Denmark: Carlsberg announced satisfactory earnings growth for beverage activities

Leading Danish brewing giant, Carlsberg A/S, announced on February 21 that its net revenue climbed 5% to DKK 38.0bn in 2005, driven by strong growth in Eastern Europe, particularly at BBH. In local currencies, net revenue climbed 4%.

Company’s operating profit was DKK 3,518m, against DKK 3,401m in 2004. Beverage activities generated operating profit of DKK 3,422m, an increase of DKK 452m or 15% on 2004. This growth was due particularly to marked growth in earnings at BBH and elsewhere in Eastern Europe. Other activities, including the disposal of properties, contributed operating profit of DKK 96m, against DKK 431m in 2004.

As expected, Carlsberg’s share of consolidated profit was DKK 1,110m.

Carlsberg is investing DKK 800m in expanding and modernising the brewery in Fredericia, where Danish beer production will be concentrated from 2009. The transfer of production from Valby is expected to bring annual efficiency gains in the region of DKK 130m.

It will be proposed to the Annual General Meeting that, as last year, a dividend be paid of DKK 5.00 per share.

In 2006 operating profit is expected to be in the region of DKK 3.55bn, based on continued growth on a comparable basis for beverage activities (2005 excluding Hite Brewery: DKK 3,306m). Other activities are expected to break even. Carlsberg’s share of consolidated profit is expected to grow by around 10% in 2006.

For Carlsberg, 2005 was the year when the shift from consolidation and structural adjustment to a more operationally oriented agenda began for real. It was the year when increasing profitability and delivering operational improvements were brought into even sharper focus. Carlsberg generated results which go to show that the Group has grown healthier with a stronger platform for future business development.

Carlsberg’s traditional markets in Western Europe saw stagnation or decline and continued price pressure, while its growth markets in Eastern Europe and Asia continued to grow well. Despite difficult conditions in the Western European markets, Carlsberg improved its overall operating performance. Total beer sales climbed almost 10m hl to just under 102m hl. On a pro rata basis, beer sales grew by 9% to 68.9m hl, including 4% organic growth. Net revenue climbed 5% to a total of DKK 38.0bn, driven by strong growth in Eastern Europe, particularly at Baltic Beverages Holding (BBH).

Operating profit before special items was DKK 3,518m, against DKK 3,401m in 2004. This growth was the result of improved operating results for beverage activities, which generated operating profit of DKK 3,422m, an increase of 15% from DKK 2,970m in 2004. The main reason for this improvement was marked growth in earnings at BBH and elsewhere in Eastern Europe. As a result of this earnings growth, return on invested capital (ROIC) for beverage activities climbed to 10.2% from 9.4% in 2004.

Thus revenue and operating profit were in line with the expectations published at the beginning of the year, cf. the Annual Report for 2004, and subsequently confirmed in the interim financial statements during the year.

Many of the challenges that Carlsberg faced at the beginning of the year were overcome. The year’s achievements included a settlement with Chang in Thailand, operational improvements in Sweden, the start of the amalgamation of the breweries in Russia, and the focusing of the business portfolio, including the disposal of property activities and sale of shares in Hite Brewery in South Korea, and so also a reduction in net interest-bearing debt.

Efficiency programmes have contributed significantly to improving and standardising working procedures. Production, procurement, administration and logistics have all been made more efficient under the umbrella of the Operational Excellence programmes. The greatest savings have been delivered by Production Excellence, which has been rolled out at 32 production facilities in Europe and one in Asia. The next phase is to ensure full integration of efficiency improvements and optimisation in the way production takes place at Carlsberg.

Large transactions and reductions in the workforce as a result of decisions on major restructuring programmes during the year resulted in net special items of DKK -386m. The main items related to the settlement of the Carlsberg Asia case, the disposal of property activities, the sale of shares in Hite Brewery, and the impairment of goodwill in Turkey and Italy.

Consolidated profit was DKK 1,371m, against DKK 1,269m in 2004. Of this, DKK 261m (2004: DKK 169m) was attributable to minority interests and DKK 1,110m (2004: DKK 1,100m) to Carlsberg. Thus earnings were in line with the expectations expressed in the Stock Exchange Announcement of 2 December 2005.

Western Europe
Carlsberg sold a total of 28.4m hl of beer in Western Europe in 2005, an increase of 1% on 2004, including 1.4m hl from the acquisition of Holsten-Brauerei and Göttsche Getränke. Adjusted for this, there was organic volume growth of -4%.

Revenue fell by 1% to a total of DKK 26,302m from DKK 26,564m in 2004. Organic revenue growth was -4%, due partly to lower beer sales in Sweden and the UK. Sales of soft drinks were also down on 2004, a result mainly of lower sales in Sweden and Denmark. Overall there was a small increase in average beer prices of around 0.5%, including the contribution from an improved product mix.

