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

Good morning. My name is Lars Jensen, and I am the CEO of Royal Unibrew. With me this morning, I have CFO, Lars Vestergaard. And together, we will present our first half year result for 2021. Following our presentation, there will be enough time for questions. Now if we now turn to Slide #3. We are very happy to present the highest second quarter result ever for Royal Unibrew. Performance has been strong across the business, providing the resilience of our strategy and our business model as well as our ability to act diligently in a changing environment. The results are realized despite COVID-19 continues to impact our business and despite significantly higher sales and marketing costs. Almost all sales channels are now open, and we are working with our customers to secure supply for all consumers across our geographical footprint. Volumes were 13% higher in the first half of 2021, putting pressure on the entire value chain, but our organization has once again delivered in a challenged circumstance, not least supported by a very flexible and adaptable supply chain. We continue to invest behind the growth opportunities we see in the market. And in combination with the higher sales and marketing costs, EBIT increased by 13% in Q2 to DKK 521 million. This is 6% above the level in Q2 2019 before COVID-19. We raised our full year outlook for EBIT from DKK 1.525 billion to DKK 1.625 billion to an interval of DKK 1.625 billion to DKK 1.7 billion. We'll get back to the assumptions behind our outlook later in the presentation in more details. Yesterday, we also announced a new share buyback of up to DKK 250 million running to the end of the year. Now please turn to Slide #4. In the first half of 2021, we generated an EBIT of DKK 750 million, which is 13% higher than first half of 2020. As stated earlier, it is also 6% higher than what we delivered in H1 '19 before COVID-19 despite negative impacts from restrictions in all markets. In fact, we feel that our business is stronger at all levels compared to before COVID-19. We've proved the resilience of our strategy and business model as well as our ability to navigate safely through the crisis. The gross profit increased to 49.3% in H1 despite gross profit per hectoliter declined by 1%. Both sales and marketing costs and administrative costs increased significantly in the first half, resulting in an unchanged EBIT margin of 19.2% when we compare it to H1 2020. Growth in EBIT is driven by Western Europe and international, whereas our EBIT in the Baltic Sea decreased due to COVID-19 restrictions on the On-Trade. All in all, we produce and sell more before COVID-19. We are generating higher earnings and higher cash flows in a market that is still restricted compared to before COVID-19. That is only possible because of a skilled, dedicated team, colleagues across the business, and I want to use this opportunity to thank all employees for their great efforts. We can now turn to Slide #1 -- sorry, 5. Looking at our volume growth by category, you can see that we continue to enjoy high growth in energy drinks, which grew 36% in the first half of the year. This growth is driven by our focused actions around benefiting from the general market growth in the category, which, among other things, other includes the rollout of Lemonsoda Energy Activator in Italy, a rollout that is progressing very satisfactory. The carbonated soft drink also continued to grow significantly, which is a solid performance as carbonated soft drink has benefited positively from the strict COVID-19 restrictions, which came into place a year ago. The solid performance is created from a strengthening of our already very strong market position across geographies, focused in-store execution at all customers and a growth in the no/low sugar territory. Our malt beverages continues to grow and did so by 15% in the first half of 2021. Sell-out has been higher than sales-in, which is as a result of a destocking because of priorities in deliveries, so we have a lower trade inventory than normal. Cider ready-to-drink volume grew 12% in the first half, steaming from high growth in the Nordics and in Asia. The 10% volume growth in beer in the first half has also benefited from the reopening of the On-Trade channel but also from extraordinary campaigning in Finland in the beginning of the year, which contributed significantly to the growth. Juice and water grew by single-digit percentages in the first half by 8% and 3%, respectively. Growth was higher in Q2 than in Q1 as a result of the reopening of restaurants and hotels, convenience, et cetera. Wine and spirits declined by 6% in the first half of 2021, which is a result of a very restricted On-Trade in Finland, which is the area where we do have a business with wine and spirits at the moment. The business today in On-Trade has been impacted by the lockdown and is a main driver of the lower sales. Now we will turn to Slide #6. It has been a busy quarter with high volumes and pressure on the entire value chain. The very high sales growth has led to some production capacity constraints, and we have also experienced and been challenged by the industry-wide lack of aluminum cans. To remain a flexible supplier with the highest service level, we will secure more capacity. But for now, in the short term, production and procurement planning is more important than ever. The reopening of the On-Trade as well as the opening of the border between Denmark and Germany has also kept us busy throughout the quarter. And towards the end of the quarter, the event business also restarted, although at significantly lower level than 2 years ago, so smaller events, not the big events. On the product innovation front, we have launched, as an example, an alcohol-free version of our iconic original Long Drink in Finland as well as we have launched a plant-based enhanced water under the Novelle Plus brand with proteins. Both innovations tap into the growing demand for healthy and good-for-you products, which is a part of our strategy. In Italy, we continue to roll out our new energy drink, Lemonsoda Energy Activator, which is growing according to our best wishes and reached a #3 position in the energy drinks market during the last week of July after only 4 months in the market and with only about 50% of a weighted distribution potential reached, so an excellent performance by the Italian team. We also broke ground on the new solar panel plant next to our brewery in Faxe, which will generate around 60% of our electricity needs at our Danish production sites. We have also committed to 100% recycled plastic for the PepsiCo products in Denmark by the end of '22 and committed also in July, we expanded that to include also our Finnish business as well. In the first half of 2021, we also spent quite some resources on our strategic development on the M&A front, which was executed in the second quarter and in the beginning of the third quarter. Please turn to Slide #7. We have agreed on 3 acquisitions so far in 2021, where the acquisition of Solera Beverage Group is still awaiting final regulatory approval. In the beginning of May, we acquired Fuglsang, a strong regional Danish brewery with a strong market position in southern part of Jutland, especially within the On-Trade channel on beer, craft soda and premixed cocktails. We believe that we can leverage this very interesting brand portfolio into the rest of Denmark. And in 2021, we do not expect this acquisition to contribute significantly to sales or earnings. At the beginning of July, we also announced an acquisition of MC Energy in France, which had an enterprise value of around DKK 610 million on a debt-free basis. MC Energy owns the energy drink called Crazy Tiger, which has a market share of around 10% in a fast-growing French energy drink market, which is equivalent to a #3 position in the market. In 2020, MC Energy had a revenue of around DKK 100 million, and we expect it to contribute by around DKK 75 million to our revenue in 2021. We believe that we can take the Crazy Tiger brand to the next level through investments in innovation, in the organization and by evolving the brand to become a bit more premium, gaining new customers, new consumers and occasions and thereby, in all channels, leverage or grow an already growing existing capabilities in France. The acquisition also marks the next step in developing our French business towards a multi-niche market instead of being a niche market. We also agreed on acquiring Solera Beverage Group in the beginning of July. Solera is a leading importer and distributor of beverages across Norway, Sweden and Finland with a strong portfolio of international, mainly imported beer, wine, soft drinks and other beverages. The acquisition provides a strong platform for Royal Unibrew to expand the sales of our wide product portfolio into Norway and Sweden, in line with the multi-beverage strategy that we are pursuing in countries like Finland, Denmark and the 3 Baltic countries. It will give us a sales force covering the Nordic region and the Baltic Sea, which totaling around 30 million consumers, which is a doubling of our current footprint in the area. Solera Beverage Group is being acquired from a private equity fund, CapMan, at an enterprise value of around DKK 770 million on a debt-free basis and has around 150 employees across geographies and generates a normalized net revenue, meaning excluding COVID-19 effects, of around DKK 1.3 billion and a normalized EBITDA of around DKK 70 million on an annual basis. But as I stated by saying, the acquisition still awaits regulatory approval, which we expect to come through here in the third quarter. I will now pass the word on to Lars Vestergaard, who will go through the financial performance, the business segments and the outlook before I wrap up before we go into the Q&A.

