Barclays Global Consumer Staples Conference 2016

Sep 6, 2016

Slides

Okay. Let's move on and get started. I'm delighted once again to welcome Heineken to the conference. It's a pleasure to introduce Jean Francois Van Boksmere, CEO of Heineken and Sonja Gabriel, Head of Investor Relations. Clearly, in his time in charge of Heineken, Jean Francois has overseen significant reorientation of Heineken's geographic footprint and significant shift of its revenue and profit base towards the faster growing emerging beer markets of the world. I think those of us lucky enough to have attended the excellent Capital Markets Day in Vietnam back in May were able to see firsthand the group's both impressive portfolio management and trade and execution skills in action. And it's undoubtedly some of the initiatives like that that we saw on the ground that have helped drive the improving top line growth and the improving margin expansion that have become a feature of Heineken's results over the last few years. So with that, Jean Francois, let me hand the podium over to you or the stage, however you want to sort of play it. Thank you very much. Thank you, Simon. I see that I'm mic'd up here and that I might walk. Ladies and gentlemen, I'm afraid that it's every year back to school. It's not the first time I'm here, but that every year I present more or less the same story, only the title of the slides might differ a little bit, but a strategy and a winning strategy, you don't change every year. So, for those who attended others of my deliveries at this particular back to school, they will see a lot of similarities with the presentation of last year. Now, I have to find here and out of queue, I suppose, yes. Perhaps I'll take you a little bit back in the history of Heineken and what in the last fifteen years have been changed. And basically, those are four things. The first one is that we transformed our geographic footprint towards where the beer category is growing. So the so called emerging markets offer population growth, strong growth of urban areas as well as a display, a virtuous circle of economic development and better political governance. We have been doing something like 49 acquisitions, spending $23,000,000,000 in various geographies, but the bulk of it has been in so called emerging markets. And where in the year February, we had 80% of our profits were coming from North America, The U. S. And Western Europe and only Western Europe. Today, over 60% of our profits is coming from the so called emerging markets and out of our new footprint. The second thing that we changed is we were faced over the last fifteen years as market leaders in Europe with a crude reality of declining demand. The declining demand for our category of products has a lot to do with demographics. The baby boomers being 20% more numerous than the X and the Y generation that follow, we were facing with just declining numbers across Europe. And on top of that, the people don't take alcohol anymore for lunch occasion, that you don't drive you don't drink when you are going to drive as was done thirty years ago. And that people are more conscious of their health and drink a little bit less and more in moderation, which is all good for the sustainability of our business. But it took away a lot of volume out of our business. And we have spent quite a number of years in reshaping in Europe all our supply chain and distribution arrangements across the continent. We have been closing 48 plants. We have been reinvesting also. And we have also multiplied the productivity of our operations by 2.5. But we invested a lot of time, efforts and also money in the restructuring of Europe during these years. And at the same time, in The U. S, which back in the year 2000 was a third of the total profits of our company, Competition increased and from corona and from the craft beers, the markets became increasingly more expensive to compete and cost of doing business went up. Heineken brand was under pressure. And we had to redeploy our Heineken USA business from a practically Heineken only business into a premium portfolio business. We added the Mexican brands that we currently have here, first in franchise from FEMSA and then we bought the beer activity subsequently in 2010. But we devoted also a lot of time the last fifteen years in transforming our North America operation into more of a portfolio company. This is the second block of what we have been doing the last fifteen years. Then about portfolio, we were very much a company geared towards the Heineken brand. Through all these acquisitions and entering into new markets, we acquired also a flurry of new brands, and we now have above two fifty beer brands alone. And so we have to evolve from a Heineken centric company in a portfolio centric company still with a high priority on Heineken, because if it would be a division separate in our organization, It is only 15% of the volume, but it is well over 30% of profits of our company. And certainly, the brand, the only global brand we have, but the one which also in the coming ten to twenty years still has a lot of potential to grow. And then finally, people and culture. We evolved from being a very Dutch company and there is nothing wrong to be a Dutch company because we built the Heineken brand by passionate Dutch people who traveled around the world planting the flag in 179 countries with the flag with the brand. So, it was certainly needed. But again, through all these acquisitions we have made over the last fifteen years, we