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Heineken Hit As Brazil, Currencies Force Margin Outlook Cut

Published on Jul 31 2018 11:37 AM in Drinks tagged: Heineken

Heineken Hit As Brazil, Currencies Force Margin Outlook Cut

Heineken cut its full-year margin forecasts due to currency weakness in some more profitable markets and expansion in Brazil.

The brewer reported first-half earnings below market expectations and said its operating margin would decline by 20 basis points in 2018, compared with a previous forecast of a 25 basis point increase, after it fell sharply in the first six months.

Overall, the brewer sold more beer in the first six months of 2018 than expected, with growth rose steepest in its two most profitable markets, Vietnam and Mexico, along with Brazil, Cambodia, South Africa, Ethiopia and Russia.

Translational Hit

The Dutch brewer, whose Heineken lager is the top seller in Europe, said the new guidance was because of the negative translational hit from currencies concentrated more in its higher margin countries, such as Vietnam, and a larger dilutive effect of its expanding Brazilian business.

Heineken acquired the loss-making Brazilian operations of Japan's Kirin in 2017 to become the number two player in the South America country, and had previously warned of an impact on its margins.

"We're bringing the margin up but it's not yet at group average and at the same time we have double-digit growth of volumes and revenue, which frankly we had not expected," Chief Financial Officer Laurence Debroux told Reuters.

She added that Heineken now believed Brazilian margins could climb to company-average levels.

"A year ago we did not want to say that because it was still to be seen, but at this stage we do think this is possible.... We say (in) three to five years," she said.

List Of Factors

Trevor Stirling, beverage analyst at Bernstein Securities, said there was "an arms-length list of factors and one-offs" explaining the first-half profit weakness.

"If you're an optimist, you'd say a lot of the first-half weakness is from one-offs and high growth in Brazil is a long-term positive, but then you need to do much better in the second half to hit the revised guidance," he said.

Stronger revenue growth was partly offset by higher expenses and increased input costs, notably for aluminium, Heineken said.

The brewer's first-half operating profit before one-offs grew 1.3% on a like-for-like basis to €1.75 billion, below average forecast of €1.89 billion in a Reuters poll.

The operating margin fell by 118 basis points. Excluding Brazil, this would have been a 76 basis point decline.

Earnings per share at €1.89 was also below the Reuters consensus forecast of €1.95.

News by Reuters, edited by Hospitality Ireland. Click subscribe to sign up for the Hospitality Ireland print edition.

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