Thank you, Lars. So if you please turn to Slide #8, please. The performance in Q2 '21 has been very strong. Societies and therefore, importantly, for us, the On-Trade has slowly reopened and supported volumes throughout the quarter. We have still seen and we still will see restrictions in the On-Trade but less than what was the case in the last quarter. The weather was not so too good in the beginning of the quarter, whereas in June, it was warm and supported growth, especially in Denmark and Finland. The warm weather coincided with Euro 2000 football tournament and therefore, also contributed to growth. On the coming slides, I'll return and go more into detail on the different top line drivers. In total, volumes increased by 12% compared to Q2 2020. Price/mix was positive among the other things due to the reopening, which drives both positive channel mix, positive product mix and premiumization. This led to an increase in net revenue of 16% in the quarter. Sales and distribution expenses increased by DKK 109 million compared to last year. Admin costs increased 39% in the quarter driven by a normalization in the cost level compared to last year, but also cost to advisers in relation to the 3 acquisitions we have done so far in 2021. As a result, EBIT increased DKK 58 million corresponding to 13% in the quarter, resulting in an EBIT margin contraction of 80 basis points to 22.6%. For the first half year, the EBIT margin was flat at 19.2%. Free cash flow increased by 19% to DKK 785 million, which is higher than expected and caused by a change in payment terms on excise duties in Finland as well as higher activity across the group. On the later slides, I will go into more details on the components of our free cash flow. Cash flow -- if you turn to Slide #9, please. Cash flow before changes in net working capital increased by 11% to DKK 929 million in the first half of the year compared to the same period last year. Noncash adjustments were almost unchanged, so the improvement in cash flow before changes in net working capital was driven by higher earnings. Cash flow from operating activities increased by DKK 183 million to DKK 885 million in the same period. The increase is driven by a positive contribution from net working capital, which contributed positively by DKK 81 million compared to minus DKK 21 million last year. Net working capital is positive impact by the change in payment terms on excise duties in Finland. Net investments in property, plant and equipment was DKK 202 million, which is significantly higher than last year but in line with expectations. This means that free cash flow for the first half year reached DKK 683 million, which is 16% more than the same period last year. The free cash flow headwinds of around DKK 200 million, which we expected for 2021 at the beginning of the year, has been materialized. But the higher-than-expected growth across the business as well as the change in payment terms in the Finnish excise duty mitigates these headwinds on a full year basis. Please turn to Slide #10. Before I give the word back to Lars for his final wrap-up, I will just take you through our outlook for 2021. As Lars mentioned at the beginning of our presentation, the strong set of result in the first half and the strong momentum into the third quarter has led us to upgrade our 2021 full year EBIT outlook to DKK 1.525 billion to DKK 1.625 billion to a new guidance of DKK 1.625 billion to DKK 1.700 billion. With the continued reopening and normalization of our markets, we will continue to increase our sales and marketing expenses towards more normalized level, build our brand equity further and invest in growth opportunities as we see them across the market. We have increasing raw material and freight costs in the market as we speak. And we have increased the headwind from DKK 50 million to DKK 75 million in our guidance, and these added costs are included in our new guidance for the year. We expect the positive contribution from MC Energy in the second half of 2021 and potentially also from Solera Beverage Group. The biggest risk on earnings expectations short to medium term remains COVID-19 restrictions and potential reintroduction of stricter restrictions or lockdowns more than we have seen today. But our main scenario is that the restrictions will impact our business a lot less in the coming quarters compared to what they have done in the last 6 quarters. The low end of the guidance includes the risk of such negative development in COVID-19-related restrictions, whereas the top end includes a continued reopening of societies throughout the year. The top end of the guidance also includes a quick approval of the Solera Beverage acquisition as well as no further deterioration in raw material prices. When it comes to raw material prices, the low end of the guidance do include scenarios with higher prices than what we currently see in the market. With that, I will give the word back to you, Lars.

