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Executives

Jørgen Buhl Rasmussen – CEO

Jørn P. Jensen – Deputy CEO and CFO

Anton Artemiev – SVP, Eastern Europe

Analysts

Søren Samsøe – Danske Markets

Trevor Stirling – Sanford C. Bernstein

Michael Steib – Morgan Stanley

Paul Hofman – Credit Agricole Cheuvreux

Frans Høyer – ABG

Ian Shackleton – Nomura

Melissa Earlam – UBS

Gerard Rijk – ING

Chris Pitcher – Redburn Partners

Graeme Eadie – UniCredit

Clementine Fletcher – Bloomberg News

Carlsberg Breweries A/S (OTC:CGBWF) Q2 2010 Earnings Call Transcript August 17, 2010 10:00 AM ET

Operator

Welcome to the Carlsberg conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to your host, CEO Jørgen Buhl Rasmussen. You may now begin.

Jørgen Buhl Rasmussen

Thank you, and good morning to everybody. And welcome to the conference call for our six months results 2010. As was mentioned, my name is Jørgen Buhl Rasmussen. And I have with me today our CFO, Jørn P. Jensen; and also, our Senior Vice President, Anton Artemiev, for Eastern Europe; and also, Vice President of Investor Relations, Peter Kondrup.

The group's performance for the first six months was strong. Improvement in overall market share and a significant improvement in profits are the two key headlines. Going into 2010 following a challenging 2009 macroeconomic environment, we were clear in our ambitions to strengthen our market positions in the group for this year and in the coming years.

Therefore, we have increased our expense behind brands and activities, a high number of new products were launched, and successfully executed campaigns and events drove the improved market shares in a significant part of our business. At the same time, we relentlessly continue our focus on efficiency agenda as we still see a vast number of opportunities to improve the profitability of the group. After the very strong margin improvement for the first six months, we believe that the group is clearly on track to meet our medium term margin targets.

I'll now give you a summary of the group performance for the first six months, and then briefly go to the regions. And then as always, Jørn will then after walk you through the numbers and comment on our upgraded 2010 outlook. And thereafter, we will be happy to take your questions.

Please go to slide three. Going into 2010, we had clear ambitions of improving market shares in both volume and value. And after the first half of the year, we are on track. In Northern and Western Europe, our overall market share has started to improve after flat market share development in recent years. An important objective has been and will remain to grow share in both value and volume terms in the region.

We saw strong market share performance in Eastern Europe. There were particularly strong gains in Ukraine, continuing the very positive trends. Our market share in Russia improved sequentially during the first six months to 40.1% in Q2. And in Asia, we have once again obtained strong gains in market share across the region. And our business in Indo-China was particularly strong.

One of the drivers of the market share improvement was the successful activation of the Carlsberg brand across many markets in connection with the World Cup. And volumes of the Carlsberg brand increased globally by 8%. The performance in all regions is also a result of the acceleration of new product introductions, line extensions, and events and promotions successfully executed. We increased investments behind our brands and activities. And we increased spend behind innovations as well. That's been and will continue to be an important driver. Our brand marketing spend has increased by double-digit percentages. Nevertheless, our total operating expenses are still declining as efficiency improvements more than offset the higher marketing expense.

And now to slide four, the financial performance for the group was strong for the first six months as margins and net results improved substantially. Operating margin improved strongly by 210 basis points to 17.2%. In Q2, the improvement was even stronger with 290 basis points improvement to 23.6%. And we did see operating margin improvement in all regions.

Organic operating profit growth was 4%. And adjusted for the estimated de-stocking effect, it would have been approximately 9%. Group beer volumes declined organically by 3% for the first six months. For Q2, organic volume development was flat as Asia continued to grow strongly and Eastern Europe improved during the half year following the substantial impact from Russian de-stocking in Q1. Adjusting the estimated impact from the de-stocking, organic volume development would have been minus 1% for the six months. And price mix was flat with small positive pricing in most markets. Mix was slightly negative, but mainly due to a changed country mix.

Organic net revenue development was minus 4%, and minus 3% in Q2. Revenue was negatively impacted by portfolio optimization or delisting within non-beer products, where we have some low profitability products in a couple of Northern and Western European markets, and also a one-off impact from strikes in Denmark and Finland. Therefore, the total beverage volume declined organically more than beer volume. Net results growth was high at 80% due to growth in recorded operating profits and lower financial expense.

Finally, we are upgrading our earnings outlook for the year for both operating profit and net results. And Jørn will get back to this later. But we all believe the group delivered very strong performance for the first six months, with market share gains in the last part of the business combined with a strong profit improvement. This is completely in line with our plans to accelerate spend behind market share growth while continuing our efficiency agenda.

Let's now turn to the regions and begin with Northern and Western Europe on slide six. After market shares remained flat in recent years, the overall market share in Northern and Western Europe improved in the first six months. This was done through a combination of more product launches, a higher activation level, and therefore, higher marketing spend.

The markets that performed strongest in gaining market shares in the first six months were the UK, Poland, Southeast Europe, Denmark, and Norway. The UK continued to trend from recent quarters. And year-to-date, market share is now 16.2%, with improvement in both on-trade and off-trade. Poland benefited from strong performance of the Harnas brand and widened distribution in general. In Norway, a very important driver was the launch of Tuborg Lime Cut and Kronenbourg 1664. And in Denmark, they continued a positive share trend, in particular in the off-trade, despite the negative impact from strikes.

