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

I would like to welcome you to this presentation of Royal Unibrew's annual results for 2021. My name is Lars Jensen, and I'm the CEO of Royal Unibrew. With me this morning, I have CFO, Lars Vestergaard, and we will present the results before taking your questions. Now if we turn to Slide #3. 2021 was the first year with THE PREFERRED CHOICE strategic framework, which yielded very successful results. We continue to bring relevant products to the market, expanding the choices for our consumers, which is reflected in continued market share gains across our categories and geographies. I'm very pleased to see that the broader portfolio and higher service levels towards our customers are recognized, and we have further improved our customer ratings in 2021, which again has led to expanded and new relationships across our geographies. We have also improved on sustainability. We are still at the early stage of a long and necessary journey, but find great pleasure in recognition from Sustainalytics that has rated us at the absolute top of our industry, giving us a low-risk recommendation. On the backdrop, we delivered the highest earnings in the company's history. We increased our EBIT organically by 6%, leading to 10% earnings per share growth despite headwinds from COVID-19, increasing raw material prices and more. Our cash flow was very strong and paved the way for another year of increased redistribution to shareholders. Lars will take you through a more detailed presentation of the financial results later in the session. Acquiring companies is a core part of our DNA. And historically, we have created significant value through acquisitions, a topic I will return to later in the presentation. In terms of acquisitions, 2021 will be remembered as an extraordinary busy year, and we signed 6 deals during the year. And as you know, we also signed Hansa Borg in the first week of 2022. We still lack approval from the competition authorities of Hansa Borg and Aqua d'Or, which we would expect to get during the first half of 2022. With the acquisition of Solera Beverage Group, we established new multi-beverage platforms in Norway and Sweden, while we -- well, Crazy Tiger made a very interesting entry into the French energy drinks category. Please go to Slide #4. Talking about the energy drinks category, it continues to grow significantly, and we experienced revenue growth of almost 30% in 2021. Growth was solid across all markets, and the category now constitutes 2% of total group volumes. The profitability is among the highest in our portfolio, being more than 3x as profitable as beer on an average basis and on a gross profit per hectoliter basis. In 2021, we introduced Lemonsoda Energy Activator in Italy and, as said before, added the Crazy Tiger brand to our portfolio in France. We benefit from the significant conversion into no-sugar and no-calorie carbonated soft drinks as we generally have higher market shares in no sugar than in sugar through a strong portfolio of own brands combined with brands from our partners like PepsiCo. The no/low sugar segment in carbonated soft drink and energy drinks increased by 23% compared to 2020, which means that our shares of no/low CSD and energy drinks increased to 53% of total volumes in these categories. Low/no alco beverages are still relatively modest in most markets in terms of size. However, growth rates are highly led by significant improvements in test profiles of low-alco products. No/low alco beer and ready-to-drink volumes increased by about 25% in '21, and this category now constitutes about 3% of the total volume in these categories. The cider and RTD category is growing as it taps into consumers' increasing demands for convenience, quality ingredients, premium products and new drinking occasions. This means that products like premixed cocktails grow significantly. The cider/RTD category grew across all our markets, supported by our strong market positions in especially Denmark and Finland and with brands like Original Long Drink, Nohrlund cocktails and SHAKER. We see the category taking share from beer and spirits in the Nordic countries. We continue to see an interesting future for enhanced waters as consumers increase focus on healthy and better-for-me products. The enhanced drinks category, which we believe over time will get closer to the energy drinks category, developed positively in many countries. However, it's still a small category. Enhanced drinks are popular in Finland. And our Finnish brand, Novelle, continues to take the lead in the market. The enhanced drink category is also doing well in countries like Sweden, and we expect that this will gain momentum further in the Nordic region overall. We increased our wine business through the acquisition of Solera, and the organic development relates as -- the organic development relates primarily to Finland. We keep our volumes even though that our portfolio is quite On-Trade focused where COVID have impacted negatively. And then the last category is juice, where we saw modest growth rates in a category that was hard-hit by COVID. If we turn to Slide #5, please. We are building a stronger Royal Unibrew these years. We identified 6 growth categories in connection with THE PREFERRED CHOICE strategy. We just went through them, and we are directing significant commercial investment towards these opportunities. These commercial investments are a solid foundation for our aim of growing faster than the market in all categories. Overall, consumers are not drinking more beverages, but habits and demands are changing. New categories evolve, and we want to be ahead of the curve and meet the consumers. Not all categories are growing at the same speed in all markets. So the odd for us lies in selecting the right priorities in the individual markets. We have also created a true pan-Nordic multi-beverage platform, which we believe will drive significant growth in the medium to long term. I think we have a strong business model in the Nordics with an even broader portfolio and channel coverage that will strengthen our relationship with our customers even further and deliver relevant products for our consumers. We also expanded our business in important geographies like France and Italy. We continue to work hard on our target to be among the world's most sustainable beverage companies. In all parts of Royal Unibrew and every day, we are looking for ways to reduce our environmental footprint, to find more sustainable solutions for our customers and more sustainable and healthier products for our consumers. We, therefore, continue to support the UN Global Compact initiative. And in addition, we have decided to also enroll in the Task Force on Climate-Related Financial Disclosures as well as the Science Based Targets initiative. Our impact on the world and our willingness to reduce the negative part of it is strong and can be felt throughout the company. We are entering 2022 as a stronger company, and we therefore look into a future full of opportunities, a future with a higher level of commercial investment and, thereby, a future with continued growth. And especially in these times of turmoil, one thing is certain, and that is that we will not optimize earnings short term by under-investing in commercial opportunities, but we will maximize the medium- to long-term potential by overinvesting ahead of the curve in growth -- in the growth opportunities we see across categories and geographies. And with that, I will turn over to you, Lars.

