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Heineken

2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Heineken

Jean-François van Boxmeer, CEO and Chairman of the Executive Board

QUESTIONS FROM

Undefined Analysts

Stephanie, Bank of America

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Delivering on Strategy

Jean-François van Boxmeer, CEO and Chairman of the Executive Board Good morning everybody, thank you Sonya for introducing and for the lively introduction to wake us up this morning. I hope you are all waking up. The title of my presentation is Delivering on Strategy.

We will focus the whole day and tomorrow on Asia, and in particular Vietnam as it is the poster child of what is happening at its best here in Asia. And I hope you will enjoy taking the ride and discovering Asia with us. I think the last time we were here hosting a financial market conference in Asia was in Singapore in 2011, if I recall well. That was just one year ahead of our acquisition of the share of APB that we didn't own at the time. Don't derive from the fact that we organised a financial conference again in Asia any large scale acquisition in a year's time from now. So I want to take away all kinds of that speculation.

Delivering on strategy - you will allow me to take a little bit of a wider look, because strategy is something that is done on the long term and not on the short term. And what I'd like to do with you this morning is to take you through a look back and a look forward of what the strategy of Heineken Group has been. And I'd like to start the journey somewhere in the year 2000.

I will not follow the flow of the presentation, you have it in the booklet, for reading it at your leisure afterwards if you want, so I'm going to talk a little bit off the cuff.

If we take a look back 15 and take the year 2000 as a pivotal year, the beginning of the century. What did Heineken strategically do to grow its business and what did we realise? And I think there are four major points that we can highlight.

The first one of course is our footprint, the most known as it happened largely through acquisitions, but also through a number of greenfields that we have been setting up over the years. Basically what we did is in 2000 we had a footprint where 80% of our profits of business was happening in Western Europe, Western Europe and North America, in particular the USA. Today our footprint and our business is predominantly done in the so called Emerging Markets for two thirds of it.

We did that through a series of acquisition and really transforming our footprint into the markets where there is demographic growth, urbanisation and economic growth and where the beer category could grow, and also where there is an appetite for our premium brand Heineken. I think that is the major part and the most emerging part of the iceberg of our strategy. And we have been delivering on that quite nicely.

Always keeping in mind that we never wanted to be dependent on one sole geography for our profitability. We have learnt the hard way from the late 1990s and the early 2000s from the United States that when you're overly dependent on only one country and if the currency of that one particular country plunges you are really in deep trouble. So we particularly care in our expansion strategy of having a diversification of our risk.

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

But we stay, nevertheless committed strategically, to be a balanced brewer for mature markets and emerging markets. But definitely the footprint is what has been realised over the last few years.

If we look back in the past over the same period we have also been concentrating a lot on restructuring our mature markets business. That was 80% of our profits 15 years ago; we had to restructure that to have it still profitable today. In Western Europe - and it went in two stages, the first stage was definitely a cost base restructuring and rebase. In Europe alone we have been closing down 48 breweries and malting plants, restructuring our footprint to the wider European Union; don't forget we are the leading brewer in the European Union. We have been restructuring our footprint both in terms of production sites as well as on logistics.

And at the same time, putting on the ground the necessary investments to also boost our productivity; productivity was multiplied by two and a half over that period of time, and that's to cope with a market that in the EU has been diminishing over time, largely due to drinking habits and demographic pressure. The greying of the population as brought the markets to shrink and on the other hand habits like no drinks at lunch, and no drinks while driving, which is all good for reason, that led the alcohol industry to shrink altogether in Europe. So we have been forced to adapt forcefully to these external factors and we have done that successfully.

At the same time in the second phase and we started more or less five years ago we have been reinvesting in our top line in the mature markets, particularly in Europe, through innovation. We have taken innovation as the kind of leading pillar to be more forceful in building our top line. You cannot build your top line in a declining market, in a mature market, through pricing, obviously. So you have to do it through innovation and at the same time, making consumers rediscover beer.

And the last thing is that through the acquisition of Scottish and Newcastle in 2008 we had in the basket a product called cider, which we didn’t know about that we discovered the year subsequently and we thought it might be a proposition outside of the United Kingdom which could have a lot of appeal, if we were, and we will devote the long term commitment to develop our cider brands as a new category more worldwide.

