just On Call - Heineken's Q1 momentum set to lose fizz

• Emerging markets provide strong start to year
• Higher costs to eat into profits
• Sales momentum to slow

Heineken does not expect to maintain its strong volumes and profits momentum from the first quarter due to higher costs and tougher comparables later in the year, but the brewer is encouraged by gains in emerging markets.

Heineken's chief financial officer, René Hooft Graafland, has proclaimed the Netherlands-based brewer to be pleased with its start to 2011, but has warned that higher marketing spend and input costs will taper its momentum as the year progresses.

"We do not expect organic volume and profits growth achieved in first quarter to be indicative of our full-year perfomance," he told analysts on a results conference call today (20 April). He added that the Netherlands-based brewer also benefited from "cycling soft volumes" in the first quarter of 2010.

Excluding gains from the newly-added FEMSA Cerveza business, Heineken's organic volume sales rose by 5.5% in the three months to the end of March. Net sales rose by 3.6% on an organic basis, while profits before interest, tax and exceptional items rose by "more than 20%". The group does not publish specific profits figures for its first quarter, which is traditionally the least significant period of its fiscal year.

If FEMSA Cerveza and EUR32m of currency gains are included, Heineken's net sales rose by 22% to EUR3.59bn (US$5.16bn), with volumes up by 44%.

Heineken's performance across its key markets was mixed. Volume sales in Western Europe crept up by 0.7%, arresting a run of consecutive quarterly declines that stretches back to the second quarter of 2007.

Russia also rebounded strongly for the group, although there is more work to do to recover from the effects of the recent three-fold tax hike on beer in the country. Hooft Graafland told analysts: "Every month we are gaining back some market share, but we are not yet at the market share where we were before all this happened," he said.

Elsewhere, Hooft Graafland highlighted improving demand for beer in Mexico following a sluggish 2010, and "very encouraging" market share gains for the Heineken brand in Brazil. Africa was the brightspot for the brewer, with volumes up by 13% on an organic basis over the three months.

The US beer market remains weak and Heineken's volume sales to retailers there slipped by low single digits in the quarter. "Overall, the US beer market is still down, so we don't yet see a real improvement in the consumer environment in the US," said Hooft Graafland.

He was similarly cautious about Western Europe, despite a return to growth there. "I wish that this quarter would be indicative for the rest of the year, but to be honest we just don't know yet," he said, adding: "There are too many uncertainties."

Heineken suffered volume declines in those countries worst-hit by the economic crisis, including Spain, Italy, Portugal and Ireland. In Greece, where the Heineken brand has around a 25% volume share of the beer market, the group had a "very bad quarter". However, volumes increased in the UK, France and Netherlands during the period.

Heineken has lifted its marketing spend as a percentage of sales from 12.4% to almost 13% as it seeks to develop its namesake brand globally and retake share in Europe. Strongbow cider has this month been launched in Italy and relaunched in the Netherlands, while high-margin Desperados is to be launched in Spain, Switzerland, Ireland, Romania, Austria and Croatia.

Heineken's share price was down by around 1% for the day at 13:30 local time.