Thank you, Lars. Now please turn to Slide #11. Now I'd like to conclude this presentation by outlining that we -- that this is our key points that we are focusing on in the coming period. Clearly, it is very important to us that we integrate Fuglsang and Crazy Tiger as quickly as possible so that we can execute on the business plans we have set forward for these investments. It is business plans which includes significant investments into brands, innovations and the organizations. In case of Fuglsang, we want to invest into a much wider distribution in Denmark, thereby growing the market position significantly. With regards to Crazy Tiger, it's about investing behind the brand and the organization and the spread of the brand in France. Our strategic focus remains set out on our 6 growth drivers that we went through in details at the Capital Markets session back in May. The very high activity level across the group has led to some capacity constraints. We have also experienced and seen challenges in the industry-wide lack of aluminum cans as well as a global shortage of transportation capacity. The pressure on our production, procurement and logistic operations to secure the flow of products around the world is significant. It's therefore important for us that we spend enough time and align as much as we can with everybody around the whole value chain, from procurement to production and so on. Related to these challenges, it is a need for us to secure additional production capacity to remain the preferred partner for customers and consumers and to stay flexible for the future. We also need to continue to manage the CapEx requirements that are tied up to our CSR ambitions. We have ambitious targets in that area, and we'll be able to reach that, so we need to -- for us to be able to reach that, we need to do a number of dedicated investments. And with that, I would like to turn back to the operator, and we are ready to check your questions. Thank you.

