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Edited Transcript of HEIA.AS earnings conference call or presentation 12-Feb-20 9:00am GMT

Full Year 2019 Heineken NV Earnings Call

Amsterdam Feb 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Heineken NV earnings conference call or presentation Wednesday, February 12, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Federico Castillo Martinez

Heineken Holding N.V. - Director of IR

* Jean-François M. L. Van Boxmeer

Heineken N.V. - Chairman of the Executive Board & CEO

* Laurence M. Debroux

Heineken N.V. - CFO & Member of the Executive Board

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Conference Call Participants

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* Edward Brampton Mundy

Jefferies LLC, Research Division - Equity Analyst

* Raoul-Tristan Van Strien

Redburn (Europe) Limited, Research Division - Partner of Consumer Staples Research

* Sanjeet Aujla

Crédit Suisse AG, Research Division - European Beverages Analyst

* Simon Lynsay Hales

Citigroup Inc, Research Division - MD

* Trevor J. Stirling

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the Heineken 2019 Full Year Results Call. My name is Seb, and I'll be the operator for your call today. (Operator Instructions)

I will now hand over to the Heineken management and Investor Relations team to begin the call.

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Federico Castillo Martinez, Heineken Holding N.V. - Director of IR [2]

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Good morning, everyone, and thank you for joining us today for our 2019 full year results conference call. I'm joined by Jean-François Van Boxmeer, our CEO; and Laurence Debroux, our CFO, for today's call.

Following some prepared remarks on the results, we will be happy to take your questions.

With that, I would like to hand the call over to Jean-François.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [3]

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Thank you, Federico, and good morning, everyone. I know that you might have some questions about the press release of yesterday. But for now, I'd like to concentrate on our full year 2019 earnings results.

And so starting immediately on Slide 2. We delivered another year of superior top line growth with continued strong performance in the second half. Organic net revenue (beia) was up 3 -- 5.6%. Growth was well balanced, with beer volume up 3.1% and net revenue (beia) per hectoliter up 3.3%, due to robust pricing and premiumization in all regions. The Heineken brand growth accelerated to 8.3%, the best performance in a decade. The growth was across many geographies, with more than 40 markets delivering double-digit growth. We closed the year with an operating profit (beia) growth of 3.9%. And an operating profit (beia) margin of 16.8%, down 12 bps.

In the context of increased input costs, we have continued working on the efficiency of our operations whilst steadily investing behind our brands, our sustainability agenda and our digital transformation. Net profit (beia) increased 4.3% organically, slightly ahead of operating profit (beia) growth as lower financing costs partially offset higher taxes. Diluted EPS (beia) was EUR 4.38 per share, an increase of 5.5%, driven by net profit (beia) and a positive benefit from currency translation for once.

Looking ahead to 2020, and barring a major negative macroeconomic and political developments, we expect our operating profit (beia) to grow by mid-single digits on an organic basis.

Now let me turn to Slide 3, where you can see an overview of our performance with organic net revenue (beia) growth in all regions and double-digit growth in Asia Pacific. Price mix on a constant geographic basis was up 3.4%, driven by share increases and premiumization across all regions. Starting with Africa, Middle East and Eastern Europe. Consolidated beer volume grew 4.6% organically, and price mix was up 2.9% on a constant geographic basis. The premium portfolio increased double digit, with strong performance of Russia, South Africa, Nigeria and Ethiopia. Organic net revenue growth was up 8.9%, with Nigeria flat despite an increase in excise duties. Regional operating profit (beia) was stable as the growth in South Africa, Russia, the DRC, Egypt and Ethiopia was offset by declines in Nigeria and Ivory Coast.

In the Americas, consolidated beer volume was up 2.6% organically, following a strong fourth quarter with 5.2% growth. Price mix on a constant geographic basis was strong at 7.1%, mainly driven by Brazil, with growth in the mid-teens due to premiumization and pricing. In Mexico, pricing was ahead of inflation and beer volume grew low single digit, with a double-digit growth of the premium portfolio led by Heineken, the launch of Heineken 0.0 and the successful rollout of Amstel Ultra. The impact of the OXXO contract renewal continued in line with our expectations and additional locations have begun operating under the new terms from January 2020. In Brazil, the Heineken brand, Amstel and Devassa grew strong double digit, whilst the economy portfolio declined high single digit, following 2 price increases in the year. In the U.S., beer volume declined mid-single digit. The Heineken brand was slightly down, including the benefit from the introduction of Heineken 0.0. Operating profit (beia) for the Americas was up 4.6% organically, with growth in Mexico and Brazil was partially offset by the U.S.

In Asia Pacific, consolidated beer volume grew 11.8%, with double-digit growth in Vietnam, Cambodia, Myanmar, Korea and Japan. Price mix was up 0.8% on a constant geographic basis. In Vietnam, we grew strongly on the back of favorable beer market conditions and our portfolio expansion strategy driven by Tiger, Larue and Heineken supplemented by the launch of Heineken Silver. The region delivered organic operating (beia) growth of 12.1%, driven by Vietnam and Cambodia.

