Carlsberg A/S

H1 2021 Financial Statement Conference Call

18 August 2021 with:

CEO Cees 't Hart and CFO Heine Dalsgaard

PARTICIPANTS

Corporate Participants

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

Heine Dalsgard - Chief Financial Officer, Carlsberg A/S

Other Participants

Trevor Stirling - Analyst, Sanford C. Bernstein

Søren Samsøe - Analyst, SEB Enskilda (Denmark)

Richard Withagen - Analyst, Kepler Cheuvreux SA (Netherlands)

Laurence Whyatt - Analyst, Barclays Investment Bank

Tristan van Strien - Analyst, Redburn Partners

Olivier Nicolai - Analyst, Goldman Sachs International

Fintan Ryan - Analyst, JPMorgan Securities Plc

Nik Oliver - Analyst, UBS AG (London Branch)

André Thormann - Analyst, Danske Bank A/S

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

MANAGEMENT DISCUSSION SECTION

Operator: Ladies and gentlemen, welcome to the Carlsberg's H1 2021 Financial Statement. For the first part of this call, all participants are in a listen-only mode. Afterwards, there will be a question-and-answer session. [Operator Instructions] This conference call is being recorded. Cees 't Hart

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

Cees 't Hart, CEO

Good morning, everybody, and welcome to Carlsberg's H1 2021 conference call. I am Cees 't Hart and I have with me CFO, Heine Dalsgaard; and Vice President of Investor Relations, Peter Kondrup. The world is still dealing with the challenges of COVID-19 and I hope that you and your families are safe and well. Let me begin by summarizing the headlines for H1.

The Group delivered a strong set of results and, overall, like-for-like numbers were ahead of 2019, underpinning the relevance of our strategic priorities and the long-term health of our business. COVID-19 continues to impact our business and while we see recovery in some markets, other markets are still heavily impacted. Therefore, uncertainty for the remainder of the year persists.

Finally, we are satisfied that the good results for H1 and the start of Q3 have enabled us to upgrade our earnings guidance and launch the third quarterly share buyback program. I will now go through the key headlines for the first half year and the commercial and the regional highlights, and after that Heine will take you through the financials and the new outlook for 2021.

Please turn to slide 3. The Group delivered a strong set of results in H1. Total volumes were up organically by 10% and revenue by 9.6%. Albeit these numbers were helped by easy comps especially in Q2, we are pleased that the business delivered approximately 2% organic volume growth compared with the pre-COVID level in H1 2019.

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Revenue per hectoliter improved sequentially during the half year, and for Q2 it was plus 5%. The improvement was supported by channel mix, following the gradual reopening of on-trade, particularly in Western Europe, and product mix. All regions contributed to the organic operating profit growth of 15.6%. The operating margin was up by 10 basis points to 16.1%. Free cash flow was strong at DKK 5.3 billion, supported by the higher EBITDA, a positive impact from working capital, and lower operational investments. So far this year, the group has returned to DKK 4.9 billion in cash to shareholders through dividends and share buybacks. Heine will go into more details on the financials in a few slides.

Please go to slide 4 and some strategic highlights. We are pleased with the progress of the SAIL'22 priorities so far this year. Our core beer volumes grew by 8%. Particular brands to highlight includes Tuborg, Wusu in China, Huda in Vietnam, Mythos in Greece, and Baltika in Russia.

We are driving the digital agenda across the Group. We saw very good growth for our online platform, Carl's Shop, with the number of active customers being up by 25%. The platform is currently available in eight markets and we expect this number to increase to ten by year-end. We are also encouraged by the value growth generated by Carl's Shop, with revenue per hectoliter being up 5% in H1.

Online sales to consumers primarily takes place on various third-party platforms, including e-retailing and online-to-offline (O2O). In total, our eCommerce revenue increased by 30%. In China, which by far is the most advanced online market, O2O revenue was up by 130%. Our strong online presence in China and its continued growth has led to our online market share being well above our average national market share, the latter being around 8%.