Brand market expense increased organically by double-digit percentages to support key brands and activities. And a number of new products were launched, for example Tuborg Lime Cut in the Nordics. Also existing brands were rolled out in more markets like Tuborg in the Baltics, Kronenbourg 1664 in Norway and Finland, and Somersby in Finland and Croatia. A significant number of activations took place in connection with the World Cup or in relation to music and summer events.

The group's beer volumes in Northern and Western Europe grew organically by 1% in a market declining by an estimated 1%. Organic net revenue development was minus 2%, which was impacted negatively by portfolio optimization within non-beer and the strikes in Finland and Denmark. Due to this portfolio optimization, total beverage volumes declined by 1%, compared to the 1% volume growth for beer.

In Q2, beer volumes were flat, with minus 2% for total beverages. There was a small positive pricing in most markets, but a slight negative mix due a changed country mix and the ongoing challenges. To support price and mix, our value management efforts are becoming an increasingly important lever and an integrated part of the way we do business.

Organic operating profit improved strongly by 21%. And operating profit margin grew by 260 basis points to 13.1%. The improvements are driven by beer volume growth, lower input costs and efficiency improvements.

And now, to slide seven and Eastern Europe, there were clear signs of improving market conditions in the region as the macroeconomic indicators improved and consumer sentiment picked up. Organic volume development for the region was minus 13%. This was impacted substantially by the higher Russian excise duties and the de-stocking that took place in Q1.

Adjusting for the Russian de-stocking impact in Q1, volumes would have declined by an estimated 7%. There was a notable improvement in Q2 with minus 3% organic beer volume, which was driven by some improvement in overall market conditions and slightly warmer Q2 than last year. Volume growth for the other markets in the region was 12%, with strong growth in Kazakhstan and Uzbekistan. In a flat Ukrainian market, the group's beer volume increased by mid-single-digit percentages, continuing the strong trend of market share improvements, reaching now 28% market share.

We invested significantly more behind our brands and marketing activities in the first six months. And several significant product introductions took place in all markets in Q2, just ahead of the peak season.

Organic net revenue development was minus 15% for the first six months, then minus 3% in Q2. The improved revenue performance in Q2 reflects the overall volume trends, no impact from de-stocking, and the phased implementation of price increases in Russia. Organic net revenue growth was positive in all markets outside Russia. Organic operating profit development was minus 13%. But adjusted for the Russian de-stocking impact, it would have been minus 2%. The markets outside Russia performed very strongly with 35% organic growth.

Margins grew substantially for the six months, with a super strong 280-basis point improvement in Q2. This Q2 performance was driven by lower input costs, efficiencies, and a gradual improvement in price per H/Liter as the Russian duties were phased in during the six months. And margins improved in all markets.

Now, turning to slide eight and a few comments on Russia; the Russian market declined by an estimated 9% for the first six months. Market conditions improved slightly at the end of the period as consumer dynamics became more positive. And in combination with marginally warmer weather, the market decline in Q2 was more modest at an estimated 7%.

Due to improved macroeconomics and slightly improving consumer sentiment, we have adjusted our expectations for the Russian market development in 2010. We still expect the market to decline due to the excise duty increase in January. But we now expect a high single-digit decline, compared to previous expectations of low double-digit decline. The market share improved sequentially during the first six months, and was 40.1% in Q2, compared to 39.1% in Q1.

As part of our plans for Russia in 2010 to strengthen our market share, we launched a number of new products just ahead of the peak season. In addition, at this rate, the activity calendar was executed by region and channel throughout the first six months to optimize market performance.

And within non-beer products, Eve was launched and Kvass continued to perform strongly, and we always are building distribution of our mineral water product.

Our Russian end market sales, or you could say consumer uptick, was minus 11% for the first six months and minus 8% for Q2. Our shipments were lower at minus 17%, due to de-stocking activities in Q1. All the de-stocking took place in Q1. And stock levels were at a normalized level by the end of Q1. Shipments in Q2 were minus 5%.

To offset the excise dues increase, we have taken several price increases since November of last year. And we have increased prices to our customers by approximately 25%, with significant variation between branch and regions. And this is slightly ahead of the markets. As the tax increase was passed on in smaller steps, there was a negative price mix effect for the first six months of minus 5%. For Q2, the price mix effect was slightly better at minus 3% as price increases were coming through.

And now slide nine, since January this year, our market share continuously improved in both volume and value terms. This has been driven by the high level of product launches and strong execution. And we believe we are better on track to continue our positive trend of market share improvements in the Russia markets.

And now to Asia in slide 10, our Asian business continues its strong performance and recorded 17% organic beer volume growth. The growth was not only because of overall market growth in the region, but also through market share improvements driven by high level of innovations and activities across all our markets. All markets in the region recorded organic volume growth, with Indo-China being a main contributor, with 28% as a number of products were launched in all three markets strengthening the local product portfolios and contributing to the gains in market share.

The Chinese business continues to grow with both the international premium category and local Western Chinese brands, delivering 10% volume growth. A number of the local Chinese brands were re-launched with the objective to premiunize [ph] in smaller steps, and also strengthen consumer appeal. With World Cup activities in most markets across the region, and in Malaysia as an example, this was a successful driver behind the volume developments.

The premiumization efforts to the product launches, line extensions, and re-launches, combined with price increases drove a positive price mix for this region. Organic operating profit growth was very strong at 48% due to volume growth, price mix improvements, lower costs, and efficiency improvements across all markets. Lastly, we are very pleased that we have made a conditional agreement to acquire an additional 12.25% of the Chongqing Brewery Company.