So building the top line in the mature markets has been very important for us over the last five years. Whereas in the period where we have been downsizing our business and concentrating on productivity we have been losing a bit of market share. We have accepted eroding market shares in those years to maintain profits, at the same time since the last five years we have been reinvesting in our top line and tangentially in the mature markets of Europe, gaining globally - slightly market share again.

That is for Europe. On the other side of the Atlantic we restructured our business from Heineken USA being a mono-branded company, totally manically focused on the Heineken brand to a more wide portfolio business. It took us quite a number of years to do that, because also in America the beer market declined for more or less the same reasons that we have noticed in Europe, albeit at a slower pace - the decline, than in Europe. But we, having a strategy of concentrating only on premium brands in the US,

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

we don't produce in the US, we are a minor player by volume and we are a premium player, but we have been redeploying quite successfully our portfolio in the US. Going out and still staying strong as Heineken, but adding a line of Mexican brands and also more lately developing the cider brand in the United States of America and seeing this business, which has been in quite a steady decline in the earlier part of the century, going slowly back to growth. That is our strategy for the mature markets.

Now the third pillar of strategy development over the last 15 years has definitely been whilst Heineken remains our main brand, it is our defining competitive advantage it is still growing and it has been growing over the period and it will continue to grow above the average of our portfolio.

Think about it, if it was a region it would make 30% of our profits, so it remains a very important business proposition and it defines the Heineken Group. But saying that, at the same time we have been learning to develop a broader portfolio of brands, which you have to do when you embark on a - on a forward looking innovation strategy. So what we have been doing is embracing more beers, more brands and more line extension and venturing into other product categories like cider over the last 15 years, with an acceleration over the last five years. This is the third strategic transformation of the Heineken Group. Bear in mind we have today 250 brands of beer - only, not counting cider brands. So that is the third pillar where we have been investing.

The fourth I would say strategic transformation of this company I would say is the people. This company has been growing worldwide with the brand Heineken by and large thanks to the dedication of Dutch people travelling all over the world and planting the flag and selling Heineken and doing that with pride and passion. We maintain these values, but today we share these values with much more nationalities. As a kind of emblem of it our head office in has 46 different nationalities working in the very tiny, and lately, even reduced head office. But still, 46 nationalities working there.

The inner circle of power as I can call it, I mean the executive team of the company has also evolved and is much more diversified in terms of origins and even now gender diversity than it ever was before. So I think it's a journey and it will not stop. But that is definitely a big transformation.

Those are the four strategic transformations that Heineken has been going through over the last 15 years.

Bear in mind that our strategy is always built and did not change - and it's the strategy that I inherited from my predecessors and I will leave to my successors one day. It is the fact that beer, being still a very local business and winning in our type of business is winning in local markets. And you can do that with local brands, national brands, regional brands as well as global brands. And we are very versatile at Heineken, we have the whole range. But you have to be very clear in your strategy, country by country whether you go for what you call broad leadership, or segment leadership, premium leadership.

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

And so when you go for broad leadership you can only make superior returns if you go for the number one, or a very strong number two position. And that is strategically what we strive to be in every market. And the Vietnam showcase over a quarter of a century of success shows an evolution that from time to time you start with the premium leadership and then you go to a broad leadership. And I think our friend Leo, Managing Director of VBL will explain that in his presentation.

And the second leg - so premium leadership which is anchored in the Heineken brand, the Heineken brand is present in 179 countries in the world, it's the leading premium brand in the world, we intend that it stays that way. At the same time, building on the knowledge we have been developing for the Heineken brand, we want to build a larger portfolio of premium brands that can travel around the world. That remains our very steady strategic course that this company will follow.

We do believe that superior shareholder return on the long term, because we are, of course being family controlled, more oriented to the long term, that is what is it is and you know when you buy a Heineken share it is that way. We strive to have a sustainable business and produce steady growing returns over a very long period of time. And we believe in order to reach that that you have to be concentrated first on the consumer, listening, following tastes, creating new tastes also, it's not only following it's also creating, which if for a large company much more difficult to do. That is important.

The second thing is that you have to grow with your customers, how difficult that might be because you have tensions with customers all the time. And I think you have never to compromise on quality. And that the people who work for us all over the world, being such a diversified company, should be very, very motivated, they should wake up in the morning and love going to work and not must go to work.

Now if we have all that we have the ingredients where if we maintain a good capital allocation discipline and a cost discipline in the organisation which we do, we will continue to deliver good returns for the company.

