Investor Update

Feb 20, 2018

Slides

Hello, ladies and gentlemen, and welcome to the Heineken IFRS Reporting Standards Changes Call. My name is Courtney, and I'll be your coordinator for today's event. For the duration of the call, you will be on listen only. However, you will have the opportunity to ask questions. I will now hand you over to your host, Federico Castillo, to begin today's conference. Thank you. Hello, everyone, and thank you for joining Heineken's conference call on IFRS 15. The objective of today's call is to spend a brief moment to explain in more detail the implications of IFRS 15 on the financial statements of Heineken in an efficient way. As indicated in our press release of last week, these changes have no impact on operating profit, net profit or EPS. However, the changes will affect our revenue line and some of the metrics relative to revenue you probably use to model our business. We will initially cover the general aspects of the changes and we will finish by sharing the key metrics of 2017 as if the standard had already been applied. Before we start the presentation, it should be noted that it contains financial information as if IFRS 15 would have been applicable in 2017. The final impact is still under review and as a result the actual restated financial information may differ from the financial information included in this presentation. I'll now hand over to Marcel van den Bosch from Global Accounting and Reporting within Heineken. Thanks, Federico, and good morning to you all. In May 2014, the International Accounting Standards Board issued IFRS 15, revenue from contracts with customers, which was subsequently endorsed by the European Union. This new standard is applicable as of the 01/01/2018 and supersedes existing standards and interpretations related to revenue. Heineken will implement IFRS 15 by applying the full retrospective method, which means that prior period financial information will be restated. IFRS 15 established a framework for determining whether, how much and when revenue is recognized from contracts with customers. Heineken has assessed the impact of IFRS 15 and concluded that it will not change the impact or sorry, not impact the timing of revenue recognition. However, the amount of recognized revenue will be impacted mainly by excise taxes and payments to customers, which will be explained on the next slides. The first report applying IFRS 15 will be the twenty eighteen interim financial statements to be published on the 07/30/2018. Let's have a look at the first area impacted by IFRS 15, being excise taxes on Slide four. Currently, Heineken excludes all excise taxes from revenue. However, IFRS 15 prescribes that an assessment of the excise taxes needs to be done on a country by country basis. An all or nothing approach is no longer possible. Therefore, applying IFRS 15, Heineken will have the following accounting for excise taxes. In countries where the excise taxes become payable upon the moment of the sales transactions and the taxes charged over the sales price, Heineken concluded that the excise tax is collected on behalf of third parties. For these countries, the excise taxes will continue to be excluded from revenue. In other countries where excise duties are akin to a production tax, the excise tax is borne by Heineken and will therefore be included in revenue. To provide full transparency on the impact of the accounting for excise, a new subtotal called net revenue will be added in the consolidated income statement, representing the revenue as defined in IFRS 15, which is after discounts, minus the excise taxes for those countries where the excise is borne by Henke. The net revenue line under IFRS 15 will be comparable to the revenue line in current accounting. In addition, Heineken will disclose in the notes to the consolidated financial statements the total excise tax. So excise which is collected on behalf of third parties plus excise which is akin to a production tax. Turning to Slide five. Another area of change are payments to customers. Currently, most of Heineken's payments to customers are recorded as operating expenses. However, IFRS 15 prescribes that any payment to a customer is a reduction of revenue unless such payment is for a distinct good or service. Following this guidance, Heinz considers most of the payments to a customer a deduction of revenue as in most cases, the services received cannot be sufficiently separated from the goods delivered. Examples include listing fees and marketing support expenses. Only when these payments relate to a distinct service, the amounts will continue to be recorded as operating expenses. As a result, there will be a reclassification between operating expenses and revenue, reducing both revenue and expenses. Let's have a look at the twenty seventeen consolidated income statement on Slide six. It highlights the areas of change we've just discussed. This information is also included in the notes to the financial statements published in our annual report yesterday. Looking at the table, you can see both the impact of the excise taxes and payments to customers. For excise taxes, you can see the separate line item, excise taxes with an amount of €4,200,000,000 included in revenue. Next to these excise taxes, €1,400,000,000 of excise taxes on behalf of third parties in 2017, and this amount is, therefore, still excluded from revenue per IFRS 15. With regard to payments to customers, you can see a reclassification between operating expenses and revenue of €297,000,000 reducing both revenue and expenses for 2017. Overall, these IFRS 15 changes do not impact operating profit, net profit and EPS. I will now hand the call back to Federico for the rest of the presentation. Thank you, Marcel. In Slide seven, you will find the key metrics that are affected from the changes that Marcel just explained. These are revenue, net revenue, net revenue of BEIA, net revenue of BEIA per hectoliter, operating profit BEIA margin, marketing and selling expenses as percentage of revenues and CapEx as a percentage of revenues. You will find in this table the figures for these metrics as included in our press release of last week and the corresponding IFRS 15 values. As you can see, we use the definition of revenue of 2017 to compare the net revenue based metrics. Of special importance is that the guidance provided of an operating profit margin expansion of around 25 basis points, which was announced last week, excludes the estimated