Earnings Call: Q2 2017

Jul 31, 2017

Good morning, everyone, and 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. At this time, I would like to turn the conference over to Heineken Management and Investor Relations. Thank you. Good morning, everyone, and thank you for joining us today for our 2017 half year results conference call. As usual, I'm joined by Jean Francois Van Boixmere, our CEO and Laurence Dubrow, 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 Francois. Thank you, Sonia, and good morning, everyone. Turning first to Slide 3, 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 and our innovation agenda delivered. And all of this was despite challenging economic conditions in some developing markets and significant currency pressure. Revenue grew 5.7 percent organically with positive volume and revenue per hectoliter growth and Heineken volume was up 3.9%. This top line growth combined with a continued focus on costs delivered operating profit growth of 11.8 percent organically, with margin up 34 basis points. Diluted earnings per share, BEA, was up 6%, mainly driven by organic growth and partially offset by currency headwinds and to a lesser extent a negative impact from consolidation. And our full year 2017 expectations remain unchanged. Turning to Slide 4, our results show that Heineken's unique and diversified geographic footprint is delivering strong balanced growth again in the first half of twenty seventeen. There was positive organic volume, revenue and profit growth from every region. All regions also showed accelerated volume growth in the Q2. 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 was up 12.4% on an organic basis, but negative currency impact remained significant. In the Americas, consolidated beer volume was up 2.8% organically, driven by strong growth in Mexico with 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 digit due to the weak macroeconomic climate and tough trading conditions, particularly in the Value and Mainstream segments. However, 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. Overall, Americas delivered strong organic operating profit by a growth up 15.9%. Asia Pacific volume growth accelerated in the 2nd quarter following a slower Q1, primarily due to debt 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 growth of 8.8% driven by a 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 UK, revenue per hectoliter growth would have been 0.9%. In the UK, volumes declined low single digit on account of a partial delisting by a large customer. Our premium beer and cider volume performed well. The start pubs and bars business delivered good results. In France, volume was up high single digit despite lapping tough comparatives, while 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, and the regional operating profit was up 16.1% organically due to good revenue management, disciplined cost control, innovation and successful premiumization. Turning now to Slide 5. In the first half of twenty seventeen, Heineken volume was up 3.9% organically, with growth accelerating in the 2nd 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 digits 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 have also used this campaign to successfully promote our Heineken 0 variant, which we launched in the Q2. Heineken 00 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. Aflagan, Tiger, Krusovice, Tecate and Rex Drive will grow all grew volume double digit with high single digit growth for Desperados. So premium was up low single digit, whilst Amstel declined slightly due to weakness in Nigeria and Greece. We continue to be very excited about Sire, which I'll talk a little more about shortly. Turning to Slide 6. 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 00 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 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 2,300,000 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 UK, our largest markets, the Cider declined mid single digit, notably due to partial delisting in a modern trade retailer. Excluding the UK side of volume would have been at double digit. Our craft and variety beers continue to perform well. Lagunitas, Morcabit, Biramoretti Reggionale and Givirtz 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 McGee and his team. We continue to innovate around Draught, the sub, our at home Draught beer system is now in 7 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. RULOG, 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 Brazil Kirin acquisition and the proposed acquisition of Punch in the UK. Moving then on to Slide 7 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 7, this leaves us well positioned in premium beer with just under 25% of the premium beer segments. This combines the Heineken and Sol premium volumes with Eisenbaum and Baden Baden. The total consideration paid to Kirin for the shares was €594,000,000 which is a bit lower than the €664,000,000 in the release due to netting of the proceeds from the sale of the Bakaku 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 expected to cover its cost of capital in Brazil in approximately 5 years. Turning finally to Slide 8, we announced in December the acquisition of Punch A. Given UK takeover panel rules, I'm 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 VIN Acquisitions Limited, we announced a back to back deal with Heim to acquire the pubs in Punch Securitization A as it is called. This securitization comprises around 1900 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 1st 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 Francois, and good morning, everyone. Turning first to Slide 9. And as explained by Jean Francois, 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 for Ektoliter. This does reflect a strong first half with volumes skewed towards the Q2, helped by the timing of Easter and some good weather, particularly in Europe. Operating profit via 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 UK. A few words on that one. As explained in February with our annual results, we have adjusted the way we UK operation accounts for the cost of products both 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. And mechanically, with the same operating profit and more revenue, you get a negative impact on operating margin. Growth of organic revenue, 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 16, but adjusting the full year 2016 amounts, retrospectively. And 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. It reached just over EUR 1,000,000,000, up 10.5 percent organically. So 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 has provided us with extra leverage over the past few years. The difference of €165,000,000 between net profit BEA and net profit reported relates almost entirely this half year to amortization and acquisition related of acquisition related intangible assets. As you will remember, in first half twenty sixteen, we had a non tax deductible impairment charge of €233,000,000 for the DRC, including in reported net profit. Diluted EPS of €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 and to a lesser extent consolidation. Free operating cash flow, which was up 38 percent or €205,000,000 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 €10,500,000,000 with an organic growth of 5.7 percent, and I'm going to refer to Jean Francois's comments on organic revenue growth. For the rest, consolidation change added 1.2% or EUR 121,000,000 mainly driven by the Americas with the first consolidation of Brazil Kirin for 1 month and Lagunitas for 2 months. As expected, the negative impact of currency was material, reducing revenue by €320,000,000 or 3.1 percent, mainly attributable to the Nigerian NELA and to a far lesser extent to the British pound, the Mexican peso, the Congolese franc in the DRC and the Egyptian pounds. Turning now to Slide 11, operating profit reached €1,800,000,000 dollars Consolidation change was negative on growth by €10,000,000 or 0.6 percent, mainly in Asia Pacific from our acquisition late last year in the Philippines. Currency impact was also negative, reducing operating profit by €90 2,000,000 or 5.3 percent 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%, and this indeed merits some more detail on our costs. First, marketing and advertising expenses. They decreased organically by 0.6% and resulting in 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 20.16, 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%. And on a per hectoliter basis, it is up 3 point 3%. So taking out the effect on volume, this increase of 3.3% is the net of savings achieved to our procurement policies and of significant transactional currency impacts in our key developing markets. Personal costs were up 6.2% organically, so slightly ahead of sales growth. And 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 percent in operating profit, achieved despite heavy transactional currency headwinds in some of our largest emerging markets. And as Jean Francois already mentioned, a positive contribution to organic growth of operating coming from all four regions. Slide 12 now walks us through the development in diluted EPS over the half year period. EPS was up 6% with EUR0.18 coming from organic growth. The impact from consolidation was EUR0.03 at EPS level. And again here, currency translation, as you can see in the chart, reduced it by a negative impact of €0.05 Let's now have a look at free operating cash flow on Slide 13. We have had a robust cash flow generation, €746,000,000 in the half year compared to €541,000,000 last year. The increase was mainly due to a stronger cash generation from our operations in the first half and the 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 €615,000,000 representing 5.9 percent of revenue, so 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. And for some of those projects, CapEx will accelerate in the second half, which is why we have retained our guidance of just below €2,000,000,000 for the year. Net debt to EBITDA 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. So 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 25, are maintained for the rest of the year, so not the guidance, but the pure calculation, you see a much higher impact at operating and net profit level than the one calculated at the time of our Q1. And that is without a further devaluation of the NAYRA, of course. So pretty much in line with our guidance from the beginning of the year. Given this and 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. And bringing all this together, we expect further organic growth in revenue and in profit. And excluding major unforeseen macroeconomic and political business as well as the impact of Revencure in Lagunitas and the proposed French 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 have 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 20 16. And finally, CapEx again in 2017 should be slightly below €2,000,000,000 With that, I would like to hand back to the operator, and we will be happy to take your questions. Operator? And we will take our first question from Edward Mundy from Jefferies. Please go ahead. Hi, good morning everyone. I've 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 other financial results into the second half. The second is on Heineken 0. Early days, but as you said in the 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? And the third question, pretty good improvement in Africa. Do you expect this to continue into the second half and beyond? And how quickly do you think the business can recover back to peak margins of 20% or so in Africa? Okay. So I'll start 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. So that would be, I would say, the Q4 that we're giving for an 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 early test, as you remember. So the Q4 was pretty strong. It's more moderate in other regions. So that is what you can derive from following our result quarter after quarter. But definitely, we'll see confidence delivering the guidance for full year. As two-zero-zero, no cannibalization, that is not the issue. It's about going after new occasions of consumption. And one has to realize it's early days. It's a good start 0, but it's not really very, very big volumes yet. Africa margins, it's hoping for its Africa and Middle East and Eastern Europe is a very big region and knows also a lot of contrast. So 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, but the macroeconomic trends will continue to be adverse in countries like Nigeria, in countries like 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 Cote 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. So it's a contrasted, but 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 a follow-up on my first question. So I didn't I probably didn't make it clear enough. Question was more around the other net finance income or expenses, which was, I think, EUR 68,000,000 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, whether there are some phasing issues between H1 and H2. But are 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. And 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 I mean, 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? And 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? And 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? And 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? And can you say you