have had to learn to tap into the resources from other cultures, I. E, other countries in Europe, but also crossing the Atlantic to countries like Mexico, Brazil or in Asia and Africa. And today, if the leadership group of Heineken used to be 90% Dutch and one foreign who was the alibi to be an international company, Today, the majority is from all over the world. And you have an active, still very active minority of Dutch people in the company. And that was the whole transformation over the last fifteen years of this company. We work today as we speak. We have a strategic framework in which we play. And because we are a company that grew through export and planted its brand as the only true international premium brand all over the world, our default strategy of our original strategy is to be the leading premium brand in the world. And that means in all these 179 countries, making sure that Heineken is the premium brand available in these. That is our default strategy. But as we acquired and we went into a portfolio strategy, wherever you are in the market, if you want to make money, you better be in a number one or a very strong number two. And those are the two this is our dual strategy, premium segment, premium leadership on the one hand and where you have a full portfolio, you better make sure you're number one or a very valid and strong number two. Now out of my heart, out of the 86 operations we have across the world and where we have a broad portfolio of products, in 79 of them, we are in that number one or number two position. And we always have five, six to work on as we speak. Operationally, we work around six priorities for the business. It's win in premium, we call it, led by Heineken. Of course, Heineken is the flagship brand we have. It also unites a group like Heineken, which is constituted by a lot of acquired companies. And to make a one culture, it's one practice, you can build it easily when everybody sells the same brand Heineken alongside its own national portfolio. But winning premium means that we want strategically to be overweight in premium. And also our people are incentivized to grow the premium revenue part of our portfolio faster than the rest. So that's an important pillar. The second one is to shape the cider category. This is a category we entered through the acquisition of Scottish and Newcastle in 02/2008. Cider is a new business not to The UK, not to Ireland, not to a few Scandinavian countries and South Africa. But in the rest of the world, cider is a very minute category. Through the acquisition of S and M, we have discovered that business and we think it's portable in other geographies, then it's a long haul adventure. You're not going to make cider a big category just in five years nor in ten years, but in twenty years, you might do so. It's an alternative to beer. It is more unisex in its approach. It appeals men and women alike. And if we take the success of Cider in The UK as a measure of what you can do, we think on the long term, this is an important new business for us to develop. Led by cool marketing and innovation, we believe that great marketing and good innovation is the essential driver of the top line. Be commercial aggressive, no assertive, sorry, and I call it aggressive, but assertive, it's you have to have a mentality to win market share. That's I think important and that's very much promoted into the group. But at the same time, driving end to end productivity. These are all the programs in order to improve our productivity in supply chain, in distribution, in purchasing, in administration. You name it, we have programs in place to continue to improve our end to end productivity. And the last one is Brewing a Better World, which is our sustainability program. Sustainability is not something that you run next to your business. You run that in your business alongside a couple of strategic lines that I will share with you. Now, winning premium led by Heineken, you see here just a display of other international brands. We have only one truly global brand that is Heineken. It's very difficult. It took us eighty years to have it really global. You'll find it really everywhere. But there are a number of other brands that we can make travel or brew under license in other places. And you see the portfolio as it stands today. And there are various in shape. It can be a sire like Strongbow or an Abbe beer like Afrigen. You have Mexican brands like Tecate, they travel just over the border to the Sunbelt in The United States Of America or our latest acquisition in Jamaica, which will be more of a niche beer, but which can easily travel as a premium brand in our distribution systems across the world. For the Heineken brand, which receives always a big attention, we the news of the first half is our entrance into Formula One. A lot of people have questioned that. We of course, there is there was an opportunity to become a sponsor of the event. So we don't sponsor a team, we sponsor an event. It reaches consumers beyond what we were classically doing with the Champions League, the soccer Champions League in Europe, which is highly viewed also in Latin America, in parts of Africa and Asia, we felt that to sustain the growth of the brand, we needed one sport property in addition to that. And if you look at all the world of properties, Formula One is certainly next and second to football in its international reach. And it's complementary to football because it does not reach exactly the same people. So for a brand like Heineken, this was