In Europe, consolidated beer volume was marginally lower on an organic basis with the region back to growth in the second half. The premium and low and no-alcohol portfolios grew mid-single digit, with Heineken 0.0 growing mid-double digit. Price mix was up 1.8% on a constant geographic basis, driven by the growth of Heineken, Desperados, Birra Moretti, local premium brands and craft. In the U.K., beer volume increased low single digit, driven by the premium portfolio, whilst cider declined high single digit, largely due to the challenging comparable of last year, when we had great weather and the football World Cup. In France, beer volume declined slightly but outperformed the market, driven by the growth of our craft and premium portfolio. In Italy, beer volume was up mid-single digit, driven by Ichnusa and Messina. Spain declined slightly with our craft and cider portfolios growing double digit. In Poland, beer volume was down high single digit, mainly driven by our economy portfolio. In The Netherlands, beer volume declined mid-single digit due to a challenging comparable versus the good summer last year. Regional operating profit (beia) decreased 0.8% organically, impacted by a significant step-up in investments to upgrade our technology and digital platforms in the region.

Now turning to Slide 4, the Heineken brand accelerated its growth to 8.3% to deliver its best growth in more than a decade. Growth came from many markets led by double-digit growth in Brazil, Mexico, South Africa, Nigeria, the U.K., Romania and Germany. Brazil is now the largest market for the Heineken brand globally, and with the addition of the U.K. and Nigeria, 12 markets now sell more than 1 million hectoliters of the brand. The successful rollout of Heineken 0.0 continues, and is now available in 57 markets. The brand will be the official beer partner of the UEFA EURO 2020, and has extended its partnership with the Champions League until 2024.

Turning to Slide 5, I would like to share some highlights on other drivers of our strong top line growth. Our portfolio of international brands grew high single digit, driven by the double-digit growth of Tiger in Vietnam and Cambodia; and Amstel in Brazil, Mexico, Russia, South Africa and the U.K. Our craft portfolio grew mid-single digit, driven by double-digit growth in Europe, more than offsetting lower volume in the Americas. Lagunitas is now available in 35 markets, with local production in The Netherlands and Brazil.

Volume of our low and no-alcohol portfolio increased high single digits to 14.1 million hectoliters. The no-alcohol portfolio grew double digit, driven by Heineken 0.0, line extensions of other leading brands and beer mixes. Cider volume was stable at 5.6 million hectoliters, with double-digit growth outside the U.K., especially in South Africa and Russia. In the U.K., volume declined, as I said earlier, high single digit, and we see encouraging results in new cider markets like Vietnam and Mexico.

Revenue from our proprietary draught systems grew double digit. The Blade, our countertop draught system, is now available in 32 markets. We continue to deploy our e-commerce platforms to digitally connect with our customers. Today, our digital B2B platforms are operational in 17 markets. And Beerwulf, our B2C, business-to-consumer, platform in Europe continues to gain scale.

Moving now to Slide 6, on sustainability. Brewing a better world is 1 of our 5 strategic priorities. It addresses our commitments to promote health and safety in our operations, protect our other resources, reduce CO2 emissions, source sustainably, advocate responsible consumption, and grow with the communities where we operate. Over the past decade, we have lower our water usage by almost 1/3 to 3.4 hectoliters of water per hectoliter produced, and 3.1 hectoliters in water-scarce areas in 2019, ahead of our 2020 targets. So in March 2019, we introduced our 2030 water ambition, which is called Every Drop. And next to the continuous improvement in water consumption, we aim to improve the water catchment area surrounding our production sites. Today, 15 of the 24 of our breweries in water-scarce areas have started water-balancing projects, including nature-based solutions like reforestation and also wetland restoration. In 2018, we set out our Drop the C program to reduce CO2 emissions with an ambitious target to power our production facilities with 70% renewable thermal energy and electricity by 2030. Thermal energy accounts for nearly 80% of total energy consumption in the brewery. We are at the beginning of this journey and reached 19% in 2019. In 2019, we increased our local sourcings percentage of agricultural supplies in Africa to 44%. Although we made progress, we have much more to do to reach our ambition of 60% in 2020. So we're far off. We spent over 10% of Heineken media budgets on When You Drive, Never Drink or other responsible consumption awareness campaigns in more than 60 markets. We aim to reduce our plastic use and contribute to increased collection and recycling of plastic where possible. To have the biggest positive impact, we use regional strategies to take into account the majority of each region, the local use of plastic and the current availability of recycling infrastructure.

And with that, I am finished, and I will hand over to Laurence, who will talk about the hard numbers. Laurence, over to you.

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [4]

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Thank you, Jean-François, and good morning, everyone.

Let's turn now to Slide 7 and the financial overview of the year. Looking at the net revenue (beia) of EUR 23.9 billion. Organic growth for the year was 5.6%, revenue per hectoliter (beia) grew 3.3%, with an underlying price mix effect of 3.4% on a constant geographic basis. Beyond the continued premiumization of the portfolio, we were very intentional in taking price in a year of significant input cost inflation. Operating profit (beia) grew 3.9% organically. The strong top line performance was partially offset by the input cost inflation of around 5%, in line with our guidance of mid-single digits, and the incremental investment behind our brands and our digital transformation. I will provide more context in the following slide on this.

