Good morning, everyone, thank you for joining us today for Heineken's 2018 full year results. For your information, this conference is being recorded. There will be an opportunity for questions at the end of the conference, and if you would like to ask a question, you can press star one on your telephone keypad. At this time, I would like to turn the conference over to Heineken management and investor relations. Thank you.
Good morning, everyone, thank you for joining us today for our 2018 full year results conference call. I am joined by Jean-François van Boxmeer, our CEO, and Laurence Debroux, our CFO, for today's call. Following some prepared remarks on the results, we will be happy to take your questions. With that, I would like to hand the call over to Jean-François.
Thank you, Federico, good morning, everyone. I immediately start on slide two. I hope you have slide two in front of you. In 2018, we delivered another year of superior top-line growth, with organic net revenue up 6.1% and net revenue per hectoliter growing 2%. Consolidated beer volume grew 4.2% with growth across all regions. Brazil, in particular, recorded a stellar performance growing double digits following the successful integration of our two businesses. The Heineken brand grew 7.7%, and that is the best performance in over a decade. Operating profit beia grew 6.4% organically, and operating profit beia margin was 17.2%, down 17 basis points, mainly due to the first-time consolidation of Brazil, higher input costs, and adverse currency effects. Diluted EPS was up 7.9%, driven by organic growth, partially offset by adverse currency effects.
We will propose to the AGM a dividend of EUR 1.60 per share, an increase of 8.8% versus last year, bringing our payout ratio to 37.6% of net profit. Our strategic priorities are growth-oriented, with an ever-increasing emphasis on sustainability, both socially and environmentally. We focus on innovation and operational excellence, so our consumers enjoy our brands, and we exceed our customers' expectations. At the same time, we keep seeking productivity improvements, and we are constantly reassessing our spending behavior. Going into 2019, we expect the environment to remain uncertain and volatile. Overall, we anticipate our operating profit beia to grow by mid single- digits on an organic basis. On slide three, you can see an overview of our performance with organic net revenue growth in all regions with a faster rate of this growth in the second half driven by price mix.
Net revenue per hectoliter was up 2% for the full year organically, with growth across all regions except Asia-Pacific due to country and brand mix. Operating profit beia grew 6.4% organically, accelerating in the second half of the year due to both higher revenue and overall slower growth of expenses despite continued pressure from higher input and logistic costs. Starting with Africa, Middle East, and Eastern Europe. Consolidated beer volume grew 5% organically, and net revenue per hectoliter beia was up 5.2%. We saw strong volume growth in South Africa, Russia, Ethiopia, Rwanda, and Egypt. This more than offset volume declines in Nigeria, the DRC, and Ivory Coast. Regional operating profit beia was up 16.2% organically, mainly driven by South Africa, Ethiopia, Egypt, Russia, and the DRC.
In the Americas, consolidated beer volume was up 5.4% organically, driven by strong growth in Mexico and Brazil, which more than offset lower volumes in the U.S. and Panama. Revenue per hectoliter was up 3.2% organically, with an acceleration in the second half driven by price increases and premiumization. In Mexico, beer volume grew single digits, and the Heineken brand continued to deliver strong double-digit growth. In Brazil, our premium and mainstream portfolios grew strong double digits, led by the Heineken brand, which grew by more than 1,000,000 hL . During the last quarter, our operations in Brazil were affected by supply chain constraints and systems migrations. In Asia-Pacific, consolidated beer volume grew 8.2%, with double-digit growth in Vietnam, Cambodia, Myanmar, and Korea. In Vietnam, we continued to grow strongly in the main cities and to expand to secondary cities and rural areas, led by Tiger and Larue.
In Cambodia, beer volume returned to growth in the fourth quarter, led by Tiger and Heineken. Regional net revenue beia per hectoliter declined by 2.5% due to adverse country and brand mix. The region delivered organic operating profit beia growth of 3.4%. In Europe, consolidated beer volume grew by 1.3%. Pricing in the retail market continues to be challenging, but net revenue per hectoliter was still up 1.8%, driven by the growth of premium brands and the innovations in low and no alcohol, as well as crafts. In the U.K., total volume was up low single- digit with the Heineken brand growing strongly. Our pub operation successfully completed the integration of Punch and is delivering strong results in line with expectations. In France, beer volume grew mid-single digit led by Heineken, Desperados, and Affligem.
In Italy, the Heineken brand and Ichnusa are leading in the strong growth of our premium portfolio and overall growth. Spain declined low single digit due to unseasonably cold and rainy weather in the first half, and disappointing tourism in key regional markets. The Netherlands was up low single digit, driven by the low and no alcohol and craft and variety portfolios. Regional operating profit beia increased by 4.2%, driven by top-line performance and disciplined cost management. I now turn to slide four. The Heineken brand volume was up 7.7% organically in 2018, the stronger performance of the brand in more than a decade. The brand grew double digit in Brazil, South Africa, Russia, Mexico, the U.K., Nigeria, Poland, and Germany, mainly due to the Heineken Original. The ongoing success of Heineken 0.0, so no alcohol, now available in 38 markets, also contributed to the growth.
