London — Heineken, the world’s second-largest brewer, wants to challenge leader Anheuser-Busch InBev in one of its key markets — and that is 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 on Monday, warning of a headwind as it integrates a business in Brazil that it bought from rival Kirin for 2.2-billion real ($666m). The stock fell 2.2% as of 11.31am 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 long-term forecast for profit growth next year, she said, as the company moves past an 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 mergers and acquisitions valuations, Debroux also said.

"We grow through targeted acquisitions in countries where we’re not, or where we think we’ll add some power," Debroux said on Bloomberg TV. The company has acquired California-based Lagunitas Brewing, 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 paid $1bn for Ballast Point Brewing in 2015 and entered the cannabis market with a minority stake in Canada’s Canopy Growth 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 legalised in a number of states in the US."

Debroux said "it’s too early, we don’t see any impact right now."

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

Adjusted operating profit rose 9.3% on an organic basis to €3.76bn, beating the consensus estimate of €3.65bn.


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