Earnings Call: Q2 2016

Aug 1, 2016

Good morning, everyone, and thank you for joining us today for Heineken's 20 16 Half Year Results. For your information, this conference is being recorded and 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. Please go ahead. Thank you. Good morning, everyone, and thank you for joining us today for our half year twenty sixteen results conference call. I'm joined by Jean Francois Van Bochmere, CEO and Chairman of the Executive Board and Laurence Davroe, CFO and Member of the Executive Board. Following some prepared remarks, we will open the call for your questions. And with that, I'd like to hand the call over to Jean Francois. Thank you, Sonia, and good morning, everyone. I'm going to read out the presentation starting by Slide 3. And let me start by saying that the results in the first half of twenty sixteen were strong, supported by all regions apart from Africa, Middle East and Eastern Europe. Year to date, we have delivered positive top line and profit growth, demonstrating further progress we have made delivering on our strategy. Revenue grew 4.7% organically with positive volume and revenue per hectoliter growth. And the Heineken brand volume in the premium segment was up 2.6%. This top line growth combined with a continued focus on costs delivered operating profit by up 12.6 percent organically, and with a margin increasing by 124 basis points. Diluted earnings per share, BEA was up 7.8%, mainly driven by organic growth. It is important to highlight that the half year results were in the context of a continued volatile global backdrop. At the same time, we have also said that for 2016, we expect to deliver margin expansion in line with our medium term guidance. This takes into account the tough comparatives and increasing currency headwinds in the second half. Turning now to slide 4, the results clearly demonstrate that Heineken's unique and diversified footprint is delivering strong balanced growth. Notably, most markets delivered good growth, offsetting some of the weakness in Africa, Middle East and Eastern Europe. Let me start by talking on Africa, Middle East and Eastern Europe, where consolidated beer volume declined 1.2% organically. Beer volume in the region remained under pressure impacted by challenging macro dynamics and low oil prices. Furthermore, the continued affordability trend combined with weaker tourism impacted our business. We saw positive volume in Nigeria, which was more than offset by weaker volumes in Russia, Egypt, Algeria and the DRC. Revenue per hectoliter growth was up 2%. And in Nigeria volume grew in the Q1, flattered by easy comparatives due to last year's elections. We saw a low single digit volume decline in the second quarter. The performance of Life and Goldberg remained very strong benefiting from the continued outperformance of the value for money and mainstream segments. Merger synergies were fully delivered along with cost savings, but were offset by the negative mix and inflation. Operating profit in the region was down 14.3%, negatively impacted by currency volatility, commodity prices, and rising cost inflation. In the Americas, consolidated beer volume was up 4.7 percent organically, driven by volume growth in Mexico, more than offsetting slight decline in Brazil and the U. S. In Mexico, we saw high single digit volume growth, driven by effective marketing programs and sales execution. Higher pricing, continued cost savings and successful revenue management improved profitability in Mexico. This was despite increased competition, price promotion and currency pressures. In Brazil, volume declined low single digit driven by the weak macroeconomic backdrop and tough trading conditions. Our focus on premiumization continued however and Heineken volume was up double digit. In the U. S, volume was slightly negative and depletions slightly positive. Our Mexican brands continued to be the key growth drivers with the Cate volume up double digit and Dozequis up low single digit. The Heineken brand continued to show improvement. And overall the region delivered a strong 20% organic operating growth there. Asia Pacific continued to show excellent momentum with consolidated beer volume up 19.4% organically. Vietnam, Cambodia and Indonesia all delivered double digit volume growth. And in Vietnam, beer volume grew double digit, driven by strong performance of the Tiger Bread. Improved consumer confidence and strong commercial execution were drivers of our results in Vietnam, where we gained share overall. Regional revenue per hectoliter was down 6.8 percent adversely impacted by negative country mix. Underlying pricemix was down 1.9%. The region delivered strong organic profit by a growth of 30.9%, again driven by the strong performance in Vietnam, Indonesia and Cambodia. Last but not least, in Europe, consolidated beer volume was up 2 point 3% in the first half with growth supported by the Euro 2016 football event, weaker comparables from last year, and additional selling in Greece ahead of an excise duty increase. Revenue per hectoliter was up 0.8%, reflecting the success of our innovation and premiumization strategy despite deflationary and off trade pricing pressure. In the U. K, volume grew low single digit driven by off premise performance. Our pubs business delivered good results. In France, Spain and Portugal, volume was up in the low single digits. In the Netherlands, volume was flat as we deliberately avoided participating in some of the off premise intense promotions. Operating profit was up an impressive 15.7% organically, driven by disciplined cost management, a continued focus on innovation and the successful premiumization strategy. Turning to slide 5 now. In the first half, the Heineken brand premium volume was up organically 2.6%, with performance of the brand a somewhat mixed picture. Growth was seen across all regions apart from Africa, Middle East and Eastern Europe, which was impacted by affordability trends and weaker tourism. We saw double digit growth in Brazil, the U. K, Mexico, New Zealand, Cambodia and Romania. Was also strong growth in a number of other important markets including France and Spain. But volume growth in these markets more than offset weaker Heineken volumes in Russia, Vietnam and Algeria. As I mentioned, the overall performance of the brand was mixed, although we do not see this as a long term trend. We remain confident all of the activities we are deploying on the brand and continue to believe that the brand will grow higher than is currently the case. The Heineken brand equity was supported once again by a highly successful campaign around the UEFA Champions League, the continuation of the city's platform, as well as music and product stories. We have an exciting pipeline for the remainder of 2016, mainly to the new Formula 1 activation, which gives us the opportunity to access new consumers across more time zones and allows us to launch new responsible drinking campaigns. As well as our truly global flagship Heineken brand, we