Heineken N.V. (AMS:HEIA)
Netherlands · Delayed Price · Currency is EUR 66.14
+1.22 (1.88%)
Apr 30, 2026, 5:36 PM CET
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Earnings Call: Q4 2020
Feb 10, 2021
Good morning, everyone. Thank you for joining us for today's live webcast of our 2020 Full Year Results and Strategy Review Update. Your hosts will be Dolf van den Brink, our CEO and Laurence De Bruu, our CFO. Keeping safety first, we have been tested for COVID and are in good health. Following the presentation, we will be happy to take your questions.
The presentation includes forward looking statements and expectations based on management's current views and involve known and nonterially. I will now turn the call over to Dov.
Thank you, Federico, and welcome to you all. Very happy to host you together With Laurence for 2 days teleconference here in sunny and wintery Amsterdam. Now we truly hope You and your families are all well and safe and that you are 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, at 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 surveys 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 socialize responsibly, leveraging the strength of Heineken Brands 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 €10,000,000 With our Back the Bars initiatives and waiving a total of €50,000,000 in rental payments to our pubs and bars, We supported local communities and frontline medical workers with donations worth more than €23,000,000 including water, Non alcoholic 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, beer volume declined organically by 8.1%, a better result than the first half of the year. We had a good Q3 as restrictions eased over the summer months and consumers returned to the on trade, But a challenging Q4 as lockdowns were Rion introduced. 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%. Bayer declined organically by 35 0.6 percent 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 €800,000,000 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 by EMEA ended the year at 12.3%.
Net profit declined organically by 49.4 percent with a corresponding EPS of €2 per share. Now allow me to briefly update you on our performance by region. Starting with AME. Net revenue declined organically by 9.5 percent and operating profit in Asia 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 Moltena 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 expansions, Henneke 0 grew double digits and is now the market leading non alcoholic beer brands. 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, continuing 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 Q3.
We focused on pricing value and grew price mix close to 2 times inflation. Amstel Ultra, Heineken 0 and cider across all channels nationwide. In Brazil, the Heineken brand had an outstanding performance, growing more than 40% during the year. Amstel and Devansa 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 Q4, and we will complete the expansion of Ponte grocer in the Q2 of 2021. The U. S. A.
Volume decline of mid single digits resulted from the on freight 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, Which is now the number 1 non alcoholic beer market in the beer brand in the market. Throughout the crisis, we continued to keep our eyes on the long term As we entered Peru in November, launched Heineken and 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 margin 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 La Rue and the launch of BFFYET. In premium, Heineken Silver doubled its volume and we launched Heineken 00.
We are very pleased with the progress made in China by CRB. Heineken grew strongly in the double digits and China is now the 5th market in size for the brands. 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 percent organically And operating profit decreased by 68.6 percent also organically, a big deleveraging effect driven by the on freight volume decline. Beer volume was down 8.2% organically with renewed lockdowns resulting in the 4th quarter down 16.7% On track to the almost 70% decline of the Q2. Our commercial and supply chain teams swiftly adapted and increased our 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, Biramoretti 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 owing 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 number one market, Brazil, with an outstanding growth of more than 40%.
Heineken 0 grew double digits with growth in all regions With a strong performance in Mexico, Brazil and the USA, Brazil had a superb start following the launch of Heineken 0.0 in July 2020, Quickly becoming our 3rd largest market in the world for the non alcoholic extension. Vietnam was another market in the 27 launches in 2020. Engine of the brand, Heineken Sulfur reached nearly 1,000,000 hectoliters on 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 to capture this opportunity. Looking at the example of Beowulf, our pen tripled it in the UK, But that understates the momentum as the exit rate of 2020 was almost 5 times that of the previous year. The acceleration is not limited to Beowulf as the number of orders tripled across all our platforms globally, including 6 to go and drinkies. Now over to you, Laurence.
Thank you, Dorothe. Let's go to Slide 12 for the financial overview of 2020. Starting with the net revenue BEIA, EUR 19,700,000,000, an organic decline of 11.9%. That is minus 7.8% in the second half, coming from minus 16.4 percent in the first half. The improvement, as Dorf explained, is clearly linked to the relative easing of constraints on our operations over the summer, including in Europe and to positive pricemix percent to €2,400,000,000 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 4 55 basis points. Net profit dropped to EUR 1,100,000,000 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 particularly our Vietnamese operations, meaning that there is less decline in the profit that we have to attribute to those minorities. The impact of EAS amounted to EUR 1,600,000,000 on operating profit, so a EUR 1,300,000,000 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 €204,000,000 The free operating cash flow was €1,500,000,000 The decline in cash flow from operations was partially offset by better working capital and the reduction in CapEx. Diluted EPS vega ended at €2, in line with net profit vega. And finally, as a consequence of lower EBITDA, Our net debt to EBITDA ratio reached 3.4 times. We remain committed to return to 2.5 or below. I'd like to move now to net negative impact of 0.2%.
As mentioned in the first half, this comes from the divestment of our own activities in China in 2019, partially offset by small acquisitions. Currencies now. Currencies had a very significant negative translation Our impact much more pronounced in the second half than in the first and overall decreasing net revenue by 5.3% or EUR 1,300,000,000 Remember that 2019 was positive, and you have to go back to 2016 to see such an impact. This was almost Half attributable to the Brazilian reais, a quarter to the Mexican peso. And on organic basis, our top line declined by EUR 2,800,000,000 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 UK, particularly affected by the closure of on trade. Revenue on a constant geographic basis, the underlying pricemix 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 pricemix in Europe and APAC was offset by positive pricemix development in Americas and in AME. A bit more by region.
