Ladies and gentlemen, welcome to the Carlsbad 2018 Financial Statement Call. Today, I'm pleased to present CEO, Case Ed Hart, and CFO, Heine Dates Call. And just to remind you, this conference call is being recorded and a transcript of the call will be made available online.
Good morning, everybody, and welcome to Carlsberg's full year 2018 conference call. My name is Katie Harte, and I have with me, CFO, Heine Delguidt, and Vice President of Investor Relations, Peter Conberg. Let me first briefly summarize the key headlines for the year. We delivered strong financial performance both on top and bottom line We see good growth coming from our sales and 2 priorities. We are significantly increasing the cash returns to shareholders, and we are well prepared for continued growth in 2019.
I will go through the highlights of the year, our strategic progress in the regions, and Hager will take you through the financials and 2019 outlook. Please turn to Slide 2. Before I go through the numbers, let me spend a few minutes evaluating the financial, strategic and organizational health of our company. Financially, we continue to positive trajectory that we have been all since 2016. For 2018, we delivered strong top line growth margin and ROIC improvement and a very healthy cash flow.
We have also been able to invest significant funds in support of our sales 22 priorities in order to strengthen our growth profile. In 2016 and 2017, our focus was on delivering funding the journey benefits. In 2018, our focus was to shift gears to growth to deliver top line growth enabled by the significant sales 22 investments. If that, we're very pleased with the results, albeit we were helped by a very warm summer. Strategically, we make excellent progress on our growth priorities and saw strong numbers for craft facility and alcohol free brews as well as in Asia.
We continued building stronger capabilities within areas such as sales, marketing and digital, and we continued to grow our DraughtMaster. Looking at the organizational health of the business, we are also moving in the right direction. It is continuous and never ending journey as we see our winning culture becoming increasingly embedded across the group. Our competencies in areas such as commercial, finance, supply chain, digital and data as strengthened. We also see a very good attraction of bringing to life our purpose of brewing for a better today and tomorrow.
Including our sustainability program together towards 0. We are confident that being a purpose driven company will become increasingly important for our people. Customers and consumers and for attracting new talents. At the end of the day, for a well embedded purpose, we'll help us to deliver sustainable long term value for our shareholders. Back to the numbers now, as you can see from the slide, net revenue grew organically by 6.5% and operating profit by 11%.
The gross cash generation remained strong at 1,000,000,000 and we reduced net debt further ending the year with a leverage of 1.29 times. As a result of the strong financial performance, the board will propose to the ATM an increase in dividends of 13%. In addition, we have today initiated 4,500,000,000 gigabytes share buyback program. Heine will come back to the details. Slide 3 and a few words on our Golden Triangle, which serves as a key KPI in our performance management.
It helps us to continuously aim at balancing growth and profits, but at the same time, delivering a strong free cash flow. For 2018, we delivered a well balanced golden triangle of top line growth, margin improvements and operating profit growth. But at the same time, achieving a strong free cash flow. The organic volume growth was driven by all three regions in parts of Western Europe and Russia, We were also helped by warm weather during the summer. People margins strengthened by 100 basis points due to a solid 2% pricemix volume leverage and efficiency improvements.
The 11 percent organic operating profit growth was the result of improved GPO and cost efficiencies, which were positively impacted by funding the journey, and all this more than offset a significant increase in marketing investments. Please turn to Slide 4 and a few comments on our international premium brands It's also very good growth. 6064 Blanc continued its strong performance, causing the 1,000,000 hectoliters mark in 2018, The brand grew by 49%, even after having achieved 46% growth in 2017. We saw growth in most markets, with particularly strong growth in Russia, China, Ukraine, France and some export markets. Greenberg also continued its double digit growth pattern and grew by 14%, driven by Western And Eastern Europe, and with particularly strong results achieved in markets such as France, Denmark and Russia.
Tumor, our largest brand grew by 10%, mainly driven by continued strong growth in India and China together adding another 1,000,000 hectoliters to our Asian volumes. The brand also grew in several markets Europe such as Denmark, Norway, Serbia and Bulgaria as well as in the Turkish license market. Volumes of the Carlsberg brands grew by 5%. We saw solid growth in all three regions. On the slide, you can see the brand's new design, which was launched in September.
The new groups and the number of sustainability improvements have been launched in Norway Finland, Sweden, Denmark, and the UK, and will be rolled out across other Carlsberg markets such as China, India, Malaysia, and many more during 2019. Please turn to Slide 5 and a brief update on some of our strategic priorities which are receiving support from our sales 22 investments. The strong growth of the craft and specialty category continued and we grew our portfolio by 26%. Russia, France, China and Poland were important drivers of this growth. During the year, we launched Brooklyn Improvement and established the microbrewery in Lithuania taking the number of craft breweries in Western Europe to Tandem.
Our extensive portfolio of local alcohol free brews includes brands such as Balsburg Nordic in Denmark, Bouygueskom in Norway, Southwestern, and for free in Switzerland and Belgium 0 in Russia. Healthfree brews grew by 33% in Western Europe and in Russia, Belgium, 0 grew by 35%. It may be launched BRL, which is our 1st global standalone alcohol free brew. BRL was launched in Bulgaria and Poland this positive initial consumer response. The rollout of the DraughtMaster System continued, supporting the availability of our craft as specialty portfolio in Lyon Trade.
The system is available in all Western European countries and the process of converting both fuel pack installations in the Nordic markets is well underway and expected to be finalized within the next 2 to 3 years. In 2018, we increased the number of DraughtMaster installations by approximately 35%. Building the right capabilities in different functional areas is a vital part of Sales 22. A very important area is digital and in 2018, we set up a new team to drive momentum and progress within this area. One of the digital successes this year was a business to business platform, Karl's Shop.