have an extensive and strong portfolio of brands and it is worth mentioning some of our other international brands' performance. Afriga and Sol delivered double digit volume growth and Desperados saw high single digit growth. Our regional power brands such as Tiger, Dos Equis and Tecate all continue to deliver strong volumes. And in most markets, our mainstream brands remain key in providing scale to grow the premium platform. We remain very excited about cider, an area where we are actively building the category and which I will talk a little bit more on shortly. Now turning to slide 6, innovation is now firmly embedded in our strategy and way of thinking at Heineken. In the first half, innovation contributed €1,100,000,000 of revenue, implying an innovation rate at 10.5%. Our innovation focus remains set around key 4 key teams, all of which I'm sure you are now familiar with having listened to us present present over the last few years. Leading innovation in cider, capturing the low and no alcohol opportunity, satisfying the need for craft and variety beers, and innovating around draft systems. We continue to lead in the Cider category with new country launches, which include the China and Vietnam. Cider volume was a double digit with an acceleration in the Q2. In the UK, very positive performance was driven by successful Strongbow Dark Fruit, Strongbow Cloudy Apple and Old Mood. In Europe, volumes more than doubled in Romania, Ireland and the Czech Republic. In the Americas, Mexico and Canada saw double digit volume growth and in the U. S. Strongbow outperformed the cider category. 1 of our star innovations, Radler, is now present in 47 markets across all regions. This is directly addressing the emerging theme of moderation, capturing the low and no alcohol opportunity and creating new drinking occasions for our brands. Within craft and variety beers, we continue to leverage off the comprehensive and extensive strength of our brand portfolio. H41 being just one example of an innovation in this segment in the first half of the year, which was launched in Italy and the Netherlands. At the same time, Lagunitas is starting its international journey and is being rolled out in a number of markets as we speak. We also almost as part of the bread and butter of the business continue to innovate around draft. The sub, our at home draft beer system continues to show positive trends. Also Brewlock. Brewlock, our innovative on premise dispense system is showing good growth. With that, I would like to hand over to you, Laurence, to take you through the financials. Thank you, Jean Francois, and good morning, everyone. So turning now to Slide 7. Our positive volume momentum combined with growth in revenue per hectoliter of 0.8 percent, actually it is 1.1% on an underlying basis, resulted in organic revenue growth of 4.7%. This reflected a very good Q1, also boosted, as we had said, by Easter timing and a very strong Vietnamese and Chinese New Year followed by a solid second quarter. Operating profit was up 12.6 percent organically, reflecting growth in revenues, but also good achievement from costs. Operating margin increase reached 124 basis points, also on the back of positive one offs and weak comparables. Let's remember that in the first half of twenty 15, operating margin was flat. All in all, net profit reached €977,000,000 up 11.2 percent organically. The difference that you see of €391,000,000 between net profit BEA and reported net profit relates mainly to exceptional items, the most significant being an impairment of €233,000,000 taken on assets in the DRC. And also, as you will remember, in 2015, reported net profit included an exceptional gain of €379,000,000 from the sale of Empaque in Mexico. Diluted EPS of €1.71 was 7.8% higher compared to the same period last year. And finally, free operating cash flow up 11.3% on last year can be called robust. At the end of the first half, our net debt to EBITDA ratio was 2.44 times, in line with our guidance and our commitment to the credit agencies to target 2.5 times or below. Moving to Slide 8, let me talk about revenue growth, a bit more about revenue growth. So revenue reached €10,100,000,000 with an organic growth of 4.7%. Consolidation added 2.8 percent or €274,000,000 mainly driven in the order of size by incremental revenue from South Africa, Malaysia, Slovenia and Jamaica. What is striking though here is a negative is driven by adverse development of the Mexican peso and is driven by adverse development of the Mexican peso and also to a lesser extent, the Brazilian re ash, the British pound, the Russian ruble and the Nigerian naira. Turning to Slide 9. Operating profit was up an impressive 12.6% organically at €1,700,000,000 and this calls for a few comments on costs as well. First of all, I'd like to say that marketing and advertising expenses increased slightly more than revenue for this first half year, resulting in a marketing to sales ratio of 14.1% compared to 13.9% last year. This means that our performance was achieved while investing firmly behind our brands, which is always healthy. Now let's look at other costs. On an organic basis, input costs were up significantly, mainly due to the negative impact of ForEx in emerging markets. However, raw materials increased less than revenue and energy as well as logistic cost even decreased. As for support costs, they increased far less than revenue. So overall, a good performance on costs, which also included some hedging benefits, helped us achieve this organic increase of 12.6% in operating profit and this in spite of currency headwinds in emerging markets starting with Mexico. Unfortunately, we are expecting more impact of those headwinds in the second half. Consolidation directly coming from the acquisitions we did last year was positive on operating profit there growth as well by €52,000,000 or 3.4%. Currency impact was negative, reducing operating profit by €91,000,000 or 5.9 percent, again with the Mexican peso being by far the most impactful, followed by the British pound, the Nigerian naira and the Vietnamese dollar. As Jean Francois already mentioned, on a regional basis, weaker performance in Africa, Middle East and Eastern Europe was more than offset and compensated by strong results in Asia Pacific, Americas and Europe. Now Slide 10 walks us through the developments in diluted EPS via over the half year period. EPS was up 7.8 percent with $0.18 coming from organic growth. 