Thank you, Lars. So if we could turn to Slide #6, please. Our organization performed very strongly in the year despite increasing inflation and COVID restrictions. We delivered organic growth of 9%, especially driven by high growth in the International segment and Western Europe. The Baltic Sea segment was negatively impacted by COVID-19 restrictions throughout most of 2021. In the fourth quarter of 2021, organic volume growth amounted to 6% with the highest growth in Western Europe and International. An organic price/mix of 3% in 2022 resulted in an organic revenue growth of 12%. The Baltic Sea segment contributed the most. In the last quarter of the year, all segments comes due to significant price/mix, resulted in an organic revenue growth of 18% in the quarter. EBIT grew 6% in 2021, amounting to DKK 1,652 million, the highest level ever in Royal Unibrew's history. M&A contributed 3 percentage points to the reported growth. In the fourth quarter, organic EBIT growth amounted to 10%, primarily driven by Western Europe. If we look at the challenges faced with restrictions and inflation during 2021, we are satisfied with the results. The EBIT margin declined by 1.8% to 18.9% in 2021, which was a result of COVID-19, increasing input prices and dilution from acquisitions. We also delivered strong cash flow generation of DKK 1.296 billion in 2021, a decline of 8% compared to 2020, which was extraordinarily high due to one-offs. If we turn to Slide #7, please. This slide gives a view on the development win within the business segments, starting with Western Europe, which can be seen -- which have seen impressive double-digit organic growth rates in both volume, revenue and EBIT. In Q4, the business had very high activity levels driven by strong momentum and less COVID restrictions relative to 2020. Denmark had a strong momentum throughout the year with some positive impact from staycation and generally strong execution across categories and channels. Italy delivered the best results since more than 10 years in 2021 in both On and Off-Trade as we experienced significant growth in all categories leading to value market share gains in all 3 product categories during the year. In France, Lorina continued to gain market share in Off-Trade, but was also listed in around 3,000 bakeries as the first step into the convenience channel. Crazy Tiger continued to its strong growth in volume and market shares following the acquisition. In the Baltic Sea segment, volume and revenue are 3% and 6%, respectively, in 2021, whereas EBIT had declined by 5%. In Finland, continued restrictions in On-Trade muted the development. We continue to see a premiumization of our beer portfolio and the RTD category. Original Long Drink grew compared to 2021. In the Baltics, we continued to increase our share of above mainstream beer in our portfolio, mainly through development of the Latvian Bauskas brand; whereas the rollout of energy drink, CULT, has reached a market share in the Baltic region of 8%, which is roughly double up from 2020. We continue to see strong demand for our products in the International segment. Sellout in the markets we operate in continues at a high pace, and volumes and revenues are significantly higher than last year, both in the quarter and year-to-date. The International segments have been strongly impacted by higher freight costs and capacity constraints in 2021, resulting in a significant EBIT margin decline. The performance in all different segments are quite different and shows some very different dynamics. The performance in Baltic region is very much driven by restrictions compared to 2020. And then similarly, a substantial part of our business is On-Trade and convenience-related. So we are happy that all restrictions have been lifted in Finland during the last days. Please turn to Slide #8, and a short comment on the EBIT development in 2021. As I said, EBIT increased 9% to DKK 1,652 million compared to 2020, which was the highest level ever. Around 3 percentage points of this was related to positive contribution from acquisitions closed in 2021, whereas the organic part was the remaining 6% of the reported growth. The organic growth included significant headwinds from input price increases, higher sales and marketing expenses and investments in our organization, meaning that the underlying momentum in the business was very strong in 2021. So we have placed our organization for a solid performance, and we have a very strong starting point commercially for 2022. Please turn to Slide 9, and I look at the cash flow. Our cash flow before changes in working capital increased by DKK 156 million to DKK 2.024 billion, which was mainly driven by a net result which was DKK 100 million higher than the year before. Changes in working capital was positive at DKK 104 million. The positive impact came from changes in duty payment dates in Finland and higher activity levels. Our CapEx was higher in 2021 than in 2020, leading to a free cash flow before M&A and financing, which was DKK 118 million lower than 2020. The free cash flow was extraordinarily high in 2020, positively impacted by extraordinary beer campaigns and COVID-19-related channel and contract mix changes and a low CapEx level. Please turn to Slide #10. So if we look at what goes on in the world right now, we're just going to try to explain a little bit about what -- how this impacts our business. It is, of course, early days, so all these comments you have now are gathered throughout the last couple of weeks. So if we just look at it, if we look at our sales to customers in Russia, Belarus and Ukraine, it accounts for roughly 1% of group earnings and is, therefore, a manageable part of our business. Only a small part of our supplies comes directly from Russia, Ukraine and Belarus, and we are in progress to move this sourcing to other suppliers. This impact will be limited. The biggest exposure comes from inflationary pressure, which is mainly driven by energy, aluminum, et cetera. For the year, we have hedged the same level as we would normally do at this time of the year, which means that we had open positions. On top of this exposure comes from indirect exposure through our suppliers' conversion costs, primarily aluminum cans, malt, glass bottles. These are all energy-heavy industries and with a substantial part of this has fixed price agreements. But clearly, our suppliers will be under severe pressure due to this cost pressure. And then finally, we also see a risk, they were in the right effects from increased competition for raw materials stemming from other categories as well as changes on commercial behavior. So these are the impacts we can see from the geopolitical uncertainty at this point in time, which have impacted our guidance as we will go through later on. Please turn to Slide #11. Let's start with the fact that uncertainty is much higher than normal, and the guidance reflects this. Fundamentally, we see that we are gaining share in all markets and that our investments into growth is working. We do believe that we are on a very promising journey, and we continue along the same priorities to grow market share and premiumize our portfolio. And the outlook for 2022, we expect an EBIT in the range of DKK 1.65 billion to DKK 1.8 billion in 2022 based on a revenue of 11 -- DKK 10 billion to DKK 11 billion. The expected EBIT range has been lowered by DKK 100 million due to the inflationary risks related to geopolitical developments happening over the last week. During 2021, many raw materials and other input costs increased in price. The outlook was based on the market prices as of mid of February 2022. We have increased prices towards our customers to mitigate the impact from higher costs, and the assumption behind our outlook is that gross profit per hectoliter is broadly unchanged in general, including mix effect. The DKK 100 million is an early estimate of the impact from the unfortunate events happening in Ukraine after mitigation efforts. We have not factored in any down trading from the general higher inflation letting -- meeting our customers, and we assume that spending power is fairly intact due to the low unemployment rates in our core markets. The outlook assumes impact from COVID-19 in the On-Trade channel in the first quarter of 2022. It assumes a normal summer weather and traveling activity back to normal. The top end of the guidance assumes that price increases neutralize the headwind from higher input costs, no impact on consumer spending and behavior and no material COVID-19-related restrictions beyond the first quarter of the year. The low end of the guidance, on the other hand, assumes some negative consumer reaction to the higher prices, increased competition and/or COVID-19-related restrictions beyond the first quarter of the year. Any significant input price increases due to current geopolitical uncertainties assume to be covered by further price increases or cost mitigations. We assume that we will see no major supply chain disruptions deriving from the geopolitical situation. And finally, we expect CapEx to remain around 5% of revenue also in 2022 and the tax rate to be around 21%. Please turn to Slide #12. Despite having made dilutive acquisitions in 2021, we maintain our long-term EBIT margin target of 20% to 21%. The acquisition of Solera Beverage Group will dilute our group margin by roughly 2 percentage points, and the acquisitions of Aqua d'Or and Hansa Borg will further dilute the EBIT margin when they are approved. Contrary, our well-established markets are expected to continue to deliver EBIT margins at least in line with our long-term margin targets. Our ambition is to build strong platforms for future growth in our new markets by investing in organizations, IT and multi-beverage competencies. This means that in a scenario with no further dilutive acquisitions beyond what has already been signed, it may take up to 5 years before we reach our long-term EBIT margin target. This reflects our belief in our ability to expand EBIT margin as we realize synergies from recent acquisitions, secures efficiency improvements in our existing business and benefit from investments into selected growth opportunities while expanding our partnerships. If we acquire a sizable margin dilutive business during the coming years, this will likely move the time line or we would need to calibrate the margin target. It all depends on specific assets, the timing and the synergy potential, et cetera. On the coming pages, Lars will run through the time lines of 2 earlier integrations, which will indicate how we create value once we acquire a business, but also that it takes time for the full potential is achieved. And with that, I would like to turn the word back to you, Lars.

