Carlsberg A/S (CARLB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Carlsberg's Q3 2022 Trading Statement. [Operator Instructions] This conference call is being recorded. I will now hand it over to the speakers. Please begin.

Good morning, everybody, and welcome to Carlsberg's Q3 2022 Conference Call. My name is Cees ´t Hart, and I have with me CFO, Heine Dalsgaard; and Vice President, Investor Relations, Peter Kondrup. Let me begin by summarizing the key headlines for the quarter driven by both volume and revenue growth, the group delivered strong top line performance for the quarter. We delivered particularly strong volume growth in Asia and in many markets in Western and South-East Europe. We increased our full year guidance yesterday and finally, increasing the fourth quarterly buyback for the year by DKK 500 million to DKK 1.5 billion due to the strong financial health of the group. I will provide the headline for the quarter, and Heine will take you through the regions and the upgraded full year outlook. We delivered 3.6% organic volume growth in Q3, particularly supported by continued strong growth in Asia and solid growth in many markets in Europe. Revenue per hectoliter grew strongly by 8% due to price increases in all markets and in Asia, a positive country and channel mix. Organic revenue growth was 11.6%. Reported revenue was DKK 20.2 billion, which was an increase of 13.9%. A positive currency impact mainly from Asia, was partly offset by the deconsolidation of the business in Nepal. As was the case in H1, our Q3 performance was well ahead of Q3 2019 with total volumes being around 8% and revenue around 20% above Q3 2019. Looking at our on-trade volumes they were approximately 5% above 2019 levels. Please turn to Slide 4 and a brief update on some of our international premium brands and alcohol-free brews. Carlsberg delivered a very strong growth of 12% thanks to particularly strong growth in most Asian markets, including China, Malaysia, India and Vietnam and in European markets such as Sweden, Germany, Greece, Croatia and Bulgaria. The 6% growth of Tuborg was driven by strong growth in Asia, not in India and [indiscernible]. Our volumes in Western Europe were impacted by declining volumes in Norway. 1664 Blanc was impacted by the difficult situation in Ukraine and lockdowns in China, while the brand saw strong volume growth in markets such as Denmark, Sweden, Greece, Serbia and Malaysia. We are very satisfied with the 34% growth of the Brooklyn, supported by growth in markets such as Switzerland, U.K., France and the Baltics. Our alcohol-free brews grew by 50% in the [indiscernible], with strong growth in markets such as France, Switzerland, Germany, Poland and Denmark. Total volumes were, however, impacted by a significant decline in Ukraine and lower volumes in some other CEE markets. Excluding Ukraine, alcohol-free brews volumes were up by 6%. With this, I will hand over to Heine, and he will take you through the regions and outlook.