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. Also, financing expenses suffered from the revaluation of payables in hard currencies, in particular following the devaluation of the naira, which I will come back to in just a few seconds. The consolidation impact was favorable, but relatively small at EPS level with just $0.03 coming from acquisitions last year. Currency translation had a negative impact of €0.10 per share. And finally, there was a small residual benefit of just €0.01 from last year's share buyback. Let's now have a look at free operating cash flow on Slide 11. It remained pretty robust with the generation of EUR 5 €41,000,000 in the first half compared to €486,000,000 in the same period last year. The increase was mainly due to stronger cash generation of our operations, partly offset by higher level of CapEx and increased working capital in the period. Let's start with the working capital. The main reason for the increase in cash outflow from changes in working capital was some one offs in Mexico. Without this, the underlying impact is slightly positive. CapEx amounted to €698,000,000 which represented 6 0.9 percent of revenue. The increase in CapEx on the prior year was in line with our expectations and included capacity investments as planned and our net debt to EBITDA ratio, again, increased only and our net debt to EBITDA ratio again increased only slightly from the 2.3 times at the end of June 2015 to 2.4 times 1 year later, giving us, if needed, some margin to maneuver. Moving now to the next slide. As I'm sure you recall, we have promised to provide you with some color on the impact of the NERA, and this is what I intend to cover with Slide 12. As you know, a new flexible exchange rate regime was introduced on the 20th June in Nigeria, resulting in an immediate devaluation of approximately 30% to the previously fixed official rate, as shown in the table on the slide. And although it is still early days, there are signs of improved liquidity in the market, which is a good start. This also puts us in a better position to update you as some of the uncertainty has been cleared. So let me start by explaining the impact on the first half, and I will have to get a bit technical here. In line with IFRS and in the absence of any other reliable rate, transactions in hard currencies were recorded in the P and L at the fixed official exchange rate up until June 20. At the same time, during the first half, it was more and more difficult to obtain hard currencies in Nigeria at whatever rate and payables kept accumulating. After the devaluation finally happened, we revalued those payables at the official floating rate And therefore, we took a ForEx hit of €24,000,000 which is in other net finance expenses, so below profit. Now moving to what's happening and what's going to happen in H2. Beyond the June 20, all transactions are recorded using the official floating rate. And as such, the impact of rate fluctuation is reflected in expenses and hence in operating profit. And actually, this is another reason why the operating margin growth will be lower in the second half and this explains partly our guidance. Now, as you know, Heineken owns a little over half of Nigerian breweries and as such, the impact at EPS level was not material in the first half. For the full year, we'll still see we see a negative impact, which will depend on where the floating rate is going to go. But bear in mind that the devaluation also opens the way business can react to mitigate the impact with continuing cost control, of course, but also with some pricing measures. So quite a long development on NARAD devaluation, which by far is not our only currency. But I hope it helps you to understand the impact. As a conclusion and as you have seen in today's press release, we have confirmed our guidance for 2016. Namely, we expect to deliver further organic growth and profit growth revenue and profit growth with operating profit margin expansion in line with medium term guidance of around 40 basis points. This does take into account both increasing currency headwinds and tough comparative in the second half of the year. Just quickly touching on some of the more technical financial guidance for 2016. We now expect an average interest rate of 3.1 percent for the full year, a little below the previous guidance of 3.3%, but in line with interest rate in the first half. As a reminder, we've now completed most of the refinancing of our old more expensive debt and therefore positive leverage from this will be less this year than in recent years. As for the effective tax rate, it should be broadly in line with 2015 with our guidance here unchanged. We now expect CapEx in 2016 to be slightly below €2,000,000,000 versus our previous guidance of slightly above €2,000,000,000 This is a small adjustment, which reflects the benefit from foreign exchange as well as some refinement of our plan as we progress throughout the full year. In the first half, we completed our capacity extension in Cambodia and our new brewery in Shanghai. With that, I'd like to hand back to the operator and Jean Francois Van Vauxmer and I will be happy to take your questions. Operator? Thank We will now take our first question from Andrea Pistacchi from Citi. Please go ahead. Your line is open. Hi, good morning. I have a couple of questions, please. Firstly, on Nigeria, if you could tell us a bit how you see trading conditions in the market there and more specifically on pricing. You referred to the ability now to you're more free on pricing there. Has pricing been put through already? And the competitive environment there is pricing coming through from all players in the market? And then on more broadly on year. Looking forward, you have easier comps, but effect pressures on your COGS. So how do you see the moving parts on your margins in the next, let's say, 12 months? Should we expect from a profit point of view, do you think things have bottomed out in Africa? Thanks. Shall I start with the margin? Sure. Okay. So Africa, Middle East, definitely, the impact of the economic, the macroeconomic background and conditions. And specifically, what you've seen in Nigeria, which represent more or less half of our exposure in Africa, Middle East has impacted margin and is continuing to impact margin. As consumer in Nigeria, good news is that they keep drinking beer after first half of twenty fifteen where we were a bit worried about volumes. Now this is back, but definitely trading down to more value and lower mainstream brands, which are actually flying in volumes in our portfolio. Actually protect the margin in that portfolio to work on our costs, which we have also done with the merger of Nigerian Brewery and Consolidated Brewery by deriving the synergies from that merger. We do have the possibility to react on price and it is true that the devaluation also opened the way that and we'll give you more on that a bit later. But the impact on margin has been significant. Difficult to tell you how long it will continue. The one thing is sure for us is that we're much better geared to actually weather that storm than we were 2, 3 years ago when the crisis started in Africa, Middle East. The other thing I'd like to tell you is that our guidance of 40 basis points, which is basically what we're giving, relies on 4 regions. And when you see what Europe is able to deliver, you see actually the relevance of having these large footprints, because yes, we're going to have to weather storms. There are going to be cycles in emerging markets today in Africa, Middle East, yesterday or maybe