Denmark: Carlsberg A/S net revenue climbed 8% to a total of DKK 19.3 billion as at 30 June 2006

Carlsberg A/S announced August 09 its financial statement as at 30 June. Beer sales in the first half were 33.9m hl (calculated pro rata), which is 6% higher than sales in the same period of last year, corrected for loss of the volume contribution from Hite Brewery. This trend is attributable to higher sales in BBH and Asia, and the good weather during the World Cup also contributed to a positive trend in Western Europe in the second quarter.

The Carlsberg brand achieved an increase of 5%, including a significant contribution from Western Europe. The Tuborg brand continued to grow, with a global increase of just under 12%, primarily as a result of strong development in BBH.

Net revenue rose by 8% to DKK 19,251m, driven by good development in Western Europe and continued progress in BBH. Activities in Asia also contributed increasing revenues, partly as a result of acquisitions made and partly as a result of continued organic growth.

Operating profit before special items was DKK 1,722m, an increase of 30% on the same period last year. Excluding the earnings contribution from Hite Brewery in 2005, operating profit for brewing activities increased by DKK 419m or 34% as a result of a favourable development in price and product mix, continued rationalisations in Western Europe, and synergies and restructuring in BBH. As part of the ongoing process of focusing the business, the remaining shareholding in Hite Brewery has been sold. Landskron brewery in Germany has also been disposed of, and production at Bodø in Norway discontinued.

Carlsberg sold a total of 13.3m hl of beer in Western Europe in the first half, on a par with last year. The second quarter saw a positive trend in volume compared with the same quarter last year. Net revenue climbed 5% to a total of DKK 12,818m. The general price profile in Western Europe has been positive over the last half, resulting in an increase of approx. 2% in average selling prices per hl of beer. The overall increase in net revenue has also been affected by a positive trend in sales of other beverages.

Operating profit was DKK 908m, against DKK 741m in 2005. DKK 40m of the increase of DKK 167m relates to profit on the disposal of assets and other income of a non-recurring nature. The remaining improvement in operating profit of DKK 127m (+17%) can be attributed to increasing revenues and rationalizations resulting from the Excellence programmes etc. The operating margin for the period was 7.1%, equivalent to an improvement of 1 percentage point compared with the first half of 2005. Activities in the Nordic countries showed a satisfactory trend overall, with a combination of product launches, price increases and rationalisations leading to a slight increase in operating profit. Market shares were gained in both Denmark and Finland, and in Sweden there were continuing operational improvements as a result of rationalization gains under the LogEx programme.

In the United Kingdom there was a positive development in the off trade, with progress for both the Carlsberg and Carlsberg Export brands, as a result of which the company has invested in a new canning line in Leeds. The difficult competitive situation in the on-trade remains unchanged. Rationalisation of the logistics function is proceeding to plan.

The trend in Germany remains positive, but non-returnable packaging has taken off more slowly on the market than expected following a change in the deposit system. In Switzerland the beer market grew in the first half, and sales of the Feldschlösschen brand developed well.

Baltic Beverages Holding (50%)

The Russian market achieved a volume increase of 6% for the first six months of the year, gathering pace after a weak start. BBH’s other markets made similar progress, with growth rates of 16% in the Ukraine, 22% in Kazakhstan and 6% in the Baltic States. BBH realised total beer sales of 10.5m hl (calculated pro rata), an increase of 8%; this figure includes a doubling of sales of Tuborg (+6% of total beer volume).

Net revenue was DKK 3,596m, against DKK 3,037m in the first half of 2005. This represents an increase of 18%, approx. 7% of which resulting from an improved price/mix and approx. 5% from exchange rate movements. There was a strong development in operating profit, which rose by 32% to DKK 751m (DKK 568m in the first half of 2005). The profit trend can be attributed to improved sales, innovation and the introduction of new products on the market, as well as the realisation of synergies arising from the merger of the Russian breweries. The operating margin was 20.9% (+2.2 percentage points compared with the first half of 2005), which can partly be attributed to an activity-related shift in sales and marketing between the first and second halves.