Operating profit margin (beia) was slightly down by 12 basis points, driven by the impacts of our incremental investments. And, as you know, we restated the 2018 numbers for the accounting impact of IAS 37. Net profit (beia) reached EUR 2.5 billion, up 4.3% organically. And here, we had some benefit from lower interest rates, but also a negative impact from higher income taxes. In particular, The Netherlands, where we have a large part of our financing, introduced the limitation on the tax deductibility of interest charges applicable from 2019.

The diluted EPS (beia) ended at EUR 4.38, or 4.9% higher than in 2018. It still includes the dilutive effect of EUR 0.03 from the sale of Heineken N.V. shares to CRE as part of our agreement to join forces in China. Free operating cash flow amounted to EUR 2.2 billion, pretty much flat versus the previous year, including the one-off positive impact of the first adoption of IFRS 16. And finally, our net debt-to-EBITDA ratio reached 2.6x. Note that this includes the net investment in China for about EUR 2 billion and the impact of IFRS, which brought alone EUR 1.3 billion of lease liabilities onto the balance sheet. IFRS alone represents an additional 0.1x in the ratio. So as you can see, we're very close to our commitment to stay at or below 2.5.

I'm now looking at Slide 8, and our net revenue (beia) of EUR 23.9 billion. Consolidation changes had a negative impact of 0.5% or EUR 190 million. The negative effect of our divestment of China and of the first implementation of IFRS were largely offset by the positive effect from other acquisitions, primarily Namyslow in Poland. Currencies had a positive translational impact this year -- last year, increasing net revenue by 1.2% or EUR 278 million. This was mainly attributable to gain in the Mexican peso, the Vietnamese dong and the U.S. dollar, partially offset by losses in the Brazilian reais and the Haitian gourde. On an organic basis, our top line delivered growth of EUR 1.3 billion or 5.6%.

Volume growth was 2.2%, with consolidated beer volume up 3.1%. The largest contributors to that growth were Brazil, Vietnam and Cambodia. Europe was broadly stable as it faced a challenging comparable versus the summer of 2018, where we had great weather and the World Cup. Revenue per hectoliter grew 3.3%, with the underlying price mix on a constant geographic basis at 3.4%. In Asia Pacific -- in APAC and AMEE, we implemented robust pricing for the year, with the exception of Nigeria. In Europe, the mix impact came in strong due to the growth of our premium and low and no portfolios. And in the Americas, price mix was well balanced between the growth of premium in Brazil and pricing ahead of inflation in Mexico.

Let's now look at the development of the operating profit (beia) on Slide 9. First, consolidation changes, they had a small negative impact of 0.6% or EUR 21 million. Currencies had a positive translational impact, increasing reported operating profit by 2.1% or EUR 80 million, which come from the same currencies as our revenues. The organic growth was 3.9% or EUR 153 million, which pretty much all came in the second half. The acceleration was mostly derived from the factors that we discussed at first half. Input cost yield in the second half increasing around 5% per hectoliter on an organic basis for the full year. And this is in line with the guidance that we gave at the beginning of the year. The increase for the full year has 3 components, if you wish, each of roughly equal weight: higher commodity prices from our 2018 hedges; transactional currency effects, quite a lot on Brazil; and also, the mix of products. Commodities driving the impact were barley, energy for glass and aluminum. And as for the negative transactional impact, again, it mainly affected Brazil. The phasing of expenses also helped us in H2, and that is true for some of our international sponsorships as well as for our investments in digital transformation and technology upgrade. In both cases, we had already stepped up our game somewhat in the second half of 2018. And therefore, the (inaudible) was more favorable in H2 than it was in H1. In addition, during the second half, our margins benefited from a more favorable mix. For instance, in Brazil, our premium and mainstream portfolios markedly outpaced the growth of our lower-margin economy brands. The mix also benefited from the acceleration of volume growth in Vietnam, where margins are above group average. Regarding Vietnam, it is also interesting to highlight that in the end, we did not see in 2019 a significant uplift from the earlier effects.

I move now to the diluted EPS (beia) on Slide 10. So EUR 4.38 for 2018, up 4.9% or EUR 0.20. We have here a negative impact of 0.7% or EUR 0.03 from consolidation changes. On the positive side, this impact includes our share of profit from CRE in China between May and October. On the negative side, there are also some dilutive impacts linked to smaller acquisitions and to the first implementation of IFRS 16, which we are treating as a consolidation change. Currency translation brought a benefit of 2.3% or EUR 0.08. The sale of Heineken share to CRE resulted in a dilution of 0.7% or EUR 0.03. And so excluding this, our EPS organic growth was 4.3%.

Cash flow on Slide 11. So free operating cash flow reached EUR 2.2 billion. And of the EUR 811 million increase of cash flow from operations, about EUR 250 million came from the one-off benefit of the implementation of IFRS 16. If I move to working capital, it was basically flat versus 2018. Receivables and inventories moved broadly in line with the increase in our top line and the mix of our operations. Payables did continue to improve but less than in 2018, where we saw a strong improvement in our payment terms, particularly in Brazil, following the integration of our acquisition. The average payment terms improved by about 10 days this year, and we believe that they are now pretty much at industry standard. CapEx reached EUR 1.9 billion, which was a little bit below our guidance of slightly above EUR 2 billion, and represented 8% of net revenue. Significant investments included capacity expansions in our Vung Tau brewery in Vietnam, in 4 of our breweries in Brazil to increase our output of premium beer, particularly Heineken, and in Sedibeng in South Africa. It also included a step-up in net investment to refurbish the pub estate in the U.K.