And with this, I would like over to Jørn, who will now go through the financials.

Jørn P. Jensen

Thank you, Jørgen. Please turn to slide 12. We did deliver strong performance for the first six months. This was supported by forex movements at stable currencies recovered versus the euro or the DKK. Those movements have positively impacted the recorded results. Most importantly is, of course, the Russian ruble as the average rate for H1 is around 10% than last year.

Net revenue declined by 2% that, in total, equals the effect from net divestments, i.e. the small divestment in Germany and the acquisition in China in Q1. In Q2, our reported net revenue was plus 2% operating profit growth was 12%, with 3% organic growth in the beverage activities. In Q2, the reported operating profit growth was 16% on which beverage activities in organic terms contributed with plus 7%. Driven by the 12% operating profit growth, positive special items, and lower financial expenses, net profit increased significantly by 80% to DKK3.1 billion; and for Q2 alone, net profit growth was 36%.

As the year has progressed, we have not changed our focus. We will continue to support brands and activities by spending more on brands and trade marketing. We'll continue to drive the efficiencies better, and at the same time, keep focused on earnings, margins, and cash flow.

And on slide 13 and the income statement, as you can in the table, organic net sales decline was offset by the forex, i.e. the decline in (inaudible) business. Jørgen has been through the organic revenue development. So I will move on to gross profit.

Despite the revenue decline, the growth profit increased by DKK610 million corresponding to a recorded growth profit margin improvement of 290 basis points. In organic terms, the margin increased 210 basis points, with improvements in all regions due to lower input costs and efficiency improvements, and for Asia also with good contribution from higher sales prices. The organic margin improvement was 230 basis points for Northern and Western Europe, 180 basis points for Eastern Europe, and 270 basis points for Asia.

A few words on the organic margin development, specifically for Eastern Europe that improved strongly year-over-year in Q2, compared to a year-over-year decline in Q1. The three main elements are sales price per H/Liter, input costs or variable costs per H/Liter, and fixed costs per H/Liter. Input costs per H/Liter are quite similar in Q1 and Q2, and are down versus last year.

In Q1, sales price per H/Liter was down significantly due to the phased introduction of price increases to cover the significant duty rises in Russia on 1st of January. By the end of Q2, the duty increase was fully passed on to sales prices. But as an average across Q2, sales price per H/Liter was still slightly down versus last year, but of course, up significantly from Q1.

In H1 this year, fixed production costs were lower than in 2009 due to the efficiency problems. In terms of fixed costs per H/Liter, Q1 was worse than in 2009 due to lower volumes. Whereas in Q2, fixed costs per H/Liter were better than in both Q1 2010, but also Q2 2009. All-in-all, this means that the margin decline of 160 basis points in Q1 sends it to a margin improvement of 230 basis points in Q2. In reported terms and due to the mix of the foreign exchanges in Eastern Europe, the margin impact is, in both quarters, more positive than the impact in organic terms.

Organic total OpEx, including brand marketing, declined by DKK92 million. The lower costs are due to lower logistics and sales costs were to increase our brand and trade marketing investments by double-digit percentages.

Other income net increased by DKK150 million organically. This primarily reflects the sale of a brand from the French business, with one-off contribution from this transaction equals the one-off negative impact from the strikes in Denmark and Finland in Q2, i.e. in the Northern and Western European regions; and the group, the net effect is neutral.

All-in-all, operating profit was DKK5 billion. And organic development in the brewing activities are plus DKK125 million or plus 3%. It's including the de-stocking effect from Russia of estimated DKK300 million. Excluding this effect, the underlying organic development was plus DKK425 million or plus 9%. Of the process and impact of DKK366 million, around 80% relates to recovery of Eastern European currencies.

And now to slide 14, special items amounted to DKK354 million. The number's impacted by the non-cash, non-tactical income in Q1 of DKK390 million relating to a new IFRS accounting treatment of step acquisitions following the Xinjiang acquisition. Financial costs, net were down DKK633 million, compared to last year. The main reason is improvement in other financial items of DKK511 million due to movements, last year a sizeable loss, this year a gain.

Interest expenses declined by DKK122 million, driven by the de-leveraging and lower floating interest rates. Tax rate was 27%, excluding the non-taxable income of DKK390 million of special items. So all-in-all, net profit was DKK3.1 billion. Adjusting for the IFRS accounting impact of Xinjiang of DKK390 million, the net profit improvement was DKK985 million or 67%.

And now, cash flow on slide 15, the sum of the first three lines, EBITDA, including other non-cash items, adds up to an improvement of DKK674 million. Change in working capital was flat in line with trends. Our strong focus on working capital continues. And as outlined before, we have changed focus from period-end to average working capital in order to achieve a greater positive impact on average net interest bearing debt, i.e. wanted effect on both net profit and net debt. All-in-all, cash flow from operations was DKK4.7 billion.

Slide 16, please. Our focus on CapEx continues to be high on the agenda and CapEx declined slightly, compared to last year. In constant currency, the decline would have been even higher at approximately DKK100 million. DKK1.1 billion was spent on acquisitions. The majority of the movement in Q2 on this line relates to a prepayment for the addition of 12.25% stake in Xinjiang that was announced in Q2. Finally, there is positive mid-cash flow from June 1 from real estate activities related to the disposal of one building in the Tuborg site in Denmark. All-in-all, free cash flow was DKK2.4 billion.

