Heineken Sees Stagnant Annual Profit Amid European Slump

Heineken Reports First-Half Profit That Misses Estimates
The company said costs to produce its beer will rise 8 percent this year from an earlier forecast of 6 percent. Photographer: Chris Ratcliffe/Bloomberg

Heineken NV said full-year profit will be stagnant as demand in western Europe stumbles, highlighting the Dutch brewer’s need to win the battle for full control of Asia Pacific Breweries Ltd.

Heineken expects net profit before exceptional items and amortization and excluding acquisitions and currency swings to be “broadly in line” with the the 1.58 billion euros ($2 billion) reported in 2011. The shares fell as much as 5.6 percent, the most in a year, as some analysts questioned whether it could meet that goal.

“The full-year guidance looks, quite honestly, pretty optimistic, particularly since western Europe isn’t going to get any better,” Melissa Earlam, an analyst at UBS AG in London, said today. Profit on that basis fell 4 percent in the first six months.

Brewers including SABMiller Plc and Anheuser-Busch InBev NV are expanding in emerging markets as they wrestle with declines in Europe as the economic crisis drags on consumer confidence and a wet summer damps demand for ale. Heineken has sought to offset the drop with cost-cutting measures including brewery closures.

Heineken dropped as much as 2.49 euros to 42.01 euros in Amsterdam trading today, paring its annual gain to 19 percent. SABMiller has advanced 23 percent this year, while AB InBev is up 38 percent.

Beer Battle

The maker of Amstel beer raised its offer last week to gain control over APB after a month-long tussle to prevent a company connected to a Thai billionaire from disrupting its hold. Heineken’s volume of beer sold in the first half rose 8.3 percent in Asia, the company’s fastest regional pace, while it dropped 2.9 percent in western Europe, Heineken’s biggest market.

“The business of APB provides direct access to two of the world’s most exciting growth regions for beer –- Southeast Asia and the Pacific Islands, and China,” Chief Executive Officer Jean-Francois van Boxmeer said. “We are working towards a swift completion of the transaction.”

Heineken on Aug. 17 said it offered to buy its joint venture partner Fraser & Neave Ltd.’s 40 percent stake in Asia Pacific Breweries for about S$5.6 billion, or S$53 a share. Heineken, which already owns 42 percent of the south-east Asian brewer, had previously offered S$50 a share for the brewer of Tiger beer.

APB Integration

The company will focus on the integration of APB and growing brands in the region after the acquisition is completed, Van Boxmeer said. Heineken theoretically halts acquisitions when the company’s net debt to Ebitda ratio tops 2.5 times, he said. Heineken’s net debt to Ebitda ratio could increase to about 3 times on the APB purchase, according to estimates by Nomura.

Heineken, which controls about 8.8 percent of the global beer market, has the smallest emerging-markets presence of the world’s big three brewers, according to data compiled by Bloomberg. About 37 percent of operating income came from western Europe last year.

First-half earnings before interest and taxes, excluding some items, were 1.27 billion euros, Heineken said. That compared with the 1.31 billion-euro average estimate for profit on that basis in a Bloomberg survey of 10 analysts. The figure represents a so-called organic decrease of 5.5 percent, compared with the median estimate of 9 analysts for a 0.5 percent increase.

Europe Slide

Earnings slid 14 percent in western Europe, Heineken said. It announced a new savings program in February, focused on more efficient global purchasing of commodities and services, to save 500 million euros by 2014. The company had 85 million euros of pretax savings in the first half, led by reductions in Europe.

Production costs will rise 8 percent this year from an earlier forecast of 6 percent, after the price of goods to produce its beer increased 6.9 percent in the first half.

Revenue rose 5 percent to 8.78 billion euros. Analysts estimated sales of 8.81 billion euros. On an organic basis, it rose 4.5 percent compared with a 4.4 percent estimate, and consolidated beer volume increased 2.8 percent versus a 3.2 percent estimate.

The Desperados brewer said it gained share in the U.S., the world’s second-biggest beer market, and increased volume in Mexico, where it bought the beer operations of Fomento Economico Mexicano SAB, or Femsa, in 2010. The company achieved targeted cost cuts from the Femsa acquisition of 150 million euros, ahead of schedule.

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