In Europe, the negative pricemix is fully due to channel mix. In APAC, the negative pricemix 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 pricemix was particularly impressive. In Mexico, the growth was double inflation. And in Brazil, pricemix improved by double digits, Largely from portfolio mix, head of the market.
And finally, in Ame, 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. 1st, consolidation changes. Small negative impact coming from the integration of our Chinese operation into CRB.
Then translational currency effect. Here, you may recall we had a small positive impact in the first half. This is now fully reverted to a negative impact on the Brazilian reais. Now I move to the organic decline of €1,400,000,000 If If I take the geographic lens, more than 90% of the decrease in operating profit there 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 strength, 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 EUR 2,000,000,000 decrease in net revenue minus variable expenses, you can say 3 quarters of that comes from volume impact and the rest from the increase in input cost per extra ounce 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 bottles, 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 €800,000,000 And I'd like to zoom on this €800,000,000 of cost mitigation. It represents a net reduction of 9% of the total. We adapted our commercial activities, which 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 sales 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 around responsible socialization, and we invested behind our launches by Aviat in Vietnam, The 27 launches of Hainan 0.0 including Brazil and Vietnam or the launch of Pura Pura Mia. We kept our commitment to no structural layoff in 2020. So the contribution that you see here of personal expenses to the EUR 800,000,000 came from a variety of actions such as So cut off short term incentives, hiring freeze and also less overtime and less seasonal work. We also reduced, Of course, all kinds of discretionary spend, including travel, conferences and the likes.
While doing that, we continue the deployment of standardized ERPs In 8 more countries of AME, APAC and the Caribbean and we progress our SAP program for Europe, always remote support. Some of these new ways of working remote support will continue in the future. And for instance, we will spend less on travel. You can expect that most cost mitigation, However, in 2020 are non repeating benefits. And therefore, it was important to start already planning ahead for more structural savings.
More to come on those savings when we discuss Evergreen. But as we look already at EAS on Page 16, you can see that EUR 331,000,000 are booked in 2020 already as restructuring costs, and they relate to restructuring that we are implementing in 2021. As you know, under IFRS, you can only book What you can estimate and document quite precisely, so fair to say that the corresponding plans are ready. Looking now at impairments. In addition to the EUR548,000,000 from the first half, we took a further EUR 450,000,000 net impairments in the second half.
Trigger for these impairments were the impact of the crisis in developing countries such as Papua New Guinea or Jamaica and the consequences of own trade restrictions in some developed ones, mainly concerning Lagunitas and some of our pubs in the UK. The latter actually follows a very rigorous application of IFRS, as in aggregate, our pub estate has more than enough headroom, And we see good underlying long term potential in these businesses. And finally, the amortization of acquired intangible of euros 273,000,000 was comparable to what we had in the previous years. In total, EAS amounted to €1,600,000,000 almost €1,300,000,000 higher than last year. Let's now go to cash flow on Slide 17.
Free operating cash flow amounted to 1 point €5,000,000,000 Despite the sharp decrease in cash flow coming from the operations, the cash conversion ratio rose from 80% to 110%. Change in working capital was positive. As expected, the negative situation of midyear reversed into a positive impact at year end, mainly coming from decreases in receivables across all regions following the lower top line, partially offset by decreases in payables from lower purchases. CapEx played a large role with EUR 485,000,000 reduction of cash out coming from operational investing activities. At the beginning of the year, there was significant cash out coming from higher investment in Q37 percent reduction versus previous year.
From the end of Q1, we implemented a drastic reduction in non committed CapEx. We continued with necessary investments related to safety, of course, but also supporting future growth, such as the expansion of Punta Grosso in Brazil or Vung Tau in Vietnam. Moving on to comment on our net debt to EBITDA ratio. At the start of the crisis, we secured ample liquidity. In the first half year, we issued about EUR 3,000,000,000 in bonds at favorable terms and extending the average duration of our debt by about 1 year.
As a result, we're significantly above what we would otherwise maintain. Despite a decrease in net debt, the decrease in the EBITDA due to the extraordinary circumstances of 2020 brought our net debt to EBITDA ratio to 3.4x at the end of the year. As mentioned before, we remain We committed to bringing this ratio down to our long term target of below 2.5. Our decade long Brewing a better world ambition concluded with solid results. Instead of talking you through progress against each target, I would like to highlight a few examples from 1st, as you would expect for Heineken, we take promoting responsible consumption very seriously.
For example, Our latest campaign launched in New Zealand boldly stated, Don't bring this, with a small print saying, if you are driving. In essence, We want to continue to leverage the strengths of the Heineken brand to be a force for good. Secondly, we look beyond the walls of our breweries to protect and improve the whole water catchment. And we are very proud that today, 10 of our breweries located in water scarce Areas of Mexico, Spain and Egypt returned more than 100% of the water used in production to the local watershed. And third example, in the Netherlands and in Brazil, Heineken brand volumes are brewed with 100% energy from renewable Sources making Heineken even greener.
Let me now share a bit of perspective on 2021. As many countries around the world have reintroduced lockdowns and restrictions to contain new waves, we expect the pandemic continue impacting the first half of the year. In Europe, for instance, we see less than 30% of the on trade open at the end of January. As the vaccines are rolled out, we expect that conditions will gradually improve in the second half of the year. Product and The channel mix will likely continue to adversely impact our results.