a great thing to do. It has been a long process to enter it because you have to realize that classically, we were always forbid ourselves to sponsor motor races because if you drive, you don't drink. And so we had very much a tradition of never sponsoring motor racing. So we have to overcome a few ones of our mental hurdles ourselves. But at the same time that the brand fits very well the world of Formula one, at the same time, there is nothing stronger than Formula one and Formula one drivers to make the point that when you drive, you don't drink. And that's what I'm going to show you next. You have a video, if I'm not mistaken. No thanks. I'm still delighted. Still delighted. Now this is the kind of offspring you can make from Formula One. I don't know if you are a generation who remembers Jackie Stewart. Who remembers Jackie Stewart? Come on, more than a four times World Championship of Formula One. This is a man, if you know his history, who has done more than anybody else for the safety of the sport. He was racing at a time that every year there were people losing their lives in Formula One. Today, you have still very spectacular crashes. Nobody loses anymore its life in a Formula One race, thanks God. Jackie Stewart has been very, very instrumental in making Formula One a safer sport. And at the same time, he is very, very adamant about that message of moderation and of absolute abstinence when it comes to drive. And he has been so kind to lean himself to producing a great advertising to make the point. And of course, he is much more credible than when I would say that, obviously. So this is the kind of spin off that we want to take from Formula One. Back to the cider. Here, you see a little bit of the portfolio. And we are making progress in entering geographies where cider was totally unknown or not done or not produced and not proposed to the population, countries like Bulgaria or Hungary. Some are successes like the two ones I named to you. Sometimes we try and it doesn't work out like we have tried hard in Italy without success. We are quite successful here in The United States where we are just second player for cider. We are redeploying our cider operation in South Africa. Cider will take time. But cider is a marvelous business because there is so much you can do in beer. And this is an adjacent category where the technology is very much similar to beer. And it's a product which is more like light beer, low alcohol refreshing product. And we have great expertise in United Kingdom around it and it certainly will be one of our long term strategic pillars to grow our business. Led by Cool Marketing, I showed you previously the movie of Jackie Stewart around Formula One. I think what is important is that at the end of the day, great brands are built. Having a superior quality is always something which is it's not always said, but it has always to be there. But beyond having a great product, you have to have a great story. And that is what cool marketing is all about. It's having a great story. And that over the years has been changing in the way you communicate with people and consumers where direct communication through social media is only ever increasing and traditional advertising always decreasing. But it's an important pillar to build brands and gain market share is to continue to be leading in marketing, advertising and activation. Innovation is the other leg. Often, is said that it is very difficult. People always ask him what is about the pricing and the pricing and the pricing. If you go in the continent like Europe, you have practically no pricing. We live in a total deflationary environment at the moment. The only way to have pricing, the only way to have revenue increase is, of course, to invest in innovation. We have been starting that in 2011, and you see that we grew from 4% to 11% of our total revenue is made out of innovations. Now innovation is not for the sake of innovation. It's for the sake of coming with new products, propositions, packaging that will stick with the consumer. And I always I only think that the innovation is successful is when it is still growing and it is not accounting anymore as an innovation. So it's very important that the innovation per se is not what we pursue, but the innovation is more an engine to bring more diversity and variety in our category and grow our business that way. You just see a few example here, but we very much concentrate our innovation effort again around the cider as you can see, but also against low and no alcohol propositions, an area where traditionally we were not paying too much attention for. Ten years ago, we were proposing an alcohol free beer as a kind of a surface product. Today, we propose it as a full product or low alcohol products with or without addition of fruit and flavors like the Radler's have been very successful throughout Europe. And there's all kind of initiatives which fulfill the consumer need on the one hand, but also our margin accretive for us. Craft and variety is another very important leg of our innovation. You have seen here in The U. S, the craft market is 12% of the volume and more than that of the profits. It is a growing category also in Europe. And it's our response to the rising craft. And it's not only in The U. S. And Europe, you see it also popping up in emerging countries, in big cities in emerging countries like Rio or Sao Paulo or Mexico City, you see it in Shanghai, you see it everywhere. There is an appetite for other taste and for diversity. The answer