Thank you, Lars. And all acquisition cases are different. And we would like to take you through a bit of financial on 2 of these M&A cases from the past years. The first one is the Hartwall acquisition. And what you can see on the left-hand side in the -- on the slide here is the net revenue development where we focused our efforts on the efficiency agenda through the first 4 years of the ownership. And that was where we adjusted the organization to fit the Royal Unibrew business model of a strong local ownership, implementation of our IT platform and enabling a performance management model. So the development in the net revenue was 0. The next 4 years, which is a period from 2017 and until today, has been much more focused around the commercial agenda and the quality of the net revenue. And during this period, we have gained -- we have grown significantly in the ready-to-drink category, in the enhanced waters and within premium beers. We have a -- but also a part of it is de-prioritization of products with lower margin. The conversion into profit, which is what you see on the right-hand side, it clearly illustrates that we have been able to create a lot of value by operating the business better than the previous owner and that we have converted that into competitive power that has driven quality of the top line over time with a more premium portfolio and with a better usage of the assets, which is also what we call the operational leverage. A part of the improvement is from the better usage of the equipment and lower amortizations over time, and some of them ran out after 5 years. If we go to the next slide, #14, that gives some color on the Crodo LemonSoda acquisition and the additional impact on the beer business in Italy. On the left side, you can see that we have increased the revenue by 31% since we acquired the business. Secondly, that 13% out of the 31% comes from higher selling prices, so higher net revenue per volume. The rest is then volume growth, which sits both inside Italy but also outside of Italy. Crodo was not a cost case, but a commercial case from the beginning, and that's why it's more net revenue-driven from the start. If we zoom in on the beer business in Italy, we were basically flat from 2013 to 2017 on the net revenue and on the earnings. And we safeguarded the profit by cost measures, efficiencies, probably also a bit of lack of investment and -- meaning that we were a bit behind the curve. Now we have been able to grow the top line by 14% since 2017 and in spite of COVID, and that is why channel mix and reinvestment into the business adds, in total, a 9% profit growth. A part of the cost increase is the generic support both to LemonSoda and [ Terme ]. So I mean when the net revenue is not -- or the earnings is not following the net revenue, that's adding to the totality. So the acquisition -- or both acquisitions here illustrate that we can manage very different acquisitions. We can make them work well and, thereby, it's not only one playbook that we implement when we acquire companies. It really depends on the situation. So in conclusion on these 2 M&A cases, we want to stress that the dynamics of the acquisitions are different, but they have an initial period of operational investments with integration, which usually is finished within the first 6 to 24 months, depending on the size and the complexity of the acquired business. And it is first when integrated that we can really start to benefit from synergies, be it operational or commercial. Now please turn to Slide #15. And just to round off the presentation, I would like to give a few words on our current priorities. Right now, the inflationary risk connected to the geopolitical situation in Ukraine is clearly top of the agenda. We have to mitigate further input price inflation, prepare plans to mitigate potential supply chain disruptions while managing the additional pressure many employees feel right now just getting out of a difficult period with COVID. We have installed some of the same communications lines as we did when COVID started in order to secure fast knowledge-sharing and decision-making. As Lars mentioned, when we went through the outlook for 2022, any significant input pricing increases due to geopolitical uncertainties is assumed partly covered by further price increases or/and cost mitigations. With a number of companies we have acquired, we are very busy integrating these companies to deliver synergies. Crazy Tiger is going live on our IT platform as we speak, and the integration of the Solera Beverage Group is progressing according to the plan. To this aim, we will strengthen the organization to ensure that we can continue to drive both organic and inorganic growth. We plan to increase our commercial spending. We can see in the underlying development that this is driving growth, and we will also continue to target the investment towards our key priorities as they provide strong growth opportunities. Having said this, we are looking into how the uncertainty related to inflationary pressure impacts competitive behavior, and we will review opportunities during the year. Finally, it continues to be a key focus to manage our CapEx, ensuring production capacity, but also our continued ESG journey to stay among the most sustainable beverage companies globally. And with these words, I will send it back to the operator, and we are ready to take your questions.

