HEIA Heineken

By Saabira Chaudhuri

Higher costs held down profits in the first half of the year for Heineken NV (HEIA.AE) even as the world's second-biggest brewer sold more beer globally and launched its non-alcoholic Heineken variant in the U.S.

Shares were trading 5.4% lower in afternoon trading in Amsterdam after Heineken on Monday reported operating profits that missed expectations. The Dutch brewer--which also owns Sol, Birra Moretti and Tiger beer--blamed higher costs on aluminum prices and expenses tied to the rollout of a new technology system, among other things.

Net profit for the six months to June 30 was 936 million euros ($1.04 billion) compared with from EUR950 million the year earlier.

Net revenue grew 5.6% on an organic basis to EUR11.45 billion.

Heineken's operating profit grew 0.3% organically to EUR1.78 billion, missing analyst estimates by 6.7%.

In an interview, Chief Financial Officer Laurence Debroux said Heineken had also logged higher expenses tied to advertising for the launch of its non-alcoholic beer Heineken 0.0 in the U.S.

"In the U.S. you always have to punch above your weight in terms of advertising investment," she said.

Like its rivals Anheuser-Busch InBev S.A. (BUD) and Carlsberg AS (CARL-A.KO), Heineken has been investing in non- and low-alcohol brews as millennials across much of the developed world cut back on drinking alcohol. The brewer said low and non-alcohol volumes overall increased by a high-single digit percentage to 6.9 million hectoliters. It said 48 of its brands now sell non-alcoholic variants.

In the U.S., Heineken's eponymous brand continued to struggle with beer volumes dropping by a mid-single digit percentage in the half. The company said that was offset by the recent launch of Heineken 0.0, which did well.

Heineken's exposure to the U.S. is far smaller than that of AB InBev and Molson Coors Brewing Co. (TAP). That's holding it in good stead at a time when many Americans are spurning mainstream lagers for craft or imported brews as well as wine and spirits.

Globally, the company's beer volume rose 3.1% organically while the Heineken brand saw volume rise 6.9%. Beer volumes climbed strongly in the Asia Pacific region, Africa, the Middle East and Eastern Europe. They declined in the rest of Europe which came up against a tough comparison with the year-ago period that benefited from the men's soccer World Cup and warmer weather.

Asia is becoming a bigger focus for brewers who hope to accelerate efforts in the region's higher-growth markets at a time of sluggish growth in many developed countries. In April, Heineken closed its multibillion-dollar deal with government-controlled China Resources Beer (Holdings) Co. (0291.HK), which gives it access to a sprawling distribution network in the country.

AB InBev recently tried to publicly list its Asia arm saying this would help it create a platform to do more acquisitions in the region, but the world's biggest brewer scrapped the potential listing after it couldn't get the price it was after.

On Monday, Ms. Debroux said Heineken's aluminum prices for the first half of 2019 were locked in through hedges last year when prices were very high, raising the brewer's costs.

Aluminum prices last year were hit by a range of factors including higher tariffs, production curbs at the world's largest alumina refinery in Brazil and a strike by workers at aluminum giant Alcoa Corp. (AA).

Aluminum is priced in dollars, and the weak Brazilian real further exacerbated the impact of higher aluminum costs for Heineken in that key market, according to Ms. Debroux.

Heineken said its expenses for the half climbed 6.8% to EUR9.66 billion.

Despite all this, Heineken backed its guidance for the year. Bernstein analyst Trevor Stirling said the second half of the year "needs to be exceptionally strong" but added that this was "doable." Heineken should see some of its headwinds ebb amid more favorable hedges on aluminum and an easier comparison on expenses tied to the technology rollout which began in the second half of last year as well as on marketing expenses.

Ms. Debroux said part of the reason analyst estimates were so off the mark was because Heineken offers guidance once a year rather than on a quarterly basis.

--Anthony Shevlin contributed to this story

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

July 29, 2019 08:28 ET (12:28 GMT)

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