tomorrow in other regions. And Africa, Middle East has helped us a great deal in the past on margins as well. But we are actually mitigating that by the footprint. And when we say 40 basis points, we do include everything. We are not communicating on organic margins. We take everything into account, including the headwinds on currency. And this is our commitment for this year to actually and our guidance to actually be able to deliver that. And that includes taking actually compensating measure for those margin downside in Africa, Middle East. On Nigeria pricing, we have been taking price earlier this year, I believe in May. And we have been followed by a certain lag time by competition. We are the market leader, so I suppose we have to accept that. But going forward, it's very much depending on how the currency will develop. And of course, the Nigerian economy is very much linked to the dollar. So, at least we have to be mindful that going forward, we are not losing ground there. So, observing the currency developments, we will need to do some pricing over there because otherwise you might risk your business going really down. So we have some experience doing that in previous periods in Nigeria, but also in other African countries. And on the other hand, as Laurence was pointing out, the fact that we are in a down cycle in Nigeria forces also the whole organization to look at a very sharp way to its productivity. You have to realize Nigerian Brewery is a strong company. It's very it has a commanding market share, very motivated troops, beautiful brand portfolio, good innovation rate. It has it all, but it can also do a jump in productivity Ethiopia has been in the past quarters a very strong a strong contributor. It's been growing volumes very strongly, mitigating some of the volume declines you've had in other countries. Now my understanding is that you're more capacity constrained and there has been a drought there. Could you confirm this? Or are there also is a competitive intensity, has that gone up and when will your new capacity come on stream there? Thanks. We you all know that in May, Ethiopia had a terrible drought and that has some impacts on the overall economy as you can imagine in such a country. And at the same time, I reckon the competitive intensity has increased a bit in Addis Ababa with a slowdown of our flagship Walya brand. So, there is a little bit more competitive activity. But again, you have to look at Ethiopia on the long run. And we stay committed and very confident in the developments of our operation in Ethiopia. Thank you. Thank you. We will now take our next question from Trevor Stirling from Bernstein. Please go ahead. Your line is open. Good morning, Jean Francois and Laurent. Two questions from my side please. First one is, I wonder if you could give us a bit more color on share trends in Mexico at the moment. Appreciate the data is a little bit difficult to assess, but your interpretation or a sense of share trends would be very helpful. And the second thing in Europe, an exceptionally strong margin performance. I guess we got used to the idea that in Europe all savings are going to be absorbed by weak underlying top line trends. And now we have very strong top line and clearly the savings are hitting through. If we went back to the flattish volume growth and revenue in Europe, would we be in a situation of flat margins? Share trend in Mexico, well, difficult because the shares you can collect in Mexico are only partial because you have a lot of pop and mom shops in regions, which are not totally accounted for. We reckon that we have been a little bit on the pressure in the first half year in terms of share, but it goes up and down between our main competitor and ourselves in a relative small bandwidth, I have to say. So, that is what I can say about share trends in Mexico. And then in Europe, it's I see Laurence wants to say something. I'm very proud of Europe. Go ahead, go ahead. No, in Europe, definitely volume helps. And you've seen really nice volume development in the first half, also helped by the euro, very good impact from the euro. But what you're seeing is that the premiumization does work. And you see that in a country like France, my country actually drinking beer and premium beer is becoming more and more trendy. So and that is something the interest in beer, you actually bring through the innovation. And this is not the only word. We see it at work in a lot of countries. And if you look throughout Western Europe, where the growth come from, you find a lot of very positive country in this first half. I wholeheartedly support Laurence's comments. Thank you very much, Jean Francois and Laurence. Thank you. We will now take our next question from Tristan Van Stearns from Deutsche Bank. Please go ahead. Your line is open. Hi, good morning guys. Just two questions, just a follow-up on the previous 2. One, just on Africa and in the Congo, Jean Francois, can you just give a little bit more color what's happening? And you guys invested about €400,000,000 I think 4, 5 years ago. Is the impairment based on that investment basically? And the second on Europe, just to unpack that margin improvement in that market. I mean, Poland went up almost 600 basis points. Is the Polish business backwards should be and will that continue in H2? And to what extent is the PUP your PUP performance in the U. K. Relevant to your margin accretion here in this half? I take the DRC, the ugly stuff and Laurence takes the good stuff in Europe. The DRC, yes, you're right. It's a depreciation it's an impairment story of fixed assets. Growing capacity. 5 years ago, we took the decision to indeed invest in north of €400,000,000 to not only renovate because our installations were really in need of investments. And but we also have done some capacity extensions. Now based on the outlook that we back then had, we were much more optimistic 5 years ago than we can be today. That explains why we have done this impairment, which impairs roughly a little bit under half of our total investments. And that's mainly, I would say, the capacity extension that we have seen. That said, I think that we continue to look at the DRC as a potential good market, seeing its population and urbanization. It has a high urbanization. Population is still growing. We all know the difficulties it entails. There is a lot of things that we can do, but there are a lot of things we can't do. So, we have to wait for, I suppose, for better times and meanwhile work hard to stay competitive and work our way out of the situation as it stands. But it's a promise for the longer term for sure in our portfolio. Maybe just follow-up on the Congo. Is the competitor intensity getting worse in that market as well in addition to the economy? Or is it just the economy? No, it's the economy. Yes, absolutely. I think our competitor is the same ship or boat as we are. Now moving to our Polish business. I have to flag that the improvement in margin also takes into account the fact that we