Thanks Cees, and good morning, everybody. Please turn to Slide 5 and Western Europe, which delivered volume and value growth, albeit and as expected at lower rates than in first half due to less favorable comps. Volumes grew organically 2.4% and with a similar positive growth in both on and off-trade. Revenue per hectoliter was plus 3% as a result of the price increases earlier in the year. We saw healthy revenue per hectoliter growth across all markets, but country mix had a negative impact on the regional number due to less volume in higher-priced Norway and higher volumes in lower-priced Poland. Organic revenue was up by 5.7%, including the impact of currencies, revenue growth was 6.7%. Due to the significant inflationary pressure, we concluded negotiations for a second price increase during Q3 in all markets, except for Germany. However, the impact in Q3 from the second price increases was limited as low price increases came into effect in late Q3 or will come into effect during Q4. Despite the general deflationary pressure and deteriorating consumer sentiment, in general, we have, most of our markets, not yet seen any material down trading. Looking at the market. Volumes in the Nordics were impacted by tough comps due to the warm summer last year. Volumes in Sweden grew helped by the increase in the border trade, while they were flat in Denmark and decline in Finland and in Norway. In Norway, the volume development was anticipated. Contrary to last year, the country's borders were opened, and this led to an increase in the Norway-Sweden border trade and in the number of Norwegians going abroad for the holidays after COVID. Volumes were up double digits in both France and Switzerland, supported by very good progress for the core beer portfolio, including 1664 in France, premium business and also alcohol-free brews. In Poland, the macroeconomic environment remained challenging with inflation volume in the mid-teens. Our volumes were up by [ 10% ] supported by easy comps and retailers starting up prior to our price increases. Alcohol-free brews grew well supported by the warm weather. In the U.K., we improved our market share in both off and on trade, but our volumes for the quarter were down by low single digits impacted, in particular, by a tough month of September. Please go to Slide 6 and Asia, where we had another very good quarter, supported by strong performance across all markets. Volumes grew by 9.9% driven by growth in all markets, albeit in many markets, this was on the back of easy comps due to last year's COVID-19 restrictions, which have since been removed. Asia remains our designated volume and value growth engine, and we are therefore pleased that our volumes were 19% higher than pre-COVID 2019. Revenue per hectoliter improvement of 9% was the result of growth for our premium brands, country and channel mix and several price increases so far this year. Carlsberg, Tuborg and some of the group by a growth of 1664 Blanc in Malaysia, Singapore and Hong Kong was offset by lower volumes in China. Organic revenue growth was 19.3%, with reported growth being 25%, which is the result of a positive currency mix and currency impact from all markets, [indiscernible] and also the deconsolidation of Nepal. The Chinese beer market was impacted by COVID-19-related lockdowns and restrictions, declining by an estimated 3%. Some of our Western strongholds were impacted by these restrictions and lockdowns. But despite of that, our growth continues and volumes increased by 1% which strengthens our market share, thanks to both our international brands and local brands, such as [ Chongqing ] and Chongqing. Carlsberg, Tuborg and Somersby delivered good growth, while 1664 Blanc was impacted by the on-trade lockdown. Revenue per hectoliter was up by 4%, supported by both price increases and also mix. Our Indian business saw strong volume growth in Q3 with volume and value still well above 2019 versus last year, [indiscernible] volumes almost doubled, and Tuborg also delivered very strong growth. It was another quarter with very good volume growth in Laos, in Vietnam and in Cambodia. In Laos, we achieved very strong volume growth in the off-trade, with more than offset lower consumption levels and frequency in the on-trade due to the high inflation. There was very good momentum behind across the range of the local power brands Beerlao and for Somersby. In Vietnam, the Huda brands grew very strongly as is Carlsberg, Tuborg and Blanc, albeit these metered beer volumes are still quite small. Overall, our volumes in Vietnam were up by 55%. In Cambodia, volumes benefited from [indiscernible]. We saw strong growth for both the STING energy brands and the -- Encore beer brand. Blanc has been introduced in the market with the initial consumer response being very positive. In Malaysia, we posted very good volume growth, although this was in the back of easy comps. The premium portfolio delivered good progress. Slide 7 and Central and Eastern Europe, please. Retail volumes were impacted by the war in Ukraine and were down by 2.5%, while revenue per hectoliter was very strong at plus 18% due to price increases and country mix. Value was up organically by 14.7%. Excluding Ukraine, organic volumes was up by 1.4%. On the back of tough comps, the Balkan markets posted good volume growth, including very good growth for the international premium brand portfolio. Initially, low double-digit volume growth was driven by growth for the local power brand, Poretti and the premium beer portfolio, including Tuborg and Grimbergen. Greece volume growth was low double digits the brands, local brands, retails, [ Thaibev ] and Somersby were important growth drivers. We remain deeply impressed by the strength and resilience of our Ukrainian colleagues who continue to navigate the extremely difficult humanitarian situation and the enormous business challenges. Our volumes were of course impacted by the war albeit the decline was less severe than the first half. For the quarter, volumes were minus 18% with an improving trend during the quarter. As for Licence business, we saw good growth for Carlsberg and for alcohol-free portfolio. Before going for our earnings expectations, just a few words on Russia, where our volumes declined by 4% while revenue was up organically by 22%. The complicated task of preparing the Russian business for sales continues. As part of this, we are executing over 150 separation work streams, while at the same time, continuing the divestment process. Please turn to Slide 8 and the outlook for the full year. Yesterday, we upgraded our full year earnings outlook, now expecting organic operating profit to grow by 10% to 12% compared to previous expectations of high single-digit growth. Reason for the earnings upgrade relates to better-than-expected performance across many of our markets. The good results have been achieved while at the same time, increasing our marketing investments to support the long-term growth of our brands. Even with the increased guidance, we are expecting weak operating profit growth in the second half than the first half for the same reasons as mentioned at the first half announcement, namely increasing commodity and energy pricing, which have a more severe impact on our cost of sales and logistic costs in second half than the first half due to the rolling off of the more favorable hedges from last year while we are increasing pricing again in second half. These price increases lagged the input cost increases. In addition, we are further accelerating investments into our SAIL'27 strategic priorities, including marketing investments across group and sales investments, in particular in China and Vietnam. Lastly, we have tougher comps in the second half than in first half, and revenue per hectoliter is not benefiting from the Western European on-trade recovery as was the case in first half. Based on the spot rate yesterday, we assumed a currency impact on operating cost plus DKK 250 million compared to plus DKK 350 million at the first half. The guidance is, in particular, due to depreciation of the [indiscernible] and the Norwegian ground. All other assumptions remain unchanged. Net finance costs, excluding FX, assumed to be around DKK 550 million saturate approximately 22% and CapEx around DKK 4.5 billion. Slide 9, please, and an update on the share buyback. Last Friday, we concluded our first share buyback this year amounting to DKK 1 billion. The 3 buybacks so far this year have amounted to a total value of [ 3.33 billion ] shares corresponding to 2.4% of the total number of shares. Since the start of the buybacks in 2019, we have bought approximately 10% of the total number of shares. Today, we initiated this year's last quarterly buyback, which will run until January 27, 2023. Due to the earnings upgrade and our strong balance sheet and liquidity position, we have decided to increase this buyback to DKK 1.5 billion compared to the DKK 1 billion in previous quarters, thereby bringing the total of the [indiscernible] buybacks in 2022 to DKK 4.5 billion. The increase in the Q4 buyback is not an indication of the size of the quarterly programs in 2023. The quarterly programs will, as always, depends on expected earnings and cash performance as well as expected leverage by in 2023. The Carlsberg Foundation will continue to participate in this year buyback on a pro rata basis. Further details can be found in the Q3 [indiscernible] statement. And now back to you, Cees.