Now when we look forward the strategy is I think clear. We have challenges in the world and we have new challenges and we have - beyond the challenges that are specific, not specific for our industry. Being a worldwide company I dare to say that 75% of our results is the product of macroeconomic factors, political factors, things that you can barely influence. And always I say you have to surf the wave and not try to break the wave and you have to read where the way is coming from in order to surf fast on these waves. And so it is important that the people, the leaders of Heineken that works everywhere around the world knows how to interpret and how to surf that wave. But I think that is not specific to our company, I think it would be true for every world company around the world.

What is now specific, and the specific challenges we face as an industry and as Heineken in particular is on the one hand you have the creation of what we call Superbrew or Megabrew which is the product of the intended, I still have to quote intended merger or acquisition of SAB by ABI, which we expect to happen obviously, creating a very large competitors which outweighs by a hefty number our cash flows on the one hand. And on

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

the other hand you see the emergence of smaller players, known as the craft brewers in the USA, but it is not only in the USA that you see that phenomenon, also in Europe, but also here in Asia, also in Mexico, also in Brazil. It is happening everywhere.

The cost of capital, of making ale beers, which is high temperature fermented beers, and I'll spare you the whole details of the difference. But it is much less capital intensive. And the public rediscovering that palate of taste that ale beers are offering, are creating a new competitor to the likes of Heineken who are global companies how focused mainly on the lager segment. So that is definitely a challenge from the bottom and from the top at the same time, and you can image it is also an opportunity. That is the first, I would say block of challenges we face.

The second specific one is the changing landscape of retailing. And that is very diverse across the world. It's in emerging countries going from traditional trade to organised trade, which takes various forms. It is in Europe going from - in the organised trade from the big formats, the hypermarkets to the more convenience stores, the chain convenience stores. It is in the on-trade in the mature markets going from beer dominated outlets to outlets where food is dominating and beer is becoming a minor partner. How do you cope with all these trends?

Finally, and not least importantly, it is of course the influence of the internet of things; let me call it that way, on our business. We are quite successful in doing with it on the communication part, how to communicate and talk with people over social media. That is something that Heineken has certainly been pioneering. But you can also sell through the internet and how to engage with actors, technologies to make our business grow, see it as an opportunity more than as a challenge. Think about the rise of Alibaba in China and an example where we have chosen to sell the SUB only on the channel of Alibaba just to underline how breaking these trends can be.

So those are the three trends that are important to our industry. And hence when we go forward we have a response, which is basically of building on the top line, it is that we passionately believe that have to continue to be great storytellers and product makers. And it goes hand in hand. You cannot tell a great story if you don't have a great product.

At the same time we have to be savvy to discover, or even create, more consumption occasions for our products and brands. That is where we have to invest and look for. The innovation agenda is key for us, but innovation is not for the sake of having a rate of innovation, that would be sterile; it's a tool we use for a couple of years to ignite the thinking. But an innovation is only successful when it is still rising and not accounted any more in the books as an innovation - that means past the three years that any innovation was introduced.

Being innovative requires also a high discipline because you have to take out SKUs and propositions that don't make sense and that consumers don't want to drink. So it requires a certain degree of discipline and you have to manage much more complexity in your supply chain than ever before, because it's absolutely a given that we have to

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

maintain productivity levels with double the SKUs that we had before - that's the big, big challenge we face now.

But certainly innovation and venturing outside the core lager category, going back to enrich the lager category, going to explore and propose products in the ale categories, developing the cider category, developing the no alcohol and the low alcohol categories is also high on our agenda and the craft segment. And in that last one I would say it's probably where our strategy is not yet refined. We have to still explore and define what it can be. It's merely a trial and error.

But what works already well let's say in the craft brewing category, it's the line extension of particular brands we have, which most of the time are rather mainstream, but they are very linked to beer, they are not lifestyle brands, but they are really beer brands. And those are the most credible brands to apply line extensions to; I give an example of Moretti in Italy, which did a lot of crafty line extensions which are hugely successful. Or the brand called Brand in the where we applied that, or Cruzcampo in Spain. So we have a number of brands where you can do - or Zywiec in Poland where you have these line extensions which are crafty and you see that they provide for the growth.

On real craft brewers, I mean people who started up their business 20 years ago from scratch, we are venturing into Lagunitas in California and Chicago, it's a first toe in the water. We also have to accept with humility to learn from these guys how that trade functions. So we are fully in the discovery mode, but we have a good feeling and a good vibe that together we will discovery new paths of growth that we can apply, not only in the US, but also outside the US.

