Good morning, everyone. Thank you for joining us today for Heineken's 2017 half-year results. For your information, this conference is being recorded. There will be an opportunity for questions at the end of the conference. If you would like to ask a question, please press star one. 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 2017 half-year results conference call. As usual, I'm joined by Jean-François van Boxmeer, our CEO, and Laurence Debroux, our CFO, for today's call. Following some prepared remarks on the half-year results, we'll be happy to take your questions. With that, I'd like to hand the call over to Jean-François.
Thank you, Sonia. Good morning, everyone. Turning first to slide three, let me start by saying that our half-year 2017 results were strong, with all four regions contributing to organic volume, revenue, and profit growth. The benefit of our balanced footprint was very clear, enabling us to deliver broad-based growth across the group. Premium brands outperformed. Our innovation agenda delivered. All of this was despite challenging economic conditions in some developing markets and significant currency pressure. Revenue grew 5.7% organically with positive volume and revenue per hectoliter growth. Heineken volume was up 3.9%. This top-line growth, combined with a continued focus on costs, delivered operating profit BEIA growth of 11.8% organically, with margin up 34 basis points. Diluted earnings per share, BEIA was up 6%, mainly driven by organic growth and partially offset by currency headwinds, to a lesser extent, a negative impact from consolidation.
Our full year 2017 expectations remain unchanged. Turning to slide four, our results show that Heineken's unique and diversified geographic footprint is delivering strong, balanced growth again in the first half of 2017. There was positive organic volume, revenue, and profit growth from every region. All regions also showed accelerated volume growth in the second quarter. Let me start with Africa, Middle East, and Eastern Europe, where consolidated beer volume grew by 1.5% organically. Strong growth in Ethiopia and South Africa more than offset lower volume in Nigeria, where high inflation, a weak consumer environment, and the economic recession continued to weigh on results. Revenue per hectoliter increased 11.9%, mainly due to pricing in Nigeria. Elsewhere in the region, Egypt was weaker due to increased taxes, rising inflation, and weak tourism. The DRC remains a difficult market. Ivory Coast, Ethiopia, and South Africa are performing well.
Regional operating profit beia was up 12.4% on an organic basis, negative currency impact remained significant. In the Americas, consolidated beer volume was up 2.8% organically, driven by strong growth in Mexico, which more than offset volume decline in Brazil, Panama, and to a lesser extent, in the U.S. Revenue per hectoliter was up 2.9% organically. High single-digit volume growth in Mexico was due to strong brands, a good innovation agenda, and effective sales execution in the market. In Brazil, volume declined high single digits due to the weak macroeconomic climate and tough trading conditions, particularly in the value and mainstream segments. It is important to highlight that our premium portfolio, led by Heineken, delivered double-digit volume growth. In the U.S., volume declined slightly with Heineken up slightly, but offset by volume decline in our Mexican portfolio, which underperformed the category.
Americas delivered strong organic operating profit beia growth up 15.9%. Asia Pacific volume growth accelerated in the second quarter following a slower Q1, primarily due to Tet timing. Consolidated beer volume was up 6.3% organically for the first half. Vietnam and Cambodia delivered double-digit volume growth, offsetting weaker volume in Indonesia and Malaysia. Volume in China declined given headwinds and the impact of parallel trade there. Regional revenue per hectoliter was down 1.2%, adversely impacted by negative brand mix. In Vietnam, volume grew double digit, driven by strong performance of the Tiger brand and effective marketing and sales execution. The region delivered strong organic profit beia growth of 8.8%, driven by performance in Vietnam and Cambodia. In Europe, consolidated beer volume was up 1.9%. Growth was driven by our premium portfolio. Heineken was up 7%, thanks to successful innovations, brand investment, and early success of Heineken 0.0.
Revenue per hectoliter was up 1.9%, despite deflationary and off-trade pricing pressure. Adjusting for accounting changes in the U.K., revenue per hectoliter growth would have been 0.9%. In the U.K., volumes declined low single digits on account of a partial delisting by a large customer. Our premium beer and cider volume performed well. The Star Pubs & Bars business delivered good results. In France, volume was up high single digit despite lapping tough comparatives, whilst Spain grew mid-single digit, benefiting from an acceleration in off-trade. The Netherlands saw low single-digit volume growth, with Heineken growing mid-single digit. Poland volumes decreased by mid-single digit in a competitive market, the regional operating profit beia was up 16.1% organically due to good revenue management, disciplined cost control, innovation, and successful premiumization. Turning now to slide five.
In the first half of 2017, Heineken volume was up 3.9% organically, with growth accelerating in the second quarter. Declines in Asia Pacific, due to Vietnam and China, were offset by growth in all other regions, particularly in Europe and the Americas. The brand grew double digit in Brazil, South Africa, Russia, Italy, Mexico, South Korea, Canada, Romania, and Hungary. A number of other important markets, including France, the Netherlands, and Argentina, delivered good growth. Heineken brand equity was supported again by the successful campaign around the UEFA Champions League sponsorship, which we recently extended until 2021. We also saw continued success with the cities, product stories, and music platforms. Our new partnership with the Formula 1 provides an opportunity to access new consumers globally and allows us to launch a powerful responsible drinking campaign: when you drive, never drink.