[Operator Instructions] Our first question comes from Fredrik Ivarsson with ABG.

First question, on Western Europe, where were you in terms of On-Trade levels versus pre-pandemic levels in Q4? And do you assume any positive margin impact from channel mix in the full year outlook? That's the first question. I'll stay there and let you answer.

When we look at On-Trade, the last part of Q4 was pretty tough because most On-Trade was closed down. And then -- and of course, that impacts also the margin because we couldn't do, I would say, the usual adjustments to cost levels as it happened really, really fast. And what you have seen in the first part of this year is that, first, we had still some restrictions in January. If we look at the countries where restrictions has been at the lowest level, then there's been a lot of cases in the countries, and that means that people have been more at home because they had to take care of themselves and their families or they have been in quarantine. Now where we see that the number of cases is going down, we see in our core markets that we are getting closer to the 2019 level in terms of On-Trade business in the channels that have been opened. So if you look at the event space as an example, it's still not up and running. But if you look at the bars, the restaurant, et cetera, then we are getting much closer. So yes, On-Trade was a negative surprise towards the end of Q4 and a bit in the beginning of the year here, but we are confident with what we see right now that we will get back to normal -- more normal levels.

And second one on Solera and Hansa Borg in Norway especially. Assuming that you get the approval for the later one, of course, how should we think about the synergies from merging those 2 names, given that Solera has quite a significant share of wine in the portfolio? Would you care to share some light on that?

So the process that we always do when we do acquisitions, it is that as a buyer, we build hypotheses around what is possible. And that's the full catalog of potential synergies in commercially and cost and better service to the customers, et cetera, et cetera. When we get the keys, we sit down with the local management and then we test the hypothesis and we get input from the local organization. Some of the hypotheses, we probably have to cancel and then they have some better ideas on what we can do, and then we build an integration plan and start executing. So that was what we alluded to here that when it comes to a number of the synergies, that is something that you would see being implemented or where we see the potential benefits after 6 to 24 months, depending on the complexity of the acquisition. If you look at the potential merger between Hansa and Solera, and we still need to get the approval on the Hansa acquisition, then that is more complex than an acquisition of, as an example, Fuglsang or Crazy Tiger, which are with less people, less categories, less channels, et cetera. So that is what you need to take into consideration.

Right. But too early to get any sort of quantified levels of synergies?

As I said, we need to build the plan together with the local management team, secure that, that is anchored, that we have an implementation time line that is realistic, and then we do it bit by bit so that we make sure that we excel on the plan and do not lose focus on the wrong things. So that's the status.

Yes. Yes, fair enough. And one last quick question. Where were you in terms of commercial spending versus where you sort of want to be in especially Western Europe?

We have, in 2021, we have invested significantly more than we did the year before. We believe when we look at the share of voice numbers that we are gaining a bit of share of voice and predominantly in the categories that we have identified as growth categories, so spending ahead of the curve. And we will still have to see how 2022 plays out in terms of the share of voice. And as you would know us, we would be pretty close to the situation, so that means that making sure that we spend the right amount of money on the right initiatives and that we stay flexible during the year, invest in the initiatives that work, cut in the ones that doesn't work and then adjust. So that's the Royal Unibrew way of dealing with it.

Our next question comes from [ Brian Swenson ] with JPMorgan.

Fintan Ryan here from JPMorgan. Two questions for me, please. Firstly, with regards to the guidance that you set out, could you give us some more color on your assumptions in terms of the volumes and the price/mix that you'd hope to be achieving in the market? And also, what was your base case for raw material sort of COGS inflation for 2022? And given the sort of the extra hit that you factored in now for the situation in the last few weeks, what's now your base case for COGS inflation for 2022? And then secondly, more on your sort of long-term ambition for your 20% to 21% margins. I note that a number of your peers have walked away from specific percentage EBIT margin targets, particularly given how volatile the top line and the pricing can be. What gives you the confidence that in 2026, 2027, you can actually get back to the 20.0 or 21.0 percentage EBIT margin given the uncertainty in the end market environment?

Thank you. Lars, if you take the raw material piece, then I will try to talk a bit about the other 2 topics. So the way that we operate and, in particular, in an inflationary environment, that is that we try to redo our commercial strategies in particular in the multi-beverage markets where we have very broad portfolios. And if you look at it core price list-wise, we have not, in all geographies and in all categories, been able to pass on the price increase to the consumer. And thereby, we have been through a process of reevaluating the campaign intensity. The debts go high, low versus everyday fair price where you have more an on-shelf price, which is something between a promotion price and a standard list price. We have been through and changed a number of things in terms of our pack sizes. And then ultimately, we have also relooked and reshaped, I would say, the input for the planograms in the retailers. And we are working on a constant premiumization in the On-Trade so that we secure that we have a better offering at the point of consumption. And then you asked the question, so what is -- how much is that in a percentage? And to be honest, I cannot give you a specific percentage on this. But the mindset here is that we need to make sure that we cover up for the cost price increases that we saw back in -- before we started the negotiations with the trade. And that is what you need to keep in mind here, and that is that in the Nordic countries, the negotiations normally is conducted from October, November and then they are finalized during December and implemented kind of, like as we speak, 1st of February. And then Italy, France will be 2, 3 months in delay. And that means that the prices -- the price increases that the consumers see right now, those price increases are related to the impact that we talked about in November where we said soft drink companies should increase prices by around 5-ish percent, and beer companies should increase by 6%, 6.5%. That is now in a different territory to cover up for the underlying, and that means that what we have ahead of us is kind of like the same procedure, but with a time lag, and we still need to see the reactions from the consumers on the new price points that is being put in as we speak. Then if I jump to the question around the EBIT margin and the long term here, I think we have tried to build some scenarios assuming certain growth rates on how we can see that the business will evolve over the coming years and how we, with the acquisitions that we have made and the 2 that are in process, how can we over time create organic growth, how can we create synergies and how can we potentially attract partners, more business with partners across the different geographies. And with that scenario, we feel that it is -- that is within reach that we get to the frame of between 20% and 21%, but that also means that there will be countries below and there will be countries above, which we also have today. If we find acquisitions that are big with lower margins, but still good for us and delivering solid profit in terms of hard core numbers, then the only thing that we highlight here is that we might need to change the time frame a bit depending on which geographies and then -- and how the synergies lies. And if this is a business, that potentially can generate margins at the same level; if not, then we will need to recalibrate. So we don't live from margin. We live from the cash that we generate. But for us, it is vital that it is a quality stamp of our business and the way that we operate the business that we stay focused on generating a solid EBIT margin. So that is a core, I would say, a core pillar of how we run our business. And then, Lars, if you would comment on the raw material question?