And finally, on slide 18 and our outlook. The performance for the first six months was strong, primarily due to the positive movements, in particular, the recovery of the Russian ruble, the operating 2010 earnings acquisitions. We now expect an operating profit of around DKK10 billion, compared to previous acquisitions of operating profit in line with 2009 of DKK9.4 billion. That corresponds to growth this year of DKK600 million in reported terms. If adjusting for the Russian stocking in Q4 2009 and the subsequent de-stocking in Q1 2010 of estimated – respectively, costs DKK300 million and minus DKK300 million, the underlying growth would be DKK1.2 billion or plus 13%.

Based on the expected operating profit growth and the de-leveraging of the company, net profit is expected to grow around 40%, excluding the DKK390 million contribution from Xinjiang. And for the avoidance of doubt, all impacts from higher spot prices on some raw materials are included in the outlook, in addition to this, our comments with the recent speculation or delays around potential impact on 2011.

We have all the regions and markets started to increase volumes and prices several months ago. Obviously, there are always variations between the regions and markets that locally will impact sales prices. But for the group, we do not expect any material impacts from increased raw material prices next year.

And now, back to Jørgen for final comments.

Jørgen Buhl Rasmussen

Thanks, Jørn. This was our last slide for today. So just to summarize on the back of the first six months development, firstly, we are very pleased with the strong performance for the first six months. And secondly, we are spending more resources and more investments behind our brands and innovation, and the fact that we have gained share in the last part of the business this year made us even more certain that the portfolios we are building and activities that we are planning will drive further share gains. And thirdly, we continue to work on organizational values and processes to drive a performance-based culture with a strong leadership across markets and functions.

And now, we are happy to take questions. And as I've said in my introduction, we also have our SVP for Eastern Europe here, Anton Artemiev.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Søren Samsøe from Danske Markets is on the line with a question.

Søren Samsøe – Danske Markets

Yes, good morning, Søren here from Danske. First of all, a question regarding your guidance from our growth in Russia, just so I understand it right, what you have assumed for the second half because as I can see, it should be the same level as first half. Do you believe the consumers still need to see some price increases and that's the reason why a bit cautious? Also, are you assuming a worse or a better macro scenario for second half compared with first half?

And I mean we have 7% growth in Q2. It was significantly more negative than in Q1. I think it's minus 12% or something like that. Don't you see a positive trend to your equity or to put into your numbers for – or your assumptions for the second half?

Jørn P. Jensen

I assume, Samsøe, this was about moderate growth and moderate growth assumptions. For the full year now, we're seeing high end single digits. And high end single digits, Jørn is telling me nine. It could be eight. I mean, time will show. But we are seeing high end single digits. It could be in line with first half or slightly better than first half for the full year. And that would change some of the assumptions for the second half here.

Søren Samsøe – Danske Markets

Okay. If you'll comment a little bit on the margin for the second half so we know what to put into the numbers. What should we expect in terms of A&P costs and other cost development in the second half? Will it be as favorable as first half or how should we see it?

And also, regarding the strong growth end market in Asia, if you could confirm that there's nothing one-offish in the strong number report in Q2.

Jørn P. Jensen

When it comes to the major cost elements in the second half in Eastern Europe, then you will continue to see us spending more and more on – behind our brands and trade marketing investments. Then we do – we have included slightly higher input costs based on what we know, not what we think, what we know for the second half, for Eastern Europe as well.

Jørgen Buhl Rasmussen

Before I take Asia, maybe I'll ask Anton if he has anything to add about market development here now.

Anton Artemiev

Yes. Certainly, our second quarter view on the market development in Russia compared to previous safety nets is related to a number of reasons. One of them is certain recovery of the Russian economy and the improving purchasing power of consumers. And what we see as a tendency as – the beginning of their recovery, people tend to save more than to spend, even if their incomes have improved. Now, we see people spending more and more. And that is certainly attractive (inaudible).

Of course, another factor was somewhat better weather, the very fact that the industry has agreed in – undertaken price increase, so they're helping, in a way, certain soft pricing, and also the fact there has been successful introduction of the medium price (inaudible). So a number of factors have played in. And some of them, of course, will keep going like we believe the macro economy in Russia will not get worse in the second half. So those are the main reasons for our upgrade for an outlook for Russia now.

Jørgen Buhl Rasmussen

And on Asia, what you're seeing for the first half is what you – that's the trend we see in our business in general out in Asia, so a very strong performance in those markets, gaining market share, spending behind our brands, and peer activities. And no one-offs, no unique things happening in the first half, so expect to see more of the same in the second half.

Jørn P. Jensen

And also, in the second half, no input costs than we did have in the second half last year in Asia.

Søren Samsøe – Danske Markets

Okay. Thanks.

Operator

Trevor Stirling from Sanford C. Bernstein is on the line with a question.

Trevor Stirling – Sanford C. Bernstein

Good morning. Please, three questions. Firstly, concerning the input costs, Jørn, you mentioned that 2011, you expect to be neutral versus 2010. Would it be fair to expect that that will be just slightly higher input costs in Eastern Europe and slightly lower in Western Europe?

The second question relates to the – with regards to the weather impact in Russia in Q3, it seems to me that there's a number of effects going on through these higher temperatures, which normally would drive higher consumption of beer. But also, there's more than many reasons that's preventing from going outside and socializing, which would be a negative effect. And maybe Anton can talk a little bit about exactly what he sees happening at the moment.

