Carlsberg's Q1 results gets the analysts' treatment

Shares in Danish brewer Carlsberg rose 3% on Tuesday (11 May) as the firm reported first-quarter earnings that beat analysts’ estimates. The brewer also stood firm on its forecast of a strong profits rise in 2010, despite seeing first quarter sales damaged by a three-fold tax rise on beer in Russia.

Share rose by DKK13.9 (US$2.34) to DKK460.80 in Copenhagen trading as Carlsberg reported net profits of DKK471m (US$78.6m) for the three months to the end of March, compared to losses of DKK212m in the same period of 2009.

Net sales however, fell by 7%, to DKK11bn.

The tax rise in Russia, where Carlsberg is the beer market leader, was the main reason for the declines in sales and operating profits. Russia's beer market shrank by 12% in volume terms during the quarter, reflecting stockpiling by distributors ahead of the tax hike, which was implemented on 1 January.

Carlsberg’s share of the Russian market fell to 39.1% from 40.9% a year earlier even though the brewer did not fully pass on the excise hike to customers. The destocking trend drove beer shipments down by 30% and lowered earnings by about DKK300m, the company said.

But Carlsberg wasn’t on it’s own. Last month, Heineken said Russian volumes fell by about 40% after it passed on all of the excise increase.

Sanford Bernstein analyst Trevor Stirling said Carlsberg’s revenue and profitability in Europe and Asia helped offset “plunging sales” in Russia.

“Results were stronger than expected despite Russia weakness,” Stirling said. “Following the completion of the S&N acquisition, Carlsberg derived more than 50% of its EBIT from Eastern Europe. 

“However, that ratio is likely to fall in 2010 as company results are impacted by the excise duty increase. These impacts were felt in 1Q10, though one should be careful not to read too much into that as Q1 is not material for company results expectations,” he added.

The first quarter is the least significant for Carlsberg, as alcohol consumption is typically lower than during the rest of the year and brewers normally use the time to prepare for the busier quarters ahead.

ING analyst Gerard Rijk echoed Stirling’s comments. “This is a very good first quarter,” Rijk told Bloomberg. “Europe is very good, and Asia was not expected to be so strong.”

The Asian markets continued to grow in the quarter and the group's organic volume growth was 16%. Including acquisition and consolidation changes, beer volumes grew by 38%. The volume growth was mainly driven by its businesses in Indochina and China with particularly strong performance in Indochina.

In north and western Europe, the firm’s operating margin widened to 5.6% from 1.9% and CEO Jorgen Buhl Rasmussen remained confident that there is “more potential” to improve European profitability as raw-material costs come down this year.

“As expected, the beginning of the year was affected by de-stocking and consequent volume decline in our Eastern European business and we continue to follow our detailed plans for the region,” Rasmussen said.

Indeed, Sydbank analyst Morten Insgaard told Reuters the quarter was “fairly strong”, but that the firm hasn’t had the start to the year he expected in Russia.

He added that Carlsberg must now show that it can take market share. “I think they can,” he said. “But the first quarter is a small one, so we'll have to wait and see how that plays out.”

Carlsberg repeated an outlook, given in February, for a 2010 operating profit in line with 2009, adding that earnings would be skewed towards the second half of the year due to the Russian de-stocking in the first quarter and the phasing of price increases linked to the excise duty increase in the country.

"We are on track to deliver on the 2010 guidance," Rasmussen told analysts in the firm's results conference call. "Northern and Western Europe and Asia delivered good profit growth during the quarter."

Stirling added: “As the Russian market improves sequentially (though still remaining down in double-digits) we expect overall company volume trends to return to mid single-digit falls with low single-digit revenue reduction over the balance of the year. For 2011, we expect volumes to return to growth driving positive organic sales growth and continued EBIT margin expansion.”