Based on our current hedges, we see Significantly higher transactional impact on input costs. And so all in all, it is unfortunately safe to say that revenue, operating profit and margin should be below the 2019 level. To summarize 2020, 2020 was a year of profound impact on our business but also of transition. COVID-nineteen has had a material negative impact on our business, amplified by our strong positioning on trade and our geographic footprint. We focused on what we could control and showed a strong competitive performance with market share gains in most of our key operations, with the Heineken brand holding to its momentum.
We took sharp cost mitigation actions while continuing to invest in the future, and we maintained a strong financial position and are planning for a dividend in line with our policy. Throughout this very difficult year, it has been the constant drive and the pride of our teams to navigate the crisis while building a bright future for Heineken. And now it's my pleasure to hand it back to Doles to discuss the way forward.
Very good. Thank you, Laurence. And that concludes the update on the full year results 20 Later in the Q and 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 a 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, At 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 over the organization, from all regions, functional No, Erik. To join us in this journey of taking a step back, taking stock about what is going very well, what could be better, what are strengths, What are opportunities? Also important to even a bit more profound to become Aware of maybe old mental 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 It's 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, is 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 strengths and opportunities of us as a company. Then at the top of the flywheel, superior growth. That is what we always 1st and foremost want to be focused on, but then also a Step up in productivity growth. At the heart of the flywheel, based on our values, our sustainability responsibility Strategy and our people strategy.
And 6th 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 strengths and opportunities where in short, we are super proud of being a growth company, a superior growth company And at the same time, 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 number one asset, represented in over 190 markets, having incredible momentum even during this year of Our OpCo centric decentralized model, we find it unique. A lot of global FMCG companies centralized, globalized, In 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 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 2019 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 Francois left over the years with a good balance between Emerging markets and more developed markets, there's a lot of embedded growth and 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 is less inorganic headroom left. There are 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 markets. It also comes with higher currency volatility That's very relevant in this year 2020, 2021.
Another key source of our growth has been premium, in which we have been a pioneer all those decades But still very relevant. It starts by Brandt Heineken having a lot of momentum as we shared About flat in 2020 in a year, the beer market was down, but high single digit growth in 2019. This is a 5,000,000,000 EuroRef, 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 Ignusa brand in Italy, taking a relative small regional brand from Sardinia and making it an absolute National winner in premium. Now as much as this has been a source of growth for the past, we still see a very big Opportunity out there, more than 100,000,000 people a year entering the middle class.
So we expect this to continue to be an important source of growth. Now a 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 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's 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 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 decentralopco 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 and 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 AT 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, but 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, 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 Brazil 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, 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 to worry 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 extirpated, of course, in the year 2020 with the drop we just presented that in detail. And this will impact the near term.
The big drop in revenue won't 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 entree business. It will take time on 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 effects 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 of ADIV and flexible during 2020 to even do that remotely. As shared, we are quite proud of our direct to consumer platforms like Beerwolf. We are 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. No matter 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 1st decade has come to an end. We delivered a fantastic performance in that regard, improving our water You can see by over a third by a poor. And we need to take our responsibility to really step it up as expectations are going up quite rapidly. Now then as a last lens of this review part, this First chapter, a couple of comments on our people strategy, our culture.
We believe it's one 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. It's kind of deliver the goods kind of mentality. And all of this It's implied 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 of 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 on new trends, new developments happening out there. And it takes also a slightly more external orientation. 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 1st 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 five 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 3rd priority is accelerating IT simplification. Great start, mate. 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. 4th dimension, raising the bar on our brewing a better world ambition by launching a new ambition for 2,030.
And last but not least, The 5th priority underpinning it all, driving more speed, agility, external orientation throughout the organization. With that, I'm moving to the 2nd 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 1st and foremost a growth company. Now that It 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, being a bit more tough And sharper in the way we prioritize and focus our resource. On footprint, whereby, Yes, there is less absolute inorganic opportunity out there compared to 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 Cruises. Now that's for kind of the inorganic.
We do have and we have really structurally done them over Fine. 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 trends that we're seeing, for example, in Ivory Coast Ethiopia is a fantastic example. This is an over 100,000,000 population country, where out of from scratch, We built a very important company, which is now a very strong number 2 in that market.
Lastly on this, We do know there's a couple of good reasons 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 Restructure 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, 1,000,000 hectoliters by now, launched in Vietnam and China with new opportunities coming. We are already over 1,000,000 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 Cote D'ivoire where we are locally producing it. Tiger, of course, very important after Heineken, our largest international Premium brands, but now having a lot of success in Nigeria, showing that the brands can travel. Moretti now doing extremely well in the UK, in Romania. Amstel Being a critical brand in Brazil, very important in Mexico, ADOI's 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 then last but not least, complementing Heineken and these international brands with these local Premium Champions. I've mentioned Ignusa before. Historically, we have had Dos Equis in Mexico Eisenbaum in Brazil Aguila In Spain, there's many examples. Bedela 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 1st 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 is 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. Amstrad 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 3rd bucket is really moving beyond beer to the boundaries and beyond the boundaries.
We have done a fantastic job on Rattlers Combining beer with fruit juice, we were the 1st mover. We did scale that, 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 side of 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 Heart Seltzer in the U. S. A. We have Canajeha. We have Pura Piranha launched in Mexico, New Zealand, and we're bringing that to selected European markets.
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 a 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, box number 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 wall chain and designing it as one cohesive Ecosystem that then plugs into year 1 to accelerate.
We set ourselves a target of €10,000,000,000 of revenue just in the fragmented trades 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 to be done in this regard.