Saying that we will continue to focus on top line growth, we will not forget the productivity side, and the productivity - the efficiency side goes end to end. It is not only a question of production, it's all a question of the whole chain, from the purchasing to the delivery, to the retailer where we have to apply productivity, cut all the waste, cut all unnecessary processes. And I can tell you the bigger the company, the more difficult it is to do, obviously because it entails a lot of changes, the same with your customers - the bigger the customer the more difficult it gets.

But that is something that we have to concentrate on. We have done an awful lot of jobs on our supply chain. There is a well-embedded discipline in doing so in the supply chain and it serves as a role model for the entire organisation of how to do it. And we apply the same discipline as well to logistics, as well as purchasing, as well as to the sales organisation, because that's a big part of our organisation. Today the sales organisation is way bigger in terms of FTEs, in terms of people working for it than the supply chain organisation is. And not to forget to organise better, simpler processes and trying to combine and leverage the scale in administration, setting up shared service centres, as we have been doing in Europe, but also elsewhere going forward. This is a bit of the agenda.

So we have a strategy, there are a number of challenges going forward, we see that a number of these challenges give us also an opportunity, e-trade, craft brewing, no

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

alcohol low alcohol and cider are definitely beyond our traditional trade that we know well, new discoveries and new things where we want to invest to grow our business.

Now with that I think I'll close my little introduction and I gather - ah yes you want to show a little movie, that's it. Normally in the presentation there is that moment where I talk about Heineken and how marvellous the brand is, so we have, of course, to close my presentation a little commercial from Heineken and afterwards I will take a few questions if you like to. Thank you for your attention.

Applause

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Video played

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Questions and Answers

Jean-François van Boxmeer, CEO and Chairman of the Executive Board Now the last guys with the beard is our Head Brewmaster at Heineken, so we engaged him into the marketing department, next to making beer.

We have time for questions. So the floor is yours.

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Question Thank you very much, both you and some of your competitors have talked about an increased focus on light beer and no alcohol, or low alcohol beers. Can you talk about what may be some of the things that are driving that?

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Jean-François van Boxmeer, CEO and Chairman of the Executive Board I think it's the health consciousness, beer is very much associated to also thirst quenching, it's a very thirst quenching proposition, more than soft drinks, but it contains 5% alcohol. So with a proposition at half that alcohol, or 3%, or 2.5 to 3% you just have more pleasure for less alcohol. And that's a bit of the key insight that you give, that's for the low alcohol. It varies, people can be health conscious for calories, it's a bit of how it was introduced in the beginning, but I think it's much more of a lifestyle opportunity in the refreshment and taste combination that we look for. That's one.

And the no alcohol proposition is definitely linked to people who don't want to take a drop of alcohol and still enjoy the taste of beer. In Europe we have been observing that in Spain where people have a very strong tradition of after work going for tapas and with tapas you drink beer. But most people have to take their car after that moment and so they went for non-alcoholic beer, and that's how that whole segment in Spain has been taking off. Think of all countries also who cannot drink alcoholic beer for religious

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

reasons. So I think there is certainly an opportunity for no alcohol beers coming up there.

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Question Thank you. A couple of things just following on from that, I mean how big do you think your craft and your low alcohol or non-alcohol business is now within the context of the overall Group? And perhaps Jean-François how do you see that developing over the next three to five years?

And maybe linked to that, you mentioned in the presentation in relations to Lagunitas that that was your first toe in the water, if you like, into that segment, you're learning a lot. You know should we expect further M&A in that segment to be a core part of the strategy, or should we think about - as you said, more brand line extensions around the craft type products as being the priority?

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Jean-François van Boxmeer, CEO and Chairman of the Executive Board I never speculate on coming M&A, that you know I'm not going to start today. But whilst you cannot exclude it it is not what makes that strategy. I think you have two dimensions to what craft brewing is. Craft brewing in the US is new brewing, those are people who, 25 years ago, started up a shop and said we're going to provide for a type of beer that no one else is providing to the market. That's how craft brewing kind of was born in the US.

Whereas in Europe craft brewing has existed forever and it's more very, very old breweries who kind of survived the violence of the lager beer brewers who took the lion's share of the market and after that happened over a period of a century, some were still alive and began to re-flourish as being old craft breweries. And more recently also in Europe you have new entrepreneurs going after craft beers.