Thank you, Heine. We are very satisfied with the performance of the Carlsberg group so far in 2022 considering the severe circumstances with the war in Ukraine, the pandemic, the commodity and energy price increases and the overall inflationary pressure that is putting tremendous pressure on our business, our customers and our consumers. Our colleagues across the group have put significant efforts into successfully managing these challenges and our Q3 performance the earnings upgrade and the increased cash returns to shareholders are a testament to their hard work. Looking ahead, the business environment remains challenging with an uncertain macro situation, very high cost inflation and weakening consumer purchasing power. We will address these challenges and the need for price increases by leveraging our strong commercial programs well-embedded performance management systems, tools and capabilities while not losing sight of our long-term SAIL'27 priorities and ambitions. That was all from our side today. But before opening up for Q&A, let me summarize. The group delivered strong top line performance for the quarter, driven by both volume and price mix. Volume growth was particularly strong in Asia and in many markets, invested in Southern Europe. We have increased our full year guidance and finally we are increasing the fourth quarterly buyback for the year by DKK 500 million to DKK 1.5 billion due to the strong financial health of the group. That's all from my side. And as usual, for the Q&A, we will limit the number of questions to 2 per person to ensure that as many as possible, get a chance to get through. After your questions, you are welcome to join the queue again. And with this, we are now ready to take questions.

[Operator Instructions] The first question is from the line of Trevor Stirling from Bernstein.

I do have 2 questions. But I think before the questions, Heine, I think this is probably our last public -- your last public appearance with the analysts. Is that right?

That is right.

So I just want to say thank you very much.

[indiscernible] come back today at the very end of the call, it's over.

Jumping a little bit case, but just to say, Heine, thank you very much for all you've done for Carlsberg over the years. Thank you very much for all you've done for us and your patience in answering what may be very stupid questions at times. So hopefully, I've got 2 questions for you, hopefully, they're not too stupid. So the first one, price mix in Europe was 3%. It was probably just a little bit less than I was expecting. I appreciate that the second round of pricing hasn't kicked in yet. But can you just talk a little bit about what was going on within that 3% in terms of product mix, country mix, pricing, et cetera. And then second question, looking forward to 2023 and the COGS outlook in 2023, I appreciate you're not fully hedged and you never will be fully hedged, but at the moment, do you think it's going to be worse than 2022, better than 2022? Any directional steer you can give us would be very welcome.