Slide 5, please, and our growth priorities which all posted very strong results for the half year. Craft & speciality grew by 21%, particularly driven by 1664 Blanc and Somersby and supported by the reopening of the on-trade in many markets. In Q2, the growth was even stronger at 27%. Alcohol-free brews grew by 26% for both the half year and Q2, even following a very strong 2020. We achieved double-digit growth in all three regions, although the category remains very small in Asia.

In Asia, we achieved strong organic revenue and operating profit growth. Notwithstanding the importance of China for the strong growth numbers, almost all markets made meaningful contributions to both top- and bottom-line, albeit supported by easy comps last year.

Slide 6 please, and a few words on our organisational health and sustainability agenda. Just before the summer, we got the results from our employee survey, which is conducted every other year. Given the significant challenges for all our employees during the past year, we were very pleased that the results were largely on par with 2019 and that the participation rate was very high at 92%, slightly ahead of 2019.

The overall employee engagement score was strong at 82%, which is in the top quartile. The good results show that the many initiatives we took during 2020 to support and take care of our employees, to empower them further and assure good communication resonated well with colleagues across the Group.

We continues to make progress towards our sustainability targets. Our Together Towards ZERO program is part of SAIL'22 and we have ambitious targets for carbon, water, health and safety, and responsible drinking. Zooming in on carbon, a few examples from the half year included our Finnish brewery becoming the eight carbon-neutral brewery in the Group. In Sweden, our supplier switched to biogas trucks for the distance not covered by electrified train, thereby making our long-distance transport route fossil-free. In May, we officially inaugurated the new total water recycling plant at our brewery in Denmark. The plant will recycle 90% of the process water, making the Fredericia brewery the most water-efficient brewery in the world.

And now to a review of the regions, please go to slide 7 and Western Europe. After a very challenging Q1, restrictions were gradually lifted in many markets from mid-Q2, leading to a gradual recovery of the on-

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trade channel. The weather in Q2 was bad across the region in April and May, but improved considerably in June. In June, we also saw a positive benefit from consumers celebrating the reopening of on-trade, which coincided with the European Football Championship. Total volumes grew organically by 1.1%, with significantly improved dynamics in Q2. Including acquisitions, the volume growth was 7.7% for H1.

Consumers' return to the on-trade also led to a considerable improvement in channel and brand mix during Q2, and revenue per hectoliter was up 6% for the quarter. Organic revenue growth was 12.5%, while it was more muted for the half year due to the challenging start to the year. However, even though on-trade volumes were up by almost 80% in Q2, they were still only at index 60% versus 2019. Profitability strengthened gradually during the half year despite a significant increase in marketing investments, particularly in Q2. Operating profit grew organically by 1.2%.

Excluding acquisitions, the operating margin improved by approximately 10 basis points, while the reported operating margin declined by 110 basis points due to the dilutive effect of last year's acquisitions, especially the Marston's brewing business as the UK business is heavily on-trade skewed and therefore was lossmaking the beginning of the year.

Slide 8 and a few additional comments on Western Europe. In the Nordics, we gained or kept market share in all markets but Finland where our market share was impacted by less promotional volume. Norway continued to benefit from the cross-border to Sweden, and in Denmark the reopening of the Danish- German border contributed to the strengthening of our market share. In Norway, very strong off-trade volumes offset the decline in on-trade but impacted price/mix. The strong momentum of our Pepsi franchise in Norway and Sweden continued, particularly in Q2.

In Poland, the volume and value growth were driven by our alcohol-free brews, Carlsberg, Somersby, and local brands such as Zatecky and Kasztelan. Somersby has been particularly successful in Poland, which is the brand's largest market.

Our Swiss business is heavily on-trade exposed. Even though our off-trade business continued to perform well with good progress of craft & speciality and alcohol-free brews, total volumes declined due to restrictions.

In France, we saw a gradual improvement during Q2 as the off-trade started to reopen. Q2 volumes were up by high teens.

In the UK, the key focus so far this year has been the integration of Marston's brewing business, and that is progressing well. The business recovered strongly during Q2 when the restrictions were relaxed, and volumes grew by double-digit.

