Carlsberg A/S : FY 2022 Conference Call Transcript

Carlsberg A/S

2022 Financial Statement Conference Call

7 February 2023 with:

CEO Cees 't Hart and CFO Ulrica Fearn

PARTICIPANTS

Corporate Participants

Cees 't Hart -Chief Executive Officer, Carlsberg A/S

Ulrica Fearn - Chief Financial Officer, Carlsberg A/S

Other Participants

Andrea Pistacchi - Analyst, Bank of America

Olivier Nicolai - Analyst, Goldman Sachs International

Trevor Stirling - Analyst, Bernstein Autonomous LLP

Simon Hales - Analyst, Citigroup Global Markets Ltd.

Sanjeet Aujla - Analyst, Credit Suisse Securities (Europe) Ltd.

Laurence Whyatt - Analyst, Barclays Capital Securities Ltd.

Søren Samsøe - Analyst, SEB Enskilda (Denmark)

Mitch Collett - Analyst, Deutsche Bank AG

André Thormann - Analyst, Danske Bank A/S

Richard Withagen - Analyst, Kepler Cheuvreux SA (Netherlands)

Thomas Lind Petersen - Analyst, Nordea Bank Abp (Denmark)

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to the Carlsberg's Full-Year Results for 2022. For the first part of this call, all participants are in a listen-only mode. Afterwards, there'll be a question-and-answer session. [Operator Instructions] This conference call is being recorded.

I will now hand it over to the speakers. Please begin.

Cees 't Hart, Chief Executive Officer, Carlsberg A/S

Good morning, everybody, and welcome to Carlsberg's full-year 2022 conference call. I am Cees 't Hart, and I have with me our new CFO, Ulrica Fearn; and Vice President of Investor Relations, Peter Kondrup. Before we go into all the details of 2022 and the 2023 outlook, I would like to welcome Ulrica who, as you know, joined us only five weeks ago. We are pleased to have Ulrica onboard, and as Ulrica will join us on our roadshow in the coming weeks, many of you will have the opportunity to meet her in person. At this call, I will go through the key headlines and the regions, and Ulrica will take you through the financials and the 2023 outlook.

Let's now look at the financial performance. Please turn to slide 3 and some of the many headlines for the year. 2022 was a challenging year due to the war in Ukraine, rising input costs and COVID-19, particularly in China. The war in Ukraine has had a profound impact on our business, both from a humanitarian, operational and financial perspective. Because of the Russian invasion of Ukraine, we decided in early March to do a strategic review of our long-term options in Russia, and this led to the difficult but necessary decision to sell our Russian business.

Regardless of these challenges, the Group delivered a very strong set of results with revenue growth of 15.6% to DKK 70 billion. Note that these figures exclude the business in Russia, which is no longer part of Central & Eastern Europe, but reported separately as business held for sale. We delivered all- time high operating profit of DKK 11.5 billion, while at the same time increasing marketing investments by 19% organically, corresponding to DKK 1 billion. Thanks to the very strong cash

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generation, we returned DKK 7.8 billion to shareholders through dividends and share buybacks. This morning, we announced another increase in dividends of 13% to DKK 27 per share. We are very satisfied to end SAIL'22 on such a strong set of numbers, and we are well prepared to deliver on the growth priorities of SAIL'27.

Please go to slide 4, where we take stock of the financial achievements, since we launched SAIL'22 in 2016. The Group's financial health is strong. When we launched SAIL'22 in early 2016, it was with the ambition to invest in and develop our portfolio, geographies, capabilities and winning culture in order to deliver consistent organic operating profit growth through top line and margin improvements, improve ROIC and increase the annual cash returns to our shareholders.

As you can see from the charts on this slide, we have successfully delivered on all key financial metrics. Despite the war, the significant commodity price increases and COVID, we have achieved strong earnings growth and cash flow while increasing marketing investments by more than 25%. We have achieved these results, thanks to our highly engaged people and the significantly improved strategic health of the Group.

We have strong market positions and strong brand portfolios in our key markets. We have clear strategic priorities. We have invested behind our key growth drivers in terms of brands and markets. We have embedded the Funding the Journey cost focus across our markets and functions, and we have significantly strengthened our capabilities.

The organizational health in Carlsberg is very good. Our purpose of brewing for a better today and tomorrow is clear and well understood. Our purpose-led and performance-driven culture is well embedded. Our employee engagement and commitment are high, and we have a strong ESG agenda with ambitious targets.