Turning to slide five, I would like to reflect on the other developments which contributed to our strong top-line growth. Our portfolio of international brands grew double digits, notably driven by Tiger, Krušovice, Birra Moretti, and Desperados. Cider volume increased to 5.600,000 hL . In the U.K., volume grew mid-single digits, and outside the U.K., we have now reached more than 2,000,000,000 hL . Moderation trends continue to create new drinking occasions for our low and no alcohol brands. Their volume increased to 13,100,000 hL due to the performance of Radler and Heineken 0.0, and that despite lower malt volumes in Nigeria. Our craft and variety beers grew double digits. Affligem launched a lower alcohol variant, driving double-digit growth. Lagunitas continued to expand outside the U.S. and is now also brewed in our craft brewery of Wijlre in the Netherlands.
Craft line extensions such as Brand IPA in the Netherlands or Birra Moretti Regionale in Italy continue to grow strongly. During 2018, we continued to roll out the Blade, a countertop premium draft beer system targeted to small outlets. We continue to invest in our e-commerce platforms, both B2B and B2C, as they gain traction across markets. Turning to slide six and Brew a Better World . Last year, we surpassed our 2020 commitment for CO2 emissions, and this year we reduced them further to 5.5 kg of CO2 equivalent per hectoliter produced, a 47% decrease since 2008. This year, we have also surpassed our 2020 ambition on water efficiency. The average water consumption in our breweries was 3.5 L of water per liter of beer, a reduction of 30% compared to the same year till 2008.
It is also 3.2 L of water per liter of beer in water-stressed areas. Last February, we announced Drop the C, our 2030 ambition for CO2 reduction, aiming to cover 70% of all our electric and thermal energy needs in production by renewable energy. In 2018, we launched 13 renewable energy projects, and you will find more details in our annual report that will be available next week. We are also aware of the pressing water issues globally, and here we are finalizing a new 2030 ambition, which we will announce shortly. Responsible consumption continues to be a high priority, and in 2018, 69 markets dedicated at least 10% of the Heineken media spend to responsible drinking campaigns. Finally, as part of our regular review cycle, we have refreshed our code of business conduct and associated policies and rolled them out to all operating companies in 36 languages.
In particular, we renewed our brand promoter policy, incorporating the suggestions and advice of NGOs and brand promoters themselves. Moving now to slide seven. I would like to conclude by highlighting the announcement of the strategic partnership with CRE to join forces in China, pending regulatory approval. In the largest beer market in the world, the partnership will bring together the best-in-class route to market with an unparalleled international brand portfolio led by the Heineken brand. A key milestone for us and a big opportunity for both businesses. For more details on this, please refer to our announcements of August 3rd and November 5th of 2018, where you can read all the details about this deal. With that, I would like to hand over to Laurence.
Thank you, Jean-François, and good morning, everyone. Let's turn now to slide eight and the financial overview. Looking at the net revenue beia of EUR 22.5 billion in 2018, organic growth was indeed 6.1% with volume growth across all regions. Revenue per hectolitre beia grew 2% with growth in all regions except Asia Pacific due to mix. The underlying price mix effect was 2.9% with pricing alone contributing 1.6%. Operating profit beia was up 6.4% organically, and the growth was actually +11.1% in the second half. This acceleration came from our top-line growth, of course, but also from slower overall growth of expenses, despite continued pressure from higher input and logistic costs.
Operating profit margin beia was down 17 basis points, slightly better than the updated guidance we provided at the end of July, and that includes the negative impact from the first consolidation of our acquisition in Brazil for 22 basis points. Net profit beia reached EUR 2.4 billion, up 12.5% organically, growing much more than our operating profit. What you see here is partly the result of a very good performance of our joint venture, CCU and UBL, and of a lower effective tax rate. The main driver by far is a decrease in other net finance expenses. Indeed, payables denominated in non-local currencies were less impacted in 2018 than in 2017, most notably in Nigeria and in the DRC
Just to mention, because you also have the IFRS measures on that page, the EIAs in 2018 included an impairment of EUR 183 million, essentially in the DRC., while in 2017 they included a profit from sale of our wholesale activity to Sligro in the Netherlands. Diluted EPS beia was EUR 4.25, 7.9% higher than last year. Free operating cash flow grew to EUR 2.2 billion, a 10.6% increase, with higher CapEx being offset by improvements in working capital. Finally, our net debt to EBITDA ratio improved to 2.3x , well within our target of 2.5x Moving now to slide nine and our net revenue beia of EUR 22.5 billion. On top of the 6.1% organic growth, consolidation changes added 2.4% or EUR 540 million, mainly due to Brazil and to a lesser extent, to Punch in the U.K.