Operating profit was DKK 2,023m, against DKK 2,269m in 2004. The decrease was due primarily to lower earnings in the UK (particularly in the 4th quarter) and to a variety of project-related expenses in 2005 (Excellence programmes etc.) being incurred in the countries concerned. The financial impact of the Operational Excellence programmes and the implementation of the turnaround plan for the Swedish operation strengthened the overall business.

The operating margin was 7.7%, down 0.8 percentage points on 2004 and therefore not satisfactory. A number of measures have been implemented to reinvigorate earnings in the region, cf. below.

Sweden

One clear priority during the year was improving the performance of the Swedish operation, which therefore underwent extensive restructuring, including staff cutbacks and redundancies, the refocusing of the product range on mainstream and premium brands, and the rationalisation of logistics. These many initiatives proved a success: the Swedish operation generated operating profit of around DKK 100m and has therefore taken a big step towards achieving the level of earnings that its market position warrants.

Norway and Finland

There was price pressure in both Norway and Finland, but both Ringnes in Norway and Sinebrychoff in Finland had success launching new products and packaging types. Earnings were stable.

Denmark
Earnings in Denmark were down, due to a general downturn in the market and problems with the transition to a new automated order-picking system. On the upside there was the opening of the new Jacobsen brewhouse, which was an immediate success in the speciality beer segment. To counteract the current and expected future trend in the market, cutbacks and redundancies were made in administration and sales, among others, in 2005.

As part of the work to optimise and improve production at Carlsberg and increase the profitability of Carlsberg’s Danish subsidiary, the decision has been taken to discontinue large-scale production in Copenhagen and concentrate Danish production at the brewery in Fredericia instead. Over the next three years a total of around DKK 800m will be invested in expanding and modernising the brewery and building a new high-bay warehouse in Fredericia. Production is expected to be concentrated in Fredericia by the end of 2008, bringing annual efficiency gains in the region of DKK 130m.

UK
Competition in the UK market is intense. Carlsberg UK’s volumes and earnings were negatively affected by the consolidation of pub chains. At the end of the year a provision of around DKK 125m was made for the cost of streamlining business processes and the production, logistics and administration organisation. Combined with additional efficiency measures and adjustments in 2006, especially in logistics, this is expected to create an improved platform for the UK business in the future.

The total reduction in staff at Carlsberg UK from the 4th quarter of 2005 to the end of 2006 is expected to be approx. 400. New bottling and canning lines will be taken into use from March 2006 to accommodate rising demand from the off-trade.

Germany
Holsten-Brauerei has now been part of the Carlsberg Group for nearly two years, and the financial targets originally set for the acquisition have been achieved. The operational integration of Holsten-Brauerei has generated substantial synergies and good growth in earnings.

Switzerland and Portugal
Both Switzerland and Portugal delivered satisfactory results, albeit not quite up to the high levels of 2004. Tougher drink-driving laws were introduced in Switzerland at the beginning of 2005, which led to a drop in sales of beer to the on-trade. As part of the strategy of focusing on core business, the mineral water operation Passugger was sold at the end of the year. In Portugal the market fell back slightly after particularly high sales figures in connection with EURO 2004. Combined with increased competition, this led to reduced earnings.

Italy
The Italian business was affected by the integration of distributors and by restructuring. The business lost market share in 2005, due to the decision to scale down sales of value beer to the off-trade and a drop in sales volumes for the Splügen brand following price increases. Profitability is still not satisfactory, and so goodwill was impaired by a total of DKK 277m. Earnings will be increased, among other things, through increased efficiency in the strong distribution system and through cost reductions.

Baltic Beverages Holding (50%)
BBH’s markets put in a strong performance in 2005, led by Russia where there was growth of 6%. The markets in the Ukraine, Kazakhstan and the Baltic States grew by 25%, 25% and 8% respectively. BBH grew its sales volumes in these markets by 13% to 20.6m hl, so underlining its strong position in the region.

Net revenue climbed to DKK 6,568m from DKK 5,418m in 2004, an increase of 21%, including 8% due to an improvement in price/mix. Operating profit rose by 27% to DKK 1,316m (2004: DKK 1,038m). These earnings reflect both continued favourable market conditions and the realisation of the first synergies from the operational integration of the Baltika, Pikra, Vena and Yarpivo breweries in Russia. The operating margin was 20.0%, up 0.8 percentage points on 2004.

