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  • Brewer's share price plunges on weak Q2
  • Russian beer market will shrink again in 2011
  • High costs damage profit margins  

Carlsberg's shares have taken a battering after the brewer chopped full-year profits guidance following a "disappointing and unexpected" performance in Russia.


Carlsberg's share price plunged by 18% on the Copenhagen Stock Exchange earlier today (17 August), after the brewer reported net profits down by 26% for the six months to the end of June, to DKK2.5bn (US$483m). The Denmark-based brewer warned that underlying net profits will only rise by between 5% and 10% in 2011, compared to previous guidance of 20% growth.

Russia is the group's problem market, where it owns the country's largest brewer, Baltika Breweries. Carlsberg's CEO, Jørgen Buhl Rasmussen, told analysts that a 1% drop in overall volume sales on Russia's beer market for the half-year was "disappointing and not expected". Consumers in the country "need more time to fully adjust" to higher prices following last year's three-fold hike in beer duty tax, he said on a conference call. 

Drinkers have been trading down to cheaper beers and Buhl Rasmussen said that he "no longer expects our Russian market share to grow this year". Meanwhile, the brewer said that it now expects Russia's beer market to decline in low single digits in 2011, after previously predicting market growth of up to 4%.

With Russian beer drinkers refusing to play ball, Carlsberg's exposure to high barley costs was more pronounced, particularly in the second quarter. The brewer had to import most of its barley into Russia, due to a poor domestic harvest in 2010. As a result, the group said that malt costs for its Russian operations hit "unprecedented heights".

Carlsberg's net sales in Eastern Europe actually rose by 12% for the half-year. But, unfavourable exchange rates and high costs dragged operating profits at the division down by 17%, to DKK2.17bn (US$420.5m), and by 26% in the second quarter.

The extent of Carlsberg's difficulties in Russia surprised many analysts. In the second quarter, Carlsberg's operating profit margins in Eastern Europe dropped by nine times more than anticipated by Sanford C Bernstein. "It now appears that the trends are more structural as the Russian beer market is not recovering as fast as management expected," said Bernstein in a note today.

Fresh restrictions on beer sales will add to brewers' problems. Last month, Russia's Government sanctioned a ban on beer sales at all kiosks, although it will not be implemented for 18 months. A ban on television, billboard and radio advertising is set to be in place within a year.

For all the problems, Buhl Rasmussen remained resolute in his belief that Russia's beer market will grow over the medium-term. "I'm still confident that consumers will move away from high alcoholic products to low alcoholic products, such as beer," he told analysts. Right now, he said, "vodka is down more than beer, so it's not like vodka is taking share from beer".

Analysts at MF Global said that the worst may be over, at least for this year. "We continue to believe that improving macro conditions and a pre-election spending boost will lead to improving consumption trends in Russia in 2H11," they said today. "We also highlight that Carlsberg will benefit from significantly lower raw material costs from Q4 2011."   

Elsewhere in Carlsberg's business, its divisions in Western Europe and Asia performed broadly in-line with expectations. In Western Europe, volumes were flat for the half-year, with price rises lifting net sales by 4% to DKK18.1bn. In Asia, volumes rose by 17% on the first half of 2010, with net sales up by 21% to DKK3.3bn. Carlsberg said that it has captured a 6% volume share of India's emerging beer sector.

For the first-half, Carlsberg's overall operating profits slipped by 5.4% on the same period of 2010, to DKK4.7bn. There was better news at the top line, with Carlsberg's net sales up by 8% to DKK31.3bn. Global volume sales rose by 5%, although volumes benefited from weak comparative sales in the first quarter of 2010 in Russia, when distributors destocked beer following the Government's tax hike.

In the second quarter, Carlsberg's operating profits fell by 13% to DKK3.7bn and net profits dropped by 22% to DKK2.2bn. Net sales rose by 4% to DKK18.7bbn.

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