Currencies had a negative impact, reducing net revenue by 4.7% or about EUR 1 billion. This was mainly attributable to the Brazilian real, the Mexican peso, the Nigerian naira, the Vietnamese đồng, and the Russian ruble. With slide 10, we want to provide a bit more insight on the development of the operating profit beia margin during the year. In the first half year, as I'm sure you remember, our operating profit margin was down by 118 basis points, at the end of July, we told you that we expected a very different picture for the second half. This has indeed materialized, leading to -17 basis points for the full year. Starting with the acquisition in Brazil.
In the operating profit margin of the first half year, there was a negative impact of 43 basis points coming from the consolidation of this acquisition at the end of May 2017. Well, the absolute value of this impact isn't changed, but it is now spread over the full year, representing a dilution of 22 basis points only, if I may say. As you know, we are happy to report that Brazil, while still below average group margin, is growing very fast. Excluding this, the margin is actually up five basis points. Let me provide a bit more details here. On the one hand, input cost per hectolitre increased by 3.6% for the full year, largely driven by packaging materials and commodity inflation, and including an increased transactional currency impact, for instance, in Nigeria, Mexico, and the DRC.
Logistic costs also played negatively on the margin with the impact of one-offs in H1, such as the truck strike in Brazil or the railway strike in France, but more generally, an inflationary trend in a number of countries. On the other hand, we had a significant positive impact in H2 from operating leverage in our fixed expenses, especially in production. This can be traced back to synergies kicking in in Brazil, but also to the fast growth in markets such as Brazil again or South Africa. We also had in H2 a more favorable comparison base for the head office, as our investments in some systems and commercial platform had already intensified in the second half of 2017.
Finally, we continued to benefit from the increased productivity of our marketing and sale expenses, as well as some operating leverage here as well in fast-growing countries, while fully supporting our strong top-line growth. Continuing with slide 11, operating profit beia reached EUR 3.9 billion in 2018, an organic increase of 6.4%, as strong top-line growth, positive operating leverage, and efficiencies in our marketing and selling expenses were partially offset by rising input and logistic costs and transactional currency effects.
Consolidation changes, mainly Brazilian Punch, added EUR 453 million or 1.2%. Currency impact was negative, reducing operating profit by EUR 176 million or 4.7%. The main impacts came from the Mexican peso, the Brazilian real, the Vietnamese đồng, and the Nigerian naira. Looking now at diluted EPS beia on slide 12, EUR 4.25 up 7.9% or EUR 0.31, with EUR 0.49 driven by organic growth and EUR 0.02 coming from consolidation.
This more than offsetting the EUR 0.20 decline from currencies. Let's now go to cash flow on slide 13. Free operating cash flow reached EUR 2.2 billion in 2018. The increase of EUR 250 million was largely driven by the positive change in working capital and particularly by payables, as we continue to bring our payment terms closer to industry standards. Partly offsetting this was an increase in CapEx. In 2018, we invested in additional capacity in markets like Ethiopia and Vietnam, but also Mexico, Brazil, Cambodia, Haiti, South Africa, as well as in a greenfield brewery in Mozambique. CapEx investment represented 8.4% of net revenue or EUR 1.9 billion, pretty much in line with our guidance for the year. Let me now wrap up with the full year outlook for 2019.
Our strategic priorities are growth oriented. In 2019, we will again strive for superior top-line growth through a combination of volume, price, and disproportional growth of our premium portfolio. We expect input and logistic costs for actually to increase by mid single- digits this year, and we will continue to mitigate this by driving productivity and efficiencies in our operations as well as our head office while investing to grow our brands and to accelerate our digital agenda. For 2019, excluding any major unforeseen macroeconomic and political developments, we expect operating profit beia to grow by mid single- digits on an organic basis. Noticeably, our guidance moves to an organic form, reflecting our ambitious growth agenda and taking away the uncertainty from currencies and the timing of consolidation changes.
We will continue to provide a translational currency impact update on a quarterly basis, as well as, of course, timely announcement on any material scope change. Finally, the technical guidance for 2019. We expect an average interest rate broadly in line with 2018 and an effective tax rate beia between 27% and 28%, and CapEx in 2019 should again be around EUR 2 billion. With that, I would like to hand back to Federico and then to the operator to open the floor for your questions.
Thank you very much, Laurence. Operator, we are ready for the questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you change your mind and wish to withdraw your question, please press star two. You will be advised when to ask your question. The first question comes from the line of Edward Mundy from Jefferies. Please go ahead.