Russia
In Russia BBH grew faster than the market as a whole, its beer sales growing by 13% to a total of 16.6m hl. Market share increased to 36.3% (2004: 34.2%), further cementing BBH’s position as the market leader. Progress was made across a broad front, led partly by the Baltika brand and Tuborg, which is now the leading licensed brand in Russia. Continued growth in sales and earnings can best be achieved by amalgamating the Russian breweries: Baltika, Pikra, Vena and Yarpivo.

The Baltic States
The trend in the Baltic States remained positive with large increases in market volumes, especially in Estonia and Lithuania, where beer consumption per capita is now up around 90 litres a year. PET packaging is becoming increasingly popular in all the Baltic States. The Baltic States continue to show good earnings capacity.

The Ukraine and Kazakhstan
In the Ukraine the market featured fierce price competition. Together with changes in BBH’s sales structure, this led to a loss of market share, especially for the Slavutich brand. On the upside, the Tuborg brand made progress in the licence segment. The business in Kazakhstan achieved volume growth of more than 50%, driven by campaigns for the Derbes and Irbis brands.

Eastern Europe excl. BBH
Sales of beer grew by 9% to 12.3m hl. Revenue climbed to a total of DKK 3,367m (2004: DKK 2,902m), and operating profit to DKK 314m (2004: DKK 61m). These earnings were the result of very strong growth at Carlsberg Polska and better results at the Balkan businesses. Türk Tuborg improved on 2004 but posted another operating loss.

Poland
In Poland good results were achieved in a buoyant market. Carlsberg Polska gained market share partly through innovation, including the launch of new higher-margin products. Following the implementation of the Excellence programmes, the operating margin in Poland is now on a par with the best-performing countries in Western Europe.

Turkey
In Turkey there was a drop in beer sales, and earnings were again unsatisfactory, albeit slightly better than in 2004. Türk Tuborg lost market share, due primarily to lower sales of the Skol brand. This negative performance led to goodwill and other assets being impaired by a total of DKK 563m. A number of initiatives have been launched to raise productivity and cut costs, including a reduction in the overall workforce. A number of measures are also being introduced to generate growth and strengthen distribution.

The Balkans
The breweries in the Balkans achieved healthy growth in sales and realised a positive earnings trend. The profit trend is due to the rationalisation programmes implemented and the launch of new products, including Tuborg Green.

Asia
Total beer sales grew by 28% to 7.6m hl (2004: 6.0m hl), including 5% organic growth and 23% through acquisitions, primarily in Western China. Excluding volumes from Hite Brewery, there was organic growth of 14%. Net revenue climbed to DKK 1,626m (2004: DKK 1,463m), corresponding to growth of 11% (excluding revenue at associated companies in South Korea and China). Operating profit came to DKK 392m, compared with DKK 404m in 2004, negatively affected, as expected, by the cost of launching and marketing Carlsberg Chill in China.

Malaysia
Volumes in the Malaysian market fell due to an increase in excise duties on beer and so higher retail prices. Sales of Carlsberg Green Label fell in line with the rest of the market, while Skol positioned itself in the value segment. Earnings in Malaysia were on a par with 2004.

China and Vietnam
Carlsberg’s operations in the new markets of Western China and Vietnam are in a development phase and generated strong organic volume growth and positive operating earnings.

CHANGES TO THE EXECUTIVE BOARD
Jørgen Buhl Rasmussen (50) will join the Executive Board with effect from 1 April 2006 to replace Executive Vice President Paul Bergqvist (60), who reached retirement age in January 2006. From 1 April the Executive Board of Carlsberg A/S will therefore comprise Nils S. Andersen, President and CEO, Jørn P. Jensen, Executive Vice President and CFO, and Jørgen Buhl Rasmussen, Executive Vice President.

INCENTIVE PROGRAMMES
In 2005 a total of 201,250 share options with an exercise price of DKK 288.29 (2004: 214,988 options with an exercise price of DKK 268.39) were granted to members of the Executive Board and other senior employees in the Carlsberg Group, a total of around 130 employees. In 2006 around 220,000 options will be granted with an exercise price calculated as the average share price during the first five trading days following the publication of this financial statement.

ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will take place on 15 March 2006 at Falkoner Centret in Copenhagen starting at 4.30 p.m. (CET).

BOARD RESOLUTIONS AND PROPOSALS TO THE ANNUAL GENERAL MEETING
The Parent Company recorded a profit in accordance with IFRS of DKK 691m for 2005. The Board of Directors proposes that a dividend be paid of DKK 5.00 per share, or a total of DKK 381m. It is proposed that the remaining profit of DKK 310m be taken to reserves.

THE PRINTED ANNUAL REPORT
The printed Annual Report for 2005 is expected to available no later than 6 March 2006.

MANAGEMENT STATEMENT
The Board of Directors and the Executive Board have today discussed and approved the Annual Report of the Carlsberg Group and the Parent Company for 2005.

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