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Post date: 08/20/2014 - 10:29

Heineken Reports Strong Profit Growth

Group revenue +4.6% organically with revenue per hectolitre up 1.5%
Group beer volume +3.1% driven by growth in Africa Middle East, the Americas and Western Europe and an improved performance trend in Q2 in Asia Pacific
Heineken® premium volume +6.6% reflecting strong performance in key markets
Innovation rate accelerated to 7.4%, contributing €682 million of revenues
Group operating profit (beia) +13% organically; Group operating margin up 130bps
€141 million of pre-tax Total Cost Management2 (TCM2) cost savings delivered in H1 2014; 3-year TCM2 target of €625 million reached ahead of schedule
Net profit (beia) of €772 million, up 19% organically; diluted EPS (beia) +14%
Targeting year-on-year improvement in consolidated operating profit (beia) margin of around 40bps in the medium term; expected to be above this target level in 2014

Group revenue +4.6% organically with revenue per hectolitre up 1.5%
Group beer volume +3.1% driven by growth in Africa Middle East, the Americas and Western Europe and an improved performance trend in Q2 in Asia Pacific
Heineken® premium volume +6.6% reflecting strong performance in key markets
Innovation rate accelerated to 7.4%, contributing €682 million of revenues
Group operating profit (beia) +13% organically; Group operating margin up 130bps
€141 million of pre-tax Total Cost Management2 (TCM2) cost savings delivered in H1 2014; 3-year TCM2 target of €625 million reached ahead of schedule
Net profit (beia) of €772 million, up 19% organically; diluted EPS (beia) +14%
Targeting year-on-year improvement in consolidated operating profit (beia) margin of around 40bps in the medium term; expected to be above this target level in 2014

OUTLOOK STATEMENT

(Based on consolidated reporting)

Top-line growth: HEINEKEN delivered solid top-line growth in the first half of the year. Whilst the economic outlook remains mixed, HEINEKEN expects positive volume development over the remainder of the year, with an underlying growth rate slightly below the first half of the year. This volume growth will be led by developing markets in the Africa Middle East, Asia Pacific and Americas regions.

HEINEKEN expects revenue per hectolitre growth in the second half of 2014 to moderate versus the first half of the year primarily due to a negative country mix effect. Overall, HEINEKEN expects healthy organic revenue growth for the full year 2014 with an unfavourable impact on reported revenues from foreign currency translational movements.

Continued margin expansion: HEINEKEN targets a year-on-year improvement in operating profit (beia) margin of approximately 40 basis points over the medium term. This will be driven by revenue management initiatives, ongoing cost savings and the anticipated faster growth of higher margin developing markets.

For the full year 2014, margin expansion is expected to be above the medium-term target level.

HEINEKEN still expects a slight increase in marketing & selling (beia) spend as a percentage of revenue in 2014 (2013: 12.6%) and input cost prices to be stable to slightly lower in 2014 (excluding a foreign currency transactional effect).

Consolidated operating profit (beia) growth is expected to moderate in the second half of the year due to slower top-line growth, the phasing of head office related and other costs and stronger comparative growth in the second half of 2013.

Foreign currency movements: Exchange rate movements will adversely impact reported revenues and profits in 2014. Assuming spot rates as of 15 August 2014, the calculated negative currency translational impact on consolidated operating profit (beia) is now expected to be approximately €70 million (previously €115 million). At net profit (beia), this effect is now expected to be around €50 million (previously €75 million).

Lower financing costs: HEINEKEN now forecasts an average interest rate of around 4.0% (versus earlier guidance of 4.1%) (2013: 4.4%) reflecting a lower effective interest rate on outstanding bonds.

Effective tax rate: HEINEKEN now expects the effective tax rate (beia) for 2014 to be at the high end of the earlier guided range of 28% to 30% (2013: 28.7%).

Improving financial flexibility: HEINEKEN remains focused on driving strong cash flow generation and disciplined working capital management. As previously communicated, HEINEKEN expects to reach its target net debt/ EBITDA (beia) ratio of below 2.5 by the end of 2014.

In 2014, capital expenditure related to property, plant and equipment is still forecasted to be approximately €1.5 billion (2013: €1.4 billion). HEINEKEN expects a cash conversion ratio of below 100% in 2014 (2013: 84%).

