Aug. 27 (Bloomberg) -- Heineken NV, the biggest Dutch brewer, increased first-half profit by 35 percent after raising prices and acquiring Foster's lager and Strongbow cider in the breakup of Scottish & Newcastle Plc.

Net income was 407 million euros ($598 million), up from 302 million euros a year earlier, the Amsterdam-based company said today. Sales gained 17 percent to 6.41 billion euros.

Heineken lifted prices in western Europe, its biggest market, by 4 percent in the half to recoup higher expenses for barley, aluminum and energy. Profitability still fell in the region as economies weakened and smoking bans drove drinkers away from bars. The brewer bought S&N assets in the U.K., Portugal and Belgium to gain scale for cost cuts.

``Heineken is managing to pass on raw-material costs, which is important,'' said Nico van Geest, an analyst at Keijser Securities NV in Amsterdam. ``Companies can raise prices, but the question remains what it does to volume. In Heineken's case, it's not too bad.''

Excluding 134 million euros of one-time costs, including a reorganization charge in France, profit would have been 541 million euros, Bloomberg calculations show. That met the 540 million-euro median estimate of seven analysts Bloomberg surveyed.

Chief Executive Officer Jean-Francois van Boxmeer said the brewer raised its share of the global ``international premium'' beer market, defined as brews with prices about 35 percent above average, to more than 20 percent during the half.

Shares Rise

Heineken rose 55 cents, or 1.8 percent, to 31.84 euros in Amsterdam trading. The stock had dropped 28 percent in 2008, the second-worst performance in the eight-member Bloomberg Europe Beverages Index.

The Dutch brewer last week said S&N, whose assets were divided between Heineken and Denmark's Carlsberg A/S this spring, won't necessarily boost earnings per share in 2009 as consumer confidence in Europe falls and interest rates rise. The acquired assets were included in Heineken's results from May 1.

Heineken's more expensive beers include the Asia-Pacific region's Tiger and Heineken Premium Light, sold in the U.S. The company said on a conference call that the U.S. import market was ``stable.''

Sales of such labels rose in all regions except North and South America, as the U.S. market became ``more competitive,'' Van Boxmeer said today at a press conference in Amsterdam.

Russian Margins

In Russia, Heineken's biggest market measured by volume, the company lifted its market share to about 15 percent from 13 percent at the end of last year, while its operating profit dropped.

Increasing profitability ``is essentially a matter of pricing,'' Van Boxmeer said. The company took a hit ``from the input costs and from rising transporting costs'' in the country. Van Boxmeer called the Russian market ``very competitive.''

He expects an improvement in Russian margins in the second half of the year. Heineken implemented price increases in the second quarter.

`Cautious' Outlook

The brewer said today that so-called organic net income will increase by at least ``mid-single digits'' for 2008. That basis excludes potential acquisitions or divestments, currency movements, one-time items, amortization and accounting changes.

``The outlook for 2008 is very cautious,'' Rabo Securities analysts Karel Zoete and Patrick Roquas said in a note to investors. However, ``it leaves room to over-deliver.'' They recommend investors buy Heineken shares.

Commodity costs increased 15 percent in the first half and will probably increase at the same rate in the second, the brewer said. Operating profit as a percentage of sales dropped to 10.7 percent from 12.3 percent a year earlier, while western European volumes fell 1.3 percent during the first half. Raw material and packaging costs will rise about 8 percent next year, Heineken said today.

``In western Europe and the U.K., life has not become easier'' in the second half, Rene Hooft Graafland, chief financial officer, said in a Bloomberg Television interview. He said Heineken will need to boost its margins in Britain, where the company suffered increased taxes.

Sales in western Europe rose 25 percent in the period, boosted by the Scottish & Newcastle purchase. In the U.K., where Heineken had less than a 1 percent market share prior to the acquisition, the purchase contributed 608 million euros to sales and 28 million euros to operating profit.

Edinburgh Office

Net income was reduced by a charge of 60 million euros, mainly related to the closure of S&N's Edinburgh office. Profit in the year-earlier period was reduced as a result of a 219 million-euro European Union fine for alleged price-fixing in the Netherlands.

Excluding interest and amortization, earnings rose 7.4 percent to 925 million euros. Heineken will pay an interim- dividend of 28 cents, an increase of 17 percent.

Heineken may sell ``non-core assets'' such as property, Hooft Graafland said today. The company won't sell business units, he added.

To contact the reporter on this story: Joram Kanner in Amsterdam at jkanner@bloomberg.net

Last Updated: August 27, 2008 12:12 EDT