London: SABMiller PLC said the Russia is one of the most exciting beer markets in the world but has declined to reiterate comments that Western European markets are "singularly unattractive".

In a conference call, chief executive Graham Mackay said: "The Russian beer market is still growing very rapidly. It's one of the most exciting markets in the world and has been for some years now and obviously attracts a lot of attention."

Mackay said SABMiller has a strong business in Russia -- growing in "high-ish double-digits" consistently for at least the last five years -- though it is small and operates only in the premium beer segment.

"It's highly profitable for its size but it is not a mainstream player at all, so it doesn't have the bulk or scale of the three bigger players," he said, adding the group has been rapidly expanding its business in the country.

"We've effectively been in an out-of-stock situation there for just about every summer for the last three of four years, so we have a capacity expansion going on and we are very pleased with our progress," said Mackay.

The group earlier this year unveiled plans to invest 170 million usd in a greenfield brewery in Ulyanovsk, some 100km east of Moscow. The new brewery, which is slated to have an initial capacity of 3 million hectolitres, is expected to be operational in early 2009.

SABMiller has approximately 6 percent market share by volume in Russia, lagging rivals Baltic Beverages Holding, SunInterbrew and Heineken, however Mackay refused to be drawn on questions if the group was satisfied with its position as number four brewer in the country.

SABMiller, which has been rumoured as a potential white knight for Scottish & Newcastle PLC, currently being pursued by Carlsberg A/S and Heineken NV, with finance director Malcolm Wyman previously describing mature Western European beer markets are "singularly unattractive".

"We all know that Western European markets have been in decline," added Wyman today, but refused to comment further in the light of the offer taking place for S&N.

Carlsberg and Heineken this morning upped their proposed bid for S&N to 750 pence a share, dependent on an S&N board recommendation and limited confirmatory due diligence. S&N has yet to table a response.

SABMiller reported first half adjusted pretax profit up 15 percent to 1.773 billion usd despite increased input costs and investment across the business.

The brewer of Peroni Nastro Azzurro and Pilsner Urquell said investment and productivity gains are offsetting cost pressures and expects progress in the second half but said it faces a more challenging environment.

Mackay said commodity costs, particularly of agricultural commodities, are still rising.

"We have seen very high increases in the last few months and we expect those to continue, so the full impact of commodity costs will be felt perhaps a bit more," he said.

Mackay said the group has been able to pass on much of the cost increases as price increases to consumers, adding there is no indication the brewer can't continue to do so.

Mackay said one of the issues is substitution or crowding out of other cereals by maize for ethanol purposes for fuel, but added: "We think that phenomenon is starting to fade so perhaps that will have a shorter life than the other problems."

He said that poor malting barley harvests in Europe and other parts of the world, combined with surging demand for brewing raw material particularly in far east, and under investment in malting plants have also been driving the input costs upwards.

"We think the very firm agricultural markets will persist for another year or two from now, given a return to normal harvests which we hope for in this year," he said.

Mackay noted that margins have come off slightly in absolute terms and said it could be 2-3 years before the group could restore its margin levels. Group EBITA margins dipped 20 basis points to 16.9 percent with gains in North America offsetting falls in other regions.

The brewer said its North America Miller Brewing operations, which are slated to merge with the US operations of Molson Coors to form MillerCoors next year, saw a 19 percent increase in EBITA to 300 mln usd, following on from an organic increase in sales to retailers of 1.4 percent in the first half. EBITA margin increased to 10.8 percent from 9.6 percent.

SABMiller said at the second anniversary of the Bavaria acquisition, the implementation of its strategy to renovate the beer category in Latin America remains on track although the speed and scale of the initiatives being implemented has led to some inevitable market dislocation during the period. EBITA for Latin America, before exceptional items, increased 13 pct to 438 pct, though EBITA margin declined 140 basis points, including 40 basis points attributable to changes in invoicing of distribution costs.

SABMiller said EBITA fell 2 percent in South Africa to 405 mln usd, though at constant currency grew 3 percent. EBITA margin was down 100 basis points to 20.1 percent due to the increase in mainstream beer sales over premium beer sales, following the loss of license to produce and market Amstel earlier this year.

SABMiller said its European operations EBITA was up 29 percent to 622 mln usd, or 17 percent on an organic constant currency basis, with EBITA margin down 30 basis points at 21.3 percent.

EBITA from Africa and Asia was up 16 percent at 277 mln usd though margins dipped there to 16.3 percent from 17.7 percent.

SABMiller declared an interim dividend of 16 cents, up 14 percent on the previous year.

Copyright 2007 AFX News Limited. All Rights Reserved.