And finally, let's go to the outlook for 2020. So in 2020, our strategic focus remains growth-oriented, so we anticipate to continue to deliver superior top line growth through a combination of volume, price and premiumization. We also anticipate low single-digit increase of input cost per hectoliter on an organic basis, with the benefit of lower price in some commodities to be largely offset by transactional currency headwinds and product mix. Note here that today, we have hedges for around 70% of our main commodities. So that normally gives us a pretty good view. We will also continue with cost management initiatives and productivity improvement to fuel investments behind our brands, innovation, digital transformation and sustainability agenda. As a result, we currently expect operating profit (beia) to grow by mid-single digit on an organic basis, barring major negative macroeconomic and political development. In particular, it is currently not possible to assess the extent and duration of the impact of the novel coronavirus on the economy and on our business.

And finally, let me give you some color on more technical elements of our guidance. We anticipate an average interest rate and an average effective tax rate broadly in line with 2019 and CapEx related to property, plant and equipment of around EUR 2 billion.

And with that, I would like to hand back to Jean-François for some final remarks before we open the floor to your questions.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [5]

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I think we can go immediately to that.

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [6]

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So with that, I'd like to open the floor to your questions. Is that better?

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [7]

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That is a good idea.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Trevor Stirling from Bernstein.

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Trevor J. Stirling, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [2]

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Before I dive into the questions, I just wanted to wish you all the best, Jean-François, for the next chapter. Many thanks for all the patient explanations over the last 15 years.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [3]

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Thank you. I will do my best for the last time then.

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Trevor J. Stirling, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [4]

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So 3 questions, please, as ever. The first one, as you reflect the results and the individual countries, Jean-François, which countries give you the greatest pleasure, you say, "That's a really good job" and which countries do you think is still work in progress? The second question, a bit more technical. Laurence, you've highlighted the EUR 37 million incremental IT expenses in Europe. Is that something that we should expect to be ongoing as we roll out the systems and eventually fall out? Or perhaps -- a little bit of color there would be helpful? And final question, the drink driving legislation in Vietnam, I appreciate it's very, very early days. I note that industry volumes were down 4% in the first month. But can you give us any color about how things are working out and how you expect things to evolve?

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [5]

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The first one, we can hold the floor for another hour in giving you color to my favorite ranking, but I don't think that would be very useful. I think you would have 3 -- what is important in the business is always that you know how -- what's the future potential of any businesses. And so you have businesses that you run for kind of a steady, slow growth, and you have others where you have to do a turnaround, and then you have third ones, which are really in the making, in the building. So you have all categories of these kind of businesses around the globe in all geographies, and you'll have always somewhere, somehow countries which are doing more than expected, and you have a few countries who suddenly have a fallout. And I think that has been my experience ever in these 15 years that you have to deal with reality. But what the strategy behind this is -- that we have been placing bets on new countries year after year after year, in mature but also in developing markets, and more in developing markets than in mature markets. And I think that those who are still in the building and where I watch them very closely is, of course, Brazil in the first place. It's going to be China through CRE. It's going to continue to be India and a couple of countries in Africa to come, because those are markets where we still have a lot of potential ahead of us. When it comes to European markets, it's more about how can you engineer a steady slow growth in markets which otherwise have saturated in our categories and which are not fueled by demographic growth intrinsically. So that is -- that takes, of course, another approach. But if we look at the world today, we have covered geographies pretty well, I would say. And so -- and then you have the countries where you need to do a kind of a turnaround where you had better fortunes in the past and you have to reengineer another business model. And I think particularly about Nigeria as an example of these. So that is just to give a color. But I think for anyone who is at the helm of a portfolio company like us would have to look at these things and place every operation in its cycle, in the lifetime, and run it accordingly. Overall, you have to continue to engineer the sum of the parts in order to give the profile of growth that we try to do year after year, which is a superior top line growth and with improving operating results. The latter part is, of course, a bit more volatile. What I'm -- I would say, pleased with is that we can sustain the top line growth through managing our geographies on the one hand, and also managing our product portfolio, our offerings and our investments in distribution and in digitalization for making our business grow.

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [6]

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On your second question, Trevor. Yes, EUR 37 million incremental on -- concentrated on (inaudible), which is our technology backbone transformation in Europe. We're going to be delivering the first set of capabilities in that transformation and in that tool in 2020. You should expect that this is going to increase still a bit in 2020. At some point, probably towards 2021, it will level, but you should definitely expect that those expenses are part of the digital transformation of the company as we move on and for the foreseeable future. So we're still in a ramp-up phase and ramp-up, as you could see, was a bit more in first half than in second half because your comparison base was different. So at some point, that will also level. But another year of increase there. Legislation in Vietnam, do you want to cover that? Or...