Then moving on to the next part. And 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, As everybody is going to talk about the €2,000,000,000 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 €2,000,000,000 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 So 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 companies, really enabling, supporting The General Manager and his or her team delivering these savings, these productivity improvements, 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 1 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 the more important Because that's the muscle that we'll 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, EUR 2,000,000,000 in savings to mitigate the inflation transactional effects, which is particular 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 $2,000,000,000 of gross savings. 3 year program, we aim to deliver this between an organizational redesign. This part is a bit front loaded. This is what we are really doing as we speak and is being evacuated. During the 3 3rd quarter results, We already spoke about the reorganization at the head office where we were aiming for 20% personnel cost reduction.
That is being in 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, Right size whatever was which of course is very large for a company like Heineken. And we do that with sadness as these Our 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 €350,000,000 of savings, And it will take around €420,000,000 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 You know, 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 is 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 1 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 1 global media agency. There's still a lot of what we call non working dollars, agency fees, production costs, Printing cost of POS materials, what have you, we're going to go after that. And as we are digitally connecting The whole route to consumer, we see a lot of opportunities also in our sales force effectiveness and we can Chief is around €500,000,000 of OpEx. That's particularly relevant for the organizational redesign part.
These Structurings that already are for a large extent booked on 2020. The CapEx part of €400,000,000 is mostly to reap the cost of goods sold productivity opportunities. Let me move to the next slide, the bottom line. And normally with these kind of programs, you do it while your revenue has been growing A step at a time. For us, it's a bit different because we have this massive decline in our revenue in 2020, which puts a lot of deleveraging pressure on our margin as we have seen and it will take time for the top line to recover, particular that on trade business in Europe.
So yes, we do expect between now and 2023, of course, our top line to bounce back, But not per se fully in the on trade. So some of these negative probably that won't be a full compensation. So we know that we cannot rely fully on top line growth. We also know that we're incurring a particular challenging period of cumulative inflation. We are particular in 2021.
This year, we will see at least double the transactional FX impact from what we saw in 2020 or the years before. That's already of mitigation in 2020. About 57% is marketing and sales. But that 40%, a lot of that will bounce back because that was variable pay, that was truffle, that was some of it won't come back, a lot of it will come back And that will place into that red bucket. And that's why we are deliberately intentionally setting ourselves a very ambitious Productivity target of growth in restoring our marketing and sales levels to at least 2019 level and front loading Our digital and technology investment.
And that should bring us back to delivering a 17% margin by 2023. Now, Anshberg, how fast or not on trade channel will recover? We have good assumptions on the cumulative inflation side, but there's still unknowns, particularly in 2022, 2023. And that's why, Again, what we feel very explicit and strong about is delivering that €2,000,000,000 That is what we can control. And we firmly commit at the back end, whatever happens to get free, we are committing to restoring operating leverage.
We want to fully embrace the notion that your bottom line should always outgrow your top line. Moving to the next part of the flywheel, because it's very important to reap those productivity improvements, but then to really use them to accelerate investments in growth. And let me speak a little bit to that. There's 2 clear priorities here. 1st and foremost, marketing and selling.
This is what drives future growth for the company. And we will start By restoring spend to 2019 levels. And people will say, why 2019? Well, we just see it as a first milestone. Let's get back there And then we'll see where we take it from there.
Now importantly, we will want to make that spend work much harder Because we see a couple of 100 of 1,000,000 of opportunity, if not more, on efficiencies on the commercial spend That we're going to fully reinvest in marketing and selling behind new consumer propositions, new occasions, fewer bigger brands, Digitizing that route to consumer, what have you. Now speaking about digitizing route to consumer, the second priority is digital and technology. We simply need to now accelerate harmonizing the digital core. We have made a good start with base program, which Comes to an end this year with SharpX, which comes to an end next year, but we need to continue to end with that harmonized Standardized digital coupons and digitizing that route to consumer. And here we are not waiting.
Already in 2021, We are making a big incremental investment in digital technology above the level of 2019. And we do see structural increases in the absolute and therefore percentage of revenue that we are putting behind digital and technology. Also, as important is that the way we do use the resources at our disposal. And as said, Being sharper, more intentional about resource allocation is going to be very important. We know that very decentral Bottom up, OpCo model.
This is a relative vulnerability. We are having a lot of dialogue in the leadership team with our GMs on how to get the balance right between being entrepreneurial locally, but also being a bit tougher and sharper in the choices that we make. One example is, for example, in Europe, where we had a very large portfolio and whereby the team, The GMs and regional team, they deprioritized 60 brands altogether, took away all the funding. Some of them these some of these brands were delisted. Some of them, we just are going to milk, so to speak.
And we identified, more importantly, 25 brands In premium, they were going to focus on and we significantly increased the investments up to 4 times the prior levels On these brands, another example is in APAC, where we are being much more deliberate in moving resources Between countries where you have countries that have a lot of upside recovery that we expect to come very fast out of the crisis like Places like take longer. Now talking about resource allocation, also very important to speak about capital. We do see an opportunity to further improve our operational capital efficiency on CapEx, on cash flow. Also here being very decentral, we found too big of a variance in capital expenditures. Same amount of expansions or replacement at a simply lower cost by consistently applying the same kind of Standards and benchmarks.
Continue to be quite rigorous and financially disciplined on investments. There we do believe we have a very It's a good track record. I think our acquisition strategy has been reasonable and good. RONA return on net assets, but it's something that we need to keep our eye on. As Laurent said, And we remain committed to bring leverage back to net debt to EBITDA below 2.5%, and we repeat that we fully commit to our dividend payout of 30% to 40% of net profit.
