Carlsberg A/S : H1 2023 Conference Call Transcript

CARLSBERG H1 2023 CONFERENCE CALL TRANSCRIPT

16 AUGUST 2023

Corporate Participants

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

Ulrica Fearn - Chief Financial Officer, Carlsberg A/S

Other Participants

Laurence Whyatt - Analyst, Barclays Capital Securities Ltd.

Trevor Stirling - Analyst, Bernstein Autonomous LLP

Edward Mundy - Analyst, Jefferies International Ltd.

Simon Hales - Analyst, Citigroup Global Markets Ltd.

Nik Oliver - Analyst, UBS AG (London Branch)

Olivier Nicolai - Analyst, Goldman Sachs International

Søren Samsøe - Analyst, SEB Enskilda (Denmark)

André Thormann - Analyst, Danske Bank A/S

Mitch Collett - Analyst, Deutsche Bank AG (UK)

Richard Withagen - Analyst, Kepler Cheuvreux SA (Netherlands)

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to the Carlsberg's H1 2023 Financial Statement Conference Call. 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 call is being recorded. I'll 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 Half Year 2023 conference call. My name is Cees 't Hart and I have with me CFO Ulrica Fearn and Vice President of Investor Relations, Peter Kondrup Let me begin by summarizing the key headlines for the first six months of the year.

• We delivered strong revenue growth as a result of revenue per hectoliter improvements and volume growth in Asia.
• We delivered solid organic operating profit growth despite the challenging cost environment.
• Due to the solid year-to-date results, we upgraded our earnings outlook yesterday,
• and we are today starting the second quarterly buyback program this year, amounting to DKK 1 billion.

I will go through the key headlines, strategic highlights and the regions and after that, Ulrica will explain the financials and the full year outlook. Please turn to slide 3.

We saw total volume growth driven by Asia and premium brands. Revenue growth was strong at 11%, mainly driven by revenue per hectoliter improvement of 10%, which was the result of growth of our premium brands and price increases across all markets.

Revenue growth was strong across all three regions. We delivered a solid 5% organic operating profit growth with a strong revenue per hectoliter improvement, offsetting the significant cost pressures from higher input costs, energy and salaries. Operating profit growth was particularly strong in Asia and Central and Eastern Europe.

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Despite the adverse foreign exchange movements, adjusted earnings per share for the continuing business increased by 0.2%. Cash generation remained high and free operating cash flow was DKK 4.3 billion. As a result of the solid H1 performance and the healthy balance sheet, we are initiating the second quarterly share buyback program this year of another DKK 1 billion.

The disposal of the Russian business has been a key task for us. We were therefore pleased when we signed the sales agreement in June. However, unexpectedly, a presidential decree issued on July 16 placed the business under temporary management of the Russian state. Ulrica will provide more details later.

Please turn to slide 4 and a brief update on the SAIL'27 portfolio categories. 2023 is the first year of our new strategy SAIL'27. We executed well on key strategic priorities, achieving solid growth for our premium brands and continued growth in Asia. We invested in key SAIL'27 initiatives, balancing the shorter-term challenges with the long-term growth opportunities.

Growing our premium volumes is an important long-term value driver for the group. We have a strong portfolio of international and local premium brands. And in H1, our premium portfolio grew by 3%, driven by 5% growth in both Asia and Central and Eastern Europe. The growth was mainly driven by premium volumes of Carlsberg and Tuborg, 1664 Blanc and Brooklyn.

In Western Europe, premium volumes were impacted by down trading in Poland and declined by 2%. In many markets across Europe, we saw a good momentum for the alcohol-free category. In Q2, volumes were up by 2%, while volumes for the half year were impacted by the lower volumes in Q1 and declined by 1%. The half year development was impacted by lower volumes of Baltika 0.0, as we delisted the brand in Ukraine last year after the outbreak of the war. Excluding Baltika 0.0, total alcohol-free brew volumes increased by 4% in Q2 and by 1% in H1, fueled by good growth for the alcohol-free line extensions of Carlsberg and Somersby in Europe.

Please turn to slide 5 and our international brands. Carlsberg volumes were up by 1%, driven by strong double digit growth in Asia, with particularly strong growth in China and India, while we saw lower volumes in Western Europe. Tuborg volumes grew by 3%, driven by Asia, notably China and Vietnam, and in Central and Eastern Europe, in markets such as Ukraine, Serbia and Greece. The 5% growth for 1664 Blanc was broadly based across most markets. In China, volumes grew by 4% in Q2, while volumes in the half year were impacted by the lower volumes in Q1 due to lower sales in the nightlife channel. The Brooklyn brand has recovered strongly after the pandemic, when it was impacted by on-trade closures. The brand grew by more than 50%, supported by very strong growth for Brooklyn Pilsner in the UK, which is the largest market for the brand.