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [7]

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I think the legislation in Vietnam, on itself, it is a welcome legislation. Of course, we take the view worldwide, "When You Drive, You Never Drink." So you have to be very coherent. We believe that, that is the only sustainable policy going forward. So that is not a discussion. The impact of it that we will see, I know that everybody has plunged on one article published with a very high number. Now it seems to be rather at the high side. It would induce that half the population is basically driving not in state of being capable of driving in the cities in Vietnam. I don't think that kind of number would be reality. But it will have an impact for sure, but it has to be seen over a longer period of time for the simple reason that, a, in general, we didn't see anything because we have Tet and we have a very good Tet. You have the unfolding coronavirus which affects mainly China, but will also have ripple effects in surrounding countries. And there also, you can't make any prediction. But then bear in mind that Vietnam stays a growth country. And so you have conjunctural things going up and down and structural things, which is the growth of the market and tougher drink-and-drive laws that will be enforced, I hope, it should be, and that will net out. But I keep on pointing out to the fact Vietnam is intrinsically still a growing beer market.

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Operator [8]

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The next question comes from Edward Mundy at Jefferies. Please go ahead, Edward.

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Edward Brampton Mundy, Jefferies LLC, Research Division - Equity Analyst [9]

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Three for me. The first, for Laurence. I'm not asking for margin guidance, but are you able to highlight were there any new initiatives on the cost management or productivity improvements relative to, let's say, 6 or 12 months ago? And in your mind, what are the key levers to delivering mid single-digit organic EBIT growth? The second question is on Western Europe. Do you anticipate a better year there given more normalized weather comps as well as the European football championships? And the third one for Jean-François, as you pass on the baton, you're putting yourself in Dolf's shoes. What do you see as the biggest opportunity for Heineken over the next decade or so?

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [10]

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I'm already so grateful that the third question -- first question is for me. That doesn't happen much this morning. So I will answer it with pleasure, I'm not giving you a margin guidance, of course. So the leading factor behind the organic EBIT growth, which was the second part of your question, is definitely the superior top line growth to start with and the tilt of that superior top line growth towards premiumization, which is continuing. If you look at even one specific market like Brazil, and you know that Brazil is still something that plays negatively on our margin, because the average margin for Brazil is much lower than the group average, when hit there, you see that really a large part of the growth and strong double-digit growth comes from our premium and mainstream -- upper mainstream portfolio, Heineken, of course, but also Amstel and Devassa. And that does help with EBIT growth, operating profit growth. And that will help ultimately to tilt the margin in Brazil as well. So I would say, superior top line growth driven by premiumization price, because we're very intentional on taking price when we can, the mix. That will -- that is what -- and the volumes, that is what plays the most. Of course, we continue to work relentlessly on productivity. And there is -- I mean the paramount example in this company is definitely supply chain, where we have a very decentralized production tool, we produce where we sell, where our consumers enjoy our beer, which also, by the way, sometimes protect us from some reaction. I mean, we are actually producing and employing people where people drink our beer and our consumers are. And there, with that footprint, we have managed to drive productivity year-on-year. And we're already looking at the next stage of productivity and efficiency through digital, through connecting our brewery, through using artificial intelligence and augmented reality. So that is something that's never ending. There is always a new frontier here. So that is part of what we're doing.

And then constantly, we're revisiting the size of our operations, we're revisiting the cost base of our operations in all their dimensions, whether it is commerce. As you know, commerce, you have to look at advertising and marketing, you also have to look also at all the digital firepower that you can put behind your brand and how you can target this marketing, and how you can target your sales much better than you used to, or with tools that actually get the consumer where they are, pretty much on their phones, and we're also looking at support cost. So there are a number of plans that have been implemented in the past. There are a number of plans that actually have been announced in a number of European countries, in particular, but not only. And that is not only a major country versus the emerging countries. If you look at a country like Mexico, it's been able to weather really very strong headwind from currencies by actually finding productivity and efficiencies year after year after year. So you always have to get back to your cost base and make sure that it is tailored to your activity, but also to your environment, frankly.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [11]

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Yes. And then about your question whether I should step in Dolf's shoes or he should step in mine? That's a bit confusing what's going to really happen. But if you give me -- you asked me about an outlook of what are we for the next 10 years, if only I had a crystal ball, I think your first strategy is continuing. I think we are not in an industry where you have to expect a brutal disruption. That is not going to happen. But you can have strong evolutions, and that is what I hope for. But I cannot preclude, and you will have to ask the question to Dolf in 6 months' time and then in a year time, and every year, as time moves on. I think when you look at our industry, a company that does not grow is a company that will die. It's very simple. So I don't know any substitute for success of the company than being able to engineer its growth. That means that you have to evolve constantly. And the book is never finished of a company. What I can see for the coming 10 years is, first of all, that your strategy is most probably more differentiated region-by-region than it has ever been before. And that is in contrast to the fact that we say we live in a global world because Internet connects us all. But the business agenda will be very different. The atomization of demand and customization of offer in the west is accelerating, whereas having big super brands in some countries is still the relevant way of having a successful and growing business for the next coming 10 years. So the speed at which demand will evolve is not going to be overall -- everywhere the same, and you have to do justice to that differentiation, which means that you have also to constantly adapt your organization and your strategy for that. I think eventually, we will offer more products. We have more than doubled our product offering on an organic basis, not just considering the acquisitions we made. But if you take every operation in the world, they have, over the last 8 years, doubled their SKUs on offering at least, there is overall a tendency of offering more choice. We will all go for premiumization because as the demand for core beer will decline, that's inevitable, people will look for more value. And it inevitably also begs the question about, "Do you go beyond beer?" And it is a question which remains largely unanswered globally that -- which can be answered country by country, market by market, and in a relevant way. And in a way, that's what we do with cider, that's what we do with craft beers, that's what we do in 0.0, low-alcohol beers. And the fine-tuning is regionally very different. Beyond that, you have also to look at value chain integrations, vertical or horizontal. Also, that will evolve over time. I don't believe that business is static. You always have to look in every geography where you operate, where are the next natural opportunities for growth in those geographies where you operate? And I think that it is naturally there where we will look. And I'm confident if I look what we have been doing not only for the last 10 or 15 or 20 years but for the last 154 years, I think that is what's ahead of us. But the changes are going to be there. The volume is globally -- the volume growth of core beer category is globally decelerating, but with varying market differences between geographies. Some geographies have still huge potential increase, think about India or the whole African continent. For beer category that is still big increases to expect. In Europe, none. So that's what I mean by you will have to continue to develop a differentiated geographical approach. And I am now said that I have to stop. There is a question on Western Europe. So there I stop. Edward, and then, question on Western Europe?

