Ladies and gentlemen, welcome to the Carlsberg Q3 twenty nineteen Trading Statement. Today, I am pleased to present to CEO, Keesit Hart and CFO, Heine Dalsgaard. For the first part of this call, all participants will be in listen only mode. And afterwards, there will be a question and answer session. Just to remind you, this conference call is being recorded and a transcript of the call will be made available online.
Speakers, please begin.
Good morning, everybody, and welcome to Carlsberg's Q3 2019 conference call. My name is Keesa Pardt, and I have with me CFO, Heine Dahlgaard and Vice President of Investor Relations, Peter Gondrugh. We are pleased that we, in Q3, were able to deliver solid revenue growth, despite tough comparables with last year. Particularly, our Asia region continued its very good performance, delivering sustained strong growth rates. Our volumes and top line in Western Europe were solid in spite of the very warm and dry summer last year, while we had tough comps and faced challenges in Russia that negatively impacted our market share year over year.
We were, of course, pleased that we earlier this week were able to make the 2nd positive adjustment this year to our earnings outlook. This is another proof point of the execution of SAIL 22. It is also a consequence of improved geographical footprint as solid earnings performance in China and Western Europe more than offset challenges in Russia. I will now go through the highlights of the quarter and Heine will talk you through the regions and outlook. Please turn to Slide 2 and the headline numbers for the quarter.
Organic net revenue grew by 3.1% in Q3. This was driven by 4% pricemix and a slight organic volume decline of 0.5%. In reported terms, volume growth was flat due to the increased ownership of Cambrew, which was consolidated from the 1st August 2018. The imported net revenue grew by 5.3% positively impacted by currency movements and the consolidation of Cambrew. The positive currency impact was mainly coming from Asia and Eastern Europe.
For the 9 months, organic net revenue growth was 3.8%, largely in line with the quarter. Please turn to Slide 3 and a few comments on our international premium brands, which saw somewhat mixed results for the quarter. 1664 Blanc continued its strong growth trend and grew by 30%. The growth was broadly based with particularly strong growth in markets such as China, France, Russia and EU Green. Our largest brand, Tuhok, grew by 5%, driven by growth in several markets, including China, India, Serbia, Croatia and Norway as well as license volumes in Turkey.
We saw strong growth of Grimbergen in markets such as Switzerland, Denmark, Poland and Germany. Total Grimbergen volumes were the quarter declines though by 1% as a result of volume decline in France being the brand's largest market. Year to date, greenback volumes were up by more than 2%. The Carlsberg brand saw good volume momentum in markets such as Malaysia, Singapore, Russia and Kazakhstan as well as in our export and license markets. However, total brand volumes declined by 2% impacted by tough comparables in Western Europe, not least in the U.
K. Excluding the U. K, volumes of Carlsberg brand were up by 3%. Please turn to Slide 4 and a brief update on some of our strategic priorities. The growth trajectory in the craft and specialty category continued, and we grew our craft and specialty portfolio by 12% in Q3 and 15% for the 9 months.
We have an attractive portfolio of strong brands in the category, and we were pleased to see that being evidenced by the solid growth in the quarter despite the slight decline of the Grimberger brand. We saw growth of craft and specialty across most markets with particularly strong results in Poland, Ukraine, China, France and Switzerland. The volume growth of alcohol free brews for the first 9 months was +8%. In Q3, we saw minus 4% as continued solid growth of 7 percent in our Western European markets was offset by tough comparables and category decline in Russia and lower sales in a few export markets. Looking at the cider category, where Somersby is our key brand, it continues to perform very well.
Somersby grew by 20% for the quarter and 14% year to date, mainly driven by markets such as Poland and Ukraine. Slide 5, please, and a comment related to our sustainability program, Together Towards 0. In September, we announced the investment in a water recycling plant at our brewery in Frederica in Denmark. The recycling plant will significantly reduce the brewery's water usage to just 1.4 hectoliter water for 1 hectoliter beer, which is absolutely world class. This investment will serve as a platform for learnings, which we can apply at our other breweries in our pursuit of reaching the 2,030 target of 1.7 hectoliter water usage for 1 hectoliter beer.