We've also used this campaign to successfully promote our Heineken 0.0 variant, which we launched in the second quarter. Heineken 0.0 is now available in 16 markets, all in Europe, with promising results to date. As you know, complementing our truly global Heineken brand, we have an extensive and strong portfolio of international brands with high potential to travel across geographies. Affligem, Tiger, Krušovice, Tecate, and Red Stripe all grew volume double digit, with high single-digit growth for Desperados. Premium was up low single digit, whilst Amstel declined slightly due to weakness in Nigeria and Greece. We continue to be very excited about cider, which I talk a little more about shortly. Turning to slide six. Innovation is firmly embedded in our strategy and how we think at Heineken.
As I have already mentioned, we are pleased with the performance so far of Heineken 0.0, launched in the first half. We continue to see significant potential in the low and no alcohol category. These products directly address the theme of moderation and are creating new drinking occasions for our brands. In Europe, low and no alcohol volume was up double digits, although this was offset by volume decline in malt products in Nigeria and Egypt. Total volume was 6.1 million hectoliters in the first half. We remain the leader in the cider category, which delivered low single-digit volume growth and reached a total of 2.3 million hectoliters in the first half. Growth was particularly strong in South Africa, where the recent launch of Strongbow was very successful. Other countries that contributed to the growth included Vietnam, Poland, Ireland, and the Netherlands.
The U.K., our largest market, the cider declined mid-single digit, notably due to a partial delisting in a modern trade retailer. Excluding the U.K., cider volume would have been up double digit. Our craft and variety beers continue to perform well. Lagunitas, Mort Subite, Birra Moretti Le Regionali, and Żywiec variants all delivered particularly good performance. These brands are meeting consumers' needs for authenticity, flavor, and heritage. With the acquisition of the remaining stake in Lagunitas, we were pleased to reinforce our ties with the Lagunitas brand and to continue to work with Tony Magee and his team. We continue to innovate around draft. The SUB, our at-home draft beer system, is now in seven markets and continues to show positive trends. As well as SUB sales continuing to increase, website traffic, click conversions, and average order size are all showing encouraging growth.
BrewLock, our innovative on-premise dispense system, also continue to perform well. Before handing over to Laurence, I would like to spend some time talking about the recently completed Brasil Kirin acquisition and the proposed acquisition of Punch in the U.K. Moving on to slide seven for that. In February, we announced the acquisition of Kirin's operations in Brazil, and the transaction closed at the end of May. This transaction transforms our existing business across Brazil, extending our footprint and increasing our scale and platform for further premiumization. As you know, we have taken the decision to leverage Kirin's existing route to market, and we are currently in discussions with the Coca-Cola bottlers. The combined Heineken Brazil business will be a strong player in premium, with a solid base in economy and mainstream volumes, as well as in non-alcoholic beverages.
As you see on slide seven, this leaves us well-positioned in premium beer, with just under 25% of the premium beer segment. This combines the Heineken and Sol premium volumes with Eisenbahn and Baden-Baden. The total consideration paid to Kirin for the shares was EUR 594 million, which is a bit lower than the EUR 664 million in the release due to the netting of the proceeds from the sale of the Macacu brewery. We expect significant synergies from the transaction, from procurement, optimization of the existing brewery footprint and logistics, and through selling general and administrative expenses. The transaction will be margin dilutive by around 40 basis points in 2017, and is expected to cover its cost of capital in Brazil in approximately five years. Turning finally to slide eight, we announced in December the acquisition of Punch A.
Given U.K. Takeover Panel rules, I am still very restricted in how much I can say, but I would like to make a few comments. Following a recommended cash offer for Punch Taverns plc by Vine Acquisitions Limited, we announced a back-to-back deal with Vine to acquire the pubs in Punch Securitisation A, as it is called. This securitisation comprises around 1,900 pubs. As you may have noticed, we submitted undertakings in response to the points raised by the CMA, and a few weeks ago, the CMA announced that there are reasonable grounds to believe that our undertakings or a modified version of them may be acceptable to remedy their competition concerns. Our proposed undertaking relates to the disposal of 30 pubs. We provided guidance at the time of the transaction that it was expected to be earnings-enhancing in the first full year following acquisition.
Earlier this year, we said that expected completion would be by the end of August. With that, I would like to hand over to Laurence to take you through the detail of the financial results. Over to you, Laurence.
Thank you, Jean-François, and good morning, everyone. Turning first to slide nine. As explained by Jean-François, organic growth of 5.7% this first half is a result of a positive momentum in volumes, combined with growth of 3.4% in revenue per hectoliter. This does reflect a strong first half, with volumes skewed towards the second quarter, helped by the timing of Easter and some good weather, particularly in Europe. Operating profit beia was up 11.8% organically, reflecting growth in revenues, the benefit from premiumization, some phasing in advertising and marketing expenses, and also cost efficiency. Operating margin increase was 34 basis points, and actually a bit more if we exclude the impact of the accounting adjustment in the U.K. A few words on that one. As explained in February with our annual results, we have adjusted the way U.K. operation accounts for the cost of products bought for resale.
More precisely, part of this cost was previously netted between revenue and raw materials, which was not the correct accounting treatment. The consequence of the de-netting is more revenue on one hand and more cost on the other hand, but no impact on operating profit. Mechanically, with the same operating profit and more revenue, you get a negative impact on operating margin. Growth of organic revenue per hectoliter, and operating margin, excluding this impact, are all shown in the footnote of this slide and in the press release. This will not impact our full year numbers, as we proceeded with the adjustment for the first time at the end of 2016, but adjusting the full year 2016 amounts retrospectively. To come back to operating margin growth on a like-for-like basis, excluding this, it would have been 41 basis points for the first half.