[Operator Instructions] Our first question comes from the line of Jemima Benstead from Citi.

Two questions from me, please. Firstly, I'd love to hear a little bit more about how confident you are in managing the input cost headwinds, particularly those higher in 2022. Can you talk us through the levers that you have to pass the pressure through to consumer? Basically, how confident are you in your pricing power? And then the second question, you saw margin pressure, particularly in Finland and the Baltic due to those high commercial investments. I'm interested to hear a bit more about which categories this investment was focused on, particularly given your market shares were unchanged in the period. Are you getting the return that you want from this commercial investment?

Yes. Thank you, Jemima. I think if we start with the input costs because I think that's a topic that we have also seen in the words that you have all written so far as one of the biggest pillars. I think if you look at it from a helicopter point of view, I think we have proven throughout the last many years that we are, I would say, pretty capable in the whole area of working with price pack strategies together with our customers, finding the right package for the right moment at the right price to the consumer, and thereby, over time, I would say, maximize the opportunities to create value for everybody in the chain, even the consumers in that respect. That will continue unchanged. Undoubtedly, I would say that this is a new situation. And the last time where we have experienced, call it, significant inflation is back -- before the financial crisis 2008, 2009. So what does that mean? That means that consumers need to learn about new price points. We probably need to introduce even new pack sizes. We need to work on the different priorities that we have between the different type of products that we have, and our motion for all, talking about the multi-beverage markets, to a lesser extent, the niche markets where it's more individual products. So I think we are confident that there is an open-minded attitude towards this in the market. So when we talk to retailers, they know, they acknowledge that price adjustments need to be made. What we, of course, do not know is if we hit price points where the consumer starts to say, "Hmmm, that looks too expensive, so I would rather do something else." So there's a number of learnings that we will have to go through during the period where the prices will be adjusted. But I think we have the tool box. I think we have the right mindset to -- I would say, to deal with it in the broader sense. Yes, I don't know if you have anything to add to that question, Lars.

No, I think we are targeting to ensure that we mitigate the pressure by all the tools that Lars just mentioned. So if we look at our hedges, they are -- a lot of the hedges that we have been using this year have not been extended into next year at the same attractive prices as we've had this year, so there will be a step-up on prices. And of course, as Lars mentioned, the confidence we have in managing next year's profitability, of course, also relies on what competition is doing. So our ambition is that -- of course, that we mitigate the entire input cost pressure by all the tools that Lars mentioned. If we take the question on the Baltics, I think we are actually pretty confident in the development in the Baltic area. We had a strong development during the quarter where the restrictions was pretty tough on the Baltic business in the beginning of the quarter. But as we exited the second quarter, the impact was actually a lot less. So I think we do not see any warning signs in the Baltics at all. It is a question of a lot of restrictions being in place this year. A lot of them have been lifted. The run rate is higher. We have seen a small introduction -- reintroduction of some restrictions in On-Trade in Finland. But in the big picture, our business in Finland and the Baltic countries is back to normal level. So this is, what you can say, just comparison figures and higher investments behind the innovations that we've done. So no warning signs in Baltics at all.