Morning, Jean-François. Morning, Laurence. Three questions, please. The first is on your new guidance of mid single- digit organic EBIT. Presumably, this is 4%-6%, and any color you are able to share on how you see the shape of mid-single digits relative to 2018. The second question is, Jean-François, in your opening comments, you talked about seeking productivity improvements and constantly reassessing spending behavior. Are there any new initiatives you can point to and provide perhaps a bit more color around the commercial spend productivity program and how you balance productivities here versus top-line growth measures? The third question is on the supply constraints and systems migration that you pointed to in Brazil in Q4. Are both of these resolved now for 2019?
Laurence?
I can easily start with the supply constraint. It is actually logistics constraint in really the peak of the peak of the year, the top month, which is December. It is kind of a shortage of truck because the sales were flying so much that there was a shortage of truck in Q4. This is peak season, so that is, I would say, hopefully a one-off. In terms of the SAP transition, we actually transition our operations into Kirin SAP, which is a larger one. At the moment of the opening, there were a few days where the delivery was a bit less easy, but that passed as well. It is part of the integration process.
On your question on guidance, I am afraid I will not be more precise than what we have said, and I could not be more precise. We give guidance on superior top-line growth, which means we would like to be leading in the industry and over the market. That is one of the things, and we have shown being able doing that, and we want to continue doing that. We give guidance with confidence that we can grow our operating profit beia with mid single- digits going forward. I cannot add anything more than that guidance that we give you today. Now, your question about initiatives on productivity and cost. We always have been focused on that. We started initially, a long time ago, by concentrating our efforts essentially on our supply chain activities within the breweries.
We expanded that in the whole supply chain, and especially also looking at the whole logistic aspect and to optimize that also. That is a complex interaction of optimizing existing logistics systems as well as finding out better and more efficient location allocation systems. I remind you, beer is a lot of water, and it is very onerous. Having your logistics optimized is, as Laurence pointed out too, from Brazil and the whole integration case of Brazil and the synergies of Brazil, logistics is a very important part of our efficiency. These programs of relentless productivity improvement are in place, and they are there to mitigate inflation, which from time to time spikes and can be more pronounced in some periods than others. Your specific question on marketing sales productivity.
I'm not going to dwell into the detail of a number, which in percentage might go down but in absolute goes up. We also there have plans in place to have more out of the buck we invest. In advertising above the line, out of our sponsorships, and out of our promotions. That is a discipline that we have been gearing up over the years, because there also, it is not automatic that if you spend more, you're going to sell more. We never guide, by the way, the spending as a % of revenue is never guided for, also internally. Every operation, if there is one thing which is rather zero budget-based, it is the marketing and sales spend. Year-on-year, people sit down and they reassess, how can we better build and make our brands grow?
It's a sum up of all kinds of activities, both above the line and below the line, that gives a plan, and that is designed to grow. As a result, after a year, you can just account for that yes, we have a better productivity of our marketing spend today than we had a few years ago. Our present growth rate and top line is underlying that those activities are paying off.
Thank you.
The next question comes from the line of Simon Hales from Citi. Please go ahead.
Thank you. Morning, Jean-François. Morning, Laurence. Three questions as well, please. Just firstly, in terms of costs, you flagged the higher input costs again that you're facing this year. I don't know if you can provide a little bit more detail as to where they're hitting geographically. Is there any particular phasing of those impacts through the year? I'm just trying to get a feel for how margins might develop H1 versus H2.
Also on the cost side, if you can just talk a little bit about the lower head office costs that you reported in the second half of 2018, and how we should think about that line developing going forwards. Then from a market standpoint, could you update a little bit more on what you're seeing in Nigeria, and I think, particularly more recently, we've just had another excise duty increase go into that market. I'm assuming you haven't priced that through. Finally, Laurence, I don't know if you can comment on working capital outlook for in sort of 2019.
Talking about the higher input costs, it's definitely an impact that we had in H1 and in H2. If anything, there was a bit of acceleration in H2. If you look where it is focused, it is really widely on packaging costs. That includes underlying commodities, but that includes as well transactional impact, which we have been suffering in a number of our markets. When we guide into 2019, we do guide for mid-single digit increase in our input and logistic costs. You will see a continuation of that trend. I would say that as we got commodities, we pretty much know where we're going because we're hedged for a large part of our commodity input. Logistic, we don't see the trend changing. That's how much color I could give you. Now, the lower head office cost, you have two phenomenon here.
First of all, there were a few one-offs. We called them that in H1, they are not reproduced in H2. What's more important is that we ramped up our system and platforms both in commerce and finance and supply chain, and we did that already in the second half of 2017. When you compared first half 2018 with first half 2017, you saw the incremental impact. Now I would say this is business as usual. This is why you do see the phasing of those expenses being different. But that we had also, I would say, planned for. We called for that in the H1. Working capital? Working capital. We've moved back. We've done, I would say, the main part of the road in terms of moving back our payment terms to industry average
I insist that this is not on the back of smaller suppliers. First of all, there are regulations, and we're very strict in abiding with regulations in a number of countries. Also, this is not where we had to improve. We had to improve on major contracts where we're really not getting the same conditions in terms of payment terms as our competition. Then we moved back closer to average. There is still a little bit of a way to go, I would say the essential part has been done in 2018.