Moving now to net profit BEIA, it reached just over EUR 1 billion, up 10.5% organically, slightly less growth than in the operating profit, the difference being higher tax in the half year, largely due to the mix of profit skewed to higher tax countries. This included no significant further benefit from the refinancing of expensive debt, something that had provided us with extra leverage over the past few years. The difference of EUR 165 million between net profit BEIA and net profit reported relates almost entirely this half year to amortization of acquisition-related intangible assets. As you will remember, in first half 2016, we had a non-tax-deductible impairment charge of EUR 233 million for the DRC, including in reported net profit. Diluted EPS BEIA of EUR 1.82 was 6% higher than in 2016.
The difference between organic growth in net profit and the growth in EPS is mainly due to translational currency impact, to a lesser extent, consolidation. Free operating cash flow, which was up 38% or EUR 205 million on last year, can be called robust. At the end of the first half, our net debt to EBITDA ratio was 2.5 times, in line with our financial policy. Slide 10 now provides a bit more on revenue growth. Revenue reached EUR 10.5 billion with an organic growth of 5.7%, I'm going to refer to Jean-François's comments on organic revenue growth. For the rest, consolidation change added 1.2% or EUR 121 million, mainly driven by the Americas with the first consolidation of Brasil Kirin for one month and Lagunitas for two months.
As expected, the negative impact of currency was material, reducing revenue by EUR 320 million or 3.1%, mainly attributable to the Nigerian Naira and to a far lesser extent to the British pound, the Mexican peso, the Congolese franc in the DRC, and the Egyptian pound. Turning now to Slide 11, operating profit BEIA reached EUR 1.8 billion. Consolidation change was negative on growth by EUR 10 million or 0.6%, mainly in Asia-Pacific from our acquisition late last year in the Philippines. Currency impact was also negative, reducing operating profit by EUR 92 million or 5.3%, with the Nigerian Naira being, again, by far the most impactful, and much smaller impacts from the Egyptian pound, the British pound, and the Mexican peso. Excluding consolidation changes and currency impacts, organic operating profit was up by an impressive 11.8%, this indeed merits some more detail on our costs. First, marketing and advertising expenses.
Resulting in a marketing to revenue ratio of 13.5% compared to 14.1% last year. This includes some impact of phasing as our marketing and advertising expenses last year were skewed to the first half with Euro 2016, for instance. Still a very healthy ratio, and as you know, it is a key element in our strategy to put the right level of resources behind each and every one of our brands, whether global, international, or local. Now let's look at other costs. On an organic basis, input costs, which is raw material and packaging, was up 5.8%. On a per hectoliter basis, it is up 3.3%. Taking out the effect on volume, this increase of 3.3% is the net of savings achieved through our procurement policies and of significant transactional currency impacts in our key developing markets.
Personnel costs were up 6.2% organically, slightly ahead of sales growth. Overall, support costs are increasing far less than revenue, which translates our attention to cost in general, and also a number of targeted programs initiated in key countries. All in all, an organic increase of 11.8% in operating profit achieved despite heavy transactional currency headwinds in some of our largest emerging markets. As Jean-François already mentioned, a positive contribution to organic growth of operating profit coming from all four regions. Slide 12 now walks us through the development in diluted EPS BEIA over the half year period. EPS was up 6% with EUR 0.18 coming from organic growth. The impact from consolidation was EUR 0.03 at EPS level. Again, here, currency translation, as you can see in the chart, reduced it by a negative impact of EUR 0.05.
Let's now have a look at free operating cash flow on Slide 13. We have had a robust cash flow generation, EUR 746 million in the half year compared to EUR 541 million last year. The increase was mainly due to a stronger cash generation from our operations in the first half and a lower level of capital expenditure. The cash flow generated from the change in working capital, as you see from the slide, was comparable to last year. CapEx amounted to EUR 615 million, representing 5.9% of revenue, lower than last year. CapEx investment this year is expected to be skewed to developing markets, investing for future growth, and in particular in markets such as Mexico, Vietnam, Ethiopia, Cambodia, Haiti, and Brazil.
For some of those projects, CapEx will accelerate in the second half, which is why we have retained our guidance of just below EUR 2 billion for the year. Net debt to EBITDA BEIA ratio of 2.5 times at the end of the first half compared to 2.4 times in 2016 is in line again with our financial policy. Strong first half and teams are fully motivated, of course, and geared to continue to please our consumers and serve our customers at our best. We continue to expect volatile economic conditions with consequences on emerging market currencies. Actually, if you look at the translational update that we have given for the full year, assuming spot rates as they were on July 25th, are maintained for the rest of the year. Not a guidance, but a pure calculation.
You see a much higher impact at operating and net profit level than the one calculated at the time of our Q1, that is without a further devaluation of the Naira, of course. Pretty much in line with our guidance from the beginning of the year. Given this, also the recent strengthening of the euro, we continue to assume that headwinds from currencies will be indeed in 2017 comparable to what we had to face in 2016. Bringing all this together, we expect further organic growth in revenue and in profit, excluding major unforeseen macroeconomic and political developments, as well as the impact of Brasil Kirin, Lagunitas, and the proposed Punch acquisition. We also expect continued margin expansion in line with the medium-term guidance of a year-on-year improvement of around 40 basis points. Just quickly touching on some of the more technical financial guidance for 2017.
