Carlsberg A/S : Q1 2021 Conference Call Transcript

Carlsberg A/S

Q1 2021 Trading Statement Conference Call

28 April 2021 with:

CEO Cees 't Hart and CFO Heine Dalsgaard

ANALYSTS PARTICIPATING

Edward Mundy - Analyst, Jefferies International Ltd.

Fintan Ryan - Analyst, JPMorgan Securities Plc

Trevor Stirling - Analyst, Sanford C. Bernstein Ltd.

Fredrik Ivarsson - Analyst, ABG Sundal Collier AB

Laurence Whyatt - Analyst, Barclays Capital Securities Ltd.

Mitch Collett - Analyst, Deutsche Bank

Nik Oliver - Analyst, UBS AG (London Branch)

Olivier Nicolai - Analyst, Goldman Sachs International

Pinar Ergun - Analyst, Morgan Stanley

Tristan van Strien - Analyst, Redburn (Europe) Ltd.

Simon Hales - Analyst, CitiGroup Global Markets Ltd.

MANAGEMENT DISCUSSION SECTION

Operator: Ladies and gentlemen, welcome to the Carlsberg's Q1 2021 Trading Statement Conference Call. 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.

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

Cees 't Hart, CEO, Carlsberg

Good morning, everybody, and welcome to Carlsberg's Q1 2021 conference call. I hope you are all safe and well despite the continued challenges posed by COVID-19. My name is Cees 't Hart, and with me CFO, Heine Dalsgaard; and Vice President of Investor Relations, Peter Kondrup.

The Group delivered a good start to the year. Thanks to strong performance in some of our key markets, notably in Asia and Central and Eastern Europe. This more than offset continued COVID-19-related challenges in many Western European markets. I will provide the headlines for the quarter and our performance against our SAIL'22 priorities, and Heine will take you through the regions and the full-year outlook.

Due to seasonality, Q1 is traditionally a very small quarter for our businesses across Europe; while in Asia, it is an important quarter due to the festive season. The 11.5% organic volume growth was mainly driven by more than 50% volume growth in China as well as solid double-digit volume growth in markets such as Russia and India. Reported volumes grew by 12.8% due to last year's acquisitions.

Our international premium brands performed very well. Tuborg, 1664 Blanc and Somersby were up by 20% to 30%, mainly driven by growth in Asia and Central and Eastern Europe; and for Somersby, also strong growth in Poland. Carlsberg and Grimbergen were impacted by on-trade restrictions and therefore declined.

Organic revenue grew by 3.8%. The revenue per hectoliter of minus 7% was due to negative country mix in both Western Europe and Asia, and channel mix due to less on-trade, in addition to higher promotions in Russia compared with same quarter last year.

Please turn to slide 4 and a brief update on some of our strategic priorities. When we look at the strong growth numbers for all our growth priorities on this slide, we were, of course, very satisfied. We saw good underlying growth dynamics, although the numbers are also impacted somewhat by easy comparables for Q1 last year. Asia is our designated growth region and delivered as such in Q1. Albeit that we had easy comparables, we saw particularly strong growth in China and we also saw good growth in India. Heine will provide more color on Asia in a moment.

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On the back of a good growth in 2020, the growth trajectory for our alcohol-free brews continued with 24% growth in Q1. The category growth is supported by an increasing awareness of health and wellbeing, which has only been further accelerated by COVID-19. We saw very good progress in all regions, although strong growth in Asia was from a very low base. Our craft & speciality volumes grew strongly in Asia and Central and Eastern Europe, while category volumes were down in Western Europe.

Total volumes grew by 13%, with 1664 Blanc being the star performer with 33% growth. Somersby also delivered very strong results in the first quarter, and this was particularly driven by strong growth in Russia, Poland, Kazakhstan, and Australia.

An important driver of the strong progress for our craft & speciality and alcohol-free brews as well as a stronger core beer portfolio, has been the step up in our innovation efforts in line with SAIL'22. On the next slide I will give more details on our innovations.

Please turn to slide 5. In recent years, we have significantly strengthened our innovation efforts and processes. And as a result, seen a number of improvements including optimization of existing products, renovations, expansion of existing products in new markets, and innovations both within liquid and packaging innovation. A few examples are shown on this slide.