of Heineken is, on one hand, we have crop growers. On the other hand, we will we have acquired and we will continue to acquire some craft breweries, but we will also with existing brands propose some line extensions, which are crafty. And craft brewers most of the time are very, very expensive. And by doing the line extension of mainstream brands, we can also propose affordable craft beer to a larger number of consumers. We do that a lot in Europe. In countries like Italy or Spain or The Netherlands or Austria, we are heavily investing or Poland, we are heavily investing in line extensions of existing brands with a craft appeal, making an IPA, an ale and Weitzbeer under the name of an existing beer brand, and we do that with success. And the last one is the innovation in draft systems. It's a specialty of Heineken. We continue to develop ourselves home draft systems, one way kegs, which we use now for The U. S. It's good for the freshness of the beer, but it's also good for the economics, because a keg was rotating every nine months. So that's not a very good investment if you have such a lower rotation. So you better use a one way keg. So it's where economics and quality work hand in hand. Those are the four pillars on which we build the innovation policy at Heineken, which allows us to grow our top line. That slide should have been related to the previous one, but that's what I told you about the importance of social media. And more and more, our marketing campaigns are in the hands of people who are ever younger and who understand how this works. And we decentralized a lot more of the creative work today. And it's done a lot on the spot. We used to produce a few movies like you saw, was the one with Jackie Stewart. Those are big production made with an agency and actors and Jackie himself and those are mega productions. But next to that, we do a lot of small short little commercials that are done with very low budgets, 5,000 and they are spread on the Internet and their lifespan is very short. But you create hundreds of them and that is what changed. And so you have a total different governance of how a brand is operated than what you had ten years ago. That's a bit the direction in which we go. And you see the part of direct communication is only and will only continue to increase. Commercially assertive, it's the excellent outlet execution. We have had for decades and decades a very strong discipline in the supply chain to measure productivity and always want to improve that productivity. All breweries benchmark themselves. There is an internal contest. And those are people from breweries who audit other breweries. And that is how the system internally works and kind of produces internal improvement of productivity. Now the same reasoning you can apply to the sales system. After all, sales tasks are very repetitive. They are incredibly boring like supply chain is. There is not a lot of fantasy. Execution is about doing every day the same thing absolutely perfectly. What is important is to give to the people who do that recognition and from time to time, they should be able to celebrate. But it is important that the commercial operations are trained and formatted like the supply chain operations are with a rigorous discipline. And that is what the end to end is doing. And we have been developing a whole method, which I'm not going to explain, but to kind of bring all our sales forces to a higher level and then create an emulation between the countries to ever increase the productivity of the sales forces and thus making progress. The end to end productivity means that we start from the purchasing all the way down to the administration surrounding all our processes. We continue in the supply chain, in distribution, in admin to invest in standardization and in productivity improvements. New financial shared service center, mentioned here in Mexico, China, Singapore, Brazil. We have learned that in Europe, we have 22 different country administrations that we put in Krakow in one administration, now we can do that in other countries and we roll these things out, where technology can serve to have lower costs of execution. And in the breweries, is productivity of our equipment, of our labor, it's zero waste, it's worth consumption and energy consumptions, those five factors having constant attention to make improvements. And finally, stop I end with the brewing a better world. You have here the six strategic pillars of our sustainability policy. Of course, we start with water because we use a lot of water. When I started my career in Heineken, were using around 12 to 15 liters of water to make a liter of beer. It's now down to three point something. And in some cases, it can even go down to 2.5. So, a lot of technology, but a lot of practices have been going into that to reduce our usage of water and trying to go to a water neutral balance. We work specifically in areas where we have water constraints in some parts of Africa. And in Mexico, there is water scarcity. We have been working with Unidol to learn how to even go beyond what we do today. But water is absolutely a high priority for us. At the same time, we have reducing our CO2 emissions. We have been the 2020 target is to reduce by 40% in our direct production our carbon footprint. We're well on track to do that. In the fridges, we have the same target by using better, more energy efficient technology. You have to realize that we put a lot of fridges into usage across our system everywhere in the world. We have