deconsolidated Distribevs, which was very low to negative margin. So that does play a role in the comparison of this year versus last year in terms of margin. But apart from that, the Polish business the Polish background is still quite challenging. That hasn't changed. Know that the Polish market is also a game of people being delisted and relisted. We were delisted 2 years ago, relisted last year. 1 of our competitors was delisted last year. Another one is delisted this year. So that does play in the comparison. But at the same time, the Polish market remains a bit a bit more than 1,000 pubs in the UK, and it is actually contributing nicely to the performance. It is relevant to our performance. Yes, it's become relevant to our performance. We the way we also make money is by turning them around by investing in this pub, churning actually the bottom part of our portfolio and then reinvesting the cash that we get from selling some of the pub into investing in better service, in better looking pubs, in better cooking. And as you know, the experience of the pubs with food and the beverage, it's kind of a cheaper entertainment, which is quite resilient and has proven quite resilient recently. So whatever the background in the UK, we very much believe that this will stay very relevant to our performance. Thank you very much. Very clear, guys. Thank you. We will now take our next question from Anthony Boakalo from HSBC. Please go ahead. Great. Thank you very much. Following up on Tristan's question, your competitor has announced plans to sell off what is your sort of co leader in the Polish market. If it does fall into the hands of say a financial buyer rather than a brewer, do you think there's a possibility that the dynamics of the market may change? And then the second question is on Russia where you described the pricing environment as aggressive, I think was the word you used in the release. Can you give us a little bit of background and color on what's going on and with the pricing dynamics in Russia? And how is it mix, is it promotion, can you sort of give us a little bit of detail on that? Thank you. I will do Poland and Laurent Zuniga with Russia. Yes, well, it's speculation. I don't this is a theoretical case in which a non industry buyer would bid the highest price for an asset in Poland, which is already a price wise a very competitive market. So, paying a hefty price for a business into which you would like to compete even more on price is going to be a catch-twenty 2, I think. So we'll see what it will be. Competitive dynamics will change for sure, and it's going to be depending on who is the acquirer, but then it starts to be speculation. But specifically, let me repeat to your Private Equity thing. I mean, typically you need also an exit for that and you would not acquire it for a cheap price in the market, which is very competitive. But that's only speculation. Okay. On Russia, let me first reiterate that Russia is smaller in the context of overall Inogen is definitely less than 5% in volume and even less in operating profit, unfortunately. It remains for us a well managed and relatively resilient business, albeit in a market that remains challenging and difficult. So in the first half, Heineken volumes declined high single digits, likely a bit more than the market. And indeed, one of our competitors has been aggressively reducing the prices of 1 of the premium brands. And I can be more precise on that because the Carlsberg CEO Carlsberg CEO made no mystery of the fact that they went aggressively to reduce the price on the brand Carlsberg in the first half. And that has been definitely detrimental to work in terms of volume and we believe to the market in terms of profit terms in general. Okay. Thank you. Thank you. We will now take our next question from Carl Walton from UBS. Please go ahead. Thanks guys for the questions. Just a couple of very small follow ups and then one wider question. So there's 2 small follow ups. I think you mentioned pricing in Nigeria, you took some in May. You may not be willing to share, but is there any sort of sense of scale of how much was taken by the sort of wider market in May? And kind of I think I mean, the question is how many kind of how long you think it would take sort of if things stay as they are sort of get through incremental pricing versus the move in the actual FX? The second quick follow-up was in terms of Ethiopia capacity. Can you just remind us when the new capacity comes online? And then the wider question is just on country mix. I think you mentioned a little bit about the impact in Asia Pacific. Is there anywhere else or the other key regions to sort of mention in the division, sort of inter divisional country mix impact that we've seen in the first half? Thank you. The follow-up, Nigeria pricing, no, I will not give you anything. That's clear. I mean, pricing is in our hands. And I gave you a general trend of we have to take into account the currency development because that is reality. Timing, phasing and intensity is totally a commercial decision. And the Ethiopia capacity comes on streaming in October to answer your question. As for the country mix, you're right, it affected the Asia Pacific as I said and then no significant impact anywhere else. Okay, great. Thank you very much. Thank you. We will now take our next question from Gerard Rich from Yes. Two questions, if I may. First, about Nigeria and about the transfer of payments to the headquarter in Amsterdam. Has that already started again after the problems in the first half and now with the higher level of liquidity in the market? Second question about the innovation rate. It is now above 10%. What do you expect it to be in the second half? Will it be around this same level? And related to that, the introduction of Lagunitas worldwide, How many markets will be attacked in the second half? And does it has an impact on your general A and P increase in second half twenty sixteen? So starting with your question on Nigeria, yes, we were able to source some hard currencies in June July, and we use that to pay our suppliers, which are some of them interco, some of them third parties. And then we have prioritized definitely the business by paying the overdue in raw materials and packaging materials for the company to be able to operate normally. So but that has started, which is why I was reasonably positive about But a volatile rate is always better for business than no rate at all. But the volatile rate is always better for business than no rate at all. So we have been able to source some hard currencies. Does it mean that you does not have a gain to book something negative in the other financial expenses? Well, that you cannot know. It will I mean, the market the market can be open and then can close tomorrow. But at this stage, basically, you'll have the normal trend of payables. And then when the rate changes, then you'll book something. But at this stage and at current rates, I wouldn't we do not see it as significant. But that can