Tet in 2021. We reinforced our market leadership in Vietnam and significantly outperformed the overall market. Our dual strategy in mainstream and premium is a clear success. Mainstream grew double digits with Larue and the launch of Bia Viet. In premium, Heineken Silver doubled its volume, and we launched Heineken 0.0. We are very pleased with the progress made in China by CRB. In 2020, they launched successfully Heineken Silver in April and Amstel in December. Heineken grew strongly in the double digits, and China is now the fifth market in size for the brand. Indonesia has been heavily impacted by the absence of tourism and on-trade restrictions. We outperformed the market in all regions other than the key Bali area. We acquired Strongbow in Australia, bringing it home to Heineken and scaling up our beer and cider portfolio in one of the world's leading beer and cider markets. Finally, moving to Europe. Net revenue declined 18.8% organically, and operating profit decreased by 68.6% also organically, a big deleveraging effect driven by the on-trade volume decline. Beer volume was down 8.2% organically, with renewed lockdowns resulting in the fourth quarter down 16.7%. On-trade volume declined by 40% during the year and by more than 60% in the fourth quarter, close to the almost 70% decline of the second quarter. Our commercial and supply chain team swiftly adapted and increased their focus in the off-trade. Volume grew in the low teens, and we gained market share in more than 80% of our markets in this channel. Premium brands had a strong performance, particularly Desperados, Birra Moretti and Sol. The strong shift from on- to off-trade drove a negative price/mix of 5.4%. Additionally, Heineken 0.0 and our wider low- and no-alcohol portfolio continued to grow and strengthened our leadership in this growing segment, supported by strong consumer demand. The Heineken brand, the most trusted international beer brand in the world, outperformed our own broader portfolio and the overall beer market. Excluding South Africa, Heineken even grew 2.8%. The brand delivered double-digit growth in 25 markets around the globe, including in its #1 market, Brazil, with an outstanding growth of more than 40%. Heineken 0.0 grew double digits with growth in all regions, with a strong performance in Mexico, Brazil and the U.S.A. Brazil had a superb start following the launch of Heineken 0.0 in July 2020, quickly becoming our third largest market in the world for the nonalcoholic extension. Vietnam was another market in the 27 launches in 2020, ending the year with a total of 84 markets for Heineken 0.0. The latest line extension of the brand, Heineken Silver, reached nearly 1 million hectoliters of volume, really extraordinary, with Vietnam volumes nearly doubling and a successful launch in China in April 2020. Now finally, before handing over to Laurence, an example of our momentum on e-commerce. Online shopping trends have accelerated during the pandemic as we all spend more time at home. And we have been able to leverage our direct-to-consumer platforms to capture this opportunity. Looking at the example of Beerwulf, our pan-European direct-to-consumer platform, we nearly doubled the total revenue and more than tripled it in the U.K. But that understates the momentum as the exit rate of 2020 was almost 5x that of the previous year. The acceleration is not limited to Beerwulf as the number of orders tripled across all our platforms globally, including SIX TO GO and Drinkies. Now over to you, Laurence.

Laurence Debroux: Thank you, Dolf. Let's go to Slide 12 for the financial overview of 2020. Starting with the next revenue -- the net revenue (beia), €19.7 billion, an organic decline of 11.9%. That is minus 7.8% in the second half, coming from minus 16.4% in the first half. The improvement, as Dolf explained, is clearly linked to the relative easing of constraints on our operations over the summer, including in Europe and to positive price/mix, particularly in the Americas. Operating profit (beia) declined by 35.6% to €2.4 billion. The deleveraging is there throughout the year against less in H2 than in H1 and partially offset by mitigation on costs. I will come back to costs later. As a consequence of the deleveraging, margin was hit by 455 basis points. Net profit (beia) dropped to €1.1 billion, an organic decline of 49.4%, higher than the decline in operating profit. This is due to the cost of additional debt secured at group level as well as higher local debt, FX losses on payables in hard currencies in some emerging markets and a better relative performance from our operations with minority interest, particularly of Vietnamese operations, meaning that there is less decline in the profit that we have to attribute to those minorities. The impact of (eia) amounted to €1.6 billion on operating profit, so €1.3 billion increase versus last year, and I will also come back on this. As a result of exceptional items, we recorded a net reported loss of €204 million. The free operating cash flow was €1.5 billion. The decline in cash flow from operations was partially offset by better working capital and the reduction in CapEx. Diluted EPS (beia) ended at €2, in line with net profit (beia). And finally, as a consequence of lower EBITDA, our net debt-to-EBITDA (beia) ratio reached 3.4x. We remain committed to return to 2.5 or below. I'd like to move now to net revenue. I'll start on the right side of the chart with consolidation, small negative impact of 0.2%. As mentioned in the first half, this comes from the divestment of our own activity in China in 2019, partially offset by small acquisitions. Currencies now. Currencies had a very significant negative translational impact, much more pronounced in the second half than in the first and overall decreasing net revenue by 5.3% or €1.3 billion. Remember that 2019 was positive, and you have to go back to 2016 to see such an impact. This was almost 1/2 attributable to the Brazilian reais, 1/4 to the Mexican peso and the rest mainly to the Nigerian naira, the Russian ruble and the South African rand. On an organic basis, our top line declined by €2.8 billion or 11.9%. Volume was down by 9.8% with the largest individual decline in hectoliter from Mexico and South Africa, 2 countries affected by complete lockdowns for part of the year, followed by Spain and the U.K., particularly affected by the closure of on-trade. Revenue per hectoliter (beia) declined by 2.4%, largely as a result of geographic mix. Now on a constant geographic basis, the underlying price/mix effect was broadly flat for the year despite the negative impact of channels. In general, our premium brands performed better than our mainstream portfolio, which in turn, outperformed our economy portfolio. And overall, the negative price/mix in Europe and APAC was offset by positive price/mix development in Americas and in AMEE. A bit more by region. In Europe, the negative price/mix is fully due to channel mix. In APAC, the negative price/mix effect is due to the faster growth of our mainstream portfolio in Vietnam and the lower volumes on the premium segment in countries heavily dependent on tourism, such as Indonesia. In the Americas, the positive price/mix was particularly impressive. In Mexico, the growth was double inflation. And in Brazil, price/mix improved by double digits, largely from portfolio mix, fueled by strong growth of Heineken and supported as well by 2 price increases ahead of the market. And finally, in AMEE, the growth came from Ethiopia following a price increase to pass-through a large excise increase. Nigeria also contributed with the growth of the premium portfolio and pricing. Looking now at operating profit and again, starting from the right. First, consolidation changes. Small negative impact coming from the integration of our Chinese operation into CRB, then translational currency effects. Here, you may recall, we had a small positive impact in the first half. This is now fully reverted to a negative impact of €129 million or 3.2%, mainly driven by the Mexican peso and the Brazilian reais. Now I move to the organic decline of €1.4 billion. If I take the geographic lens, more than 90% of the decrease in operating profit (beia) came from Europe, Mexico, South Africa and Indonesia. In Europe, the impact was amplified by over 40% of volume decline in on-trade. The issue is that you lose volume with higher gross profit per hectoliter and you keep a higher cost base. So a strong position in on-trade and our vertical integration in pubs and wholesale, which in normal times are great strengths, turned into a temporary weakness. Note that the deleveraging effect in Europe was not as bad in the second half, largely due to strong cost mitigation. Mexico and South Africa, obviously, we had our operations suspended for several months. And in Indonesia, the loss of tourism around Bali was detrimental to our profitability. Now let's take a different lens. Looking at the €2 billion decrease in net revenue minus variable expenses, you can say 3/4 of that comes from volume impact and the rest from the increase in input cost per hectoliter of about 10%. If I look into the input cost and the main impact was from SKU and channel mix by far. In Europe, we sold more one-way bottles and cans, which have, on average, much higher cost per hectoliter than the returnable packaging, particularly the kegs that we sell in the on-trade. And the continued premiumization trend also drove a higher use of one-way bottle, especially in Brazil, of course. On top of the negative mix, there was a negative transactional currency impact. Those were minor at half year, but accelerated in the second half and ended up driving close to 25% of the increase in input cost per hectoliter for the year, very concentrated again in a few markets, namely Brazil and Mexico. And good to note that in 2019, commodities -- 2020, sorry, commodities had a small positive impact. Beyond variable expense, we looked at all addressable costs. And starting in March, we took action to cancel and reduce as much as possible without jeopardizing future growth. Some costs are not immediately addressable, for instance, depreciation and amortization, which are a consequence of past investments. But from the addressable part, we took out about €800 million. And I'd like to zoom on this €800 million of cost mitigation. It represents a net reduction of 9% of the fixed cost base, excluding depreciation and amortization. Marketing and sales made the largest part, 57% of the total. We adapted our commercial activities to the changes in consumer behaviors. And for instance, when on-trade was closed, it made sense to reduce advertising spend, and we saved on point-of-sale material and promotions. At the same time, we protected the long-term equity of our brands with specific activities. For example, we refocused the Heineken brand campaigns around responsible socialization, and we invested behind our launches

