Denmark: Carlsberg’s strong growth in earnings driven by Western Europe and BBH

Carlsberg released its 2006 financial statement in a press release on February 20.

• Net revenue climbed 8% to DKK 41.1bn (DKK 38.0bn in 2005). The increase was due to a strong performance at BBH, a good performance in Asia and 4% revenue growth in Western Europe.

• Operating profit was DKK 4,046m, against DKK 3,518m in 2005. Beverage activities generated operating profit of DKK 3,997m (3,306m in 2005, excluding the contribution from the then associate Hite Brewery Co. Ltd.), corresponding to an increase for continuing operations of 21% relative to 2005. Other activities, including the sale of real estate, contributed operating profit of DKK 49m, against DKK 96m in 2005.

• Net profit was DKK 1,884m, against DKK 1,110m in 2005.

• It will be proposed to the Annual General Meeting that a dividend be paid of DKK 6.00 per share, corresponding to an increase of 20% (DKK 5.00 per share in 2005).

• For 2007 Carlsberg anticipates growth of around 5% in net revenue. Operating profit is expected to increase to approx. DKK 4.5bn of which approx. DKK 4.3bn comes from the brewing activities. Net profit is expected to show a small improvement on the reported figure for 2006.

“The progress made in 2006 is very pleasing – partly because it is based on broad progress in our key companies,” comments CEO Nils S. Andersen. "This shows that the many changes made in Carlsberg in recent years are bearing fruit and that we have created a professional organisation and with it a solid foundation for continued strengthening of the business in the years ahead."

Business development

For Carlsberg, 2006 was partly about building further on the results achieved through i.a. the Excellence programmes. As expected, it was mainly items on the operational agenda rather than structural acquisitions or divestments that were afforded the highest priority and, as a result, Carlsberg has demonstrated continued progress.

The traditional Carlsberg markets of Western Europe performed well, partly a reflection of strong consumer confidence and good summer weather. Innovation, mix adjustments and general price increases also led to higher sales prices. Carlsberg’s growth markets in Eastern Europe and emerging markets in Asia also put in a good performance. There was fierce and increasing competition in several markets, including in some of the Asian markets. Carlsberg sold a total of 72.6m hl of beer (calculated pro rata), equivalent to an increase of 9% excluding the contribution from Hite Brewery Co. Ltd. Organic growth accounted for 6.4% of this increase, and the year’s acquisitions for 2.3%. The positive development was due to continued growth in sales volumes in all the regions. Sales of other beverages grew by 6% to a total of 17.5m hl.

The international brands Carlsberg and Tuborg both performed well, with volume growth of 7% and 17% respectively, the latter due to very strong growth in Eastern Europe.
Net revenue climbed 8% to a total of DKK 41,083m. The increase was due to a strong performance at BBH, a good performance in Asia and 4% revenue growth in Western Europe.
Operating profit before special items climbed 15% to DKK 4,046m (DKK 3,518m in 2005). Beverage activities generated operating profit of DKK 3,997m (DKK 3,306m in 2005, excluding the contribution from the then associate Hite Brewery Co. Ltd.), corresponding to an increase of 21%, a result of a generally positive performance across the business. Other activities, including the sale of real estate, contributed operating profit of DKK 49m, against DKK 96m in 2005.

As a result of the positive earnings growth, the return on invested capital (ROIC) for beverage activities was
12.4%, against 10.2% in 2005.

Net profit grew by DKK 774 million to DKK 1,884 million.

Hence both revenue and earnings were better than anticipated not only at the beginning of the year, cf. financial statement for 2005, but also during the course of the year, cf. quarterly financial statements for 2006. The Board of Directors considers the growth in earnings to be highly satisfactory.
A number of steps were taken in 2006 to continue making the Carlsberg Group more efficient. At the beginning of the year the decision was taken to end the brewing activities in Valby at the end of 2008 (with the exception of the Jacobsen brewhouse). The Landskron brewery in Germany was sold, and production ceased in Bodø in Norway. Steps were taken towards a new production model in Finland, including centralised bottling and warehousing facilities and it was decided to discontinue the production of soft drinks at the Saltum-Neptun breweries in Denmark by the end of 2008 at the latest.

Work on the Excellence programmes continued, and efficiency improvements were made in a wide range of functions in administration, production, procurement and logistics. On top of the previously introduced Excellence programmes, which all aim to make working processes more rational and efficient, a Commercial Excellence programme is being implemented with the aim of growing revenue and creating value through increased sales.

