Australia's second-largest brewer, Lion Nathan Ltd, said today that despite getting off to a solid start to the year, its Australian and New Zealand beer businesses had experienced "challenging trading conditions at the end of the quarter which continued into January."

In a statement on the Australian Stock Exchange, Lion Nathan said that as a result, both businesses had recorded declines in volumes in the quarter when compared to the same period last year.

"In Australia, competitive pricing in the alcoholic beverage sector and a softer tap beer market resulted in a 2.6% decline in first quarter volumes," a statement said. "The impact of this volume decline was partially offset by the benefits of the continuing shift to higher margin premium brands (where volumes grew) and improved pricing."

The company added that no significant cost pressures were experienced during the period and Lion Nathan continued to invest behind its brands.

The company said that poor weather over the holiday period had hit on-premise trading in New Zealand. Lion's domestic beer shipments were down 4.3% on the same period last year.

"The pricing environment remained very competitive with Lion Nathan bringing its pricing down in December to meet the market," the statement said.

Lion added that its wine business saw volumes ahead slightly on last year, driven by the continued success if Wither Hills and increased exports from the Australian wine business, particularly to the UK.

It also said that in the domestic Australian market, margins improved as a result of improvement in mix.

Lion Nathan CEO Rob Murray said: "The performance of our Australian and New Zealand beer business, particularly since the end of December, has been disappointing. At this early stage it is not easy to forecast what impact this will have on our full year result but we would expect net profit after tax (from operations) for the full 2005 fiscal year will be within the A$230m to A$235m guidance already provided to the market."

He added that this was prior to the one-off impact of a provision of around A$5m for raw materials, inventory and other associated local costs in the Australian RTD business, which is the result of a product recall in Japan initiated by a distributor.

Murray added: "The charge will be taken in the first half and may be reduced by recoveries from third parties. We believe this provision covers the full extent of our costs and any future third party claims will be vigorously defended."