millions of fridges I think to and they are replaced every five to seven years. And every time you replace them, you go for a better technology. You have to do that with a rigorous discipline. But there is a lot of money and carbon footprint to be saved there. The last challenge is distribution. That's one of the most difficult to realize. I have to admit that. As your business grows, your footprint in distribution grows naturally. That's the hardest nut to crack. It's the amount of miles that you drive to bring your product and to optimize that is perhaps the biggest challenge that we will have, because we will have to continue to source our product from scaled plants. And so distribution will always be an integral component of our business. Sourcing sustainability, it is all the problematic about, A, in specifically for Africa, where we have a target to source 60% of our raw materials from Africa, but also our commitment to sustainable agriculture all over the world, where we have an objective to have 50% of raw material supply from sustainable source. It's a whole adventure. It's going to take decades to come there. But a commitment of a company like ours will move things. We are not alone in these kind of fields. Other companies are doing also great efforts. It's a collective effort, I realize that. But we play our part in our own industry here. Health and safety, very important for us. We still have rate of accidents which are too high. In our plans, it's now pretty good. We strive in our own plans for zero fatalities and zero accidents. You will never reach the zero, but you have to strive for that. But because we are a company that employs a lot of people in distribution, road traffic accidents are still a very important part of our universe. And we devote since a few years a lot of energy and attention into education and prevention for all our distribution activities in order to make it a safer place. We will continue to advocate responsible consumption. We make an alcoholic product. Abuse is not good. We should not be shy of saying that. And we should play our role for responsible consumption. Now, there is only a limited amount that you can do. A lot has to do with education and with culture. And there are lots of differences in the world about perception of how bad or good and the attitude towards alcohol consumption and alcohol abuse is. That is difficult to change. But what you can do is advertising the correct behavior with your brand in a way you want to say, actually bring the message that actually it's not very cool to be drunk, all right. When I say that through dry campaigns, it is not very credible. But when people like Jackie Stewart say that, that it is actually totally ludicrous to drink when you're to drive, it makes more impact. And I think we have to put our money where our mouth is and deploying, I would say, advertising spots, which are good for the brand, but also who make the point that actually alcohol abuse is not a good thing and it's actually not cool to abuse it. It's a long way though. It's a long way, but Heineken was the main brand we have started to do that. It's not the first commercial we do in that vein. We have had the campaigns with celebrity DJs about the dense more drink slow. And I have even big rows with my own commercial organization because when you have to choose between drink less and then more, you will sell less. And I'm saying, yes, then we choose to sell less. That is what we have to do. The customer will not be happy. If we lose a customer, I better lose the customer than doing the wrong thing in these big dense parties. But it's a whole cultural evolution, I tell you. It's not a simple thing. There is not one simple recipe. Heineken wants to be very committed to making progress in that field. And finally, inclusive growth, that's a theme that many companies today embrace, ours too. Growth is not inclusive, is not going to be sustainable. We all realize that. How you do that? This is more obvious in the developing world, in countries or areas like Africa, where it is obvious that when you make growth more inclusive, you will also as a benefit as a business benefit from it. It's all our investments in Medicare in Africa around the places where we produce and sell, but it's also our investments into local agriculture that bring all that more inclusive economy. It's a sum of little things rather than big declarations, but at the end of the day, they're also good for business. Now, is the strategy delivering? Well, here you see that because we focus a lot on that margin there, on the margin improvement and the commitment we made to improve the margins years over years. This is delivery and we think that we can continue to deliver margin improvement in the near future. I have to caution that margin improvement is not the ultimate goal. If I always say that if I could keep my margin stable and having my revenue growing by 5% a year instead of 3%, I would might perhaps choose that one. So one has to see it in a dynamic that 40 basis point is also made on a guess that you have to also to grow your top line. Now, have made that commitment a few years ago. There is no reason to walk away from it. But it's only a partial measurement of the success of the company, I have to say. And that is how we create value. One has to and that's to my point, we call it the Heineken Golden Triangle, but that is where all the people in all operations are accounted for. A good business and a growing business is one that grows its revenue and market