Dutch brewer Heineken raised its full-year forecast for operating profits on Wednesday (28 October), giving an indication that the embattled beer market is starting to stabilise. Michelle Russell looks at the group's performance.

Heineken, which is the UK's biggest brewer after last year's takeover of Scottish & Newcastle, said that it had "grown volumes in both cider and beer on a relative basis" in the third quarter in the country.

The brewer also raised its group full-year forecast on like-for-like operating profits, to low double digit growth from previously expected high single digit growth.

Sales in the third quarter totalled EUR4.07bn (US$6.02bn), flat versus the three-month period a year earlier.

Analyst Kris Kippers of Petercam Bank said the sales appeared worse than expected because the company was not able to hike prices as well as it did in the first half of the year.

"With a top line in jeopardy...cost cutting efforts are necessary to safeguard the company's bottom line," he said in a note. "We do not expect Heineken to return to above industry (average) volume performance, as consumers are trading down, certainly in the US." He repeated a "hold" advice on shares.

Volumes fell by 4.7% on a like-for-like basis in the July-September period from a year earlier.

Kippers added that Heineken has been "missing some emerging markets".

"The focus on premium beer is a good strategy in the long-term, but in this environment it is hurting."

The world's third largest brewer, whose brands include Heineken and Amstel, said beer sales volume in Europe, Asia and the Americas continued to be under pressure from a weaker global economy. Consumers, it said, are switching to cheaper private label beer brands - a market in which Heineken does not compete.

However, Heineken CFO Rene Hooft Graafland said in a conference call on Wednesday that it would stick to its focus on the premium beer market.

"The premiumisation trend continues," he said.

The Morning Star believes Heineken, like its rivals, is being hit hard by the economic downturn and falling beer drinking in its mature markets.

"It has responded to the downturn by cutting costs and raising prices for its brews, but has also had to focus on reducing debt, which rose after it bought parts of UK-based Scottish & Newcastle last year," the publication noted.

As part of its cost-cutting programme, Heineken said it had closed breweries in France and Spain, and would close another four breweries and three malting plants. The closures and other cost cuts will result in a charge of EUR130 - EUR150m for 2009.

Cost cutting "gives us confidence that Heineken can continue to produce good earnings growth this year despite a sluggish top line," Jonathan Fell, an analyst at Deutsche Bank said.

The brewer has repeatedly said its focus in 2009 is to reduce costs and lower debt, but recent speculation has linked the firm with a move for Femsa in Mexico.

Femsa posted a strong lift in profits for its third quarter on Wednesday and has confirmed that it is open to a deal with a multinational brewer.

Heineken distributes Femsa beers in the US, but may face competition from SABMiller for a deal.

"Heineken is a long-time partner of Femsa, and markets and sells Femsa products in the US. An acquisition would give it greater presence in emerging markets in Latin America, reducing its reliance on mature markets in Europe," the Morning Star reported.

However, Hooft Graafland said this week that Heineken feels it can still create value for shareholders in mature markets.

"We judge M&A opportunities based on the value you can create", he said. "You can create value by having a number one or number two position in an individual market."

He added that Heineken would be "wary" about debt-financed acquisitions if it lifted the firm's net debt/EBITDA ratio above 3.5. In the first half, Heineken's ratio was 3.1.

Shares in were mostly flat in Amsterdam, trading down 0.5% at EUR29.85 at 0900 GMT on Wednesday. The shares are up 37% from a year earlier.