Baltika Zero is our largest alcohol-free brand in Russia and the Group. The innovation, Baltika Zero Grapefruit outperformed the alcohol-free segment and supported the very strong growth of our alcohol- free portfolio in Q1 in Russia.

Another successful innovation comes from Frydenlund in Norway, where the brand serves as a bridge between mainstream and craft & speciality. The Juicy IPA was launched in 2020 to support the brand equity of being a trendy, high-quality brand, and has been very popular with consumers, contributing to the stellar performance in Norway.

Somersby 0.0 is the number one voted alcohol-free brand in Poland. In 2020, we launched Somersby 0.0 Wild Berries, to further accelerate the growth of both the Somersby brand and our alcohol-free portfolio. This very strong brand and category growth in Poland served as solid proof points of the success of our continued innovation efforts for Somersby.

In China, Tuborg Pure Draft was another innovation launched in 2020. Priced at a premium to Tuborg Green, it has been very well received by young Chinese consumers and volumes have been ahead of our expectations.

In total, innovations accounted for more than 10% of Group revenue in 2020.

Please turn to slide 6. We have in recent months received many questions regarding our strategy of what's next. So let me elaborate on our thinking. First and foremost, I want to emphasize that SAIL'22 remains our strategy until end 2022. However, we are now starting to look at our next strategy period, so from 2023 and onwards. The process will very much mirror the successful process which we applied back in late 2015 and early 2016, when developing SAIL'22.

A few insights into this are that we will kick off the discussion at our annual strategy seminar with the Supervisory Board in June. After that, in the late summer, early fall, we will start doing more thorough analyses and deep dives. This work will again be appropriation and conducted in different work streams and driven by all the members of our extended leadership team, to ensure the involvement of all relevant markets and functions.

The valuable learnings from the development of SAIL'22 were that the broad engagement in the strategy and development process facilitated a committed buy-in to and acceptance of the strategy by all key people across the organization; and therefore, a high level of engagement and speed and execution of the strategy. Not surprisingly, the strategy will include considerations with respect to categories, brands, markets, capabilities and execution.

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As you can see on the slide, the working title is SAIL'27. It is important to emphasize that next leg of the journey for Carlsberg will most likely be a continuation of SAIL'22. So an evolution rather than a revolution. We expect that many of the priorities in SAIL'22 will remain, such as craft & speciality, alcohol- free brews, and growth in Asia. We will, of course, look into possibly interesting new categories and whether some capabilities need to be further strengthened. We expect to share with you information on the updated strategy, including how we see the future growth algorithm for our company, during 2022.

Slide 7, please, and a few words on our geographic footprint that provides a strong foundation for our current and future growth ambitions. We are pleased with having a very good balance between growth and mature markets. Our mature markets provide interesting value growth opportunities, while our growth markets provide both volume and value growth opportunities. The balance between these markets has strengthened a lot during the past years; and the importance and size of the growth markets in Asia have strengthened significantly.

In particular, the VIC markets - China, India and Vietnam - provides interesting growth opportunities. We are also seeing market volume growth in Eastern European countries such as Kazakhstan and Ukraine. Even Russia has had a positive market volume development in recent years. Across our regions, the value growth opportunities through the ongoing premiumization remain very attractive. We are therefore confident and even more confident than back in 2015, when SAIL'22 was developed, that continued strong execution of our strategic priorities in all our markets across Western Europe, Asia, and Central and Eastern Europe will deliver appealing long-term top- and bottom-line growth.

And now, over to Heine, for the Q1 regional update.

Heine Dalsgaard, CFO, Carlsberg

Thank you, Cees; and good morning, everybody. Please turn to slide 8 and Western Europe, and again, this quarter was significantly impacted by lockdowns and restrictions. Volumes declined organically by 5.8% due to lockdowns of the on-trade across the entire region. Revenue was down by almost 15% due to channel and country mix.

Reported volume and revenue development was slightly better due to last year's acquisition of Wernesgrüner and the Marston's brewing activities. Our alcohol-free beverages continued to perform very well and grew by 26% with brands such as Tourtel in France and Somersby 0.0 in Poland being the key drivers.

In the Nordics, Norway continued last year's growth trajectory, helped by the closed borders. Finland and Sweden were impacted by restrictions, and in the case of Sweden, also by less order sales to the Norwegians. Volumes in Denmark were flat, with off-trade growth offsetting the decline in the on-trade and border.