I will now hand over to Heine, who will take us through the regions and outlook.
Thank you, Kees, and good morning, everybody. Please turn to Slide 6 and Western Europe. Net revenue grew organically by 0.2%, a very solid performance considering that we, in Q3, were cycling very tough comparables from last year's warm and dry summer, whereas the weather has been more normal this year. The total organic volume development was minus 0.1% and pricemix was slightly positive. We saw positive pricemix in most European markets, while the growth of license volumes in our export and license division once again impacted the regional price mix.
Excluding the export and license division, price mix in Q3 was positive by around 1%. Reported net revenue grew by 0.2% and the currency impact was insignificant. In spite of the very warm summer last year, the Nordics delivered 1% organic total volume growth, positively impacted by strong performance in Denmark and a customer contract in Finland that we didn't have last year. Price mix was slightly negative due to product mix. In a slightly declining French market, we saw growth for our premium brands.
Total volumes were, however, impacted by lower volumes of the mainstream Honore brand and the lower level of promo from our side due to some bottle shortage issues. Pricemix continues to improve driven by mix as prices remain under pressure. In Poland, volumes grew slightly in a flat market. We continue to see solid pricemix improvement, mainly due to good performance of premium brands such as SummerSween, Sateshkin and Ocuchium as well as growth of alcohol free brands. In Switzerland, we saw a volume growth and good pricemix supported by successful premiumization.
In Southeast Europe, we saw good performance with particularly strong results in Bulgaria and Serbia. And in the U. K, our market share is stabilizing following the relaunch of the Calfrac Pilsner, also although volumes were down due to tough comparables with last year's good weather. Slide 7 and Asia, please. The positive momentum in Asia continues and net revenue grew organically by 14.2%, driven by strong pricemix of 8% and 5.7% organic total volume growth.
Reported net revenue grew by 18.7%, supported by currencies of 2.8% and a net acquisition impact of 1.7%. Percent. The acquisition impact related to Cambrew, which was consolidated from August last year. The strong pricemix improvement was mainly the result of our successful premiumization efforts. We had another strong quarter in China.
In a slightly declining margin, our volumes grew by 6% and combined with a continued very strong pricemix, net revenue grew organically by 20%. The growth was a combination of sustained growth of the international premium portfolio, which grew by approximately 8%, the big city expansion, growth of loan per premium brands and price increases. India was impacted by tax and price increases in some states, and as a result, volumes were flat for the quarter. Price mix developed favorably due to positive state mix and also price increases. Both LARS and Vietnam delivered solid double digit volume growth driven by our local power brands.
This week, we agreed with our partner to acquire the remaining 25% in our Cambodian business and consequently, we will owe 100%. In August, we initiated a significant task of rejuvenating the anchor brands. Beer volumes continued to decline while the CSC business performed well. Turning the business around in Cambodia is a substantial task, and it requires significant marketing investments, time and patience. In Malaysia and Singapore, our business continued to deliver very strong performance.
Slide 8 and Eastern Europe, please. Net revenue in Eastern Europe declined organically by 2.3%. Total volume development was minus 8.2%, while pricemix was strong at plus 6. All markets in the region saw positive pricemix supported by both price increases and regional growth of premium offerings, especially within the cost and specialty category. Reported net revenue grew by 3.7%, positively impacted by currencies.
Our market share in Russia was flat sequentially, but down year on year, driven by the continued intense competitive environment. Combined with a slight market decline, our volumes in the quarter were down by 12%. Price mix remained very solid at plus 4%, in line with year to date. As the competitive situation in Russia remains challenging, we expect pricemix in Q4 and margins for second half to come under pressure. In Ukraine, our volumes declined due to bad weather and a lower level of promotions from our side compared with the overall market.
