Royal Unibrew A/S (RBREW.CO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Royal Unibrew's Q3 '25 Trading Statement. I'm Lars Jensen, CEO of Royal Unibrew, and I'm joined today by our CFO, Lars Vestergaard. We'll take you through the highlights of our performance in the third quarter and then open for questions at the end. Before we begin, please note the usual disclaimer on Slide #2. It contains important information about forward-looking statements, assumptions and risks that may impact our outlook. With that, let's start with a broader view on Slide #3. Let's start with a look at our strategic progress and long-term targets. Our financial performance demonstrates that the strategy is working with solid commercial execution and strong margin expansion. We continue to benefit from our growth framework, where 60% of our net revenue sits in attractive and growing beverage categories such as no/low sugar, carbonated soft drink, energy, enhanced RTD/cider and premium. In markets where consumer confidence generally remains low, we delivered organic revenue growth of more than 3% in the first 9 months of '25, which is ahead of European peers. Our top line growth was supported by the new activities in BeLux, but also negatively impacted by reduced private label production in Italy and adverse currency movements. The key for Royal Unibrew is profitable growth. We focus on categories, markets and channels where we can grow sustainably and profitably, while exiting or diminishing areas that dilute our margin or strategic focus. From '26, this step will reduce group revenue by around 3.5%, but have no impact on EBIT or volumes. The decline in net revenue is predominantly from snacks and will impact the Northern European segment. Operational efficiency is deeply rooted in our culture and across the organization. Our teams are constantly looking for smarter ways to operate, whether it's optimizing production and logistics or simplifying workflows or improving our allocation of resources. The strong EBIT margin development in the first 9 months of '25 shows that this mindset is delivering results, not just in our established markets, but also in the newer ones. Finally, on this slide, our long-term ambitions remain unchanged, and we aim to deliver an organic EBIT growth of 6% to 8% per year, double-digit earnings per share growth and continuous improvement in return on invested capital. Now let's turn to the Q3 highlights on Slide #4. We delivered another strong quarter with reported EBIT growth of 15% and organic EBIT growth of 14%. Net revenue grew 3%, while organic growth was 4%. We saw continued strong execution in our growth categories and improved momentum in our Northern European segment. Earnings per share increased by 20% and free cash flow developed in line with our plans. And with less than 2 months to go of '25, we now expect to deliver full year EBIT growth at the high end of the 8% to 12% range. Let's look closer at the performance in each of the segments now, and we will start with Northern Europe on the next slide, which is Slide #5. In Northern Europe, organic volume growth was 1% and net revenue increased by 3% in the quarter. Finally -- sorry, Finland rebounded after a soft Q2 market by cold weather that was impacted by cold weather. July was significantly warmer, which supported stronger volumes. As Finland has a more premium portfolio, the strong Q3 improved our price/mix for Northern Europe segment in total. In Denmark, we continue to gain value share across most categories. Faxe Kondi delivered strong growth, particularly in the no/low-calorie segment and Booster maintained momentum as the leading energy drinks in the market. Our beer portfolio led by Royal and Heineken also grew despite a declining total beer market. In Norway, we saw solid revenue growth in the quarter, which is driven by the momentum in the RTD/cider category and beer. And this is despite a continued soft consumer sentiment. And overall, Norway is tracking on our plans. In the Baltics, we experienced a decline in volume and revenue in the quarter due to relatively cold summer and a more competitively pricing environment, but profit remained intact. Now let's move to Slide #6 and look at Western Europe. Western Europe delivered a 9% organic volume growth and 11% revenue growth in Q3. Growth was driven by BeLux, which amounted -- accounted for around 12% of the total segment growth. In Italy, we continued to gain market share, but growth was lower than in the first half of the year due to a colder weather in Q3. Our beer brands, Ceder's and Faxe performed well, and the Crodo soft drink range continued to take share across channels. As we have previously described, we have reduced private label production to free up capacity for our own brands. This supports the price/mix and profitability even if total volume is down in the quarter. In France, we continue to gain market share in soft drinks, which is driven by our 2 local hero brands, Lorina and Crazy Tiger. In the Netherlands, the business continues to track on plans on revenue and margins and margins are up year-to-date. We focus on profitable growth as we enhance our brands and focus on introduce more options to strengthen the price pack play. This is why we have deselected some nonprofitable promotions. In BeLux, we estimate that we have maintained market share in '25. BeLux remains loss-making this year as expected, but continues to develop according to plan. BeLux has now been part of our portfolio for a year. And starting from October '25, it's included in a year-on-year comparison. Now let's turn to Slide #7 and the International business segment. The nature of the International business means that quarterly performance can be volatile and often influenced by timing effects of inventory movements. That's why we typically look at this in a 12-month running perspective or year-to-date when we are at this time of the year to get a clearer view of the underlying trends. When we look at sales outgrowth across our key market, it remains in the low teens, confirming a strong consumer demand for our brands. Sell-in growth declined in Q3 following some inventory buildup earlier in the year. Year-to-date volumes are up around 12%, which is now calibrated with the sales-out momentum. Net revenue declined slightly in Q3, but was up 4.5% year-to-date. And besides the inventory normalization in Q3, net revenue was impacted by currency headwinds and country mix and with faster growth in African markets where price per liter is structurally lower. Category growth was led by the Faxe beer, the Crodo soft drink and Vitamalt. Profitability and margins remain strong in the segment. And with that, I will hand over the word to Lars to walk you through the financials.