We expect an average interest rate broadly in line with 2016. As I've said before, having now completed most of the refinancing of our old, more expensive debt, there is no more positive leverage to be expected from this. As for the effective tax rate, this should also be broadly in line with 2016. Finally, CapEx, again, in 2017 should be slightly below EUR 2 billion. With that, I would like to hand back to the operator and we will be happy to take your questions. Operator?
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question, and we will take our first question from Edward Mundy from Jefferies. Please go ahead.
Hi. Morning, everyone. I got three questions, please. The first is on other financial results. I was wondering whether you could give a little bit of color on the outlook for the financial results into the second half. The second is on Heineken 0.0. Early days, but as you say in a press release, it looks very promising. Are you able to comment on whether you're seeing any cannibalization at all on your existing beer volumes? The third question, pretty good improvement in Africa. Do you expect this to continue into second half and beyond? How quickly do you think the business can recover back to peak margins of 20% or so in Africa?
Okay. Good morning, Ed. I'll start with the first question. On financial results, I think the color we're giving for H2 is to tell you that, in light of the good performance of H1 and the expected volatility of emerging currency, we're maintaining our guidance for full year. That would be, I would say, the sort of color that we're giving for H2. What you can see is the performance of our market for H1, and you also know what kind of comparable we're up against in H2, depending on the region. For instance, in Vietnam, it's a pretty high comparable because we had the early Tet, as you remember, so the Q4 was pretty strong. It's more moderate in other regions. That is what you can derive from following our result quarter after quarter. Definitely, we'll feel confident delivering the guidance for full year.
As to Heineken 0.0, no cannibalization. That is not the issue. It's about going after new occasions of consumption. One has to realize it's early days. It's a good start, Heineken 0.0, but it's not really very big volumes yet. Africa margins. Africa and Middle East and Eastern Europe is a very big region and knows also a lot of contrasts. Putting all together in one region would not do justice to its diversity. What I can say is that we see slight improvement in Nigeria. The macroeconomic trends will continue to be adverse in countries like Nigeria, in a country like the DRC, in Egypt, and also in Russia.
On the other hand, in a contrasting way, the business is on fire in countries like Ethiopia or Côte d'Ivoire, where we just started a year ago, and we are gaining share and doing an excellent developments in the Republic of South Africa. It's a contrast. Overall, the region is doing slightly better, but one has to recognize that in that vast region, we still have a number of economies that have to cope with headwinds, and they won't go over just as of tomorrow.
Thank you. Sorry, Laurence, just to follow up on my first question, I probably didn't make it clear enough. Question was more around the other net finance income or expenses, which was I think EUR 68 in the first half. I know you've given some pretty good guidance on your group coupon for the year and also the tax rate for the year, where there are some phasing issues between H1 and H2. Were you able to comment a little bit on the other net financing-
Guidance for the second half, because it really depends on what individual currencies are going to be doing, on whether there will be a devaluation or not in Nigeria. It is quite difficult to anticipate, but you should not expect it to fade away.
Thank you.
We will take our next question from Carl Walton from UBS. Please go ahead.
Thank you for the questions. Again, on the Africa region. Just on Nigeria, in terms of the profit growth you flagged as a key driver and obviously pricing and cost-cutting efforts into that. Can you remind us where you are now on local sourcing of raw materials there? On the Naira devaluation, just to confirm, you are still expecting that. If so, when? If you have any view on how that's changed for this year. Then switching to South Africa, post the JV unwind, obviously a very strong run rate of growth so far. What is your expected run rate of growth into the medium term? I think last time you said you didn't want to commit to necessarily reaching profitability or breakeven in 2017. Is that still the case? Can you say you would expect profitability in 2018 from this stage? Thank you.
I'll take the first one on Nigeria. As you know, we have a commitment to be sourcing 60% of our raw agricultural material from local sources by 2020. I can tell you that we're very close to that already in Nigeria. Actually, on another type of supply, which is packaging, we're higher than the 60% already in the country. We are progressing well here. Yes, this is definitely one part of the mitigation. One thing that we've done since the beginning of the crisis on the Naira is make sure that we need as little hard currencies as possible by minimizing imports. I must say, the local team has done a great job at significantly decreasing our need in the country. Well, then, of course, if you are going to sell cans, then you're dependent on aluminum market, which is an international market in dollars.
Even if you sourced it nationally, it is quite international in any way. That does help, and that does help in the profitability of the market. This being said, a lot of it is due to the very healthy and necessary price increase that we had to take on several occasions last year and whose global impact you feel this year.
As to South Africa, indeed the business is doing well, both in beer premium end, but also in cider, which is also growing quite fastly. Strongbow brand is developing really well. Most probably, we did in the statement that we are working towards a better utilization of our capacity in South Africa. As you can imagine, if you use your capacities well, you start to have better returns. We are not going to give precise guidance of when and upward margins and all these details by geography. You have to realize that in South Africa, we are the challenger in the market. We have a modest market share, and we are more of a niche operator. We focus more on the premium side of the market because the market is big enough to do so.