And the next question comes from the line of Richard Withagen from Kepler Cheuvreux.

I have 3 questions, please. First of all, yes, you mentioned your production and your packaging lines. What are the long-term implications from higher capacity utilization on your packaging lines? Is it simply investing more? Or do you need to increase the flexibility of your production setup? That's the first question. Second question is, yes, coming back on sales and marketing spending. How does it compare in first half 2021 to the first half 2019? I guess it's still lower. But what is the outlook? Should we expect as a percentage of sales for it to be back to 2019 levels in 2022? And then the last question I have is, yes, indeed, coming back to the input cost environment. You're mentioning DKK 75 million impact in '21 and a significantly higher impact in '22. Maybe -- I mean can you quantify that? Is it going to be double the impact next year? Or are we even looking at a bigger impact?

Thank you, Richard. If we look at the overall setup of our, call it -- of our geographical footprint with the production lines, et cetera, et cetera, we have actually, already this year, I would say, been able to create a lot of flexibility between the sites. So we have had certain lines and brew houses and so on and so forth. We have had ample capacity like in Italy. We have also had ample capacity for certain packaging types in Finland as an example. And both of these areas have helped out on producing more for the entire group. So that's the -- call it, the first year in 10 years where we have utilized our platform more cross-border than we have ever done before. That has created a lot of learnings in terms of how we can, call it, optimize our footprint and also create in reality a better return on the CapEx when we then do them because then that means that when we buy a new line, then we can reallocate volumes and thereby save a lot of logistic costs and at the end of the day, makes it a more -- a better investment faster. I think, overall, if you look at our footprint, we have 2 relatively large sites today, so our Lahti site in Finland and the Faxe site in Denmark. And they are, ultimately, the center of our capacity expansions. There's a limit to what we can do to a number of the other sites because they are located in city centers where it's difficult to expand significantly. So by nature, you would see that most of what we do would be in these areas. And when it comes to Italy and France, we have a lot of flexibility still. So this is more in the Nordic space that we are focusing our expansions, so to speak. When it comes to the -- with the marketing costs, and of course, there's a difference in this respect to -- between the sales costs and the marketing costs because when you look at the marketing costs, they're more consumer-oriented, if not 100% consumer-oriented, whereas the sales cost is more channel-oriented. And given that we have had restrictions in On-Trade, as an example, we have had convenience where you have had less traffic and so on and so forth, by nature, you would see that sales costs and the activities that we conduct there deviates compared to the restrictions, right? So that's the comparison that you should do. When it comes to the marketing costs, we are -- I would say, we are probably, all in all, around the same level as we were in 2019, but we are about 30% higher in H1 than we were in 2020. And that's in spite of the fact that the savings only came in from about mid-May, end May because that we had to do the marketing that was already booked, we had to conduct that, so April, in spite of the restrictions, was a full month and then it faded out during May. So we are spending significantly more, which is one thing. The other one is, of course, the effect of what we do. And I think we can praise our marketing teams on the effectiveness of what we do. So that's the other piece of comparing to '19 versus '21, but it's also how much do we get out of it. And I think net, we are getting more for the money that we spent.

