Heineken Holding's CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Heineken Holding N.V. (HKHHF)
by: SA Transcripts

Heineken Holding N.V. (OTCQX:HKHHF) Q4 2013 Earnings Conference Call February 12, 2013 4:00 AM ET

Executives

George Toulantas – Director, IR

Jean-François van Boxmeer – CEO and Chairman

René Hooft Graafland – CFO

Analysts

Andrea Pistacchi – Citi

Robert Vos – ABN

Simon Hales – Barclays

Sanjeet Aujla – Credit Suisse

Trevor Stirling – Sanford Bernstein

Chris Pitcher – Redburn

Olivier Nicolai – UBS

Henry Davis – Bank of America Merrill Lynch

Jonathan Fyfe – Mirabaud Securities

Andrew Holland – Societe Generale

Sander van Oort – Kempen

Marco Gulpers – ING

Operator

Good morning everyone, and thank you for joining us today to discuss, Heineken’s 2013 Full Year Results. (Operator Instructions). At this time I would like to turn the conference over to George Toulantas, Director of IR. Please go ahead, sir.

George Toulantas

Good morning everyone, and thank you for being with joining us today. I’m joined by Jean-François van Boxmeer, CEO and Chairman of the Executive Board and René Hooft Graafland, CFO Member of the Executive Board.

Following prepared remarks we will turn the call over for your questions. Let me now hand the call over to Jean-François.

Jean-François van Boxmeer

Thank you George and good morning everyone. I will start with the prepared remarks as they are called. Starting with slide 3 and I think they will be presented to you on your screens as I go. Our performance in 2013 was clearly below our expectations at the start of the year. Group revenue grew 1.3% and group operating profit, beia was up 2.8% including the full consolidation of APB. Our organic volume performance in 2013 was impacted by weak consumer spending in Europe and softer than expected economic in some of our key developing markets. However, organically the revenue increased slightly driven by solid revenue per hectoliter growth of 2.7%. Group operating beia increased 4.6% organically with growth of our higher margin developing markets contributing to 20 basis points of margin expansion.

Diluted EPS beia of €2.75 compared with the €2.89 in 2012. The majority of this decline relates to the introduction of the revised IAS 19 accounting standard as well as negative currency translation movements which René will explain shortly. Despite the number of challenges we strengthened our business by making continued progress against our strategic priorities and driving market share gains in a number of important markets including Mexico, Vietnam, France, Russia and the U.S.

Our investments in local and global brand innovation drove higher innovation rate at 5.9% versus 5.3% last year and delivered €1.1 billion of additional revenues. The APB business was successfully integrated and maintained its strong growth momentum. At the same time we intensified our cost focus particularly in Europe through restructuring initiatives to drive efficiencies across production, wholesale and logistics. Through our global business services organization we reduced cost by increasing the level of centralized purchasing and transitioned further operating companies to our shared service center in Poland. These and many other initiatives contributed to TCM2 cost savings of €300 million in 2013.

Let me now turn to the regional overview. Volume in Africa, Middle-East declined slightly organically reflecting a combination of slower economic growth, civil unrest and beer excise duty increases. Once this volume performance was below our expected level of growth we sustained investments in our brands and added new capacity in several markets including Nigeria, Ethiopia and the DRC.

This leaves us well-positioned to benefit from an improvement in economic conditions within the region where growth fundamentals remain firmly intact. In Nigeria, high inflation and pressure on household incomes constraint consumer spending and resulted in some consumer down trading in the category. This has led to low single digit volume growth in Nigeria mainly led by our lower main stream brand portfolio.

We were encouraged by the improvement market and volume trends in the fourth quarter. Our profitability in Nigeria was higher in 2013 however as we benefited from pricing initiatives and highly disciplined cost management. In the Americas, Beer volume declined by 2% organically flowing strong growth in 2012. This performance reflects a weaker beer market in Brazil and subdued economic conditions in Mexico and the U.S.

Despite this we drove solid revenue per hectoliter growth of 3.6% and achieved market share gains in all key markets in the region. TCM2 cost savings of €69 million were also realized across the region. Softer beer markets conditions in Mexico contributed to a slight volume decline however profitability grew strongly let by effective higher pricing and the continued delivery of cost efficiencies. In the U.S. sales to retailers went down 0.6% again outperforming the overall beer market. The Dos Equis brand continued its strong growth momentum whilst Tecate Light also grew in the double digits. This was offset by lower volume for the Heineken brand.

In Brazil our volume performance was affected by weak economic conditions which impacted mainstream brand performance. However volume of Heineken beer increased as we continue to exploit opportunities in the growing premium segment in Brazil.

In Central and Eastern Europe now the difficult economic conditions and favorable weather impacted volume development across the region. This led to negative operating leverage contributing to lower profitability in the key markets of Russia, Poland and Romania. In Russia the effect of the further excise duty increased and other restrictive legislation let to a low double digit volume declines slightly behind overall markets. However our value growth focus in Russia led to improved revenue per hectoliter growth and value share gains.