GROUP OPERATIONAL REVIEW

In the first half of the year, group revenue increased 4.6% organically, made up of a 3.1% increase in group total volume and a 1.5% increase in group revenue per hectolitre. In the second quarter group revenue grew 5.5%, on an organic basis.

Group beer volume grew 3.1% organically in the first half of the year reflecting successful marketing programmes, increased innovation and strengthened sales execution. Volume performance also benefited from favourable weather and the football World Cup against a soft comparable prior year period. This led to market share gains in several of our key markets including Nigeria, Vietnam, France, The Netherlands, USA, Spain and Brazil. Group beer volume in the second quarter grew by 4.5% which includes a positive impact from the later timing of Easter.

Group operating profit (beia) grew 13% organically, primarily reflecting higher revenues and improved cost efficiencies across production, logistics and head office support expense, partly offset by higher planned marketing and selling expense. Group operating profit (beia) margin increased by 130 basis points in the first half led by Africa Middle East and the Americas.

Heineken volume in the premium segment grew 6.6% and by over 5% when excluding the effect of excise-related destocking in France in January 2013. In particular, Heineken® volume was up double-digits in Western Europe driven by strong underlying brand performances in France, Spain, Ireland, the UK and Portugal. Further, Heineken® returned to growth in Asia Pacific in the second quarter driven by China, Taiwan and Malaysia which more than offset lower brand volume in Vietnam. Heineken® also saw strong brand growth in Brazil, Poland, Russia, Germany, Nigeria, Mexico and Chile in the first six months. Brand equity for Heineken® continued to benefit from the 'Open your World' global campaign. In May, 'The City' commercial was launched globally as part of the 'Cities of the World' campaign series. This fully integrated campaign is being activated through digital innovation and special edition bottles.

Volume of the global brands Desperados, Affligem and Sol all grew in the double digits in the first half of the year, reflecting a broader focus on extending HEINEKEN's premium brand portfolio. Volume of cider grew in the mid-single digits led by growth of the Strongbow brand.

HEINEKEN has continued its strong focus on innovation. During the first six months, we launched a number of successful innovations, leveraging our premium-led global and local brand portfolio. As a result, the innovation rate accelerated to 7.4%, up from 6.0% in the comparable prior year period and contributed €682 million of revenues. During the period, Radler Zero (0.0% ABV) line extensions were launched in 8 countries in Europe.

TCM2 delivered €141 million of pre-tax cost savings in the first half of 2014. The supply chain function contributed 75% of achieved cost savings in the period. This brings the cumulative cost savings realised since the beginning of 2012 to €637 million, ahead of the targeted cost savings of €625 million for the 3-year period ending 2014.

HEINEKEN is committed to driving further efficiencies across its entire cost base. This includes the realisation of ongoing productivity improvements across the global supply chain function as well as other rightsizing and restructuring initiatives to optimise its cost structure. In addition, HEINEKEN will further leverage the success of the Global Business Services (GBS) organisation by realising additional cost savings in global purchasing and further extending the geographic scope and activities of HEINEKEN's shared services. These and other cost initiatives, together with effective revenue management, are expected to underpin further operating profit margin expansion over the medium term.

The cumulative upfront GBS costs incurred as at the end of June 2014 is €187 million, of which €147 million has been recognised as an operating expense and €40 million capitalised.

INTERIM DIVIDEND

In accordance with the existing dividend policy, HEINEKEN fixes its interim dividend at 40% of the total dividend of the previous year. As a result, an interim dividend of €0.36 per share of €1.60 nominal value will be paid on 2 September 2014. The shares will trade ex-dividend on 22 August 2014.

DEFINITIONS

Organic growth excludes the effect of foreign currency translation effects, consolidation changes, accounting policy changes, exceptional items and amortisation of acquisition-related intangibles. Beia refers to financials before exceptional items and amortisation of acquisition-related intangibles. Group figures include HEINEKEN's attributable share of joint ventures and associates. Group revenue in 2013 has been restated from the earnings release dated 21 August 2013 (with no impact on group operating profit (beia)). The license fee for the Heineken® brand has been increased since 1 January 2014. To facilitate a meaningful financial and margin comparison compared to last year, the regional impact is reported as a consolidation change in 2014.

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