And as a reward for Heine that we can shine the last time, over to you now.

And thank you Trevor for the kind words. So price mix in Europe, around 3%. If we look at market per market, we are actually having a quite healthy price/mix effect in all of our markets. The reason for the 3% has to do with country mix, due to the fact that Norway which is higher price is down and Poland, which is lower price is significantly up. So the reason for the 3% is country mix, if we double-click on the individual countries, we have a rather healthy or very healthy price/mix effect in all of our markets. With respect to COGS 2023, first of all, we are now approximately 90% hedged on aluminum and also on malls for 2023. It's too early to give sort of precise comments, as you know, on 2023 for cost and loss due to the volatility. We do expect cost per hectoliter to increase. We will, as you are well aware, stick to our rigor of drumbeat for the overall business. And we will stick to sort of defending our profit per hectoliter using the same tools, the same methodology, the same approach, including OCM, which has served us so good so far.

The next question is from the line of Edward Mundy from Jefferies.

Two questions from me, please. Just following up from Trevor's question just on Europe revenue perhaps depreciate that adverse geographic mix has held it back. Do you have a sense of what the underlying price/mix would have been if you adjust for both to Norway and the Polish impact? And then secondly, on China, has disruption from September continued into the early part of Q4? And any more sort of color you can give on your business in China?

Yes, Heine, the first, and I will take the China one.

So it is, as said, a healthy market per market on average, something like mid-single digit.

So when we -- yes, when we go to China, as you've seen for China, Q3 was a bit muted with regard to the volume growth, development and very much following the COVID-19 restrictions impacting in particular the Northwest, but also Chongqing and the Xinjang province. We are still doing better than the market and delivering a positive share development revenue per hectoliter developer. But the [indiscernible] indeed, we are a bit more hit back over in the second half of the year than even as when we speak about current trading than in the first half of the year. To put a bit more color on that, Xinjang and Nanchang are not being released from [indiscernible] so far, also in Junan with some tightening of the measures. So in that respect, we see some development in the second half of the year more than in the first half of the year based on COVID measures in China.

The next question is from the line of Tristan Van Strien from Redburn Partners. .

Can you hear me?

Well, we hear you vaguely.

Can you hear me now?

Yes, we do.

So first of all, I'll second Trevor's comments. Thank you very much, Heine. We really appreciate it. Good luck in the future. I'm sure you do credibly well. Just 2 questions. One, just expand on the European consumer. I mean you basically seeing no material impact on volumes so far with your pricing. Is there any other commentary you can make on what you're seeing with the European consumer, especially in light of some of the comments yesterday by one of your competitors. And then the second question, just to follow up on China. I don't think I saw revenue per hectoliter number. So maybe if you can comment on that if possible. And additionally, yesterday or 2 days ago, China Resources Beer expanded into the baijiu market. And I just think your thoughts on that, in particular, in China, is that something perhaps you guys will be looking at as well?

Okay. I'll take questions. With regards to the European environment, the consumer sentiment is indeed very low, but we have seen very little evidence of our consumer impact of any consumer impact, but we see some signs in some markets with Poland being the most feasible one, the flavored products. These are a bit more expensive like Somersby are declining. But on the other hand, Harnas, mainstream brand is increasing. In France, we've seen growth for our mainstream brand, Kronenbourg, which indicates maybe some down trading in front, but also shows the strength of our portfolio covering all price points. But also on the other hand, we continue to see a very solid development in markets like Switzerland and Denmark with stable volumes, a solid revenue per equity development and this continued good premium demand. [indiscernible] for Q3 obviously a lot of time when -- as inflation continues to increase, and brewers increased prices again in the second half of the year and beginning of 2023. Yes, we could argue we see a somewhat bigger risk in 2023. But again, for now, very little evident. Then with regard to the net revenue per hectoliter in development in China that's 4%. And as we said during the Capital Market Day with regards to China, we have our SAIL'27 network program for China does not involve the view or other markets. We think we have in the beer segment ample opportunities to grow. And we will, for the time being, stick to that time, Tristan.

