just On Call - Carlsberg Quizzed on Russia

Carlsberg faces an uphill battle to persuade analysts that it can rejuvenate its Russian beer business this year, following a tumultuous 2011.

The outlook for Russia's beer market dominated Carlsberg's full-year results call with analysts earlier today (20 February). An expected return to volume growth in 2011 did not materialise and, together with higher costs, this was largely responsible for a 4% drop in Carlsberg's profits for the year, to DKK5.15bn (US$914m). 

The Denmark-based brewer said that it plans to acquire all outstanding shares in the Russian market leader, Baltika Breweries, in order to improve its financial position there. But, Carlsberg owns 85% of Baltika already and many analysts were sceptical about how significant the deal will prove for earnings.

Carlsberg's CEO, Jørgen Buhl Rasmussen, told analysts that the Baltika deal, which will cost up to DKK6.5bn, will enhance group profits from the first day after completion. He said that the move paves the way for greater cost savings, similar to those pursued in Western Europe.

When asked how Baltika's minority shareholders currently block access to such savings, Buhl Rasmussen said: "It does mean that some of the integration initiatives, especially in Western Europe, are quite difficult to do in Russia with the minorities in there."

Despite the brewer's desire to improve the efficiency of its Russian business in a market hit by slowdowns in consumer spending and excise tax hikes, the firm still expects the cuntry's beer market to improve. As at the same point of last year, Carlsberg predicted that Russia's beer market will return to "modest" volume growth in 2012, after shrinking by a further 3% in 2011.

Buhl Rasmussen stuck to his long-held belief that per capita beer consumption in Russia, which has fallen from 78 litres in 2008 to 64 in 2011, will come back. "Inflation in general is likely to be a lot lower and the outlook for the economy is fairly positive," he said of Russia in 2012. "We believe the market offers appealing per capita consumption opportunities as consumers shift away from high alcohol products like spirits to low alcohol products like beer." He added: "Consumers did spend 10% more on beer in 2011, despite volume being down."

Over the year, Carlsberg said that it lost some market share in Russia. It remains by far the biggest player, but will face fresh competition from a combined SABMiller-Anadolu Efes operation over the next 12 months. Still, Buhl Rasmussen said that he expects Carlsberg to recover market share in the country this year. 

While improvements in Russia are important to Carlsberg, Buhl Rasmussen also highlighted that the Baltika deal offers an opportunity to redirect dividends that would have gone to minority shareholders and use them to pursue growth in Asia.

Excluding one-off items, Carlsberg's volumes sales for the 12 months to the end of December rose by 9% in Asia, with net sales in the region up by 15% to DKK5.6bn. This remains small in the context of Carlsberg's group net sales of DKK63.56bn for the year, but the firm is keen to build Asia as the third pillar to its business. Baltika could provide extra cash to do this, it is hoped.

In Western Europe, Carlsberg's reported beer volumes were flat for the year and more cost cutting looks to be on the way. "We see many more opportunities [for cost savings] in Northern and Western Europe," Buhl Rasmussen told analysts. 

In 2012, overall Carlsberg operating profits are expected to be flat, with net profits only slightly ahead of 2011, the group predicted.