Dolf van den Brink: Very good. Thank you, Laurence. And that concludes the update on the full year results 2020. Later in the Q&A, there will be plenty of opportunity to ask your questions. Now I would have vastly preferred to be able to give this update on our strategic review in person in a proper financial market conference. But sadly, circumstances don't allow, so I will take approximately the coming hour to give you an update about what we've learned so far, what we have prioritized, what we have decided now. An hour is quite long virtually. It's quite short for the kind of story that we want to share. But I want to make sure that we leave enough time at the back end for questions, both on the full year results as well as on the strategic review. As we have said, and Laurence just used those words, our mantra has been, from the beginning, to both navigate the crisis and build the future. And to be very conscious that the crisis management should not crowd out all the energy, all the attention from really thinking and reflecting on the future of the company at a very critical crossroads for us, crossroads in the world, in the industry and for us as a company. We kicked this off right over the summer. And what was important to me that was not me or even the new leadership team stepping into their new roles kind of gun-swinging, but we really started by mobilizing and listening to the organization. We invited around 200, 250 people from all of the organization, from all regions, functional areas to join us in this journey of taking a step back, taking stock about what is going very well, what could be better, what our strengths, what are our opportunities. Also important to even a bit more profound to become aware of maybe augmental models or limiting beliefs that were holding us back from progressing. Altogether, this has created a lot of energy in the organization and also a very strong sense of urgency. Now we labeled this journey EverGreen, inspired by nature, the resilience, this continuous sense of renewal that you find in nature. Of course, we have something particularly with the word green. Nature is all about growth, and the core intent of EverGreen is to deliver superior and profitable growth in this fast-changing world. It is about finding the right balance between continuity and change, between becoming very aware of our strength as well as the vulnerabilities that needs to be addressed, the strength of our culture which is very unique as well as boosting adaptability, adaptability, agility being particularly important at this moment where everything is accelerating. And lastly, emphasizing, this is a multiyear journey. This is not just a 1-year program. This is a multiyear program and also multidimensional. It's not just a growth story or a cost story. It's both and more. So this kind of gives a little bit of the scope and intent of EverGreen. Now for what is to follow, I would like to use this what we came to call our Heineken growth algorithm as the frame of how we structure the presentation, and it has 6 components. It starts by being very explicit about the unique strength and opportunities of our company. Then at the top of the flywheel, superior growth. That is what we always, first and foremost, want to be focused on. But then also a step-up in productivity improvements, which are needed to accelerate investments in order to drive superior growth. At the heart of the flywheel, based on our values, our sustainability, responsibility strategy and our people strategy. And the sixth and last, all of this leads to long-term continuous value creation. So I will tell my story following the 6 building blocks of this growth algorithm, and starting with the strength and opportunities where, in short, we are super proud of being a growth company, a superior growth company. And at the same time, we see a big value-creation opportunity going forward. Now starting with our strength, and we see many. We synthesize them to these 5. Once again, it is about always being a growth company, innovating, pioneering in the beer industry over the 150-odd years. The Heineken brand, our #1 asset, represented in over 190 markets, having incredible momentum even during this year of pandemic. Our OpCo-centric decentralized model, we find it's unique. A lot of global FMCG companies centralized, globalized, became complex matrix organizations. We always kept decision-making power close to our consumers and customers in the market, our values and our focus on quality and people and, last but not least, our more long-term focus grounded in the fact that we're still a family-controlled business. Now speaking to that first part of those strengths, being a growth company. That's easy to say. It's hard to deliver. We are proud that over the many years, we have been able to do that. If you take the 2015 to '19 period, we delivered a CAGR of 5% revenue growth, which was clearly ahead of peers, ahead of other consumer goods categories. And this is something that is important to sustain going forward. This growth is grounded in a very strong footprint. And this is an important part of the legacy that Jean-François left behind, a balanced footprint, the cumulation of significant deals over the years with a good balance between emerging markets and more developed markets. There's a lot of embedded growth. Beer is still very much in demographics game. This footprint gives us a lot of access to that future growth. Now what's also true, it comes with some challenges. Compared to the last 15 years of rapid consolidation, the next 10 years, proportionally, there's less inorganic headroom left. There's still many things we can do. But proportionally, it won't have the same impact. So organic growth will only become more and more important. Now as we rebalance the company from very dependent on developed markets to more balance between emerging markets and developed market, it also comes with higher currency volatility as very relevant in this year 2020/'21. And lastly, we have a couple of value-dilutive operations that need to be addressed. Another key source of our growth has been premium, in which we have been a pioneer all those decades ago, but still very relevant. It starts by brand Heineken, having a lot of momentum as we shared, about flat in 2020. In the year, the beer market was down, but high single-digit growth in 2019. This is a €5 billion revenue brand growing in the mid- to high-single digits and much more to come, but it's not only Heineken. We have a basket of beautiful international brands like the Tiger brand that continues to grow very fast. And then we have local premium champions, as we call them, for example, the Ichnusa brand in Italy, taking a relative small regional brand from Sardinia and making it an absolute national winner in premium. Now as much as there's been a source of growth for the past, we still see a very big opportunity out there. More than 100 million people a year entering the middle class, so we expect this to continue to be an important source of growth. Now more recent source of growth is the 0.0 segment, still less than 1% of global beer. But in the more developed European markets, this is already over 5% and sometimes getting close to 10% of the total beer market. We have taken a leadership position in this. We put our most important brand asset, Heineken, behind this when we launched Heineken 0.0 in 2016. We are now present in 84 markets. And looking to the future, the biggest mistake we could make is taking our foot off the gas. We are still only early in this journey. But there's other things happening in this regard. We see the blurring of the category boundaries. And in that regard, particularly the U.S. market being very innovative, but we see it starting to happen in other places as well. This will be a big source of growth. And we really need to step up in this regard, being attentive to tap into this. And we do know, as a beer category, that with certain consumer segments, female consumers, younger consumers, we are below penetration and we need to do a better job at closing those gaps. So work to do in that regard. Now underlying that growth is, as before mentioned, our decentral OpCo-centric model, whereby being so close to our end consumers and customers in those 80 operating companies makes us very attentive to local opportunities. Also the accountability, the P&L responsibility is in the local market with the GM and his or her management team. And we do believe, again, this has been a key component of our growth profile. But there's a flip side, whereby we see a big opportunity in leveraging that network, that scale in better ways. At times, we are scattering our resources a bit too much because you have all these 80 operating companies, a little bit reinventing the wheel so we can be more focused. We have been relatively slow in adopting common platforms in IT and other areas. We are very good, learning fast in the local operating company. We're not that good at learning across the boundaries of OpCos, so we want to be more deliberate in that. And importantly, we see a big productivity opportunity by leveraging this network in a better way. And talking about productivity, I think this is an important slide to show. The numbers speak for themselves. And whereby our margins, both our gross profit margin as our operating profit margin, has been somewhat stagnant over the last years. It's important to be balanced because to a good portion, this has been driven by the acquisition of Kirin Brasil in the summer of 2017. As that business was relatively lower margin, that has impacted our overall number. We still stand by that decision. We believe Brazil can be a phenomenal value-accretive operating company in the future, and we're willing to make that investment for now. But truth be told, if you look into more depth to other regions, other operating companies, we can do a better job in growing our gross profit margin and avoiding that kind of slipping operating profit. In particular, what we don't like is that the advertising and marketing and selling expenses are slipping as a percentage of revenue. Not too worrying if that happens 1 or 2 years, but when that becomes a trend, it's concerning because it could affect your future growth. Now zooming in a little bit more on the more recent situation with COVID, and that pressure on our margin was dramatically exacerbated, of course, in the year 2020 with the drop. We just presented that in detail, and that will impact the near term. The big drop in revenue, one bounce back in one go, there will be a volatile variable recovery. We are suffering from a particular strong operational deleveraging, driven by our large European on-trade business. It will take time for that business to recover. So we will continue to be impacted in the near term from that effect. And altogether, there is a lot of cost pressure from inflation commodities and, in particular, transactional currency effect. Laurence already indicated that the delayed effect of the synchronized emerging market currency depreciations of 2020, the big effect will be felt in 2021. So that is the reality that we need to take into account. Now zooming in a little bit more on our digital and technology activities. We have made a good solid start on standardizing our technology landscape, our ERP systems. We have become quite innovative and flexible during 2020 to even do that remotely. As shared, we are quite proud of our direct-to-consumer platforms like Beerwulf. We're making good progress on B2B. Having said that, we do know that we really need to accelerate harmonizing our IT landscape. There's still a lot to do in that regard, and we're relatively on the late side there. So this will be a very important priority. Now whatever what happens in the world, we do need to accelerate harmonizing, standardizing our system as we believe this to be a prerequisite of really grabbing the full potential of digital. When you build all those kind of digital applications on the back of a very scattered data process technology landscape, that would become an issue. So we need to step up in that regard so that we can scale our B2B and B2C platforms, a big priority going forward. On Brewing a Better World, Laurence just indicated, we launched our Brewing a Better World ambition back in 2009. So our first decade has come to an end. We delivered a fantastic performance in that regard, improving our water efficiency by over 1/3 by improving our carbon emissions by 50%. But having said that, we do know that we need to do more, and we need to take our responsibility to really step it up as expectations are going up quite rapidly. Now then as the last lens of this review part, this first chapter, a couple of comments on our people strategy, our culture. We believe it to be one of our key competitive strength. We have a very passionate culture, grounded in strong values, in respect, in transparency, in trust. We are a company that is very socially cohesive. I think we're all like, it's no nonsense. It's kind of deliver the goods kind of mentality. And all of this exemplified by very, very high employee engagement scores. And as we shared before, even in 2020, with thousands, tens of thousands of people working remotely from home, our engagement scores actually went up rather than down. Now the flip side is, we also still see opportunity, particularly with all this change happening in the world, we really believe that we can move faster. We can be even more agile, and we have been very agile in 2020 reacting to the crisis, but we also need to become more agile proactively, really moving faster on new trends, new development happening out there. And it takes also a slightly more external orientation. Another element is as -- yes, the competitiveness is going up the level of specialization. The depth of capabilities needed is going up and up. So we see an opportunity of being more intentional, more structured in our talent agenda and our capability agenda. And last but not least, I already spoke over about this great network of operating companies, but too often kind of moving by themselves, reinventing the wheel rather than really flying information. So we also see an opportunity in the way we operate our OpCos in a more kind of networked manner. Now that kind of concludes that first review section. There is a clear double message. On one side, we see -- and we are proud to be a superior growth company. And at the same time, we see significant value-creation potential going forward. And it has kind of 5 key conclusions, which are 5 key priorities going forward. The first one is all about growth. It's about continuously enhancing, expanding our portfolio, our footprint, our route to consumer by really placing consumers and customers at the core and get closer, more proximity to those consumers