So that's on the outer circle of the flywheel. Then at the heart, based on our values, Our sustainability responsibility strategy and our people strategy. Now talking about The first, sustainability and responsibility. As said, very proud of what we have delivered over the last decade. Heineken has a long track record On sustainability, I checked.
We published our first environmental report in 1994, long before this was kind of fashionable. But we do realize going forward, we really need to step it up. We need to take our responsibility. And I don't only say this as a business leader to the world. And we as Heineken, we want to be in the front guard of role modeling The movement to reducing carbon footprint to go to net 0, to Further improve and completely balance our water footprint in water stressed areas.
Now we realize it's not just about Environmental sustainability, increasingly, it's also about social safety, always a priority, and I think we can do more. And then last but not least, very relevant being an alcohol beverage company responsible consumption. Historically, we've always taken a leadership role, But also there, we need to further step up. Now today, there's already so much messaging that we preferred Otherwise, we risk getting lost in all the other messages, but very important and we owe you a big update on this in the months to come. Also very important, we have launched an Sustainability Responsibility Committee as part of our supervisory board.
So also at board level, there's very strong commitment behind this agenda. Then our people strategy. And again, at Heineken, we always say we are people centric. As the incoming CEO, I feel a huge sense of responsibility to be Stodian to our culture. At the same time, you're never done.
This is forever developing And we really believe that we can build an even stronger Heineken by leaning into some of these priorities. On culture, asset, speed, agility, We do believe we can move faster. We have seen that consumer and external orientation being quicker to pick up new trends, being quicker to shape new trends and that cost conscious culture, the discipline of really moving information as a company going after these productivity improvements. Boosting capability, very important. The bar is rising fast.
We need to be more deliberate about talent, starting with inclusion and diversity. This will be part of our S and R ambition 2,030. So we will share a new set of ambitions on inclusion diversity in a couple of months' time. Strengthening our local talent pipeline, particularly in emerging markets and boosting our foundational and spiking capabilities. More kind of newer Capabilities like digital, revenue management, but also more foundational capabilities in a lot of the less developed operating companies.
And last but not least, our enhancing our operating model that is grounded forever in OpEx. At the same time, we know that we need to enhance it and that we need to find a balance between entrepreneurship and discipline, That we need to fly more information by adopting common ways of working, by embracing common systems, By really being more deliberate about learning across the silos of the individual operating companies. If we don't do this, We won't be able to deliver these productivity improvements. We won't be able to harmonize our IT landscape. And maybe one of the reasons why we have been maybe a bit slow in that regard is that we still had to make this intervention.
And let me be maybe a bit more Explicit about it with this visual that we're using inside. And the wording that we have chosen is disciplined entrepreneurship Because it is too dramatic. Historically, we're good at the right side of the brain. We love to be pioneers. We love to be creative.
We love to explore. We love to enter all these far flung places. We love to initiate new trends like with 0.0. We are very sensible to local needs. The flip side of that is that we are not as focused as we can be, that we are very fragmented in approaches, That we are very slow in adopting common platforms and common ways of working.
That we're not learning as fast from each other. And that's where that left side comes in. The left side of the brain, be more explicit about the framework, Be more focused on driving alignment, on focus on common processes. And the key is to have the 2 In balance, one is not more important than the other. And on both sides, we have work to do.
And we're using this visual To be very explicit about it and have a dialogue with the organization on how to make sure we do this right. And one example that comes to mind and that I use to explain this, when you think of some of the greatest entrepreneurs of our era, Jeff Bezos of Amazon or Steve Jobs of Apple, incredible right brain, incredible entrepreneurs, very courageous, very creative and innovative And at the same time ruthlessly disciplined, focused, methodical about their approach. And we can learn something in that regard. And once again, we believe This slight enhancement of our operating model is productivity improvements, harmonized RT and technology landscape And what have you. One last slide on this section.
I would just love to speak to the leadership team And led by Laurence and myself, I'm super proud of this team. I'm super proud of, For example, Marc and Roland, who have been members of the team for some time now, will bring a lot of experience and expertise to the team. And then we have Seven new members of the team with very different backgrounds. We have 8 nationalities on the team. We have great You know people with strong marketing backgrounds in regional president roles, we have people in functional leadership roles with managing director experience.
And yes, bringing this team together over last year's summer has unlocked a lot of energy. And we were quite deliberate about team building, which may sound weird, but this was one of the things I really worried about stepping into the role Four different time zones from Singapore to Miami and how do you create a cohesive team out of it. And we spent about onethree of our time in June, July On team building, virtually, I'm sure it raised some eyebrows like we are spending so much time on team building while the world is at fire. But in hindsight, I think we're all Very happy we did because we, in a very accelerated way, built trust and psychological safety in the team, but also being comfortable to challenge each other, To have constructive conflict because that is kind of the leadership culture that we have in mind, Evergreen, reaching out to There's a couple of 100 people. Now moving to the last part of the growth algorithm, Long term value creation, Air Whereby is really a jewel story of and delivering that superior long time top line growth As well as recovering our operating margin to 17% by 2023 and gearing fine.