The platform is currently available for customers in 6 European markets, and it just passed won't do indicate in net revenue. Slide 6 had a few comments on our sustainability efforts which are driven by our sustainability program sustainability targets, being 0 carbon footprint, 0 water waste, 0 irresponsible drinking and a 0 Excellence culture. For each of these ambitions, we have defined clear measurable and signed based targets for 20 22 2030 all measured against a 2015 baseline. In 2018, we continued our efforts to achieve targets Our sustainability report will be released later today, and it contains a wealth of information on our progress. Let me briefly touch upon 2 of the areas.
Our ambition for CO2 emissions is to reduce this and our breweries by 50% in 20 22 and reached 0 by 2030 compared to the 2015 baseline, we have reduced emissions by 20%. Our brewery in Sweden became the 1st brewery in the group to run on 100 percent renewable energy and all our breweries in Western Europe now run on 100 percent renewable electricity. Water usage is another important area for us. As we have reduced our water usage by 9% per hectoliter, compared to the 2015 baseline taking us down to 3.1 actually. Here among the most water efficient breweries in the world, but we still have some way to go to reach our target.
And now I will hand over to Heine, who will take us through the financials and outlook.
Thank you, please, and good morning, everyone. Please turn to Slide 7. So net revenue grew organically by 6.5%. This was driven by volume growth of 4.8%. And a positive pricemix of 2%.
Reported terms net revenue grew by 3% impacted by negative currency movements. Customer goods sold per hectoliter grew organically by approximately 1% mainly due to higher input costs and mix The solid pricemix and ongoing efficiency improvements led to a gross margin improvement of 20 basis points to 50%. Operating expenses increased organically by 4%. This was driven by higher marketing expenses, supporting our SAIL 22 growth initiatives. Marketing expenses grew organically by more than 15% or around SEK 700,000,000 reaching 8.6% of net revenue compared to 7.8% last year.
Excluding marketing expenses, reported operating expenses declined by 1% or a 45 basis point reduction to net revenue as a result of funding the journey initiatives. Depreciation was down from EUR 4,700,000,000 to EUR 4,100,000,000 mainly due to an extraordinary depreciation charge in first half twenty seventeen. In total, we delivered 11% organic growth in operating profits. In reported terms, operating profit grew by 5.1% due to a significant negative impact from currencies of EUR 500,000,000. Operating profit margin increased by 30 basis points to 14 0.9%.
As expected, and as we saw earlier in the year, the second our organic operating profit growth of 8.3 percent was lower than the 14.2% in first half. This was due to lower depreciation in first half twenty eighteen versus first half twenty seventeen, a positive year on year impact in third half from sell in to the 1st season in Asia and higher spend in second half twenty eighteen to support our SAID 22 priorities. Before turning to the next slide, a few comments on funding the journey, which is a program have now been concluded. As we've talked about in the past, the benefits from the program exceeded our initial expectations. The benefits came from all 4 work streams.
So that is value management, supply chain efficiency, operating expense efficiency, and rightsizing of businesses. Taking all this together and compared to the 2015 baseline, we have improved the underlying profits organically by around SEK3 billion. As said previously, we have reinvested more than SEK 1,000,000,000 back into the business into sale 22 growth initiatives. We will not announce a new efficiency program, but rather ensure that funding the journey as a mentality and way our living will stay in the organization By applying our disciplined approach, we will continue to take our costs and we will maintain discipline on cash. Slide 8, please.
Further down, the P and L net special items amounted to minus 88 1,000,000, primarily due to restructuring measures in Western Europe. Net financials improved to minus 722 compared to -7 88 last year. In line with our expectations, net financial expenses, excluding currency gains and losses, amounted to 758,000,000 versus EUR 908,000,000 in 2017. The improvements versus 2017 was mainly due to a reduction in our net interest bearing debts, including the repayments of the EUR 1,000,000,000 bond in October 2017. Tax was 400,000,000, corresponding to an effective tax rate of 28 percent, which was in line with our expectations.
Non controlling interests amounted to EUR 824,000,000, slightly higher than last year. They primarily relate to our businesses in Malaysia, Chongqing, China and Layers. The Carlsberg's group share of consolidated profits increased to SEK 5,300,000,000 compared to the SEK 1,300,000,000 in 2017, which was impacted by the impairments of the Bolzier brands. Adjusted earnings per share were up 9% to 35.2dkk per share. And now some comments on the cash flow on Slide 9 please.
We had another year of strong cash flow delivery and we will continue our strict cash discipline in the years to come. Free operating cash flow amounted to SEK8.1 billion, which slightly higher than last year. Trade working capital was very strong at +1.9000000000 and better than we expected at the beginning of the year. All three regions improved on trade working capital and especially Asia delivered strong progress. As a consequence, trade working capital through net revenue improved to minus 16% or a 200 basis point improvement compared to 2017.
We are very satisfied with our trade working capital performance. Net interest paid were SEK 863,000,000. This was higher than last year, as last year's number was impacted by a 1 off income related to the settlements of a financial instrument. Taxpaid amounted to SEK 2,400,000,000 or approximately CHF400 million higher than last year. This was due to certain one off tax payments and the consolidation of Cambrew in Cambodia.
Total operational investments amounted to EUR 4,000,000,000, slightly below depreciations of EUR 4,100,000,000. This corresponds to a CapEx to revenue ratio of 6.3%. Financial investments net were SEK 1,900,000,000, primarily due to the increased ownership in Cambrew in Cambodia and Superbark in Portugal. As a consequence, free cash flow for the year amounted to 6 point 2,000,000,000. We also increased our ownership in Olympic Brewery in Greece and Alabama brewery in Belarus, As these entities were already consolidated, the cash flow impact from these 2 acquisitions is accounted for in non controlling interest below the free cash flow As a result of the strong cash flow, we continued to reduce financial leverage.