Our business in France was impacted by lockdown of on-trade that will probably stay in force until mid- May. We saw very good growth in the off-trade and our market share improved slightly due to good performance of our premium portfolio. Switzerland was impacted by on-trade restrictions. Our business over-index in on-trade and events and under-index in off-trade, and therefore, volumes declined.

Poland continued its growth trajectory, seeing good growth of alcohol-free, craft & speciality and Somersby and continued good execution in the off-trade.

In the UK, the integration of Marston's brewing activities is progressing very well, and cost synergies are tracking well. Our UK volumes were challenged by lockdowns as strong off-trade demand was insufficient to offset the lost on-trade business. As you know, on-trade opened for outdoor serving two weeks ago, and we've seen great excitement among consumers who are finally able to go to the pub again.

And now slide 9, and Asia, please, where we saw a great start to the year, thanks to very strong performance, in particular in China. Volume and revenue grew by approximately 30% for the region. We

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saw strong premium growth in a number of markets. The 1% growth in revenue per hectoliter was impacted by country mix due to stronger growth in markets such as China and India, where revenue per hectoliter is below the regional average.

Our Chinese business delivered more than 50% organic volume growth due to good execution of the Chinese New Year, continued growth of our premium brands, both local and international, continued city expansion and easy comparables with Q1 last year that was significantly impacted by COVID-19. We continued to strengthen our market share, driven by growth of our local premium and international premium brands as well as growth in the e-commerce channel.

Excluding China, the rest of Asia reported organic volume growth of 5%. We saw a good start to the year in India and Vietnam, with both markets delivering high-teen volume growth. In India, the growth was mainly due to lower excise tax in some states, trade loading in other states ahead of price adjustments and easy comparable numbers for the month of March.

In Vietnam, the growth was driven by restrictions being lifted during the quarter, and growth outside our core region in the central part of the country. In other markets such as Nepal and Malaysia, our business remained in lockdown and also declined for the quarter. Net-net, a good start for the year in Asia, but the situation remains very fragile in several markets, and we see intensified lockdowns following increases in infection rates. Therefore, we expect continued volatility in the coming quarters.

And now slide 10, and Central and Eastern Europe, please. The region delivered a solid start to the year. Revenue grew organically by 3.1%. This was driven by 8.9% organic volume growth, partly offset by declining revenue per hectoliter. The lower revenue per hectoliter was mainly the result of the higher level of promotions in Russia compared with the same quarter last year and, in some markets - and that's primarily in Southern Europe - a negative channel mix due to on-trade restrictions. Reported revenue declined by 9% with a currency impact of minus 12% due to the depreciation of Eastern European currencies in the second half of 2020.

With the exception of Belarus, all markets in Central and Eastern Europe delivered strong organic volume growth for the quarter. Russia achieved strong mid-teens volume growth, mainly due to a higher market share year-on-year following our so-called Plan B with a higher level of promotion, that was initiated at the end of Q1 last year. Our market share in Q1 this year was at the same high level as in Q4. In Ukraine, our volumes grew slightly in a declining market that was impacted by cold weather and frequent changes in COVID-19-related restrictions.

In Southern Europe, January and February were challenging, but in March, all markets reported strong volume growth. This was mainly due to easy comps as restrictions started from March 2020. However, in the large on-trade markets in Southern Europe such as Italy, Greece and Croatia, the situation remains uncertain due to continued lockdowns and the dependency on the tourist season.

In our export and license business, growth was driven by the licence businesses in Turkey and Ireland and the export business to South Korea and to Australia in particular.

Now slide 11, please, and an update on our share buybacks. As we said in February, we will execute the 2021 share buybacks as quarterly programs due to the continued business uncertainty related to the COVID-19 pandemic.

The first quarterly share buyback program ended Friday last week. In total, 749,879 shares were purchased at a total value of DKK 750 million, corresponding to an average share price of DKK 1,000 per share. The daily volume bought represented an average of around 6% of daily traded volumes on Nasdaq Copenhagen.

Today, we then initiated the second quarterly buyback. As we had a good start to the year, the value of this second share buyback program has been increased. The intention is to buy back Carlsberg B shares amounting to DKK 1 billion up until August 13.

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