An Accounting Shared Service Center has been started up in Poznan in Poland. The new office has initially taken over duties from other sites in Poland and will in 2007 take over duties from Germany, Switzerland and the UK.
The remaining shares in Hite Brewery Co. Ltd. were sold, drawing a line under seven years of value-creating minority ownership.
Carlsberg established a joint venture (South Asia Breweries Ltd.) in the Indian province of Rajasthan, with production expected to start up in the first quarter of 2008. BBH also announced investments in the Olivaria Brewery in Belarus and a new brewery in Tashkent in Uzbekistan, expected to start up production in summer 2007.

The Western European markets as a whole showed a positive trend, with growth in a number of Carlsberg’s core markets. Rising prices for a number of important raw materials led to less favourable trading conditions, but Carlsberg improved its performance in the region overall.
A total of 28.2m hl of beer was sold during the year (27.8m hl in 2005), an increase of 2%. This positive performance can to some extent be attributed to good weather during the summer months. Net revenue climbed 4% to DKK 27,307m, due primarily to a generally positive performance in the Nordic countries and growing exports. Sales of soft drinks and mineral water also rose as a result of progress in the Nordic countries. Sales prices for beer were up around 1.0% overall, with positive contributions from all markets except for Italy.
Operating profit was DKK 2,425m, against DKK 2,027m in 2005. The increase was due primarily to higher earnings in the Nordic countries and the UK, and to growth in export revenue. The operating margin rose by 1.2 percentage points to 8.9%, reflecting both the aforementioned factors and the positive effects of the Excellence programmes.

Nordic countries
There was growth in all of the Nordic countries. This was due to product launches, price increases and a continued focus on costs, including ensuring continuous forward-looking adjustments with a view to maintaining and extending market positions. Market share increased in Denmark and Finland, and operating profit was up on 2005 in all of the Nordic countries. Sinebrychoff in Finland announced extensive restructuring, with the centralisation of a number of functions, and there were better results in Sweden, with growth in brands such as Carlsberg and Ramlösa. The implementation of the Logistics Excellence programme in Sweden has already reaped rewards in the form of lower logistics expenses in 2006.
United Kingdom
There was a positive development in sales in the UK, driven by rising sales to the off-trade and continuing growth in market share for the Carlsberg brand. Sales to the independent on-trade also outperformed the market, and new contracts were secured with major pub amd leisure groups. Operating profit improved despite a large bad debt from one customer.

Germany, Switzerland, Italy and Portugal
Sales in Germany and Switzerland rose by a small amount compared with 2005, while sales in Poland and Italy were slightly lower. Total earnings were unchanged. There was an increase in sales of strategic local and international brands, such as Feldschlösschen (Switzerland), Super Bock (Portugal), Holsten (Germany) and Carlsberg and Tuborg, while sales of tactical and regional brands fell. There was continued focus on cutting costs and making the business less complex. Unsatisfactory earnings in Italy led to impairment of the remaining goodwill.

Russia
The Russian beer market showed growth of 10%, including an estimated 3 percentage points due to extraordinarily strong growth in the third quarter as a result of increased demand for beer during a period of disruptions in the supply of wine and spirits to the off-trade. Unseasonably mild weather in the fourth quarter is also believed to have had a positive effect on sales. The other BBH markets also showed growth in 2006, with growth rates of 12% in the Ukraine, 17% in Kazakhstan and 5% in the Baltic States. BBH’s total beer volumes increased by 10.6%, and on a pro rata basis there was growth of 14% to a total of 23.4m hl, including continued strong growth for the Tuborg brand.
Net revenue climbed DKK 1,385m to DKK 7,953m, an increase of 21%, of which 7.7% was due to higher average prices. Operating profit grew by 37% to DKK 1,804m (DKK 1,316m in 2005). This profit reflects both favourable market conditions in the region and improvements in the business, including the realisation of synergies of around DKK 230m (approx. USD 80m for BBH at 100%) arising from the successful merger of the Baltika, Pikra, Vena and Yarpivo breweries in Russia. Operating profit was also boosted by special market circumstances in the third quarter, which are believed to have resulted in one-off benefits of around DKK 110m (50% of approx. EUR 30m). The operating margin was 22.7%. Excluding the special circumstances in the Russian market, the operating margin is estimated to have been just below 22% (20.0% in 2005).
BBH is paying a total dividend to its shareholders of EUR 150m for 2006 (EUR 115m for the 2005 financial year), half of which accrues to Carlsberg.

