Carlsberg Group CEO Discusses Q3 2010 Results - Earnings Call Transcript

Nov. 9.10 | About: Carlsberg Brewery (CGBWF)

Carlsberg Group (OTC:CGBWF) Q3 2010 Earnings Conference Call November 9, 2010 3:00 AM ET

Executives

Jørgen Buhl Rasmussen – CEO

Jørn P. Jensen – CFO

Anton Artemiev – SVP, Eastern Europe

Analysts

Søren Samsøe – Danske Markets

Nico Lambrechts – Bank of America/Merrill Lynch

Ian Shackleton – Nomura

Jorgen Buhl Rasmussen

Trevor Stirling – Sanford C. Bernstein

Matthew Webb – JP Morgan

Melissa Earlam – UBS

Andrew Holland – Evolution Securities

Hans Gregersen – Nordea

Michael Rasmussen – SEB Enskilda

Matthew Jordan – Matrix

Adam Spielman – Citigroup

Jon Fell – Deutsche Bank

Gerard Rijk – ING

Paul Hofman – CA Cheuvreux

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

Good morning everybody, and welcome to the conference call of our nine months 2010 results. My name is Jørgen Buhl Rasmussen, and I have with me today our CFO, Jørn P. Jensen; also, our Senior Vice President, Eastern Europe, Anton Artemiev, and then Peter Kondrup, Vice President of Investor Relations.

The performance for the first nine months was strong. Firstly, we are seeing signs of market recovery in Eastern Europe. And secondly, we are improving overall market share trends. And then thirdly, we have achieved significant profit improvements through efficiency improvements and lower input costs. Going in to this year, we were clear on our ambitions to strengthen our market position for this year, and in the coming years. And therefore, we have increased our spend behind brands and activities, and we have introduced and successfully executed many new products, campaigns and events, all driving the improved market shares in a significant part of our business.

During the year, we have continued our focused efficiency agenda as we still see substantial opportunities to improve the profitability of the group and reducing the profitability gap to all best-in-class FMCG companies.

After the very strong margin improvement for the nine months, we believe we are clearly on track to meet our medium-term margin targets. However, we’ll have to work hard to mitigate the impact on rising raw materials and packaging costs which will require sales price increases.

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

We have seen generally improving market trends across our regions. The Northern & Western European beer markets declined by an estimated 2% for the nine months. While this is an improving trend compared to 2009, consumer dynamics remain challenging in a number of markets in the region.

The Eastern European markets are benefitting from better macroeconomics and improved consumer sentiments, and in Q3, also from warm weather. The Asian market continued the strong growth trends in the mid-to-high single digit growth rates. For 2010 we had intensified the focus on driving market shares across all three regions. To drive and support volume and value market share growth, we have increased investments behind our brands and activities. We have also increased spend behind innovations and accelerated the number of product introductions. All these efforts, together with value management, have been and will continue to be an important driver.

Our marketing investments increased by double-digit percentages. Due to all these efforts, we have been able to gain market share in a large part of the business during 2010. A particularly satisfying outcome has been a 4% volume growth of the Carlsberg brand, well ahead of the overall volume development, driven by successful activation during the summer and the World Cup.

For the nine months, our beer volumes declined organically by 1%, impacted by the Russian de-stocking in Q1. Adjusting for this, volume growth would have been plus 1%. However, in Q3, the volume growth for the quarter was plus 3%, and mainly driven by continued strong growth in Asia, flat Northern and Western European volumes, and very importantly volume growth in Eastern Europe, where Russia helped by warm weather returned to growth.

Organic net revenue development was minus 2% but the 2% growth in Q3. Price and mix was flat with small positive pricing in most of markets. However, negative country mix offset the positive pricing impact.

And now to Slide 4. The focus on driving efficiencies across all regions and functions continues. For the nine months, we have again been able to deliver substantial savings in most part of the business. Part of the savings have been synergies from the S&N acquisition. By the end of Q3, we have realized all DKK 1.3 billion which is approximately six months ahead of plan. Gross margin improved organically by 260 basis points due to production efficiencies and favorable hedges and input cost.

Excluding sales and marketing spends, which was up double-digit, operating expenses were down and reported operating margin improved strongly by 270 basis points to 19.6%. The third quarter improvement was even stronger with a 330 basis point improvement to 23.5%. The Q3 margin benefited from the phasing of sales and marketing activities between Q3 and Q4 versus last year in Eastern Europe. The operating margin improved in all regions.

Organic operating profit growth was 9%. But adjusting for the de-stocking in Russia in Q1, operating profit growth was an estimated 12%. In Q3, we delivered double-digit organic operating profit growth in all three regions. Net results growth was very high at 57% due to growth in recorded operating profits and lower financial expenses. The strong focus on improving cash flow continued and the group kept cash flow at a high level.

Now let’s turn to the regions and let’s begin with Northern and Western Europe on Slide 6. For the Northern and Western European markets, we saw an improving trend in the nine months compared to the weaker 2009 markets. However, the markets remained challenging with an estimated 2% decline. Our beer volumes in Northern and Western Europe grew organically by 1%; and Q3 volume development was flat. The beginning of Q3 was weak in some of the markets such as the UK, where there had been strong volume growth during the World Cup campaigns.

Carlsberg improved its market share across the region and consequently improved the recent year’s trend of flat Northern and Western Europe share. This was done through a combination of more product launches, high activation level, higher marketing investments, and value management.

Strongest market share gains were recorded in the UK, in Poland, Southeast Europe, and also Norway. The UK continued the trend from recent quarters and grew market share in volume and value. The volume market share year-to-date is now 15.7%, an increase of 140 basis points. The UK business gained in both on and off-trade, and the Carlsberg brand family is now the largest in the UK off-trade.

Poland benefited from strong performance of the Harnas brand, product launches, and widened distribution in general. In Norway, an important driver was new product launches. Marketing investments increased organically by double-digit percentages to support key brands and activities. A significant number of activations took place in connection with the World Cup and in relation to music and summer events.

Organic net revenue development was minus 1%. There was a small positive pricing in most markets but a slightly negative mix due to a changed country mix and the ongoing channel shift. To support price and mix, our value management efforts continue to be an important lever and an integrated part of the way we do business.