change over the year, right? It's not the guidance that I'm giving you. As to the innovation rate, I'm not going to give any guidance on that. We gave 5 years ago guidance that we would reach 6% in 2020. I want to a little bit down white the importance of the innovation rate as is. I don't think you should expect forward an innovation rate going from 9% and 10 and then 11 and then 12. That is not what we aim for. What we aim for is to bring in new products, new SKUs, new brands to more markets that will stick and last. So the innovation is still an important dynamic in our business. We just report for this half year, it's 10%. Is that good or bad? It's only good on the longer term. If these innovation, they stick beyond the timeframe in which they are accounted for as innovations. And this is the real success. And we try to make innovations, which are more margin accretive as our existing portfolio. It's not always the case, but potentially we want the majority of them to be like that. That's what we are aiming for. And so we report that innovations are 10%. We are at the dynamic period because our innovations, they sustain, let's say, 4 pillars. The first one is it is the bringing more international lager brands, be it regional or worldwide to the world. Think about Tiger in the Asia Pacific region and one day it will be beyond the Asia Pacific region. It's rolling out Sol in more markets. It's the developments around the Amstel brand and its international premium proposition. The Heineken brand in itself is not an innovation, but that's part of the premiumization strategy. The second one is the no and blow alcohol product range that we want to offer. We concentrate a lot of our innovation on that. We started with Radler, but it is also today Farooz in Indonesia as an example or Moltena, this is very popular in Nigeria, in other countries like the DRC, for instance. So, you'll have to see the agenda of innovation also geared more and more toward no and low alcohol varieties. We spoke about the draft systems, the sub, the BrewLock, those things are presented in our numbers, but we continue to invest quite a bit in those systems. And the last one is craft and variety. And there, it's line extensions of existing brands, bringing more variety of taste with that same brand. We do that very successfully in Italy with a brand like Moretti or Cruz Campo in Spain with the Brant brand, it's 2 times the same word, in the Netherlands, just as examples of crafty line extensions with existing brands. But we also push some craft beers like Afligam is pushed in more and more geographies or Morcebit, which is a Belgian spontaneous fermentation beer that we have introduced in France this year. And then finally, Lagunitas, which is disembarking in Europe, starting with the Netherlands and the UK, more countries to follow, I think France also. So we have plans with Lagunitas to roll it in more geographies than just the United States, obviously, and it is going well, but it's very early days. Now, all these are the 4 pillars, which sustain the innovation policy. That innovation policy and strategy is what gives us growth and higher margins financially. But again, the percentage that we report is in itself not the most important metric. It's the dynamics and the fact that we can be accretive and that the innovations will stick over time. Did you change your incentives to let it stick over time? No, because we try in some places, yes, when they are on a local level, you can tweak that. But overall, I think you should not start to micromanage a company. So what is important, I always say to manage well a company in the longer term is to stay focused on what I call the golden triangle, which is you have to stay concentrated and put the bulk of your incentivations on that golden triangle making progress over time. And you can translate elements of these three elements of the Golden Triangle as more operational stuff market by market in a more granular way when you come closer to the ground. That's what we do. But we don't do incentivize overall a blanket incentivization on innovation, that would be wrong. Thank you. We will now take our next question from Oliver Nickolle from Morgan Stanley. Please go ahead. Your line is open. Hi, good morning, Jean Francois and Laurence. I've got three questions, please. First of all, in Europe, you reported a Second question is on Asia. If you could again go through the drivers for the strong 5.40 basis points margin improvement. And also, should we expect a negative impact on margins from the Vung Tau Brewery acquisition that you've done in July? And just last question on Mexico. You mentioned competitive pressure on price. Could you just perhaps be a bit more specific if it's in one specific channel or if it's something which is actually different from what you have seen last year? Is it still on Bud Light or is it across the board? Thank you very much. Okay. The shares in Europe, you can go to IRI or we were gainers in the U. K. And France. The Netherlands, we lost a bit of share and Spain and Poland are flat. Those are the most important markets. But you have to realize that these shares fluctuations are again in very, very small abroad bands and we see nothing trend wise, which would be alarming. And then on your question on margin in Asia, main contributors are Vietnam, but also Cambodia was a positive contributor to margin expansion and definitely Indonesia comparing to with a weak point where that were coming from last year. And Mexico is the competitive pressure is essentially on pricing and promotion intensity, which is normal. You have 2 very big players there and then duopoly inevitably gives you some competitive pressures. It is nothing which is new. It is cyclical and it's always regionally contained if I may say what I see. Thank you very much. Thank you. We will now take our next question from Stephanie Doss from Bank of America. Please go ahead. Your line is open. Hi, Jean Francois. Hi, Laurence. Three questions for me, please. The first one in Europe. You mentioned the benefit from buying in Greece ahead of the excise. If you could quantify if it is significant or other technicals we should be aware of? And then in terms of European trading, have you seen a slowdown in on trade and tourism due to the attacks? 