You will also understand why we are not giving too much details about our operations in South Africa.
I am coming back to your question on the timing of devaluation of the Naira. Of course, no idea. I would say the one comforting thing, and it is little comfort, but it is a bit less difficult to get hard currency, so liquidity is a bit better. Definitely better than just before the first devaluation in June 2016. The gap between official rate and parallel market rate is nowhere as big as it was at the time. When we say we see small signs of improvement in the underlying situation in Nigeria, that is what we see. I call that small signs because we all hope it is predictive of a situation becoming better, but you still have high inflation, and you still have a country in recession over there and still low output in terms of oil. The underlying issues of Nigeria have not been solved yet.
Great. Thank you very much.
Our next question is from Trevor Stirling from Bernstein. Please go ahead.
Morning, Laurence and Jean-François. Two questions from my side, please. The first one relating to Brasil Kirin. Jean-François, I appreciate you are limited in what you can say because negotiations are underway with the Coke bottlers in Brazil. Once you have reached agreement, presumably there is still a pretty massive operational challenge, which is integrating those two distribution platforms. Any color you are able to give would be great. The same thing for Laurence. Laurence, there was a bit of a step up in the head office charges. Is that the new normal? Should we be expecting that run rate now more around EUR 50 rather than the EUR 20 that it was in the prior year?
I start with Brasil Kirin. Yes, you're right. I cannot say we are in middle of such an integration. It's only first month. As we have said, we have declared that we would rather integrate our business around the distribution platform dedicated to beer, which the Brasil Kirin operation is going to be the backbone of. We have the difficult task to unwind with the Coca-Cola bottlers distribution system. It's out there in the public that we are busy with doing that. On the other hand, it is also not the intention to give details about these negotiations as they go on. It's a huge task to integrate that, but rest assured that our teams are busy with it. A company like Heineken has lived from integration, has grown through integrations. We are up and running doing that.
You are absolutely right to point out that, I would say the biggest challenge in the whole operation will be the lift and shift of the distribution from one focal point to another, and we will work for as smooth as possible transition, because it has to work for us, but it has also to work for the Coca-Cola bottlers in a certain way, and that's what we are working for.
Coming to your question on head office. The main difference is a step up in some investment behind our brands, and in particular, the F1 platform here. You know the head office is made of many different things, so there are also a bit of one-offs here and there, but that is really the main explanation. Without any more details, you can actually multiply it more or less by two to get to full year in the model.
Okay. Thank you very much, Laurence and Jean-François.
You are welcome.
Our next question is from Tristan van Strien from Redburn. Please go ahead.
Good morning, guys. Two questions if I may. One, on the Netherlands, you are doing a deal with Sligro. I am just curious to find out, are you totally getting out of wholesale or a bit of color on that one? The second bit on South Africa, it appears that the consumer is under pressure there. If you look at the retail data and you look at the countries, basically almost in a recession, yet beer seems to continue to grow. It is the fastest growth rates over a decade. Maybe a bit of consumer insight on that market. What is driving that beer consumption from your perspective? Thank you.
Tristan, for the Netherlands Sligro, it is not heralding that we are stepping out wholesale activities altogether across Europe or where we do that. As I always said, the wholesale activities or vertical integration activities are looked after market by market, and as circumstances in landscape and competition situation and demand can change, we can change our point of view. You will remember that we have divested our wholesale business and sold it in Poland, previous year. The Sligro deal is announced. It is currently being worked out, but basically, it is lifting out the physical distribution of all our portfolio of beers and non-beer products. The current assortment that we are bringing to the market of non-alcoholic brands and juices and waters and wines and spirits to the on-trade and exclusively to the on-trade to Sligro.
Sligro has been growing and thriving in the Dutch market by being the reference wholesaler for food. The landscape of on-trade has changed in the Netherlands over the last, let's say, two decades from essentially beer outlets to more food outlets where beer plays a role but doesn't play any more the dominant role. If you take that evolving landscape into account, for us, the winning combination is to work together. We will continue to do ourselves the direct deliveries of what we call tanker beers. For big outlets to get their beer delivered with tank systems that are refilled. That is a distribution feature that we will keep. For the rest, Sligro will carry our products as a logistical provider, but we will keep commercial contacts with the outlets as well, as that the billing will go through Heineken going forward.
That is how we have structured more or less the deal. It's now worked out for an implementation in the coming month. We think this is a win-win situation for us going forward in the Netherlands. As to South Africa, you want me to do it or you want to do it?
What?
You can do it also. We can divide a bit the work.
Definitely not the easiest economic situation in South Africa, but we are extremely happy about the development of our volumes, and then particularly on the Heineken brands. Of course, in that kind of case of recession, what you see is.
Questions on Brazil, please. I appreciate that you are still in the middle of the discussions with the Coca-Cola bottlers. If you could please comment on how much are you planning to support the Kirin distributors after this change, given that most of their distribution is done by third-party distributors, right? On timing, FEMSA announced that the termination date for the contract should be October 31st, which seems a bit early given the complexity of this change. If you could comment on that as well. Lastly, your portfolio will still miss a mainstream brand in Brazil, right? I wanted to understand if the plan will be to push Amstel to become your key mainstream brand there, or the plan is to improve either the Kirin or the [Skol] brands. Thank you.