And the third thing, coming back to the basis for the 4% growth in net profit, excluding the one-off benefits from the acquisition in China, but it seems it does include the big swing in other financial items from minus DKK335 million to DKK176 million. So that more than DKK500 million net swing is included in the net profit gain.

Jørn P. Jensen

If I just take the first and third, then when it comes to input costs next year, then as if there are variations between regions and markets. And don't forget Asia, a more and more important region as such. And there, you actually – have been seeing a very good harvest, also when it comes to quality. But of course, our variations are from region to region and from markets to markets, which again, also will impact, to a certain extent, price development in the different markets.

When it comes to the 40%, then you're right that it is excluding the DKK390 million. But of course, it's excluding what it was exchanging, including changes on other the financial items.

Trevor Stirling – Sanford C. Bernstein

Thank you.

Anton Artemiev

Yes, on the weather in Russia. Yes, it is very true that the warmer weather helps us to sell. At the same time, there have been also small issues. What will be the residual impact on the consumption is probably to the percent – even estimates – exact estimates for the market for July are still to come. But what we see is that nothing at the moment makes us to believe that our judgment of their high single-digit for the whole year should be different because of the weather.

Trevor Stirling – Sanford C. Bernstein

Okay. Thank you very much, Anton.

Operator

Michael Steib from MS is on the line with a question.

Michael Steib – Morgan Stanley

Yes, good morning. Just on your new guidance for around DKK10 billion in EBIT, I'm trying to get a feel for what's around me. And essentially, just mark-to-market, the effects impact, it nearly gets you to DKK10 billion, DKK9.8 billion, somewhere thereabouts. I think that's very contentious [ph] also. Should we really view the DKK10 billion figure as a floor for 2010 for the full year? Or in other words, is that a conservative estimate? Or are there still considerable variations around that in your view?

And then, the second question I would have is on the margins in Western Europe, which were up strongly. Could you give us a bit more detail on some of the initiatives, some of the projects you're working in, and how that will broaden in the second half of this year? Thank you.

Jørn P. Jensen

Around DKK10 billion means – around DKK10 billion being – is so much at the moment. And yes, it includes annual pre-precise amount, what the intake was from and what remaining intake was from the mentioned DKK9.8 billion up to DKK10 billion, and underlying improvements as such. But it is our best estimate at this point in time.

Jørgen Buhl Rasmussen

Regarding Western Europe and the margin development, there are – these are the main factors here, so we have some – we have (inaudible). At the same time, we do have, in most markets, small benefit in pricing. The key drivers are really low input costs as we have this year in Northern and Western Europe, and also in general other many efficiency initiatives we have taken in the Northern and Western. Those have been put in place last year in 2009. We are getting, for many of those, the full year benefit this year. And also, we have put in place new initiatives.

Without going into each of them in detail, a lot of this is around processes. And where we can, it's about centralizing a process to support our business and do it in one place. And this is achieved despite the fact that we have increased our investment behind our brands, in marketing and trade marketing. That's obviously the percentages.

Michael Steib – Morgan Stanley

Yes. Okay. Thank you very much.

Operator

Paul Hofman from Credit Agricole is on the line with a question.

Paul Hofman – Credit Agricole Cheuvreux

Yes. Good morning. This is Paul from Cheuvreux. I have two questions. The first one on the input costs again, you said in Asia, you expect still some lower input costs in the second half. Is it your – if I understand it correctly, you expect an increase there. Have you now changed your overall view of input costs for the full year? I remember that you anticipated some 150 basis points improvement on EBIT coming from input costs for Northern and Western Europe and Asia, and some small benefits still in Eastern Europe for the full year. Has it now shown a bit more positive, and also looking at that gross margin jump?

And secondly, a question on pricing, I noticed you have passed on everything, but price is still a bit negative. But do you see opportunities now to approach the CPI over Asia? But of course, back to pricing, will you have the pricing power that you have in the market?

And I brought – the final and third question is on special items. It's now $5 million, I believe. There was, of course, a trend of negative DKK100 million, DKK150 million. Yes, what can you say about special items going for us, also related to restructuring? Thank you.

Jørn P. Jensen

So the first one, what I tried to say around input costs and Eastern Europe was that we now expect it to be slightly higher in H2 versus H1. If anything, I guess you can say that we had seen a slightly lower than previously expected input costs in the first half. On the other hand, now we will see a small increase on the lower than expected H1 numbers, compared to how we previously had in Eastern Europe.

When it comes to special items, then the efficiency – if you assume it will be zero for the full year, I think you are more or less where you should be.

Jørgen Buhl Rasmussen

And on pricing, that's correct. By June, we have included all the impact of the excise duty costs in Russia in our ex-factory price. As to the – what else shall we do with pricing, we prefer not to comment on that. Thank you.

Paul Hofman – Credit Agricole Cheuvreux

Thank you.

Operator

Frans Høyer from ABG is on the line with a question.

Frans Høyer – ABG

Good morning. Regarding Northern and Western Europe, you had 0% organic growth in the second quarter and 4% organic sales decline in the second quarter. And you mentioned country mix and channel shift as reasons. But also, you have highlighted that you've been introducing a lot of new products. Is it possible to break down the negative 4% price mix effect on the country mix, channel mix, and new products, please?

Jørgen Buhl Rasmussen

Would it just be a repetition again of what we told you? Or this is all about–?