Yes, I think actually, you did answer it. So Lars mentioned what the COGS inflation rates were. And the way we've built our plan is that all the markets are targeting to increase prices so that the gross profit per hectoliter in absolute was the same amount or was stable year-to-year, including mix effects. So there is, of course, a time lag. So we made a lot of the price payments towards the late part of last year, the price increases towards the end of last year where input prices has gone up further since then. So there's a time gap in that. But in general, the plan has been built to ensure that our gross profit per hectoliter generally stays constant.

Great. And just a follow-up, is there a scope do you think within your customer pricing negotiations to rather than wait until Q4? Is there any scope or interest from your customers to be able to maybe put through another price increase in Q2, Q3, if necessary?

That is what we need to work out and working on every day. There's no guarantees in life. I think also what is happening right now with the -- especially the energy prices, that in some countries are putting a really hard pressure on the consumer spending power. I think retailers, but in principle, also authorities in some countries, they are extremely aware of what is going on towards the consumers. I think the difference is that in the Nordic countries, the unemployment rates are relatively low. And that means that when you add it all together and look at that average household spending power compared to 3 years ago, it is still in a good spot. But there will be, I think, discussions around, are we going to buy a new car, are we going on holiday. And then if you cut on those spendings, I think our scenario is that then you'll probably be good to yourself in other categories, and that was what we saw during COVID-19 that we were actually in the everyday indulgence category and benefited a bit from that process. And it really also depends on how competition will behave here. So we have been moving first on pricing is our reading this time. And it also, for us, looks like that we have not been on the shy side of getting coverage on the raw material prices. So one thing is what we see, but a different thing is what competition see and how they act, and that is also why cost is at play here. If competition will cover up for the gap here by more cost cutting, it's likely that we will do the same and, thereby, secure that we had the same share of voice at least as we come from.

Our next question comes from Søren Samsøe with SEB.

It's Søren here. Three questions. Firstly, on the sort of extraordinary DKK 100 million buffer you put into the guidance now for an EBIT level, if you could just elaborate on sort of what primary cost categories are included in that. Is it -- I assume it's something like glass and maybe also malt and barley given Russian and Ukraine's role in the market price there. And then on price, you had a very strong price/mix in Q4. And probably primarily driven by mix, but should we assume then going into first half that -- or '22 that mix comes down and then prices start to increase more because of your price increases in January? Or is it fair to assume that the mix will still be strong as On-Trade is coming back? And then finally, if you can talk a little bit about the strong momentum you saw in volumes in Q4, if that is continuing in January and February in key markets.

Thank you, Søren. If I start with the volume/price/mix, and Lars, you can comment on the DKK 100 million. If you start with the volume first, we have a good momentum in the business, and that is what you see in Q4, and that is throughout. Of course, there's some lags because of On-Trade. But when we look at it channel by channel, we have a good momentum in the business. And there was a bit of a dip on the market for the first 2 to 3 weeks of January because of the closures or the restrictions and a lot of infected people, consumption during the Christmas season was relatively low on the sell-out side, and that means that the stocks in stores were high and the, I'd say, the buying intentions, because of tiredness in the society, got a little bit of a hit. But after the first 3 weeks, we have seen that the market have regained, and it's getting, I would say, into a more normal and expected level. So -- and that is also what you can hear in our guidance here, and that is that if you look at it from a Royal Unibrew top line point of view, we are in a nice spot. We came out with a good flight attitude. And we haven't seen anything indicating something else until today. The movable parts in terms of price/mix, they are relatively big because of the changes in the selling prices, the list prices, the changes in the promotional execution and then the On-Trade, Off-Trade and convenience mix that you would see coming in. So as Lars said, so what we are trying to achieve here is that on a per-channel basis, we need to end out on a profit contribution, gross margin level per volume which is equal to what we had last year. And then you will see some changes because of the different channel mixes, but that's the guiding principle that we are operating under.

And if we turn to the DKK 100 million, if we look at what has gone on, happened over the last couple of weeks, you've seen significant increases in oil prices, in natural gas prices and so on. And a lot of these, what you can say, inflationary pressures impact us in a number of different ways. Some of it comes from our suppliers who are energy heavy in what they do. If you look at something like PET, that is also quite closely related to the oil price. So there's a number of categories where we see that the impact from higher energy prices, in particular, will impact us. So the impact comes from energy, comes from heating, from electricity. It comes from PET. It comes from a number of different areas. And I would say it's a bit of a fluid world we live in right now where the prices are moving quite a lot up and down in the year. So our ambition is, of course, that if we see that the input cost inflation goes up, it should be passed on to customers. So the DKK 100 million is not necessarily an indicator of what is the impact, but it's the net of the activity. So some will be covered by higher price and some will be, I would say, where we look at our spending levels and so on. So the DKK 100 million is what you can say an indicator of the increased risk we see in a year where some of the main suppliers of energy to Europe are in conflict. So it's what you will say an early estimate of how this could impact our cost level and what we are not able to pass on to consumers.