Slide 6 and our ESG program Together Towards ZERO and Beyond, which we launched in August last year, and which addresses the areas that are the most material to our business and to wider society. One of these is the new focus area of sustainable agriculture or Zero Farming Footprint. We have set bold ambitions to drive action on climate and biodiversity through regenerative agriculture and sustainable sourcing of ingredients. We already have encouraging examples of sourcing regenerative barley in markets such as Finland where the annual Christmas brew is brewed from regenerative barley and France, where 45 farmers are supplying so-called responsible barley for the 1664 Blanc. And in the UK, we are looking to follow suit with the Carlsberg brand.

Please turn to slide 7 and Western Europe. Volumes were impacted by the consumer sentiment and bad weather in early Q2 and declined organically by 2%. Our premium portfolio and alcohol-free brews performed better than our mainstream core beers across the region. Our mix was better than the category development observed in the markets where external data indicates that the high inflation is impacting consumer behavior, putting pressure on market volumes and in some markets also category and general mix.

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We outperformed the total market, gaining both volume and value market share. We are, of course, satisfied with this development, as it is a clear indication of the strength of our brand portfolio and that our investments in premium and alcohol-free are paying off. Non-beer volumes grew by 2%, driven by good soft drinks performance. Revenue per hectoliter increased by 12%, supported by the positive channel mix in Q1, price increases and a positive country mix. Consequently, organic revenue grew by 9%.

COGS per hectoliter in Western Europe increased by mid-teens due to the significant increase in commodity, packaging and energy cost. However, as a result of the high revenue per hectoliter and continuous cost focus, and despite increased sales and marketing investments, operating profit grew organically by 1%, while the reported operating profit margin declined due to cost pressure.

Volume growth in the Nordics was low single-digit and mainly driven by growth for the soft drinks portfolio. In Sweden, mid-single-digit volume growth was driven by premium, alcohol-free brews and soft drinks. In Norway, the low single-digit growth was supported by Somersby and soft drinks. In Finland, premium and other beverages did well but total volumes declined slightly due to mainstream beer. In Denmark, volumes grew by low single-digit and our market share strengthened.

In France, the market was down due to high inflation and bad weather. Our volumes declined by low single- digit, but with a positive volume and value market share development due to good results for our local premium portfolio, 1664 and Grimbergen.

In Switzerland, our local premium brand Valaisanne, Grimbergen, the relaunch of 1664 Blanc and alcohol- free brews all did very well. However, the Swiss market was impacted by bad weather, seeing volume decline and unfavorable category mix. Our total volumes declined low single-digit.

The Polish beer market remains tough, declining by 7% as consumers are impacted by lower disposable income. Downtrading continued, with mainstream taking share from premium and flavored products. Our volumes declined by high single-digit as we had to take significant price increases to offset the considerable inflation in our cost base.

In UK, the weak consumer sentiment impacted the beer market. We outperformed in both the on-trade and off-trade channels, but our volumes declined by low-single digit, although with a solid June due to warm weather. We saw good growth for premium brands such as Brooklyn and Poretti. And we are pleased that we from June have the Kronenbourg brand in our portfolio after the termination of the licensee agreement.

Please go to slide 8 in Asia, where we continued to deliver strong results. Volumes grew by 4.8% with particularly good performance in China, Laos, Vietnam and India. Revenue grew organically by 12% with a revenue per hectoliter increase of 7%, mainly due to premium growth and price increases.

Operating profit increased organically by 8%, while the foreign exchange impact, mainly from China and Laos, led to a reported decline of 3%. Due to a significant increase in sales and marketing investments, the operating margin declined to 24.3%.

In China, we continued our growth trajectory and delivered 5% organic volume growth and 7% organic revenue growth. Increased domestic travelling supported growth in our strongholds in the western part of the country. We expanded our big cities to 91 cities and volumes continued to grow. Volume growth was mainly driven by Carlsberg, Tuborg and the local mainstream brands Chongqing and Dali. Dynamics for Wusu improved in Q2, leading to slightly growing volumes after the decline in Q1. 1664 Blanc grew in Q2 despite increased price competition, supported by growth in the improving nightlife channel.

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The Indian beer market benefited from a strong economy, increased tourism and warm weather. Our volumes grew by mid-single-digit, mainly driven by Carlsberg. We grew less than the market due to capacity constraints.

Our volume growth in Vietnam was in the low-double-digits. While the market was flat year-to-date June, it weakened considerably during Q2 because of the macroeconomic slowdown. The market declined by 6% for the quarter according to Nielsen. Consequently, our volume growth slowed down in Q2, although still posting low-single-digit growth. Our international premium brands 1664 Blanc, Carlsberg and Tuborg grew strongly. The local mainstream brand Huda also grew.

In Laos, volumes grew by double-digits. We made significant price increases to offset the significant inflationary pressure. In Cambodia, beer volumes grew while total volumes declined due to weaker energy and soft drinks volumes.

Slide 9 and Central and Eastern Europe where the beer markets were impacted by bad weather in Q2 and high inflation. As a result, our volumes declined by 2%. We gained market share in most markets in the region, thanks to the good health for our brands. Revenue grew organically by 16%. The strong revenue per hectoliter growth of 19% was thanks to price increases, easy comps in Ukraine and the positive product, channel and country mix.