share, has a good return on sale and a good return on its invested assets. That's where our people are measured to. And of course, one or the other operation will be measured, some will have to improve their return on sales, other their return on assets and others will have to work on their growth or on all three. But that is how we steer and we give objectives to all our operating companies, so that we can continue to make the Heineken business growing in the future. It's not rocket science, but if you keep the discipline and we have been keeping the discipline now for quite a number of years, you can make progress. Now, Investor Relations like summaries, I think I've said enough. And I thank you very much for your attention. And if you have questions, feel free to ask them. Maybe I could just ask one more people are perhaps thinking. I mean, Jean Francois, you talked a lot there about responsible drinking and highlighted the work you're doing with Formula One now. Can you talk a little bit about the innovation playing into that? You put up on the slide the low alcohol or no alcohol category being part of your innovation agenda. How do you think about that over the long term? I mean could you become a significantly more meaningful player in that low or no alcohol segment relative to where you are today? Yes. The answer is absolutely. We have had that experience in Spain. There were non alcohol beer has become a significant category part of our business in Spain. Why is that? Because people after work, they go to eat tapas, they like beer with tapas, but they're going to drive, so they don't drink alcohol. That's how it emerged. It's looking after these occasions, people conscious of health, conscious of the moments where they cannot take alcohol and as an alternative to carbonated soft drinks or just water. So with malt based beverage, you can do a lot. And that has not yet been exploited. And it takes various ways and forms. It's not only your classic non alcohol beer, but it's also malt based beverages like we have the Maltinas in Nigeria, which are vitamin drinks, if you will, this is unfermented wort. So it covers an array of categories as well as low alcohol proposition. People are more open today for light beers than they were ten years ago. Ten years ago, in Europe, you say this is a light beer, they say, this is not a good beer. Today, understand that. The fact that we launched light beers with lemon juice, make it a little bit more refreshing and having it a bite, it's been a huge success. I think there is a lot to be done in the development of no and low alcohol. It will certainly grow at a much faster pace than the regular beer category. And therefore, we want to invest there. Just a quick question. More strategically, right, the beer world is getting smaller and smaller. Your competitors are getting bigger and bigger. I guess it's a family decision on the future of Heineken, but how does Heineken fit into the to a consolidating global beer landscape now that your competitors are even bigger, right, even in The United States with Miller getting bigger and ABI and whatnot? How do you guys fit in and what's the thought process going forward? Yes. You say competitors, and I'm taking away the S. There is one guy who went much bigger. We were number three. It takes number one to buy number two, then you are number two, right? Now arguably, and your point is about the gap that there is between number one and number two. That's rarely seen in industry that in any given industry that the gap is as big as that. But it's in the food and beverage industry, I mean, and that is quite intriguing. Now, what it is in our business is that the sum of the local leadership positions weigh more than the global leadership. So, your local dominance is more of significance than your global significance in our type of business, Because still, if we specialize in bringing international brands and global brands, the world of beer is largely still a local one. And in the developed markets, Europe and The United States, it takes the opposite direction. Everybody wants to have local. So on the one hand, competitive pressure comes from a much bigger group than we are that has a lot of firepower, I admit that. But at the same time, you have to keep your head cool and look at every individual competitive situation in any given market. And the other competitive game and danger comes really from the bottom. And that is all the smaller actors that eat your lunch and you have little space to move against them, because they don't want to have 1520% or 40% returns. They're happy with 5%. They claim they're local, you can't claim it and so forth and so forth. And so this is kind of a new competition that you have in parts of the world, which is difficult to combat. Now, I don't believe that having an absolute, the bigger is a thing that you should pursue. We have to look at our competitive situation and the possibility of growing our business in decades to come. And there we still believe that with the size we have, the presence we have, the brands we have and the people we have, there is nothing to be afraid of. Over the last twenty years, we have been delivering a dividend per share increase compounded increasing 10% a year, also the last ten years. From time to time, you have flux, but that's more or less the profile. I think it is not necessarily required to be as big as the bigger guy to continue to have a profitable and growing business. But it's a thing that we could debate for one more hour.