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CASTLE MALTING NEWS in partnership with www.e-malt.com Chinese
10 May, 2006



Brewing news Denmark: Carlsberg’s net revenue climbed 6% in the first quarter

According to the interim report made public on May 10, beer sales in the first quarter 2006 were 13.2m hl (calculated pro rata), which is 2% higher than sales in the same period of last year, corrected for the volume contribution from Hite Brewery. This development conceals a larger volume, particularly in Asia, and a smaller volume in Western Europe. Total sales of soft drinks etc. were 4.1m hl, an increase of 2%.

The Carlsberg brand achieved an increase of around 1% and the Tuborg brand continued its positive trend with global growth of around 6%, primarily as a result of strong development in BBH.

The Operational Excellence programmes continue to contribute to the increased efficiency and standardisation of work processes. The initiatives within production, procurement and administration are being followed by an equivalent programme for logistics, with the first pilot programmes now being implemented in Sweden and the UK. In the short term, efficiency measures and cost savings will continue to be the major source of improved profitability in Western Europe.

Profit improvements were achieved in the quarter, helping to underpin the positive full-year expectations. However, it is important to emphasise that earnings in the first quarter, as in previous years, will make only a modest contribution to Carlsberg’s overall results.

Western Europe

Carlsberg sold a total of 5.5m hl of beer in Western Europe in the first quarter, a decrease of 4% on last year. The organic development should be seen in the light of a decision to reduce sales of non-profitable lines in Sweden and Italy, and weak sales to the on-trade in the UK.

Net revenue climbed 2% to a total of DKK 5,363m, compared with DKK 5,260m in the first quarter of 2005. Average selling prices for beer were 4% higher per hectolitre, thanks to a better mix, partly as a result of reduced sales in the discount segment in Sweden.

Operating profit was DKK 15m, against DKK -87m in the first quarter of 2005.

The Russian market achieved a volume increase of 2% after a weak start to the year owing to a very cold winter. BBH’s other markets in the Ukraine, Kazakhstan and the Baltic States achieved growth rates of 17%, 36% and 5% respectively. BBH realised total beer sales of 3.8m hl, an increase of 3%.

Net revenue climbed to DKK 1,276m, against DKK 1,086m in the first quarter of 2005. This represents an increase of 17%, of which around 6% is due to an improved price/mix and around 9% to exchange rate movements. Operating profit climbed 6% to DKK 153m (DKK 145m in the first quarter of 2005), driven by higher earnings in Russia, although this was partly offset by lower earnings in the Ukraine. The operating margin was 12.0% (1.3 percentage points lower than the first quarter of 2005). Operational gearing is slightly higher for the first quarter this year than last year, primarily as a result of expansion of the sales force.

Following the minority shareholders’ approval of Baltika’s merger with Pikra, Vena and Yarpivo, work is under way to merge the individual breweries in Russia. Sales and distribution of some of the products have been transferred to Baltika’s organisation, and production has also been reorganised in a number of cases. A total market share of 34.9% was achieved (1.2 percentage points lower than the first quarter of 2005). The new Baltika is expected to strengthen its position as the merger progresses through the year.

The Baltic States achieved a total market share of 40.5% (40.9% in the first quarter of 2005) and posted another increase in profits. The trend in the Ukraine continues to be characterised by stiff competition, while momentum remains positive in Kazakhstan where very high growth rates (> 50%) continue to be achieved, driven among other things by strong development for Derbes in the canned beer segment, supported by a marked increase in marketing expenses.

BBH is expected to continue to achieve growth and progress. The important Russian market is expected to increase by 3-5% and, as previously, BBH is expected to achieve increases in excess of the general market trend. Combined with synergies in connection with the operational integration of the Russian breweries, this is expected to contribute to increased earnings, and enable BBH to maintain an operating margin of at least 20%.

Eastern Europe excl. BBH

The growth markets in Eastern Europe achieved only a small increase in sales volumes in the first quarter and total beer sales climbed 2%. Higher sales on the Serbian market improved the overall figure.