and customers around the world. The second one is to complement growth, where we have done a good job with an increased focus on productivity, and I will get to speak to that in more detail. The third priority is accelerating IT simplification. Great start made. A lot needs to be done. And we need to move faster in this regard in order to fully capture that e-commerce potential that we believe is out there. Fourth dimension, raising the bar on our Brewing a Better World ambition by launching a new ambition for 2030. And last but not least, the fifth priority underpinning it all, driving more speed, agility, external orientation throughout the organization. With that, I move into the second part of our growth algorithm, superior growth, whereby very importantly, we first need to recover from where we were before the pandemic and then consistently structurally drive superior growth with consumers and customers at the core. Now the way we would like to do that is by focusing on these 5 pillars. What's very important to us, we are, first and foremost, a growth company. Now that starts by that footprint. We are very happy. We're proud of the footprint. It has a lot of embedded growth, but you're never done. More can be done. Portfolio, the same thing. Route to consumer, particularly with digital, a lot to be done, partly to avoid disruption, partly to recapture the value that's out there. Importantly, in the end of the day, we are a beer company. This is about bottles and cans, and you need to get them on the shop floor. And we are proud of our kind of no-nonsense execution culture, but you're never done. We believe we can still do better. And last but not least, an area where we probably need a bigger step change is resource allocation, be a bit more tough and sharper in the way we prioritize and focus our resources. Now a bit detail on some of these pillars. On the first one, on footprint, whereby, yes, there is less absolute inorganic opportunity out there compared to the last decade. We still believe there's opportunities as exemplified by what we did in Australia last year, really creating a platform in a very important profit pool of premium cider and beer brands for the future. We entered the Peruvian market by the -- with the acquisition of Tres Cruces. Now that's for kind of the inorganic. We do have an important track record on greenfield operations. And I think we are a bit unique in that regard. We have really structurally done them over time. And the benefit of doing so many is that you really start developing a learning curve. And that allows us to start increasing our hit ratio, our success ratio. Very proud of recent strengths that we're seeing, for example, in Ivory Coast. Ethiopia is a fantastic example. This is an over 100 million population country where out of -- from scratch, we built a very important company, which is now a very strong #2 in that market. Lastly on this, we do know there's a couple of value-dilutive operations, some for a good reason because there are recent market entrants, some for less good reason, and we just need to be a bit tougher in addressing that. One example is the Philippines where we were not confident that we were on the track that brought us to superior profitable growth. And together with our partner, we significantly restructured that operation to address that. Now of course, always, as Heineken, premium will be a very important opportunity. Always starting with brand Heineken, where over the years, we have become more and more innovative with 0.0 as an important example. Heineken Silver, a newer opportunity, doubled its volume, 1 million hectoliters by now, launched in Vietnam and China with new opportunities coming. We're already over 1 million hectoliter brand in 12 countries. We see potential to push that to at least 15 countries in the near future. International brands, where we have this beautiful portfolio of brands that are working across multiple markets. We have Desperados, which is becoming a pan-European premium proposition. Double-digit growth even in the middle of the pandemic, an important brand in markets as diverse as France, Poland and even now, in Côte d'Ivoire, where we are locally producing it. Tiger, of course, very important. After Heineken, our largest international premium brand, but now having a lot of success in Nigeria, showing that the brand can travel. Moretti, now doing extremely well in the U.K. and Romania. Amstel, being a critical brand in Brazil, very important in Mexico. Edelweiss, largest market globally now is not Austria anymore, it is Korea. So you see that these brands can travel, and the team is doing a very good job without kind of being too top-down imposing on it in finding the right opportunities for those brands. And the last but not least, complementing Heineken and these international brands with these local premium champions. I've mentioned Ichnusa before. Historically, we have had Dos Equis in Mexico, Eisenbahn in Brazil, Aguila in Spain. There's many examples, Bedele in Ethiopia. And we believe we can focus on fewer. We were maybe a bit too scattered in the past and really doubling down, scaling those local opportunities. Then on to the more kind of innovative part of our portfolio. As said, very proud of what has been done on 0.0. We were a first mover. We put our money where our mouth was on it. My biggest fear is that we take it for granted too soon. We're still early on this journey, and we really need to double down on this opportunity. And there's no reason why this can't grow into 5%, or give or take, of the total global beer market over the next decade. In the middle, stretching beer. There's -- almost everywhere in the world, trends to more drinkable, more sessionable beers, lower bitterness, slightly lower alcohol percentages. Tiger Crystal, an important example throughout the Asian region. Amstel Ultra, an example, in the Americas region. Heineken Silver is playing into that same trend, and we believe we can do more in that regard. And when you do it of these kind of big-brand vehicles, you can scale this relatively fast. The third bucket is really moving beyond beer to the boundaries and beyond the boundaries. We have done a fantastic job on Radlers, combining beer with fruit juice. We were the first mover. We did scale it, particularly in Europe. We did a fantastic job with cider. And impressively, these days, Russia, Mexico, Vietnam are becoming important cider markets to us without having a historic kind of cider markets in those places, and we believe there's more opportunity there. Now the part where we have done less good of a job, the seltzers, the ready-to-drinks, and there, we are really stepping up. We already announced a partnership with AriZona where we're going to launch AriZona SunRise Hard Seltzer in the U.S.A. We have Canaria. We have Pure Piraña launched in Mexico, New Zealand, and we're bringing that to selected European market. But here we want to, yes, increase our speed, our agility, our sensibility to picking up new trends earlier and really jumping on them or, even better, shaping them. Then short word on digital, on digitally connecting the whole value chain from brewery to distributors, to wholesalers, to outlets to consumers, there's always a lot of focus on the online sales, the direct to sales at box #4. And of course, we are there. We try to take a leadership position in that. But truth be told, the bigger opportunity for beer seems to be really digitizing that whole chain and designing it as one cohesive ecosystem that then plugs into your standardized IT landscape as we discussed before. And in this regard, we really want to accelerate. We set ourselves a target of €10 billion of revenue just in the fragmented trade by the year '25 to be digitally enabled. We're digitizing, of course, and digitally enabling our sales force. We have now over 130,000 pieces of equipment digitally connected from these EPOS systems in our 6 stores, in the tavernas in South Africa. We did an acquisition of Touchsides, a South African EPOS operator that has really enabled us to accelerate in that regard. But we also have digitally connected fridges and draft systems right now. So a lot to be done in this regard. Then moving on to the next part. We love growth, and we will always be growth inclined, but we know that we need to balance that. We need to complement that, is a better word, because we don't want to take our foot off the gas on growth but we need to complement that with an increased focus on productivity improvement. And we will launch a productivity program, but more important, and that's what I want to share on this slide, is everybody is going to talk about the €2 billion program. What's more relevant for me and for us is in really building the muscle of continuous productivity improvements. Something that, at the moment, you finish your €2 billion program will still be in place in order to deliver operating leverage beyond. This is an area where we have spent a lot of time with the leadership team and with the organization. Now it is not that we didn't do cost programs in the past, but there were more ad hoc individual OpCos after an acquisition, for example, or after a particular large devaluation. So we know how to do it. But what we've never done is doing it structurally, consistently across all 80 operating companies at one time and altogether. And that takes common language. That takes a common mindset. It takes common ways of working, common processes, common tools that were not in place. And over these last months, we have put a lot of effort and energy in building that. It's a bit fancy wording, apologies for that. A company-wide productivity management system is for a lack of a better word, but it's basically building that muscle that consistently delivers productivity improvement across the company. Now one small example there is in every operating company, we have appointed a transformation officer, typical, a young talent who has the potential to become a future Managing Director. That person is appointed for at least the next few years to the management team of these local operating company, really enabling, supporting the General Manager and his or her team delivering these savings, these productivity improvement. But then we connected all these 80 transformation leaders in one kind of neural network, which permits us to very quickly learn together, to very quickly scale best practices that we see in one operating company to the others. We also rolled out one standardized software application that allows us to capture, in a consistent way, all these productivity initiatives and move them through the funnel to full delivery with full visibility locally, regionally, globally as to how many initiatives we have in the funnel and at what stage. Just some examples, we're also completely tying this to our remuneration priorities. So the left side, in a way, to me, is more important because that's the muscle that will give in the short term, the midterm and, we hope, we are aiming for the long term. Now on the right side, we do know and we are committing to a relative large cost program over these next 3 years, €2 billion in savings, to mitigate the inflation transactional effects, which is particularly high that we're incurring right now, to make sure that we are able to reinvest in growth by restoring sales and marketing, by front-loading our investments in digital and importantly, to gear for operating leverage beyond. Now let me take a bit more time on this slide. Zooming in on that €2 billion of gross savings. Three-year program, we aim to deliver this between '21 and '23 with broadly 3 key focus areas. One is an organizational redesign. This part is a bit front-loaded. This is what we are really doing as we speak and is being effectuated. During the 3 -- third quarter results, we already spoke about the reorganization at the head office where we were aiming for 20% personnel cost reduction. That is being effectuated as we speak. But we also launched a global initiative where basically, every single operating company was invited to take a fresh look at our organizational structures and simplify, delayer, rightsize, whatever was necessary in the local market. Altogether, that concerns around 8,000 FTEs, which, of course, is very large for a company like Heineken. And we do that with sadness as these are cherished colleagues that will be moving on. At the same time, we do know this is a necessary intervention we need to make, to make sure that we emerge from the pandemic, the crisis, stronger. This will deliver annualized around €350 million of savings, and it will take around €420 million of restructuring costs, of which the majority was already taken on 2020, as Laurence shared. So that's kind of one important bucket. The second one is your cost of goods sold, which is about half our cost base and logically, a very important part of any productivity program you would do. And we do see, still, a lot of opportunities in this regard. As you can imagine, particularly after a period of growth, a period of success, that the number of SKUs, brands, packages has mushroomed. And this is an important moment to kind of take stock and really focus on the biggest opportunities and really reducing the long tail. And that reduction will have a massive reduction in complexity in our supply chain, in the breweries, in the logistical networks, freeing up a lot of resources. Another one is logistics. So we always kind of focus on breweries, but our fixed production cost is about the same size as our logistical spend globally. And whereby historically, we have had a more centralized approach to managing the breweries with kind of a more forceful approach, exchanging best practices, setting benchmark, that was less true on logistics. A start has been made, but truth be told, we can do a lot more in this regard. And this is a big part of our cost structure as said. I've seen this myself in Mexico where logistical costs were particularly important, and I've seen what can be done to do that more efficiently. Last bucket, commercial effectiveness, both on the fixed commerce cost as well as the advertising and sales cost. Also there, we see a lot of opportunities. Media, of course, a big component. Whereby historically, you bought local media, local newspapers, radio, television. Through local media agencies, we have been consolidating over the years. And as you may have seen, last November, we announced we're going to consolidate behind one global media agency, dentsu. Because today, about 40% of our media spend is digital, going 50%. And you buy that, not from local players, you buy that from 3, 4 global social media companies. We see and we know there's a big saving in just consolidating to one global media agency. There's still a lot of what we call nonworking dollars