Across the region higher price our excellent outlet execution programs drove higher revenue per hectoliter and supported overall value share development. Our full year performance in Western Europe was affected by a weak first half where volumes decline by 8%. However this was a year of contrast as volumes stabilized in the second part of the year was group revenue grew slightly leading to share gains in the second half. Our renewed strategic agenda for the region is focused on investment in premium brand development and accelerated innovation agenda as well as effective trade marketing programs and tailored channel execution.

In 2013 we successful launched Radler the local brand in nine markets across Western Europe. We also strengthened our position in the cider category in the UK. Bulmers have become the number one over over-ice draught cider in the country whilst we also successfully launched new flavors of variants under the Strongbow and Bulmers brands.

We will continue to leverage our innovation capabilities in cider to capitalize on the fast growth of this category globally. Strong reported growth in the Asia-Pacific region includes the consolidation of APB. Group beer volume in the region increased by 4% organically driven by the growth in APB markets and higher volume in our export markets of South Korea and Taiwan.

Turning now to the performance of APB which continued to deliver strong operating results in 2013. On the pro forma basis APB volume grew 7% with operating profit of 14%. This reflects strong operation performance in Vietnam, Singapore, Indonesia, Malaysia, New Zealand Papua New Guinea and China. Our marketing programs for the Tiger brand unit strong results with the brand growing 30% across the region. This was led by continued strong brand growth in Vietnam which contributed to overall share gains in the country. The Tiger brand is central to our strategy of building a winning brand portfolio across all our markets in the Asia-Pacific region.

Together with our investments in new capacity we’re well positioned to exploit the significant regional growth opportunities in the long term. Following the successful integration of APB we are standardizing process in the systems across the expanded region. We are also building our commercial capabilities in the region by leveraging knowledge from global sales and the marketing functions.

Let me now take a moment to update you of the performance of our largest market Mexico. As highlighted at our Investor Conference in Mexico City last December, the successful execution of our strategy, Mexico has driven an impressive top line and profit growth performance since our acquisition in 2010. This is being supported by a clear brand portfolio strategy across both main stream and premium segments and an extensive route to market enabling wide outlet coverage. At the same time we have delivered significant cost savings leading to operating profit margin expansion of 220 basis points in 2014 and over 500 basis points since 2010.

We continue to see significant further upside in this important markets. As I mentioned earlier we were encouraged by the improved trading performance in a number of our key markets in the second half of the year. This follows a soft first half performance which has negatively, sorry which was negatively impacted by weather conditions in several countries. In Western Europe we’re encouraged by slight pick-up in consumer confidence in a few of our key markets. Coinciding with an improvement in lead economic indicators across the region. We also stepped up our innovation and sharpened our commercial execution in the marketplace with volume developments in the second half of the year. Volume in the second half grew in the UK, Netherland, Spain, Ireland and Portugal. The beer markets of key countries in Africa, Middle-East also improved driven by a return to mid-single digit volume growth in the fourth quarter in Nigeria and stronger performances in the DRC and Burundi.

Trading conditions remain challenging in Egypt and South Africa. In the Americas the second half performance was probably in line with the first six months. Improved trends in Mexico and Chili were offset by softer beer market developments in Brazil and the U.S.

We’re driving innovation as a source of competitive advantage to support future top-line growth. I’m pleased with the excellent progress we have made this year as we continue to leverage our global innovation capabilities at speed to create excitement for our consumers and value for our customers. During the year the higher margin Radler product variance a mix of beer and 100% natural juice was rolled out in the further 19 markets, Radler beers are now available. In Turkey alone, markets across all of our regions and we plan to further consolidations in several markets. In cider we launched Strongbow Gold in Mexico and several flavor variance in the UK.

We’re also capitalizing on cider opportunity in the U.S. with a Strongbow brand where investments are driving accelerated brand growth. The Desperados brand grew 2% supported by further roll out in four new markets with the brand now available in over 60 countries. These and further innovations across the group lifted our innovation rate to 5.9% which is almost in-line with our ambitious long time target of 6%.

The Heineken brand in 2013 was 1.8% lower against strong comparable growth of 5.3% in 2012. Brand performance was affected by destocking in France and the U.S., Heineken volume was also lower in Vietnam as part of a deliberate strategy to further develop our brand portfolio in the country and noticeably tighter. This success percent and overall market share gains in that country. Our sustained investments for the Heineken brand continued to drive global brand equity supported by the Open Your World Global campaigns, innovation and our global sponsorship properties. During the year the Heineken brand saw solid South Africa and Chile. We also achieved two important milestones firstly the Heineken brand surpassed 1 million hectoliters in China and secondly the brand achieved volume leadership in France for the first time in addition to its existing position as the highest value brand in the country.

2013 was a more challenging year than many of us have expected it to be at its outset. And notwithstanding this we make good progress against a number of our strategic priorities and in 2014 we’re and we will stay focused on continuing, strengthening our future growth platforms. We will further increase our investments in brand building and consumer facing initiative to strengthen our markets positions.

This will be supported by exciting and scalable local and global brand innovations as well as programs to drive growth of Heineken and our other high margin global brands Strongbow, Desperados and Sol.

We will again allocate around 2/3rd of our capital expenditure towards our faster growing developing markets to explore the structural long term drivers for volume in value growth. And finally we’re committed to further be leveraging our balance sheet to capture growth opportunities.

