Heineken Full-Year Profit Beats Analysts' Estimates on Spending Reductions

Heineken NV, the world’s third- largest brewer, reported 2010 profit that beat analysts’ estimates as the company lowered spending more than anticipated amid falling sales of beer.

Earnings before interest and taxes, excluding one-time gains or costs, totaled 2.61 billion euros ($3.5 billion), Amsterdam-based Heineken said today in a statement. That beat a 2.52 billion-euro median estimate of 16 analysts surveyed by Bloomberg News. Profit was helped by 280 million euros in pretax savings from Heineken’s cost-cutting program. Sales volume excluding acquisitions or disposals fell 3.1 percent, more than the 2.8 percent decline forecast.

Brewers including Heineken are cutting costs in developed countries and looking to emerging markets to improve profitability and increase sales. Growth in the U.S. and Europe has been stinted by competition and government cost-cutting measures, which are holding back consumer spending. Heineken, the maker of Amstel and Newcastle Brown Ale, reported a 2.2 percent decline in organic revenue, which excludes divisions the company purchased or sold.

Heineken’s results were “light on volumes, but with more cost savings than expected,” Trevor Stirling, an analyst at Sanford C. Bernstein, said today.

European Investments

The brewer will focus on investing in and selling more profitable beer in Europe and the U.S. to deliver “value growth,” Chief Executive Officer Jean Francois van Boxmeer said in the statement. The shift will affect the company’s earnings in the near future, Heineken said, without being more specific. The company expects ongoing “cautious consumer behavior” in the U.S. and Europe.

Heineken rose as much as 2.11 euros, or 5.7 percent, to 39 euros, the highest intraday price since April 2008, and was up 4.3 percent as of 11:55 a.m. in Amsterdam trading. The company has a market value of about 22 billion euros.

The company said it expects a “low-single-digit” increase in the cost of goods to make beer, including malting barley and packaging, and will charge more for beer to mitigate the effect. Heineken will raise prices by a larger amount in some regions than in others, Van Boxmeer said, without specifying markets.

‘Deteriorating’ Material Costs

“Since they are the first brewer to report, this will probably represent a relief to the market as the brewers have recently been under pressure on the back of continued rises of commodities,” Javier Gonzalez Lastra, an analyst at Exane, wrote today in a report. “We remain cautious, however, on the input-costs front as we believe the outlook is continuously deteriorating here.”

Van Boxmeer declined during a conference call today to give a forecast for sales or profitability for 2011.

The amount of beer sold in western Europe slid 3.6 percent, the second-worst performance of Heineken’s units. The region accounted for almost half of the company’s revenue in 2010. A “challenging economic environment impacted consumption,” particularly in sales to bars and restaurants in Italy, Spain, the Netherlands, the U.K. and Ireland, Heineken said.

The amount of beer sold in central and eastern Europe plunged 8.6 percent. Consumers and distributors in Russia bought less beer after the government raised taxes on the beverage in January 2010.

Heineken is the “most exposed to austerity budget economies” of the European brewers, according to Andrew Holland, an analyst at Evolution Securities in London. “Trading in most of the markets where Heineken controls its business -- Europe west and east, and the U.S. -- remains weak.”

Brand Strategy

The company’s focus on “higher margin” brands, including Dos Equis, Desperados and Strongbow, and new products in Europe will “slow down” declines in the region’s sales, Van Boxmeer said. He declined to comment on how the strategy will affect profitability in 2011.

“It’s a tough time” in developed markets, as the baby- boomer generation drinks less and consumers have doubts about how the economy will develop, “but we continue to invest in our business,” Van Boxmeer said. “The crisis will blow over one day.”

The company will deliver fewer savings from its cost- management program next year due to the “earlier-than-planned” realization of savings in 2010, Heineken said. Van Boxmeer declined to comment on the amount of possible job losses as a result of the measures. The company closed factories in Europe last year, and will continue to derive savings from the region in 2011, he said.

Decline in Americas

Sales of beer in the Americas, excluding the effects of Heineken’s purchase of Fomento Economico Mexicano SAB in April 2010, fell 2.5 percent, Heineken said. Sales in the U.S., the world’s second-largest beer market, slid as sales of the Heineken brand declined.

FEMSA, which Heineken bought to expand in Latin America, generated 2 billion euros of revenue and 315 million euros of profit in the eight months following the acquisition, the company said.

The contribution from FEMSA was “stronger than we had anticipated,” Gonzalez Lastra at Exane wrote today. He has an “outperform” rating on Heineken stock.

The FEMSA acquisition has “significantly increased Heineken’s emerging-market exposure,” which is “clearly beneficial to the company’s growth prospects,” analysts at MF Global, including Andy Ford in London, wrote in a report.

Net Income Rises

Net income rose to 1.44 billion euros from 1.02 million euros a year earlier. Analysts surveyed by Bloomberg had estimated full-year profit at 1.35 million euros. Net income before amortization and one-time items rose 20 percent to 1.45 billion euros. The company had targeted growth of “at least low double-digits” for the year. The main Heineken brand’s volume rose 3.4 percent, led by growth in Brazil and South Africa.

Sales in Africa and the Middle East rose 9.7 percent. The beer market in Nigeria, which represents about 50 percent of volume in the region, according to analysts at Sanford C. Bernstein, grew 10 percent in the year, Heineken said. The company saw “strong volume growth” across key brands. Heineken said in January that it had bought controlling interests in five breweries in the country, which is Africa’s second-biggest beer market, to alleviate a shortage of capacity.

“Robust economic growth” drove beer volume increases of 4 percent in the Asia-Pacific region, and profitability soared 44 percent as the company raised prices, sold more and saw lower input costs, Heineken said. Drinkers in Vietnam, Taiwan and China bought more Heineken-branded beer.

Free operating cash flow amounted to 2 billion euros, which helped cut net debt as of Dec. 31 to 8.1 billion euros from 9.3 billion a year earlier. Heineken raised marketing and sales spending by 5 percent to 12.4 percent of revenue, and “we will further step up marketing,” Van Boxmeer said.

The brewer’s marketing spending beat estimates at UBS, Jason DeRise, a London-based analyst for the bank, wrote today. “Heineken did not under-spend” on advertising and promotions to help achieve organic profit growth, he said.

To contact the reporter on this story: Clementine Fletcher in London at cfletcher5@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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