Thank you very much, Lars, and please turn to Slide #8. Net revenue has increased by 5.3% in Q3 or 4.3% organically. Gross profit grew by 5.9% in the quarter. The higher gross margin growth compared to net revenue reflects both our focus on profitable growth and efficiency improvements. The cost base increased by less than 2% year-on-year, which is mainly related to the impact from BeLux and recent acquisitions. The underlying development in cost reflects our strong focus on efficiency and cost control. The efficiencies have mainly been achieved within sales and distribution expenses, while we continue to invest in sales and marketing to support our growth ambitions. We are seeing clear benefits from our improved production footprint and initiatives to streamline logistics and distribution operations. EBIT increased by 15% in Q3 and 13% year-to-date. The EBIT margin expanded by 160 basis points in the quarter and by 110 basis points year-to-date. Tax and financial expenses are developing as expected with an effective tax rate of 22% and net financial expenses in line with our guidance. Net profit is developing as per plan, but declined year-on-year. Please note that in Q3 2024, we benefited from a tax-free gain on the sale of the shareholdings in Poland of DKK 204 million. Adjusted for this, net profit was up 18% year-on-year in Q3 and year-to-date. Earnings per share adjusted for the extraordinary gain in 2024 increased by 20% in the quarter and 19% year-to-date. Let's move to the cash flow and balance sheet on Page 9. Cash flow is tracking in line with our plans. Operating cash flow amounted to DKK 1.724 million year-to-date and up 18% from last year, supported by strong operating performance. Year-to-date, free cash flow reached DKK 973 million compared to DKK 1.032 billion last year. The decline reflects the one-off proceeds from the sale of our Polish shareholdings in 2024. Furthermore, we are running higher CapEx in 2025, and this will also continue into Q4. CapEx is according to plan, and we expect full year level of around 7% of revenue. Net interest-bearing debt was DKK 6 billion at the end of September, and the gearing ratio was 2.1x EBITDA, in line with our target. Our ongoing share buyback program of DKK 300 million runs until the 19th of December 2025. Finally, return on capital employed is improving, supported by higher earnings and Norway and BeLux are on track to deliver 10% cash ROIC by 2026. Let's move to the outlook on Page 10. Based on our performance so far and our expectations for the remainder of the year with less than 2 months to go, we maintain our full year guidance range. However, we now expect EBIT growth to be in the higher end of the range of 8% to 12%, supported by our continued focus on efficiency and margin expansion across the organization. We still expect full year net revenue growth of 5% to 6%. This reflects an acceleration in Q4 compared to the first 9 months, and this is consistent with trends observed so far in the quarter. The consumer environment remains challenging but stable compared to 2024. This is also in line with our previous expectations. Other assumptions for guidance are unchanged. And with that, I'll hand the word back to you, Lars.

