Russian worries send a shiver through S&N

Europe's biggest brewer, Scottish & Newcastle, yesterday failed to reassure investors that a slump in profits at its Russian beer subsidiary was temporary, sending its shares 5 per cent lower.

The group said operating profits at Baltic Beverages Holding, which it co-owns with Denmark's Carlsberg, had halved following a tougher-than-expected first quarter. Its shares slid 17.25p to 359.5p.

S&N, which last month revealed plans to raise up to £2.5bn by selling its pubs estate, blamed costs relating to two new breweries and changes to the distribution network across Russia for the disappointing performance.

The Edinburgh-based group, which acquired its 50 per cent share of BBH, maker of Baltika beer, when it snapped up Finland's Hartwell in February 2002, said operating profit in the three months to the end of March was 51 per cent lower at €29m (£21m). It said a 20 per cent slide in the value of the Russian rouble against the euro had adversely impacted the results. Measured in euros, sales fell 15 per cent to €216m, although they rose 6 per cent in local currency terms and 4 per cent in US dollars.

The company said: "The first quarter, due to the winter weather is the low season for beer sales throughout BBH's areas of operation." Although sales of beer are outpacing the rest of the Russian drinks market, especially among the younger generation of post-Soviet Russians, vodka is still the winter tipple of choice to ward off the country's often Arctic weather conditions. "Market volumes fell 5 per cent against a very strong comparative period," it added.

Anthony Geard, an analyst at Investec Securities, said: "Russia isn't a bad market. It's just catching up from a little bit of over production and an over-congested industry pipeline." The Russian beer market has doubled over the past four years, and up to early 2002 it was growing at 20 per cent, Mr Geard added.

S&N reiterated its prediction that full-year beer volumes at BBH would grow by "high single digits", although Mr Geard said growth was more likely to be around 6 per cent. The brewer said market volumes, which grew by 4.7 per cent in Ukraine and were level in the Baltics, improved during the quarter.

Although Carlsberg raised doubts that it would manage to raise prices in Russia fast enough to keep pace with inflation, S&N's finance director, Ian McHoul, was more positive. He said that for the rest of the year BBH's intention was to get price increases through in line with inflation, which the Russian government estimates will accelerate from 5.2 per cent in the first quarter to 12 per cent for the full year.