WORLD TELEVISION 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 Page 2 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. Page 3 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, Page 4 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 Strongbow 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.