Thank you, Lars. And let's move to Slide 11. Our management agenda remains consistent with what we have communicated earlier. We are continuing to execute our growth strategy with focused efforts across growth markets like Italy, France and international. New markets such as Norway, Netherlands and BeLux is now about fueling the commercial momentum and the more developed markets like Denmark, Finland and Baltics is where the efficiency and cost discipline remained high on focus. We will keep driving operational efficiency across the organization and optimize resources used to strengthen margins further. We keep our focus on delivering on our sustainability targets as well as our long-term financial targets. Now let's move to Slide #12 for the key takeaways. And to sum it up, we delivered a strong Q3 with revenue growth above industry average, a 15% EBIT growth and a solid margin expansion. Our strategy is working. We are growing in our key categories and markets while exiting low-margin business. And as a reminder, this will reduce net revenue by 3.5% in 2026, mainly in Northern Europe, while there will be no impact on EBIT and volumes. Our cash flow and balance sheet remains robust, enabling both investment and shareholder returns. And finally, we now expect to deliver the full year EBIT growth at the high end of the 8% to 12% interval. And with that, we are ready to take the questions. So operator, please go ahead.

[Operator Instructions] And the first question comes from the line of Thomas Lind from Nordea.

Congrats on the very strong numbers here. Two questions from my side. The first one is regarding the sales and distribution expenses. They make up 22.5% of your revenue here for the quarter. As I can see it, this is the lowest, at least the percentage-wise sales and distribution expenses you've had only in 2020 when societies were locked down due to COVID, did you have a lower cost here. So I guess my question is what's driving these very low sales distribution expenses? And how sustainable is this very, very impressively low number? That would be my first question. And then the second question is a bit more on markets. I would like to maybe hear you elaborate a bit on the Dutch Netherlands market. If you could just give us a bit of an update. It seems like it's returning to growth. What is driving this growth? Are you increasing the sales force? Or is it something else, the new slim cans? Yes. So any update there?

So if we start with the sales and distribution expenses, we have been working very hard to optimize our footprint. And of course, within logistics and the way we spend our money in the sales force, that is where we have found a number of efficiencies that is showing in the quarterly numbers. So it is low. Remember, there is quarterly variances between these numbers and do not take one quarter and extrapolate for that. But I think this is a place where we have seen solid improvements. Remember that we have moved some production closer to the end consumer, which, of course, helps distribution expenses structurally. And then we have been looking at smarter ways of doing things within the sales area. So this is an area where efficiencies are paying off.

And then on the question around the Netherlands, there's a lot of moving parts. And we are fairly -- I would say fairly consistently over the last 5, 6 months seen that the net of that is positive for the top line of the business, but it's also supporting our margin enhancement and the buildup of getting to a 10% return on invested capital. And I think the word that I would say that is the most important one is consistency in the strategy that we are pursuing. which is a mix of enhancing the price pack offering in the markets where we do see some elements in the market this year, but where I would say the expectation for the future is on a higher level, meaning '26, '27. That is where we have, I would say, a larger opportunity to enhance that agenda, in particular, in the carbonated soft drink space. It is [Technical Difficulty]

I've just got one really, and I suppose it is elaborating on the question on sales and distribution expenses performance. I suppose I'd just like to get your thoughts on the profit development going into next year. I mean you've now guided to the high end of 8% to 12% for this year. If I look at next year and compare to what we're seeing now, I mean, I think you've spoken about previously expecting a kind of tick up in a lot of these efficiencies and synergies going into 2026. And then zooming out, I suppose we're going into a relatively benign sort of cost environment more generally. You do have this impact from the Pepsi snacks exit, but you've commented that, that won't have any impact on EBIT. So I suppose I just want to get your kind of your take on the moving parts in terms of the EBIT growth development for next year. And I suppose, is there any reason why we should expect any deceleration versus what we're seeing this year given that quite a few things, I suppose, are going to get incrementally more favorable?