Net revenue climbed to DKK 634m (DKK 603m in the first quarter of 2005), and operating profit was DKK -77m (DKK -70m in the first quarter of 2005). These figures can be attributed to an improved, though still negative, result in Türk Tuborg and reduced earnings in Carlsberg Polska in the first quarter as a result of the planned increase in marketing efforts. The trend in the Balkans remains positive.

Asia

Total beer sales were 1.6m hl (1.8m hl in the first quarter of 2005, of which 0.5m was from Hite Brewery, now sold). The volume trend for ongoing business was +24%, +10% of which as a result of organic growth (higher sales in China, among others) and +14% as a result of the acquisitions of Cambrew (Cambodia) and Xinjiang (Western China).

Net revenue climbed to DKK 514m (DKK 401m in the first quarter of 2005), an increase of 28%; the revenue figures do not include revenue in associates in South Korea and China. Operating profit was DKK 126m, compared with DKK 103m in the same period of last year, which comprises higher earnings in Malaysia and Singapore and an increased operating profit from acquisitions. The figure has been reduced by the derecognition of earnings in Hite Brewery following reduction of the ownership interest, as a result of which it is no longer included as an associate.

Other activities

Other activities include the development and disposal of properties, primarily at the former Tuborg site in Hellerup north of Copenhagen, and the operation of the Carlsberg Research Center. These activities generated operating profit of DKK -21m in the first quarter, against DKK -26m in 2005.
During the first quarter an agreement was entered into concerning sale of a shopping centre, presently under construction, on the Tuborg site in Hellerup north of Copenhagen. The agreements entered into concerning delivery of properties/flats at Tuborg Syd in the period 2006-08 will mean investments of around DKK 410m, 400m and 20m, and sales proceeds of around DKK 105m, 770m and 780m respectively. Property development will therefore have a negative effect on free cash flow in 2006 as a result of investments which will not be realised until the properties are sold in subsequent years.

Gain on sales/new rental income in 2006-08 is expected to be around DKK 85m, 275m and 285m.
Around 70,000 m2 of housing, 20,000 m2 of commercial properties and 10,000 m2 of public buildings remain to be constructed and sold on the Tuborg site.

It is still early days where development of the Valby site is concerned. Project proposals etc. are expected to be drawn up over the coming year.The present interim report has been prepared in accordance with International Financing Reporting Standards (IFRS) and additional Danish interim reporting requirements for listed companies and, for the first time, in accordance with the provisions of IAS 34 Interim Financial Reporting.

Income statement

Net revenue totalled DKK 7,807m in the first quarter, an increase of just under 6% on the same period of 2005, with around 2% resulting from exchange rate movements. Revenue growth has been driven by continued positive developments in BBH and progress in the Nordic countries. Organic growth was DKK +86m (up 1 percentage point). Sales of beer totalled DKK 5,488m or 70.3% of total revenue.

Gross profit was DKK 3,761m, an increase of 6%, and the gross margin was 48.2%, which is 0.4 percentage points higher than for the same period last year.

Sales and distribution expenses grew by 3% to DKK 2,993m, including a significant increase in BBH as a result of expansion of the sales force. Administrative expenses amounted to DKK 745m, against DKK 687m in the first quarter of 2005, an increase of 8%. This increase can be attributed to BBH and exchange rate movements relative to the same period of 2005.

Other operating income, net, climbed DKK 45m to DKK 46m as a result of profit on disposal of properties. The Group’s share of the net profit of associates fell by DKK 35m to DKK 14m, largely due to the sale of Hite shares in 2005 and subsequent deconsolidation of the share of profit in Hite.

Operating profit before special items was DKK 83m against DKK -22m in the first quarter of 2005.
Beverage activities generated a profit of DKK 104m, an increase of DKK 100m. This positive trend was mainly the result of growth in earnings in Western Europe. The overall operating margin was 1.1%, which was 1.4 percentage points higher than last year.

