Heineken says Brazilian expansion to dilute profitability


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LONDON: Heineken NV, the world’s second-largest brewer, forecast a drop in profitability this year as it expands more quickly than expected in Brazil, where its beer business has lower margins.

The full-year margin will shrink about 20 basis points, Heineken said Monday, also pointing to currency headwinds. Adjusted operating profit rose 1.3 percent to 1.75 billion euros ($2 billion) in the first half, missing analysts’ estimates.

The Dutch company became Brazil’s second-largest brewer last year when it bought Japanese brewer Kirin’s business there for about 2.2 billion real ($590 million). Kirin had stumbled amid competition with Anheuser-Busch InBev NV, and now Heineken is stepping up the fight in that market.

“It’s a little bit counter-intuitive, but it is a problem for satisfied people,” Chief Financial Officer Laurence Debroux said in a phone interview of the company’s lower profitability in the short-term due to revenue growth from Brazil. “We weren’t expecting these products to accelerate so fast in the first year.”

The company’s roster of brands in the country now includes Schincariol in the mass-market segment as well as more expensive Devassa and Eisenbahn lagers. 

Kirin’s Brazil unit wasn’t profitable at the time of acquisition, though it is now and margins should catch up to Heineken’s average level in three to five years, Debroux said.

“This should lead to low- to mid-single-digit downgrade, on a stock which had performed well into this print,” Morgan Stanley analysts led by Olivier Nicolai wrote in a note to investors. 

Heineken had forecast its margin to improve 25 basis points this year in February, lower than its target for past years. Higher raw material costs and a currency headwind are also reasons the brewer gave for cutting its forecast Monday.

AB InBev reported earnings below estimates last week as marketing spending on the soccer World Cup hurt second-quarter profit growth.

Heineken’s beer volume rose 4.5 percent on an organic basis, compared with the estimate of 3.1 percent. - Bloomberg
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