As we deliver the final year of SAIL'22, it's therefore safe to conclude that the Group is in a good place with a strong financial, strategic and organizational health. Building on this resilient foundation and with the clear long-term strategic direction set out in SAIL'27, we are confident that we will continue to deliver appealing top and bottom line growth and value creation for our shareholders and our stakeholders.

Please turn to slide 5 and performance of our international premium brands. As presented at the Capital Markets Day in Copenhagen in September, a key growth and value driver in SAIL'27 is to step up in premium. Notwithstanding the current macroeconomic environment, we continue to trust in the long-term opportunities for premium, both for international premium brands and local premium brands.

We saw a good development of most international premium brands. Carlsberg grew by 14%, driven by Asia and key European markets. Tuborg grew by 9%, also driven by Asia, especially India and Vietnam. Brooklyn grew by 42%, achieving good growth in most Western European markets, supported by the launch of Brooklyn Pilsner. Blanc delivered good growth in many markets, including Switzerland, Denmark, Malaysia, Vietnam and the Baltics. But due to the war in Ukraine and lockdowns in China, the brand declined by 4%. Somersby grew in markets such as Denmark, UK, Laos and the Balkans, and in China, where we launched Somersby in 2021, volumes tripled. However, total volume growth of 1% was impacted by the war in Ukraine. Excluding Ukraine, Somersby grew by 5%. Several local premium brands, such as Jacobsen in Denmark, Eriksberg in Sweden and Wind Flower Snow Moon in China, delivered solid growth.

Please turn to slide 6. The growth of our alcohol-free brews continued in our Western European markets, as penetration of the alcohol-free option continues to increase. The Western European region delivered 7% volume growth, driven by brands such as Tourtel, Somersby 0.0 and Carlsberg

0.0. As Ukraine is a large market for alcohol-free brews, total volume growth was impacted by the

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war. Excluding Ukraine, total alcohol-free brew volumes increased by 1%, impacted by lower volumes in some export and license markets. Including Ukraine, volumes declined by 6%.

Digital is a key focus area in SAIL'27 that we will invest more in, for example, in rolling out our B2B e-commerce platform, Carl's Shop, which is currently live in 11 markets across our three regions. There was continued positive momentum on the platform and revenue increased by 51%. In Western Europe, revenue per hectoliter on Carl's Shop increased by 6%. Our e-commerce revenue grew by 42%, mainly driven by strong growth in China, our most advanced online retail market. In Western Europe, we improved our online market share in several markets, including the Nordics, France and the UK.

Slide 7 and an overview of our enhanced ESG program, Together Towards ZERO and Beyond, which we announced in August 2022. Together Towards ZERO and Beyond reaffirms our commitment to help tackle global challenges and raises our ambition level even further, addressing a wider array of material topics to create a more holistic ESG program. When we launched our previous program, Together Towards ZERO in 2017, we set a number of targets for 2022 against a 2015 baseline within the areas of carbon emission, water, health and safety, and responsible drinking.

Evaluating our accomplishment against these 2022 targets, we have delivered on two out of three targets for carbon reduction at our breweries. We exceeded our target to reduce CO2 emissions at the breweries by more than 50%, reaching a reduction of 57%. Looking at renewable energy sourcing, we now source 100% renewable electricity for our breweries in Western Europe and Asia, but we have not met our 100% target globally, achieving 92% in 2022. This is due to lack of availability of certificates in four Eastern European countries, where we will continue to explore alternative solutions.

Looking at water, we have cut the amount of water we use from 3.6 to 2.5 hectoliter for every hectoliter of beer produced. This equals a 31% reduction, beating our 25% reduction target for 2022 and making us one of the most efficient major brewers in the world. We are working hard to create a safe environment by making improvements each year on a steady course towards ZERO Accidents, and we have cut our lost-time accidents by 41%. But changing behavior takes time, as we still have work to do in embedding our ZERO Accidents Culture across all our markets.

And now to the regions, please turn to slide 8 and Western Europe that experienced a volatile year with a strong H1, thanks to the on-trade recovery, and a weaker H2 due to the continued increase in commodity and energy prices and price increases lagging the cost increases. Revenue per hectoliter increased by 8%, mainly driven by the positive channel mix in H1 and related positive brand mix.