Organic operating profit improved by 16%. And operating profit margin grew by 250 basis points to 15.3%, driven by efficiency initiatives and lower costs.

And now, to Slide 7 and Eastern Europe. For the nine months, we’ve seen clear signs of improving market conditions in the region as the macroeconomic indicators and consumer sentiment picked up. Markets have also been supported by very favorable weather conditions in Q3. Organic volume development for the region was minus 7%. But adjusting for the Russian de-stocking in Q1, volumes would have grown at an estimated 3%. In Q3, the region which tend to grow and the first quarter that we have been able to deliver organic volume growth in the region since the beginning of the economic crisis. In Q3, volumes in all markets grew with the exception of Russia where volumes were flat.

The market in Ukraine grew by approximately 4% while our beer volumes increased by high-single digit percentages continued a strong trend of market share improvement, now exceeding 28% market share.

We will continue to invest significantly behind our brands and marketing activities. Sales and marketing costs increased for the nine months to support the significant number of innovations and new products.

Organic net revenue development was minus 8%, with plus 4% in Q3. The improved revenue performance in Q2 and Q3 reflects the overall volume trends, no impact from de-stocking, and the phased implementation of price increases in Russia.

Organic operating profit development was minus 4%. But adjusted for the Russian de-stocking impact, it would have been plus 4%.

Margins grew substantially by 200 basis points to 31.1% for the nine months. This margin performance was driven by lower input costs, efficiencies, and a gradual improvement in price per H/Liter as the Russian duty increase was phased in during Q1 and Q2.

For the nine months, we have not yet been impacted by the higher raw material and packaging prices. This will however impact negatively from Q4 and onwards.

Now, let’s turn to Slide 8, and a few comments on Russia. The Russian market declined by an estimated 5% for the nine months. Market conditions improved during the summer as consumer dynamics became more positive and as favorable weather impacted positively. In Q3, the market grew by an estimated 2%. We adjust 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 high single-digit decline. The revised expectations are mainly due to the warm weather during the summer.

Our market share for the nine months was 38.9% or 80 basis points decline. For Q3, the year-over-year decline was 70 basis points. This can be explained by a couple of factors. Firstly, during the summer, there has been a higher-than-expected level of activations among our competitors in the market. And secondly we have faced [intermediate] price increases in several states since November 2009. With the exception of one competitor, we have been leading on price increases.

By the end of Q3 gaps still exist and are higher than expected versus most of our competitors. In response to this, we have accelerated our activation level during Q3 and the higher market share of 39.6% in September is a reflection of this. Due to timing of some activities in the market, our sales and marketing costs will increase somewhat in Q4 compared to Q3.

Our Russian end market sales, or consumer uptick, was minus 6% for the nine months but plus 2% for Q3. Our shipments were low at minus 11%, due to de-stocking at distributors in Q1. Once again, adjusting for the Russian de-stocking, shipments for the nine months were minus 7%. Q3 shipments were up plus 1%. Price/mix was negative by 4% for the nine months as the tax increase was passed on smaller steps since November last year. For Q3, the price/mix effect was better at minus 1%, the small positive pricing and a negative mix. To offset the excise duty increase, we have increased prices to our customers by approximately 25%, with significant valuation between brands and regions. At the end of Q3, we were still slightly ahead of most of our competitors.

Slide 9 please, and a view of the trend line of our Russian market share development. This confirms a strong and growing trend line for our market share performance in Russia and we are confident that we can continue this trend. And please note that from January 2008, we’ve started now to use Nielsen data for our retail audits.

And now Slide 10, and Asia. Our Asian business continued its strong performance recording 16% organic beer volume growth. This was across all markets in the region, but particularly strong performance Indochina, China and India. The growth was driven by overall market growth in the region, together with market share gains across a majority of our markets. The high level of innovations, product launches, and activities across all our markets supported the growth.

The Chinese business delivered 11% organic volume growth driven by both the international premium category and local Western Chinese brands. Several of the local Chinese brands were re-launched with the objective to premiumise in smaller steps, and strengthen consumer appeal. This led to a 4% positive price mix in China.

The growth in Indochina was particularly strong due to market growth and market share gains. This is reflecting on a number of product launches that have been done to strengthen the local product portfolio. The premiumisation efforts with product launches, line extensions, and re-launches, combined with price increases drove a very positive price mix for the region, despite a negative country mix. Organic operating profit growth was very strong at 40% due to volume growth, price mix improvements, lower costs, and efficiency improvements across all markets.

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

Jørn P. Jensen

Thank you, Jørgen. Please turn to slide 12. The nine months performance was very strong with organic profit growth, margin improvements, net special growth and a strong cash flow.

For Q3, the group was able to report organic revenue growth mainly due to continued growth in Asia and return of growth in Eastern Europe, helped by the warm weather and improving market conditions.

Net revenue increased by 2% with an even stronger development in Q3 of 8%. Organic growth was minus 2% but plus 2% in Q3. Asia has been a significant contributor to the net revenue growth. Our results still positively impacted by forex and most importantly is the Russian rouble as the average rate for the nine months was around 10% higher than last year. The rouble weakened somewhat in late Q3 and into Q4 and this will be negative for the remaining part of the year. Operating profit growth was 18% with strong organic performance in Asia and Northern and Western Europe. In Q3, the recorded operating profit growth was 26%, of which organic growth contributed 16%. All regions had positive organic growth in the quarter.

Operating margins was up 270 basis points to 19.6%, positively impacted by efficiency improvements and input costs. Net profit increased significantly by 57% to DKK 5.1 billion. We are on track to deliver around 40% growth in adjusted net profit for the full year.

Free cash flow remained at the high level of almost DKK 6 billion despite spending more than DKK 1 billion for acquisitions.

During the second half of 2010, we have seen a continued rise in the input costs. In our outlook for 2010, we have included the impact from this.