And regarding your question on the input costs, maybe just to give you the full picture, there is a shortage of a number of the categories that we are using for our products. So the key priority for us is actually to ensure that we actually get the supplies. There is a shortage of cans. There is a shortage of sugar, of dextrose, of many different categories. So the first priority of our teams is actually to secure that we can get the raw materials. And so far, the team has done a good job in this. But it is a very unusual supply market we have, and it's not a market that is in equilibrium in any way. Then when it turns -- in terms of the prices that we are paying to our suppliers, they will increase as we move through the year. So the comparison figures for the rest of the year will be impacted more by higher input costs than what we've seen in the first part of the month. So -- and then when we exit the year, we will be paying more or less market prices on most commodities. And the way we are managing is, of course, that we have a very active dialogue with our sales organization about when do we go out and manage the price increases. Most of them will done -- to be done with the annual negotiations with the big retailers. And of course, there, we will see how much we can compensate by price increases, but we will also be working on efficiencies and mix changes. So there will be many different tools that we can use to ensure that we can mitigate the pressure from input costs next year.

And the next question comes from the line of Fredrik Ivarsson from ABG.

First question on volumes. If we look at the organic volume growth in Q2, I think it was 5% versus Q2 '19 and the same number in Q1 was 11%, so I guess a bit of a slowdown. I'm curious to hear whether that's a good run rate to expect for the coming quarters or do you expect that to accelerate in H2?

I think the movable parts are relatively big here given COVID in and out. I think when you look at our run rate in a 12 months' perspective, we are high single digit or something like that. There might be some individual swings between quarters. And that is also the reason why that we talk about capacity constraints, we have never seen such a high growth so fast. And a part of it is, of course, deriving like in the beginning of the year from the Finnish beer campaign, but it's also driven by the market share gains and so on and so forth. We are not so volume-driven. Of course, it's important to create efficiencies in some parts of the supply chain, but we are more focusing on what kind of a revenue that we generate out of it. I am not going to guide you, Fredrik, on -- if this is 5% or 6% or 7% or 3%. I think it ties up to the ambitions that we want to grow, we want to gain a little bit of share and we want to be smart on our price pack strategy. And then that, at the end of the day, derives a number of [eggs]. And just to give you a little bit of a view on this is if we grow at the magnitude that we do now, we need to add another production line every -- kind of like every 9 months. So on one hand side, of course, volume generates more business. On the other hand, it also generates an enormous pressure on the organization to secure that there's available capacity. So we are more net revenue focused than we are volume focused.

And one more question from my side. So the implicit guidance for H2 is a quite steep earnings increase in contrast to H1. Can you elaborate a bit on the key drivers for the implicitly, I guess, stronger margin expansion than we saw during the first half of the year? Is it more of the same in terms of channel and product mix? Or what should we expect in that sense?

Yes. I think one thing we should really remember is how last year actually happened. If you remember, third quarter last year, actually, most channels were trading at a fairly good level. On-Trade was open. And we had to spend any money on commercial investments, like all competitors did. So we had a quarter with good revenue, low investments. So a very strong quarter 3 last year. So if you look at the comparison between last year and this year, in quarter 3, you should not expect a significant step-up this year. But when it comes to quarter 4, there was a very strong lockdown in more or less all On-Trade segments throughout our markets. But actually, also the restrictions were so tight that they impacted Off-Trade in the fourth quarter. So the fourth quarter is easier comps compared to the third quarter. So that's one thing you have to really bear in mind when you think about the year-to-go number for our business. The full year guidance also includes what we have delivered up until mid-August. And remember that the weather was very, very nice in both Denmark, Finland, Italy and the Baltic countries. We only had France in our footprint where we had some bad weather, and that's a small market for us. So we had good weather in July, and quarter 4 is hopefully not impacted by the same restrictions as we saw last year.

Right. Yes. Sorry, I was a bit unclear. I was actually referring to '21 versus 2019 earnings, which implicitly is quite astonishing if you're delivering on your guidance here. But I guess the answer will be the same. So I'll leave the queue for other guys.