On the left vertical axis, As you see the different components of the growth algorithm on the horizontal, the different phases, we're clearly, hopefully, At the back end of this mitigation phase, the crisis phase where our revenue continues We impacted where it's all about short term cost mitigation, reducing spend, suspending capital expenditure, a lot of focus on health and safety. We are hoping that sometime over the summer, we are coming out of this phase. And we really go into that recover and build phase, Really reaccelerating our underway, restoring our marketing and selling expenses step by step, Front loading our digital technology investments, launching in 2 months' time this new 2,030 ambition on SNR And really making that concerted effort in new spiky capabilities. And then 2024 and beyond should be the grow and expand Phase whereby we start to scale the investments we've made behind our brands and technology and start delivering on that very ambitious S and R and people agenda. Now in closing, I have 2 remaining slides.
I know in the past, Jean Francois, Laurence has spoken to you about our golden triangle. That was our way of expressing how we looked at value creation. And we are expanding that to what we now call the green diamond, which continues to have growth at the top end, always a top priority, Profitability, capital efficiency and we're adding sustainability responsibility at the kind of equal footing It's an integral part of how we think and reflect about long term value creation and no longer or And not per se criticizing our past, but I think historically becoming primary part of how we think about the company and how we Create value and using that frame of the diamond, you see all elements of the algorithm coming back, deliver superior top line growth, Accelerated investments delivered a EUR 2,000,000,000 in cost savings, recover margin, gearing for operating leverage, Stepping up capital efficiency, reducing leverage strategy. Now with that, I come to the end of the story that I wanted to share. Once again, I apologize if it felt a bit Rushed, given its virtual format, I didn't want to take much longer than an hour.
Hopefully, over the next I think we have 45 minutes to an hour for Q and A. Hopefully, that gives plenty of opportunity to and share your questions. So on that note, let's move to the Q and A.
Our first question comes from Trevor Stirling
I'm still struggling a little bit about the net margin algorithm. Effectively with the guidance of 2017, you're saying back at 2019 margins by 2023, But you're going to say SEK 2,000,000,000 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 offsets, But also what's your pricemix?
Thank you, Trevor. Laurence, would you like to take a first go at that?
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 elevation is to say that when we talk about inflation, we talk about inflation and transactional also impact of the And 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 linked with the footprint.
And of course, as Dorf explained, there are lots of variables How fast the volume and the mix recovers and what the actual inflation gets to be in 20222023. 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 that the 2 things today that we can really commit to because we will do what it takes, it is the EUR 2,000,000,000 cost Because that is something that we can control. And we looked at our pre crisis 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 is 17% margin by that time.
It's not an exact, I would say, how things will play in between. They can be different scenarios, frankly, Trevor.
Thank you very much, Laurence.
Thank you, Trevor. Onto the next question.
Our next question comes from Sanjeet Aujla of Credit Suisse. Sanjeet, please go ahead.
Hi, Dolf, Laurence. Many thanks for the presentation. Just going back to the margin target you set out, Can you just elaborate on how conservative you've been on the top line recovery? For example, are you assuming the European entree channel can normalize Back to 2019 levels by 2023 or are you embedding a permanent channel and tax mix impact in that trajectory? That's my first question.
Thank you, 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 Back 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. That 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, various won't be right. And we don't want to box ourselves into an endless discussion about this Given how incredibly volatile the situation is, what we do control is the €2,000,000,000 and that's why we're very explicit about it.
But also, we want to put ourselves on the line, and we give that bookend 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 the 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 to gather 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 the more kind of wet on trade, discotheques, Nightclubs 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 Well, it 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.
That's very clear.
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 for 2021, can you just elaborate a little bit on that? I think it was slightly positive in 2021. How are you seeing that shape Sorry, you're slightly positive in 2020. How do you think that shaped up to 2021?
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 20 21. That is really what should be impacted the most negatively by far, relatively benign on the commodities given our hedges.
Understand. Thank you, both.
Thank you, Saint Yves.
Question comes from Simon Howes of Citi. Simon, please go ahead.
Hi, Dolf. Hi, Laurence. Thanks for the questions and the presentation. 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 towards and 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 More on volumes and less on taking real price.
So it's a volume mix story. Maybe or do you want to stay on 1st off?
Yes. Let us reply to that first. That's a very important component indeed Because as you indicatively saw in how we visualized 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 offsets 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 these synchronized 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, whatever. And you can't completely offset that by pricing. We have been quite value oriented in Mexico, for example, in 2020 With delivering pricing at double local inflation, but it was largely insufficient to offset the depreciation and therefore the transactional FX. 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 2 price increases. We are not a market leader. We have such strong brand equity that we felt confident leading with a price increase in September 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 It carries a big impact and a big deleveraging impact that needs to be compensated. So those two elements are two key reasons why we need so many savings to compensate the in a way shortfall on top line in order to restore your margin.
Got it. That's really helpful. And can I just ask, I mean, Dorf, 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've sort of lagged some of your competitors historically, be it hard seltzers or elsewhere? How far of a push away from beer are you signaling? Could we see you moving into canned cocktails or into spirits, Into new alcoholic categories?
Or is this still very much beer linked when we talk about Beyond beer?
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 Rattlers, with ciders, which are clearly beyond beer, with something like Desperados. But indeed, I think initially we maybe underestimated Seltzer. We saw that really a bit too far out.
And in hindsight, that was probably not the right reaction, and we are 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, Rattlers, etcetera, 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 goalposts, 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. Markets 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. And 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.
Brilliant. Thanks so much.
Our next question comes from Richard Windbagen
I have two 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?
Shall 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 delay, 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 lasts, 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 minds.
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 too much. Laurence, on the D and T question.
Yes. Well, the biggest impact over time will be the Consumer what improves our consumer and customer centricity. So that goes 'twenty three 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 1st few years.