Frans Høyer – ABG

Northern and Western Europe, where I believe I'm right in saying that you had 4% negative price mix in the second quarter separately given that you had 0% organic sales and minus 4% – sorry, 0% organic volumes and minus 4%–

Jørgen Buhl Rasmussen

Price mix in Northern and Western Europe in the second quarter was minus 1%, flat minus 1%. Again, slight benefit from partly pricing, and then – and later to mix driven by mainly – it's not only by country mix, of course, Western and Northern Europe because some of the markets with slightly low average pricing outperform some of the other markets with higher pricing on average.

So what this is driving is the difference you see between volume development and revenue development that's non-beer. In some markets, it took some SKUs out with a lower probability, but also the fact that we had a strike in Finland and Denmark where our soft drink or non-beer is quite a significant category.

Frans Høyer – ABG

So if you were to give us a number for the effect on the top line of new product launches, which normally should help your product mix, do you have an estimate of that in the second quarter?

Jørgen Buhl Rasmussen

No. I can't give you a number. It's not that I wouldn't like to give you a number, but at the same time, I think the best indicator would be our market share performance because the market was down in that six-month period by 1% and beer volume by 1%. So they outperform the markets. And clearly, a lot of the new product introductions helped us to gain market share.

Frans Høyer – ABG

Understood. Okay. And with regard to the gross margin in Eastern Europe separately in the second quarter, I believe in the first quarter the gross margin was down 200 basis points. What was the development in the second quarter, please?

Jørn P. Jensen

No, it was minus 160 basis points in the first quarter. And it was plus 230 basis points in the second quarter.

Frans Høyer – ABG

Many thanks. Thank you.

Operator

Ian Shackleton from Nomura is on the line with a question.

Ian Shackleton – Nomura

Hi. Good morning, gentlemen. Two questions, could you update us where we are on the different regulatory measures that were supposed to become the Duma ahead of the summer? It seems to have gone very quiet there. And secondly, looking at page 27 and the market share numbers for Russia, could you just give an indication of how much your competitors also passed on, on pricing vis-à-vis the duty increase?

Anton Artemiev

So regulatory, you are quite right when saying it's been a relatively quiet period with the lawmakers on vacation. Actually, there is no news. Everything, what we met the past – last time, when we talked with you on the table, there are different discussions on the different measures. Nothing is decided. Discussions would most probably continue through the end of the year. And what we think might happen, to our best knowledge, we have included in our outlook.

That's about regulatory. As to the price, one exception for Heineken, we have been ahead of the rest of the competition in pricing. But by now, it is practically everybody have passed the excise future growth into their ex-factory prices.

Jørgen Buhl Rasmussen

We're still slightly ahead up–

Anton Artemiev

We still have been ahead of average.

Ian Shackleton – Nomura

And so, just to come back from the regulatory situation, are you saying that probably we don't hear any more until the end of the year? Could this be a 2011 issue at the earliest?

Anton Artemiev

Discussions will most probably continue in the fall. Discussions regarding repaid universe – regarding advertising and the like, all the stories you know. And more decisions would be made. We wouldn't like to speculate in public entities, and much more for the Russian government.

Ian Shackleton – Nomura

Thank you very much.

Operator

Melissa Earlam from UBS is on the line with a question.

Melissa Earlam – UBS

Hi. Good morning. I have two further questions on Russia, please. The first one is following up on the market share question that Ian just raised. In Q2 this year, you say your market share is 40.1%. Now, while that's a sequential improvement, it still seems to be down on a year-on-year basis. You didn't give the Q2 '09 market share from last year, but your H1 '09 was 41%. I'm just wondering if you can explain the dynamics there a little bit, whether that's related to the phasing of price increases or innovation, and whether your objective still remains to gain market share in Russia on a year-on-year basis for the full year.

And then, the second question is on the mix dynamic in Russia. Can you talk a little bit about whether that is a negative channel mix effect you've been seeing or whether that is trading down within your portfolio? Thank you.

Anton Artemiev

Yes, regarding market share trends. We have the most market share in the period of December-January. In fact, you're right. It's been related to price transition. We have started first with a pricing transition in November. It also relates to our phasing of innovations and the launches of a new product as most of our competition went into the market with the novelties by – in the second half of last year. We've done most of our activities in the pre-season – just before season. And the full effect of those will – is still to come, though we already see the improvement of our market share from Q1 to Q2.

And to answer to it, yes, we believe we will keep growing our market share objective to have an improved market share on a year-on-year basis.

Melissa Earlam – UBS

Could you possibly give us a Q2 '09 market share number? We've got the 41% for the half, but it would be helpful to have it for the quarter a year ago as well, if that's possible.

Jørn P. Jensen

Q2 2009, we will find it for you, Melissa.

Melissa Earlam – UBS

Thank you.

Anton Artemiev

It was around 41%.

Melissa Earlam – UBS

Okay. Thank you.

Jørgen Buhl Rasmussen

Forty-one point one percent.

Anton Artemiev

Forty-one point one percent.

Melissa Earlam – UBS

Right.

Anton Artemiev

So all of these – what we saw is – of course, year-on-year is somewhat negative mix. But again, if we take quarter-on-quarter development, it's been EBIT less or a slight improvement in our mix. And what we're seeing when we are turning to a better EBIT comparison in the second half of the year, we are optimistic of our mix.

Jørn P. Jensen

Yes, in general. So just to answer that, Melissa, don't forget that we started to see negative mix in Q3 last year. So Q3, Q4, Q1, and Q2 has been negative. But of course, coming into Q3 this year, we have somewhat easier comps when it comes to mix.

Jørgen Buhl Rasmussen

And then, the improving consumer dynamics should also help in this area. I think one more point, we used to more packaging mix change. In the last few quarters, it's been a mixture of packaging change and also some brands change.