Nigeria, let me zoom out. Nigeria is a difficult country for us, for a number of years already. The zoom out is just to point out that it is going on for a number of years. An economic downturn. It's going better, certainly not a hooray situation in Nigeria, first thing. That has led consumers to downtrade. We have a full portfolio in our Nigerian breweries operations today with high priced brands and low priced brands. In effect, you have seen over the last five years, the big shift from what were the mainstream brands to what were the economy brands. These economy brands have become the new mainstream. That's a major phenomenon, and repricing the whole industry down. The competitive pressure initiated by SAB and now continued by ABI is not helping at all, of course.
The repositioning of the whole market from what used to be mainstream to the value segment of the market, which is a new mainstream, again, has been pushed through during a period of economic recession. In so far, our price level suffered a lot more than our volume levels over that period. The second element that you have to think, Nigeria is a stock listed company, you can for yourself make the analysis of all these numbers, is that the high devaluation rate of the naira towards the euro has also pushed down, expressed in hard currency, the sales price. Like for like, the value segment, which is the new mainstream, is lower than it was five years ago. We had a cumulative effect of devaluation and of segment shift in the Nigerian market.
If we just zoom in in the last quarter, it was better. We had flat sales after a third quarter, which was kind of relatively bad, the one before, which was at -6 , the first half year of last year was at -6 , if I remember well. The last quarter was okay. Seeing through our portfolio, the good news is that the Heineken brand is growing double-digit, really strong double-digit. We continue to believe that the Nigerian market is a strong consumer market. The whole portfolio going forward will reposition in another shape. It will never come back as it was five years ago.
We never underinvested in our business. We restructured heavily the business for the new realities, this is a fit business for when Nigeria will return to fair weather. This is what we invest to. I do not have a gloomy outlook over Nigeria, but it's still rough weather and working through ahead. It's a fantastic option for growth in the future for us, and we have also to underline, we are still by far the market leader in Nigeria, and we are very intention to maintain that.
Perfect. Thank you.
The next question comes from the line of Trevor Stirling from Bernstein. Please go ahead.
Hi, Jean-François and Laurence. I suppose three questions from my side, too.
Hi.
The first one, I appreciate you're not going to give any more detail on the number and guidance and don't expect that at all. Can you just give a little bit more color about where you think the threats and the opportunities are, clearly, as elections in Nigeria, South Africa, political uncertainty in Mexico. Just a little bit of color around where you think the big uncertainties are would be very helpful.
Second question, given Americas margins down more than 140 basis points than the year, and you've got negative country mix going on there, is that the scale of the margin pressure which we think expecting in 2019? I suppose then finally, staying in the Americas, the U.S. has had a very torrid 2018. Are there any signs that it got slightly better towards the end of the year, or the pressure is still as intense as it was in 2018?
Trevor, I take the first question for me and leave the others to Laurence. You alluded specifically to geopolitical events, and they always have influence. I'm customary to say, and I really do believe it, that our business, for 70%, is dependent on things that we can't totally control. We have to surf the wave the best we can. Elections are always, I would say, important events, whether that's in Brazil or in Mexico and tomorrow in Nigeria or South Africa. They are equally important even in European countries. It's everywhere important as to the freedom of operation and the level of taxation in which we operate. That is what. Then what general policy does to the general economy because beer is a discretionary spendings. In that framework, we have to look for what political events influence directly or indirectly our business.
I'm not going into forward-looking statements and not making speculation what could happen. We never did that, and I do not want to start that. Of course, we internally give it a lot of thought, and it's something that we are always having on our radar screen. Unfortunately, I will not comment on that. I will just add that for Nigeria, because I was attentive, I forgot to say it, that the excise duty increase that was due to start this year in January has been delayed by the Nigerian government to June 2019. We had a little bit of relief. I will say the shock of a excise duty increase will come a bit later in the year, just as a reminder for you. I hand over to Laurence for the rest of the answers.
Hi, Trevor. Well, if you look at the margin in the Americas, you have a mixed impact as Brazil is growing very fast and has a lower than average margin. Now, if you dive a little bit into the countries, you have a strong increase of the profit and of the margin in Brazil, which is not enough to offset the impact of the decrease in the U.S. and Panama for this year. I wouldn't take that as a global trend. This is just how the mix of our countries plays this year. Again, very strong growth in Brazil and the margin moving up pretty nicely. In terms of doing better in the U.S. in the future, maybe you can help me with that, Jean-François.
