Carlsberg faces analyst grilling on Russia

Carlsberg faces analyst grilling on Russia

Carlsberg has attempted to reassure investors that it can steer its way out of trouble in Russia, but there is concern that the brewer does not have control over the accelerator pedal. 

Carlsberg's net profits crumpled by 15.5% in the nine months to the end of September, to DKK4.7bn (US$871.6m), largely due to ongoing weak conditions in Russia's beer market. Operating profits missed many analysts' estimates for the third quarter. 

This was nothing like the shock inflicted by Carlsberg taking an axe to its profits guidance after the first six months of the year, but it's clear that things have not improved in Russia and that no one is sure when they will.

Carlsberg, though, at least believes it is a case of 'when', not 'if'. "We continue to invest in the Russian business in anticipation of a strong recovery," its CEO, Jørgen Buhl Rasmussen, told analysts on the brewer's results conference call today (9 November). A cynic might argue that there really is little choice, given that Eastern Europe remained the largest contributor to Carlsberg's operating profits in the first nine months of 2011, even though the group's operating profits in the region fell by a fifth during that period.  

Assuming Russia's beer market does return to growth, the timing and pace of any recovery is still uncertain. Brewers may only have six months left to advertise their products on television, radio and billboards. Meanwhile, a ban on beer sales at kiosks is also set to take effect in 2013. Regulation aside, Carlsberg said that Russia's beer market is suffering amid general inflation in the country. 

The market is expected to shrink in low single digits in 2011, after initial projections that consumption would rebound from volume declines of around 10% in 2009 and 2010. Carlsberg's Baltika Breweries, by far Russia's leading brewer, has lost around 1.5 percentage points of market share so far this year, dropping to 37.8%. 

Given this backdrop, and the importance of Russia to Carlsberg's overall profits, analysts peppered the company with queries on today's conference call. Does Carlsberg still think the Russian beer market will return to moderate volume growth in 2012? Right now, it does, but this forecast will be reassessed in February.

Buhl Rasmussen said that Baltika's loss of volume market share is "not satisfatory", but that the brewer's value share is doing better. "We are increasing prices more than the competition," he told analysts. 

Nevertheless, he said that competition on beer pricing is increasing in Russia. This may intensify further once SABMiller and Anadolu Efes have combined their operations in the country. The enlarged Anadolu Efes in Russia will have greater reach in premium beer and will leapfrog both Heineken and Anheuser-Busch InBev's Sun InBev business to be the market number two, albeit still around 20 percentage points of volume share behind Baltika.

Is Carlsberg worried? "Consolidation in a market like russia can only be positive and, if anything, makes the market more rational," Buhl Rasmussen said.

Following Carlsberg's announcement in its half-year results statement that full-year profits would only rise half as fast as originally forecast, the brewer's share price has taken a battering. Today, though, the group reaffirmed that guidance, which allayed concern that a further downgrade was on the cards.

Beer volumes in Russia are expected to be inflated in the fourth quarter by distributors stocking up ahead of an excise tax increase in January. Beyond that, the challenges are mounting for the incoming CEO of Baltika Breweries, Isaac Sheps.

"We are not satisfied with the current trends and we will reverse it," Buhl Rasmussen said.