Heineken reported underlying net revenue of €7.7bn in the third quarter, up 3.3% on an organic basis. This was in line with market expectations, with growth driven by 2.6% higher prices and just a small uplift in total volumes of 0.7%.
Premium beer volumes grew at a faster pace of 4.5%, led by Brazil, South Africa and India. Heineken was the standout brand with total volumes up 8.7%, including double-digit growth in 30 markets.
All full-year guidance has been reiterated, including underlying operating profit growth of 4-8%.
The shares rose 2.2% in early trading.
Our view
Heineken’s third-quarter results were largely as expected, with revenue growth coming from a mix of both price and volume growth. That’s given management the confidence to reiterate full-year guidance heading into the final stretch of the year.
The group owns high-end favourites such as Heineken, Birra Moretti, Old Mout Cider and many more. The ongoing shift by consumers towards these more premium brands remains strong and should help to boost profitability going forward.
The Asia Pacific region is a key market for the group. Last year saw a sharp sales decline in the region as it wrestled with the effects of an economic slowdown. Comparing to a lower base has helped to flatter first-half growth numbers, but performance remains sluggish. We still view this area as a key growth driver for Heineken, but would like to see more concrete signs of the economy picking back up before getting too excited.
Encouragingly, non-alcoholic offerings have continued to show positive momentum. Headlined by the leading Heineken 0.0 brand, the group has a growing portfolio of non-alcoholic beers and ciders, and holds the number-one spot in many of its markets.
The eB2B platform is another shining light. This makes it easier for business customers, like bars and pubs, to order in their selected drinks - while simultaneously cutting out sales reps to improve margins.
Efficiency improvements helped to deliver €300mn of cost savings in the first half, giving a clear line of sight on the full-year target of €500mn. That’s freeing up cash to deploy into other areas of the business, with a material step up in its marketing efforts being top of the agenda. Mexico, Brazil, India and Vietnam look set to capture most of this spending, with these markets being seen as the group’s route to sustained long-term growth.
The ratio of net debt to cash profits (EBITDA) was 2.4 at the half-year mark, just inside management's long-run target of under 2.5 times. We're not concerned at this point, but with higher interest rates pushing up the cost of funding this debt, we'd like to see this ratio move lower in the near future.
All in, we’re pleased by the improved operational performance and the positive effect it’s having on profitability. But there’s still plenty of work to do to sweeten investor confidence. A sustained period of growth in the key Asia Pacific market is needed to help put the wind back in Heineken’s sails. Until more concrete signs of that begin to emerge, we don't see many catalysts for a material uplift in the valuation.
Environmental, social and governance (ESG) risk
The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry-wide, especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.
According to Sustainalytics, Heineken’s management of ESG risks is strong.
Heineken aims to reach net zero in scope 1 and 2 emissions, as well as reduce scope 3 emissions by 21% by 2030. Net zero across the entire value chain is expected by 2040. Investors should keep in mind that product consistency and quality is a major selling point for Heineken. Any slip-up on this front could lead to brand damage and the potential to lose market share and revenue.
Heineken key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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