And now Slide 13, and the income statement. As you can see in the P&L table, the positive impact of forex on net revenue more than offset the negative organic development and the negative impact of net disposals leading to reported net revenue growth of DKK 889 million. Despite the organic revenue decline, organic growth profit increased by DKK 666 million. The positive development is due to lower input costs and efficiency improvement, and for Asia, the additional benefit from volume growth and higher sales process per H/Liter.

Organic total OpEx including brands marketing increased with DKK 149 million. We have increased our total sales and marketing expenses by double digit percentages and reduced logistics and admin expenses.

Other income net was up DKK 155 million organically. This reflects the sale of a brand from the French business. So, all-in-all, recorded operating profit was DKK 9.1 billion with a positive organic development of DKK 672 million. Of the positive forex impact of DKK 687 million, around 75% relates to the recovery of Eastern European currencies. The organic development in the brewing activities of DKK 639 million or plus 8% still includes the negative de-stocking effect in Russia of estimated DKK 300 million in Q1. Excluding this effect, the underlying organic development was estimated plus 12%.

On this note, I just want to remind you of the positive DKK 300 million impact from de-stocking in Q4 last year, which will not be repeated this year.

And now to slide 14, special items amounted to minus DKK 108 million. This number is on one hand, positively impacted by the non-cash, non-taxable income in Q1 of DKK 390 million related to a new IFRS accounting treatment of step acquisitions following the Xinjiang acquisition. On the other hand special items are impacted negatively in Q3 by DKK 300 million non-cash tax deductible impairment on some Eastern European brands, including the Slavutich brand in Ukraine, where we took a strategic decision to focus on the Lvivske brand instead of the Slavutich brand.

Financial costs net were down DKK 675 million compared to last year. The reduction is partly explained by the lower net average debt this year and partly by the improvement in other financial items of DKK 445 million due to forex movement.

The tax rate was 27% excluding a non-taxable income of DKK 390 million in special items. All in all, net profit was DKK 5.1 billion. Adjusting for the IFRS accounting impact of Xinjiang of DKK 390 million, the net profit improvement was DKK 1.4 billion or 45%.

And now cash flow on Slide 15. The sum of the first three lines EBITDA including other non-cash items has is off to an improvement of 1.9 billion. Change in working capital was minus DKK 284 million, in line with plans. 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. if you want to see an effect on both net profit and net debt. End of Q3, straight working capital to net revenue on a 12-month basis was around 1% compared to 4% a year-ago. All-in-all, cash flow from operations was DKK 8.8 billion, an improvement of DKK 355 million.

Slide 16, please. Our focus on CapEx continues to be high on the agenda and CapEx in the first nine months was more or less on the same level as last year. DKK 1 billion was invested in acquisitions. The majority of this amount relates to a prepayment for the additional 12.25% stake in Xinjiang that was announced in Q2. Finally, there is a positive mid-cash flow from real estate activities related to the disposal of one building in the Tuborg site in Denmark. So, all-in-all, free cash flow was DKK 5.8 billion [lastly on] last year despite the payments related to the Asian acquisitions.

And finally, Slide 18 and the outlook. The performance for the first nine months was strong. For the full year, we have made a slight change to our assumptions for the Russian market decline. The positive impact from this will however largely be offset by rising input costs in Eastern Europe and adverse currency impact as the rouble has weakened since mid-September. The rouble exchange rate is assumed at 42 to 43 for Q4.

A comment on Q4 and Russia. Although we expect market improvements in Q4 following the product launches and a very high level of activations, profits will decline year-over-year for several reasons. Firstly, the de-stocking impact of minus DKK 300 million. Secondly rising input costs. Thirdly, and without revealing our pricing plans for Q4. You need to bear in mind that we started the price increases needed for this year to offset the duty increases already in November 2009, where we increased prices 4-5%. And this means doing a comparables, that we had higher net sales prices in Q4 last year than what we have as of today.

And finally tracing of sales and marketing activities into Q4. Based on this, we now expect an operating profit of more than DKK 10 billion compared to previous expectations of an operating profit of around 10 billion. Compared to our expectation after Q2, special items are now expected to be impacting negatively by the DKK 300 million impairment on Eastern European brands in Q3. Net profit is still expected to grow strongly by around 40% excluding the DKK 390 million contribution from Xinjiang.

And now, back to Jørgen for final comments.

Jørgen Buhl Rasmussen

Thanks, Jørn. And this was our last slide today. Just to summarize on the back of the first nine months. Firstly, we are very pleased with a very strong performance for the first nine months. Looking forward, Northern and Western Europe remains challenging. And Eastern Europe, we see encouraging signs of improving market conditions. And in Asia, growth is expected to continue. Secondly, we continue to spend more resources behind our brands and innovations. We did it for the first nine months, and we will continue to do so with an acceleration in some markets in Q4. The fact that we have gained share in the last part of the business so far this year make us even more certain that the portfolios we are building and activities that we are planning will drive further share gains. We firmly believe in the strength of having strong international brands combined the strong local power brands. Thirdly, we continue our focus on driving efficiencies, making sure we get the right balance between topline growth and efficiencies. Finally, and as we explained at our recent Capital Market Day, we continue to drive the progress of the company further towards a modern fast moving consumer goods company.

And with this, we are happy now to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Søren Samsøe from Danske Markets.

Søren Samsøe – Danske Markets

Yes good morning gentlemen. Soren from Danske. Firstly, a question regarding the phasing of your marketing cost. I can see that your sales and distribution cost is up DKK 600 million year-over-year in Q3. Is it a similar increase year-over-year which we will see in Q4 or how should we view this in our models?

And also another question regarding Russia. The market share drop that you are seeing, if you could maybe elaborate a little bit more on what the competitors have done, have they made promotion? Have they actually lowered prices in Q3 and you have increased prices? And then what are the retaliations you have done? Have you done any major promotions? And what will you do in Q4? What will sort of be – will you continue to strike down the competition or how will you react now?

Jørgen Buhl Rasmussen

Søren, if we take the first one, then of course in absolute terms, we are always spending more in Q3 in total on sales and marketing expenses. But what you will see in the point on this phasing is that you will see more sales and marketing expenses that you would normally see in a Q4, especially in Russia. And that is the special point we are trying to get across. So, you will see increased activities and more spending than what you would normally see in a Q4 in Eastern Europe/Russia.