Operator: [Operator Instructions] Our first question comes from Trevor Stirling of Bernstein.

Trevor Stirling: Dolf and Laurence, just one question from my side, really. I'm still struggling a little bit about the net margin algorithm. Effectively, with the guidance of 17%, you're saying back at 2019 margins by 2023, but you're going to save €2 billion of cost savings. So can you talk a little bit more about what's the color in terms of the cost inflation assumptions that are going into your red offset, but also what your price/mix assumptions are? Because I presume you're still planning to take price and expect mix growth over that period as well.

Dolf van den Brink: Thank you, Trevor. Laurence, would you like to take a first go at that?

Laurence Debroux: So to recover this 17% margin, actually a little bit higher than where we were right before the crisis, you need to work all the way back up to where you were in terms of the mix of SKUs and channel in a way, so you need to actually compensate for the full deleveraging effect. So that will happen gradually. And we've taken a few assumptions, of course, of how and when it happens. Could be quicker, could be slower, we bet not. But this element of top line will play -- will definitely play a role. Then the second thing I would say, to give you an indication, is to say that when we talk about inflation, we talk about inflation and transactional also impact of the currencies. And that we know in terms of our cost -- inflation on our cost, that, that at least plays quite a big role in 2021, and we know because we hedge. So we have quite a bit of certainty already on some of the large currencies that we are exposed to. So this is -- and then you get the inflation lead with the footprint. And of course, as Dolf explained, there are lots of variables here, how fast the volume and the mix recovers and what the actual inflation gets to be in 2022 and 2023. So there will be moving parts. So, which is why we have made assumptions that lead us to what we give you. But we've also look like how -- I mean to actually play with those different factors as they materialize and that they become certainties. And what we say is that the 2 things today that we can really commit to, because we will do what it takes, it is €2 billion cost because that is something that we can control. And we looked at our precrisis unaffected cost base of 2019 and really look line by line and associated programs to each of these planned reduction. That's one thing. And the other thing is to say that we want to recover this 17% margin by that time. It is -- it's not an exact, I would say, how things will play. In between, they can be different scenarios, frankly, Trevor.

Operator: Our next question comes from Sanjeet Aujla of Credit Suisse.

Sanjeet Aujla: Just coming back to the margin target you set out. Can you just elaborate on how conservative you're being on the top line recovery? For example, are you assuming the European on-trade channel can normalize back to '19 levels by 2023? Or are you embedding a permanent channel and tax mix impact in that trajectory? That's my first question.