Work to merge the individual breweries, including transfer of sales and distribution of some products to Baltika’s organisation, is running to plan, and the Russian business realised a volume increase of 8% in the last quarter. A total market share of 35.6% was achieved (-0.7 percentage points compared with the first half of 2005), albeit with a slight increase late in the period. BBH launched a number of new products on the Russian market during the period, including Baltika Cooler and Tuborg Twist, with the clear ambition of being a leader in innovation.

Total market share in the Baltic States rose to 43.8% (42.7% in the first half of 2005), with the business in the Ukraine managing to gain market share in the second quarter after a weak start to the year. Strong growth (+40%) was achieved in Kazakhstan, driven by the Baltika and Derbes brands. BBH is expected to continue to achieve growth and progress. The important Russian market is expected to grow by approx. 5%, and BBH is expected to continue to outperform the market. 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 markets in Eastern Europe achieved a relatively small volume increase in the first six months of the year, with total beer sales rising by 3% to 6.3m hl. Higher sales on the Serbian, Bulgarian, and Croatian markets improved the overall figure.

Net revenue climbed to DKK 1,661m (DKK 1,619m in the first half of 2005), and operating profit was DKK 32m against DKK 94m in the same period of last year. First and foremost this figure reflects lower profits in Poland and an item of non-recurring income worth DKK 31m from 2005. The trend in the Balkans remains very positive.

Despite a positive market trend, sales fell in Poland, primarily as a result of a decision to reduce stocks in distribution and the wholesaler chain in order to achieve a more effective and direct correlation with sales in the off-trade. The market has also been characterised by price competition in the discount segment.

The Turkish market has been challenging in the first half, but cost savings have contributed to a small increase in operating profit compared with the same period of 2005.

The Balkan businesses, Serbia, Bulgaria and Croatia, achieved both significant volume growth and increased selling prices, thanks to a better product mix and general price rises.

Asia

The Asian businesses sold a total of 3.8m hl beer (3.8m hl in the first half of 2005 inclusive of 1.1m hl from the Hite Brewery which has now been sold). The ongoing business achieved a volume increase of +36%, 9% of which relating to organic growth and 27% to the acquisitions in Cambodia and Western China.

Net revenue climbed to DKK 1,141m, against DKK 782m in the same period of last year. (The revenue figures do not include revenue from associates in South Korea and China.) Operating profit rose by 9% to DKK 221m as a result of profit improvements in countries such as Singapore, and higher earnings from the activities acquired in Western China. Hite contributed DKK 66m to operating profit in the first half of 2005. Excluding the profit contribution from Hite, the improvement in profit in Asia was DKK 83m.

Other activities

Other activities include the development and disposal of properties, primarily at the former Tuborg site in Hellerup, Copenhagen, and the operation of the Carlsberg Research Center etc. These activities generated operating profit of DKK 55m in the first half against DKK 14m last year.

The most recent estimate of the financial consequences of agreements entered into concerning delivery of properties/flats at Tuborg Syd etc. in the second half of 2006 and in 2007 and 2008 is that this will mean investments of approx. DKK 250m, DKK 430m and DKK 30m and sales proceeds of approx. DKK 20m, DKK 720m and DKK 780m in the respective periods. 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. Selling profits/new rental income in the second half of 2006 and in 2007 and 2008 are expected to be approx. DKK 30m, DKK 330m and DKK 240m.

Income statement

Net revenue totalled DKK 19,251m in the first half, an increase of 8% on the same period of 2005, with approx. 1.4% resulting from exchange rate movements. Revenue growth has been driven by continued positive developments in BBH and progress in Western Europe generally and in Asia. Organic growth including exchange rate movements was DKK +989m (+5.6%). Beer sales represented DKK 13,621m or 70.8% of total revenue.

Gross profit was DKK 9,754m, an increase of 9%, and the gross margin was 50.7%, which is 0.3 percentage points higher than for the same period last year.

Sales and distribution expenses grew by 4% to DKK 6,743m, including rising costs in BBH in connection with the integration of sales and distribution in Baltika’s organisation.