Craft has two dimensions, one is taste and the other is the history of a person who starts a business, the small versus the big, the guy who creates something. And I think we should not try to compete with the latter part of the craft story. We have to concentrate on the product side, but making clear, that yes we can brew beer.

One has to realise that the most difficult beer variety to brew and do proper quality, a proper job with is lager beer. It’s way more complicated than for an ale beer. The least hops you use in a beer the more light you make it, the more difficult it is to have a proper quality and have a quality assurance. People don’t realise it, often lighter products are discounted as being inferior products, it is not the case, it’s much more difficult and crafty really to make. But anyhow that’s consumer perception.

But we want to participate in the variety of taste, and when we have been acquiring 50% of Lagunitas you note it is 50% because we don’t believe we would be able to manage because this is still a very entrepreneurial, growing company which we have to learn a lot of how it works and how they do it. But we ventured into it. At the moment

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

where they have reached a stage which is beyond just the local community so we still look for scalable otherwise you will be as a kind of serial investor and a start-up venture capitalist in craft brewing. That is not the path we follow.

Now to your low and no alcohol segment. It’s already a big segment now. I don’t have the number top of my mind I have to say, and I hate to quote numbers which are not correct but it is already quite a sizeable segment all over the world. It takes different shades and varieties. In Nigeria the malted beverages are - the Malta business which is a malted beverage is a huge segment which has been growing over the last 15 years consecutively. That’s an important business. We have the Fayrouz brand which in the Middle East is quite nicely growing and which we introduced in Indonesia which are malt based soft drinks, quasi I would say fruit juice and malted beverage.

And then you have the whole segment of the low alcohol beers like the first one was of course Heineken - sorry Amstel Light in the US followed by Heineken Light and we have been introducing more and more light varieties as line extensions in the world. And we see that growing at a much higher pace, in effect two times to three times the pace of the regular lager market. So that is where the growth is coming through, there is an appetite for and you have from to time to trial and error some propositions and see what fits the best with the consumers.

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Question Good morning. Jean-François you mentioned Megabrew as one of your big challenges going forward once Megabrew is real, because their bigger cash flow generation being a multiple of yours. I just wondered whether you could share with us what you may have been discussing in terms of how they may make life more difficult for you once they’re a reality?

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Jean-François van Boxmeer, CEO and Chairman of the Executive Board On the one hand of course we have been discussing these things otherwise we wouldn’t do our job as you can imagine. On the other side those are very competitive insights that you are asking for which I am unable to share with you. Stating the obvious because that is what I have to do, is not leading me automatically to share with you what we’re doing to do about it, that would be I think inappropriate if you would allow.

But you have challenges of course, you have also opportunities. That’s the way you should look at it.

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Question As a follow up your margins are - if you put the other two companies together your margins are significantly lower as a group. Is scale a reason enough to believe that that gap will never close?

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

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Jean-François van Boxmeer, CEO and Chairman of the Executive Board I don’t think we go after the margins of ABI. We have to - we have been committing ourselves to improving our margins because I think we have the possibility of improving our margins. A company like ours being as the second largest brewer in the world much smaller than the first one, we have to be overweight in the premium segment and having better margins.

There is a difference in how the margins come. The highest margins in our industry come from positions where you are a dominant player in any given market which is large where you can build scale, where you have good logistic infrastructure and you have very fragmented competition. It’s the textbook of the Harvard Business School; I mean I'm not saying that - so margins are essentially a derivative of a competitive situation and pricing power in the market. It also is a resultant of the power of your retail.

Even if you had a 70% market share in a Western European country right, but you would have on the other hand a very concentrated and powerful retail, organised retail chains in front of you, you wouldn’t make - and you would be as productive as you are in Brazil, you would not make the same margins. So one has to realise that it is not something that you have just to link scale, you’re big and so you'll make margins. You can be big and making lousy margins. The biggest beer market in the world is China. It has one of the lousiest operating margins in the world in its mainstream market. I just score that as an example.

So we do not make margin comparison our obsession. Margin comparison is important in any given market, that is very important, for the local managing director how to improve its situation that is important. But on a global scale it’s very much the resultant of your footprint and how the situation is and how these things will evolve also. You always have to place a margin story in any given market, place it in a graph of 20, 30 years, you might have surprises. We exist for 150 years so I'm pretty confident that it should not be an obsession but we are committed to improve them, that is what I can say.