Anton Artemiev

Yes, so all-in-all, both packaging and brand mix is stabilizing and is ready to be deposited to our book for the rest of the year. As to the mix in channels, that has more significantly impact our safe spot as we sell with no substantial difference on margins and on pricing into different channels.

Melissa Earlam – UBS

Many thanks.

Operator

Gerard Rijk from ING is on the line with a question.

Gerard Rijk – ING

Yes, good morning. Three questions, if I may. First is on Russia. Can you give a feel about the size – the relative size of percentage sales in other products than beer, and also, the growth rates in these other products, like Kvass, mineral water, and other soft drinks?

Second question is about the 25% price increase in Russia. Can you give an indication how that worked out on the retail sales price level for the consumer? Was that around 10%?

And third question is about the efficiency drive. You said that it's mainly based on closures and on centralizing. That were the measures you took in 2009, early 2010, but you still also get the feel that still much more can be done. Can you give indication in which areas it might occur, in Northern & Western Europe, Eastern Europe, or Asia, and where it can happen, in supply chain distribution or other parts of the business?

Anton Artemiev

Yes. The first one on Russia, our volumes for non-beer is just under 5% of our volumes in total. So it is still not very heavy–

Gerard Rijk – ING

Sorry, under 30% you said?

Anton Artemiev

Just under 5%.

Gerard Rijk – ING

Under 5%, okay. Yes.

Anton Artemiev

So it is a relatively not so significant part yet of our business. Beer will remain our focus for the foreseen future. But non-beer is good as a share. So growth rates for non-beer are positive. So as a share of our portfolio, it is good.

As to the retail price, when I said 25% and when Jørgen mentioned 25% increase in our prices, that was our ex-factory prices starting from November. So totally, we – on average, retail price is 25%. And then, it takes a certain time for these price increases to go to consumer price. We estimate now, at the moment, consumer price is – have probably increased around 20%, plus-minus.

Jørgen Buhl Rasmussen

I think sometimes when you say – and some of you sometimes say it's only half the increase to consumers as the increase passes by. Sometimes, I think if against the margin being taken by the different statements in the chain and sense of the different retailers.

On your last point about efficiency, I think you look at this in the broad sense because you're really looking at changing how we work, not just in supply chain of closing a brewery. It's of course all our functions, where we – and especially in back-end support functions where we look and can be synchronized a process and include only one location or two locations across a group of certain regions. That's what we've done a lot of. And we see more opportunities going forward.

Many of you, if not all of you, have heard about business undertaking project. That will be an enabler when we look forward. We believe we have a lot more to do in the broader sense in the supply chain, so a lot more to come. A lot has been done at group level, but also in local markets. So when we entered 2009 – and we all talk about prices also in local markets, we changed in a lot of places how we work to try to streamline.

Gerard Rijk – ING

Yes. And going forward, it's also in all fields that you still see savings? And how about further procurement savings in the group?

Jørgen Buhl Rasmussen

It's in general. It's in all fields. So it's in certain – production and supply chain. It's in IT. It's in all our processes. And that's reflected on our margin targets, mid-term margin targets.

Gerard Rijk – ING

Okay. And so, which year do you think that you can continue with this kind of heavy reductions, 2012, '13?

Jørgen Buhl Rasmussen

I don't think that's an end to this journey because what we don't know today, we will maybe know in two year's time, three year's time. And we can continue looking at things differently. So I think this is an end to this journey. We should never think about that this journey stops.

And remember, as an industry, and certainly as Carlsberg, we started later on this whole efficiency mindset. Some of the big FMCG companies – so we are learning from all the things they did several years ago, and can still apply a lot of that learning into our businesses, and have a lot more to do.

Gerard Rijk – ING

And on the revenue management side, where are you in the cycle of improving that? Is that in the early phases, or is that in the middle phases, or end phase?

Jørgen Buhl Rasmussen

What was that again, the first one?

Gerard Rijk – ING

Revenue management.

Jørgen Buhl Rasmussen

We call it a "tool box". That's how we solve the problems. So we have a number of tools here in terms of how to manage promotion, portfolio, SKUs, pricing. And that tool box keeps being expanded and developed. So value management is something we will have to get in to all markets as a mindset. And I think it's out there to a great extent. But I'm also convinced we will have a much better tool box in three year's time than the one we have today. And again, we can often learn from the basic tasks in FMCG companies.

Gerard Rijk – ING

Okay. Thank you very much.

Operator

Chris Pitcher from Redburn Partners is on the line with a question.

Chris Pitcher – Redburn Partners

Good morning. A couple of questions, firstly, following up on your guidance, the around DKK10 billion to me implies that your organic profit growth in the second half goes negative. Is that largely a function of the fourth quarter year-on-year de-stocking effect, coupled with some higher input costs? Or are stock levels reasonably high post-World Cup? Is that more of a top line slowdown going into the second half to justify that slowdown?

And then on the working capital, you had flat working capital in the first half, which would normally be a period for cash outflow. Should we be expecting a working capital inflow for the year now in the region of DKK1 billion to DKK2 billion looking at what cash flow normally looks like in the second half? Thank you.

Jørn P. Jensen

To answer the first one, that's a great question. Yes, you are obviously right that we will have, everything else being equal, negative impact coming from the simple fact that we will not expect – we do not expect a stocking up effect this year in Russia. But apart from that, it is – we have quite a good feel for this around DKK10 billion.