Net interest bearing debt was reduced by SEK2.3 billion to CHF 17,300,000,000 and the net debt to EBITDA ratio came down to 1.29 times. This is a continuation of recent yields progress, and we now have reduced net interest bearing debt by more than SEK 19,000,000,000 dkk since 2014 and over the same period, reduced net debt to EBITDA from 2.7x to now 1.29x. Consequently, the group is now in a significantly stronger financial position than just a few years ago. As mentioned, we increased our ownership in 4 businesses. The 2 biggest ones were in Cambodia and Portugal.
In Cambodia, we acquired an additional 25% in Cambrew, bringing our ownership to 75% and giving us control. The acquisition was in line with our sales 22 priority of growing our business in Asia, and we see interesting opportunities in Cambodia both in terms of future market growth and our ability to strengthen the business through an enhanced portfolio and improved route to market. In Portugal, we increased our total ownership of SuperBOC from 44% to 60% through an acquisition of 28.5 percent of the holding company via ZM that controls the business. However, As our partner still controls Visa, we don't have the control of SuperBot and the business remains an associated company in our accounts. Increase.
We increased our ownership in Olympic Brewery to 100% and in Belarus, we increased our ownership in the Alibaba run rate to 78%. In total, cash flow relating to investments in amounted to SEK 2,800,000,000 in 2018. Slide 11, please. And a few words on ROIC dividends and payout ratio with our clear shareholder value KPIs in sales 22. We managed to improve ROIC in all three regions.
We increased group ROIC excluding goodwill by 5.20 basis points to 20.9% and including goodwill, which is our internal KPI, the increase was 120 basis points to 8.1%. The higher ROIC was a result of improved profits and lower effective tax rates and our strict focus on cash, which reduced invested capital. When it comes to capital allocation principles, we've been targeting an adjusted payout ratio of around 50%. We reached that last year and we maintained this level for 2018. Therefore, the board will propose to the AGM on March 13, that dividends a 100% increase in dividend compared to just 3 years ago, as you can see from the chart.
Slide 12, please. And a few comments on capital allocation, which we on several occasions, the past year promised to come back to today. As a result of the healthy state of the business in terms of earnings growth, margin improvement returns and the significant reduction leverage, the Supplies Report has decided to significantly increase the cash returns today initiating a share buyback of SEK 4,500,000,000. Combined, the total cash return for the year will amount to SEK 7,200,000,000 corresponding to approximately 6.5 percent of the market cap of Galberg. Let me go through the rationale behind our balance sheet and the decision to use buyback programs to return cash.
When we announced sales going to do in 2016, we set clear principles for capital allocation as you can see from the slide. After having invested in the business, both organically and now also inorganically, reduced leverage to significantly below 2 times and reached the 50% payout ratio already. We have now come to point number 4 in our capital allocation principles, which is either high dividends or buybacks. Following discussions with a number of our largest shareholders. We concluded to maintain the 50 percent payout and use buybacks as a flexible tool to return additional cash to shareholders.
The amount of cash that we will return in any year will depend on the actual leverage in the years past, so for this year, the 1.29 times leverage and the outlook for the coming year. We will, at all times, maintain a conservative balance sheet And we also want to have the firepower for potential M and A if the right opportunities arise. It is clearly not an exact science, but when balancing this, we concluded that EUR 4,500,000,000 for this year would be 6 month deeds with the first tranche amounting to SEK 2,500,000,000. The program starts today and will be done in accordance with the EU Safe Harbor Regulation. This yes will be canceled at the AGM next year except for those needed to cover CF based incentive schemes.
The Carlsberg Foundation has notified us that they will participate in the share buyback pro rata corresponding to the 30 percent economic interest in Carlsberg. The details are described in the full year announcement We exit 2018 with good momentum. We delivered strong results, and we've been able to invest significantly in the business. As a result, we feel well prepared for 2019 despite the well known headwinds of high input costs and tough comps in Western Europe. The key focus for 2019 will be to further drive organic revenue growth while at the same time ensure that we maintain a strong focus on efficiencies, costs and cash.
The strict cash discipline will focus on working capital as well as fixed assets. Our regional priorities will be to increase net revenue and operational margin in Western Europe, drive growth in Asia through premiumization and strengthen market leadership in Eastern Europe. Based on this, we expect to deliver an organic operating profit growth of mid single digit percentages. Based on the spot rates on February 5th, we we assume an insignificant translation impact on operating profit. Other relevant assumptions are finance costs, excluding FX of SEK 700,000,000 to SEK 750,000,000 and effective tax rate of below 28% and CapEx of around SEK 4,500,000,000.
Our sale of 22 financial priorities remain unchanged for 2019, meaning that we want to grow operating profits organically increased ROIC and ensure an optimal capital allocation. And now I'll take you, Keith.
Thank you, Heine. Please turn to Slide 14 and Western Europe. Western Europe delivered strong results in 2018, partly supported by the warm summer in the northern part of the region, especially in Q3. Net revenue grew organically by 3% as a result of point 6 percent organic total volume growth and minus 1 pricemix. Reported net revenue grew by 1.2% due to the disposal of the German wholesale at Nordic Atranke in 2017 and the negative currency impact.
Price mix was positive in the majority of our Western European markets, supported by successful premiumization efforts and some price increases, partly countered by the higher growth of non beer products. On the regional level, the positive pricemix was more than offset by country mix due to growth in license markets such as Turkey, and loss of volumes in high revenue export markets in the Middle East. Excluding export and license price mix was around 0.5%. Organic operating profit grew by 7% and operating margin improved by 60 basis points to 50%. The earnings progress was driven by volume growth, value management premiumization, funding the Journey benefits and lower depreciation.
The organic operating profit growth in the second half of the year was 6.3% and operating margin declined by 10 basis points year on year for the half year due to higher investments in sales 22 priorities such as craftless facilities, alcohol free brews, and drop up Master Oard. Total volumes increased organically by 3.6% and beer volumes by 2.9%, supported by the warm weather Q3, we saw a significant improvement in the second half of the year after a difficult start to the year. Non beer volumes grew by 5.9% due to good performance in the Nordics. We estimate that our regional market shares grew slightly. Slide 15 please have a few country specific comments.