So I would say this common backbone, we've already progressed, and we're completing our ERP replacement I mean, Asia Pacific, AME and some of the Caribbeans actually in 2021. And we have kind of attacked Our SAP landscape in Europe, and we will 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 Quackau in Poland and 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 is.
Long term, it's really what's consumer and customer centric. Yeah, thanks.
Our next question comes from Ed Mundy of Jefferies. Edward, please go ahead.
Hi, Jonathan. Hi, Laurence. Hi, everyone. Thanks for the presentation. I've got a question on this concept of building muscle To drive margin medium term over and above the €2,000,000,000 that you referred to and the use of transformation leaders, as they've gone about their business, And what have they found so far from benchmarking 1 opcode to the other?
And what sort of low hanging fruit have you seen so far?
Hi, Ed. Thanks for your question. I think at this moment in time, we have 1500 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 mobilized 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 3 d 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 2, 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 1500 initiatives, it's just early days. We're just 1 or 2 months into the start of the program.
Great. And then my follow-up, as you think about Margin expansion beyond 2023, and I appreciate the $2,000,000,000 the initial productivity bring up $2,000,000,000 we're focusing on 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 transformation leaders bringing together a funnel? Or do you think it's going to come from operating leverage and premiumization given that Clearly, within the 17%, there isn't necessarily full recovery in the entree within Western Europe.
I mean, how do you think about margin recovery beyond 2023?
So beyond 2023, the idea of the funnel is to permanently fight inflation of cost. So it's to have it as a constant North Star. 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 the 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 a muscle of more resilience to shocks, while actually protecting the growth engine of the 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 through the bottom line, but That is adapting to circumstances and opportunities.
Our next question comes from Oliver Nikolay of Goldman Sachs. Oliver, please go ahead.
Hi, good afternoon. Just two questions. Just first of all, with this new strategy, can you please tell us if management and the MDs and 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?
Thank you.
Thank you, Oliver. 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 your remuneration policy, ultimately To pass by a vote with 75% at your AGM, etcetera. 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 in-depth a 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 will consider whether we're going to Update 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 growth savings target. So that is one metric that has been consistently cascaded throughout The organization is part of the individual target of all our senior managers from top to bottom. So hopefully, that Speaks to your question, Oliver. 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.
Ken, on brewery closure in Europe, there are no brewery closure in Europe included in this EUR 2,000,000,000 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 Quarter 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 in renewing the funnel. So My answer today is about to your question on the EUR 2,000,000,000. But I mean, there are no sacred cows.
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 the customers and consumers And in terms of also bringing profitability as well.
Thank you, Daut and Laurent.
Thank you, Oliver.
Our next question comes From Andrea Pistacchi of Bank of America. Andrea, please go ahead.
Yes. Hi. Good afternoon. So two questions, please. First one is, you haven't touched in the presentation on your wholesale operations And the vertically integrated model, how does this fit into your strategic review?
And do you see opportunities or ways to reduce your on trade cost whilst maintaining the benefits of downstream integration. And the second question is, if you look at the business Those 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 I mean, a couple of years ago, one could have thought about the U. S, but that has improved or not since then.
Thank you, Andrea. Laurence, would you like to speak to the First, I'll take a second.
To the wholesale operation, and then and as described in the first part So of today, indeed, our vertical integration in wholesale, which we consider as strengths, 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.
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 and Nigerian breweries heading in the right direction and becoming less of a concern.
Also, 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 apparently the beer market has not been doing well and has been losing Care 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 sub pockets 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 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 old mental model Of the beer brands as we always had them and uncomfortable to kind of completely revamp 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 be relatively small, But 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 fifty-fifty.
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 Then I think we originally thought possible in scaling Heineken, in scaling Amstel, in scaling De Vasa, 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 SO. So those are just a couple of thoughts on Some key markets, Andrea.
Thank you.
Thank you very much.
Our next question comes from Nick Oliver of UBS. Nick, please go ahead.
Hello, M. Dolce Laurence. Thanks a lot for the questions. 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 And for some of the big exposures in LatAm over the next 12 months would be very helpful.
Very good. Thank you, Nick. 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 in setting very specific margin targets, and that's why we're also not doing that beyond 2023, 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, yes, we feel an obligation, a responsibility to be explicit About that 17% in 2023. On different opcos, now 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 EUR 2,000,000,000 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, With 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, it's 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 impact 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 seventythirty, 70% premium, 30% mainstream. And so far, we have been able to do that without too much Margin erosion, because we were growing skill so fast and leveraging skill faster. But indeed, in a market like that, we won't be Obsessed with an absolute margin as long as the overall value creation continues to be strong as it was in the So those are a couple of thoughts on your questions, Nick. Over to you, Laurence.
Yes. And on the transaction also, indeed, coming from Largely Brazil and Mexico. And we have plans 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 the 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.
Thank you. 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 difference of 6 months versus 12 months, how much was covered? Just when we think about models trying to get the half years right in terms of the margins.
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 currencies 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 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.
Our next question comes from Celine Pennuti of JPMorgan. Celine, please go ahead.
Yes. Good afternoon. Thank you for taking my questions. My first question is on the EUR 2,000,000,000 cost savings. You said EUR 350,000,000 is coming from headcount reduction.
Can you spell out where the remaining parts are coming from? And I wasn't clear 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 will be also it will be fair also to believe that this will be more back end loaded starting from 20 The second half of this year. My second question is probably the the sister question to it is in terms of The cost that you are mentioning, so you said for 2021, most of the 800,000,000 Savings will come back. Does this include the front loaded investment that you are talking about IT?