Pride mix was positive. And consequently, our Ukrainian business delivered high single digit organic net revenue growth. In Kazakhstan, we saw positive results. The market grew, and our business continued its very positive trajectory supported by growth of craft and specialties in alcohol free brews and local premium brands. Slide 9 and outlook, please.
As you saw earlier this week, we adjusted our earnings outlook from previously high single digit organic growth in operating profit to now around 10% organic growth. The changed outlook was driven by continued strong Chinese performance and solid Q3 numbers in Western Europe. Combined, this more than offset the challenges in Russia. As previously communicated, we expect less strong earnings improvement in the second half compared to first half due to 2 key reasons. Firstly, in Asia, we have a reversal of a pension provision in China of RMB170 1,000,000, but at the same time, market expense will increase significantly in second half as we continue to invest in China to maintain our positive momentum.
In addition, in Cambodia, we are making long term investments to bring the business back in shape. Secondly, in Eastern Europe, we are facing challenges in terms of market share loss and intensified competitive environment in Russia and Europe, putting pressure on pricemix and margins. We are taking actions to address these challenges. In both Asia and Eastern Europe, our actions are may to secure the long term sustainable growth of our company. In addition, as many parts of the group are performing well, we are in a position where we can invest more in the long term growth of our company, while at the same time deliver very solid financial results.
Based on the FX spot rates on October 30, we assumed plus $150,000,000 currency impact compared to plus $100,000,000 previously. Other relevant assumptions are unchanged with our expectations being finance costs excluding FX of around SEK 700,000,000 reported effective tax rate of below 28% and CapEx of around SEK 4,500,000,000 at constant currencies. Back to you, Kees.
Thank you, Heine. Before we open up for questions, a few final remarks from my side. The group delivered a solid performance in Q3 with organic net revenue growth of 3.1%. We are well on track to deliver solid top and bottom line growth for 2019 in spite of tough comparables. And finally, we are pleased that we earlier this week announced another earnings upgrade for the year.
And with this, we are now ready to take your questions.
Thank you. Okay. Our first question comes from the line of Sam Samsir of SEB.
First, I had a question in regards to your craft and specialty portfolio, which still shows good growth, but it seems like there are some issues regarding France, if you could maybe go into detail with that. And then secondly, if you could go into details with I understand that the price on glass is going up, how that will impact your input costs or how that will impact your input costs, sorry?
Yes. Thank you. So as you say, craft and specialty segment is doing well for us in our portfolio. The Grinberg brand is declining in Q3. The brand continues to deliver growth in most markets like Denmark, Poland, Switzerland and Germany.
The largest market for this brand remains France, where the brand declined as we lost some overall market share to the lower level of promotions and the bottle shortage. Excluding France, the brand grew by 8%. On the borders, Heine?
Yes. Good morning, John. As you know, we don't comment on sort of individual license within COGS and we don't guide on COGS for 2020 before we guide for 2020, which we do in February. But just to mention a few of the positives and the negatives, and you're absolutely right that price and gas is one of the negatives. But on the positive side, on cost for next year, you have barley, which is declining.
You have aloe that is also declining. And then on the negative side, there is both sulfur pricing that's going up, paper in some regions going up and then you're absolutely right that there is a glass shortage that is driving up glass bottles significantly. But overall, as said, there is a lot of processes and minuses. And again, we don't guide specifically on 2020 before we are in 20 20. And it is and please bear in mind that there is a time lag from current spot pricing and then until it impacts our P and L due to hedging.
So this year, the impact is very limited. And next year, we don't comment more than in general terms, which is what we've done wrong.
Okay. But maybe you can comment in relation to the issue on or the impact from that you can't get the right glass bottles. How is that a concern sort of longer term to your growth in Craft and Specialty? Because if that's been impacting your growth in France this year, I assume it could also impact your Craft and Specialty portfolio more generally going forward and the growth there? There?