Søren Samsøe – Danske Markets

Can you confirm it will be more, less or same level in Q4 as we saw in Q3?

Jørgen Buhl Rasmussen

No, I actually did not comment on that. So, what I am saying is that we are spending more than what we would normally do. So, you would see more than a normal growth on those cost lines in Eastern Europe in Q4.

Jørn P. Jensen

And also bear in mind, without being specific on numbers here, that last year we did not have a lot of activity level in Q4 and we also made comments on that earlier this year, in Eastern Europe.

Anton Artemiev

Good morning ladies and gentlemen. I would like first to address the very fact that in Q3 are flat compared – our market share compared to Q2 was practically flat. It was down just two decimals, and this is a, you know, it’s in the range of error, so to speak. But yes, we saw the increased level of activities by competition and that can be anything from brand marketing activities to different kinds of in-store activations. What we saw is still remaining a gap – in the price increases, though not very significant by the end of the Q3, but those will take into account the time lag, and competition always followed us in price increases with a certain time lag. So, in accumulated times, it’s been a significant visible price difference in what we do and competition did in general, with the exception of one.

So combination of this high level of activities by competition and some pricing lag led us not to leave on the price – on the share growth, but once again the share was largely flat. As a result, towards the end of the third quarter, we have increased level of brand activities which led us to have a market share highest within the last year, which is 39.6%, and we keep a high level of activities onwards.

Søren Samsøe – Danske Markets

But do you think that competitors, because they have done some heavy promotions that they have actually seen, well, they haven’t really made any money in Q3 because they have lower prices and increased promotions, while you have actually continued to have very good margins in Q3?

Anton Artemiev

Well, how much money did they make, it is a question to them. But you saw our strong results for Q3.

Jørgen Buhl Rasmussen

Yes.

Søren Samsøe – Danske Markets

Okay. Thank you.

Jørgen Buhl Rasmussen

I think always what we have seen here in Russia, the bigger impact is the fact we all have to big price increases and then we have the gap between the timing us versus competition. I don’t think the scene as such is changing in Russia has been competitive for years. And continue to be competitive. But yes, a little more activity than expected in Q3. But the big factor is probably pricing.

Operator

The next question comes from Nico Lambrechts from BOML.

Nico Lambrechts – Bank of America/Merrill Lynch

Hi there. Good morning. Just got a question on the finance charges. Is it possible that you can guide us for why the finance charges are much ahead of what the market expected in the third quarter? And may be what the coupon would be next year, and a little bit of the dynamics around your refinancing? I understand we should have all-in coupon of 6%. Is that a conservative number or not?

Jørn P. Jensen

Nico you are definitely still well off, assuming slightly below 6 odd in. What happened in Q3 was of course that you can say up and until mid-September, we still saw an appreciation of the Russian rouble to the euro and then suddenly in the latter part of September, it started to devaluate. And that is what is impacting and driving the change from Q2 to Q3 on these other financial items. So, where we had Q2 appreciation of the rouble, a small again after Q2, we had after Q3 a small loss, which i.e. a big swing in Q3, which comes from – that it was coming from appreciation in Q2 to depreciation or devaluation in Q3. So if you assume that end of September rouble exchange rates to euro will more or less remain throughout the year, then the impact on that line on other financial items in Q4 should be very, very modest.

On the other hand, if you expect the devaluation, then it will be a minus, appreciation it will be a plus. So, it is because we – in September did see this sudden devaluation of the rouble to the euro. Nothing else.

Nico Lambrechts – Bank of America/Merrill Lynch

Right. And into next year, what finance coupons will be used excluding the other financial items, and then how would the other financial items be driven again by the FX, is that correct?

Jørn P. Jensen

That same logic on all the financial items, as this year when it comes to other financial items. When it comes to coupons, then that will definitely be – that will be positively impacted.

Nico Lambrechts – Bank of America/Merrill Lynch

But what coupon should we assume excluding the other financial items? Call it a clean coupon, because I think you have been guiding on an all-in coupon of 6%.

Jørn P. Jensen

As I understand, the consensus in the model is around 5.5.

Nico Lambrechts – Bank of America/Merrill Lynch

That for the clean?

Jørn P. Jensen

Yes.

Nico Lambrechts – Bank of America/Merrill Lynch

And you are comfortable with that?

Jørn P. Jensen

Sure.

Nico Lambrechts – Bank of America/Merrill Lynch

Okay. Excellent. And then maybe just a follow-up question on Russia. What are the dynamics of beer taking share of vodka and what is – has there been any further regulatory – new regulatory development? And is there any further development on the potential of a further minimum vodka price increase? Maybe for Anton.

Anton Artemiev

Yes, thank you. There is no exact data on vodka market. The large portion of it is still kind of uncontrolled vodka market. But what we know for now is that the official market has gone down by around 6%. We assume or we estimate that the inefficient market has also gone down somewhat. As a result, we had somewhat of a decline in the vodka market, and we also have as you know, assuming for nine months we have 5% and we have had mid-single digit decline in the beer market. So in terms of proportion, you would expect proportions we make, which is vodka is still accounting for 70% of the total alcohol intake and beer and wines 30%, which again is one of the factors leading us to believe that there is a strong potential for beer market growth.

Regarding the minimum vodka price, you know it is at the moment, it’s at 89 rubles per half a liter bottle and there has been multiple discussions how to increase it further. And there was different numbers ranging from, say, 110 to sometimes 200 and more rubles. What will be the exact result of the discussion and the decision by the government, we don’t want to speculate. But I would assume that the changes in minimum of the vodka prices are likely, because all the discussion are about increasing that minimum price.

As to the beer regulation…

Nico Lambrechts – Bank of America/Merrill Lynch

Anton, if I may interrupt, sorry about it, these discussions, are they happening at parliamentary level?

Anton Artemiev

No, for the moment these discussions on minimum vodka price are mainly on the government level, the different ministries and especially Ministry of Finance who takes the lead in these discussions.

Regarding the beer regulation, what we saw recently is on the third of November, there was – not the government, but one of the members of the parliament proposal which was voted positively in the (inaudible) and then it will be discussed in the parliament in the coming weeks.