And then just to add a general comment, and it's not to be a [ better views ] or anything in this relation, but if you look at the -- our kind of communication history, we were the first one when COVID came in to take out the guidance because of the level of uncertainties. We were also the first one to reinstall guidance in the beverage industry. I think we were the first one to highlight -- I think maybe there was one other kind of like simultaneously with us that highlighted in November that cost increases were pretty high and that as an industry that we needed to go up with price increases based on what we saw at that time of between the 5% and 6.5% depending on the categories. And then we have seen the rest of the industry repeating that within their guidance over the last 4 weeks. So of course, all other companies, they need to do their own guidance. They have their own numbers, they have their own hedges, they have their own pricing, whatever it is. I think there might be a time difference between when this will hit the beverage industry or the individual beverage companies in the industry. But my thinking here is that it will hit us all. And then move on to the next question.

Yes. And then just finally on -- just a follow-up on the thing on the volume. If you could just say in your Q4 volume growth, how much do you think is stocking ahead of price increases in January to fortify that?

Very, very little.

Our next question comes from Edward Mundy with Jefferies.

A couple of questions from me, please. Coming back to the DKK 100 million, and I appreciate it's still very -- it's quite helpful for you to give an additional cushion given the [ recent change ]. But I hope that you can give a little bit more sort of granularity around sort of what are some of the assumptions you're assuming, for instance, on oil given that the oil price is moving -- continuing to move an awful lot? The first question. The second question is just on M&A. You've done an awful lot in 2021. Obviously, it's still...

Ed, the sound is very, very terrible. We hear only half of the words. So maybe you can try to call in again?

Is that any better?

Try again.

Let me [ triangulate ] that question again. So just coming back to the DKK 100 million, is there any more granularity you're able to give in terms of what your assumption is on the oil price given that it's moving around a lot? So let's start off with that question, first of all.

Do you want to answer that, Lars?

Yes. So I think we -- I mean you can look at the prices. I think you guys probably know more about them than we do. It's a very -- it's moving a lot. And I would say, I think we -- the DKK 100 million should be seen as, what you can say, a risk number that we have put into our expectations for '22. And it's not an exact science based on the prices as of yesterday. And we have, of course, looked at what are the forward prices, what are the hedge levels we have and estimated what is the impact on our cost level. And then, of course, some of it has to be passed on to consumers. So I would say it's not an exact science with the [ 15 ] digits on. If we look at where we had the guidance before the war broke out in Ukraine, we actually felt that we were in a pretty good spot with strong momentum in our brands, with strong market share gains and with strong plans where we would invest behind our growth categories. And then we've had 2 weeks where things have been sent upside down from a, what you can say, commodity price level. So therefore, we have made an evaluation to take down our guidance and then with the DKK 100 million simply just to reflect that there is more uncertainty. It's not an exact calculation of what goes into all categories because we will, of course, do mitigation actions in a number of ways. But I think it's important to note that we also -- if you look at the market share development, the way our premiumization works in the different markets, we are actually on a very strong path in most markets when it comes to market share gains and our commercial performance. So we don't want to destroy that, what you would say, positive commercial development by starting to focus too much on the input price and [ ratio ]. So just think of this as costs have come -- will come up for everybody, and we put in a risk of DKK 100 million to mitigate some of that.

Got it. Very clear. The second question is on M&A. You've done an awful lot in the last year. Does it pause a breath or does the pace continue? And as a sort of second question on M&A, are there any conditions precedent whereby the share price dipped below a certain level, there's no obligation for Hansa -- the vendor for Hansa to complete the transaction? Or are you very much locked in given it's an equity transaction?

So in terms of the Hansa acquisition and Aqua d'Or, there is the condition precedent on our side, and that is a competition approval. And that's it. There's a small one for Aqua d'Or, but that's more on a paper exercise. So we are locked in on those ones, and we are still happy about that.

Very good. And then in terms of the outlook for M&A, does it pause a breath or does this pace continue?

I think we have a lot on our table right now in terms of M&A and integration. We still need to keep our eyes and ears open. And as I've said before, I think that the key thing for us is that we get to know if there's any processes going on so we can decide if we want to participate or not. I think what we have experienced since we acquired Solera, and that has been further strengthened since we announced Hansa, and that is that there's a number of partners that would like to expand business with us or new partners that are discussing -- want to discuss with us on what we can do for them given that we can cover up for a number of countries with an execution model that is really strong. And as of a couple of days ago, we have announced internally here that we have made an agreement with ekaterra, which is the Unilever spin-off with tea, so Pukka, Lipton and Medova Tea. And we are going to take over that business from 1st of June this year in Denmark, Norway and Finland, which is an add-on to the collaboration that we already have with Lavazza in Finland, so that we start to build a concept around coffee and tea, which is extremely strong in our service model towards On-Trade and convenience in particular. So it's just a small example of how the platform extension, actually relatively fast, have delivered a strengthening of our strategic platform in all of the Nordic countries. And ekaterra has their own setup in Sweden right now, and that's the reason why that we haven't taken over Sweden or will take over Sweden.

Got it. And then my final question, third question is really on energy. You mentioned it's sort of 3x more profitable than beer, but a very nice revenue per hectoliter. It's 2% of your business. I mean, in your mind, how big would you like energy to be as a percentage of for the group sales?

That's a very good question because I think some of the categories, they are challenging each other. I think when we did our strategic work and identified these 6 growth categories, the 2 with the biggest potential as we see it over 3 to 5 years period of time is no/low sugar, generally speaking, so less calories, and the other one is energy drinks in all shapes and forms. So when we put it up there, then that's because that this is something that we feel is -- yes, can be much bigger. And I think our growth rates indicate it and the acquisitions that we have done indicate it. So we have a great view on that we can be the local champion of energy drinks in the countries where we have decided to compete in the energy drinks category.

Our next question comes from André Thormann with Danske Bank.

The first one is around Solera and MC ENERGY. Can you elaborate on what your assumptions is for Solera and MC ENERGY going into 2022 for growth and margin? That's my first question. And the second, that's in terms of the Solera platform. At least I understand that previously, you have indicated that you were going to launch products at Solera platform in the beginning of 2022. Have you done this? And if not, why not? And will it come this year? That's it.