Dolf van den Brink: Sanjeet, in this assumption, we don't expect the on-trade European business to fully be back by the year 2023. So indeed, we do feel there still will be a deleveraging effect there. Now to the spirit of the questions, we know there will be a lot of questions there. The problem is you have different ingredients. You have top line which has a volume, a channel, a pricing component. You have cost which has an inflation, the reversing of mitigation, transactional effects. And then you have your cost program, your reinvestments and your margin. The top line and that cost inflation, there's a lot of different moving parts in there. And yes, we have plenty of assumptions, but we know the minute you write them down, variance won't be right. And we don't want to box ourselves into an endless discussion about this assumption or another given how incredibly volatile the situation is. What we do control is the €2 billion, and that's why we're very explicit about it. But also, we want to put ourselves on the line, and we give that book end of the margin. That no matter what happens with the others because, by nature, you won't have your assumptions all correct. But we do commit to that 17% by 2023. But yes, back to the on-trade. The on-trade in Europe will be damaged, and it will take time for that channel to fully recover. We are not worried about the underlying consumer behavior. And that's kind of universal. People want to get together in a restaurant and share a meal. People want together in a bar and share a beer. That behavior will come back. But we will lose about 10%, 15% of the outlets to bankruptcies most likely. There will be a restructuring across the sorts of on-trade with more kind of wet on-trade discotheques, night clubs maybe taking longer to come back and maybe the dry on-trade like restaurants coming back quicker. Again, a lot of moving parts, and time will tell what will be the truth. But all in all, we are kind of cautious on the assumptions we are making on the recovery of particularly the European on-trade business. Thank you, Sanjeet.

Sanjeet Aujla: Great. Just a quick follow-up question for Laurence on the underlying cost inflation assumptions. I didn't hear you talk about commodity cost inflation, Laurence, in your outlook in 2021. Can you just elaborate a little bit on that? I think it was slightly positive in '21. How are you seeing that shape up or -- sorry, slightly positive in '20. How are you seeing that shape up in '21?

Laurence Debroux: So indeed, it was slightly positive in 2020. If you look at 2021, I'm obviously looking at what we've hedged already, and we are very progressive hedging throughout the year. So that is actually -- and I know what we're taking with us. And it should be kind of like rather benign as well. I would say probably slightly on the negative, but rather benign. So in terms of commodity pricing, the only thing is really the transactional in 2021. That is really what should be impacted the most negatively by far, relatively benign on the commodities given our hedges.

Operator: Our next question comes from Simon Hales of Citi.

Simon Hales: A couple for me. Sorry, just to come back to this sort of margin bridge again. But I'm just trying to get my head around a little bit, what you're really assuming with regards to the pricing component within the margin bridge over the next 3 years? And how much of the cost headwinds should we expect to think could be offset by actual pricing? And how much is really going to just be offset by these productivity savings? I'm just trying to sort of square the circle here. Are you focusing more on volumes and less on taking real price? So it's a volume/mix story, rather than a pricing story in the top line? Or am I missing something there? And my second question, maybe -- or do you want to take the one first up?

Dolf van den Brink: Yes. Let us reply to that first. That's a very important component, indeed. Because as you indicatively saw in how we visualize that waterfall, we see cost inflation to be larger than the upside on the top line. Now over time, of course, you want to make sure that your pricing offset local inflation. That is broadly true in more developed markets. In your emerging markets, unfortunately, those currencies don't depreciate linearly, but goes in these big bursts. And often, you have to synchronize devaluations happening at moments of crisis. And 2020 was a clear example of that where you have devaluations of up to 30% in Brazil, 20% in Mexico, Nigeria, South Africa, what have you. And you can't completely offset that by pricing. We have been quite value-oriented in Mexico, for example, in 2020, with delivering pricing and double local inflation. But it was largely insufficient to offset the depreciation and, therefore, the transactional effects. So we will be very focused on pricing. I think that's an important signal to give. Look, what we have done in Brazil. We have taken two price increases. We're not a market leader. We have such strong brand equity that we felt confident, leading with the price increase in September and December, which has been well-executed in the market. So we will be focused on that, but it won't be enough in the short term, particularly this year, next year, that may -- or we expect that to be insufficient. And that's why we need relative large gross savings to compensate for that. Also, as we are not fully assuming a full recovery of the European on-trade business, that carries a big impact and a big deleveraging impact that needs to be compensated. So those 2 elements are 2 key reasons why we need so many savings to compensate the -- in a way, shortfall on top line in order to restore your margin.

Simon Hales: Got it. That's really helpful. And can I just ask -- I mean, Dolf, you talked about sort of how you're looking to amplify your premium position by moving perhaps more aggressively beyond beer into areas where perhaps you sort of lagged some of your competitors historically, be it hard seltzer or elsewhere. I mean how far of a push away from beer are you signaling? Could we see you moving into can cocktails or into spirits, into new alcoholic categories? Or is this still very much be a link when you talk about beyond beer?

Dolf van den Brink: Yes. It's interesting. When -- we have had many, many discussions as a leadership team about our mental models. And one mental model is, how do you draw the boundaries? How do you define beer? And it's not per se that we have an all-encompassing final answer to that question. What we do know is that we need to be more flexible. As we have been in the past, with Radlers, with ciders, which are clearly beyond beer, with something like Desperados. But indeed, I think initially, we may be underestimated seltzer. We saw that really a bit too far out. And in hindsight, that was probably not the right reaction, and we're really stepping that up, particularly also outside of the U.S. Now you still want to make sure that you stay true to your core competencies to the power of your brewery footprint, your logistical footprint. And the great thing with cider, seltzers, ready-to-drinks, Radlers, et cetera, that you can still leverage your invested capital, your total route to market and supply footprint. So yes, I think you will see us, like others, casting the net a bit wider. But we also will be cautious not to overdo it and triggering a lot of capital expenditure in completely new production or route-to-market investments. We do believe there's still plenty of opportunities in moving the goalpost, stretching the boundaries of what we consider further, but in a deliberate way. And also, to be clear, globally, there's still a lot of growth in beer. And maybe in the U.S. market, that is less true where the beer market has been challenged, and there's a lot of innovation to compensate for it. Globally, beer is still in a good place. In a lot of the markets, very important markets to us, like Vietnam, like Mexico, Brazil, like Ethiopia, South Africa, there's still a lot of growth in core beer. So we also need to be careful that we don't take our eye off the ball too much in that regard. But it's going to be a fun coming years, I do believe, where you will see a lot more new dynamic and new innovations happening.

Operator: Our next question comes from Richard Withagen of Kepler.

Richard Withagen: I have 2 questions, please. First of all, you are lowering Heineken's workforce by about 9%. So how can we be reassured that this will not come at the expense of the revenue potential of the company? And then the second question that I have is you announced a step-up in digital and technology. And I guess that will drive both the top line performance and profitability of the company, but which initiatives will have the biggest impact on operating margins by 2023?

Dolf van den Brink: Sure. I take that first question and you take the second, Laurence. Yes. On workforce, let -- yes, let me be very, very clear, we would not have done it if we would have a serious concern this would affect in any way our top line. The instructions to the operating companies has been very deliberate, to be very customized in the interventions that were being made. We didn't give kind of a top-down generic number or goal that everybody had to hit, but it was really about how can you simplify? How can you delayer? Where is there unnecessary complexity in our structures? And how can we simplify? And it was really up to every single operating company with the local leadership team to identify opportunities to simplify, to delayer and, in some ways, to resize, to take out redundancies. So we believe that this intervention can be made without disrupting the top line, without kind of affecting our potential, our capacity for driving top line. In the short term, it creates a disruption, and that's why we try to move very, very fast. And yes, in a way, get it over with because the longer this period last, the more uncertainty in the organization. And we have been very transparent. We have been communicating more than we have ever done before, bringing the organization along. And that's why this is being effectuated as we speak. Again, time line is differing a little bit across countries. But Richard, this was very explicit on our mind. And I feel also, together with the leadership team, knowing this organization well and across the board, that this intervention can be done without rocking that boat to March. Laurence, on the D&T question.

Laurence Debroux: Yes. Well, the biggest impact over time will be the consumer, what improved our consumer and customer-centricity. So that goes '23 and beyond, and that's part of the funnel of continuous productivity improvement and on continuous -- actually supporting the growth of our top line as well. So that will play on the margin moving forward. In the short term, what we're doing is really building the backbone and the common ERPs and the start-up processes and moving to shared services is what you will see enabling us in the first few years. So I would say this common backbone, we've already progressed, and we're completing our ERP replacement program in Asia Pacific, AMEE and some of the Caribbean actually in 2021. And we have kind of attacked our SAP landscape in Europe. And we were progressing through that program between now and 2023. And that will enable simplification, productivity, continuing to grow our operation shared services, starting with the shared service we have in Krakow in Poland and then which is actually really very well working now. So we're expanding the scope of that shared service at this stage. So short term, that's this. Long term, it's really what's consumer and customer-centric.

Operator: Our next question comes from Ed Mundy of Jefferies.