positive effect of 24 basis points resulting of the IFRS 15 implementation. And finally, in Slide eight, you will find the details per region of the estimated changes in net revenue BEIA per hectoliter and operating profit margin BEIA per region. The impact is different per region depending on how relevant our payments to customers within the commercial practices in each region. I would like to finish by reminding you that the half year results 2018 will be published on July 30, will be the first time Heineken will be reporting the financial results including all of these changes. And with that, I would be happy to hand back to the operator and take any questions you may have on this topic. We currently have no questions coming through. Okay. So our first question comes in from the line of Edward Mundy. Please go ahead. Yes. I only have one question. It's on Slide eight of the presentation. Just wondering why does The Americas have no IFRS impact on the revenue per hectoliter whereas all the other divisions do? Yes. So as mentioned before, payments to customers and excise duties do have a significant impact on our reported income statement. But besides these, we've also seen some minor impacts in the area of ECO or environmental taxes on packaging, which were treated similar as excise taxes and also commissions to external staff. Those were previously deductions of revenue, which in the future will actually be as cost, but their impact is far more minimal. And what we've seen is based on the commercial practices and the routes to market that the payments to customers was not yes, it just didn't happen in The Americas as it did with the others. So therefore, the impact on the total revenue of the region is minimal and hence, the impact on the revenue per hectoliter. Okay. Thank you. The next question comes in from the line of Nico Von Stackelberg. Please go ahead. Hi there. I was just wondering if you could give me a quick insight into what constitutes a distinct service and maybe just talk a little bit about how you're defining what goes into sort of what basket there. I mean, I guess it's probably pretty clear from what you're looking at. But can you just give some practical sort of in the field insight so we can better understand that? Yes. So maybe to turn it around the other way, it's probably easier. So if you would have with a large retailer a marketing contribution, you would not have that marketing contribution if they would not be your customer. So in that case, it's clearly based on the relationship, and then it's, yes, sometimes difficult to assess, okay, what's related to the pricing and what's the service that you're getting to value that. So that's really one where which is now considered to be a discount. But we have with our customers, in general, we don't have a lot of distinct goods and services, which you can separate. It's really only in a handful of countries, and that's really, really specific. So I think we probably don't go into that detail. Okay. Thanks. The next question comes in from the line of Tristan Van Strien. Please go ahead. Good morning, guys. Just two questions. One, this first one is just can you just give us an idea of which are the big countries where the excise is a production tax versus the other category, as part of the sales value, just in the big markets. So it just gives us an idea around it. And then the second question, just a follow-up on The U. S. Because excise is charged on a volume basis, I would have thought that one of the main areas where excise would now be captured. Have you treated The U. S. Differently perhaps? So on regarding your first question, Tristan, I would answer it the other way around because the big majority of the countries around the world actually, it's the excise duties are pretty much a production tax. And it's where countries are more like a VAT kind of tax, the countries that are the exception. And the countries that make the bulk of that, in our case, is Mexico, Brazil and Vietnam. Okay. And Brazil, okay. And in terms of the I'm a bit surprised about The U. S. Though because excise is charged on a volume basis. And I thought that would have been one of the main areas where excise would now be captured. Am I misreading that in terms of the way you've treated The U. S? Well, I think what Federico just explained is that so if I don't know exactly what you mean with capture, but if you say that will be included in revenue because it's not we're not considered an agent, so it's only invoiced at the moment of sales and based on the sales price. That's indeed not the case in The U. S. So therefore, it is included in the amounts where we consider ourselves that the taxes are borne by Heineken, and therefore, we need to include it in revenue. So therefore, it's included in the €4,000,000,000 Okay. And I'm sorry, while I get some line, there's two other questions then. Do you the excise that you collect, do you consider that part of your core working capital calculation as well? And then secondly, do you expect the interpretation of the way you look at excise to be common across the sector? For the first one, the answer is yes because it's part of receivables. Part of receivables and payables? Exactly, receivables and payables. And for the second one, I'm not aware of significant differences with our peers. We're not aware of what our peers exactly will be doing in this regard. This is really our assessment. Is there any reason why they shouldn't follow the same assessment? There's nothing unique that you have done in your interpretation. It should be common across the sector in your view. Yes, I agree. If you look at historic practice, though, you do see divergence between within the industry as also some already considered themselves as fully an agent and otherwise fully a principal. However, as discussed in the call, all or nothing approach is no longer possible. So with the new guidance of IFRS 15, this is how we got to the conclusion where we which we currently presented. Okay. We have no further questions coming through. So I shall hand you back over to your host. Thank you everybody for attending this call. We had quite an attendance for an accounting topic, which makes my accounting colleagues here extremely happy. Of course, if you have any follow-up questions, where you know how to contact us through Investor Relations. Thank you very much. Ladies and gentlemen, thank you for joining today's call. You may now replace your handsets.