would expect profitability in 2018 from this stage? So I'll take the first one I'll take the first one on Nigeria. As you know, we have a commitment to be sourcing 60 percent of our raw agricultural material from local sources by 2020. I can tell you that we're very close to that already in Nigeria. And actually, on another type of supply, which is packaging, we are higher than this 60% already in the country. So we are progressing well here. And yes, this is well here. And 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 import. And I must say the local team has done a great job of significantly decreasing our needs in the country. Well, then of course, if you are going to sell cans, then you are dependent on aluminum market, which is This being said, a 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 with global impact you feel this year? As to South Africa, indeed the business is doing well both in beer, premium and but also in cider, which is also growing quite fastly. Stronger brand is developing really well. I most probably we did in the statement that we are working towards a better utilization of our capacity in South Africa. And as you can imagine, if you use your capacities well, you start to have better returns. But we are not going to give precise guidance of when and not with 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. And we focus more the premium side of the market because market is big enough to do so. But you will also understand why we are not giving too much details about our operations in South Africa. I'm coming back to your question on the timing of the evaluation of the Neira, of course, no idea. But what I would say the one comforting thing and it's little comfort, but it's 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. And the gap between official rate and parallel market rate is nowhere as big as it was at the time. So when we say we see small signs of improvement in the underlying situation in Nigeria, that is what we see. And I call that small signs because we all hope it's predictive the 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. So the underlying issues of Nigeria have not been solved yet. Great. Thank you very much. And our next question is from Trevor Stirling from Bernstein. Please go ahead. Good morning, Laurence and Jean Francois. Two questions from my side, please. The first one relating to Kirin Brazil. Jean Francois, I appreciate you're limited in what you can say because negotiations are underway with the Coke bottlers in Brazil. But once you have reached agreement, presumably there's still a pretty massive operational challenge, which is integrating those 2 distribution platforms. So any color you are able to give would be very great. And the same thing for Laurence. There was a bit of a step up in the head office charges. Is that the new normal? Should we expecting that run rate now more around 50 rather than the 20 that it was in the prior year? I'll start then with Kiran Brazil. Yes, you're right. I cannot say we are in middle of such an integration. It's only 1st month. As we have said, we have declared that we would rather integrate our business around the distribution platform dedicated to beer, which the current Brazil operation is going to be the backbone of. And we have the difficult task to unwind with the Coca Cola Bottles distribution system. Now it's out there in the public that we are busy with doing that. But 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 lift from integration, has grown through integrations. So we are up and running doing that. But you're 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 and 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. And 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 should 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. And without any more details, you can actually multiply it more or less by 2 to get to full year in the model. Okay. Thank you very much, Jean Francois. You're welcome. And our next question is from Christian Van Schrein from Redburn. Please go ahead. Good morning, guys. Two questions if I may. One just to on the Netherlands, you're doing a deal with Sligro. And I'm just curious to find out, are you totally getting out of wholesale or a bit of color on that one? And then 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, the fastest growth rates over a decade. So maybe a bit of consumer insight on that market, what is driving that beer consumption from your perspective? Thank you. Tristan, for the Netherlands Ligro, 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. And you will remember that we have divested our wholesale business and sold it in Poland previous year. The Sligo deal is announced. It's currently being worked out. But basically, it's lifting the physical distribution of all our portfolio of beers and non beer products. So 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 Slegal. Sligo has been growing and thriving in the Dutch market by being the reference wholesaler for food. And the landscape of on trade has changed in the Netherlands over the last, let's say, 2 decades from essentially beer outlets to more food outlets where beer plays a role, but doesn't play any more the dominant role. And 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, so for big outlets to get their beer delivered with tank systems that are refilled. That is a distribution feature that we will keep. And for the rest, Sligo will carry our product 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 a deal. It's now worked out for an implementation the coming year. But 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? Or you can do it also. We can divide a bit of work. So 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 some case in that kind of case of recession, what you see is you I appreciate it that you're still in the middle of the discussions with the Coke bottlers. But if you could please comment on how much are you planning to support the curing distributors after this change given that most of their distribution is done by 3rd party distributors, right? And then 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? And then lastly, your portfolio will still miss a mainstream brand in Brazil, right? So 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 key ring or the skin brands? Thank you. I tried 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 Coke partners, plus the range of Heineken Brazil, plus the range of Keire in Brazil, starts to be a portfolio which is so large that it's going to be difficult to create the kind of focus we demand on the beer products to boost our competitive position in Brazil. And that is the main reason why, strategically, we think