2nd question on craft. Diageo recently mentioned that in the U. S, it was becoming a bit unorganized and that the momentum was slowing down quite significantly in Craft. Have you noticed any similar trends? And maybe is it relevant for Europe too? And in terms of China, your new brewery, can you maybe go over what you are seeing in China in terms of underlying trends versus your own? And then lastly, more technical questions. Did that did I hear the hedging benefit in organic EBIT? Can you quantify maybe the transaction gain? And then the other net financial income, if we what we should expect or a similar impact in H2? Thank you. On Greece, I don't think we're going to quantify that. We have been flagging it, but that is kind of a on the year performance, it won't affect, but one has to realize that when you have such a high excise duty increase, which is nearly doubling the excise duty increase, you will have a big effect on the sales. So going forward, I think that Greece will not it started to come out of the crisis and bam, you got another hit, of course, because breweries cannot it's not like the shipping industry, you can take another flag if you don't like the flag you have. But here we cannot sail out of the harbor. So there is nothing to do. We fought hard, but that's what it is. So but Greece is for that not such any more significant market in the European total that it will hurt that much our results. To your question of the trading slowdown following the recent tax, yes, you see that in the cities that are affected immediately after you always see a slowdown of at least 3, 4 months. Those are this is for now, it's only kind of incidental information that we have. But I'm living here in Amsterdam. It is true that we receive a little tourism is slightly under pressure as opposed to last year. A lot of people coming out of the U. S. Are not visiting some cancellings from Asia and that has a little effect on some cities. It's very difficult to quantify. And I wouldn't make it a kind of a total overall thing that will bring and tip the business into a reverse or in a reverse mode. I don't think that we are there, but it has a slight effect. And as to your question on the craft momentum and the craft growth momentum in the U. S. Slowed down noticeably. I don't have the numbers top of line, but some of the craft brewers have been we were used to kind of double digit growth. The growth rate of the craft category has come to slow down. It's a little bit above 6%. But within that, Lagunitas is clearly outperforming with 17% up in that first half year. So the performance in the Craft segment is very mixed bag. Some players have really had a difficult time and some others still enjoy some good growth, but it's definitely the case that the overall segments growth has slowed down, partially we think due to a cluttered offer. Distributors have to do with more and more SKUs. It's difficult to handle for them. Retailers, the like, and I think there is a kind of shakeout going on in the U. S. Craft market, and we will have to see where it lands. The IPA category is still, I would say, at the rather winning end. And in the IPA category in the craft, Lagunitas is the winning brand. So, that's why we are performing quite well at the moment, which we of course enjoy. Thank you. And on your question on the transactional impact and on the other net financing expenses, first of all, other net financing expenses, that line includes other things than this ForEx this kind of ForEx losses, and in particular, expenses linked to pension and revaluation of pensions. So that will that's still there. Part of that significant part this half year was on the ForEx loss due to the devaluation of the NERA. It happens when you actually have payables piling up that you cannot pay and a brutal devaluation. So unless the devaluation of the currency of currencies goes very, very fast, you would not expect to have very important amount as relates to payables in this line. So we're not forecasting anything right now. But again, as I answered earlier, it will depend on the situation on the naira and on the volatility of the currency. And as for the transactional, we don't guide specifically on the transactional. Again, our guidance on margin includes everything. And if you see the performance of the operating margin growth in the first half, 124 basis points. And what you can extrapolate for the second half, given the fact that we keep the guidance at 40 basis points, what you see there is a significant part of the difference is due to the fact that comps very high for Europe and the Americas in 2015. Most of the organic increase in operating profit was down in Q3 in Europe last year. So this is very difficult comps for the summer. And then the other part is due to foreign exchange headwinds. So that's where it is. All in all, leading to the 40 basis points overall for the year, which is pretty much in line with what we were expecting, yes, because we knew also the timing of the year last year and we also knew that we were moving into 2016 with high risk on currency headwinds. Thank you very much. Thank you. We will now take our next question from Komal Dilan from JPMorgan. Please go ahead. Hi, good morning. Just two questions from me, please. First one is on Mexico and your pricing trends there. Could you quantify what level of price increase you took in H1? And then also you mentioned an adverse impact from working capital in Mexico. Is this just FX or is it an underlying issue we should be aware of? And then the second one on Asia, please, very strong growth in H1, underlying trends seem very strong as well. But is there anything that can derail growth for the company in the region? Thank you. Mexico pricing was very much in line with inflation. So that's what we did. And then the working capital question of Mexico. Working capital question on Mexico, the one offs are linked part of it to the CapEx and the fact that there were high CapEx planned at the end of last year. And actually, we made the expense at the beginning of this year. So there is nothing, I would say, major or business related in this one off. It's very technical. And then moving to maybe the answer on Asia. Yes, this is a phenomenal fantastic growth in the first half and which follows a great 2015 year. If you look at Vietnam, which is half of our presence in Asia in terms of size pretty much, Well, urbanization there is still increasing pretty fast. The level of premium is not where it is in other countries, even in Asia. And then you have in Vietnam, just to give you an example of how the demographics play, you have 1,000,000 person entering the legal age of drinking every year. And that is forecast by outside organization that have nothing to do with us as continuing over the past 5, 10 years at least. So when we say that, the underlying, this combined with the fact that the economy is not dependent as others are dependent on commodity pricing, it lays the ground for really still some upside in Vietnam. And then comes a fact, of course, the expansion in Cambodia that we talked about and the fact that we hopefully have bottomed in Indonesia and are doing better now, even if we're not back yet to the level of 2014 before the minimart ban. Okay, great. Thank you. Thank you. We will now take our next question from Sanjit Aujla from Credit Suisse. Please go ahead. Yes, hi. Just a quick one on South Africa. You consolidated that business around 6, 7 months ago. Just thought to get your thoughts on how the integration is fair in there versus expectations? And is that business yet profitable? Thanks. Short answer, no. We are the integration is going fine. We are not dissatisfied with how it went, but we are just we just took over