Yes, but -- yes, I think just maybe concluding on this topic. There is so many movable parts and you get more and more every day kind of. So it gets more and more difficult to really make a -- by element, make a comparison to 2019. And that is also why Lars is talking about it the way that he's talking about it. Some things you can compare to '20, other things you can compare to '19. I think the ultimate piece here is that we are growing our business, in principle, in all our geographies, so we have a good momentum. And as we have shown you on the volume slide in the deck that we went through, we are growing in the categories that is growing. So we feel that we are well placed. We are investing ahead of the curve. And when we are talking about investing ahead of the curve, you always measure that on a share to voice -- share of voice basis. So it's not always dollar to dollar, but it's also relatively to how your competitors spend in the market. And that's the formula that we pursue. There might be some changes between quarters, but it's the 12-month kind of horizon that you should put on these things on a rolling basis.

And the next question comes from the line of Søren Samsøe from SEB.

Firstly, I have a question on Baltic Sea and EBIT margin which was down, I think, 340 basis points in Q2. How much of those basis points was due to the launch of Novelle Pro and the energy drink original in Finland? And should we expect a similar amount of marketing costs in Q3 and Q4 in Baltic Sea?

I think, Søren, the margin discussion in the Baltic Sea is purely because of restrictions. So when we talk about marketing spending it is that we have not cut down on our marketing spendings while we have seen the restrictions because we believe in the innovations and by the -- and also as a starting point, these innovations are more retail-driven. Novelle Pro is more convenience-driven. So even though that people are traveling less in Finland and buying less products in convenience, we have not postponed the launch. We have not cut down on the spending in the launch phase because this is for the long run. So you can say that On-Trade is down both in Finland and in the Baltics, but we haven't changed our innovation plans and have kept spending at the right level for the future earnings. And we have -- in the future, you said that, so how does that look going into the second half, we have the exact same view. That was also -- if you go back to how we treated second half last year, that was exactly the same view. So in spite of the fact that On-Trade closed down in most geographies in November, December last year, we kept spending the marketing money to make sure or to increase the likelihood that our flight attitude going into 2021 would be either the same or enhanced. Now it has been enhanced, so I think we came through successfully in terms of what we did last year. And we have the same philosophy around what we do this year. And that's not only in the Baltic Sea. This is something that we basically do across all geographies.

Okay. I'm not sure that it's completely clear to me. But -- so is it fair to assume a margin decline in second half in Baltic Sea?

We are not going to guide you on specific segments and margins. I think what is important here is that overall, as a totality, Royal Unibrew is growing. There are some countries where the governments are a little bit more harsh on the restrictions. And even though that that's the situation, we are -- as it looks right now, we're not going to change our plans in terms of how we execute in the market because we do believe that it is the long term that matters and not the short-term optimization of a quarter. And that might lead to that there will be a small margin decline in one of the segments due to that, which, in our mind, is okay because we are not, as I said, optimizing the specific quarter but looking at how we are creating a flight attitude of the business going into the next years.

So I think just to -- maybe just to explain it in a slightly different way but the same meaning. Our target is not to, what you can say, deliver profit by quarter. It is to ensure that the business grows as much as possible in the medium term. And as Lars mentioned, the commercial part of money we have, we allocate them to the best growth opportunities we have. The growth opportunities we had in Finland were actually pretty good and have delivered as expected. Then there are restrictions in Finland in the same quarter, which means that the EBIT margin in Finland is not as high as it was previously. But that's not, for us, a warning sign at all because it's, what you can say, the lack of top line is driven by restrictions. But the growth in the new innovations we've had are actually pretty solid. So when you look at it in the long -- with a long-term view, it is exactly where we would like it to be. So again, no red signs in the Baltic Sea. And when you look at the -- from the beginning of the quarter to the end of the quarter, the performance was pretty strong when we exited the second quarter.

Okay. Then my second question is on the group level, on the gross margin, I think it's up around 170 bps in Q2. How much of that is due to opening of On-Trade?

I think you can -- if you compare the markets -- market last year versus this year, it is a completely different environment, where last year, people were afraid of losing their jobs. You saw a huge volume in Off-Trade. You saw a movement to big packs. Where this year, you've seen, in many places, a fairly normal consumption with On-Trade opened and with some level of convenience, albeit not back to old levels. So I would say it's a lot about channel mix that drives the improvement in margins in the second quarter.

