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Brasil Kirin deal drags on Heineken profit margin

Faster-than-expected growth in Heineken NV's Brazil operations hit profit margin in the first half of 2018 and sent the company's share price down 4.5% on July 30.

Announcing its results for the first half of 2018, the Dutch brewer cut its guidance for full-year operating profit margin from a 25-basis-point year-over-year increase to a 20-basis-point drop.

Heineken said the dilutive impact of the consolidation of Brasil Kirin, which it acquired in June 2017 for a total consideration of €644 million, and the acceleration of the combined Brazilian operations, which carry an operating margin lower than the group average, weighed on performance.

"It's been a faster shift in our geographical portfolio than we originally anticipated. It is bad news in the short term for these margins, but fantastic for long-term growth," Heineken CEO Jean-François van Boxmeer told analysts during a conference call following the release of the results.

Van Boxmeer added that it would be three to five years before the benefits of the company's Brazil strategy would fully show in margin terms.

Foreign exchange was the other main factor in Heineken's decision to revise guidance, delivering a negative impact of roughly €179 million on consolidated operating profit and €112 million on net profit, primarily due to the strength of the euro against a number of currencies.

Further challenges during the first half of 2018 included trucking strikes in Brazil, rail strikes in France, a shortage of CO2 in the U.K. and unseasonably cold and rainy weather in Spain. On the call to analysts, van Boxmeer also highlighted increasing competition in Nigeria and stated that shipments to the U.S. were "not great."

Before exceptional items and amortization of acquisition-related intangible assets, Heineken's net profit came in at €1.08 billion, or €1.89 per share, compared with €1.04 billion, or €1.82 per share, in the first half of 2017. The S&P Capital IQ consensus mean estimate for normalized EPS was €1.95.

Operating profit came in at €1.46 billion, down from €1.64 billion on a yearly basis. Before one-offs, operating profit dropped to €1.75 billion from €1.81 billion, with the operating margin declining to 16.3% from 17.5%.

Net revenue grew to €10.78 billion from €10.34 billion, representing 5.6% year-over-year organic growth. Consolidated beer volume grew 4.5% organically in the first half.

Heineken's shares were down €4.18 at €88.18 during midday trading in Amsterdam.