Ed Mundy: I've got a question on this concept of building muscle to drive margin medium term over and above the €2 billion that you referred to and the use of transformation leaders. As they've gone about their business, what are their stand so far from benchmarking one OpCo to the other? What sort of low-hanging fruit have you seen so far?

Dolf van den Brink: Thanks for your question. I think at this moment in time, we have 1,500 initiatives from 35 operating companies sitting in the funnel. So there's a gazillion smaller and larger ideas that are being generated bottom-up throughout the company and again, being replicated very quickly because we're really incentivizing operating to companies to learn from one another. Partly, I personally -- my eyes were really opened in what is possible in this regard when I was responsible for our Mexican operating company, where we had a very strong muscle in focusing on these continuous productivity improvements. Our Mexico operation is very disciplined, I would say more disciplined than on average within Heineken. Even the HR Director is an engineer, so this is really a strength. And there, they had built that muscle over time and I've seen it operate. And it's -- the most important part to it is the ideation, it's the brainstorming process where every month, every quarter, you mobilize the organization to brainstorm new ideas of identifying waste, identifying complexity, identifying inefficiencies and pursuing them relentlessly and taking them from idea to full completion. And what we're taking is learnings from a market like Mexico. Poland, we had a couple of markets that were particularly strong. And we have kind of packaged that into one common way of working that we are rolling out consistently. And the ideas can be from -- indeed, how you handle POS material or how you print POS material centrally or decentrally to ideas about 3D printers in breweries. So you don't need to hold a stock of, how do you call it, spare parts, but you can print them in the moment to, yes, more kind of straightforward ideas. But it's amazing to see what happens when you kind of create a common way of working and invite the organization to contribute to that. And those 1,500 initiatives, it's just early days. We're just 1 or 2 months into the start of the program.

Ed Mundy: Great. And then my follow-up, as you think about margin expansion beyond 2023, and I appreciate the €2 billion, the initial productivity you bring up, €2 billion of cost savings today. As we think of margin expansion beyond 2023, do you think it's going to come from more structural opportunities, such as the ERP standardization? Or do you think it's going to come from the process of transmission leaders bringing together a funnel? Or do you think it's going to come from operating leverage and premiumization, given that implicitly within the 17%, there isn't necessarily full recovery in the on-trade within Western Europe? I mean how do you think about margin recovery beyond 2023?

Laurence Debroux: So I'd say beyond 2023, the idea of the funnel is to permanently fight inflation of costs. So is to have it as a constant, we go after cost inflation. And if you do that, then you provide some mitigation to what happens to your very good footprint because by definition, you're in high-growth country. So you're in countries that can bring a bit more of uncertainties on ForEx and a bit more of cost inflation in a way. But once you say that, I mean, you don't cut your way through prosperity. That's not the idea. The idea is really to really enable this top line and to be able to redirect the investment to what's most productive for the brands and what's bringing operating leverage through premiumization and really through driving our mix and driving our brands to be even more successful. So it's difficult for me to tell you what will be more, is it this or that? For me, it is really this -- the permanent productivity mindset becoming the way of working to enable this growth and to make this growth really sustainable and profitable moving forward. So that actually builds the muscle of more resilience to shocks while actually protecting the growth engine of the company. This is really what we want to achieve. And then there are years where you probably reinvest most and years where you actually let more go to the bottom line, but that is adapting to circumstances and opportunities.

Operator: Our next question comes from Olivier Nicolai of Goldman Sachs.

Olivier Nicolai: Just 2 questions. Just first of all, with this new strategy, can you please tell us if the management in the MDA as the top employees of Heineken, incentives have also been changed to reflect this focus on cost savings and margin recovery by 2023? And also just a follow-up on the EverGreen program. So on the savings part, does that include any potential footprint reduction in Europe like brewery closure, for instance?

Dolf van den Brink: Thank you, Olivier. Let me take that first question. And Laurence, maybe you can take the second. So on the management incentives, we gave it a good thought. In the Netherlands, under the current regulations, there is quite a long lead time to change the remuneration policy, ultimately to pass by a vote with 75% at your AGM, et cetera. If we would have wanted to change that, we should have kicked it off somewhere over the summer, which was in the middle of the moment that we started with the EverGreen journey. So I made a deliberate choice to not rock the boat in that regard. We didn't know at that moment in time exactly where we would end. Also, there's already so much changing in the world and in the company that we accepted continuity on the metrics, as you know them, as they are public. And for next year, we can consider and we'll consider whether we're going to update them and change. For now, they are what they are. There is a good component of what we call individual targets where we have flexibility year-by-year to change. And what I can share is that we have given every single senior manager, including every single executive team member, a gross savings target. So that is one metric that has been consistently cascaded throughout the organization as part of the individual target of all our senior managers from top to bottom. So hopefully, that speaks to your question, Olivier. And indeed, in the course of this year, we will see if the need arises to further update the overall structure of our STI, LTI remuneration.

Laurence Debroux: So on your question on brewery closure in Europe, there are no brewery closure in Europe included in this €2 billion plan. We actually -- we were even increasing capacity in Europe in some places. And we're investing in France, we're investing in Italy to actually support increases in volumes on some of our brands. What is clear is that optimizing the network, really playing that network in the best way possible, is something that will be key into renewing the funnel. So my answer today is about to your question on the €2 billion. But I mean, there are no sacred cow. We'll always be looking at optimizing the network and making sure that we put it at work in the best possible way in terms of serving the market, serving from the customers and consumers and in terms of also bringing profitability as well.

Operator: Our next question comes from Andrea Pistacchi of Bank of America.

Andrea Pistacchi: Yes. So two questions, please. First one is you haven't touched in the presentation on your wholesale operations and the vertically integrated model. So how does this fit into your strategic review? And do you see opportunities or ways to reduce your on-trade cost base whilst maintaining the benefits of downstream integration? And the second question is, if you look at the business, both from a single country point of view, are there any areas or countries that, in your view, need intervention or where you think you should be doing things differently? I mean a couple of years ago, one could have thought about the U.S., but that has improved a lot since then.

Dolf van den Brink: Thank you, Andrea. Laurence, would you like to speak to the first, and then I'll get to the second?

Laurence Debroux: To the wholesale operation. And as described in the first part of today, indeed, our vertical integration in wholesale, which we consider a strength, particularly when it enables us to reach customers that we wouldn't otherwise reach as well, has turned into more of a weakness temporarily this year. We're not hanging on to wholesale whatever happens. I mean we've done some correction to actually to the portfolio over the years. We sold some wholesale in Poland, for instance. We've actually readjusted and we partnered in our wholesale with Sligro in the Netherlands. So we permanently look at that portfolio, and we make sure that since it has indeed lower individual margin, that it really enables the rest of our business, our brewing business. And this is definitely the case in the countries where we are in wholesale. So we still believe it's a strength. We will continue over the years to always look with a critical lens at what brings or not a competitive advantage to our markets and to -- in different countries. But I would say, as of today, there is no kind of like global view on wholesale that would be different from what it was just before the crisis.

Dolf van den Brink: Yes. So let me speak to the question on single countries that are of concern. The good thing is that some countries who have been on our radar like Nigeria actually seem to have turned the corner. The local leadership team has done a great job over last year in rejuvenating the portfolio, premiumizing, also driving efficiencies. So very pleased to see Heineken Nigeria, Nigerian Breweries heading in the right direction and becoming less of a concern. So we actually grew volume last year. We see premiumization happening. The U.S. will always be on the radar, and I particularly feel a sense of responsibility there having operated in the U.S. And the U.S. is a very unique market in that sense because partly, the beer market has not been doing well and has been losing share against spirits for many, many years, and in that sense, doesn't look very attractive. At the same time, it's such a large market that certain subpockets have shown phenomenal growth. And we have not been participating sufficiently in those pockets of growth. And we simply need to do a better job on that. And I have a lot of trust in the leadership team that we have currently in the U.S. to indeed rejuvenate our portfolio in hindsight. Also in my time, maybe we were a little bit in an augmental model of the beer brands as we always had them and uncomfortable to kind of completely reinvent ourselves like others did. So yes, that is a concern. That is something that we focus on. We are not obsessed about scale. Because of the 3-tier system that we know very well, this is one of the few markets where it's not necessarily about scale. You can have large scale, but if you have negative momentum, it can still be a very tough market. You can then -- you can be relatively small, but when you have very good momentum, you can have a fantastic business. So yes, the U.S. will remain on our radar in that regard. Brazil is very important. A couple of years ago, at the time of the Kirin acquisition, I think the portfolio was 80% economy brands and only 20% mainstream premium. Today, it's already 50-50. And that is very important because revenue per hectoliter, particularly in euros, is relatively low. So to premiumize and move to mainstream is incredibly important. And actually, we have been moving faster than I think we originally thought possible in scaling Heineken, in scaling Amstel, in scaling Devassa, the craft portfolio doing very well. At the same time, we're not yet even nearly close to being satisfied by the margin that we're making. That will take a lot more work by the local team and by us all. So those are just a couple of thoughts on some key markets, Andrea. Thank you.