Operating profit grew organically by 8% due to the very good cost control and the higher revenue per hectoliter, offsetting the significant inflation in our cost base. Reported operating profit was flat, mainly because of the depreciation of the Ukrainian currency.

Our business in Ukraine remained heavily impacted by the war and the health and safety of our colleagues remain our first priority. Volume growth was high-single digit and benefited from easy comps in Q1, while volumes in Q2 were impacted by the intensified competitive activities and bad weather. Revenue per hectoliter improved strongly, mainly due to the high inflation. Our international premium brands grew strongly.

Our markets in Southeast Asia and Europe delivered mixed results. Volumes grew by low-single digits in Greece and Serbia, while in other markets such as Italy, Bulgaria and Croatia, volumes declined as they were impacted by inflation and bad weather. Revenue per hectoliter grew strongly across all markets, thanks to price increases and a positive mix supported by growth for the international premium brands.

In our export & license business, we show good growth for the premium portfolio, particularly for 1664 Blanc and Brooklyn. And with that, over to you, Ulrica.

Ulrica Fearn, Chief Financial Officer, Carlsberg A/S

Thank you, Cees. Good morning, everyone. Please go to slide 10 for more details on the P&L. Revenue was up organically by 11.2%, mainly as a result of the strong 10% growth in revenue per hectoliter. The revenue per hectoliter improvement was driven by the on-trade recovery in Q1, premium growth in Asia and Central and Eastern Europe, and price increases across most markets. There was a small positive acquisition impact of 0.5% from the Waterloo acquisition in Canada, while the currency impact was minus 5.1%, predominantly due to the Chinese, Laotian, Norwegian and Ukrainian currencies. Reported revenue grew by 6.6%.

Operating profit grew organically by 5.2%, thanks to the revenue per hectoliter improvement and our continued focus on costs and top line growth in H1. This combination more than offset the significant cost headwind from higher raw material, packaging, and energy cost. The cost of sales per hectoliter increased organically by 13% due to the higher input and energy cost and higher salaries. We were able to offset the

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cost increase in absolute term and report an organic gross profit per hectoliter improvement of 7%, but the reported gross margin declined by 160 basis points to 44.7%.

Despite the challenging operating environment, we continued to invest in our strategic priorities and our marketing investment increased organically by 7.2%, while administrative expenses were flat. Reported operating profit was impacted by a significant headwind from currencies, in particular the Chinese, Laotian, Norwegian and Ukrainian currencies and declined by 2.6%. The operating margin development mirrored the gross margin development, contracting 160 basis points to 16.6%.

Looking at the items below operating profit, special items amounted to DKK -169 million. The two main factors impacting special items in the first half year were the reversal of our provision relating to the now closed competition case in Germany and the cost of terminating the Kronenbourg 1664 licensee agreement in the UK.

Net financial amounted to DKK -332 million, which was a decline of a DKK 176 million and explained by significant foreign exchange losses last year. Excluding foreign exchange gains and losses, financial items amounted to DKK -311 million, and this was DKK 81 million more than in 2022 and mainly due to other financial.

Net interest increased by DKK 4 million, the net result of higher average net debt of DKK 1.9 billion. The effective tax rate of 21% was 100 basis points below half one 2022, in line with expectations. The net profit for the group ended at DKK 3.5 billion. Adjusted net profit for continuing operations - and that is excluding Russia - amounted to DKK 4 billion, positively impacted the organic operating profit growth and lower financial expenses and negatively by currency.

Adjusted earnings per share for continuing business increased slightly to DKK 29.3, supported by the lower number of share.

Slide 11. Free operating cash flow amounted to DKK 4.3 billion versus DKK 7 billion in 2022. The development was mainly driven by EBITDA, which was up organically 2.7%, but declined in reported terms by 4% due to adverse foreign exchange movement. In addition, there was a small negative contribution from the change in total working capital compared with positive contribution in 2022. The change in total working capital was DKK -105 million.

Zooming in on trade working capital, the 12-month average trade working capital to revenue was strong at minus 21%, compared to 20.1% last year. Other working capital was in particularly impacted by VAT and pensions.

The free cash flow was also impacted by the acquisition impact of DKK 802 million related to the acquisition in Canada of Waterloo Brewing. Net interest-bearing debt was DKK 22.4 billion, which was DKK 3 billion higher than year-end 2022. The increase was driven by the Waterloo acquisition amounting to DKK 806 million, the share buyback in half one of DKK 1.3 billion, and dividends to shareholders and noncontrolling interest of DKK 4.6 billion.

Return on invested capital improved by 30 basis points to 15.2%. Return on invested capital was positively impacted by the lower effective tax rate and improved trade working capital, offsetting the negative currency impact on operating profit. The return on invested capital excluding goodwill was 41.2%.

And now slide 12 and our capital allocation priorities. As already mentioned on previous slides, we increased the marketing investment by 7.2% in support of our strategic priorities, in line with our first capital allocation priority of ensuring sufficient investments in the business to drive sustainable long-term growth. We remained well below our second priority of having a leverage below 2 times, with the leverage ratio for the continuing business of 1.46x. Our third priority of an adjusted dividend payout ratio of around

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