Still I would say that the uncertainty which we discussed last time remains. So, it’s largely the very same discussions which are ongoing. What will happen we don’t know. Of course, our best estimate of what can be adopted in terms of beer regulation, we include in our outlook, but we don’t want to speculate on these specifically.

What I would say maybe in general, what we think is our best knowledge of what may happen, is not changing our assumptions that the market will return to the growth next year.

Nico Lambrechts – Bank of America/Merrill Lynch

What are the specific proposal that was made on the third of November?

Anton Artemiev

There were few things. I think that the most essential one is the famous kiosk ban. And this proposal is talking about that beer stronger than 5% should not be able to be sold in the kiosks. That’s, I should say, the most essential. By the way, nothing new. No news in that.

Jørgen Buhl Rasmussen

It is the same. There are lot of ideas sometime coming up and being discussed. No change compared to a few months ago.

Nico Lambrechts – Bank of America/Merrill Lynch

And then just the introduction that you did Anton is you were surprised that both vodka and beer were down at a similar level and that number, the 70% you mentioned, that includes legal and an estimate of illegal vodka. Why do think beer didn’t take a share of vodka despite the increase in the minimum price? Is it basically the increase in prices for beer?

Anton Artemiev

It’s mainly because of excise tripling and the prices – we have raised prices 25% in one go. So it is very high.

Nico Lambrechts – Bank of America/Merrill Lynch

So do you think that it is a reasonable assumption to make that beer should be in a better position to take share from vodka into 2011. If we have a minimum price increase for vodka and there is not a further big step up on excise for beer?

Anton Artemiev

We have always been saying that the longer term trend is that beer will take a share of vodka in share (inaudible).

Nico Lambrechts – Bank of America/Merrill Lynch

Thank you.

Anton Artemiev

Thank you.

Operator

The next question comes from Ian Shackleton from Nomura.

Ian Shackleton – Nomura

Okay, good morning gentlemen. Two questions from me. You have left your net profit guidance unchanged, but in addition we’ve got DKK 300 million brand right-off. Am I right to assume that’s included in that net profit guidance and if it wasn’t for that we would see an increase probably in that guidance for 40% to probably over 45% growth this year?

And the second question was around input costs which you flagged for Q4 of the next year. I mean, what sort of price increases does that warrant? One of your competitors in Russia yesterday talked about a need for 10% price increase in Russia for next year to cover the duty plus the increased input costs. Is that the level you are also thinking about?

Jorn P. Jensen

Just Ian – just to confirm, yes everything is included in the 40% apart from the DKK 390 million income coming for Xinjiang. So that is including the impairment charge of DKK 300 million.

Ian Shackleton – Nomura

Thank you.

Jørn P. Jensen

And your question on pricing. We clearly do not want to be specific on our pricing plans or thinking at this point in time. All we can say is that the input cost and maybe it’s raw material and some packaging prices, they are going up and certainly impacting our different regions, and will require price increases, will be different by markets and probably also by segments. But we will have to do pricing across most of our markets without being specific on any percent.

Ian Shackleton – Nomura

Going back to what you said earlier, Jorgen, you talked about obviously last year in Q4, you were already starting to price up as the duty increased. The implication for the comments around Q4 this time is we shouldn’t expect any pricing – any additional pricing then, we shouldn’t expect that coming through until we go into say Q1 next year. Is that the right read I am taking away on that?

Jorgen Buhl Rasmussen

What we are saying is that, first of all we do not want to reveal our pricing plans. Secondly, that if you take the price we have as of today, as we speak, then that is lower than it was, net price to us, as an average in Russia for Q4 last year.

Ian Shackleton – Nomura

And just finally to confirm, the duty increase you are expecting in January, no change from what was flagged a year ago?

Jørgen Buhl Rasmussen

No it’s still the plan from nine to ten rubles increase.

Ian Shackleton – Nomura

Right. Excellent. Thank you very much.

Operator

The next question comes from Trevor Stirling from Sanford C. Bernstein.

Trevor Stirling – Sanford C. Bernstein

Good morning gentlemen. My question has already been asked. So, nothing from me this morning.

Operator

The next question comes from Matthew Webb from JP Morgan.

Matthew Webb – JP Morgan

Hi I was just wondering if I could ask for a bit more detail on the input cost issue. I mean, which materials in particular are causing the concern, particularly in Russia in Q4, I mean, is that the malting barley price related to the poor harvest or is it sort of more transportation cost issues?

And then, on the same subject, looking out to 2011, I wonder to what extent you are hedged on your input costs at this stage. And, you know, based on that, what sort of percentage increase you would expect on your input cost next year?

And then just finally on Russia, in Q3 you talked about your product activation et cetera. I was just wondering to what extent your increased sort of marketing and selling costs has been through promotional spend or whether it’s all been in marketing new product launches, new packaging et cetera, et cetera, or whether you have actually sort of address some of these price cuts with the competition with high promotional spend as well, thanks.

Jørgen Buhl Rasmussen

Matthew, the first question on Q4 Russia, input costs, yes it is. It is, as you suggested, it is malt being the issue so to speak. When it comes to 2011 we are now – we hedged as we always are at this point in time. So, which means that we are very, very well hedged for Northern/Western Europe and for Asia. And we are as hedged as we normally are, which is somewhat less than Northern/Western Europe and Asia when it comes to Eastern Europe.

Matthew Webb – JP Morgan

Would you able to help sort of guess at this stage you know based on what you know or you know very roughly what sort of percentage out that you would expect in your input cost for next year on an average across the group or for any particular region?

Jørgen Buhl Rasmussen

Yes we definitely have that visibility and that we will discuss more with you in February when we come back with our guidance on ‘11.

Matthew Webb – JP Morgan

Fair enough.

Jørn P. Jensen

Yes, and on the question of what has been increasing in our sales and marketing expenses. I have to say, it is a combination. It is a combination of ATL and BTL activities related to new launches. It is – but those don’t exclude the price promotion. So, it is a very much of the combination.

Matthew Webb – JP Morgan

Great. Thank you very much.

Operator

The next question comes from Melissa Earlam from UBS.