Operator: Our next question comes from Nik Oliver of UBS.

Nik Oliver: Just 2 for me. I'm sorry, both linked to margins again, unfortunately. Just in the past, I know Heineken was kind of reticent to give an explicit margin target because country mix can be so volatile within the group. So just thinking from here to 2023, where do you see the biggest kind of country-level opportunities on the margin? And then any markets where we should think about potentially margins easing backwards, so maybe a market like Vietnam, I guess, where you're expanding into slightly more mainstream price points? And then the final one, just on transactional FX. I know Heineken has hedged a bit less mechanically than some of your peers in the past. But any color you could give on how you're thinking about the hedges for some of the big exposures in LatAm over the next 12 months would be very helpful.

Dolf van den Brink: Very good. Thank you, Nik. So I leave that fun last question to Laurence. And I will take that first question on margin accretion, opco-by-opco. I think, by the way, we are still relatively uncomfortable with setting very specific margin targets, and that's why we're also not doing that beyond '23. Because, indeed, of our footprint, because of our growth agenda, we don't want to box ourselves in. Having said that, we do feel a sense of responsibility that over time, and you can miss a year, because indeed, a transaction like Brazil, but that over time, there is operating leverage where your bottom line grows faster than your top line. We did feel it was important to set that bookmark of returning our margin to at least 2019 level. And that's why we feel an obligation, responsibility to be explicit about that 17% in '23. On different opcos, clearly, the operating margins in Europe need to bounce back. And to a large extent, that depends partly on the recovery of the on-trade, which we assume won't happen fully. That will take multiple years for it to be completely back. So that will be a drag. At the same time, a good portion of the €2 billion in savings will be pursued by the European operating companies. So there should be a lot of margin accretion. For sure, over time, we need to grow margin in Brazil. As said, with the ongoing premiumization, with the strength of our brand equity, which our ability to set pricing, we do feel comfortable that we are heading in the right direction. But again, that will take a concerted effort for years to come. And indeed, in Vietnam is a market where it's maybe a little bit the other way around, where you say, hey, we have been traditionally an almost full premium company. It was 90% plus premium and maybe only 10% mainstream. And there, the balance is the other way. And I'm very proud of the local team already 3, 4 years ago initiating a more mainstream strategy, complementing our premium strategy. And thank God, because otherwise, at this moment of economic impacts in the world where you see mainstream performing better than premium in Vietnam, we are taking full advantage and it's actually a major source of market share growth. And I think from the top of my head, we are already more closer to 70

Laurence Debroux: Yes. And on the transactional, so indeed from largely Brazil and Mexico. And we have planned today for a significant higher transactional impact, I would say, as much as twice higher transactional impact on our aggregate than in 2020. And then, I mean we might have good surprises. But to extent that we are hedged, we know pretty much where that should be ending. So I would still say significant -- significantly higher than in 2020.

Nik Oliver: And Laurence, can you share just with us any guidance on how the hedging works? Because I know in the past, it was -- there was a difference of 6 months versus 12 months how much was covered. Just when we think about our models, trying to get the half year's right in terms of the margins.

Laurence Debroux: We had on a month-by-month basis and to a level where usually when you get to the end of the year, you're pretty much 70% hedged on the next year. So that is pretty much how we entered 2021 for most currency that we can hedge. Because, of course, you also have currencies against Nigerian naira, you do not have a hedge today. So that's -- but on the Brazilian reais, on the Mexican peso, on the U.S. dollar, we hedge on a month-by-month basis and to get to a 70% more or less position by the end of the year.

Operator: Our next question comes from Celine Pannuti of JP Morgan.

Celine Pannuti: My first question is on the €2 billion cost savings. You said €350 million coming from headcount reduction. Can you just call out where the remaining parts are coming from? And I was unclear whether, when you talk about benefit from the IT integration or the value-dilutive operations that you mentioned, whether that's also part of it. It would be also -- will be of help to believe that this will be more back-end loaded starting from 20 -- second half of this year? My second question is probably the -- affix a question to it, is in terms of the costs that you are mentioning. So you said for 2021, most of the €800 million savings will come back. Does this include the front-loaded investments that you are talking about IT? And along with what I think is probably about €300 million of FX transaction, am I right in thinking it's about €1 billion of cost coming back or extra cost incrementally in 2021?

Dolf van den Brink: Thank you, Celine. Can you take a first go at the question?

Laurence Debroux: Yes. So about the amount of cost coming back, not sure about your precise calculation. I would start with your -- with the €2 billion and how they are split. The €800 million cost, they mark it at our close. So it's not a mechanistic -- it's not a mechanical one to one. Now going to the €2 billion, €350 million is direct personal cost from this reorganization, from this restructurings. We -- you do not have in here what that comes on top, and that's part of €2 billion as well, all the environmental costs, all the cost of traveling less in 2020, by the way. The big bulk of this €2 billion, I would say, a large bucket will be really what stood in the middle of this slide that got presented, which is very much cogs and locks and supply chain in the large sense because that starts with SKU rationalization. And that is also optimization of our logistics and tenders, and this whole part of our cost base, which is the overwhelming biggest part of our cost base, by the way. So when you see we have 50% of our cost on this, so there is -- I mean there is quite a big potential here. I'm not sure I answered your question completely. But coming back to the different buckets that Dolf presented, that's how I would take it.

Celine Pannuti: The timing of the benefit?

Laurence Debroux: Sorry, Celine, if you could just repeat?

Celine Pannuti: Yes, I'm sorry. How should we think about the timing of the benefit hitting the P&L?

Laurence Debroux: Well, there will be -- I mean we will start with putting everything in motion. We're not giving you the year-on-year benefit. It's really -- it's important for us to actually commit to this €2 billion over the next 3 years and to the 17% margin. And then as I told you, we're putting in motion all this restructuring. There will still be mitigation that you will see in the first quarter. We'll actually tell you how we progress on this as we report. But we're not breaking it down year-by-year at this stage.

Operator: Our next question comes from Mitch Collett of Deutsche Bank.

Mitch Collett: [Indiscernible] basis points higher. And then my second question is on the Green diamond, where you've obviously added sustainability. But also, I noticed you've replaced return on net assets with capital efficiency. Just wondered what we should read into that? Are you taking, I guess, a more holistic view of economic profit versus a more returns-focused approach?

Dolf van den Brink: Shall I take the first part and you take the second part? Yes. Thank you for those questions, Mitch. And a good question, why not restore the marketing in sales faster? If we can, we will. Here, we try to find the right balance. We find the balance to be right to have it restored by then, particularly because we see a lot of efficiency and effectiveness, improvements that we can reap and reinvest. So restoring it to the same level, but it will have the media savings by centralizing into one media agency, et cetera. So yes, I would say this is a realistic planning. Now if we see revenue recovering faster, you never know, then we can also see how we speed it up. But it's trying to get the balance right. But we do believe that we will [indiscernible] kicking in. On that -- on the Green diamond, Laurence?

Laurence Debroux: On the Green diamond, first of all, definitely, we're adding sustainability and responsibility. And over time, we expect to measure that, the nonfinancial indicators, with the same level of intensity that we measure the financial indicators. And I can tell you that in our business reviews internally, our regular business reviews, we are integrating that as completely part of the business. So it's not KPI that we look at a couple of times a year. It is really part of the business. So it was very important for us to bring it. Now the notion of capital efficiency, we had run out before. That that's run out with a KPI, and you can find a number of KPIs. We really want to work on this notion of capital efficiency. And that's working on our CapEx, making sure that when we invest, we make it work as much as possible for us. We have identified savings that will be not cost. Well, they end up being cost because through depreciation and amortization, you end up having them in the P&L in the way we invest. So we have clear projects in our funnels on that topic. We want to also continue working on working capital. As usual, it was positive this at the half year with -- at the end of this year. As we had explained, we were expecting it. We want to continue to work on this. So capital efficiency is kind of a global concept. And then you have a number of KPIs that we will be working on. So that is what is behind its value for your stakeholders and shareholders.

