Heineken : Deutsche Bank Global Consumer Conference 2016 Laurence Debroux Transcript

Heineken

Deutsche Bank Conference 15th June 2017

Introduction

My name is Gerry Gallagher, that probably isn't the joke it's meant to be, but anyway I'll move on. My name is Gerry Gallagher, I'm one of the consumer team here at Deutsche Bank, it's my great pleasure to introduce Jean-François from Heineken to talk to you today. The way we're going to do this is the fire side chat format, I will ask maybe half a dozen questions and then we will open it up to you guys to ask the questions you may have for Jean-François.

So with that I'll start, you just signed up for another four years as the CEO of the business. Could you perhaps tells us what we should expect over the next four years, maybe something different from the previous four years, more of the same, how you are thinking about the business over the next period of time?

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I'm afraid that I'm not going to say that I'll change the strategy because I resigned for the next period. I think the strategy of the company has been pretty consistent over quite a number of years. And essentially it is to lead the premium segment in beer and more latterly, cider across the world. And where we choose to compete in markets because beer essentially remains a very local market, it is that you need to be the number one in the market or a very good number two. And in the vast majority of the geographies where we operate we're built to have that position, Brazil is a new case of building that profitable challenger position in a promising market as an example.

So what evolved over time I would say that in the beginning of my tenure we were very much focused on restructuring the company's cost base essentially in Europe. Because we had to deal with declining demand because of demographic reasons and all kinds of reasons, but also technology and we have to redesign the supply chain for less volumes and more productivity. And then when we were done with that we started again also in these mature and inherently declining markets in terms of volume to create a virtuous circle of building value up again through premiumisation through more recently embracing a strategy for craft and variety. Going and coming with more and more varieties with low or no alcohol products, we launch Heineken 0.0 just two months ago in a number of European countries as an example of that.

So it's not that because you're going to do another four years that's the contractual stuff - that you change your strategy, an evolving strategy. And what I would say is that we have been gearing the company from an overweight in the cost control area to now more an overweight into revenue generation. That is tangentially what we are doing and we will continue to do that. And again against things like growing the Heineken brand because it's the first brand we have, it's our most important asset, it is more than 20% of our revenues and it's 25% of our profits.

And it's growing faster than the average of our total portfolio, it's also growing our other international brands, we had only one ten years ago that was Amstel but we added Tiger, we added Sol, we added Tecate. We added smaller brands like Red Stripe or Krušovice coming from the Czech Republic, all travel brands I call them, brands that can travel and that can often play a part in the premium segment. It's generating a strategy around craft and variety, low and non-alcoholic beers, cider and finally building our capabilities in e-commerce, this is the strategy to build revenue in the coming years.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

You mentioned Brazil in that answer. Could you talk to us a little bit about the acquisition, how you look to move the business forward, what are your plans in that market?

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Brazil is the illustration that if you are in the market with a full portfolio of products and brands you'd better be a credible number two if you can't be number one, which is obvious for Brazil. But the opportunity that acquiring Brazil created for us is an opportunity of reinforcing our brand portfolio and also creating synergies, both in terms of overlapping capacity that you can optimise in some regions. As well as new regions where we can grow the Heineken brand more effectively and by better margins by producing it in other location than the one we had before.

So it's a highly synergetic case Brazil for us and given Brazil brings a decent mainstream brands …. which we need to work on obviously, that we all know. But it also brings a lot of opportunities to deploy more effectively the premium segment in Brazil. And the challenge as you all know will obviously be to build a more effective route to market system going forward with the two companies we are joining together.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

If we just move on to the US market, you guys are obviously a big import player in that market. Could you talk a little bit about the rise of craft and how that impacts your business, how you think about that dynamic in the US market?

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Well historically over the last, certainly in the last ten years the bulk of the growth in the US has been taken by what we call the craft segment. The domestic lagers have been under pressure, the import lagers have been disproportionately growing with the Mexican brands and we enjoyed part of that growth also over a decade.

It was one of the reasons why we invested in Lagunitas obviously the opportunity has to create a strategy, it is because the founder, Tony Magee wanted to sell his company to somebody who was also able to develop his company outside of the United States. And we think that is a good deal because by reinforcing the position of Lagunitas outside of the USA you will also reinforce its position of leadership in the IPA segment in the United States.

So we have had interest in that company because they have a very, very good product proposition, it's a really great product. They have been very consistent in the price value equation, not opportunistic, very strategic about it. They have been very consistent about how they build the brand. And we believe that over perhaps 20 years' time when you think about an IPA you might think first about Lagunitas in the US but also outside the US. That's why we got interested in Lagunitas and so far so good.

That does not mean that we are going to buy everywhere craft brewers. But our strategy around craft and variety is built part on observation; we have already a policy of doing things. But also part of serendipity because there a number of things we don't know about the craft segment and we have to be open for a little bit of discovery I have to say, so it's a mix of both. But it's not that we're going to invest everywhere and try everything out, we remain pretty disciplined in capital allocation for that concept.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I'm just going to switch markets and talk about China a little bit. I think the company's on record as saying it's very difficult to make money there; you're applying a super premium strategy in that

market. Could you expand on those comments and just tell us a little bit about how you think about China in the context of the business?

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I've always been pretty consistent in my observation that the Chinese beer market is the largest one in the world. It has been over 30 years one of the fastest growing, bringing the per capita from 1.5 litre per capita, 35 years ago to 35 litres and it can still grow a bit. But it has been built on the back of

a very, very, very steep and most probably in human history the shortest period of putting hundreds of millions of people into an urban life. And beer is an urban life product and so it is on a very specific context that it happened.

Historically the Chinese beer industry has been driven by the fact that taxation could be enjoyed for half by the local governments, by their desire to have a tax base which was bigger. And that created the situation where you have a lot of overcapacity in China and there always has been a lot of overcapacity in China and prices have always been quite, you know, can I say - depressed - but at the low end of the spectrum.

So one has to realise that when you have an average selling price of $25 dollars per hectolitre, per 100 litres as we call it on this side of the pond, and you have a 10% return on that that's something different than in other geographies where you can have a selling price of €60, €70, €80 per hectolitre and having perhaps 15% margin because you don't - or 20% margin, or even more because you don't have that dynamic of constant over capacity. That is what led over a period, a very long period, the Chinese beer market to be a very, very competitor one and in terms of pricing very low.

That's why we have chosen to stay in the premium market and for us it is super premium because the average price is so low that the regular price of Heineken premium is super premium in China, if you will. And China is an open market; we already have a lot of parallel imports, so we have to be cognisant of the fact that we are a super premium proposition. And we are doing fine, but it's minute and in the bigger economic value creation of the Heineken Group it is not very significant.

However, if you look at it in the long term and you would continue to grow at the rates we have over a decade or so you can build a substantial business. But we have decided for all of these reasons to concentrate on that side of the market in China.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thank you, I just want to move tact slightly, we had a little bit of news out this week on the Punch acquisition, could you talk a little bit about why you're looking to do the deal and what a pub portfolio brings to the business in the UK market and the strategy around that whole business. I am appreciating that you already have a business in the UK?

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Yes and you will appreciate and I have always to make the disclaimer that the deal is still ongoing, so we are on the crew of the UK takeover panel and there is nothing I can say more than what we have said already publically. So I cannot provide you with any new insights, or new information than whatever you have read.

We are now in the phase where we have to address the question of the CMA, of two high concentrations, market concentrations, those are pockets, they are addressable and we have published our reaction that we are going to address this and present a remedial tool to it. And that is the stage we are now in.