Administrative expenses amounted to DKK 1,468m, on a par with 2005.

Other operating income, net, climbed DKK 36m to DKK 159m as a result of profit on the disposal of assets/property. The Group’s share of the net profit of associates fell by DKK 107m to DKK 20m, largely due to the sale of shares in Hite Brewery in 2005 as a result of which the income from the associate (DKK +66m) is no longer included.

Operating profit before special items was DKK 1,722m, which is up DKK 394m on 2005. Beverage activities generated a profit of DKK 1,667m, an increase of DKK 353m. This positive trend was mainly the result of growth in earnings in the Nordic countries and BBH. The overall operating margin was 8.9%, which was 1.4 percentage points higher than last year.

Net special items amounted to DKK +393m, against DKK -110m in the first half of 2005. The most significant items in 2006 were income from the sale of the remaining shares in Hite Brewery and restructuring costs. Net financial items amounted to DKK -428m, against DKK -618m in the same period of 2005. This trend can primarily be attributed to currency translation adjustments on debt in USD and lower interest costs as a result of lower interest-bearing debt. Interest was DKK -506m (DKK +29m), while other financial items totalled DKK +78m (DKK +162m).

Tax on the profit for the period was DKK -500m (effective tax rate 29.7%). Consolidated profit was DKK 1,187m, against DKK 420m in the same period last year. Carlsberg A/S’ share of net profit was DKK 1,052m, against DKK 314m in the same period last year. The major factors in this improvement were growth in operating profit, a positive contribution from special items and a reduction in net financial items.

Cash flow and interest-bearing debt

Cash flow from operating activities totalled DKK 1,091m in the first half, against DKK 1,102m in the same period of 2005. The most significant changes in the items included in cash flow are higher operating profit and a relatively lower increase in working capital, while net financial payments increased as a result of interest accrued on a loan note established in connection with the purchase of the minority shareholding in Carlsberg Breweries at the start of 2004.

Cash flow from investing activities was DKK +1,600m, against DKK -1,167m in the same period last year (DKK +2,767m). This includes profit from the sale of the total shareholding in Hite Brewery (DKK +3.3bn). Capital expenditure totalled DKK 1,587m, against DKK 1,457m last year. This represents an increase of 9%, primarily due to a higher level of investment in both BBH and the rest of Eastern Europe.

After this, free cash flow for the period amounted to DKK +2,691m, against DKK -65m last year. Cash and cash equivalents fell by DKK 375m to DKK 1.8bn at 30 June 2006, compared with the same date last year.
Net interest-bearing debt amounted to DKK 20.6bn, on a par with year-end 2005.

This trend essentially mirrors the development in free cash flow (excluding the Hite shares sold in 2005, which were included in net interest-bearing debt at year-end 2005 but in free cash flow in 2006), payment of dividends to shareholders in Carlsberg A/S, minority interests and acquisitions/financial investments.

Earnings expectations

Based on profits in the first half and the good summer weather in Western Europe, the full-year outlook is being adjusted upwards.

Net revenue is now expected to rise to approx. DKK 40bn (DKK 38.0bn in 2005; previously expected to rise to approx. DKK 39bn for 2006) with positive contributions from all regions.

The outlook for operating profit is being increased by DKK 200m to approx. DKK 3.75bn (DKK 3,306m in 2005 excluding Hite), equivalent to a total increase of 13%. Brewing activities are expected to contribute approx. DKK 3.7bn of this, and the remaining activities approx. DKK 50m.

As a result, the outlook for Carlsberg’s share of consolidated profit is being increased by DKK 150m to a total of approx. DKK 1.8bn (DKK 1,110m in 2005). Excluding profit from the sale of the remaining shares in Hite Brewery in 2006 (approx. DKK 440m after tax), profit is expected to rise by approx. DKK 250m or approx. 23%.

The above forward-looking statements, including the forecasts of future revenue, profit 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. Such factors include – but are not limited to – matters presented in previously published material from Carlsberg A/S, most recently in the Annual Report for 2005.

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