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Question Thanks for your time here this morning and for having us all here. Heineken is a much more global company than it was when you became CEO and that’s presumably brought some unique challenges as a manager. How have you managed this global dimension in terms of having good geographic leaders and yet still achieving the global objectives you have. How do you believe you’re doing a good job at incentivising people and what do you think the challenges to that are? And I'm saying that particularly with a mind to your presence in the Americas which is much larger than it was before you became CEO.

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Jean-François van Boxmeer, CEO and Chairman of the Executive Board

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Yeah it’s larger because we did a meaningful acquisition. I mean that is why we’re just larger. I think it poses every time the question of the local leadership and how you integrate. I think what Heineken is good at it’s an integrating - it’s integrating very forcefully but it’s also integrating cultures very easily. When we take over a company we blend in that company in ours. We don’t take it over and say all you guys you don’t know what you’re doing, we’re going to replace you and we’re going to show you the way. We have done that 30 years ago for a time and a while we went flat on our nose so we learned that in every company we would acquire, even in companies which might be underperforming at some times because you acquire them also because you think that you can perform better, there are always good people in the company you acquire.

And I think that we have been enlarging our talent pool by being very open in giving people from other parts of the world opportunities. It’s something that we still have to learn. It’s very easy to integrate a European company. We have had to learn to do that in Latin America and we’re still learning to do it in Asia. I'm not saying it’s a walk in the park but that is the key of the success.

And going forward it is the selection of people and the Heineken Group is very much a mix of things that we do centrally and then we have to be unapologetic about doing it is purchasing, it is tax planning, it is treasury, it is the Heineken brand just to name a few. But for the rest local markets and local teams are very much empowered and they are incentivised to perform on a local level.

All the people above are incentivised on the whole Heineken Group. It’s not on the regional because then you have a kind of super - every region becomes a super company, that’s when you have five different companies in your group so people in the operations are incentivised for 80% to 90% on their operation and all the people who supervise them, support them, incentivised on the whole Group. That’s how we make it work.

But the response is people and creating an inclusive culture for people, but pointed to performance. So it is we don’t sit around saying we have to integrate our cultures, we have to integrate our business. You create a better company culture talking about business, not talking about culture. You lose your time doing so, but you have to be inclusive in your attitude if that is …

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Question That’s great, very helpful and thank you for that. And then also on Megabrew the balance sheet, can you just share with us how you think about use of the balance sheet today that might be different? When I say you I mean not only you but your Board. How do you think about the balance sheet differently than you did say 10, 15 years ago? And obviously we have seen your competitors choose to use leverage to a very large degree. Now they’re willing to issue a good bit of equity. If you do a Lagunitas that’s easy right, it’s a billion dollars, but if you’re looking at a larger asset you have to address some more fundamental questions about how you think about the balance sheet. So

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

how is your thinking if at all different than it was say 10 or 15 years ago? And again from a Board perspective, not only from your perspective.

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Jean-François van Boxmeer, CEO and Chairman of the Executive Board Responding 15 years back is very easily, the balance sheet is very much in the hands of Heineken Holding, and the Heineken Holding is very much in the hands of the Heineken family. And it is true that the successors of the late Freddy Heineken have been much more aggressive in managing the balance sheet which means leveraging the balance sheet. They have created fantastic opportunities for the management of the Heineken company to leverage a bit better our balance sheet and make all these acquisitions.

We are committed to staying a BBB company. We are committed to having a EBITDA ratio lower than 2.5 times - or a net debt lower than 2.5 times EBITDA. Though we have shown in the past that we can go for the right acquisition over that stretch but being committed to bringing back quite quickly below that 2.5 times EBITDA. It is no mystery that the Heineken family wants to stay firmly in control of its company and that is a given when you buy a share of Heineken or Heineken Holding. That does not preclude us to grow and when you look at the competitive landscape I'm not sure that further growth is heavily dependent on leveraging more the balance sheet than we do currently.

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Question Not sure, okay fair enough. Thank you.

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Jean-François van Boxmeer, CEO and Chairman of the Executive Board In the English way of - you know what that means.

Laughter

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Jean-François van Boxmeer, CEO and Chairman of the Executive Board Not in the American way, in the English way.