that the government 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 a secondary item. That is what you have to now the way going forward and the balance between direct distribution, how we work with Coke 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. Now the 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, but it's also not good for the Coke bottlers. So that's therefore that date has been kind of put forward in order for the teams to advance the course. For the rest, these are commercial negotiations. And so I will not make any comment further on these commercial negotiations, which are currently taking place. Finally, Laura, last question is about the brands. I would argue that skin is a mainstream brand. It's perhaps a regional mainstream brand. It doesn't 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. But nevertheless, it remains, in essence, a brand that in its character is mainstream and that we have to build on. And that is what we are committed to, But also, what is the big driver of the business case is that we can also develop our premium and not only the brands we acquired, but also the brands we have already. And 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, Francois. You're welcome. And we will take our next question from Matthew Webb from Macquarie. Please go ahead. Yes. Thanks very much. Two 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, I mean, it sounds like there's no change in your fundamental approach there. So 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? Or do you consider the spend that you put behind the year 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's my first question. And then 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? And 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. Okay. So I'll take your first question, Matthew, on marketing and advertising expenses. Again, there is phasing in there. Last year was really skewed towards the first half, and we will not guide for the full year. But so we'll take that along in our guidance of operating margin. So 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 2, 3 years back. And then we actually put behind the brand what needs to be put depending on also moment in the year and evens and then so that does fluctuate. Yes. And I think for Brazil, you will allow me from pricing policy to say absolutely nothing. No, fair enough. It was Yes, it was only if there was something that was had already taken place that was out there in the market that I might have missed. But now I appreciate you're not going to give any warning. Thank you. Fair enough. Thank you. And our next question is from Oliver Nikolay from Morgan Stanley. Please go ahead. Hi, good morning, Jean Francois and 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? 2nd question about France. You're up high single digits against a very tough comps. Are you is the market really strong or are you just gaining share in the on and off trade of all there? And 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 2 brands against the other Mexican imports? Thank you. So I'll take the first one on Europe margin. And yes, definitely, when we talked about phasing in marketing and advertising, the main example I gave is definitely Euro 2016. So in countries in a country like France, for instance, it has significant impact, but not only on France. So definitely, that plays a role for the margin improvement in Europe. I would say also, well, good weather that plays on the top line. And also what you see in Europe is the result of a number of programs, I would say, not only cost because the cost that we reinvest behind the product partly program, but 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. So that's played a role into that profitability. And then 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, that's very clear. But mix is working. And mix means premiumization and means also something that is skewed towards higher margin. So in markets that are developing better than in past years, that does help as well the operating margin growth. Yes. You did France? I gave France as an example. Very good. And then so we have remains the U. S, sorry. Yes, the performance, it increased. Quarter 2 was already better than quarter 1. We had a very weak one. Tecate Light is still growing. And so the whole franchise of Tecate is Tecate Light is 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 backside. We have to change the focus on the backside where promotions go to have better distribution. So we have a lackluster performance and we are addressing that in America with our Mexican brand, but we stay tuned to make the cutter grow in the U. S. Thank you very much. We will take our next question from Andrew Holland from SocGen. Please go ahead. Yes. 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? And do you expect to get them if you haven't yet had any when might we expect to see further price increases in Nigeria? So, yes, 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. And if I can add, Andrew, pricing is trailing very much what the currency exchange is doing. So we have to recognize that. And it's 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 evaluation of the naira, which drives price increases and trying to keep our business afloat, because in Nigeria, in the 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. And 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, I think. So you might be aiming for a similar level of price increases you got last year in excess of 20%? Again, it's very depending on what how the naira evolves in the foreign exchange dose. And it's you have to wait for these things to evolve when you take your price increases. And we live also in a competitive market over there. So, we have to take that also into account. And 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 Kaumu Gillum from JPMorgan. Please go ahead. Hi, good morning. Just 2 for me please. First one on Lagunitas. I mean it looks like you acquired the remaining 50% for around €200,000,000 or €300,000,000 It seems a bit low relative to the over €500,000,000 spent in 2015. So could you comment on why this is the case? And then secondly, on Brazil, I mean, your comments on returns from the Kiran Brazil acquisition, they seem to imply very strong synergies of around high teens of acquired sales. So 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. Well, definitely, it's part of a global negotiation. And then you have a premium control premium playing also in both cases. So it is yes, it's a bit lower in the second 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 1,000,000 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 5 breweries. It's a very