When it comes to working capital, you are right. Normally, you would see a significant minus in the first – or after the first six months. That's also why we are actually pleased and we are delivering in accordance to plan so far this year.

When it comes to the remainder of the year, don't forget that we did see a significant positive impact in the last month of 2009 due to this, I guess you can say, more period-end focus versus average reduction focus. So the impact will, in reported terms, end the last day of December not being exactly different from what it was a year ago.

Chris Pitcher – Redburn Partners

Okay. So broadly, what you're saying is your working capital cash flow forecast, given the way the way you reported, will not be significant as would normally be implied by the second half inflows. Am I right in saying that, so as to clarify?

Jørn P. Jensen

What I'm saying is that this movement in working capital – in the cash flow statement would be a relatively uninteresting number. But the average trade working capital reduction throughout the year would be, and is, significant.

Chris Pitcher – Redburn Partners

As you said, the interest benefit will still be coming to you even if won't see it in the–

Jørn P. Jensen

Actually, yes. Even more interest benefit this year than what we did see last year, because it's the average reduction that we are now producing on versus last year.

Chris Pitcher – Redburn Partners

Thank you. And one very final question on China, you talked about the strength of the Indo-China business. Can I just confirm within your Asia numbers that you saw positive net sales per unit or price/mix effect in China, as well as in the region?

Jørn P. Jensen

We did. Yes

Chris Pitcher – Redburn Partners

Thank you very much.

Operator

Hans Gregersen from Nordea is on the line with a question.

Jørn P. Jensen

Hello? Should we take the next question?

Operator

Graeme Eadie from UniCredit is on the line with a question.

Graeme Eadie – UniCredit

Hi. Good morning. You have a well-known mix match between the revenues and the debt structure of the business, clearly that's going your way at the moment. In the light of that, do you see going forward a change in the geographical profile of your debt? Is that something you're looking at?

And second question just on marketing spends. You talk about strong double digit increase, what precipitated that increase? Does that reflect the fact that perhaps you underinvested in the past or does that reflect an environment where you think you need to spend more? Or is it just simply you've identified more opportunities to invest behind your brands? And what's the case historically? Thank you.

Jørn P. Jensen

When it comes to the geographical split of our debt that is obviously a thing that we are looking at more or less every day. We still think, as we did last year as well where it did not move in our favor, that it makes a lot of sense to work with the split that we currently have due to the price differences between the different currencies. Of course, eventually if we do believe that it makes sense or that it would be cheaper to fund ourselves in other currencies than what we do today, then we would change it. But for now, we are pleased with the mix that we have.

Regarding your question on marketing investments, in general, no, we have not underinvested in the past in our branch. But I think we all bear in mind last year 2009 was a different year because of what happened in the world. We had media deflation and I think everyone were holding back on spending behind brands because of the very challenging environments and so did we. But we didn't really lose share growth last year because everyone else also held back on their investments and yet, media deflation.

But we also said because we expected some improvements overall in the macro economies across the world, it would accelerate our investment behind the brands to really start driving share growth. And that's reflected in our increased spends. But I – you cannot say that we underinvested in the past. But, yes, we have, if anything accelerated our investment behind brands drive share.

Graeme Eadie – UniCredit

Could you say what the actual increase was? You said double digit. Is there any way you can firm that number, if at all?

Jørn P. Jensen

Only it's more than double digit across all our regions. So it doesn’t mean you take the same average all markets. It really depends on the market, what new products we have, and pacing can be different. So I don’t want to go into specifics by markets, but it's across the board. But some markets are significantly higher than some other markets and often driven by product news – some new products, line extensions or some big campaigns on brands. And in some markets this year, World Cup was also a big driver. Places like UK, like Denmark, all Southeast Asian markets, quite a big driver.

Graeme Eadie – UniCredit

Great. Thank you very much.

Operator

Trevor Stirling of Sanford C. Bernstein is on the line with a question.

Trevor Stirling – Sanford C. Bernstein

So one very quick follow-up, gentlemen, if I may. You mentioned about slightly higher input costs in Eastern Europe in H2. Is that compared to H1 or compared to H2 '09?

Jørn P. Jensen

That's compared to H1 2010.

Trevor Stirling – Sanford C. Bernstein

Thank you very much.

Jørn P. Jensen

Maybe one more question then we should start closing the call.

Operator

Clementine Fletcher from Bloomberg News is on the line with a question.

Clementine Fletcher – Bloomberg News

Hi, gentlemen. I was just wondering, you talked about commodity costs not having a material impact on your prices in 2011. I was wondering if you could elaborate further on what the percentage change might be when you talk about a material impact.

Jørn P. Jensen

No. We never disclose our pricing strategy in advance, so to speak. But what you are saying is we are seeing pluses and minuses in some markets. Some regions, prices are going slightly up, in other regions and markets, prices are going slightly down. So that when we add it all together, we do not think that it will have any material impact on the group next year.

Clementine Fletcher – Bloomberg News

Great. And can I ask about your barley hedging for 2011? How much of your portfolio have you got hedged?

Jørn P. Jensen

We have – it's basically the same kind of question. We have hedged or have insights into volumes and prices that give us comfort that we can say that if you add all the pluses and minuses in the group from the different markets, then it will not have any material impact on the group next year.

Clementine Fletcher – Bloomberg News

Fantastic. Thank you very much.

Jørgen Buhl Rasmussen

I think we should close the call now. Thanks for your – for listening in and also for your questions. Thanks a lot.

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