I try to answer on the first one, the distribution. Basically, we want to articulate a system which is geared to beer. Where the attention of the last mile, which is distribution, order taking, and merchandising, is focused to a portfolio of beer products.
One has to understand that if you would add all the range of the Coca-Cola company that is currently with the Coca-Cola bottlers, plus the range of Heineken Brazil, plus the range of Brasil Kirin, it starts to be a portfolio which is so large that it is going to be difficult to create the kind of focus we demand on the beer products to boost our competitiveness. That is the main reason why strategically we think that the moment has come to concentrate on the beer dedicated system or beer, let's say, a distribution system where beer is the main item and not the secondary item. The way going forward and the balance between direct distribution, how we work with Coca-Cola bottlers, and how we work with independent distributors, that is exactly what we have to do in the coming month.
The sooner, the better, because the enemy is uncertainty in all operations when you do integration. We have some experience with that. It leads me to your question about the date. The date is set rather earlier than later to keep the pressure on all teams to work into a solution that works for everybody. Uncertainty is not good for us, it is also not good for the Coca-Cola bottlers. That is therefore that date has been kind of put forward in order for the teams to advance the cause. For the rest, these are commercial negotiations. I will not make any comment further on these commercial negotiations, which are currently taking place. Finally, our last question is about the brands. I would argue that Skol is a mainstream brand. It is perhaps a regional mainstream brand. It does not have the national coverage of our larger competitor, obviously.
It might be a little bit less good in pricing than the mainstream brands of our competitors. Nevertheless, it remains, in essence, a brand that in its character is mainstream and that we have to build on. That is what we are committed to. Also what is the big driver of the business case is that we can also develop our premium and not only the brands we acquire, but also the brands we have already. Thanks to the Kirin production and distribution network, we can roll it out in regions where previously we were doing it to a lesser degree, or at least with a lot less profitability than we will be able to do it with the Kirin infrastructure, both in brewing and distribution.
Understood. Thanks, Jean-François.
You're welcome.
We will take our next question from Matthew Webb from Macquarie. Please go ahead.
Thank you very much. 2 questions, please. Firstly, on the marketing and selling expenses, I appreciate you don't guide on that line, but just in terms of the right way to think about it sounds like there's no change in your fundamental approach there. Should we therefore expect the full year spend as a percent of sales to be broadly similar to last year or even slightly higher, and therefore a much higher level of spend in the second half? Do you consider the spend that you put behind the Euro 2016 last year to be sort of exceptional and therefore, maybe look at the spend in the second half being more similar to last year? That was my first question. The second question is on Brazil.
I was just wondering, I appreciate it's early days, but have you been in control of the Kirin asset for long enough to come to any view on the suitability of their pricing policy and perhaps even make some changes to that? Obviously behind that is the very heavy promotional activity that they are widely seen as having engaged in over the last year or so. Thank you.
I'll take your 1st question, Matthew, on marketing and advertising expenses. Again, there is phasing in there. Last year was really skewed towards the 1st half, we will not guide for the full year. We'll take that along in our guidance of operating margin. I'm not going to give more granularity on that one. Again, if you look at percentage to revenue, we support the brand. You compare it to previous years and actually two, three years back, we actually put behind the brand what needs to be put, depending on also moment in the year and events. That does fluctuate.
I think for Brazil, you will allow me, on pricing policy, to say absolutely nothing.
No, fair enough.
You're welcome.
Yeah. It was only if there was something that had already taken place that was out there in the market that I might have missed. No, I appreciate you're not gonna give any warning.
No. Thank you.
Fair enough. Thank you.
Our next question is from Olivier Nicolai from Morgan Stanley. Please go ahead.
Hi. Good morning, Jean-François, Laurence. Three questions, please. First of all, in Europe, what's driving the strong margin progression you have there? Is there some marketing phasing too? Second question about France. You're up high single digit against very tough comps. Is the market really strong, or are you just gaining share in the on and off-trade as well there? Last question about the U.S. Could you just give us a bit more details about your performance of Dos Equis and Tecate in the U.S., and how do you explain the relative weakness of those two brands against the other Mexican imports? Thank you.
I'll take the first one on Europe margin. Yeah, definitely when we talked about phasing in marketing and advertising, the main example I gave is definitely Euro 2016. In a country like France, for instance, it has a significant impact, but not only on France. Definitely that plays a role for the margin improvements in Europe. I would say also, well, good weather, that plays on the top line. Also what you see in Europe is the result of a number of programs, I would say, not only cost because costs that we reinvest behind the product marketing program. Significant programs that have been initiated in a number of key countries, whether it's France or Spain, for instance, but other countries as well. That plays a role into that profitability.
All in all, what you see, if you look, for instance, our revenue per hectoliter, you see we don't get that much pricing in Europe, and that's very clear, but mix is working. Mix means premiumization and means also something that is skewed towards higher margin. In markets that are developing better than in past years, that does help as well the operating margin growth.
You did France?
I gave France as an example.
Very good. Remains the U.S., sorry. The performance, it increased. Quarter two was already better than quarter one. We had a very weak one. Tecate Light is still growing, and so the whole franchise of Tecate is Tecate Light plus the regular, so we're still optimistic, and then we have to fine-tune also a big part of our business is in California with Tecate, and we have to gear up with the pack size. We have to change the focus on the pack size where promotions go to have better distribution. We had a lackluster performance, and we are addressing that in America with our Mexican brand, but we stay tuned to make Tecate grow in the U.S.