Despite the on-trade recovery, our on-trade volumes are still around 10% below 2019 levels. To compensate for the significant commodity and energy cost increases, we took price increases in most markets during Q1 and Q3. As our costs will continue to go up in 2023, we will need to take more pricing during this year. Revenue in 2022 grew organically by 13.8% and operating profit by 12.6%, supported by the on-trade recovery.

Looking at the markets, volumes in the Nordics grew by mid single-digit, mainly driven by high single-digit growth in Denmark and Sweden. In Denmark, our business benefited from strong on- trade recovery, especially in H1. After two very strong years in 2020 and 2021, volumes in Norway declined by mid-single-digit, as borders reopened and cross-border trade and travel restarted. Our Swedish business delivered good volume and revenue per hectoliter development. The business benefited from the reopening of the Norwegian border and on-trade recovery.

In France, volumes grew double-digit in a slightly declining market. The revenue per hectoliter was up by a mid single-digit percentage with good growth of our premium beer portfolio and alcohol- free brews. Volume growth in Switzerland was in the high-teens, driven by the recovery of the on- trade, being an important channel for us in Switzerland. Key growth drivers were Feldschlösschen,

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including the alcohol-free variant, then Valaisanne and the Pepsi portfolio, which has been part of our portfolio since the beginning of 2022.

Volumes grew slightly in Poland. Revenue per hectoliter increased significantly due to several price increases taken to offset significant cost price inflation. We saw good growth for our local mainstream brands and Garage, while the flavored category declined as consumers traded down into mainstream and lower mainstream lagers. In the UK, we had a good H1, supported by the significant rebound of the on-trade. During H2, we experienced an increasingly challenging trading environment with consumer behavior being impacted by the high inflation. Volumes for the year grew mid-single-digit, but declined in H2.

Slide 9 and Asia, where we achieved very good results, supported by markets recovering after the many COVID restrictions in 2021. Volumes grew by 10.3%. Growth was stronger in H1 than in H2 because of the impact from COVID restrictions in our China footprint from August. Revenue per hectoliter improved by 8% as a result of a positive channel mix, premiumization and price increases, the combination of which led to a high organic revenue growth of 18.8%. Reported revenue grew by almost 22% due to a positive FX impact, mainly from China, which more than offset the depreciation of the Laotian kip and the deconsolidation of Nepal. Organic operating profit grew by 11.2%.

In China, volumes grew by 2% in a flat market and revenue per hectoliter grew by 3%. While we continued to have good momentum for our growth priorities, including expanded distribution, the international and local premium portfolio and the big city strategy, we were more impacted by local COVID restrictions and lockdowns in our strongholds and big cities in H2, and especially in Q4, than in H1. This is the reason why volumes in H2 declined by 3%.

Looking at our brands in China, Carlsberg and Tuborg did very well. 1664 Blanc was impacted by the nightlife restrictions and Wusu by lengthening lockdowns in its home province. There was limited impact in December from sell-in to the 2023 Chinese New Year, as this happened in January 2023. Shipments in January were largely as expected, but we do not yet have a good view on consumer off-take during the New Year celebrations, and it is therefore too early to give a firm indication on how the New Year celebrations panned out in China. We will only know this once we get the sell-out data from distributors in February and early March.

In Vietnam, we achieved more than 25% volume growth in a market that grew by more than 20%, strongly recovering from the previous year's COVID restrictions. Our volume growth was driven by the Huda brand and our international premium brands, benefiting from our strengthened route-to- market and a significant increase in marketing investments, especially behind our international premium brands.

Our Indian business delivered more than 30% volume growth, supported by easy comps and warm weather. We had a solid revenue per hectoliter growth, thanks to strong growth of Carlsberg, Tuborg and packaging mix. Despite the challenging macroeconomic environment, our business in Laos delivered a strong set of results with around 20% volume growth, supported by easy comps. All other markets, except Hong Kong, delivered very good volume growth.

Slide 10 and Central & Eastern Europe, where we had a very difficult year due to the war in Ukraine. Despite a substantial volume impact in Ukraine, regional volumes were flat. Excluding Ukraine, volumes grew by 5%. Revenue per hectoliter was strong at 15%, driven by price increases, a positive channel mix due to the on-trade recovery in South-Eastern Europe, brand and country mix. Revenue was up organically by 14.7%. Operating profit and operating profit per hectoliter were flat due to the significant commodity and energy cost increases.

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