The next question is from the line of Simon Hales from Citi.

Just a couple for me, really just sort of following up on those sort of European consumer comments case, if I can. I just sort of wondered, obviously, you're highlighting that you're not seeing any clear size of deterioration across your European footprint in aggregate at this point. Is that the assumption you're making into the year-end, i.e., do you still expect Q4 overall to be resilient from a consumer offtake standpoint? And then secondly, maybe related to that, I mean, you called out in the presentation a bit of deterioration in the U.K. as we moved into September. I think others have been flagging some weaker September and early October data out of the U.K. market. I wonder if you could just expand on your comments there? Are you seeing some channel shift on to up trade or sort of down trade to hard discounters and things like that? Any color would be great.

With regard to Western Europe, indeed, it's basically the same as already told to Tristan. With regard to Q4, don't forget that there were some closures, COVID related in December by the end of 2021. So in that respect, we feel that we should land also Q4 in Europe, okay. With regards to the U.K., and you're right, we see that from some difficulties in the market, so to say. The on-trade frequency -- the visit frequency has declined significantly over the last couple of months. Kronenbourg, as shown on as a report that they see the lowest consumer confidence that they've ever measured. So that is not good. On the other hand, we see -- we have not seen really back in our volumes in Q3. We had a minus 3 development. On the other hand, we had an improvement of our shares. And basically, with that, we look forward to Q4. So yes, of course, there are some anecdotal evidences that things are changing in U.K. But by and large, we have not seen that in Q3 yet.

The next question comes from the line of André Thormann from Danske Bank.

So first of all, I wonder whether you could give some more comments around the performance of Somersby. And I also heard your comments around 1664 Blanc. I just wonder when should we start to see growth pickup for 1664 Blanc? I understand that Ukraine and also China impacts this, but should we start to see growth pick significantly up in 2023? And my second question is also related to this. How do you look at premiumization going into 2023 in the current situation we are seeing, especially for Western Europe?

Well, with regard to Somersby, it is very much related to Ukraine. As I said, we have high expectations from Somersby in many countries that we launched over the last 2 years, and one of them is China, which had a super start from Somersby, of course, very low scale. It was more tax market, which we're now going to expand. So you should see growth from Somersby going forward. The same applies for 1664 Blanc. Indeed, especially the cities that are being hit by COVID at this moment in time in China are important for 1664 Blanc. Hence, you see some muted development on the volume of 1664 Blanc. But also here, applied with the achieved growth of 1664 Blanc in the coming years. [indiscernible] of course, is that 1 of the 2 points for that will be also the lowing of 1664 in Vietnam and a further rollout of big cities in China and where we have launched 1664, we see a good continuing underlying volume growth. With regards to, let's say, our SAIL'27 plans and especially premiumizing our portfolio. As we said during the Capital Market Day, we are under-indexed in this segment. Yes, there might be some pressure on this segment going forward. On the other hand, with all the efforts we will make to correct our situation in the index, we feel that there are still many opportunities to grow our premium portfolio in the coming 2, 3 years. So we are -- we stick to our focus on premiumization going forward towards our SAIL'27 goals.

The next question comes from the line of Laurence Whyatt from Barclays.

Just wondering [indiscernible] one question for me, please. Assuming the sale of Russia go through by the end of year-end, FY '23 leverage is likely to be very low. If there is sufficient liquidity to continue your quarterly buyback program, would you consider a special dividend as an option for capital returns?

We have had one question I understand. So over to Heine.

Yes. So first of all, as I said, the sale of the Russian business continues as planned both with regards to the sort of separation projects, but also the specific activities around the divestment process which is actually quite complicated. We will continue with the discipline that we've had on the capital allocation that we had basically since 2016. So it's not in our plans to do any special dividend, the logic that we have applied is that we will continue to invest into growing the business organically. We will continue to ensure a strong balance sheet. We will continue to have a dividend payout ratio of about 50%. And then the remaining part of the allocation will be a mix of share buybacks which we consider the most flexible tool in these circumstances and then potential M&A activities. And it's clear on the M&A side, the one that could be coming closer is buying out some minority stakes, as you know. So there are no plans of changing our capital allocation principles. It is dividend payout ratio of around 50%, and then the rest of the cash to shareholders to be done via share buyback.