Yes. So if we take the last question first, so what has happened on the Solera integration since we took over, that is that we have reshaped management, gotten the management teams in place. We have built strategies around the businesses so everybody knows where to go. We have integrated the Solera business in Finland. We have integrated that into the Hartwall organization, but still as an independent department, but making sure that they're working together with our Hartwall -- Hartwa-Trade team. And then we have, as of 1st of February, integrated the logistics. So that means that we have added on thousands of SKUs into the assortment of Hartwa-Trade, and thereby, we are starting to harvest some logistical synergies in having it all combined. In Sweden, we have expatriated 2 senior people to take the lead. So we have taken the general manager of Solera Finland, has been put into Solera Sweden. And we have taken our retail director from the Danish organization into the retail director position in Sweden so that we make sure that we, from a management point of view, have a good and solid start and with a broad knowledge about categories, both from a wine spirit perspective and from a soft drink, beer, energy drinks perspective. So that's the starting point of the Swedish organization. In Norway, we are -- we have taken over a business with a strong management, first of all, and also a business that is solid with a good position, a competitive position. And they need to do more of what they have done before and which they are doing. And then we are trying to speed up, in a couple of categories, we are trying to speed up on the innovation front, both with Royal Unibrew brands, but also with the brands that sits in the portfolio from the partner side. So I think we are well equipped to capture the opportunities in 2021 -- sorry, in 2022. When it comes to MC ENERGY, it's about keeping the growth rates. So we are system-wise integrating as we speak. So SAP is going live these hours, and we have integrated the sales force. So everybody will be now -- in the full company, we'll be working both with Lorina and MC ENERGY. And at the end of the day, the aim is to at least to keep the flight attitude of what we acquired, meaning growing faster than the energy market, and a part of that is to do innovation. It is to do design upgrades. It is to execute even stronger in the stores with a bigger sales force. But it's also to invest in the brand building for the long run so that the MC -- or the Crazy Tiger brand would be standing out the same way as a Faxe Kondi Booster does in Denmark or that it does in Finland, and we need to do investments behind it. So it's a top line-driven approach that we have to the Crazy Tiger case as we speak. I think the way that you should look at the Solera case and that is that the expectation for the 2022 is a normalized EBITDA and a normalized net revenue level, as we have communicated, and that we will start to try to work it up from there. But as we presented in the presentation, the commercial efforts normally doesn't pay out within the last -- the first half year, you need to ramp it up, you need to build the story, you need to get it listed and then you need to execute it. So that's not something that you should count in as a big driver for 2022.

Okay. And then I just wanted to follow up on the thing about the Solera platform, just to be sure here. So are you still expecting to launch Royal Unibrew products in the Solera platform in Q1 of 2022? Or would that be later in the year?

So we are already launching, and we did that actually also before Q1, some of our products. We have moved -- we have some listings. We had some listings already in the market, and that has been converted over. So Solera has taken over that business in Norway. And thereby, they start to work with our brands like Faxe Kondi, SHAKER, Original Long Drink and so on and so forth. And then you would see later during the year, you would probably see more propositions coming into the market. But it's not so evident for us in the short term to push a lot of Royal Unibrew products. What makes -- we need to do what makes sense, and that means that we need to test with the consumers if this is propositions that they can see themselves buying in the store or in the outlet. And if it makes sense, then we'll do the proper investments behind it, build the plan, get it executed. So it's much more in the short term here to make sure that the current business is excelling well and that with the partners where we have and, I would say, not full coverage of their portfolio, that we expand the portfolio and become a better partner for them.

Okay. And just one last follow-up. I understand that the IT integration is also pretty important for your acquisition and has been historically. When do you expect that Solera will be fully integrated on the IT platform?

Do you want to answer that question, Lars?

Yes. Yes, we have -- the plan is that, that will happen here in 2023. So parts of the IT platform will move over during this year, and then we'll make the full switch to Royal Unibrew systems during 2023. So the first thing we are prioritizing is to get Crazy Tiger in. And then there will be a project where we convert them so that in the first half of '23, they will go to our systems.

Our next question comes from Mitch Collett with Deutsche Bank.

My first question is back to pricing, I'm afraid. So I think you said in the guidance range explanation that the bottom end of that range assumes some step-up in competitive tension. And while I know it's really difficult to comment about competitors, can you maybe say what you've seen in terms of pricing activity? I think at the Q3 stage, you said that you've seen better price increases in the soft drinks than beer. Is that still the case? And then I think you also said that you're in the normal hedge position. Can you remind us what that is? And then a final non-pricing-related question. Your slide on the management agenda, I guess, has a lot of items, and it feels like quite a long list of things you have to get done given the acquisitions and the near-term challenges. Can you perhaps comment on how you expect to divide your time across those priorities?

