Analysts have hailed Carlsberg's half-year results as "positive" and "strong", thanks to margin expansion in the group's key Russian market. Michelle Russell examines reaction to the brewer's performance.

The results beat analysts' profit estimates of DKK1.6bn, thanks to higher beer prices and improved profitability in Russia, Carlsberg's biggest market.

Net income climbed to DKK1.94bn (US$375m) from DKK1.42bn a year earlier, while net sales rose 9% to DKK29.4bn, but fell 7% on a like-for-like basis. The difference was largely due to the contribution of the Scottish & Newcastle business acquired by Carlsberg last year.

"These results provide clear evidence of how Carlsberg can get there despite a tough trading environment," Matthew Webb, an analyst at Cazenove & Co, said.

According to the Dutch brewer, the Russian beer market declined by around 9% in the first half of 2009. The brewer now expects a decline of around 5% to 6% in the whole of 2009, compared to a previously expected 2% fall.

Despite this, Carlsberg-owned Baltika, Russia's beer market leader, increased its market share to 41%, from 38.5% a year earlier, the group said. The brewer said it expects more gains to follow in the second half.

Carlsberg's exposure to Russia has increased over the last 12 months, since its part-acquisition of Scottish & Newcastle gave it full control of the two firms' joint venture in Eastern Europe, Baltic Beverages Holding.

The brewer has stepped up cost cuts in Russia and has moved its sales mix toward higher margin, mid-priced brews and away from its cheapest brands.

"The market leader is taking advantage of the recession," Casper Blom, an analyst at Carnegie said. "Cost cutting will have an even larger effect in the third quarter."

However, with Carlsberg's large exposure to the Russian beer market, the brewer is leaving itself open to risk from a possible tax hike on beer.

Speaking at the company's first-half results conference on Wednesday, the brewer's Eastern Europe head, Anton Artemiev, attempted to calm fears of a rise.

"It remains to be seen what will happen," said Artemiev, adding: "In the past, there has been every year a different number of proposals and, so far, the extreme one never went through."

Commenting on the proposal to triple excise tax on beer but leave tax on vodka level, Artemiev said: "This is so illogical that it certainly requires a discussion and I'm sure that this discussion will take place." He added: "It would be a very negative decision for the industry as a whole. I think we will raise our voices to communicate that in the best possible way to the decision makers."

Despite this, Carlsberg said that it remains confident of margin expansion in Eastern Europe and the group reaffirmed its full-year earnings and cash flow guidance.

Sanford C Bernstein analyst Trevor Stirling believes Russia is still the dominant engine of outperformance for the group, and with operating margins in the region growing by 985bps in the second quarter, on the back of lower input costs, Stirling said he expects the margin momentum to continue through 2009.

"Carlsberg has outperformed its peers and the market so far in 2009, as anxieties about the impact of a weak Rouble have dissipated," he said.

"The results were even stronger than Q1 and we expect substantial upwards earnings revision to reflect both the strong Q2 results and the likely strong momentum for the rest of 2009 and into 2010," he added.