There's no structural -- if you look at it market-by-market, there's no structural change in the specific market.

Our next question comes from the line of Fintan Ryan from JPMorgan.

Lars, 2 questions for me, please. Firstly and I guess sort of following on from the last question, given that in your market the Off-Trade and the On-Trade channels are sort of getting back to pre-pandemic levels, are you starting to get the sense that maybe some of the consumption trends that have helped your brands over the last 18 months might reverse? And I'm thinking like maybe people -- particularly the raw material inflation environment is picking up again. Should we expect to see private label coming back gaining share? Or what sense are you getting from your retail customers about how they would be playing their own sort of promotional strategy and mix? And then secondly, just with regards to the MC Energy acquisition front as well as the energy launch in Italy, wondering if you could share any sort of any early learnings that you've got from the businesses there. I appreciate it's still very early days, but has there anything there changed your approach to like thinking about how you'll go to market in the French market, like leveraging the Crazy Tiger brand with the Lorina brand, in particular, in France?

If I try answering the first question, there was a number of questions, I think, in the question. But I think the most important one is a topic around how will consumers behave -- sorry, private label discount, low end, low mainstream versus branded and premium. I think the general rule here or the general observation that we have is that when you have a low -- relatively low unemployment rate, consumers are less interested in buying into low-end propositions. We have built -- there might be differences between markets. But in a couple of our big markets, we have clearly seen a correlation between the unemployment rate, call it, slash the consumer spending power and the likelihood that they will take a branded beverage product instead of a low-end product. And if you look through how, I'll call it, all of the Nordic markets that they look right now, they're generally -- the consumers are generally in a healthy position. And that also means that our key hypothesis, back to Jemima's first question, around how we -- how do we feel about passing on to the consumers, I think if you look at it from a consumer perspective, you probably do not find consumers in a better state in the Nordic countries to take different price points, whereas if you look at Italy, then it might be slightly different. The same in France, but that's a different type of business because it's a niche business where we do not have the same benchmarking versus competitors. So that's -- it's a totally different mechanism. Also, in terms of the percentage of price increase that you need given that this is premium-priced products, you would normally -- you need to increase, prices will -- from a -- just from a pure mathematical point of view, will, of course, be less. So there will be differences between categories. But we believe that if you look at it relatively seen, it will probably be the toughest for the low-end producers and the private label producers given the relative impact that they will see on their business compared to guys like us operating in the branded business.

And regarding MC Energy, I think we've had a pretty good start to the -- to taking over the business. So we've had it for a couple of months. It's been in the middle of the high seasons. It's been in the period where the French team have been on holiday. So of course, what we've been focusing on is to secure that they continue to grow at the pace that they've been growing at in the past. The hypothesis on this acquisition is the same as when we took it over. It is to, what you can say, integrate the business into the Lorina organization, have more salespeople out in the field, make certain we have more salespeople that put our products on the shelves and thereby both increase the sales of Crazy Tiger but also of Lorina. So I think the case regarding MC Energy is the same as when we took it over, and it's looking very interesting.

And a comment on Italy and the Lemonsoda Energy Activator. I think we have been confirmed that consumers generally would like to have a local alternative on the shelf. So the trade has embraced us and the consumers have embraced us. That means that when we are benchmarking our flavors to, call it, the top performers in the market, we are getting very close to the same level of rotation at the distribution points that we have achieved. The traders have taken generally the expansion of energy drink on shelf very positively. So they are shrinking the space for sports drinks and then they are increasing the shelf for energy drinks, which is slightly different than what we have seen in the Nordic countries where they have been squeezing more the CSD space to give energy drink more space. So I think, all in all, a very positive journey. And as you would know, this is the first time that we take Lemonsoda outside of its core space in terms of product proposition. So we also, in that respect, of course, takes a number of learnings, which could be beneficial for the future. So we are pretty optimistic still, as we talked about in May, on the energy drinks category. We are pretty optimistic about that. Generally, we are optimistic about our own ability to perform in the category.