Net special items amounted to DKK -105m, against DKK -74m in the first quarter of 2005. The most significant items here were redundancy costs in connection with the decision to close the Valby brewery in Copenhagen.

Net financial items amounted to DKK -228m, against DKK -294m in the first quarter of 2005. This trend can be attributed to exchange gains as a result of the falling USD in the first quarter.
Tax on the profit for the period was DKK +71m.

Consolidated profit was DKK -179m, against DKK -298m in the same period of last year.
Carlsberg’s share of consolidated profit was DKK -219m, against DKK -319m in the same period of last year.

Cash Flow and interest bearing debt

Cash flow from operating activities totalled DKK -939m in the first quarter, against DKK -466m in the same period of 2005, a reduction of DKK 473m. The lower level of cash flow is primarily due to a higher level of working capital and higher net financial payments resulting from payment of interest accrued on a loan note established in connection with the purchase of a minority shareholding in Carlsberg Breweries at the start of 2004 (DKK -205m).

Cash flow from investing activities was DKK +1,108m, against DKK -450m in the same period last year, and includes proceeds of around DKK +1.9bn in 2006 from the sale of Hite shares in December 2005. Capital expenditure totalled DKK 712m, against DKK 613m last year, an increase of 16%, primarily due to a higher level of investments in BBH.

After this, free cash flow in the period amounted to DKK +169m, against DKK -916m last year. Excluding sale of shares in Hite, free cash flow was DKK -1,770m.

Cash and cash equivalents fell by DKK 144m to DKK 1.1bn at 31 March 2006, compared with the same date last year.

Net interest-bearing debt amounted to DKK 22.8bn, an increase of around DKK 2bn on year-end 2005. This increase essentially mirrors the development in free cash flow (excluding receivables relating to Hite, which were included in net interest-bearing debt at year-end 2005) and payment of dividends to shareholders in Carlsberg A/S.

Earnings expectations

Carlsberg reiterates its earnings guidance for 2006.
Carlsberg anticipates volume growth. This growth is expected to be driven by organic growth at both BBH and the other Eastern European units, as well as in Asia (excluding Hite).

Net revenue is therefore expected to climb to around DKK 39bn (DKK 38.0bn in 2005).
Beverage activities are expected to generate operating profit of approx. DKK 3,550m. The operating profit of DKK 3,422m from beverage activities in 2005 included a DKK 116m share of the profit in the then associate Hite Brewery Ltd. Following the sale of some of the shares in this company in December 2005, the remaining holding is now viewed as a security, and so a share of the company’s profit will no longer be included in Carlsberg’s operating profit under profit from associates. The comparable figure for operating profit in 2005 is therefore DKK 3,306m.

Operating profit for beverage activities on a comparable basis is thus expected to rise by around DKK 250m in 2006. As a result of the disposals of property made in the past year, other activities are expected only to break even, which means that operating profit for the Carlsberg Group as a whole is forecast to be around DKK 3,550m.

The coming year is expected to see extensive work on restructuring and optimising processes with a view to strengthening and developing the Carlsberg Group. Restructuring costs associated with these decisions are recognised under special items. These costs must be expected to be considerable in 2006, and no lower than in 2005. For example, the closure of industrial production in Valby, Copenhagen, will lead to restructuring costs of around DKK 100m in 2006.
Carlsberg’s share of consolidated profit is expected to grow by around 10% relative to 2005.

The above forward-looking statements, including the forecasts of future revenue, earnings and cash flow etc., reflect management’s current expectations and are subject to risks and uncertainty. Many factors, some of which will be beyond management’s control, may cause actual developments to differ materially from the expectations expressed.

The Board of Directors and the Executive Board have today discussed and approved the interim report of the Carlsberg Group for the period 1 January – 31 March 2006.

The interim report is unaudited and has been prepared in accordance with IAS 34 Interim Financial Reporting, as adopted by the EU, cf. Accounting Policies, and additional Danish interim reporting requirements for listed companies.





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