We all pray for that and work hard. More seriously, we are a small player in the U.S., there are a number of things going well in the U.S., which do not forget that if I look at the price level that is sustained in the U.S., is far more better than what you have in Europe on average. It is true that the market is suffering, you have very little winners and a lot of losers in 2018, as we see. We're a small player, we are also rather at the side of the losers. Alas, I have to admit that. We're not satisfied with it. We have to work hard to put ourselves in the camp of the winners, obviously.
Again, we are a very small player, it's perhaps disproportionately a bit harder for us, seeing our size in the U.S., we have always good plans in the drawer, we hope to do better. That's the only thing I can say without going into the details. You know that Heineken USA and Lagunitas are totally separately managed from each other. The performance of Heineken USA is certainly due for an improvement or at least is tasked for improvement. Let me put it that way without giving any precise guidance. For Lagunitas, they were also slightly under pressure, in the segment, which overall was under pressure, they performed quite well.
The good news also about Lagunitas, it's a strong brand, that is gaining traction in the markets where we start to export it noticeably here in Europe, we even started to produce it locally here in our craft brewery in the south of Netherlands. I was calling out Wijlre, nobody knows where the place is, it's in the southern part of Holland. We have a smaller brewery, which is a craft brewery where Lagunitas now is locally brewed. We're satisfied with the development of Lagunitas also in the U.S. Our performance of Heineken USA should improve.
Thank you very much.
The next question comes from the line of Fernando Ferreira from Bank of America Merrill Lynch. Please go ahead.
Thank you. Morning, Jean-François, Laurence. I have three as well. First one on Africa. If you can talk about the drivers behind the strong operating profit improvement in the second half, despite the challenging conditions in Nigeria, as you mentioned. Second one, if we can go back to Brazil, can you talk about your 2019 expectations there as you expand the Heineken brand capacity? A third one, more of a technical question for Laurence. There was a significant increase in the other operating expense line from like EUR 10 million- EUR 95 million in 2018, which was excluded from your beia EBIT. If you can comment behind the reasons there. Thank you.
Whilst Laurence is thinking hard about your technical question, I will try to give you a view on Africa. I cannot go that much beyond what we say, but the improved performance, despite the lesser performance still of Nigeria, is due to we operate in more than 20 countries, and there are a number of countries where we have noticeable improvements, and I would only cite the biggest ones of them, which are principally South Africa, Ethiopia, but also Egypt. Also smaller countries like Rwanda and Burundi, who performed quite well. We have a portfolio of countries, and overall, we had more, I would say, increased performance than declining performance.
Even in the DRC, relatively, we did better, even if it stays a very complicated situation whereby we have taken, as you have seen, a strong impairment and basically putting the value of all our business to basically zero. At the same time, you have to realize this is, in potential, a big consumer market. It remains a very complicated situation, but by the impairment, which was a very technical calculation, obviously based on volume expectations, which are given in by outside parties. It creates also an option for the future.
I think that is how you have to look at the DRC, even if it is really not brilliant at the moment. We have a lot of operations, as I said, Ethiopia, DRC, Rwanda, Burundi, Egypt, Algeria, which are just performing well. Those compensate more than for the weakness we have today in Nigeria and the DRC and also in Côte d'Ivoire, where we are also having a slower operation at the moment.
You want me to go on the EIA. In the other-
Yeah
In the EIA, you have a number of different things, none of them major. I'll give you an example. We had a provision for onerous contract in the U.K. on our apples, which we actually talked about in the first half, that plays this year negatively. We had also some indemnity that we had to pay as part of the logistic crisis in France, because when you don't deliver on time to your retailers, if it's not your fault, you do have to pay penalties.
Then we have a few legal and tax provision here, on ongoing litigation or discussion with the authorities. It's an amount which is pretty consistent with what we had last year, except that last year we had a number of positives that came and actually minimized that. That play one way or another depending on the year, which is why we include it, because it's totally non-related to the business.
Thank you.
Absolutely.
Yeah, go on.
You asked for a specific country guidance. We cannot give that obviously, other than saying that we stay with the positive outlook on our operation in Brazil. The integration, as we said, has been played out well. The Heineken brand has traction, but not only the Heineken brand, also our other local premium propositions like Devassa or Eisenbahn, but also Amstel. They all have traction, and they are rather all premium priced. We continue to see growth in that corner of the market, and whilst we continue to make progress on our integration. You have to realize that as you grow into higher sales with a higher gross margin and filling up your available production capacity, it's a virtuous circle. That's what you have to think about.
If I may come back to your question on the AMEE region, I would say it's nice to see at the same time some fast-growing countries ramping up, as Jean-François said, and that would be the example of Ethiopia or South Africa, but also the recovery of countries that were more difficult. Egypt definitely, Russia as well. Now playing positively on the mix. You see this double effect, which is very encouraging, also for the teams in the region who are working hard on that.
