The Fizz Goes Out of Heineken

The global brewer Heineken is to slash its capital expenditure after it reported plummeting profits, writedowns of more than €750m (£660m) and a dire performance from Foster's in the UK, as it battles a global slump in the global consumption of alcohol.

The Netherlands-based Heineken, whose brands include Kronenbourg, Strongbow, John Smiths and the eponymous beer, said it will cut its capital expenditure by €400m to €700m this year, on property, manufacturing equipment and newly acquired businesses.

Heineken—which acquired Scottish & Newcastle in a joint £7.8bn deal with Carlsberg last year—has also launched a new company-wide action programme to deliver a cash generation of more than 100 per cent of net profit for the period of 2009 to 2011. Its cash generation has been on average 50 per cent of net profit in 2007 and 2008.

Jean-Francois van Boxmeer, the chairman of Heineken, said: "Our business is robust but not immune from the challenges posed by the global economic downturn. Therefore, we have in place a rigorous, company-wide focus on cash generation and cost reduction."

However, the writedowns and his damning assessment of the performance of the UK business again raised questions over whether Heineken and Carlsberg paid too much when they acquired Scottish & Newcastle. When S&N was carved up, Heineken got the UK assets and Carlsberg took the Russian and French operations.

Gerard Rijk, an analyst at ING, said: "They paid too much for S&N. They need to take action to fight the crisis." Some €526m of the €757m of writedowns related to the impairment of assets: €275m in Russia, €200m in India and €51m from its UK pub portfolio. The remaining amount was made up from S&N restructuring costs, restructuring costs from Heineken's previous cost-cutting programme, which ended in 2008, and some integration costs from the S&N acquisition.

For the year to 31 December, Heineken's reported net profit fell by 74 per cent to €209m.

Mr Boxmeer said: "The exceptional economic circumstances required us to reduce the value of goodwill in Russia, our investment in India and in our UK pub portfolio. These non-cash exceptional charges, together with lower profit contributions of new businesses and the related financing costs resulted in substantially lower reported net profit."

In 2008, Heineken's organic net profit grew by 11 per cent to €1.01bn.

Mr Boxmeer said: "In particular, the performance in the UK was below expectations as the combination of recession, on-trade downturn, un-precedented excise duty rises, the smoking ban and the fall in the value of the British pound made the market exceptionally challenging."

In the UK, sales of its beers in pubs, or on-trade, were down by 10 per cent, while sales in supermarkets and off licences, or off-trade, rose by just 0.5 per cent.

Of its brands, Foster's was its worst performer, with sales volumes down by 10 per cent in 2008, although Heineken blamed this on a lack of promotional activity. Sales of John Smiths and Kronenbourg fell by 5 per cent, which Heineken said was in line with the declining beer market. But there was more fizz in its cider sales, which were up by 8.5 per cent in 2008, buoyed by robust performances from Bulmers and Strongbow. Heineken's global sales grew by 27 per cent to €14.3bn and group beer volumes rose by 16 per cent.

Mr Boxmeer said: "In the face of deteriorating economic conditions, we have delivered a strong organic profit growth ahead of our forecasts. This has been driven by robust pricing, higher volumes, better sales mix and a reduction in fixed costs."

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