Turning now to our 2014 outlook and we expect a gradual recovery in the global economy to underpin improved trading conditions in a number of our markets. There aren’t even economic recovery in Europe it is expected to again result in lower consumption in Europe. However we expect in the improved organic volume trend versus 2013 led by volume growth in developing markets. Together with our ongoing revenue management focus this is expected to lead to organic revenue growth higher planned commercial investments in Europe where we’re stepping up our focus in innovations, investments in driving premium brand growth and outlet execution. We’re well on our way towards reaching our TCM2 targets of €625 million before the end of 2014.

Following completion of our three year planning process we see further opportunities to deliver a gradual and sustainable improvement in operating profit margins. We expect input cost prices in 2014 to be stable to slightly lower in the course of the year excluding the effects of currency transactional movement. The effects of exchange rate movements will adversely affect our reported results for 2014 assuming spot rates of 10 plus average and negative currency translational effect of operating profit, beia will be approximately €115 million and the net profit, beia this currency effect is around 75 million. The reflecting net combined movements of the minority stocks and share of net profits of JVs and associates lines.

Despite this expected currency volatility overall we expect an improved trading outlook for a number of our key developing markets. We therefore plan to increase our capital investments in the higher growth regions of Asia-Pacific and the Africa Middle-East by around $100 million versus 2013 to $1.5 billion. With that let me now hand over the call to René to take you through the financials in more details now.

René Hooft Graafland

Thank you Jean-François and good morning to everybody. As I take you through this financials for the year let me remind you that comparative of this refinanced IAS 19 on our 2013 financials is recognized as a consolidation change. Secondly, it will include an impact from APB for the six weeks and the 31st of December last year. Organic growth, 42% of APB prior to consolidation is maintained through 15th of November 2013.

Our performance in 2013 reflects a challenging first half of the year, however improved gross momentum and stronger commercial execution is of 1.5% in the second half of the year offset by 2.6% volume declining and leading to a slightly positive organic revenue. Despite this slower top line development accelerated TCM2 cost savings drove an improvement in group operating 20 basis points.

Reported net profit was substantially lower than last year however this reflects recognition of an exceptional revaluation gain in 2012 of EUR1.5b from the acquisition of APB. Net profit beia of €1585 million was 2% lower on an organic basis.

Our diluted EPS came in at EUR2.75 which is EUR0.14 lower than last year. However this includes $0.07 negative impact from revised IAS 19 and further $0.03 reduction from foreign currency translational movements. Free operating cash flow increased by 2% to 1.5 billion mainly due to a 60.8% increase in cash flow from operations which was partly offset by higher capital expenditure and income tax paid.

Our net debt to EBITDA ratio fell from 2.8 times in 2012 to 2.6 times by the end of last year. This follows the use of higher free operating cash flow and the net cash inflow from acquisitions and disposals to reduce net debt levels. Group revenue increased by 1.3% which includes a positive impact on the full consolidation of APB.

On an organic basis group revenue grew slightly. Consolidated revenue increased by 4.5% including the positive net consolidation impact of €1.4 billion or 7.5%. Unfavorable foreign currency translational movements reduce consolidated revenues by €389 million or 2% and this reflects a strengthening of the Euro against the number of local currencies in 2013 mainly the British pounds and Nigerian Naira and Brazilian Real and the Russian Rouble consolidated volume partly offset by an increase in revenue per hectoliters of 2.6% and after including a positive country mix of 0.6%.

Group operating profits, beia was up 2.80% an increase 5.6% on an organic basis. Group operating profits margins were up 20 basis points and this primarily reflects the full consolidation of the higher margin APB business and margin expansion in the Africa and Middle-East and Americas regions which offset the impact of negative operational leverage in Europe. At the consolidated level operating profit, beia includes a positive consolidation impact of 13% predominantly related to the acquisition of APB and then reduction of 1.5% or 39 million related to foreign currency translation movements. On an organic basis consolidated operating profit declines by 0.7% as lower revenues and higher input cost and marketing expense were only partly offset by realized cost savings. Net profit beia declined by €76 million with the combined impact of revised IAS 19 and unfavorable foreign currency translation movements reducing net profit beia by €60 million. Excluding the impacts of revised IAS 19 other consolidation changes increased net profit by €70 million mainly reflecting the strong result of APB.

Organically net profit beia declined by 2% as lower consolidated operating profit, higher taxation expense and minority interest were only partly offset by lower net interest expenses. TCM2 delivered the further €300 million of cost savings in 2013 bringing the cumulative amount of savings in the first two years to just under €500 million. In 2013 over 70% of the cost savings were captured in the supply chain function mainly from productivity improvements across our breweries and lower logistic cost.

Our stepped up cost focus across the group also led to a more balanced contribution from regions outside of Europe particularly the Americas, Africa, Middle-East and global support functions. Around 2/3rds of the savings were in fixed cost with the balance of variable cost savings achieved mainly in raw materials and packaging from our Centralized Purchasing activities. Some of the structural benefits in purchasing were offset by higher raw material prices in 2013.