The next question will be from the line of Andrea Pistacchi from Bank of America.

Two questions, please. First one is how are you thinking of the balance between volume and margin in Europe in the current environment? I asked this because it seems that the second round of your pricing in Europe was probably a few weeks a bit later than some of the peers. However, of course, you had good hedge cover, so you could very much do this. And the second question, please, if you could just share a few words on France where Q3 last year, you had some issues on the year before, but clearly, you've had a much stronger performance this year?

Well, we apply our so-called Golden Triangle, which is about the volume less market share, the gross profit of logistics debt margin and, of course, then the operating profit. Especially in these circumstances, we're very much focused on the profit per hectoliter. But on the other hand, we also focus on per country on the balance in that Golden Triangle. So the Golden Triangle is our leading tool, so to say, to adjust between the 3 when it applies price local market circumstances, but also the dominant logic for the future with this kind of high cost prices is to focus on the profit, the absolute profit [indiscernible] and trying to improve that one. With regards to France, indeed, we do significantly better than in previous periods as we have a 16% volume growth, a 20% net revenue development. We gained market share in both volume and value with strong performance across the brands, especially 1664 and Tourtel. We also had double-digit growth for Grimbergen and good growth for Blanc and Brooklyn. Continuing very strong performance of alcohol-free beer, again driven by Tourtel. So at this moment of time, we have the right momentum in France. Can we have the last question, please?

The last question comes from the line of Benjamin Silverstone from ABG.

My first question is regarding the channel mix. Could you please just give some more flavor on the -- dynamic seen here in Q3 and how you look at this for the next 12 months? And the second question is regarding Vietnam. -- volumes up very strongly at 55%. So could you give some more information about what is driving this market here? Is it the market itself? Or is it the investments that you put into the market this year?

With the channel mix, frankly, we have not seen that much difference versus the first half year after the improvement. When we look at Q3 on-trade versus 2019, we see that Western Europe is at an index of 98. It is even above and Central and Eastern Europe at an index of 87. When we talk about the outlets, especially in Western Europe, we estimate that around 10% of the [ mineral ] outlets have not reopened, but also those that have reopened have gained some more business. So we are back to more or less where we were. Going forward, that depends a bit, of course, on the impact of the significant price increases, especially on the on-trade. But as we said earlier, we don't see so far any significant dynamics there. Then with regards to Vietnam, as you know, we have very much hopes for Vietnam for the future. We have a special plan a special investment that we have basically made in think with SAIL'27 and investments we started off in the second half of the year. We grew by 55% in volume, 86% in net revenue. A lot has to do, by the way, with the recovery of the beer market as such. The beer market went up by 43%. So we had a good and a faster-than-expected recovery also in our loan volume. An important phase, of course, is the market share that grew supported by very strong growth for Huda and also international brands like Carlsberg, Tuborg and Blanc. But the last one, the international brands come from a low base. And I said on the CMD, we are channeling the SAIL'27 investment in Vietnam to further strengthen our presence in the market. As you know, we are very much in the center for Vietnam. And we want to extend our footprint in Vietnam. So a good start of our SAIL'27 investments in Vietnam. With that, we have come to the last question. Thanks a lot for listening in, and thank you for your questions. This was, as Trevor said, also Heine last conference call at Carlsberg. Heine, it has been a pleasure working together with you, and I want to thank you for your contributions to develop Carlsberg to the strong position where we are today. We are pleased -- we are very pleased that we have been able to recruit Ulrica Fearn, who is highly competent replacement for Heine. Ulrica has a strong global financial background, including almost 20 years in the beverage industry, in addition to having many of the same competences as Heine Dalsgaard. She will also have a fresh pair of eyes on how we can further strengthen our business, and she will join us at the first of January in the new year. But for now, Heine, thanks a lot for being an excellent colleague and a great contributor to our success. Then to those on the call, thank you again for listening. We're looking forward to meeting some of you during the coming days and weeks. Have a nice day.

This now concludes the conference call. You may now disconnect your lines.