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Edward Brampton Mundy, Jefferies LLC, Research Division - Equity Analyst [12]

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Yes, the question was do you anticipate a better year given the more normalized weather comps as well as the European football championships.

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [13]

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Well, June was very bad.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [14]

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Wait a minute. So June last year was very bad.

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [15]

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But we will hope.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [16]

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Think about -- we said it, we not only continue to sponsor the Champions League, also the Formula One, and we have the EuroCup, in addition. Now if you have better weather for that, let's pray for the better weather, but already, the programs in place in Europe for the first half are good. So I'll leave it at that.

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Operator [17]

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Our next question is from Simon Hales at Citi.

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Simon Lynsay Hales, Citigroup Inc, Research Division - MD [18]

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Three questions as well, please. Firstly, over the last sort of couple of years, clearly, the profit delivery between sort of the first and second half has been a little bit more volatile than it's been in the past. I appreciate part of that's been weather part of it, as you flagged, has been some cost phasing. As you look to 2020, should we expect a more balanced delivery of the mid-single-digit organic EBIT growth between H1 and H2? Is there anything in particular you can see at this stage that might skew it to one period or the other? Secondly, could I just ask you around sort of the marketing expenses? Obviously, marketing and selling expenses in the year were growing a little over 4%, so below sales growth. Could you give us a little bit of a color as to what marketing investment is doing within that? Was marketing investments down as a percentage of sales? Are we still investing ahead of the curve? And then just finally, Jean-François, I think on Mexico, you mentioned in your remarks that some more OXXO stores have gone nonexclusive as we come into 2020. Could you give us a little bit more color as to the numbers that have actually sort of become potentially competitive areas there? And generally, how you see the underlying business in Mexico developing this year given the weaker macro backdrop?

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [19]

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I'll start with your question on profit delivery. Yes, the weather played a role. What also plays a role is a very balanced footprint that we have now, which, for instance, if you look at Brazil, I would say, the high season, really around November, December and then the beginning of the year, which is quite different from some of our traditional markets. And then since they contributed highly to the increase of profit in the past 2 years, that has also played a role. So we don't guide, as you know, half by half. What we can say is that it's a bit coming back to the answer to the previous question, is that the first half in 2019 was marked by more difficult comparable in terms of the basis for some commerce expenses and technology upgrade, and also by a very bad month of June in terms of weather and also in terms of increased competitive environment in Europe. So that I can tell you. And then for the rest, we'll have to see with the events as they develop. But if I compare what we're entering the first half with, there are a number of things. That, plus a number of events that take place this year, of course, like the EuroCup, and that plays more favorable. In terms of marketing expenses, this is pretty stable in terms of percentage of the revenue. And then you say, marketing and selling, 11.0%, and then we were at 11.1% last year. And when you look at support behind the brand, first, the proof is in the pudding. So when you have superior top line growth, balance between volume and revenue per hectoliter, it means that we're doing something right for the brand. So that is really something that you should be first looking at. And then the other thing is, as you know, when you look at our technology upgrade, so some of them are the pure digital backbone, and we're talking our ERPs and SAPs of this world, but quite a lot of them are also as a service -- direct service of the brands. So you would have -- we also invest in different forms today. But again, 11% versus 11.1%, and the top line growth that we delivered this year, I wouldn't be too worried about that one.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [20]

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Well said, Laurence. I think it is like that. Think about efficiency of ATL BTL investments like we do in productivity. You don't have better productivity by taking ingredients out of your product. No. It's by having first time right and no losses. Well, in marketing and sales, it's a little bit the same philosophy. And so over time, we expect to be able to engineer a good top line growth and having our resources better allocated. So that explains that slight improvement year-over-year on the ratio and whilst maintaining a superior top line growth. So you have to think about it that way.