Given the higher cost savings run-rate in 2013 we expect to achieve our three year €625 million cost saving target during 2014. We will continue to reinvest part of any realized savings in 2014 in marketing programs to support our ambition for driving sustainable revenue and profit growth. The global business services organization continues to be an important enabler of TCM2 cost savings. We continue to benefit from an increased level of centralized purchasing in both product and non-product related to spend areas. We also successfully transitioned the finance transactional services of a further nine operating companies in Europe to our shared service center in Poland bringing the total now to 14 operating companies by the end of last year. We’re planning to transition the remaining 10 operating companies in Europe by the end of this year.

From cost related to GBS, we’re €67 million in 2013 bringing the cumulative spend to a €169 million. Of this amount €133 million have been recognized as normal operating expense. From 2014 the plant migration of new processes and activities from operating companies to our shared service center in Poland is expected to give rise to new restructuring activities. The related cost will be recognized as an exceptional item with associated cost savings expected to be mainly realized from 2015 onwards.

We continuously look for ways to optimize operating efficiencies. In the first quarter we undertook restructuring activities in France, Greece and the UK with further plant right sizing initiatives across our business in 2014.

Last year we continued to increase our capital investments to capture opportunities in key developing markets. Capital expenditure as a percentage of revenue increased to 7.1% from 6.4% last year with around 60% of this spend allocated towards developing markets. Examples of key programs included investments in new capacity in Nigeria, Ethiopia, Democratic Republic of Congo and in Vietnam as well as the expansion of fridges and other commercial assets in Mexico and Nigeria. We’re also investing in a new Greenfield brewery in Ethiopia and in Myanmar and the soft drink plants in Indonesia to capitalize on attractive future growth opportunities in these markets. At the same time we have successfully deleveraged the balance sheet from the net debt to EBITDA beia level of 2.8 times in 2012 immediately after the execution of APB to 2.6 times by the end of last year.

And we are on target to achieve our target net debt EBITDA ratio to below 2.5 times by the end of this year. In summarizing we have compelling growth platforms in place to support sustainable top line growth and benefit from the gradual recovery in the global economy. These include and the highly diversified emerging markets footprint, clear leadership in the premium segment with the Heineken brands proven innovation capabilities and the sustained high investment levels to support top line development.

In addition tight cost management is firmly embedded across the business. We remain committed to delivering a gradual and sustainable improvement in operating profit margin in the medium term. On that note Jean-François and I would be happy to take your questions.

Operator, could you take over?

Question-and-Answer Session

Operator

(Operator Instructions). We will now take our first question from Andrea Pistacchi from Citi. Please go ahead. Your line is open.

Andrea Pistacchi – Citi

Couple of questions please, first on Nigeria, Africa, Middle-East if you could talk a little more about what’s going on there on the competitive environment. It's been quite lumpy this year but you said volumes improved in Q4. I was slightly surprised it seems that price mix in Africa and Middle-East has also accelerated in Q4 which is a bit different from the message you’ve been giving. So if you could go through that a little and how you see Nigeria, how confident are you going into 2014? And then I guess just I may have missed this in the detail of the press release. I don’t know whether you booked on the Hartwell disposal whether there was a capital gain on that. In the past say with Cargo [ph] you had in your operating numbers a bit of capital gain so I was wondering if there was anything on Harwell in the numbers please.

René Hooft Graafland

Just to clear off the last one higher flow in the press release there was 6 million benefit there. On Nigeria you take that Jean?

Jean-François van Boxmeer

Nigeria, we have seen a decline in the Nigerian beer market already coming in the second half of 2012 and in the last quarter of 2013 we saw it picking up again. We have also being performing quite well in the past quarter. So it's very difficult to make projections about Nigeria but what I do still believe is that the fundamentals are rather still strong in so far that you’ve a higher urbanization rate, you’ve cohorts of young drinkers that are coming every year on the market. You’ve developing middle-classes that trend is there to stay in Nigeria and we have been improving our competitive position in the second half of the year with the market that was slightly picking up again. That’s what we see. However, we also see that there is a stiff competition and the so called value segment in the market is growing at a much faster rate than the premium segment with the exception of Heineken by the way which is still growing quite very nicely in Nigeria but the value segment has been growing much more and so you see a little bit of the shift between mainstream and value and thus the reason so why Nigeria we have been embarking much more on productivity and efficiency even much more than we were doing already. So that unbalance has led to better results and much better operating results than the slight increase on our sales that we recorded in Nigeria.

That’s on the price mix, one what you were saying that the fact that you see an uplift there is more the weight of Nigeria, because even with the growth of that value segment you see that overall the price levels in Nigeria are very healthy and so by the strong growth in the last quarter there you see that that has impacted the price mix for the full region although within Nigeria it is a bit under pressure.

Andrea Pistacchi – Citi

Just one last thing you say your improved performance is a combination of market improving a bit and share gains, do you have a sense of what the growth rate of the market has been sort of in 2013 and the end of the year what the trend is now about?

Jean-François van Boxmeer

Yeah so the markets for the full year was slightly up in the last quarter certainly up. So but for the full year it was slightly up.

Operator

We will now take our next question from Robert Vos from ABN. Please go ahead.

