Heineken N.V. reports full year 2013 results: Continued progress against our strategic priorities in a challenging year

• Group revenue grew 1.3%; 0.1% higher organically, with group revenue per hl up 2.7%
• Improved second half performance with group revenue and group operating profit (beia), on an organic basis, up 0.8% and 1.5%, respectively
• Heineken® premium volume declined 1.8%, including an impact from destocking in France and the U.S; continued clear leadership in the international premium segment
• Group operating profit (beia) increased 2.8% and grew 0.6% organically; group operating margin expansion of 20 basis points
• Strong performance of APB[1] with pro-forma organic operating profit (beia) up 14%
• €300 million of pre-tax TCM2 cost savings delivered in 2013
• Net profit (beia) of €1,585 million, 2% lower on an organic basis; reported net profit of €1,364 million; 2012 reported net profit included a €1,486 million revaluation gain related to the acquisition of APB
• Diluted EPS (beia) of €2.75 (2012: €2.89) includes a 10 cent negative impact from revised IAS19 and foreign currency translational movements
• Proposed total 2013 dividend of €0.89 per share, unchanged versus 2012

CEO Statement

Jean-François van Boxmeer, Chairman of the Executive Board & CEO, commented:

“2013 was a challenging year as slower economic growth in a number of key markets and adverse regulatory developments impacted performance. However, we increased investments in our premium brand portfolio and innovation. This helped to drive higher revenue per hectolitre and market share gains in a number of important markets. Our volume performance improved in the second half of the year in Western Europe and Africa Middle East. TCM2 generated €300 million of cost savings, driving higher operating margins. Whilst the performance of developing markets was not as strong as expected, they now account for nearly half of group revenues and remain strong platforms for long-term growth. We will continue to invest in and focus on the execution of our strategic priorities to drive future growth.”

Financial Summary

Outlook 2014

(Based on consolidated reporting)

In 2014, HEINEKEN expects a gradual recovery in the global economy to underpin improved trading conditions in several of its key markets. This, together with a continued focus on effectively executing against our strategic priorities – Drive Heineken® brand outperformance in the premium segment, invest in brands and innovation for growth, leverage global scale to drive cost efficiencies, capture opportunities in developing markets, drive personal leadership and further embed sustainability across the business – is expected to drive an improved business performance in 2014, and support sustainable revenue and profit growth.

Improved revenue growth: HEINEKEN expects volume growth in developing markets in Africa Middle East, Asia Pacific and Latin America and lower consumption in Europe. This is expected to lead to an improved organic volume performance trend versus 2013. In addition, revenue management initiatives are again expected to drive higher revenue per hectolitre, albeit at a more modest level compared with 2013. Overall, this is expected to result in organic revenue growth in 2014. Emerging markets currencies remain volatile however, and based on current spot rates, this is expected to have an adverse impact on reported revenues.

HEINEKEN plans a slight increase in marketing & selling (beia) spend as a percentage of revenue in 2014 (2013: 12.6%). This primarily reflects higher planned commercial investments in Europe, where HEINEKEN is focused on further premium brand development, ongoing innovation and driving excellence in sales execution.

Driving margin expansion: HEINEKEN is committed to delivering a gradual and sustainable improvement in operating profit (beia) margin in the medium term. This will be supported by continued tight cost management, effective revenue management and the anticipated faster growth of higher margin developing markets.

HEINEKEN expects to realise its targeted TCM2 savings of €625 million covering 2012-2014 during the year. An intensified focus on driving cost efficiencies is expected to result in new restructuring opportunities across the Company. In particular, HEINEKEN plans to further leverage the Global Business Services organisation to accelerate efficiency benefits in Europe by expanding the scope of activities within the HEINEKEN Global Shared Services centre.

As a result of ongoing productivity initiatives, HEINEKEN expects an organic decline in the total number of employees in 2014. HEINEKEN expects input cost prices to be stable to slightly lower in 2014 (excluding a foreign currency transactional effect).

Foreign currency movements: Exchange rate movements will adversely impact revenues and profits in 2014. Assuming spot rates as of 10 February 2014, the calculated negative currency translational impact on consolidated operating profit (beia) will be approximately €115 million. At net profit (beia), this effect will be around €75 million.

Improving financial flexibility: HEINEKEN will maintain its focus on cash flow generation and disciplined working capital management. The Company remains committed to achieving its long-term 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 forecasted to be approximately €1.5 billion (2013: €1.4 billion). This increase primarily reflects investments in additional brewing capacity and commercial assets to support the anticipated growth in developing markets. Consequently, HEINEKEN expects a cash conversion ratio of below 100% in 2014 (2013: 84%).

Interest rate: HEINEKEN forecasts an average interest rate of around 4.1% (2013: 4.4%) reflecting lower average coupons on outstanding bonds.

Effective tax rate: HEINEKEN expects the effective tax rate (beia) for 2014 to be in the range of 28% to 30% (2013: 28.7%), broadly in line with 2013.

Group Operational Review

In 2013, despite challenging beer market conditions in several key markets, HEINEKEN continued to invest in its premium brand portfolio and strengthening its market positions. This was supported by higher commercial investments to enhance brand equity and drive effective execution in the marketplace. This led to market share gains in the key markets of Mexico, Vietnam, Russia, France and the U.S. The Company added new capacity in the higher growth markets of Asia Pacific, Americas and Africa Middle East to fully capitalise on current and future growth opportunities in these regions. APB continued its strong growth momentum and was successfully integrated within the HEINEKEN Asia Pacific region. HEINEKEN’s continued focus on revenue management and disciplined cost management drove higher revenue per hectolitre and operating margin expansion.