Please turn to slide 10 and Asia where the market development varied significantly. Our Chinese business performed very well, but all other markets to various degrees were challenged by government-imposed restrictions. Total volumes grew strongly by 19.7%, with China being the key driver. Mainly due to last year's easy comparables, almost all other markets also grew volumes in H1. Total volumes grew organically by 5% compared to H1 2019. The region delivered strong organic revenue growth, thanks to the volume growth and an increase in revenue per hectoliter of 4%.

Revenue per hectoliter accelerated in Q2 due to a positive brand mix and, in some markets, channel mix. Organic operating profit grew strongly by 29%. The operating margin increased by 80 basis points to 25.8%, driven by positive operational leverage, the improvement in revenue per hectoliter and the ongoing tight cost control.

Slide 10 and a few market-specific comments. Our Chinese market share strengthened further. Our volumes were up by 23%. It also delivered strong growth versus the 2019 pre-pandemic level. We saw good progress

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for all our key priorities in China, including very good growth on our international premium portfolio, continued expanded distribution of the Wusu brand, and big city growth. Revenue per hectoliter improved by mid-single-digit percentages. Mainly due to easy comparable numbers, as restrictions were generally much tighter in 2020, our Asian volumes outside China grew by 15% in H1.

In India, our business had another very volatile year with frequent changes in restrictions. Our volumes grew strongly by 40%, mainly due to last year's extensive lockdown during Q2. The growth was led by Tuborg and Carlsberg Smooth Draught.

In Laos, we had a good start to the year, but the situation became increasingly challenging during Q2 due to a prolonged lockdown.

Volumes in Vietnam grew by mid-teens. The country saw a surge in infection rates and the reintroduction of strict lockdown measures, but during H1, our stronghold in Central Vietnam was less impacted by these restrictions.

In Cambodia, volume growth was in the mid-teens due to a strong performance of the CSD and energy drinks business.

In Malaysia, our business remains impacted by extensive lockdowns, which included the closure of our brewery for an extended period during the summer. We were able to reopen the brewery a few days ago.

Slide 11 and our Central & Eastern European business that delivered a solid performance with organic volume growth of 8.7%. The non-beer business did particularly well with 27% volume growth, not least due to our energy drink, Flash Up, in several Eastern European markets. Compared to 2019, total volumes grew by 5%. Revenue grew by 8.6%. Revenue per hectoliter for the half year was flat, but improved considerably in Q2 to plus 4%, following four quarters with a negative development.

The improved trend was driven by a positive product mix and improved channel mix in South-East Europe, and the fact that we, in Q2, were lapping our higher level of promotions in Russia that were introduced in late Q1 2020. Operating profit grew by 2.7%. Tight across discipline led to a reduction in SG&A costs, but operating profit was impacted by the transactional impact on input costs in Russia and Ukraine after last year's currency depreciation as well as higher logistic costs in some markets.

Slide 12, please. Our Russian volumes were at mid-single digit. We saw a significant improvement in revenue per hectoliter in Q2. Due to a positive product mix, with good growth of 1664 Blanc, Somersby, Tuborg, and Flash Up, price increases, and the more like-for-like comparables. The competitive environment remained tough during the half year.

In Ukraine, our volumes grew slightly in a flat market. Revenue per hectoliter improved, thanks to a positive product mix from Garage, Baltika, and Carlsberg, and price increases.

In South-East Europe, most markets had a tough start to the year, but improved from around March, mainly due to the easy comparables as lockdowns were more severe last year. In Italy, Greece, Croatia, and Serbia, volumes grew by double-digit percentages and revenue per hectoliter improved, especially in Q2 due to a positive channel mix. In Bulgaria, recent years' very positive trajectory continued.

In our Export & License business, volumes grew by more than 20% helped by the reopening in some of the key markets. Key drivers were markets such as South Korea, Australia, Turkey, and Romania.

And with that, I will hand over to Heine who will take you through the financials and outlook.

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Carlsberg A/S published this content on 20 August 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 20 August 2021 11:03:03 UTC.