Thank you very much.
We will take our next question from Andrew Holland of Soc Gen. Please go ahead.
Hi. Can I just ask you refer in the statement to your price increase in Nigeria at the end of last year. Have you had any price increases since then? Do you expect to get them if you haven't yet had any? When might we expect to see further price increases in Nigeria?
We've taken most of the pricing last year, and you see the cumulative effect of this pricing above 20%. We've taken a bit of pricing in this first half, I would say far less than last year to date.
If I can add, Andrew. Pricing is trailing very much what the currency exchange is doing. We have to recognize that. The inflation you have in Nigeria is essentially currency-driven. That is what it is. It is not because you have an overheated economy or cheap credit. It is just the devaluation of the Naira, which drives price increases and trying to keep our business afloat because in Nigeria, in Naira, the business is progressing quite nicely, but that doesn't mean a lot. We have to fight currency devaluation, and that is the most difficult. We can do that only in steep and irregular incremental steps, rather than in regular smaller steps in that country, due to the way the foreign exchange market is organized. If that makes sense.
It does. You might be aiming for a similar level of price increase as you got last year, so in excess of 20%.
Again, it's very depending on how the Naira evolves and the foreign exchange does. You have to wait for these things to evolve when you take your price increases. We live also in a competitive market over there, so we have to take that also into account.
To complement on that, the whole market took some price increase in July as well, so after the end of first half.
Okay. Thank you.
We will take our next question from Komal Dhillon from JPMorgan. Please go ahead.
Hi. Good morning. Just two from me, please. The first one on Lagunitas. It looks like you acquired the remaining 50% for around [EUR two billi on or EUR 300 billion]. It seems a bit low relative to the over EUR 500 million spent in 2015. Could you comment on why this is the case? Secondly, on Brazil, your comments on returns from the Kirin Brazil acquisition, they seem to imply very strong synergies of around high teens of acquired sales. Can we assume this is back-end loaded given you talked about previously the immediate challenges in integrating the distribution network? Thank you.
I'm going to start with your Lagunitas questions. Definitely it's part of a global negotiation. Then you have control premium playing also in both cases. It's a bit lower for the second 50% than for the first 50%. What is important that we felt it was the right time. IPA is still growing, and within IPA, Lagunitas is growing high single digit to double digit in the U.S., which is quite an exception in the craft market right now. We feel by removing the complexity of the JV at this moment, we can actually strengthen our links and develop Lagunitas brand faster on international market, and that's what we've been looking for, more than a price that is a bit lower or a bit higher than last time. Your second question was on synergies in Brazil.
Definitely, we expect synergies to be significant and to be concentrated on, well, top-line synergies, of course, being able not only to have a full portfolio, to play with a full portfolio and a much stronger footprint in Brazil, but also to accelerate premiumization. We were able to bring Heineken to a 2 million hectoliter brand in Brazil, but we felt there was a little bit of a ceiling to that if we didn't have more access to this very vast country, which is Brazil. That's going to be the case. There are also going to be a number of cost synergies coming from procurement policies, coming from supply chain. We have five breweries. It's a very good network, high quality of 11 breweries that we are acquiring. We are optimizing our global footprint and of course, SG&A. Not particularly back-end loaded. We just closed the transaction.
It's only one month of consolidation in the first half. Then, of course, all the teams are working now on portfolio strategy and on implementing the synergies. Route to market is a significant part of it, but I would say not all of it at the same time.
Okay. Thank you. Just to follow up on the cost synergies front in Brazil, is that right in terms of, is it high teens of sales?
We're not going to give any indication of that. We definitely feel that there is a lot of potential in Brazil, and the main reason why we go there is because it's a great market. Number three beer market in the world. Potential to grow, potential to premiumize far more than what it is right now. Definitely what we've said in the press release is that the transaction is expected to repay its cost of capital to-
[For in- house] distribution of the Heineken brand in the big cities. The second question is to come back on Heineken 0.0. Appreciating, as you said, it is early days. Can you say whether 0.0 attracts new types of consumers to the brand, and which one would that be? Also, will you roll it out in other regions in the next 12 months?
I'll start with the 0.0. As I said, this is mainly due to going for new occasions where normally you would not drink alcoholic beer. It's very much a free choice. Think about the lunch occasion of just after sport or when you have to drive. We learn very much from Spain, where 0.0 beer was introduced decades ago because Spain has a tapas culture. People go out and they eat tapas after work with the colleagues, and then they have to drive their car home. As the Spanish authorities were having a very strict policy on the don't drink and drive, people switched quite easily to non-alcoholic beer because the, let's say, the bitter taste of beer goes very well with those tapas. It's as easy as that. You can think about these kind of occasions in other countries, too.
It is not only for Heineken, but we do it with Heineken because Heineken being our flagship brand, it also signals to the entire Heineken group that going into and promoting more non-alcoholic products and variants of our existing brands is a good business case. It is premium and it opens market segments where we are not with alcoholic beer. To show and lead by example, we put our money where the mouth is, and we have launched Heineken 0.0 for that. Again, it's early days. It had a good start. We receive a lot of good critics about the taste, essentially, and that is what matters. We'll see how it evolves. We think there are a lot of new drinking opportunities to sell it through.
