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Heineken - a tough year ahead

Emilie Stevens, Equity Analyst | 22 April 2020 | A A A
Heineken - a tough year ahead

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Heineken NV Eur1.60

Sell: 92.16 | Buy: 92.18 | Change -0.44 (-0.48%)
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Organic beer volumes fell 2.1% in the first quarter, with March volumes down 14% as lockdowns force Heineken's outlets and production facilities to close.

As a result reported net profit came in at €94m, down from €299m last year.

Heineken expects Covid-19 impacts to worsen in the second quarter.

The group still plans to pay the final dividend for 2019 of €1.04 per share, but has cancelled the interim dividend.

The shares fell 1% on the news.

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Our View

Around a third of the global population is in lockdown, which causes inevitable problems for the brewers.

Sales have slumped and expectations are for that to continue until outlets reopen, and even then Heineken expects an economic slowdown to cause problems, piling more pressure on its customers. An extended lockdown could lead to some of them closing for good.

Coronavirus has come at a time when Heineken was reporting slowing beer consumption in developed markets. A trend being driven by the twin challenges of lower consumption among younger people and ageing populations. But on the other hand, alcohol consumption had been growing in emerging markets.

These trends are accompanied by increased demand for more premium brands. That's somewhere Heineken has something of an advantage - boasting a stable of brands that includes Amstel and Moretti - as well as the obvious one. The group's been able to deliver fairly healthy operating margins, rising from 13% in 2011 to 16.8% in 2019, although these are still some way behind its bigger rival, AB InBev.

Many will be looking to Heineken's new CEO, Dolf van den Brink who replaces the long standing Jean-Francois van Boxmeer in June, to hopefully deliver growth and further margin improvements. But we expect long term strategies will be on the backburner at least in the short term, as the group tackles the more pressing challenges of COVID-19.

That means financial resilience is the first order of the day.

Heineken's responded to the disruption with a raft of cost saving measures, which will be key to helping it weather the storm. While finding these savings are important for all businesses, they're particularly important for companies with relatively high fixed costs, like Heineken. Costs for owning and operating breweries are pretty fixed regardless of how many pints are sold. So when times are good this boosts profits, but when sales take a hit, those profits can quickly disappear.

The balance sheet is an area the group's been traditionally stronger than rivals, which adds to Heineken's resilience. As at 12 February, net debt was 2.6 times cash profits. That's still higher than we'd like given earnings are likely to take a hit, but it's covered in the near term by the group's financial headroom - with access to €3.5bn undrawn credit and having recently secured €1.5bn additional debt financing - both essential sources of cash.

Heineken is realistic in recognising things will likely get worse before they get better. Although significant, we don't think the challenges are existential. Which means beyond the pandemic, the group's focus should be how to bolster both volume and profit growth.

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Q1 trading details

Organic volume growth declined in all markets over the quarter except Asia -which saw 4.4% growth. In Europe and the Americas, Heineken's biggest markets, volume declines were seen in most countries, offsetting positive signs of premiumisaton in the Americas and growth in France and Poland.

All markets saw double digit volume declines in March - as COVID-19 restrictions ramped up, seeing many outlets closed.

Heineken branded beer bucked the trend, seeing organic growth of 5% over the quarter - driven by significant growth in the Americas.

Heineken said full year results will be impacted by lower volumes, negative currency impacts (as emerging market currencies devalue against the dollar and euro) and increased credit losses from customers.

The group has implemented a range of mitigating actions and cost saving measures. All non-essential spending is being reduced and non-committed capital expenditure suspended. Projects and technology upgrade programmes are being temporarily paused or scaled down and will be revaluated.

Heineken has said there won't be any redundancies as a consequence of Covid-19 this year. The Executive Board and Executive Team will reduce their salary by 20% between May and December and together with Senior Managers - will not receive bonuses this year.

Heineken has access to undrawn credit of €3.5bn. There are no financial terms set by its lenders, known as covenants, attached to this facility. In the last few weeks the group has raised an extra €1.5bn by issuing new bonds.

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