Robert Vos – ABN

I’ve a few questions if I may, is it fair to conclude from your outlook statement that you expect positive organic revenue growth but that you’re not yet certain about positive volume growth that’s my first question. Second question is you mentioned the impairment concerning Russia in your press release. Can you provide some color on you deteriorated medium term outlook for the Russian markets? Thanks.

René Hooft Graafland

Yeah so you’re right, we expect positive organic revenue growth but that will be in absolute terms. It depends obviously also on the currencies and on the full year, we see growth in the developing markets and we still see decline in consumption in Europe.

And on Russia the market has been down quite a bit in 2013 as you know excise duty are raised again in 2014 that is planned by the same kind of amount, again, that it was in 2013. So we expect continued pressure on overall market coming out of Russia, whilst we have been able to maintain our market share last year and that we continue to be focused on productivity measures to alleviate what the market is doing and continue to invest in our premium protect, because that yields better gross margins, obviously, and noticeably in the Heineken brand, which continues to grow quite nicely in Russia.

So with that, I think you can't be extremely positive about what the market in Russia will do over the next year, but we are holding our position over there. And mind you, at the end of the day, Russia is big in volume, but not very large in the profit contribution towards the whole Heineken NV.

Operator

We will now take our next question from Simon Hales from Barclays. Please go ahead.

Simon Hales – Barclays

Simon Hales – Barclays

A couple of questions. Can I just sort of follow up on those questions on volumes in Europe, perhaps, Rene? Obviously, you're talking about volumes being weaker, but I'm just trying to get a gauge at the magnitude between Western and Central and Eastern Europe, because clearly, the Western European performance, as you highlighted picked up in the second half to be flat last year. As we go into 2014, you've got some easy comparatives through the first half, the absence of French excise moves, et cetera., the macro backdrop picking up

I'm just trying to get a feel for the magnitude of decline you're perhaps expecting year on year in Western and Central and Eastern Europe. And perhaps there's an addendum to that on Europe. How should we think about margin development going forward? Is it wrong to assume we're going to see margin growth in Europe this year given the high levels of investment going in? Or are we going to see some of the new perhaps TCM3 cost savings starting to drop through before the end of fiscal 2014 to support margin delivery?

René Hooft Graafland

So on volume development, as you say, we have seen in Western Europe a better second half of the year that was partly influenced by the very strong Q3 where we had the first half was very bad in weather and Q3 was actually very positive on the weather side, and you saw that we had even a positive quarter in Q3 from a volume perspective. In Q4, the volumes were down, but at a much more moderate level than what we have seen in the first half of the year. So going forward, in Western Europe, we see still lower consumption. At the same time, we say that means that you should not write Europe off. On the contrary, it's a market where you can make good business with higher-margin products with innovations and obviously taking share when the pie is shrinking and that is what we are doing and what we did as a part of the good results in the second half of the year.

It's not only the market. It's also our own doing in these markets and we intend to continue that. Now, when you look at Central and Eastern Europe, there the volume developments in the market is much deeper and continued also in the second half of the year. There was certainly not an improvement in the second half of the year. Going forward, yes, you get easier comparatives, but it's still not clear signs that these markets will turn around. At the same time, what we need to do there is continue to work on the revenue per hectoliter, like we did last year and that means pushing premium brands like Jean was explaining on Russia, very much focused on the premium side of the portfolio, and also to continue on innovation.

Simon Hales – Barclays

And around the margin outlook for Europe for next year? Should we expect margin growth, particularly in Western Europe or is the reinvestment and perhaps the negative leverage from the lack of real volume growth improving going to hold that margin back, in your minds?

Jean-François van Boxmeer

I know everybody is fishing for margin improvement. This is our main job, of course, but we don't make any forecasts on that. One has to realize that on the one hand we work on productivity programs which are made to increase margins and on the other hand we also work on innovation programs which are also there to enhance the gross margin, again.

Simon Hales – Barclays

So both our actions and strategic priorities, they go in that direction though we have to fight against a category decline and also on investing in the top line to initiate and try to have more market share and we try to do that avoiding value destruction in the market but we're not alone in the market. That is the difficult balance that we operate in European markets, where intrinsically you cannot expect a lot of growth of the category for a fundamental reason that in most countries, with exceptions but in most countries, you have unfavorable demographic developments and the graying population is playing against the development of the beer category. That is a fundamental given, which you will have, let's say, from Dublin to Moscow.

But within that general observation, you still compete with other beers. You compete with other drinks categories, and Europe delivers still a fair amount of cash flow and has intrinsically still margins, it's more stable, and we work on increasing our pie, albeit difficult and everything which we do goes of course into that direction and, frankly, it's difficult to say whether Europe will deploy more consumer confidence as it did last year.

You see some signs of improvements in countries like Ireland or parts of the UK, even parts of Spain, but the place remains fairly scattered.

Operator

We will take our next question from Sanjeet Aujla from Credit Suisse. Please go ahead.

Sanjeet Aujla – Credit Suisse

Just a couple of questions, please. Firstly on APB from my reckoning, volume growth low to mid-single digit from double digit in the first half, in the second half. Just wondering if you can talk a little bit around that and also on Central and Eastern Europe, you had very strong price mix, around 4% this year. Do you think that pace of price mix is sustainable, given the competitiveness of many of those beer markets? Thanks.