Melissa Earlam – UBS

Good morning. I have got a couple of questions please. You pointed out that you’ve raised your sales and marketing by double digits. I was wondering if you could comment whether the increase has been enough significant in North/West Europe as well as in Eastern Europe.

And secondly, just a question on the pricing outlook for Russia next year, as a follow-up to these rising input costs, may be this is best for Anton, you have raised prices by 25% over the last 12 months to pass through the excise increase. Do you think the Russian consumer is strong enough to handle another significant price increase to reflect the duty and the input cost inflation pass through? Thanks.

Jorn P. Jensen

If I take the first question about the double digit increase in sales/marketing or marketing cost in total, yes, it’s across all regions. So it’s up by more than double digit in all three regions, including Northern/Western Europe. So, we are really spending behind new products, behind big campaign activities to buy share both volume and value share.

Melissa Earlam – UBS

Thank you.

Anton Artemiev

And about the strength of the Russian consumer sentiment. I have to say of course it is a function of relative pricing, and of course, here comes all the discussions about minimum price for vodka and many other things. But of course we need to bear in mind that economic fundamentals are now growing strongly in Russia. And that means, we are looking towards the growing purchasing power but also the share of that consumer spend which is spent on beer, we assume to come to pre-crisis level. So I think the consumer sentiment is strong, but how we play pricing is different matter.

Melissa Earlam – UBS

Okay.

Operator

The next question comes from Andrew Holland from Evolution.

Andrew Holland – Evolution Securities

Yes, hi, I think most of my questions which related to input costs have actually been asked, if not answered. And, but I am just struck by the difference in your tone between now and back in September on the Capital Markets Day when quite a lot of questions were asked about input costs, and you seemed very relaxed about it. I recall you referring to the barley price increases, spike and you talked about how you were well hedged and you had a number of supply contracts and so on that sort of mitigated the impact. I am just wondering what changed since then, obviously the barley price has gone high and stayed high. Is it simply that and that you had expected it to come down by now? Or is there anything else going on with the barley price, and indeed any other input costs?

Jørgen Buhl Rasmussen

It is exactly as you suggested. So, it is same effect that yes, we did have what we considered to be very good visibility at the Capital Markets Day. We did not expect an increase on the remaining parts of the volumes that were not secured at that point in time. So, it is only a reflection of – which is also a serious thing, a reflection of that barley/malt prices did come up quite a lot on those, you can say, marginal volumes that we are not secured at that point in time.

Andrew Holland – Evolution Securities

And what about any other input costs? Anything else that we should be thinking about other than barley?

Jørgen Buhl Rasmussen

Not if you are thinking about kind of the difference in tone versus what we said after Q2.

Andrew Holland – Evolution Securities

Okay. Thank you.

Operator

The next question comes from Hans Gregersen from Nordea.

Hans Gregersen – Nordea

Good morning. Just coming back to pricing in Russia. Would it be fair to assume that the increased duties going into 2011 would require 1% to 2% price increase to get compensated for that, just a ballpark indication?

Secondly, going back to your market share development in Russia during Q3. What went wrong here? I mean, obviously the market share development has not gone as you had expected. What sort of learning should we draw from the performance this quarter? Thank you.

Anton Artemiev

Well, regarding the pricing needed just to offset and that once again pricing decisions might be different, but just to offset the impact of excise increasing, it would require pricing to exclude more than 3%. In the Q3, on the market share, I don’t think something went wrong. I mean I am quite convinced we are on our long term track to gain market share. But of course it is up to competitors sometimes to increase or sometimes may be not to increase the level of activities and play temporarily on the market share ground. Well once again, we are convinced, we are on the long-term path of growing market share in Russia.

Hans Gregersen – Nordea

But does that imply you are not really seeing any surprises in your market share development in Quarter 3?

Anton Artemiev

I mean, we have seen in the history, ups and downs temporarily in different quarters, and you can see that in the presentation. But the trend is that, and that we are determined to get.

Jørgen Buhl Rasmussen

I think it’s fair to say that 2010 has been a very different year with a tax increase of 200%. We have never seen that before and then to plan pricing and know exactly what you expect is not easy in a year like 2010. And yes, as you see in our release too, there’s been some things happening in a market, not completely expected, and it is hard to expect everything and plan everything in a year where you have that kind of increase. We had hoped for higher markets here in Q3, yes. At the same time, as Anton say, we are confident, but as said again and again, we can continue building market share, volume and value market share in Russia as a trend.

Hans Gregersen – Nordea

Thank you.

Operator

The next question comes from [John Bason from – SEB Enskilda]. [John Bason from SEB Enskilda] is online with a question.

Michael Rasmussen – SEB Enskilda

Hi, it’s actually Michael Rasmussen. I don’t know what happened to the name there. It is Michael Rasmussen from Enskilda. I had most of my question answered. But I just have a few follow-up if I may.

First of all, on Russia and the mix situation, it seems like the negative 2% in the quarter was a little bit better than the kind of track we have seen in the last couple of quarters. What should we expect going into next year? Now we had a lot of discussions on what retail prices will do and how consumers feel in Russia. Do you think mix could turn towards a slight positive territory in 2011 in Russia?

My second question basically was also [related] for this year in terms of marketing costs. But if we look at 2011, has most of this been impacted in the second half of 2010 i.e. should the share of sales stay approximately flat from ‘10 into ‘11?

And just finally if you could confirm that your market share in Russia was 40.1% in Q3?

Anton Artemiev

Regarding the mix, what we saw during the year is that negative impact of mix was becoming less and less pronounced. So in that sense, the trend was positive. And we assume these trends to continue into next year.

Michael Rasmussen – SEB Enskilda

So, is that moving into positive or just becoming less negative?

Anton Artemiev

It is becoming less negative, but and that assumes that at certain point, it should switch to positive area, but not being specific when.

Michael Rasmussen – SEB Enskilda

Okay.

Jørgen Buhl Rasmussen

I think, Michael, we may be missed your second question, but I can certainly refer to your third question about the market share. You asked about the market share in Q2 2010?

Michael Rasmussen – SEB Enskilda

Yes.