good network, high quality of 11 breweries that we are acquiring. So we are optimizing our global footprint and of course, SG and A. Not particularly back end loaded, we just integrated we just closed the transaction. It's only 1 month of consolidation in the first half. And then, of course, all the teams are working now on portfolio strategy and on implementing the synergies. And route to market is a significant part of it, but I would say not all of it at the same time. Okay. Thank you. And just a 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 far, far more than what it is right now. And far more than what it is right now. And definitely, what we've said in the press release is that the transaction is expected to repay its cost of capital to How is the distribution of the Heineken brand in the big cities? And then the a 0.0 attracts new types of consumers to the brand and which one would that be? And also, will you roll it out in other regions in the next 12 months? I'll start with the 0. As I said, this is mainly due to going for new occasions where normally you would not drink alcoholic beer. And it's very much a free choice. I think think about the lunch occasion of just after sport or when you have to drive. We learn very much from Spain, where 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 carpool. And as the Spanish authorities were having a very strict policy on the don't drink and drive, people switch quite easily to normal alcoholic beer because the let's say, the bitter taste of beer goes very well with that those tapas. It's as easy as that. And you can think about these kind of occasions in other countries too. It is not only for Heineken, but we're doing with Heineken because Heineken being our flagship brand, it also signals to the entire Heineken Group that going into and promoting more nonalcoholic 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. And to show and lead by example, we do it with we show we put our money whether or not it is and we have launched Heineken 0.0 for that. But again, it's early days. It had a good start. We received a lot of good critics about the taste essentially, and that is what matters. And we'll see how it evolves. But we think there is a there are a lot of new drinking opportunities to sell it through. As to the Heineken brand in Mexico. So as you know, premium is only 5%, about 5% of the total market in half, strong double digit growth of the Heineken brand. Of course, half, strong double digit growth of the Heineken brand. Of course, because it is not completely developed premium market yet, you will see it concentrated in larger cities and where premium brands get consumed. So 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. So it's a journey of a decade of increasing distribution, if you will. And 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. And finally, you should not go into a full penetration in the beginning because by making it too widely available, you also diminish the premium. So that is the gradation in which you have to operate. And so it starts 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. So 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. And we will take our last question from Sanjit Aayula from Credit Suisse. Hi. Most of my questions have been asked, but just a couple of ones. Firstly, in Europe, it's the 4th 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? And then just a couple of follow ups on Bristol Kurian. Can you just confirm what cost of capital assumption you're using? And 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 and I will take the easy one on Europe. There is there are 2 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 1980s, which was huge. And at the same time, the Generation Dix and Wyres, which followed the baby boomers were 15% to 20% less numerous. So if you look at demographic curves, they were declining. So the beer market declined essentially because of demographics. And the intake of beer diminishes with age. So the peak of your drinking beer is your legal drinking age till you are 35, and then it kind of slows down till you are 50 very quietly. And 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. But those are just physics. And when you look at these big numbers, well, that led the whole beer market in Europe to decline steeply over the last 10 to 15 years. Reckon that all baby boomers now cross the 50s. So they are marginal beer drinkers today. The good news is, is that the X, the Y, the millennials, they are in balance. So there is no any more steep population decrease to be expected in the future. Now there are differences. Some countries are demographically more dynamic like the Netherlands or the UK. Then there are some countries which are demographically not dynamic at all like Germany or Italy. So it's not that Europe is fits one picture. But overall, it's 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. Now 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 Europe 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. So 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, but it has a business consequence. I think we have digested that and we will continue to digest that. And 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. But if you look at the whole of Europe, that has been the forces at play. And the final leg of it is competition. You compete with other drinks, alcoholic and non alcoholic. The beer category over the last, let's say, few decades has been very much focusing to big brands, Lager beer, kind of gregarious marketing and then was very successful. Today, people want choice. And 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. And 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. And 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. So as for the WACC of Brazil, at the time I'll let you a lot of time to think about the WACC of Brazil. I've had a lot of time to think about WACCOW Brazil in the past few months. So, at the time of studying the acquisition, we calculated that 12 point 5%. Now, depending on the assumptions you take, it's closer to 4% today. But yes, you can take 12.5%. Which point of view, we will take all that. Very good. Thanks. As there are no further questions, I will hand back to the speakers for any closing or additional remarks. Well, then it rest 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 twenty seventeen. And of course, as ever, if you have further queries, please contact the Investor Relations team, and Sonia Gavral stands by to take your questions on the phone. Thank you all and have a good day. Bye bye. That will conclude today's conference. Thank you for your participation. Ladies and gentlemen, you may now disconnect.