Heineken Sees Brazil Profit Drag in Showdown With AB InBev

(Bloomberg) -- Heineken NV, the world’s second-largest brewer, wants to challenge leader Anheuser-Busch InBev NV in one of its key markets -- and that’s going to cost the Dutch brewer some lost profit.

The operating profit margin will expand about 25 basis points in 2018, below the target it had for past years, the brewer said Monday, warning of a headwind as it integrates a business in Brazil that it bought from rival Kirin for 2.2 billion real ($666 million). The stock fell 2.2 percent as of 11:31 a.m. in Amsterdam.

The Dutch company became the second-largest brewer last year in South America’s largest economy after Kirin stumbled amid competition with AB InBev. Heineken’s namesake brand had double-digit volume growth in Brazil in 2017, which is improving after a slump caused by a currency devaluation and political upheaval.

The integration is progressing “very well” and the dilutive impact on profit is less than the company first expected, Chief Financial Officer Laurence Debroux said on a call with reporters. Heineken will give a new forecast for profitability next year, she said, as the company moves past earlier guidance set in 2014 for 40 basis points of annual margin expansion.

Heineken still expects underlying margin improvement in the “ballpark” of the past two to three years, Debroux said on a call later with analysts.

Rising bond yields could weigh on M&A valuations, Debroux also said.

“We grow through targeted acquisitions in countries where we’re not, or where we think we’ll add some power,” the CFO said on Bloomberg TV. The company has acquired California-based Lagunitas Brewing Co., a stake in London’s Brixton Brewery as well as South African brewer Stellenbrau.

Major beermakers including AB InBev have been snapping up craft brewers as growth of their mainstream brands slows. Constellation Brands Inc. paid $1 billion for Ballast Point Brewing Co. in 2015 and entered the cannabis market with a minority stake in Canada’s Canopy Growth Corp. last year.

Asked in the Bloomberg TV interview on whether Heineken is thinking about investing in the marijuana business, Debroux said: “I’m going to be clear: no. It’s a situation that of course we’re looking at, and that we’ve had a number of questions about with marijuana becoming legalized in a number of states in the U.S.”

The CFO said “it’s too early, we don’t see any impact right now.”

Revenue rose 5 percent on a so-called organic basis in 2017, the company said. Analysts expected 5.7 percent growth. Volume growth was led by Asia Pacific, where Vietnam is one of Heineken’s largest markets.

Adjusted operating profit rose 9.3 percent on an organic basis to 3.76 billion euros ($4.6 billion), beating the consensus estimate of 3.65 billion euros.

Among other highlights:

  • Executives said on the calls that Nigeria, DRC are worthwhile markets to keep doing business in

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