I think we will allow ourselves to come with the guidance for '26 in February when we come with the full year statement. I think the way that you should look at it is that we have a robust underlying momentum of the business. And then on top of that, we have -- for a couple of years, we have spent, I would say, above normal levels of CapEx, which, of course, should generate some solid returns. I would say that if there's anything that potentially could play to -- or say, to the negative, then it's the quality of the net revenue. In a market where the beer category is in decline, and you see some of our competitors have been losing value share for quite some time, we do see more, I would say, price allocation in terms of driving business forward than what we have seen, I'd say, over the last 3, 4 years. We have, I would say, a much stronger value focus than what we see from our peers, in particular in the Nordic countries. But we will come back to this in February. Obviously, the underlying momentum remains robust. And then for the rest of it, we need to massage and that's also why that we are sharp on efficiencies on every cost line so that we make sure that our competitiveness is not being diminished. Can you hear us?

Excuse me, Matt, any further questions? Now we'll take our next question and it comes from the line of Andrea Pistacchi from Bank of America.

So 2 also from me, please. The first one is on your confirmation of the sales guidance. Now you've -- at the 9 months, I think, reported sales was up 4.2%. So you -- it implies quite a material acceleration in Q4, which you said. Q4 should be growing around 7.5% to 12% and you won't have the benefit from the first time sort of consolidation of BeLux. So I just wanted to if you could unpack a bit what is behind this acceleration? I mean, I assume you've had a strong start to the quarter. If you comment a bit about the sort of recent trading, what maybe mean to? Is there any seasonality? Will that contribute more trading days? Is there any difference or maybe the snacks business as you -- before you exit the business, are you sort of selling more snacks? That's the first question. I understand that a bit. And then the second one really is about the environment in Europe as we go into next year. So net of the snacks business you're exiting, how do you feel about the consumer environment, the trading environment going into next year? Any reason why there should be any difference in consumer sentiment in, say, Finland and Norway? And kind of connected to this, and it's something you just touched on now in the question about -- you talked about the quality -- potential quality of net revenue. And you said that you see a bit more price allocation to drive business from peers. Do you mean by that, that sort of you're seeing, I mean, peers may be a bit more aggressive on price in order to drive volume? So how is the pricing environment panning out, do you think?

Yes. So if I start with the last one first, yes, we do see, in particular, I would say, in the cola segment that pricing is being used to try to drive performance in, I'd say, our big home markets, 2 big home markets and a bit in the Baltics as well, and it doesn't seem to work. So it's an observation from our side that the behavior has changed over the last, I would say, 4 months or so, but it doesn't help the development for the one that does it, and it doesn't help the overall market. So it is still selective and not a broad development, but it's a different behavior than what we have seen. So that is the observation, I would say. When it comes to the first question on the net revenue guidance, yes, October was a strong month for us. And that means that we are enhancing our flight altitude towards the remaining of the year. I think you should expect international to have a solid end to the year. And then the general momentum in the business indicates that in some of the newer markets like in Norway, that our trajectory on the net revenue is moving upwards. So that is the thoughts around why we believe that the 5% to 6% is still relevant as a guidance interval. On the trading environment -- yes.

Sorry, just on that question. So therefore, it sounds as it's really sort of underlying good momentum of the business rather than potential one-offs that could sort of help you in this quarter, right?

We do not really consider anything as one-offs. And then we would have said it if it would have been a one-off character. On the trading environment, I think as our guidance for the remainder of the year indicates, we are sticking with our assumptions as we laid them out in the beginning of the year, and I wouldn't call out anything materially in the consumer environment or sentiment as we see it right now anywhere, nor to the worse nor to the better. So when you call trading environment, it can be consumer, it can be customers, it can be competition. The competition I already talked about. And I think when it comes to the trading environment with our customers, I think we generally see a very positive tone of discussion in terms of driving value for us, driving value for them and driving value for the consumers. So that is the agenda that we pursue.

Now we're going to take our next question and it comes from the line of Richard Withagen from Kepler Cheuvreux.

I've got 2 questions as well, please. First of all, on the -- can you hear me?

Yes. We hear you.