The Nordic Businesses all benefited from the warm weather in Q3. Total volumes for the year grew organically by 6%. In Denmark, the beer market grew slightly with our total volumes growing in line with the market. We saw good performance for the Carlsberg brand, Specialty Products and alcohol free brews, while Tuborg Grain declined due to price increases. Price mix improved by 5%.
The non beer business delivered strong growth. In Norway, saw continued strong business performance. Our volumes grew slightly and pricemix strengthened, supported by growth of premium brands. Within alcohol free brews, we saw good traction of Munkholm and the alcohol free variants of 66 for Glunk and Subsea. In Sweden, total volumes grew, driven by strong non beer volume growth.
Beer volumes declined slightly due to the loss of distribution rights for 3rd party brands. In Finland, the beer market declined slightly. Our volume growth was strong driven by relisting in Q1, at a major retailer for the winter campaign and growth of non beer products. The French market grew, and our volumes were up by 5%. Bryx mix improved as a result of continued growth of our premium brands.
Our craft and specialty and alcohol free brands performed well of the Cronboard brand in the mainstream segment declined. The good performance was achieved despite some supply issues due to the French national rail strike. The positive trend of our Swiss business continued. Going to grow slightly and pricemix improved, driven by solid performance of our beer portfolio. Our power brands sales version, our regional brands and our alcohol free brews are all delivered good growth.
Our Polish volumes grew slightly after a slow start to the year, the business accelerated throughout December and towards the end of the year. We achieved price mix of high single digit percentages, helped by the growth of upper mainstream and premium brands such as Oggachim, Carlsberg, Sedac, and summer speed. As well as growth of alcohol free brews. In the UK, our volumes declined by 3%, mainly as a result of the declining mainstream segment. Our volumes in the premium category performed well.
During the year, we completed our exit from Portbridge Activities. The other Western European markets, we achieved particularly strong top line and margin improvement in the Belgian markets and the Baltics and in Germany, our local power brands drove the growth. In our export and license business, license sales of Tuborg in Turkey increased significantly Five sales in some Middle Eastern countries declined due to the higher duties and VAT. Slide 16 and Asia, please. Our Asia region has another very good year, delivering a strong set of results Net revenue grew organically by 13.3 percent, driven by 8.6 percent organic volume growth and 4% pricemix Reported net revenue grew by 11.4% due to a negative currency impact in most countries.
And the reason that more than offset the acquisition impact of Cambrew. The solid 4% pricemix improvement was a result of our ongoing premiumization efforts, not least in China where the premium portfolio performed strongly. The organic volume growth was broadly based with all major markets delivering solid numbers. Organic operating profit grew by 15.8%, mainly due to the strong revenue growth. The reported operating margin declined by 40 basis points to 20.4%.
While the gross margin improved considerably, this was offset by a significant increase in marketing investments as a sizable proportion of our sales were allocated to further strengthening our Asia business. As expected, the consolidation of Cambrew also impacted operating margin negatively. Slide 17, please, and a few country specific comments. Our Chinese business achieved very strong results. Net revenue grew organically by 50%, driven by 8% organic volume growth and 7% pricemix.
We outperformed the Chinese market that declined by an estimated 1%. The market decline was driven by the mainstream segment, whereas the premium segment continued to expand. Our premium portfolio grew by 13% and supported our pricemix improvement along with price increases. Our Indian business had an excellent year following the challenging 2017 that was impacted by the highway ban, GST and tax increases. Our volumes grew by 19% and pricemix was 7% due to the strong growth of the Carlsberg brand and improved pricing.
Profitability improved considerably due to the volume growth, positive pricemix and supply chain efficiencies following the opening of the Karnataka brewery. In Lales, our volumes grew by high single digit percentages, driven by growth of all 3 categories, beer soft drinks and water. Price mix was slightly negative due to the product mix. Our P and L, Abreast, strengthens its position as a result of improved communication. Our Malaysian business delivered share gains especially in the premium categories, Carlsberg's smooth gloves, which was launched in 2017, grew strongly.
Our premium international brands such as 6064 Blanc, and Servicebee also achieved very strong growth rates. In Nepal, we saw good progress Following a 30% excise tax increase in the first half year, retail beer prices grew by approximately 15% leading to a slightly declining pricemix. In the 2nd half of the year, we revitalized the communication platform for the Tuborg brands. In Cambodia, we are currently in the process of rebuilding the business, although it was a challenging year with double digit volume decline and operating loss, The first signs of the rebuild are encouraging. Our volumes of the Adapt decline slightly in the flat market, we saw strong growth of the Carlsberg brand.
Slide 18 and Eastern Europe. Our Eastern European business delivered 9.3 percent organic net revenue growth, driven by 3.1% volume growth and 6% pricemix. Reported net revenue declined by 1.3% due to the weak currencies in all markets in the region. Volumes growth in all markets. The drivers of the strong pricemix improvement differed between markets with risk and pricemix mainly being the result of higher prices by the other markets benefited from both price increases and mix improvements.
Organic operating profits grew by 11.3%, driven by volume growth, the positive pricemix and tight cost control. Operating margin improved by 30 basis points to 20.6%. H2 operating margin declined year on year from the result of higher packaging costs and adverse currency impact. Slide 19, please. In 2018, the Russian beer market grew for the first time since 2007.
The market growth was an estimated 3% supported by favorable weather in Q2 and the World Cup impact in Q3. Our volumes grew organically by 2%. Price mix improved by 2% with an improving trend towards the end of the year. Where we took price increases to offset input cost pressure. Product mix remained negative due to the continued growth of the economy segment.