Yes. So if I take the last question first. So what we try to do is to be very close to each other so that we make sure that issues stay as small as possible. And I think all the learnings that we had during the COVID beginning has given us comfort and trust in each other. So we are in these situations. I think we try to be pragmatic and fast and, thereby, make sure that it doesn't, I would say, take too much time to do the adjustment, but we align and get going and then we can adjust again if needed. I think it's -- the integrations, they are well planned. They are -- there's no delays in those and so on and so forth. So I think, yes, there's many bullet points here, but I don't think that is a big challenge for us. I think the pressure -- the biggest pressure that we have here is that we did not expect that we would spend time on, call it, the whole geopolitical consequences, so the inflationary pressure, the indirect challenges in terms of the sourcing and so on and so forth. And that means that there will be a lot in the organization that will spend time on that. We also get requests from our customers, just to give you an example, that wants to know if we get any raw materials or packaging materials from Russia. That means that we need to get to a deeper level with our suppliers to get that understanding and being able to communicate that to the customers so that they can communicate that to the consumers that are buying it in the stores. And we need to find fast systems to cope with these things so that we get it in control and that we focus our efforts on the right things. But I'm not concerned in this company. It's a big family, so we will get through it, I'm absolutely sure. When it comes to the question around the hedging, what is normal, we have a band where we can be within from the agreements that we have with the Board around how do we hedge. And there's differences between the different categories depending on if this is agricultural, which have a different pattern than aluminum, as an example. So we are just highlighting here that we have the normal level of hedge right now. So it's not like we have taken a different approach to how we try to manage our financial risk and access to materials. We are, as a company, and if you compare, I think, to the bigger corporates within our beverage business, I think we are generally and have, for many, many years, generally been more skewed towards being a bit shorter than the bigger companies. So where we have an understanding that some of the bigger companies even look 3, 4 years ahead in terms of doing hedges, we are not operating with that time frame. We are shorter in our approach. And then the question on the pricing side, could you repeat that, please? That was a competitive angle to it. I think it's very different from category to category and country to country, and it's also related to the behavior from the retailers. So I think the markets have generally been relatively full, as I said, after the summer holiday -- sorry, the winter period with Christmas. And retailers, the way that we look at it, generally speaking, is that they try to create traffic and, thereby, they try to avoid passing on, on an average, the price increases to the retailers. So they operate with the price/mix, campaign prices to make sure that it's still attractive for retailers to get in. What they, of course, is afraid of is that if pricing in all categories, food and beverage and whatever you buy in a retail store, that if that goes up by too much that consumers will be moving down on their spending behavior, they will lose traffic. And then with the margins that they generally operate with, that will be a hard hit on the bottom line immediately. So they are more traffic-oriented in their approach than they are necessarily profit protection driven. I don't know if that answers your question.

It certainly helps. I guess I was interested in across your -- the markets where it's relevant, whether you've seen any difference in the price increases that your competitor has taken on beer and soft drinks, because I think you said at Q3 that you've seen a bit more activity on the soft drink side and a bit less on beer.

Yes, I think that's still the picture in our core geographies.

And then on the hedging point, is there a way of giving a percentage of your input costs or percentage of COGS that are hedged for 2022?

No, I don't think -- that's going too specific, I would say. So no, I don't think we will comment on that.

And for our last question, we have Simon Hales with Citi.

Sorry to come back to the sort of the guidance and the outlook. Again, I just sort of really want to make sure I've got it clear in my mind all the moving parts. Can I just check sort of firstly, with regards to the DKK 100 million impact, from what you've said, my understanding really is, and I appreciate it's a fast-moving situation, but that's really your current assessment of the potential impact that we could see in 2022 from things like higher conversion costs at your suppliers being passed on to you due to rising energy costs as well as some of the costs you're likely to incur from having to source materials from outside some of those conflict-affected markets. Is that the right understanding firstly just for that DKK 100 million?

Lars, do you want to answer that?

Yes. So it's not an indicator of what is the exact impact from -- so it's capturing the impacts that you mentioned, conversion costs at our suppliers. It's capturing a higher cost for electricity, heating, for PET and so on. It's capturing that, but it's also capturing that we will adjust our commercial spending, our pricing towards customers. So it's a net of the whole package. We know that if we gave you an exact number on what is our best estimate of our COGS levels at this point in time, it would be different tomorrow. So this is a number that gives us some flexibility to maneuver. And if there are periods where we cannot pass on cost increase to customers, then that is captured in the DKK 100 million. But it's capturing the elements that you spoke about with higher conversion costs. So I would say it's not exact science where those -- I can say, there's not a spreadsheet that gives you all the details of everything because things will change during this year, and our commitment is that we will deliver on the numbers that we've set out today. Yes.

Okay. No, look, I appreciate it's sort of not an exact science at this point. And then just secondly, in terms of the EBIT guidance range, just to be clear, obviously, the input costs that you've assumed in that were priced in mid-February. So you haven't, in any of your guidance at this point, factored in directly the sharp moves we've seen in aluminum or some agricultural commodities over the last sort of couple of weeks. You're assuming that you'll be able to offset those if they stick where they are through pricing.

That's captured in the DKK 100 million. So rewind 14 days, then with the commodity prices we saw at that point in time, that would have been our guidance with DKK 100 million more than we've had the -- what has happened in the last 14 days that lowers our -- that we put in a risk buffer of DKK 100 million to mitigate the impact from higher inflation.

Okay. And then just back to Mitch's question on the hedging. I know you don't want to give a percentage hedge number for 2022. But with regards to your broader comments on how you hedge versus your competitors perhaps being slightly shorter versus some of the contracts they may have, would that also be true broadly, do you think, on a 1-year forward basis that you might be slightly lower hedged than peers as well?

We don't have the data to support any comments in that direction because I haven't seen any facts from our competitors. I think the point here is, and I think we raised that earlier on as well, and that is that even though that -- so one thing is the hedging piece, right? This is a relatively small part of the totality of what we buy. The other part is the part that relates to all the individual contracts we have with labels, crown corks, glass bottles, PET bottles, whatever it is, and the consequences for the suppliers on what is happening. And I think, yes, as we said, we have a lot of fixed price agreements with the suppliers that have been made maybe 2 years ago, it might have been made only a month ago. But the price increases that are out there, if they have not secured themselves and, in many of the instances, they might not have been able to do it at all, then there's 2 ways to enter into a discussion with the suppliers about how do we deal with this to secure that we get supplies or we can just stick with the contract and then we wish that we get no supplies, right? So I think the attitude that we have towards this is that we need to make sure that we get supplies so that we can keep the top line going. That is the best safeguard of our business given the circumstances that we have these days. And hopefully, I think both suppliers and customers will have a better visibility within a week, within 2 weeks, within 3 weeks, and then we need to adjust as we go along. And that's really how we operate the business here, and that is that we are trying to maximize our flexibility so that we make sure that we can protect the business as good as we can and take the right decisions on where to spend money and where not to spend money. So that's the approach that we have, and that's also why it's not exact science around the DKK 100 million. That is the view that we have right now. And yes, it will probably be a different number tomorrow. I cannot tell you if it's lower or higher than the DKK 100 million, and then we'll try to cope with that.

Got it. That's really helpful. I appreciate the answers.

And then thanks a lot for a lot of questions. So I hope you will all have a nice day today. Thank you.