Okay. Perfect. All right. Perfect. So on the Belgium-Luxembourg market, you talk about stable market share. Is that -- I mean, I should read that positive, right? Because the business has been under some market share pressure in the past. And then also you talk about initiatives to bring the business back into profits what are you doing to realize that. And then the second question I have is on the growth framework. You mentioned that 60% of revenues are covered now by the growth framework. Is that a good level? Are you looking to increase that? And what is the function of the remaining 40%? Is that to be able to offer the full multi-beverage model? Is this predominantly low growth but high-margin revenue? So just some details around that, please.

If we start with the business in BeLux, it is positive that we are maintaining market share because that business has been on a downward trajectory for a couple of years. The team have done an outstanding piece of work in building a winning organization in a very short period of time. We went live on SAP earlier this month, and the team did an excellent job on that. So if you look at what is it we need to do in Belgium, there's a number of things we need to do. So first of all, we need to look at the price pack architecture and make sure that it fits the markets and there's a good amount of work that needs to be done. And then we are moving some of the production to Holland so that some of the products are coming internally from, and that will give a nice cost saving when that is in-sourced. So I would say the plan for the Belgium and Luxembourg market is pretty clear, and there's very clear road map to getting into positive territory for next year. So a good organization that we built in a short period of time and price pack and in-sourcing are the 2 things that will drive benefits in the short term.

And then on the growth framework, I think the 60% is quite a handsome number, I would say. Can we enhance it? Yes, we can probably enhance it. But the trick is also that the remaining part, which is not a part of the growth framework, which is sugar soft drinks and a lot of mainstream beer that we at least keep that on the same level as where it is, so it doesn't become a burden. And this is where some of our, I would say, strong local brands, LemonSoda is an excellent example. So the no/low sugar proposition is growing very fast, but we are also gaining on the sugar variants. So it's not dragging us down. It's actually building on top of what we have. The same goes for the business that we have in Africa on the Faxe 10%. It is not a part of the growth framework as it is not considered as a premium offering, but more a mainstream offering in the African countries. So the growth framework is categories where we see structural growth, whereas for the remainder of it, there's still growth opportunities, but they are of a different nature than in growing markets. So we feel that we are at a good level. Can we enhance it? Yes, we believe we can. And then it's about making sure that you don't lose out on the positions you have in no growth or declining categories. And we have so far been quite good at that, I would say. Yes, so that's how we look at it. Can you hear us, Richard?

Okay. Great. And then maybe Lars Vestergaard, just a quick follow-up on Belgium. I mean, Lars, can you say what the margin is in Belgium? Is it low single digit negative, mid-single digit negative? What's the margin there?

It's low single-digit negative, but let's not get into too much detail because there's a lot of moving parts in that business. At this point in time, there's a lot of things that we are fixing. So I would say that's -- the moving parts are a number into next year. And I think we would be surprised if it's not positive next year.

Now we're going to take our next question. And the question comes from the line of André Thormann from Danske Bank.

Yes. just a few questions from my side as well. First, can you comment a bit more on Norway and specifically the profitability development in the quarter? How has that gone and what has been driving it? And the second is, again, regarding BeLux. Could it already turn profitable in the fourth quarter? That's my question.

If we look at Norway, I think we're super happy to see that we are building momentum on the top line of our business. So when we look at year-to-date, then Norway -- in the Nordic countries, Norway, if you take the whole Northern European segment, Norway is a country where the growth of net revenue is the highest by everybody. And when we are looking at our market shares, both in beer and the RTD/cider category, we have been building momentum over the last half year. So there is a profit enhancement in the third quarter compared to last year. So all of the hard work that the team has been doing is really paying off. And at the end of the day, following the plan that we stipulated out and made in the beginning of the year. So super happy about that. When it comes to BeLux, no, we do not expect BeLux to be profitable in Q4. As Lars said, there are some structural changes that will help us out. Those will come -- some of them from the beginning of the year and others will come when we have the trade windows in -- during the first quarter because they are more price pack oriented. So you should see an improvement coming from Q1 and then getting better during the year of '26.