Operating margin remained in excess of 20%. Our market share was stable during the year, but declined slightly in Q4 as a result of our price increases, which triggered some discussions with a large customer. The Ukrainian market grew slightly and our volumes grew by mid single digit percentages, supported by growth of our strong local power brands in the biscuit and our international brands. Price mix developed very favorably due to to price increases and the growth of premium products, with particularly strong results for 664 clients, Greenberg and Sandbusy and Garage. Our businesses in Belarus, Kazakhstan and Azerbaijan, all delivered solid revenue from earnings growth.
That was all for today, but before opening up for Q And A, a few concluding remarks on Slide 20. 2018 was the year where we wanted to shift gears to growth, but at the same time, improving margins and setting up investments in marketing and capabilities. This was a bold ambition, and we are, of course, very pleased that we succeeded. The group has over the past 3 years taken important steps forward, and we believe that we are all well positioned to target sustainable top and bottom line growth in the coming years. So to summarize for 2018, we delivered strong financial results, both on top and bottom line, These are good growth coming from our sales of the 2 priorities.
We are significantly increasing the cash returns to shareholders and We are well prepared for continued growth and expect mid single digit organic operating profit growth for 2019. And with this, We're now ready to take your questions.
The first question comes from the line of Simon
Hello. Can you hear me?
Good morning, Keith. Good morning, Jaime. Three questions if I can, please. Firstly, can I just go back to your comments around the buyback? In a clear decision to return 1,000,000,000.
I just wondered, given the outlook you've given for 2019, on my numbers, your net debt EBITDA at the end of the year will be broadly similar to where you ended 2018. Are still a long way short of the below two times level that you're targeting as being the top end of that guidance. Is there something specific as you look into 2019 as to where you might see capital allocation going elsewhere? Is there M and A pipeline perhaps that you've got greater visibility on as we look forward. And how will you evolve the share buyback discussions?
Is this a once a year decision you will make or as you go through the year, will this be an ongoing discussion you'll have with the supervisory board to the right size of that buyback. Secondly, I wonder if I could just ask a little bit about input cost pressures. I mean, you mentioned this in the presentation. You've talked about it through the second half of 2018. What's the scale of input cost pressures you're facing do you think for 2019?
And what have you been doing and what do you help continue to do to really mitigate that risk from a margin standpoint.
Yes. Good morning, Simon. So on the share buyback, so first of all, this is not an exact science as as to what the amount is going to be. Key sort of comments here. The first is that we are a cautious company and we want to maintain a strong and conservative balance sheet.
And at the same time, we also want to maintain fire power potential M and A going forward. The overall principle for deciding the size of cash return is that we take a pragmatic view and look at our leverage for the preceding year. And the budget for the coming year, this is on the basis for what we distribute to shareholders. That's not an exact sign. But that is sort of the principle we are using annualized.
1.5 is below 2 and below 2 in terms of leverage is sort of what we're aiming for. And with these numbers, all other things being equal, we are looking into something around 1.5 towards the end 19. Then whether this is an ongoing thing with with share buybacks, that is definitely something that we will discuss with the Subhash reports from time to time. Currently, the decision from the Supervisory Board is that we will continue with share buybacks. Canaccord change in the future depending on our needs for cash to expand the business and also depending on other sort of organic opportunities that may come up.
In terms of the input cost outlook for 2019, you're right, that we do see a significant cost coming into 2019. And we've discussed it before, we are well hedged. 2019. I don't discuss sort of and disclose the exact hedging, but we are well hedged. That's basically it.
And we will sort of maintain our aim to ensure that the cost increased impact comes through to pricing and mix.
And can I just follow-up on that last point, Heidi? Can you tell us what the actual input cost inflation is you think you're seeing in 2019 versus 2018? And have you outside of you mentioned in Eastern Europe? Have you taken pricing elsewhere yet to offset that?
So we expect COGS Exeliza, overall across the group to increase by 2% to 3% and assess we don't comment specifically on what do we do in individual markets. But the plan is and that's what we are targeting and that's what we are planning for. Is to mitigate this through price and mix impacts. And then when we do it, it's really something that is very specific market to market.
Perfect. Thank you.
Thank you.
The next question comes from the line of Jonas Kolber from Danske Please go ahead.
Yeah, good morning and thank you for taking my questions. First of all, on trade working capital, you managed to outperform your own expectations once again. What have you put in for 2019 of adaptation, is there any one offs in the later part of the year that will affect the development negatively in 2019 or should we expect an improvement. Then you mentioned that you've seen a significant profitability improvement in India from volumes and other things. Could you update us on where your profitability is in India?
And then my last question is on Russia. Is there any reasons for not seeing any mix effects, positive mix effects in Q4. Was that due to the interruptions you had with a customer? Or is something to do with the FS and ABI merger or what else could it be? Thank you.
Okay. Thanks, Jonas. The first question about Tradewig, Kepler Cheuvreux.
On trade working capital, I think we saw better performance on trade working capital at the end of the year than expected. And that is basically due to continued strong discipline and focus on cash across across the entire group, we are with the minus 16% trade working capital among the the best. It's always difficult to stay world class, but we will maintain also for 2019 strict discipline. There are no sort of particular one offs worth mentioning. We expect for 2019 sort of a a total effect of around 0 in terms of TKK.
And we are satisfied if we can stay within sort of a relative trade working capital of minus 14% to minus 16%.
Okay. With regards to India, we are really on a nice trajectory there. The pricemix was 10%. So we did almost 19% volume and 27% value. Which, of course, is very good.
Our share is increasing. The market growth was 12%. So we beat the market. And obviously at the moment that the price mix is good, and we get the throughput of the volumes through our breweries, the profitability improves. So where we were breakeven 3 years ago, we now are in an double digit EBIT margin position in India.
We are on the right track With regards to Russia, there we see you're talking about pricing. Yes, Q4 had an impact of a big retailer in Russia that had some issues with our price increases. On the other hand, the PET segment is still growing a bit and it has some negative impact on the total pricing of the beer category.