Jean-François van Boxmeer

So Asia had a slightly lesser growth in the second half of the year from a volume perspective but remains a very healthy, growing business, and that is what we see there. It's a bit of obviously mix between the different countries, but certainly a country like Vietnam continues to perform very well and overall, as said in the presentation, 7% volume growth or 14% operating profit growth organically is a very healthy development. Your second question was?

Sanjeet Aujla – Credit Suisse

Just on Central and Eastern Europe, you had a very strong price-mix performance this year of around 4%. Do you think that's sustainable looking forward over the next year or few, given the level of competition you face and the competitiveness of those beer markets?

Jean-François van Boxmeer

I have no crystal ball, but you have to realize that the price levels in most of these Central European markets, I would exclude Austria and Greece and Germany, which are accounted for in Central and Eastern Europe in our business arena but are really more Western markets.

But in this Central and Eastern Europe. I would say the former Soviet bloc markets, price levels tend to be low, and we have to work relentlessly in trying to improve that, and it is not just by doing price list increases. I agree with you, they wouldn't work that much although they are necessary. But the main, it's there also, it is value-added innovations and the premium portfolio that we have to develop and mainly with the Heineken brand, but also with local premium brands, with innovations, line extensions, Radler. A lot of effort is made to make sure that we can improve our average selling price also in this region. So far so good, with very strong headwinds against us, what the total market developments in most of these countries concern but that's the intention to continue.

Operator

We will take our next question from Trevor Stirling from Sanford Bernstein.

Trevor Stirling – Sanford Bernstein

Two questions please, the first one, am I would like to detect that little bit more optimism maybe then at the end of the Q3 results? And is that optimism if I'm right is it mainly driven by the improved performance in Africa?

Jean-François van Boxmeer

Yes.

Trevor Stirling – Sanford Bernstein

Okay, all right. Then, second question, we've talked a bit about Russia. Your rather big Central and Eastern European markets, in terms of Poland and Romania, any signs that things are getting less worse in those markets?

Jean-François van Boxmeer

I add Mexico also to my first list. You told Africa. I would add also Mexico to be complete, because those are important markets for us, as you all know. On Poland and Romania, look, I do not like to make too much specific comments about one or the other country. It is fairly known in the industry that the profit pool in Poland has been reduced, big time, by competitive behavior over the last couple of years. To restore that is going to be quite a long, long battle, I'm afraid. So we stay tuned in Poland to continue doing what we're good at, trying to maintain and increase slightly our share, but not at the expense of I would say of the profitability of our business.

All markets, as I said to the previous question, all markets in Central Europe remain under heavy pressure. Consumer confidence in that part of the world is not yet really restoring. We have to face that.

Operator

We will take the next question from Chris Pitcher from Redburn. Please go ahead.

Chris Pitcher – Redburn

A couple of questions, please, follow up on Nigeria and Russia. In the year just reported, you delivered more cost savings, and there's less to deliver next year, based on your targets. That obviously helped significantly in Nigeria. With the outlook for price mix pretty muted, are you going to be able to get enough cost savings out of Nigeria to hold onto margins, even with a modest volume recovery? There seems to be quite a lot of pressure there, still. And then secondly, on Russia, it's just really to better understand. You took a write-down in 2008, and it looks like you've pretty much now written off all the goodwill in Russia. What is it that changed in 2013 that meant you took the write-down now as opposed to taking it the year or two earlier, when obviously the market was going through the most dramatic upheaval? What is it that ultimately changed last year? Thanks.

René Hooft Graafland

First, on Nigeria and the margins, and is there still room for cost savings to make up for the change in market dynamics, your first question, look, Nigeria is ultimately a matter of growth. And that is where we are there. It works at very high margins, 25-plus margins. So maintaining margins is not the ultimate goal. The ultimate goal is growing the market and growing our position in the market. That is what should yield the benefits in Nigeria. And for sure, you work hard on the cost, and you have seen in a year where the business is growing less from a volume perspective, there is more pressure to address the cost but I would not judge Nigeria on its pure margin. If it's 1% up or down, that is not going to make the difference. What is going to make the difference is the growth of the market and how do we get Nigeria again back to that mid-single-digit growth level, which based on all the fundamentals could be possible.

Now, the second thing is on Russia. I think what’s changed is that you see that the measures which are taken, because as Jean is saying, commercially and the position of the Company and how we perform in the market, that is not the big reason for this write-off of goodwill. It is the prospect of a market where after a couple of excise increases and other measures doesn't stop and it continues to happen and the industry continues not to be able to pass that on directly to the consumers. So you get margin pressure, and now in 2014 again, and that has changed our outlook for the financial outlook for Russia, which has led to that impairment.

Chris Pitcher – Redburn

And could I have one quick follow-up question? On the cash conversion, you're still expecting that to be below 100%, and I understand that you're investing in the markets with growth. When would you expect to move to cash neutrality, or indeed positive cash conversion?

René Hooft Graafland

I hope never, because that means that we continue to grow.

Operator

We will take the next question from Olivier Nicolai from UBS. Please go ahead.