Heineken brand in Mexico.
Yeah.
As you know, premium is only 5%, about 5% of the total market in Mexico. What we're seeing for Heineken brand, and not only seeing because we're working hard for that, is a very strong growth. Strong acceleration in this first half, strong double-digit growth of the Heineken brand. Of course, because it is not a completely developed premium market yet, you will see it concentrated in larger cities and where premium brands get consumed. There is still a large potential for deployment of the Heineken brand, and it's actually going quite fast.
We don't want, by design, a penetration rate which is to be compared with mainstream brands. That would be wrong. It's a journey of a decade of increasing distribution, if you will. If you want to build an aspirational brand, you have to have a pricing point which is affordable, but yet making clearly the statement that it is premium. That's how also you have to look at competition in Mexico. The second thing is that your brand image should be aspirational. People should engage with your brand in a way that they are willing to pay that extra for your brand. Finally, you should not go into a full penetration in the beginning, because by making it too widely available, you also diminish the premium. That is the gradation in which you have to operate.
It start with seeding and then accelerating and then going to something which is Let me put it that way. Brazil is already years ahead of where Mexico is with the Heineken brand. We have different stages of maturity with the Heineken brand in different countries. Mexico is only at the beginning of the curve and now accelerating.
Very clear. Thank you.
We will take our last question from Sanjeet Aujla from Credit Suisse.
Hi, most of my questions have been asked, but just a couple of ones. Firstly, in Europe as the fourth consecutive year of volume growth now. How do you see the outlook for per capita consumption in some of those markets? Do you think, given the demographics, we can get back to peak levels? Then just a couple of follow-ups on Brasil Kirin. Can you just confirm what cost of capital assumption you're using? Also, what are the plans for the soft drinks business? Is that core to your operations there? Thanks.
I will let Laurence time to prepare for your questions about Kirin, I will take the easy one on Europe. There are two elements in Europe. The market is mature essentially because you don't have steep population growth anymore. The phenomenon of the baby boomers post-war, created a reservoir of beer drinkers for the 1970s and the 1980s, which was huge. At the same time, the Generation X and Y, which followed the baby boomers were 15%-20% less numerous. If you look at demographic curves, they were declining. The beer market declined essentially because of demographics. The intake of beer diminishes with age. The peak of your drinking beer is your legal drinking age till you're 35, and then it kind of slows down till you're 50, very quietly.
When you cross the 50s, it suddenly drops down because it seems that your liver function is doing a bit less, and so you have to accommodate for that. Those are just physics. When you look at these big numbers, well, that led the whole beer market in Europe to decline steeply over the last 10-15 years. Reckon that all baby boomers now cross the 50s, so they are marginal beer drinkers today. The good news is that the X, the Y, the millennials, they are in balance. There is no anymore steep population decrease to be expected in the future. Now, there are differences. Some countries are demographically more dynamic, like the Netherlands or the U.K. There are some countries which are demographically not dynamic at all, like Germany or Italy. It's not that Europe fits one picture.
Overall, it is a country which benefited, a decade ago still, or 15 years ago, from the peak of the baby boom consumption, and we had to fade that out. There is a second phenomenon in Europe going on. It is the consumption of alcoholic beverage as a whole. If you would take the absolute, you would take it as a pure alcohol degree intake, has also diminished quite a bit. It has been measured in Western Europe for a long way, and I think it went down more than 25% over the last 30 years on a per capita. People drink less alcohol for all good reasons. You don't drink at lunch anymore. You don't drink when you drive anymore, and you are more health-conscious. This is all good news for society, it had a business consequence.
I think we have digested that, and we will continue to digest that. That's also the reason why we invest a little more into non-alcoholic and low alcoholic variants to offer the choice to our consumers. If you look at the whole of Europe, that has been the forces at play. The final leg of it is competition. You compete with other drinks, alcoholic and non-alcoholic. The beer category of the last, let's say, few decades, has been very much focusing to big brands, lager beer, kind of gregarious marketing. That was very successful. Today, people want choice.
The good news is that through the movement of craft brewing and us following suit and offering much more diversity in taste as we did before, we make people rediscover the richness and the variety of the taste that beer can offer when you use different yeast, different hops, and different brewing and fermentation processes. That leads, if you will, stabilization of demand on the one hand due to demographics, which tend to stabilize, and us, as brewers, doing a better job to make our category more attractive. That is why I think that even if Europe is a mature market and you do not have to expect a category growth, which will be explosive, obviously, you can still engineer for some positive momentum in the years ahead.
And that-
I suppose the WACC of Brazil at the time.
I let you a lot of time to think about the WACC of Brazil.
I've had a lot of time to think about WACC of Brazil in the past few months. At the time of studying the acquisition, we calculated that 12.5%. Depending on the assumptions you take, it's closer to 12 today. Yeah, you can take 12.5%.
Which point of view we will take on that.
Very good. Thanks.
As there are no further questions, I will hand back to the speakers for any closing or additional remarks.
Well, it rests me to thank you, operator, and thank you for all of you to join us this morning and having the comments on our strong growth in the first half of 2017. Of course, as ever, if you have further queries, please contact the investor relations team, and Sonia Gvozdova stands by to take your questions on the phone. Thank you all, and have a good day. Bye-bye.
Thank you. Bye-bye.
That will conclude today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.