And the next question comes from the line of Ed Mundy from Credit Suisse. Please go ahead.
Hi, good morning everyone. Three questions, please. On your guidance of mid single digit EBIT growth, are you able to provide any color by region? And also do you expect to continue to invest behind sell 2022 initiatives within that guidance? The second question is on China.
You're seeing a very good trajectory here on both volumes. And price mix. Could you provide a bit more color as to how many cities you're in now and how we should think about the opportunity for China over the next few years? And then third question is on the tax rate, which fell about 100 bps in 2018. Should we expect a similar step down for 2019?
Thank you, Ed. With regard to the guidance, Heine?
Yes. Hi, Ed. So our guidance on organic profit is mid single digit. We don't split it per region. And to your question as to whether whether we will continue with our sale 22 investments, that is definitely a yes We've seen funding the journey work very well, and we've seen that the investments that we've put into the top line into growth initiatives working very well also in year.
So, yes, definitely, we will continue with SAIL investments also going forward. If I just take the tax rates on the tax rate, you're right, 100 basis points below where we were. And we guided with below 29% and we hit 28 this year, we guide with below 28% and that is basically our guidance. So where we hit specifically, is something we will come back to. But for 2017, 2018, we guided with below 29% and we hit 28%.
And then regarding, your question about the cities where we are in. By the end of 2018, We were in more than 20 cities. At the end of 2019, we expect to be in between 30 and 40 cities which is very important for our international premium brand portfolio that grew in 2018 by 13% And just to give you some details on that, Carlsberg, with 11% to work with 12% and 6064 Blanc is 15%. So the further rollout in the big cities is quite important for us.
Thank you.
And the next question comes from the line of Mitch Collett from Goldman Sachs. Please go ahead.
Can you comment on organic sales growth for F 2019? Do you think you'll be within the 2% to 4% medium term range you guided to, I think at your investor seminar back in 2017? And then secondly, now that funding the journey has ended. I just wondered whether you could comment on where you would expect margin expansion to come from going forward. If I look at what you've delivered in terms of funding the journey and then net off the reinvestment it's roughly the same as the organic EBIT growth you've achieved across that period.
Do you expect there to be other drivers of margin expansion going forward? And then a final one on CapEx versus depreciation, which are broadly equal. I noticed that your CapEx is running ahead of depreciation in Western Europe. And then below in both Asia and Eastern Europe, is that the impact of draft Master? And should we expect that shape to continue?
Thank you.
Morning. Let me take the first question and highlight the other 2. What we said is we, earlier as well, we don't guide on the top line. However, we want to continue to grow the top line, but it's, of course, will be a bit more challenging this year due to the last year's strong performance. But we, in general, commit over the period of 2017 to 2022, to grow the top line by 2% to 4 percent organic.
Yes, Hanish. And on the funding, the journey going forward, and how we see the margin progression. So we've said before that up for this year, we're guiding with mid single digit. We have said that we will continue the journey also after 2019 in terms of of improving our operating profit organically. So that remains a key priority for 2019 and also for 2020 and afterwards where the margin improvement going to come from will basically more or less the same levers as we've used in the past, which is sort of value management.
It is so that's pricing and mix It is supply chain efficiencies and then it's a strict discipline in general on our costs, our SG and A cost and our OpEx cost in general. So across the line, then on top of this, the more than SEK 1,000,000,000 that we have invested in particular in 20172018 in sale investments, also give us benefits in terms of margin progression. So even though Funding the Journey program will close Funding the Journey as a mentality, a way of living and as a focus will definitely continue. In terms of CapEx versus depreciations, you're right that there is a regional sort of difference and that will probably continue, what we can say is that what we have done over the last few years in terms of CapEx is not to underinvest, definitely not. But we have implemented a strict discipline on where we allocate our CapEx and that is what you see come through now.
That it also follows our priorities and our sale sort of priorities.
Got it. And one unrelated follow-up, which is just a clarification, the guidance you've given for finance costs in 2019, I assume that's post the impact of your buyback
That is including the impact of our buyback is.
Okay. Thank you.
Thank you.
The next question question comes from the line of Hans Geosin. Please go ahead.
Good morning. First question on Russia. We've seen during 2017 2018, there's been a quite hefty promotional activity level from one of your competitors. Have you seen any sign of that easening here in the beginning of 2019? Or do we still need further time to before you make a call on that.
That's the first question. Second question, a little bit accounting. When you made the big investments in your IT supply chain systems, you had a significant investment that would undergo depreciation charges are they coming to an end? And how should we assume depreciation continuing going forward? Thirdly, on the UK, can you give an update on when we should expect the negative revenue trend to stabilize?
And then finally, just one quick accounting. Question. If you look on the estimates, assumptions you're applying into the accounting principles, are there any changes in the 2018 accounts versus the 2017 accounts? Thank you.
Thank you Hans and good morning. With regard to Russia, and there were, let's say, the investments of our competitor main competitor, if you like, there was a road trip and our main competitor was the sponsor of that. So you're going to mention that there was extra support money We have not seen that back, like clearly in our market shares, our market shares did not really suffer from that. So in that respect, we answered that challenge well. It's a sizable number 2 player, but we don't know yet how they really will behave in the market.
Whether they will continue with this kind of high level for both promotions. We don't think that because after the World Cup, we saw a reduced level of promotions But of course, other activities. Hi, and I'll see you.
Yes, good morning, Hans. You're right that a we have reduced our depreciations over the last year. Then you're also right that a part of that come from the depreciation relating to the the investments we made a few years ago into our setup in Western Europe, what we call the DSP 1 structure. For 2018, you can or 2019, sorry, you can expect depreciations of around SEK 4,000,000,000. Then if I take the last one on accounting?
U.