Olivier Nicolai – UBS

Just to follow up on Nigeria, first of all, what is the percentage of your volumes coming from the lower-end brand, and what is the profitability relative to mainstream brands like Star, for instance? Is it significantly less profitable? The second question is on your interest rate guidance. Is it just on existing bonds only or do you already anticipate the benefit you will get probably from refinancing some of the bonds which are maturing this year? I think there is one in April which is maturing, which is €1 billion. Thank you.

Jean-François van Boxmeer

On the Nigerian margins, I will not comment. That is not my business to in, but just observe how the sales growth is going and how the profit growth and trust us how we manage a brand portfolio and on the interest, yes, you get that replacement of the high-coupon bonds in April. We have already got the financing out of the market. That’s substantially lower rates, so you see over time, each year that our interest rate goes down. And for this year, that will be 2.4, and that is based on existing finance or existing bonds and financing which we have in place.

Olivier Nicolai – UBS

So this 2.4% rates, that were the benefit this year, and that's included in the 4.1% average interest rate guidance?

Jean-François van Boxmeer

Sorry?

Olivier Nicolai – UBS

Is this average interest rate guidance of 4.1% already includes the benefits from this refinancing, what you've just done?

Jean-François van Boxmeer

Yes. This is the best estimate what we will have this year.

Operator

And we will take our next question from Henry Davis from Bank of America Merrill Lynch. Please go ahead.

Henry Davis – Bank of America Merrill Lynch

I have a question back on the margin outlook. At the third quarter stage, I think you gave some preliminary comments on your expectation for European margins into 2014. It was stable margins in Western Europe and further pressure in Central and Eastern Europe. I was just wondering firstly if this is still your expectation, and second, if you could provide us some kind of broad outlook on your other regions into next year, that would be great. Thank you.

René Hooft Graafland

I think Jean Francois has already elaborated well on the margins. What we said in Q3 stands still today in terms of that there will be help on the margins from your higher-margin, faster-growing regions. Africa, Middle East, Asia-Pacific is working at much higher margins and if they grow faster than the overall portfolio which is expected to be that will have a positive effect. Clearly, in Mexico, you have seen how we work there on the margins, and we are improving margins, and that should help the Americas. And I think Jean Francois has said enough about Europe.

Henry Davis – Bank of America Merrill Lynch

And one quick modeling question. Within the net finance costs, the other net finance line of €72 million expenses, is that a good run rate going forward?

René Hooft Graafland

It's difficult to say, because there is a lot of currency effects going through that line and pension, so I'm looking at Oban [ph]. That is the most unpredictable line of the P&L.

Operator

And we will take the next question from Jonathan Fyfe from Mirabaud Securities.

Jonathan Fyfe – Mirabaud Securities

Two questions, please. Firstly, just on Russia, how committed are you to keeping boots on the ground in Russia? I wonder if the management time and capital might be better spent elsewhere. And secondly, I don't know if you just asked if I just had a fire alarm but just could you give perhaps a little bit more detail on the FX transactional effect? Thank you.

Jean-François van Boxmeer

On Russia, we have always showed our commitment. We are hanging in there for 12 years now. It has been a bumpy road, and it's a bumpy road for two reasons. The main reason is that it is a bumpy market, that's the main reason. But we have a good position of that to realize that at some time not so long ago, we were a listed [ph] number four in the market, and we kind of crawled back a little bit better in the ranking.

So I think we're doing a good job. Once more, Russia is still a big market. I think we have to look through the fact that it is a bumpy market, because it's mainly through adverse regulation and taxation where the Russian government is just fixated by having excise duty rates expressed in euros which corresponds to the average you have in the European Union. That is their thinking. Well, when you do that in a market where the beer price are much lower, it slows down the category by a bit, I can tell you, and so it's going to be difficult still in the next coming years. But look through. We never made losses in Russia. We have been adapting our operation to every time the changing reality.

We have, of course, taken necessary write-offs of our goodwill, but we are improving our position in the market and our position in the premium end of the market. So looking through it, it will remain a big market, and I think we have a good option for the future, albeit that Russia with big volumes is not a big profit contributor to us. But I think we remain at hand with a solid option for the future.

René Hooft Graafland

And then on the FX, first of all, in the press release, we elaborated on what the translational effect would be assuming the rate of last Monday, at the spot rate of last Monday, for all the currencies, and that was that €115 million on operating profit and €75 million net profit.

Next to that, obviously, there is a transactional effect, but there you see that OpCos have a hedging policy in place, and they hedge up to six months ahead their transactional part. So you don't beat it, but you delay it. But clearly, in that transactional part, you see that OpCos, or operating companies, will have to take actions in the pricing of their products. If you are a big importer of your raw materials in a certain country and your currency plunges, you will be forced to adjust your pricing and so the hedging policy in place is to give OpCos the time to respond to what is happening but certainly it has an impact on our business.

Operator

We will take our next question from Andrew Holland from Societe Generale.

Andrew Holland – Societe Generale

Firstly, could you just say why your head office costs are not coming down, and is that a part of your cost-reduction program? I'm just slightly surprised that that doesn't seem to have come down. Second question, coming back to APB, obviously a good sales and profits performance there. Is there anything in the external environment to cause you to think that there's any reason why we should assume a slowdown in the organic sales or profit growth in APB?