Organically, group revenue grew 0.1%, with lower volume offset by higher pricing and positive sales mix, driving a 2.7% increase in group revenue per hectolitre. Organically, group beer volume was 2.7% lower, as a fragile economic environment, higher excise duties and other adverse regulatory developments led to reduced consumer spending in Europe. In addition, slower economic growth and social unrest impeded volume development in key developing markets. In the second half of the year, group revenue grew 0.8% organically, reflecting improved trading conditions in Western Europe and several key markets in the Americas and Africa Middle East regions.

Group operating profit (beia) grew 0.6%, on an organic basis, as the benefit of higher revenue and TCM2 cost savings was partly offset by higher marketing and selling expense and input costs. Group operating profit (beia) in developing markets grew around 3% organically, reflecting strong profit contributions from Mexico, Nigeria and APB markets, partly offset by lower profitability in a number of key markets in Central and Eastern Europe. Group operating profit (beia) margins expanded by 20 basis points to 15.0% which includes a positive impact from full consolidation of the higher margin APB business.

Heineken® volume in the international premium segment declined by 1.8% in 2013 against strong prior year comparable growth of 5.3%. This performance reflects lower volume in the key markets of U.S, Vietnam and France, with the latter being largely impacted by the effect of destocking following a significant excise duty increase in January 2013. Heineken® had a solid brand performance in Nigeria, South Africa, Russia, Chile, Mexico, Brazil, China, South Korea, Austria and Germany. In China, Heineken® achieved an important milestone, with brand volume surpassing 1 million hectolitres. In France, the Heineken® brand achieved volume share leadership in the beer category for the first time. Heineken® continues to maintain clear leadership in the international premium segment with 20% category share, supported by the success of the ‘Open Your World’ global campaign.

Volume of Strongbow, our leading cider brand, declined by 2% reflecting lower volume in the UK and South Africa, partly offset by solid brand growth in the U.S. and the Caribbean. During the year, Strongbow was introduced in Mexico, whilst a range of flavour extensions for the Strongbow and Bulmers brands were successfully launched in the UK. Volume of Desperados, our high margin tequila-flavoured beer, grew by 2% following a strong brand performance in the UK, Belgium, Germany and the Caribbean, partly offset by lower volume in France and Poland. Desperados was also launched in a further 4 markets, with the brand now available in over 60 markets.

In 2013, HEINEKEN leveraged its increased scale to support the roll out of global and local brand innovations across multiple markets. This drove an innovation rate of 5.9% (compared with 5.3% in 2012), contributing €1.1 billion of revenues in 2013. ‘Radler’ beers were launched in 19 markets with the product now available in 31 markets across all 5 regions. THE SUB®, a new draught beer appliance, was unveiled to exploit the fast growing at-home draught beer market and will be rolled out across a number of markets in 2014.

TCM2 delivered €300 million of pre-tax cost savings in 2013. Supply chain and commerce contributed 71% and 9% of realised cost savings, respectively. Reduced fixed costs represent approximately 60% of total cost savings primarily related to supply chain, commerce and global support functions.

As previously announced, HEINEKEN is intensifying efforts to drive operational efficiencies in Europe through rightsizing and other restructuring activities. In the fourth quarter of 2013, restructuring initiatives were implemented in France, Greece and the UK, resulting in pre-tax exceptional costs of €99 million (of which €61 million is cash related) in 2013. This was above the previously communicated estimated exceptional costs of €70 million, mainly due to the earlier implementation of planned restructuring activities in Greece.

The GBS organisation remains a key enabler of TCM2 cost savings. HEINEKEN Global Procurement (HGP) continues to drive considerable cost benefits facilitated by the central negotiation and purchasing of both product and non-product related spend areas. In addition, 14 of the 24 operating companies in Europe have now successfully transitioned financial transactional services to the HEINEKEN Global Shared Services (HGSS) centre in Poland, with plans for the remaining operating companies to transition these activities by the end of 2014. HEINEKEN plans to further leverage the scalability of GBS by expanding the scope of activities carried out by HGSS. This primarily comprises processes related to purchasing, order fulfilment and standard reporting activities of operating companies. All operating companies in Europe will have transitioned these new activities to HGSS by the end of 2015. In 2013, upfront costs related to the set-up of the GBS organisation were €67 million (including €51 million recognised as an operational expense and €16 million of capitalised IT infrastructure costs). This brings the cumulative amount of upfront GBS costs as at the end of 2013 to €169 million, of which €133 million has been recognised as an operating expense and €36 million capitalised.

From 2014, the planned migration of additional processes and activities from operating companies to HGSS is expected to give rise to restructuring activities. The related costs will be recognised as an exceptional item and not as a recurring operating expense.

Total Dividend for 2013

The Heineken N.V. dividend policy is to pay out a ratio of 30% to 35% of full-year net profit (beia). The payment of a total cash dividend of €0.89 per share of €1.60 nominal value for 2013 (total dividend 2012: €0.89) will be proposed to the annual meeting of shareholders. If approved, a final dividend of €0.53 per share will be paid on 8 May 2014, as an interim dividend of €0.36 per share was paid on 3 September 2013. The payment will be subject to a 15% Dutch withholding tax. The ex-final dividend date for Heineken N.V. shares will be 28 April 2014.