Jørgen Buhl Rasmussen

39.2% in Q2 2010.

Michael Rasmussen – SEB Enskilda

And the same level for Q3. Is it?

Jørgen Buhl Rasmussen

Basically the same level. 39.0%. So basically the same level. You have it in the attachment, also in the presentation on Slide 28.

Michael Rasmussen – SEB Enskilda

Have any of these numbers changed since you moved from Business Analytica to Nielsen Data?

Jørgen Buhl Rasmussen

Yes certainly. They have changed. There has been a difference of say around 1% in valuation of market share by Business Analytica and Nielsen because they have different panels or different areas of surveys.

Jørn P. Jensen

But they may now make comparisons with a year ago, same universe. So it’s Nielsen to Nielsen but they have changed compared to what you looked at in the past. There is nothing we can do about it.

Michael Rasmussen – SEB Enskilda

The other question I had was just in terms of marketing costs in 2011, as a percentage of sales. Will that differ a lot from ‘10 or how should we see this?

Jørgen Buhl Rasmussen

It’s on group or you talking Eastern Europe.

Michael Rasmussen – SEB Enskilda

Group, yes.

Jørgen Buhl Rasmussen

Group, I mean, we never comment on exactly our marketing spend as a percent of sales and (inaudible). So, we don’t want to be specific apart from saying we have a wish, we have an ambition to keep driving markets here. That requires spending behind our brands and activities. And you will continue seeing that next year. So we get this balance efficiency and growth right.

Michael Rasmussen – SEB Enskilda

Okay, if we have the time, just a quick follow-up. You mentioned that you now have achieved the DKK 1.3 billion in synergies from the S&N acquisition. What is the next step? I mean what should we look at now on a quarterly to quarterly basis? Now everybody seems to be looking at these negative issues in terms of input costs. But is there anything further that we can use for kind of the next targets to go to 20% group margin?

Jørgen Buhl Rasmussen

But as we also discussed for two of the regions at the Capital Markets Day, there are loads of things going on and we see lot of potential for improvement throughout the business. So, I don’t think that the fact that we have now ahead of time actually fulfilled our promise to deliver DKK 1.3 billion is changing anything at all in the whole story. So, we are continuing to work on all the many things that we are doing locally or regionally or one group. And some of those we discussed at the Capital Markets Day. So there are still a pretty full agenda here for quite a while.

Michael Rasmussen – SEB Enskilda

Okay. Thank you very much. Have a good day.

Operator

The next question comes from Matthew Jordan from Matrix.

Matthew Jordan – Matrix

Yes, good morning gentlemen. A couple of more follow-up points on the input cost issue. I think you made it pretty clear that the malted barley cost issue hits Russia in Q4. Just wanted to check that you expect to plateau that level for subsequent quarters or indeed drop away? Or is it possibly going to get worse because obviously you might still have some hedging in place in Russia in Q4 which wouldn’t be there in subsequent quarters. So, that’s the first question. Is it going to get better or worse in subsequent quarters given the current spot rate?

Anton Artemiev

It’s going to be pretty much in line with Q4 going to ‘11.

Matthew Jordan – Matrix

Okay thank you. And then switching to Northern/Western Europe. Oil and aluminum costs are also up quite substantially this year between 30% and 40%. Does the impact of that on your business get progressively worse say over the next four quarters, or is that going to be one particular quarter when it hits in a big way because of the phasing of hedging?

Jørn P. Jensen

In general, we can say always Northern/Western Europe is going to be impacted by increasing costs next year both in the packaging area and also in raw material area. And that’s also why we say that will require some pricing and price increases in Northern and Western Europe going forward. So it’s both packaging and raw materials.

Matthew Jordan – Matrix

And is that just a progressive steady impact or is it going to be…

Jørn P. Jensen

No. Due to how our hedges are working, then you will in principle see that – in principle you will see that as of first of January and then throughout the year.

Matthew Jordan – Matrix

Okay. And then the final question is how realistic is it that you are going to build and pass that on to consumers because there are quite a fragile economies in Northern/Western Europe. I am a little concerned that you won’t successfully passes on.

Jørn P. Jensen

I think we have, when we talk pricing, it’s not always only about increasing the price list, it’s also what we define as value management, how to get pricing through. But I think and hope and believe, and I mean clearly we are already in discussion with a lot of customers. A lot of these FMCG companies and fluid producers are seeing the impact of increasing raw material cost. So, I think there’s some understanding for why a number of categories do need price increases and hopefully that will help to get pricing through in Northern and Western Europe. So, we are confident we will be able to get some pricing to Northern and Western Europe, and if required, if we need it, we will do it.

Matthew Jordan – Matrix

Okay. Thanks very much.

Operator

The next question comes from Adam Spielman from Citi.

Adam Spielman – Citigroup

Hi thank you very much, good morning. You’ve said that the price gap in Russia I am talking now, between yourselves and you competitors was very much reduced at the end of the third quarter. And I was wondering if there is any way of quantifying that to see, I mean, if there are any numbers you can give to show us how that gap has progressed in the course of 2010 and where we are now?

Jørgen Buhl Rasmussen

May be I can start and then Anton can give you the details. Again I don’t want to give you numbers specifically. But let’s say again except the one competitor who went up in January, against all the others, you can look at what is the price gaps end of Q3, and there is still a price gap and then you could take the weighted kind of price gaps during the first nine months. That’s higher because we always went up and you would expect that for the market leader to go up first. But we always end up one month, may be two month, before our competitors. So, of course, the average gap during the first nine months is even higher. But still that gap exists coming out of Quarter 3.

Adam Spielman – Citigroup

And there’s no way you can quantify that at all?

Jørgen Buhl Rasmussen

No we don’t want to put percentages on, but based on couple of some percentages versus most of our competitors, not everyone, but versus most of our competitors, at the end of Quarter 3, and higher as the average.

Adam Spielman – Citigroup

Was it much higher?

Jørgen Buhl Rasmussen

Slightly somehow higher. It did result in a significant cost difference for the quarter.