Yes. It's not a concern, Sam. It's a short term challenge that we manage. It's definitely not a longer term concern.
Okay. And then the last question on regarding I understand that that there's some changes on your contracts with Coca Cola in regards to the border trade. It's been a pretty high volume contract. Maybe you can go into detail with what's happened there and also if it will impact your earnings in Western Europe? Thank you.
Thank you, Soren. Well, the Coca Cola Company has redefined the geographical areas. And consequently, we from the 1st January 2020 no longer sell Coca Cola products to the Danish German border trade. This will indeed have a result. In fact, it will have volume reduction of 30% on our Danish CSD canning lines.
And the financial impact of the Danish business will be relatively substantial for, again the Danish business. We're taking appropriate actions to mitigate the financial impact, but the Danish business will not be able to fully close the gap. We cannot disclose the exact impact on people, volumes or EBIT due to the agreements we have with our partners and especially as well for competitive reasons. But it changes no implications for the Danish and Finnish Coke Corporation where we have a long term agreement and for which the duration is not disclosed. So that's our story on the border trade.
Thank you very much.
Thank you.
Thank you. Our next question comes from
the line of Jonas Skobel of Stanske Bank. Please go ahead. Your line is open.
Yes. Good morning all and thank you for taking my questions, Kees and Heine. First on Russia, you're talking about continued pressure on your EBIT margin there. How should we look at that in H2 compared to H1? H1 EBIT margin was down 140 basis points.
Should we expect a larger decrease in H2? That was my first question. And secondly, how much of your total group volumes are now alco free? And as a follow-up, how is this volume then split between Western Europe and non Western Europe? And my third question would be how large a market is France in the Greenbogen brand?
Greenbogen brand, of course?
Thank you.
Good morning, Joss. Thank you very much for your questions. With regards to the margin in Russia, the Eastern European EBIT margin was 18.9% in the first half year. And indeed with the current competitive environment and higher promotional activity from our side, margins will be lower in H2. I think moving forward, we're more looking towards, let's say, 15%, 16% than the 19%, 20% we had in the past.
With regards to the alcohol free brands and the impact of the volume of the total portfolio, 7% of the volume is craft, specialties and alcohol free beer. In alcohol free beer, as such, 3% of the volume and 4% of the net revenue is that will be as part of our total portfolio. So again, 3% 4% for volume and net revenue. If you take craft Specialty and Alcohol Free together, we talk about 7% of volume and 14% of revenue. That is different for Western Europe.
That is higher because we started earlier with our focus on these two segments there. And craft facility and alcohol free beer is in total 12% of our Western European portfolio in volume and 20% in value. Grimbergen, as we started our brands in or basically, Grimbergen is already for ages a French brand, as you know. We picked it up in our Sail 22 program, started to export that, if you like, the concept to other markets. These markets, as we said earlier, do very well at this moment of time due to the promotional less promotional pressure and the glass issues combined together.
Grimberg and France did a bit less. We're talking about roughly 70%, 70%, 75% of our volume of Kienbergen coming from France.
Okay. There was a lot of numbers on the alco free and Crafts and Specialty there. Did you you say at any point how much of the alco free that is Western European based?
No, good cash, but we don't want to Okay. For contract reasons, yes.
Fine. Thank you very much.
Operator, I think we are ready for the next question.
Thank you. Apologies for
the layoff.
Next question comes from the line of Ron Swatz Barclays. Please go ahead. Your line is open.
Good morning, Kees and Heine. First question on Russia. There's a comment that came out on Bloomberg this morning that Karlsberg says AB InBev has been very aggressive on pricing in Russia. I was wondering if you given your opinion on the outlook for next year in terms of Russian pricing. We understand that the AB InBev FS joint venture has reinvested a lot of the synergies into promotion there.
Do you anticipate that continuing into 2020? Or do you think it will be a more benign pricing environment? Secondly, we've heard that Molson Coors are considering a strategic review of their businesses in Europe. I wonder if you have any view on those businesses? And thirdly, you mentioned you've continued the rollout of DraughtMaster into a number of new markets, particularly China.