K, first. Yes. With regard to the UK, you're right. If you look across all markets globally, the UK business is probably the one where we are most disappointed on. Performance, and we are focused on improving the profitability.
The market share loss is mainly driven by a declining maintenance segment as consumers are trading out. And we over index, as you know, in the mainstream. The Carlsberg brand continues to lose a share and we will have our relaunch announced more or less as we speak. And then in 2018, we saw a further decline of our net revenue because of the plant loss of the portraits business. So in total, we have good plans for the UK, a difficult market.
And it's, 1st, very important that the relaunch of Carlsberg will be successful. And now the accounting.
Hence, you had a question about the accounting changes from 2017 into 2018. So there are 2 changes. They have described in detail. It's relating to Ipad. It's 15
the question was when you prepare the accounts, U. S. And management make assumptions and estimates going into the accounting principles, That was what I was asking about. If there's any changes in those in 2018 versus the 'seventeen's
No, I can tell you that that is not the case. We apply the same logic and rational behind our estimate as in 2018 as we did in 2017.
And the
next question comes from the line of Sean Samsu from SEB. Please go ahead.
Yes. Good morning. First, a question on your margin, profitability, given your higher top line, you would expect a higher underlying at least productivity and maybe margins, but I understand why your EBIT margin is down giving you higher marketing costs, etcetera. But why is your gross margin down, if you could give some flavor and details to this. In second half, sorry.
I mean,
Yes. And so, hi, Dan. So you're right. Margin, so so revenue is strong. And also, our profit is strong and we also have a a good progress on our overall group margin of 30 basis points.
So we're very satisfied satisfied to that. If you look into the second half in particular, there are some one offs sort of a specific is that some of them hits OpEx, some of them hits in COGS and it is relating to acceleration of sale investments And then in particular, in Eastern Europe, we in the second half, and you can see that in the numbers as well. We were hit by negative FX and we were hit by higher commodities in particular packaging.
Okay. And then, the higher OpEx level you apply for the second half versus sales, Is that also a similar OpEx level you have assumed behind your 2019 guidance?
No, so when we look at our 20 guidance, we take out seasonality within the year and we look at the full year. So what you can expect is that the baseline for 2019 in terms of OpEx is full year 2018.
Okay. So we should expect that these sort of higher investment levels that you've seen in second half that you will continue to sort of invest at that level for the full year 2019? Is that what you're saying?
No, you can't really see that that what you can expect is that the full year effect, so you should look at the full year OpEx for 'eighteen and compare that to our assumption than 2019. In 2018, for many, many reasons, we skewed our in particular our sale investments, towards the 2nd part of the year. This year, we're starting our sale investments up earlier in the year. So we expect to invest more in sales in first half versus second half in comparison with 2018.
Okay. That's helpful. And then on Asia, you had 40% growth in the Q4, organic. Of course, I understand there are some each comparables, especially in India. But could you give us the growth in China, in India and the rest of Asia in Q4?
Well, we will come back on that one as I don't have now. Peter will give you a call.
Thank you. And then final question on your free cash flow, it seems to be rather flattish for the year. Maybe you could give us some flavor of what is your ambition going forward to 2022 in terms of your development of your free cash flow? Thank you.
Yes.
So when you look into the free free cash flow, you have to take into account that we have invested quite dramatically in the second half year in particular in Cambrew and in Superbulk. If you look at the operating cash flow, it's it's actually quite strong and slightly up versus last year. Going forward, we will maintain the strict discipline we have on cash and that goes for both, for both trade working capital and it goes as well for for CapEx investments. For the for 2019, you can expect sort of a working capital of around 0, depending on the country mix, CapEx of around SEK 4,500,000,000 asset and tax and interest in the cash flow statement assume that you can assume around EUR 2,500,000,000 to EUR 3,000,000,000. So cash is a way of living in Carlsberg.
It will remain a way of living for 2019 and also going forward. And we don't comment specifically on numbers, you know, that beyond 2019.
Okay, thank you. Just more sort of your thoughts and ambitions. So thank you for that.
And the next question comes from the line of Andrea Pistacchi from Bank. Please go ahead.
Yes. Good morning. I have three questions, please. The first one on Europe, you had a strong Q4, I think, about 6.5% organic sales growth. Now Q2 and Q3 had been very strong in Europe, but then you had some one off benefits from the weather.
My understanding is that Q4 is a sort of clean quarter with no specific one offs. And obviously 6.5% growth is a lot better than you were delivering a couple of years ago. So could you just comment on that whether there were any maybe factors helping Q4 or not? Secondly, on Russia, you talked a bit about the pricing environment still maybe uncertain, but you sound cautiously optimistic. How would you what do you think about the market in Russia in 2019?
Given no World Cup and comps? And then finally, just a question on the buyback. I understand the rationale of splitting the buyback into 2 tranches of CHF 2,500,000,000 and CHF 2,000,000,000. Is that because you generate typically more cash in H1? And whether theoretically it would be possible, for example, to seek approval from the board at the half year potentially to raise the buyback should you the come through with the cash you're generating?
Very good. Thank you and good morning, Andreas. With regard to Europe, no specific factors were, Q4. The Nordics were up. Ehud had a good quarter.
France had a good quarter. The Balkans had a good quarter. We see, the revenues of DraughtMaster growing. So it was just a good quarter. We were satisfied with that.
Q4 2017 was not the strongest. So in that respect, it was a good and forecasted strong quarter. Then with regard to Russia, as you know, the market declined by 4% to 5% in 2017. And then in 2018, it grew by an estimated 3%. And we think that is due to good weather in June and the World Cup in Q3.
And we plan for a flattish market with a slight negative bias. We remain cautious operation market and don't want to make too precise predictions. So let's say the market is around flattish. Then over to you.