And then the last one is about the OXXO stores. I don't know if we -- I have a very detailed overview of how that goes province by province, quarter by quarter, when they go over, and it has all been engineered by our local team in order to exactly minimize the impact for us and maximize the impact for OXXO. It sounds contradictory, but it is like that. So starting in regions where the competitor was strong, was giving OXXO a lot of opportunities, and we were not losing that much. We were losing, but not that much. And so we kind of move up north where our market share will be stronger, but mind you, if you -- that the more shelf space you give for brands that are not really in demand, well, they will also lose the turnover on the shelf space allocated to the competitor. It's the same thing. If they give too much to [muddle] in the north, and we were giving too much in the south, nobody's winning anything. So you have to realize that we have built that deal as the optimal win-win. Overall, it is clear we will lose over the period of transition. Volume, there is nothing we can do about. We lose mechanically volume, and that will go to competition, though you have also to imagine that, that volume is at a much lower margin for us and a very high margin for OXXO. You have to ask the question whether OXXO has the same margin on the volume they get with the other guy. But that's a separate matter altogether. So we have to see, this is a communicating vessel thing. Overall, I have to say the team is managing that well, and the impact in volume is there. But in terms of returns and profitability, given all things, it is absolutely manageable and it is not bringing neither the Mexican operation in isolation and certainly not Heineken (inaudible).

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [21]

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And we are expecting to continue to grow overall in Mexico over the period of the transition because that is a net of this impact and of good underlying trends for our business, also based on the very good performance of our premium. The Heineken brand is now making inroads and then the premium is...

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [22]

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I don't sound optimistic enough. But I just wanted to -- but you're right. The business is, of course, continuing to growing in its premium part. And so for us, the OXXO contract is a good new contract. It's a contract in which we can have long-term relationships with OXXO, and we live in a competitive world out there, and we are very well positioned in Mexico. Really very satisfied with this.

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Simon Lynsay Hales, Citigroup Inc, Research Division - MD [23]

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That's very helpful. Can I just check, Laurence, just going back to some of your comments around the margin drivers. You referenced in the statements, just bigger transactional FX headwinds around COGS. Is that also spread through the year? It's not particularly skewed to one half or the other, given the Brazilian real or some of the other EM currencies you've got exposed to?

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [24]

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I am not going to give you the breakdown. But really, the Brazilian reais is the one that probably is the most challenging, well, that we expect to be the most challenging. And there are all the currencies, but this one is I would say, the largest exposure. If you look at the volumes of beer, I mean, that's -- Brazil is our largest market, it's become the largest market for Heineken, and you know that, I mean, a number of things have to be bought in hard currency. So that does play a role. And the same way that we've had -- we've seen the Mexican operation, having to absorb that. Well, our Brazilian operation moving forward, this is very much integrated in their plans. And the way we look at it is planning to us to absorb a contrary impact on that. So that is why we are moderating a bit the positive impact of the commodities prices.

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Operator [25]

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Our next question is from Sanjeet Aujla from Crédit Suisse.

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Sanjeet Aujla, Crédit Suisse AG, Research Division - European Beverages Analyst [26]

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Three questions from me also. Firstly, on Nigeria, how are you feeling about the underlying market there? And are you in a position yet to be able to lead on pricing? Secondly, on Brazil, Laurence, you highlighted margins are still way below group levels. When would you expect those margins to get close to group levels. I think that was the medium-term target? And then just on the growth of Heineken brand, of the 8% growth that you've seen, how much is 0.0 contributing to that?

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [27]

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So we are not splitting the Heineken brand between 0.0 and the mother brand. Also, because what you're seeing is that you have far less cannibalization than what you had, for instance, when we launched Heineken Light in a number of markets. Because with Heineken 0.0, zero-alcohol, you're actually getting to some non-beer outlets. You're getting to occasions where people don't drink beer or don't drink alcohol anymore, such as lunch. And you're actually also appealing to people who don't want to drink alcohol or cannot drink alcohol in certain occasions. What we're saying is that basically, Heineken has the strongest performance in over a decade. Actually, to check the quote last year, you'll find that we already say that. So this is another record year versus last year. And I can repeat what I say last year. Last year, we say that the performance of the brand, even excluding Heineken 0.0 was the strongest in the decade. And this year, the performance, the growth of the brand, even excluding Heineken 0.0 is pretty much the same as last year. So this should be encouraging. But we don't split, and we won't split it because it wouldn't make sense.

Then your question on Brazil, the midterm guidance is that the return on net assets will be above WACC within 5 years. And that is definitely the case. So this is the guidance we gave was in terms of how it pays for the cost of capital. And that is definitely what we are seeing in that time frame. In terms of the margin, the margins will move up. They have to move up also as a factor of premiumization. And this will develop -- I am not telling you today how long it will take, where exactly it will go. But definitely, we continue to work on margin. And the portfolio has also a natural tilt that will help us, and that is helping us working on margin. Remember, we're starting from a low base. We were low single digit in the Heineken part of the portfolio, and we acquired a business that was losing money. This is going fast. Some of the synergies will be a bit delayed in terms of reuniting the distribution, but all the synergies in terms of back-office, in terms of breweries are being extracted. So we're very happy about how this is going, and this is an operation we're building for the great future. You see the growth of the Heineken brand there, and that tells you that it's going in the right direction.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [28]

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And then Nigeria, that's my most difficult thing for the moment. Yes, it's a listed company, so you can follow it. It is -- the market is growing better, so that's the good news. Pricing is not going anywhere. We have increased last year our prices in November, if I recall well, and we just did it again in January, but that is because of a VAT increase. Now our bigger competitor in the world, the smaller (inaudible) announced that it will not increase the prices before March. So it remains a very tense competitive environment. I don't know what we want to -- where we go there. We hold up our share. We're still a market leader. I think in beer, the (inaudible) is suffering more in terms of share, if you will. But I don't -- it remains a pain point. So we continue to believe that after all, we work a lot on productivity. And I have to say that the teams over there, I went there late last year, they have done a tremendous job in terms of productivity and reengineering the business for operating at structurally much lower prices than we had, let's say, 5 years ago. So that job has been done and is currently still being done. On the other hand, the good news out of Nigeria is that the premium end of the portfolio is tilting up. But the overall pricing is still lagging behind. So don't ask me to make too much projections, but I can tell you this is indeed a real concern, because the profit pool of that whole market has stumbled quite a bit over the last few years. This is just a bare reality. So it is high on our radar screen.