I
was wondering if you could give an early indication of how well these rollouts have gone. Thank you
very much. Thank you, Laurence. With regard to the outlook on Russian pricing, It's very difficult to say given the current market dynamics, probably the pressure remains unchanged. We are rebalancing our golden triangle. We have been very value focused over the last couple of years, as you know.
And with our price increases, we aimed at offsetting the cost of goods increases and sustain our margins, again, because of the new competitive environment that might not be sustainable. And therefore, we need to face up to new reality. And then of course, we will continue to try to take price increases in order to offset costs if needed and follow price inflation. But at the moment that others have another kind of choice, we need to ensure that our prices of our brands remain competitive. We're looking out to MOLKS and KORUS, we can only share with you that we heard the same, but obviously we're not commenting on that.
And with regards to DraftMaster, yes, we just completed our line in China. And It's far too early to say anything about it, but we are excited about it, of course, because we have been very successful by rolling out this concept in the Nordics, especially in Denmark, Norway and Sweden. It's going very well as well with regard to our rollout in the U. K. So we have high expectations from it.
But it will be a slow start because we first, of course, need to fully commission the line and then start to sell the product in the market.
Understood. Thank you very much. Understood. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Edward Mundy at Jefferies. Please go ahead. Your line is open.
Good morning, Kees. Good morning, Heine. Two questions, please. All on Asia, actually. The first is on China.
I was wondering whether you were able to comment on any splits between on and off trade. Are you seeing some weakness within the on trade within that market? And just a reminder, how big is the on trade for you there? The second question is on Cambodia. To what extent are you able to comment on how big or how material the additional 25% stake is?
And then the third is on India waste or some slightly slower growth within the 4th within the Q3. Do you feel that this is a new run rate for 2020? Or do you think there was some factors specific to Q3, which means that 0 isn't the new run rate?
Sorry, Ed, good morning. The last was on China or you're talking about the run rate?
That's right. So the first is on China, on trade versus off trade. The second is on Cambodia and the third is on India, where your volumes have flat in the Q3. Is that sort of a reasonable proxy for growth looking forward? Or were there some specific factors to Q3?
Yes. With regard to China, it's more or less fifty-fifty entrace off trade. And of course, we are very glad with the performance of our portfolio in China. You see indeed some pressures on some of the channels, especially the night channel. And we indeed saw some reduced growth in the health market.
But the other parts of our portfolio did extremely well as you've seen in our figures. With regard to Cambodia, over to you, Heine.
Yes. So on the Cambodian acquisition, the price is not disclosed. Million for the 25% we acquired in 2018, and it is safe to assume that we paid a bit more for the rest.
And then with regard to India, well, basically, as we always say, it's a volatile environment. We used to say it's 2 steps forward and one step back. Q3 indeed was one of these quarters that it's 1 step back. Q3 was impacted by price and excise tax increases in a couple of states. And therefore, we need to see how that basically impacts further growth.
So it's difficult to say as whether this is the new reality. Again, we are very optimistic about our expectations and opportunities in India. However, it is a volatile environment. Great.
Thank you.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Simon Hales at Citi. Please go ahead. Your line is
open. Could I just sort of go back to Russia, please, Geeta? I was just trying to understand what's happened with your pricing through Q3. You talked at the Q2 stage, I think, hectoliter in the 3rd quarter remained in line with the first half trend. And have you moved your pricing down to try to react to some of those competitive pressures yet?
And following on from that, your comments around sort of margin outlook for Russia being maybe nearer 15% to 16% ongoing. Is that an H2 comment for this year or a much longer term expectation? You now have a rebasing down of that business. And then just secondly, obviously, a very strong volume performance in Q3 in the Nordics. I mean, could you flesh out a little bit more of what you've been doing in those key markets there?