I still have difficulties to see Russia in Africa and the Middle East.
It's because of geography.
Great. Thank you.
Thank you, Laurence. Yeah.
The next question comes from the line of Tristan van Strien from Redburn. Please go ahead.
Hi, good morning. Just three from me on different countries. Just first on Europe, following up on your comment on the pricing environment. Do you see it's getting a bit better? Are you able to offset this cost inflation or to protect the gross margin? Are you going to be dependent a bit more on the mix as we look at the next year ahead? Second, on Mexico, can you just remind us what share of your volume now goes through OXXO?
As I look back on last year, your growth last year, was that in proportion to your OXXO share? Your growth in OXXO was proportional? Lastly, in South Africa, just two parts. One, just what's the role of Soweto Gold, which kind of sits at the bottom end in your portfolio in that market? Secondly on that, do you need to start looking at a second brewery in the market?
I take Europe and Soweto. Do you take Mexico?
Okay.
Shall we do that?
Yeah. Absolutely.
Look, tendentially Europe, it is the most difficult environment to price. That is a mystery for nobody.
Yeah.
It is the continent where the competition is cutthroat between producers as well as between retailers. We all know that dynamic. You know that dynamic. That is, we are living in a period where we have more inflation than usual. It's a spike of inflation on both in the COGS and the logs, as we call it, the logistics cost as well as the cost of goods sold. It is difficult. It is country by country. Allow me to not dwell on that, because those are harsh, difficult negotiations whereby we put inflation in front of our demand for price increases. Those are all negotiations which happen in a very, very competitive market. That's it. We also used, in Europe, to mitigate, and we mitigate both ways. One from the cost, which is Europe is a cost improving machine.
It's a productivity machine. If you look back 15 years, it's an ever-increasing productivity. On the other hand, we have a policy to indeed improve our margins also with mix. It's all these three things that play together, and where up so far, we have a big business in Europe. We have some bumps, but it's a pretty stable and progressing business, albeit not at very high growth rates. That's what I can say about Europe without dwelling into details. For what the South Africa concerns, the Soweto Gold is in effect the mainstream proposition, but totally regional.
We do not have, obviously, a national policy because you would need much more breweries. South Africa is too big a country to operate only out of one brewery. You pointed out to the second questions, where we never make announcements when we did not publish them. That is the chicken and the egg. If we need a second brewery, we will build it for sure, as we do ever.
Should I go to the share volume of OXXO in Mexico?
Yeah.
Share volume last year is around 25%. Well, we don't comment on performance by channel, but there is nothing to single out either there.
Okay. Very clear. Thank you.
The next question comes from the line of Andrea Pistacchi from Deutsche Bank. Please go ahead.
Thanks. Good morning. I have a couple of questions on countries in Asia, please, first, and then a third one. On Vietnam has had another strong year. You've been moving into second tier cities with Larue. Could you just give a bit more color, please, on Vietnam, whether you are moving more in gaining share, particularly in the north there. Then if you've seen any change really yet in the competitive environment there with Sabeco.
Thirdly, on Cambodia, a market where you've been growing strongly but competition has intensified. You had a weaker Q3 back into growth in Q4, if you could provide a bit of color there. Then Heineken 0.0, which I believe you've just launched in January in the U.S. What is the ambition for Heineken 0.0 in the U.S.? Do you think in the U.S. it could be as significant as over the medium term as it could probably be in Europe?
Can we start with Vietnam?
Yeah. Go ahead with Vietnam, yeah.
Another very good performance in Vietnam, indeed continuing to deploy the strategy that we have talked to you about, then we've initiated a few years ago of continuing the great growth in the big cities and in particularly Ho Chi Minh City, but also going outside of the big cities. That worked very well. As we mentioned already, well, we use Larue for that, but the good surprise is that actually Tiger works also very well outside of the large city. There is also very good potential for Larue. Our operation are continuing to progress very well, including in terms of share. What I would more highlight about the north is the merger that we announced between our north and our southern operation. I remind you, the north was 100% owned and the south is in partnership with Sabeco.
This partnership has been really successful, we decided to put two together and everything in partnership. We expect that this will give us leverage and also all the power of the large company that we have in the south to serve also our distribution and our marketing in the north. Too early, of course, to call on results, but we really see that as a next step of our development in the country. Cambodia back into growth. You know that the competitive reaction was very, I would say, overly promoting, and that actually did not do any good to the market in Q2 and Q3. There is still potential, we're still continuing with our strategy in Cambodia. It's still a very good market for us.