Operator: Our next question comes from Robert Vos of ABN AMRO.

Robert Vos: Yes. You've already talked briefly about potential brewery closures in Europe, saying that these are not part of the €2 billion plan currently. Maybe a related question, as part of the footprint growth pillar and potential disposals of those operations in the coming years? That's my first question. My second one is about the phasing of the costs. You mentioned total cost to achieve the €2 billion in savings of €500 million OpEx and €400 million CapEx. You already spent more than €300 million in costs in 2020. So what can you say about the phasing of the remainder of the associated cost to achieve the savings?

Laurence Debroux: Maybe I can take that one first. The OpEx part of the cost is very much linked with the restructurings. So you can expect mostly ARs, and you can expect that most of it is what you've seen on the left part. So there is a bit of a complement on other projects, but that is really where it is. So it's pretty much front-loaded, that part of the cost. As regards the CapEx cost, they will be kind of like going on during the 3-year period. So not giving the timing here, but that will be as the projects mature in the funnel. I would say the first one was really this restructuring part, and that's -- and we will be part of this investment of the CapEx cost is also in digital and technology. So you will be seeing that coming over the 3 years.

Dolf van den Brink: Yes. Thank you, Laurence. Yes. And on that first question, indeed, at this moment, we are not looking at closing breweries. Is it completely excluded for the future? No, but we will see whenever we feel that would be the right thing to do, but nothing concrete at this moment in time. As said, there's always a lot of focus on the brewery assets where, actually, we're spending as much on logistical cost. I think there -- that's a place where we see more opportunities in the short term and -- that we are pursuing. On your question related to value-dilutive operations, I think there's no sacred cows. In the past with Finland, with Belarus, we have shown that we would do disposals if that was the best option on the table. Again, there's nothing concrete at this moment in time. We will be very open-minded to it. Now mind you, a good portion of those value-dilutive operations are recent greenfields operations where we really see a lot of upside and a good trajectory like in Mozambique, the new ones we are starting in Peru, et cetera. And there, as Heineken, we will take a long-term perspective in building those businesses, the way we did 15, 20 years ago when we created greenfield operations in places like Vietnam and now happens to be one of our most important operating companies. But what's important is to be very open, no sacred cows, and we'll take the best decision for the company when we get to that point.

Operator: Our next question comes from Laurence Whyatt of Barclays.

Laurence Whyatt: The brewing sector's got a bit of a track record of outperforming on cost savings, and I was just wondering if that were to be the case with your €2 billion target. Or if any of your assumptions were pessimistic, how much of any additional cost savings would fall down to the bottom line? And then secondly, on the Brazil, you mentioned Brazil had a slightly lower margin when you bought that business. And I believe when the acquisition took place, there was an aim to get up to group average margin of around 17%. Now obviously, we've had a few changes in the interim years, including a pandemic. And I was just wondering what the current estimates of where Brazil's margin could get to? Could that also hit the 17% over the next couple of years before 2023?

Dolf van den Brink: Yes. Maybe I'll start with the second one, if you can then do this first one. On Brazil, yes, clearly, we are not close to the 17% yet. In particular, the large transactional FX impact is something that we need to process and get beyond. And it will take a good number of years to really get it to that level. The most important part and the most difficult part in premiumizing the portfolio, in getting scale in mainstream, and as you grow scale, optimizing your brewery footprint, we announced a new greenfield brewery in [indiscernible] where we already purchased the land, all of those are building blocks indeed in creating the conditions for the opco to start heading indeed to the average, at least, of our portfolio. But that will take time. We are uncomfortable to commit to any specific timeline on that. But that's absolutely the direction. But yes, the most difficult building blocks are being put in place. And again, in terms of premiumizing...

Laurence Debroux: What we feel comfortable that we can deliver because they are very [indiscernible] we feel is a realistic estimate. And the 17% margin is -- with moving parts is a realistic estimate as well. And of course, if you can go faster, if you can go further, I mean we are not going to stop when we get to those €2 billion. But more important than going beyond those €2 billion within the time frame is important for us to actually make sure that after this €2 billion, while we're doing this €2 billion, we're already replenishing the funnel. So this is what our energies are going to be on, deliver on what we are promising today and making sure that it's not €2 billion, big intervention and it stops, but really kind of like permanently renewed. And then still things will come through the funnel as it comes through the funnel. So I mean if there is more, there is more. But this is really the continuous process that we want to protect and that we want to build here. So committing on what we feel is realistic today.

Dolf van den Brink: I think, great, people already are thinking beyond the €2 billion. I think we're at a point in time, we're very happy hitting that €2 billion. That's a number that I don't think we have pursued before, and will take a massive mobilization of the organization to deliver in full. So we will start with that. Thanks, Laurence. I think we are entering the last 5 minutes. So maybe one -- or this is the last question, I understand, from the operator.

Operator: Our final question comes from Tristan Van Strien of Redburn Investor Partners.

Tristan Van Strien: Laurence and Dolf, 2 questions. Let me just do a follow-up from an earlier one and then maybe close on a culture question. I guess the first one, I just want to make sure I understood this correctly. When we look at 2023 and beyond in your business model, is what I heard you say is that revenue versus cost inflation is fundamentally negative and without the constant savings were on the negative margin trajectory, which makes you more sound like a HPC or food manufacturing model, and you're always chasing that next cost-savings program, which is a fundamentally different model than beer has seen in the last -- than you have seen in the last 40 years with operating leverage. I just wanted to get clarity on that, if I understood that correctly. And then second, I guess, on culture. Dolf, you used the word, I think, tougher about 6 or 7 times, which is not quite a Dutch character trait nor a Heineken character trait. And also now, we have a situation, obviously, where everybody around them sees 1/10 of their colleagues being retrenched. You have a big ambition planned. So how do you evolve this culture in Heineken? It's easier said than done.

Laurence Debroux: So revenue versus cost inflation negative? Well, not exactly. What we mean is that we want to continue to find that balance between market share, affordability, growth and margin, and make sure that we protect that balance and that we can actually really invest where we feel will be the best for the future. So no, that is not -- we're going to go after pricing. We're going to continue. You do have, in some cases, affordability or that you -- I mean you might have to give up for a given amount of time. But the ambition and is to -- is not to be a revenue versus cost inflation negative, not at all. As you know, it's not always easy to achieve. So it's good to have one more muscle to be strong with.

Dolf van den Brink: Yes. And complementing what Laurence says, we don't see the model change from the last 8 years. But in the short term, in this period, up to '23, we do see very particular challenges to overcome, which is at that -- the on-trade in Europe, we don't see it fully recover in that time frame and that we have a disproportionate amount of transactional effects to overcome. So that makes in those couple of years that we are challenged in this regard, but that's not per se something we see as a kind of permanent situation. Thank you for your question on culture, Tristan, because it is very important. And again, as said, we are very proud of the Heineken culture, which is very passionate. It's a we culture. It is very collaborative. And in no way, I intend, or we, as the kind of renewed leadership team, intend to break that. And if I used the word tough, it was not in the sense of unfair or brutal. It was meant more in the sense of clarity, making choices, prioritizing, focusing. And what I personally feel very strong about that the best way to do it is by engaging the organization and not just impose that top-down because then, indeed, you could break something that is very special and metrical about our culture. But you do it by engaging the organization, make them part of the journey. And then it's amazing what Heineken can achieve. And I've seen it multiple times in my career. When the organization fully embraces something and focuses on it, we will deliver it. But the process is as important and how is as important as to what. And that is one of the reasons why with EverGreen, we didn't start with a new CEO, new leadership team, and this is going to be the marching orders. We start by engaging 200, 250 people and listening to them, engaging them and finding them to be part of that. And once again, it was amazing to see how much energy was unlocked through that process. And also now indeed, this 10% employee reduction, which is very severe. But at this moment, I don't think I see any pushback against why because we were very transparent. We communicated more than we've ever done before on the situation we find ourselves in the challenges. I think there's an understanding of why. And it's very important that in the how, in walking the talk on our values and being transparent, taking care of the people, taking care of the people that are leaving the organization that we do live up to those values. So hopefully, that addresses any emerging concern you may have had in that regard, Tristan. But culture, in the end of the day, is the secret sauce at Heineken. And we see an opportunity to evolve it, but for sure, we don't want to affect it negatively in any way. But thank you for that question because it goes to the heart of the matter. And disciplined entrepreneurship, we use that kind of as an organizing principle to engage the organization in that way. All the best. Bye, bye.