Adam Spielman – Citigroup

Because, I mean if you wanted to get depressed you would say, well, in Q1 and Q2 you were holding back your innovations, you threw them at the market in Q3, and it didn’t really work, and you were saying the price gap has been reduced only slightly at the end of Q3.

Jørgen Buhl Rasmussen

We don’t see any reason to be depressed. We are still very happy about our business in Russia and yes, we would like to see slightly higher in Q3, yes we would. At the same time, this is part of a being in business and having competition, and we do believe with our plans in place and our product portfolio in place, we can continue our growing market share trends. So, pricing, we expect it to go up before competition, because we are market leader. There was a time lag sometimes slightly longer than what we had hoped for, yes. And then in terms of product introductions, it was not only in Q3, we also launch a lot of product in Q2. We also some time discuss about, I mean, when we took an audit like Nielsen there’s a time lag before they pick up new products, let’s see what’s coming through in the next quarter. But we are still pretty happy about our performance and certainly confident about the future. So, we are not getting depressed, and I hope you are not, you shouldn’t be.

Anton Artemiev

Absolutely not. And we are having a very strong innovation pipeline going forward as well.

Adam Spielman – Citigroup

Okay. Thank you very much.

Operator

The next question comes from Jon Fell from Deutsche Bank.

Jon Fell – Deutsche Bank

Good morning all. It’s Jon Fell, yes. A couple of things. First, just on coming to the price gaps, I am afraid again, in Russia. Are there any particular segments or channels or regions where your price disadvantage versus competitors stands out or is it fairly broad-based?

Secondly, one of your competitors last week mentioned they were suffering the effects of increased transport tariffs in Russia and Ukraine. Is that something that is going to impact or is impacting your business as well?

Anton Artemiev

Regarding the price differentials, I don’t want to comment specifically on different competitors, but what different competitors it exists in different segments. So once again for different tasks, you saw different competing brands, we have seen a visible difference in price increases. As to the transportation costs. Yes, we have to say that during the crisis, we had a benefit of very low transportation costs and usually low because of the lack of demand. Demand is now growing and price is going up, but not dramatically so that we should speak in any tone closer to raw materials. So, I mean they are growing, but business is huge.

Jon Fell – Deutsche Bank

Okay thanks a lot.

Operator

The next question comes from Gerard Rijk from ING.

Gerard Rijk – ING

Yes, good morning. Concerning the issue on input cost again. The main focus is on Russia, but you are also talking about Western Europe, Northern/Western Europe. And is that the same change that you see in those input costs in Northern/Western Europe as in Eastern Europe or is that Eastern Europe much stronger? And considering the phasing, is Northern/Western Europe also already in the fourth quarter or is that what you are guiding there much for 2011?

Jørgen Buhl Rasmussen

There’s no doubt at all that the growth in input cost next year are much higher in relative terms in Eastern Europe than in the other two regions. And to the second question, Northern/Western Europe and Asia as always are well hedged for the coming year. So, there you will not see those variances in Q4.

Gerard Rijk – ING

Concerning to UK, and Poland, you have been – well already relatively famous also in Italy for relatively aggressive pricing, in particular at the low end. Do you think that there will be any impact on the strategy from Europe?

Jørgen Buhl Rasmussen

I don’t know where that comes from. And I think one would have to look at, if you are going to Nielsen then I would say across every market and you look at our volume share development and value share development, they tend to follow each other. So whether you look at UK or you go into Switzerland or you go into Denmark, our volume share and value share tend to follow, which means we are not taking down price more than the market. So, it’s misleading if that’s the perception. Let’s say Poland. If you take Poland specifically, where it’s about getting into retailer, that’s something different. But in general we do not price more aggressively than the marketplace. Not at all. And are certainly trying premiumisation. So that’s a wrong perception.

Gerard Rijk – ING

Okay. Thank you.

Operator

The next question comes from Paul Hofman – CA Cheuvreux.

Paul Hofman – CA Cheuvreux

Yes hi, good morning. Paul Hoffman. Just one question perhaps to summarize it. Correct me if I am wrong, but I believe that you said that you still expect to return to growth in Russia, despite all – so you still stick to that 3% to 5% for next year and probably also towards the higher end of that. Can you still confirm that despite the duty increase which should be modest and also still that increase in input cost.

And perhaps, sorry, a second follow-up to that. If I look at the CPI estimate for Russia for next year, it’s around 7% to 8%. Do you believe that’s on general high-single digit price increases will be needed or low-double digits or do you believe that you will end below Russian CPI expectations? Thank you.

Jørgen Buhl Rasmussen

On the growth, when we said 3% to 5% it’s medium term average year growth which we expect. Whether it is somewhat below this 3% to 5% or within this range is slightly higher as certain specific here is very hard to predict. But yes, we believe next year, to the best of our knowledge today, the market we expect to return to growth.

And as to the pricing, as we said few times today, we don’t want to be specific. But you are right, inflation is around 7% to 8%, which is our estimate as well.

Paul Hofman – CA Cheuvreux

Okay. Thank you.

Jørgen Buhl Rasmussen

I think we will take one more question and then we have to close the call.

Operator

The next question comes from Matthew Webb from JP Morgan.

Matthew Webb – JP Morgan

Yes, hi just a follow-up on the input costs. I think you said earlier that you know the reason for the – maybe the key for input costs pressure in Russia being a bit more the amount you expected so the cost of what you are uncovered for is high than you had anticipated. Am I right in thinking that part of the – what’s going on here is that actually the volumes were higher in Q3, which has somewhat depleted your stocks, and that therefore you know you have been left slightly less hedged than you would have expected today, that’s might be putting a bit of pressure on Q4 input costs. Is that a fair assessment?

Jørgen Buhl Rasmussen

It is, you can say that you would always argue that it could be a little bit. It is primarily about that we are, as you know, less hedged in general, Eastern Europe, Russia in particular. And there we have seen increases in especially in malt. So it’s more about that spot prices on malt are now after the fires, which we assume will be a one-off thing by the way. We are facing higher malt prices for the next at least nine months.

Matthew Webb – JP Morgan

Okay thanks.

Jørgen Buhl Rasmussen

We have to close the call here now. But thanks for dialing up and listening. Thank you very much.

Operator

Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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