The merger of the Russian operations under Baltika Brewery was an important step towards further strengthening the business’s competitiveness. With growth in beer sales of 11%, market share was 36.4% (36.3% in 2005), with strong progress in the second half of the year as Baltika built further on its position as the clear market leader. These results were achieved on the back of positive growth in the Baltika brand, buoyed by the launch of Baltika Cooler, and similarly positive growth in beer brands in both the premium and discount segments. Sales of the Tuborg brand grew by 128% to 1.6m hl.

Baltic States
There was positive growth in all markets and growing market shares, most notably in Latvia. Although these markets are already mature, average beer consumption per capita increased, due partly to a number of new product launches. There was also positive growth in other beverages.

Ukraine and Kazakhstan
There was continued fierce competition in the Ukraine and, as expected, market share fell, the implementation of a long-term turnaround plan being at an early stage. Growth in Kazakhstan continued, and BBH built further on its leading market position. There was particular growth in the premium segment and the high end of the mainstream segment, with a particularly positive performance from the local brand Irbis.
BBH is continuing its expansion and decided during the year to increase its capacity in Russia with a new brewery in Novosibirsk and to invest in new markets in Uzbekistan and Belarus.
The Russian market is expected to generate growth of 3-5% per annum in the medium term, but in 2007 growth will be at the low end of this range on account of the extraordinarily strong performance in 2006 and the resulting high comparative figures. As before, BBH expects to be able to raise prices by less than the local rate of inflation in food and beverage prices. The operating margin is expected to be stable relative to the 2006 figure excluding the aforementioned one-off benefits, i.e. approx. 22%. This allows for further synergies of USD 20m from the merger of the Russian breweries, although these will be countered by rising raw material costs.

Total sales of beer grew by 3% to 13.3m hl as a result of higher sales in Bulgaria, Serbia and Croatia, while Poland in particular made a negative contribution. Net revenue was DKK 3,509m (DKK 3,392m in 2005) and operating profit was DKK 135m (DKK 302m in 2005). The decrease in operating profit reflects lower and unsatisfactory earnings in Poland and non-recurring income of DKK 31m in 2005.

Poland
Despite a rising market, both revenue and earnings were down on 2005. This was due largely to increased investment in marketing, which did not deliver in line with expectations in the short term, and to changes in the business model, including reduced inventories at wholesalers in order to obtain a more effective and direct correlation with sales in the off-trade. This process was completed by the end of the year, and performance is expected to normalise in 2007.

Turkey
The Turkish market declined, due in part to a drop-off in tourism. As part of the steps taken in Turkey to improve earnings and profitability, a number of cost savings have been made. This has led to a slight improvement in operating profit, although this remains at an unsatisfactory level.

Balkans
The breweries in Serbia, Bulgaria and Croatia continued to grow their sales volumes and market share, due partly to good growth in both Tuborg and leading local brands. A regional organisation under the name of Carlsberg South East Europe has been set up in Serbia in 2007 to promote further growth and efficiency improvements through the sharing of knowledge and core skills.

Sales of beer in Asia totalled 7.7m hl (7.6m hl in 2005, including 2.0m hl from the now divested Hite Brewery). Volumes for continuing operations grew by 38%, of which 14% came from organic growth and the remaining 24% from acquisitions in Western China, Cambodia and Laos. Net revenue grew by 40% to DKK 2,299m, against DKK 1,639m in 2005. (The revenue figures do not include revenue from associates in South Korea and China.) Operating profit was DKK 332m, against DKK 391m in 2005. Hite Brewery contributed operating profit of DKK 116m in 2005.
Excluding this contribution from Hite Brewery, operating profit grew by DKK 57m or 21%.

Hong Kong, Singapore and Malaysia
Taken together, the businesses in the mature markets featured stagnating volumes and stable earnings. Market share increased in Hong Kong despite a falling market, thanks to strong growth in the Skol brand in particular, while market share for beer in Malaysia fell.

China and Vietnam - emerging markets
There was continued strong volume growth in the emerging markets, including significant organic growth in both China and Vietnam. These businesses are in the development phase, but those in Western China and Vietnam are already making a positive and growing contribution to earnings. In Eastern China, Carlsberg is continuing to invest in marketing the Carlsberg brand in the premium segment, resulting in satisfactory volume growth.

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