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Operator [29]

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So the last question we are taking on the call comes from Tristan Van Strien from Redburn Partners.

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Raoul-Tristan Van Strien, Redburn (Europe) Limited, Research Division - Partner of Consumer Staples Research [30]

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Just a couple from me. Just the first one, if I have my numbers correct, it appears that 2019 was the first year you've been able to get price and mix that's in line or even exceeding the weighted inflation of your markets, which is quite an impressive achievement. So want to know is 2019 unique because you took some extra pricing because of the input cost pressure? Or is this kind of the new philosophy going forward in the markets where that's possible? Obviously, not Nigeria, but in other markets, is that just the way Heineken is thinking about it at the moment? The second question, a bit more detailed, Laurence. As you close the preparation phase on your HANA implementation in Europe, what are you doing to mitigate any disruption that you may have in the implementation of the deployment of the program? And can we expect some rolling stock-ups in some markets of inventories before you actually implement the program? How should we think about that? And then lastly, not a question, but simply, a very big thank you to Jean-François, and I wish you much luck. Enjoy your venture forward.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [31]

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Thank you, for the last one.

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [32]

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The question on price mix, Tristan, you usually have your numbers right. So if you look at 2019, it's pretty much 50-50 price and mix. But it's very different from one place to another. As you know, with this said, input cost higher this year, we have to be intentional. And this is something that we say internally, and we say, there need to be a very good reason not to take price. But I mean, we operate in places where affordability is a key issue. We operate in places like Europe, where basically, you have a deflationary, significant deflationary impact. So there, if you look at Europe, it will be efforts on pricing, but it will be a lot of mix and premiumization. So I wish we could run the company on philosophy. It's run very much on being intentional in going towards premium, in taking pricing, while keeping our products an affordable luxury, which they are and they have to be. And then we do it on a case-by-case basis. And our management teams are very connected to their countries and the environment. What we did is we did actually blow a little bit the horn this year and say guidance is difficult here in terms of input cost. So you have to actually look at what you can do on the pricing. And we will continue to be pragmatic and reacting, and it will also depend on the mix of countries. That will be -- so that is our -- the way we're going to run it. As for HANA, you will notice that I carefully say, this is the first phase of capabilities. We're starting with the data. We're starting with actually having a unified data management, and that's what's going to happen pretty much in 2020. And we're going to actually standardize and normalize whatever is done at our shared service center in Kraków. So we could go in much more details into the way we are transitioning, and I can cover that in a -- separately. That's what our plans are, but we are starting with basically the core of the financial processes for all our 20 markets centralized in Kraków, and the first step is about unified data model. So hopefully, that doesn't bring any kind of disruption in the operation, because we're not transferring the transactional part of it yet. It's when you start transactions in the new system. To give you an example, last year, not like -- in 2018, when we actually merged our 2 SAP system in Brazil, we had a few days where we could not invoice. That is actually when you merge system, you start transacting and you decommission our old ways of transacting, that is kind of like the cutoff moment. That's part of life. You do everything you can to mitigate it. Sometimes it happens, and you have to have contingency plans in place. That's also part of the preparation. It doesn't mean that you are completely safe and immune to anything, to everything. But that is the way it goes. And it's more -- it's the data this year in Europe more than transactions.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [33]

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Tristan, if I have to put a philosophy behind the price mix thing, and I -- because I've listened to Laurence, and she said, there is no philosophy, there is a lot of pragmatism. But if you absolutely want to make a philosophy, it would be mix always, price wherever you can. And as you heard about my Nigeria stories, that latter part is a bit more difficult.

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [34]

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I going to have this framed above my desk.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [35]

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(inaudible)

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Operator [36]

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For all unanswered questions, we refer you back to the Heineken Investor Relations team. I will now hand back to the Heineken team for any closing remarks.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [37]

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Well, it has been a pleasure as ever to have you this morning for an hour, and thank you for the good collaboration we had during the past years. So I'm just looking forward to see you maybe in other capacity. So thank you very much all of you. And thank you, operator, for having organized the thing. And for every further questions, please refer to the people who will stay behind me and will be competent to answer all of your questions, when I sneak out. Thank you.

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [38]

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Thank you.

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Jean-François M. L. Van Boxmeer, Heineken N.V. - Chairman of the Executive Board & CEO [39]

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Laurence, now over to you. Thank you. Bye-bye, all.

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Laurence M. Debroux, Heineken N.V. - CFO & Member of the Executive Board [40]

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Okay. Goodbye.

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Operator [41]

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Ladies and gentlemen, thank you all for joining today's call. It is now concluded, and you may disconnect your lines.