And along with What I think is probably about EUR 300,000,000 of FX transaction. Am I right in thinking it's about EUR 1,000,000,000 of cost coming back Or extra cost incrementally in 2021? Thank you.
Thank you, Sujine. Can you take a first go at the question?
Yes. So about the amount of cost coming back, not sure about your precise Calculation, I would start with your with the EUR 2,000,000,000 and how they are split. The EUR 800,000,000 costs say market that So it's not a mechanistic it's not a mechanical one to 1. Now going to the EUR 2,000,000,000 EUR 350,000,000 is the direct personal cost from this reorganization, from this restructurings. We you do not have in here, well, that comes on top and that's part of the EUR 2,000,000,000 as well, all the environmental costs, all the costs of traveling less less than 2020, by the way.
The big bulk of this EUR 2,000,000,000 I would say a large bucket will be really what stood in the middle of this slide that Dolf 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 bit of potential here. I'm not sure I answer your question completely, But coming back to the different buckets that Thor presented, that's how I would take it.
The timing of the benefit?
Sorry, Selene, if you could just repeat?
Yes, I'm sorry. How should we think about the timing of the benefits hitting the P and L?
Well, there will be I mean, we will start with 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 EUR 2,000,000,000 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'll see in the Q1. We 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.
Thank you. Thank you, Celine. Thank you.
Our next question comes from Mitch Colette of Deutsche Bank. Mitch, please go ahead.
Thanks. 50 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.
Very good. Shall I take the first part and move the second part? Yes, thank you for those questions, Mitch. And a good question, Why not restore the marketing and 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 1 media agency, etcetera. 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 increase kicking in. On the green diamond, Laurence?
On the green diamond, first of all, definitely, we're adding sustainability and responsibility. And over time, we expect to measure that, the non financial 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 RONA before that RONA was 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, first, 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 Well, 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 you saw, it was positive this at this 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 it, Value for your stakeholders and shareholders.
Understood. Thank you.
Our next question comes from Robert Voss of ABM AMRO. Robert, please go ahead.
Yes. Hi. Thanks for taking my questions. Yes, you already talked briefly about potential brewery closures in Europe saying that these are not part of €2,000,000,000 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 EUR 2,000,000,000 in savings of EUR 500,000,000 OpEx and EUR 400,000,000 CapEx. You already spent more than EUR 300,000,000 in costs in 2020.
So what can you say about The phasing of the remainder of the associated cost to achieve the savings.
Thank you.
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 EAS, 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 Costs, 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 the 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.
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, while actually we're spending as much on logistical costs, I think there that's a place where we See more opportunities in the short term and that we are pursuing. On your question, Vinland, 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, But we will be very open minded to it.
Now mind you, a good portion of those value dilutive operations Our recent greenfields operations where we really see a lot of upside and a good trajectory like in Mozambique, And the new ones we are starting in Peru, etcetera. And there as Heineken, we will take a long term perspective in building Uzbek 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.
Thank you, Overton.
All right. That's very clear. Thank you. Thank you.
Our next question comes from Laurence Weier of Barclays. Laurence, please go ahead.
Thanks very much for the questions. A couple from me. The Brewing sector has 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 €2,000,000,000 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 Steve, 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? Thank you very much.
Yes. Maybe I'll start with the second one, if you can 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 that to that level.
The most important parts 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 Minas Gerais, where we already purchased the land. All of those are building blocks indeed in creating the conditions for the OpCo to start heading Indeed, at least to the average of our portfolio. But that will take time. We are uncomfortable to commit to any specific time line 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, EUR 1000000000, 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're not going to stop when we get to those EUR 2,000,000,000. But more important than Going beyond those EUR 2,000,000,000 within the time frame is important for us to actually make sure that after this EUR 2,000,000,000 while we're doing this EUR 2,000,000,000 we're already replenishing the In 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 EUR 2,000,000,000 big intervention and it stops, But really kind of like permanently renewed. And then still things will come through the funnel as they come 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.
We're at a point in time, and we're very happy hitting that €2,000,000,000 That's a number that I don't think we have pursued before. And we'll take a massive mobilization of the organization to deliver in full. So we will start with that. Thanks, Laurence. On to our next question.
I I think we are entering the last 5 minutes, so maybe one or this is the last question I understand from the operator.
Our final question comes from Tristan Van Strien of Redburn.
Two 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, Because what I heard you say is that revenue versus cost inflation is fundamentally negative. And without the constant savings, we're on a 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 the last The U.
S. In the last 40 years with operating leverage. I just want to get clarity on that if I understood that correctly. And then second, I guess, on culture, Dolby used the word, I think, tougher about 6 or 7 times, which is not a quantification, obviously, where everybody around them These are 10th of their colleagues being retrenched. You have a big ambitious plan.
So how do you evolve this culture All right. It's easier said than done.
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 you I mean, you might have to give up for a given amount of time, but the ambition 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.
Yes. And complementing what Laurent says, we don't see the model change from The last 6 years. But in the short term, in this period up to 2023, we do see very particular challenges to overcome, which is Add 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 use 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 By engaging the organization and not just impose that top down, because then indeed you could break Something that is very special and magical 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 the how is as important as the 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 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, Christian, 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 That question because it goes through the heart of the matter. And disciplined entrepreneurship, We used that kind of these 2.5 hours, they flew by. Thank you for being with us.
Thanks for your patience In listening to the story, engaging on the Q and A, I'm sure there's still questions out there. Feel free to reach out to Federico and team. We're at your disposal to follow-up on them. And yes, on that note, on behalf of today, all the best. Bye bye.