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Stephanie, Bank of America You mentioned earlier that craft was more capital intensive. Could you therefore elaborate a little bit how lager and light beer are more capital intensive and at the same scale how different the margins would be? And given cider is one of your business priorities could you please put in context how cider is capital intensive or not versus those other categories? Thank you.

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

Jean-François van Boxmeer, CEO and Chairman of the Executive Board I’ll recap, ale beers is less capital intensive than lager beers. Light beers are even more touchy to make because they require more control but they are made basically in the same installations.

Cider is more expensive to make than beer but it’s largely not to capital, it’s largely due to raw material, apples. Deriving alcohol from fruit juice is more expensive than from cereals. That’s it. But it’s not - cider is not per se more capital intensive. What is capital intensive is the apple mills, crushing the apples, but those are things that we don’t do ourselves everywhere. We do it in the United Kingdom but you have to see these huge installations which are basically used during not even two months and then they are closed. You cannot do a lot with it outside that, that’s the reason why they are expensive because they’re very seasonal.

But there is a lot more use to apple concentrate across other industries that you have people who specialise and who do not have to cope too much with that seasonality. And so the bulk of our source is outside suppliers and we buy the concentrate, the juice, rather than producing ourselves.

And finally we have been working a number of years of research to be able to make cider in a beer plant using basically the same equipment. It is another yeast. The cider yeast is a killer’s yeast. It is a yeast that if it goes in contact with the beer yeast it kills it and you have no yeast anymore, it’s a war in the brewing. And so we had to develop some new technology to cope with that and to be able to safely for the beer yeast to product cider in the same installations. We are so far and we do it already in a number of our breweries in central Europe for now a number of years successfully. So that is how we can leverage also the production using installed capacity for beer, also for cider. We don’t need to build dedicated capital for that, if that answers your question.

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Question Your wholesale business has been a strategic asset for you in Western Europe in the past 10, 15 years. In light of the changing landscape, the factors that you mentioned with craft growing, with the retail - with modern trade continuing to grow, online growing, how strategic is wholesale over the next 10 years do you think? I'm thinking in particular with craft growing, the wholesale business gives you a deep penetration into the on trade so is that an advantage in the context of craft growing in the on trade to have a wholesale business, to keep it under control in a way?

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Jean-François van Boxmeer, CEO and Chairman of the Executive Board Yeah your question has two levels. At the highest strategic level I am always saying wholesale is strategic for any given set of competitive markets, most of the time it is a country but it can be even a region in a country, as long as it contributes to developing our business and our business is largely centred around beer and largely into craft and specialties and no alcohol and low alcohol and also cider. As long as it serves the purpose to grow our business and it’s a viable purpose we will continue to do it.

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

But it is not per se a core business so we are not into wholesalers for strategic reasons at the Group level. This is a very, very local decision whether we are or not, and obviously in some markets, I’ll take the particular example of France where we have a very strong network of wholesaling, your point about distributing craft brands through that wholesaling network is absolutely a competitive advantage, whereas in other geographies like Poland we have been selling our wholesaling network because it was - in the changing competitive landscape of Poland over the last 20 years it was no further necessary to operate our own wholesale network so we sold it to somebody who could leverage benefits also for us. So very, very local, and I am absolutely not dogmatic about the wholesaling, it’s on a market by market.

That is also true for when we operate soft drinks. In some markets we have a soft drinks activity and that is again if it is strategic to the local operation we do, if not we divest and that is how it is. Same thing for wine in Chile or Egypt and stuff like that.

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Question Hi there, good morning. Can you just talk about Asahi landing in Europe and what that impact might have on price dynamics going forward? Thank you.

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Jean-François van Boxmeer, CEO and Chairman of the Executive Board Asahi. Well wait and see. The intriguing thing about ABI acquiring SAB is that competitively market by market nothing changes practically for us. And in Europe with the latest announcement of also the divestment, intended divestment of central Europe makes it over the whole of Europe we just have to deal with SAB’s operation having another ownership. And I say we’ll see how they play it, that’s it. But the competitive masses in presence in the market be it in Italy or be it in Holland for in Asahi’s case is the same. So it’s another management, what will it give? So that is something we will have to watch and discover and deal properly with.

With that thank you very much for your attention and have a great day.

Applause

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END

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Heineken - 2016 Financial Markets Conference Jean-François van Boxmeer, CEO and Chairman of the Executive Board

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