I think what you can underline in Cambodia is that Cambodia is a free market. You can set capacity as you want, as opposed to Vietnam, where capacity is regulated by the state. You have an overcapacity in Cambodia, and you have a right capacity in Vietnam. Cambodia will, by definition, always be a more volatile market than Vietnam. Just for you to remind when you are trying, because when you have large overcapacities, and our competitor in Cambodia had that, the temptation is to use that overcapacity at a lower price because it's a marginal kind of benefit. That's the danger how you go with that. We're not unfamiliar with this kind of situation, but that is just two neighboring countries, but they're having two different systems. Heineken 0.0 in the U.S., yes, it's a launch.
I won't give you an objective we have. I think we have also to give it a try. Somewhere in Europe, it's a very safe bet, in Europe, we are in all our European companies in a position where we are practically a market leader or if not the number one, a very strong number two. We have a kind of infrastructure in which we place it that it's secure. In the U.S., it's a bit more delicate because we are a very small player in absolute terms. Also we ally with distributors who have a strong belief themselves that there is a need in their local markets, and this in priority with those distributors that we work to try it out. We try it out with a belief that also in America, there are moments where you don't want to drink alcohol.
You have people who never drink alcohol, you have people who love beer and don't want to have the alcohol inside or want to have a glass of beer and being able to take their automobile back home, or in sports clubs or all these kinds of things. It's lower calories and no alcohol. We got to give it a try, and up so far, it's never done in a serious way in America, but we think there is a demand latent for it. We're going to try it out with open eyes. We'll see what comes out of it. Again, working with distributors who are, like us, in for the ride and believing in the opportunity.
Thank you.
The final question comes from the line of Olivier Nicolai from Morgan Stanley. Please go ahead.
Hi, good morning, Jean-François, Laurence. Three questions on my side. First, looking back at slide 10, your margin increased by about 5 [basis points] in 2018, excluding Brazil. Since you're expecting more input cost inflation in 2019 than 2018, would it be fair to assume roughly stable organic margins in 2019? Second question is quite short-term, actually, on Vietnam. Vietnam has been very strong. Did Q4 volumes benefit at all from the earlier Tết festival? Just a last one, just a follow-up actually on Mexico from a previous question. OXXO is obviously a big customer for you. The current contract ends, I think, in one year. Do you believe your chain of six stores will allow you to maintain share in Mexico if the exclusivity with OXXO was not renewed? Thank you.
I will take the first question about, you implied asking margin guidance. I'm saying we stopped. Hear me officially, we stopped giving margin guidance. Grab back to the history, we gave margin guidance back with Rene a long time ago to fill the gap with the back then SAB, with a mix of businesses we had back then and SAB had back then. I think we have delivered on that program. We have said we stopped this year. We gave still a margin guidance for this year. We had to correct it half year. We gave a guidance on that. We delivered on that guidance. Full stop. Now forward, we give a dual guidance. A, our business model continues to focus on growth with a disproportionate attention to the premium end of our portfolio, and with an increasing eye on social and environmental responsibility.
Please weigh the two words. They are equally important. The environment and the social sustainability of our model, very important. With that, we believe with the attention that we have for cost and also what we say, spending behavior. Spending behavior, we mean zero bad costs in an organization. We give a guidance that we can improve our overall operating profit beia going forward organically by mid-single digit. Sincerely, we have to respect the guidance is public, and we're going to stick to that guidance. All questions around that guidance are accepted. The ones outside, I will not reply. Excuse me. Don't take it personally, but I wanted to make the point very clear.
Thanks, Jean-François.
Thank you very much.
The new question on Vietnam.
Yes. Mexico.
Yeah. The question on Vietnam, no impact on Q4. If anything, it's between January and February, where sales will be distributed differently.
Regarding Mexico, regarding the fact that your chain of Six stores growing over the years, do you think if the contract was not renewed with OXXO next year, those Six stores will allow you to maintain share?
I think I have to make a nuanced answer there, that the OXXO store has never been set up to build for a mitigation for the OXXO contract. OXXO and the Six stores, our own stores, they fulfill a different demand, they are geographically positioned differently. In a way, they are complementary. The Six stores work for us. They would never work for OXXO, if you will. The other way around, we could not operate in places where you have an OXXO store. It would be ludicrous to have a sixth store. It's very geographical, and when you go into whatever city in Mexico and you see what is the sixth store and what is this OXXO store, you immediately see what I'm talking about.
One has to realize that Six store is not there to mitigate per se, the loss of exclusivity in the stores. You cannot take away that if you would go brutally from an exclusive relation to a non-exclusive relationship, we would effectively be a net loser over time. That is for sure at the moment that arrives, that is just a mathematical fact, if you will. I will not dwell into how a contract will be and in which condition it will be renewed. You will hear from us when that will be done, obviously.
Thank you, Jean-François, Laurence.
I will now hand the call back to your host for any concluding remarks.
The host would like to thank the operator for the good services today, and thank you for joining and listening in today. If you have any queries as ever, please do contact our investor relations team. I wish you a very good day. Thank you.
Have a good day.