René Hooft Graafland

So head office is certainly part of the TCM activities, and you see that they contribute. You have to realize that what is reported on the head office is quite a mixed bag of the real head office but also of our packaging and for instance the maltery [ph], these kinds of businesses. Plus, the big part of the GBS spent is reported on the head office, but you can see or you can be certain, that there is a big push on the cost, that the central cost and see how we can further increase the productivity of the central support functions. That is what I can say about that.

Jean-François van Boxmeer

And APB. No, Andrew, I don't make any forward-looking growth forecasts for a geographical area. We continue to believe in Asia being an area of stronger growth within our portfolio and so it's an area where we will continue to invest in.

Operator

We will take our next question from Sander van Oort from Kempen. Please go ahead.

Sander van Oort – Kempen

A few quick questions. First of all, on the working day impact. I think in the third quarter, especially in Western Europe, we saw a positive contribution from working days, and I was wondering to what extent this also positively or negatively impacted the fourth quarter results and mainly in Western Europe. And a bit linked to that question is to what extent there is a negative impact on product rationalization, which I think has also had an impact, especially in the start of last year.

Second question is on packaging costs. Maybe you can elaborate to what extent glass or aluminum prices are favorable or less favorable versus last year, as it looks now. And thirdly, your pricing in the US, which of course depends on how Modelo increases or decreases prices, so maybe you can elaborate a bit on what your pricing strategy is in the U.S. is in 2014.

Jean-François van Boxmeer

Let me start by the last question about the pricing. Again, we're not going to make comments forward looking on pricing, except that I will continue to say that we take pricing where we can take price and that we are a niche operator in the USA. So we look at what happens in the market and we assess our competitive position and if we can improve our pricing in the USA, we would do that and we have been doing that over the last year both with Heineken and with our Mexican portfolio, and we will continue to do that. But I will not go beyond that observation.

Your second question, in the reversed order, was about the input cost. Yes, we have seen the input cost going stable to slightly down, depending the category, but there again I will not specify where and what because contract making is also a competitive activity. But, yes, overall, input cost for raw and pack has been stable to slightly down or are going to be.

René Hooft Graafland

And then on working days, Q3 indeed has one day more. Q4 was equal to the year before. I think what influences Q4 more is the loading which we had in 2012. So as a comparative in markets like France and the USA, but no impact from working days.

Operator

We will now take our next question from Marco Gulpers from ING. Please go ahead.

Marco Gulpers – ING

I've got two questions. First is, could you talk a bit more on the market share trends that you are seeing in Mexico? Where are you actually taking share? And the second is that you are reporting to see or to expect the number of employees to decline in 2014. We have already seen some improvements in personnel cost of sales in 2013. Is that the run rate that we should expect for 2014, as well? And the final question is on A&P increases. What do you exactly mean with slight increases? Is that 20, 30 basis points, or is that less? Thank you.

Jean-François van Boxmeer

Market share, Mexico, Rene?

René Hooft Graafland

0.4%. So we grow market share, and that is based on the strong success of Tecate Light, but also the more premium propositions in the portfolios like Dos Equis, Bohemia and Heineken. On a geographical perspective, you see that we get some traction now with the right portfolio in the Central West region. Regarding the number of employees, we have to indicate that we will continue to work on the productivity of the organization which will result in organically lower numbers of people employed. But as we always do, we talk to that first to the organizations involved and the people involved, and we don't do that via the external communication channels.

And then your last question was about A&P. That is exactly what we say. It is a slight increase, so that will be a modest increase, but we are committed to further on one hand increase the spend but more importantly to work on the quality and effectiveness of this band, because ultimately that makes a bigger impact than a couple of basis points more or less.

Marco Gulpers – ING

Maybe a small follow-up question. Can you update us on the on-trade trends in Southern Europe? You flagged that Spain is improving. Could you update us again on Spain, Italy and Greece, please?

Jean-François van Boxmeer

Greece is kind of stabilizing a bit, as we see it, which is a good news. I think that we still face some headwinds in Southern Europe, all the way. I was talking and referring about some green shoots in Spain in some regions. It's very timid. It's not something which is going, blowing you out. Spain remains a very big on-trade market, and so we are very much depending on that consumer sentiment.

And so far, seeing the decline of the economy in Spain, one has to recognize that the market in Spain has been upholding in a remarkable way like it did to a lesser extent, but it also did in Portugal. On the contrary, Greece, there was I would say the effect of the crisis was much bigger going forward. That is what I can say about Southern Europe but again, looking forward, I have to remain cautious. But what we do is of course to be commercially active on these markets. So that is what for us matters, so there is no reason not to continue to push on investments in innovations and also and including on-trade investments and channel investments in that channel in Southern Europe in a measured way and there where we see green shoots regionally.

Operator

Gentlemen, there are no further questions in the queue.

Jean-François van Boxmeer

Which then is ending our call, I suppose. And I would like to just in the name of all of us here, to thank you for joining us this morning. And, of course, as ever, our IR team is available, with George Toulantas at its head, to follow up on any further questions you may have.

So I wish you a good day. Bye, bye now. Thank you, operator.

Operator

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen you may now disconnect

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