How big of a benefit is the Finland retailer contract coming back to you helping those volumes?
Thank you very much, Simon. Good morning. With regards to the Russian pricing, within the season, you normally don't reduce prices. But we try to get enough promotional slots. We have got we did get less promotional slots than anticipated.
And therefore, you see still a very healthy pricemix, with a different, let's say, direction of the volume. So in that respect, Q3 has not done what we expected to rebalance, if you like, our golden triangle. And that's one of the things we need to do in the remainder of the year, but especially, of course, when we talk about 2020. Then about the margins. Yes, it is in a new competitive environment.
Prices have not been taken in line with COGS. And that means that being by our competitor, and that means that we need to rebalance our expectations in terms of margins for at least 2020 and that further depends on the competitive behavior. So for 2020, I think it's indeed more in the direction of 50%, 60%. With regards of our performance in the Nordics, which was quite strong, especially with regards to our Q3 2018 results. It is indeed Finland, and our contract is one of our trade partners.
On the other hand, Denmark had an extremely strong Q3. And what we see as well is in some of our markets that our CSD business helped to grow the business. So in that respect, good quality results from the Nordics,
Simon. Perfect. Thanks very much. Perfect. Thanks very much.
Thank you.
Thank you. Our next question comes from the line of Madhu Thort at Bernstein. Please go ahead. Your line is open.
Good morning, everyone. So quick question on China. So over the last few quarters, you seem to have a deceleration in volume growth and an acceleration in the price mix growth. So could you explain a little bit of what is underlying this trend, please?
Thank you, Nadine, and good morning. Well, there are many dynamics in the market in China. Our growth in China is driven by different elements. And therefore, you see indeed different, let's say, dynamics between volume, pricemix and then as a consequence, the net revenue. What we have is the growth of our international premium brands where we have a strong portfolio with Carlsberg, Tuborg and Blanc.
As I said earlier, Carlsberg was a bit slower in growth than normally because of the night entertainment closures. Then we have the big city expansions where we expand into cities in Eastern China. We have as well market growth in Western China, where and we are more skewed to Western China, as you know. And some provinces have been supported by changed opening hours, more tourism and good weather. And then we have a few very specific premium Chinese brands outside there that grow outside the home provinces like the Darling brand and the Windflower Snow Home.
So in that respect, we the different elements of our portfolio in China helped us tremendously in Q3, but give a bit different dynamics maybe as one of the quarters before.
Okay. That's very clear. Thank you.
Thank you.
Thank you. And our next question comes from the line of Franz Heuer of Amos Banken. Please go ahead. Your line is open.
Thank you very much. A question regarding the guidance and the organic EBIT growth, I understand that. What about the M and A impact on the reported EBIT growth? It was negative percent or so in the first half. What should we think about given the increased ownership in Cambrew for the year as a whole or for the second half, please?
Heine?
Yes. Good morning. So the impact comes from the Kratz Kambru acquisition that we did last year in August. So the logic is that when we take control, which we did last year in August, then for the coming 12 months, it's included in the non organic. Now we are in control, so there will be no change going forward.
It is to be included in the organic. And then remember as well by the way, so this is on the Cambrew part. Remember for the second half there is continued small plus on inorganic coming from the additional acquisition we did last year of buying a bit more in Superbok. So on a net basis, second half, the M and A effect on group EBIT is going to be what positive or negative? It's going to be positive.
Thank you. On the Russian market share loss, could you quantify what has happened there in terms of year on year development and where your market share is now in Russia, please?
Yes, Frans. What we see is indeed a decline. Year over year, it's almost 200 basis points. We are around 20, let's say, 27.8%. Our market share was flat sequentially, so that's good.
We have been able to install it. But year to date, we have lost indeed year over year.
Thank you very much.
Welcome.
Thank you.
Okay. If there are no other questions, then thank you very much for listening in and thank you for your questions. We're looking forward to meeting some of you during the coming days weeks. Have a nice day. Bye bye.