Yes. Andreas, so on buybacks, split in two tranches, you're right. The attention definitely is to initiate also the second tranche following our first half announcement in August this year. The reason to split the buyback in 2 is basically to give us more flexibility to adjust for potential M and As and overall business needs. Again, the second half tranche of SEK 2,000,000,000 increase as it can, but it is not the plan.
The plan is the EUR 2,000,000,000.
Okay. Thank you.
Thank you.
And the next question comes from the line of Richard Nick Haskins from Kepler Cheuvreux.
Yes, good morning all. Two questions, please. First of all, on marketing spending, perhaps can you give some background on how marketing spending has changed as part of funding the journey? And have you develop any internal tools to improve the marketing function and also how will marketing spending develop in the future will it continue to go up? 2nd question is on the regional priorities.
Heine, you mentioned it briefly. But especially on Western Europe, will there be more focus on top line growth and less on margins than in 2018? And probably related to that, will it be, specialty beers, crafts, alcohol free beers? Will that be the main focus of generating top line growth in in Europe?
Good. You take the second. I will take the first time. And so with regard to the first on the marketing expenditure, Well, we have strengthened our marketing team, or better to say the commercial team, group commercial has seen quite a lot of changes over the last 3 years. Is based on the activities we wanted to develop for the sale 22 rollouts and they have prepare the programs on craft specialties alcohol free beer but as well on the local power brands because we see a lot of commonalities between these brands.
And of course, the international power brands we have, as well, supported quite well. So we have, 1st of all, strengthened our group commercial. Then based on our strategy, we allocate the the resources across the markets. We do that on the basis of investment cases, and we see this, for example, coming back now a strong growth of craft specialties. You saw more than 30% in Western Europe on alcohol free beer, the big cities, the DraughtMaster, And what we see is that allocations based on the business cases are now giving the returns.
The way forward is that we continue to see that we want, of course, to invest in the markets The P and L needs to be balanced, but for next year, we have, as well, an increase, versus well, more or less the same kind of level of investments like this year and 2018, as you know, was already an increase of 700,000,000 DKK 700,000,000. We see good returns as we continue with investing in our brands.
Hi, Richard. And then to your question on the prices for Western Europe, There's no change in our priority for Western Europe. The journey basically continues. That started a few years go. There will be strong focus on margin progression in Western Europe, also going forward, Western Europe will be a significant part of the group's continued margin progression journey.
In terms of Western Europe, focus will continue both on top line And bottom line, on bottom line specifically, sort of the cost discipline that we've had in Western Europe over last years will continue also going forward. And then you will see a, that the sales 22, but the top line is sort of focused We've had in particular in 2018, we'll continue also in the years to come. So both top line focus and cost discipline will make us continue the market progression journey looking ahead. And that's the same as we've seen in 2018. In terms of the sales switched to products.
It varies then that we're investing our money in Western Europe. It is, it is, you're right, in craft and specialty. It is also in alcohol free. We see a significant increase in in alcohol free across Western Europe and we're putting a lot of money behind that also going forward. Then it is DraughtMaster, as you know, being rolled out now in a lot of European markets and the journey will continue.
And then it is our local power brands.
Very good. Thank you.
Thank you, Richard.
And the next question comes from the line of Trevor Stirling Bernstein. Please go ahead.
Good morning, Caitlin Heine. So a lot of my questions have been answered already, but 2 quick ones, please. The first one relating to Russia to Eastern Europe, regional pricemix was 6%, but Russia was only 2%. So does it imply that Ukrainian pricemix is very strong And if that's so, could you maybe just give the split between price and mix in the Ukraine? And the second question, I guess, the internal discussions around Tabako, you have any update on the Habeco negotiations case?
Thank you, Trevor, and good morning. Yes, you're right. In Eastern Europe, we have mainly, the Ukraine that is driving the top line, if you like, I'm just looking at the main figures now. In Ukraine, we made 5.1% volume and 25% 25.2 percent value. So in that respect, that's the real driver.
I don't have the difference between the mix and price, but I know that the majority is price. With regards to Habeco, no real updates. We continue our conversations. It has been said that the Vietnamese government would like to finish their privatization project by the end of 2022, sorry, by 2020. And Habeco is a part of that.
And that's of course what we take into consideration. Thank you very much. Thank you, Trevor. Can I have the last question? Please.
And the last question comes from the line of Fernando Ferreira from Bank of America Merrill. Please go ahead.
Good morning, Keith and Hainie. Thanks for the questions. I have 3, please. First one is still on marketing. Despite the strong growth, we saw, there's still appear to be a bit below some of your peers in terms of a percentage of revenues.
So just wondering if you have a target level in your mind going forward for what's the appropriate level of marketing investments in your business? 2nd question, if you can comment on how relevant are the alcohol free beers and crack and specialty as a percentage of group revenues today. And lastly, there's a Bloomberg headline saying that in China, the year started well for Carlsberg. So if you can please discuss the expectations for 2019 in China, please, given the strong year you had last year. Thank you.
Thank
you. With regard to the marketing investment. Basically, we don't look so much on the percentage. We look at what the market needs, and that depending on the strength of our plans, but because of the funding the journey, we have the money to invest in these markets and in these plants. With regards to the share of, cross facilities and AFP in our market, It's 7% volume, and 30% revenue, in total.
So it becomes to be a real significant part of our total portfolio. And the 3rd question was Fernando, sorry, I was at 1.
Oh, sure. China and expectations for 20 19. So there's a headline of the year started well. Yes.
That's it. That was the headline. The year started well. It's only a February now. Pet is more or less as we speak in China and it's very important for us of course, to have the right trade loading before that period starts.
And we were satisfied, very satisfied with that start. But as you know, the year is still low, but it's always good to have a good start. All right. Thank you. Thank you.
This then brings us to the end of the call. And thank you for listening in and thank you for your questions. We are looking forward to meeting some of you during the coming days weeks. Have a nice day. Thank you.
This now concludes our conference call. Thank you all for attending. You may now disconnect.