that business. And you have to go over the inevitable level of having overstocks in the market and all these kind of things and navigate to reset a little bit the business over there. Overall, we're satisfied that the fundamental challenge of the South African market is to find a way to high growth rates than we currently have. And that is by tweaking the portfolio and yes, being commercially assertive. But that is all competitive and therefore it's very difficult to give you more guidance on it. But obviously, as you can imagine, the fact that we were very interested in taking over the business in its entirety is because we have good plans in South Africa. Got it. Thanks. Thank you. We will now take our next question from Andrew Holland from Societe Generale. Please go ahead. Your line is open. Yeah. Hi. Just a couple of questions. I know you've sold your distributor or a distributor in Poland, are there any more distributors kicking about in Europe that you might also get rid of? Just mindful that obviously had a very helpful impact on your margin. And secondly, just sort of following up on an earlier question, When you are accounting for your U. K. Pubs and you sell them, how do you account for any disposal profit? Is that just included in your sort of place. It's very, very small and it's never been significant and it would be EEA. That's for the pubs? For the pubs. Right. Okay. And for the distribution, no. What has to do you know very well that if we would sell our French distribution business, which has the highest revenue, significantly our margins in Europe and it would all look beautiful. But this is not the reason when we divest distribution. It is because we think that strategically having our own distribution in any given market is not giving any more a competitive advantage. We have been doing that in the past in the UK. We are now doing it in Poland. We have done it in some parts of Ireland. We would consider wherever it takes if it does not contribute to the overall business in a meaningful way, we would of course divest it. But the fact that is diluted or accretive for the total margin cannot and shall not be a consideration. I even go a step further by saying that if in any given geography, we would see that investing in low margin, low sales, return on sales margin, distribution business would improve our competitive position, we would also do it. So it goes both ways, but it's true that in Poland, we divested the whole of our direct distribution for good reasons, which is that we were subscale, serving predominantly traditional off trade and that traditional off trade is just losing ground. So we sold it to a party that has a much broader product portfolio and which that party has synergies to continue to be profitable and deliver a good service in an otherwise declining part of the distribution in Poland. Okay. Thank you. That's very clear. Thank you. We will now take our next question from Fernand DeBoer from Degroof Petercam. It's Fernand DeBoer of Petercam. Just one Petercam. Just one question from my side. In your press release, you mentioned in the risk paragraph to see more intense competition, especially in the premium craft beer segment. You also said in the presentation that you had a higher market expense as a percentage of sales. Does this if you look beyond 2016, do you feel that this more intense competition in premium is going to be structural and that it also could force you to step up your marketing efforts? That is a very good question. But at the same time, I don't think it's the place to make speculations about that. Part of what you do is strategy. Part of what you do is in reaction of strategies and actions of others. That is and when you speak about the discretionary part of our business, it's exactly that. It's the ATL and BTL. It's totally discretionary. When you have to produce a hectoliter of beer, it's not discretionary. You can work on productivity, but you still have delivered a perfect quality beer and distribute it right in front of the consumer. So that is something that you can work on, but it's not discretionary. ATL, BTL is. Obviously, we have our strategy In some geographies, we might come across an intensification of the needed support and some others decrease. It works sometimes both ways. But making a projection about, oh, it's only going to increase, I wouldn't go that far. I've said, we are comfortable in the overall level of our spendings as a group, where we stand in the bandwidth of as you have seen us evolving. We stepped up in the last few 3 years and we are now evolving in a bandwidth of 0 point 5% and that can be up or down as we deem fit to be successful and grow our top line. Okay. Thank you very much. Thank you. We will now take our next question from Richard Whittington from Kepler Cheuvreux. Please go ahead. Yes, good morning. Two questions. First of all, on Mexico, you mentioned that group level, there was an increase in marketing spending relative to sales. Do you also see that in Mexico? So is marketing investments increasing there above the average? And can you also say on Mexico what part of the costs are in currencies other than the Mexican peso? And then the second question I have is also a bit more, I guess, philosophical question. Jean Francois, you talked about innovation rates and things like that. Can you talk a bit perhaps about your thoughts on SKU fragmentation in the global beer market? So how far can it still go and how can you how can Heineken still prioritize in the right way when brand portfolios expand? So on Mexico, we're not going give more precision on a market by market basis. And also, as you know, for competitive reasons, we don't go into that kind of detail, whether it is on the advertising and marketing or on the structure of our costs. And on the further consolidation of the market, because that's what your question alludes to. Again, it's a very interesting and a topic that to which I never kind of start to make speculation. I hold myself to that discipline for quite a number of years. It's not today that I'm going to start beyond saying there aren't always opportunities going ahead. Even if this industry has consolidated quite a lot already, further things will most of it will happen and we'll see there are opportunities enough. Thanks. Operator, I think we need to kind of end it there, if that's possible. Perfect. That will conclude our Q and A session. I will now turn the conference back to your host for any additional or closing remarks. Well, thank you very much for having stayed with us. I hope that you enjoyed the Q and A. And we have to stop it now. I'm sorry for those people who wanted to have more questions. We have been some way beyond time. If you have any questions, feel free to call Sonia at the Investor Relations team. It was a pleasure to have you. And we say goodbye and have a good day. Thank you, operator, for your good organization. Thank you, ladies and gentlemen. That will conclude today's call, and you may now all disconnect.