2015 - Carlsberg Group

Carlsberg Group Annual Report 2015 The Group at a glance8Diverse geographicspreadOur geographic exposure has changed significantly,today providing a balance between the growth marketsof Asia and the mature markets of Europe.WESTERNEUROPE39.0bnDKK – net revenue5.3bnDKK – operating profitThe Carlsberg Group is the second largest brewer in WesternEurope. According to Canadean1,beer market volumes in the region amounted to approx. 250mhl in 2015. Facts and figures onour Western European marketsare shown on page 9.The region mainly comprisesmature markets, with marketvolumes in most marketsbeing flat or slightly declining.In value terms, the region isgrowing slightly. In recent years,beer category dynamics haveimproved slightly, driven byinnovations, increased interestin speciality/craft beers andan overall improved categoryperception.1The region is generally characterised by well-established retailstructures and a strong traditionof beer consumption, particularlyin the northern and eastern partsof the region. The share of ontrade varies between markets,but generally speaking the weakmacroenvironment of recentyears has led to a shift from ontrade to off-trade consumption.The competitive landscapecomprises the global andregional brewers, with intensebut generally rational marketbehaviour.Read more about WesternEurope and our 2015performance on page 21.Independent market research and data management provider.EASTERNEUROPE11.0bnDKK – net revenue1.9bnDKK – operating profitThe Carlsberg Group is the market leader in the region’s mainmarket, Russia, and no. 2 in thesecond largest market, Ukraine.According to Canadean1, Russiais the fourth largest beer marketin the world, and total beermarket volumes in the regionamounted to approx. 115m hl in2015. Facts and figures on ourEastern European markets areshown on page 9.In recent years, Russian beermarket volumes have declineddue to a challenging macro economy, significant priceincreases and changed regulation. Per capita consumption hasthus decreased from 80 litres in2008 to 49 litres in 2015. Thedifficult market and subsequentdecline of the beer category areexpected to persist for the nextfew years.The Ukrainian market hasalso been in decline due tothe uncertain and challengingmacroenvironment as well asincreasing inflation.The off-trade accounts for themajority of the market. On theback of the tough consumerenvironment, the modern offtrade, consisting of hypermarketsand supermarkets, has grownsignificantly in recent years, nowaccounting for approx. 40% ofbeer sales in Russia.The global brewers are all present in Russia and, to a lesserextent, Ukraine. In Russia, localplayers have increased theirmarket share in recent years,and now account for approx.26% of market volumes, albeitless measured in value terms.Read more about EasternEurope and our 2015performance on page 24.ASIA15.3bnDKK – net revenue2.8bnDKK – operating profitThe Carlsberg Group has anattractive footprint with solidmarket positions in Asia. According to Canadean1, in volumeterms, China is by far the largestbeer market in the world andtotal beer market volumes inour Asian footprint amounted toapprox. 630m hl in 2015. Factsand figures on our Asian markets are shown on page 9.The Asian markets are diverse,with our Asian portfolio of businesses consisting of maturemarkets such as Malaysia, HongKong and Singapore as well asemerging beer markets suchas China, India, Myanmar andCambodia. Generally, our Asianmarkets offer considerableprospects for growth, underpinned by young populations,urbanisation, rising disposableincome levels, growing economies and, in some markets,relatively low per capita beerconsumption. However, asemerging markets, developmentcan be subject to volatility.With the exception of India,on-trade generally representsan important sales channel inour Asian markets. Off-tradeis largely characterised bytraditional outlets, although themodern off-trade is growing inurbanised areas.Competitive intensity varies,with markets being contestedby strong local brewers as wellas the global brewers.Read more about Asia and our2015 performance on page 27.

Carlsberg Group Annual Report 2015 The Group at a glanceStrong regional presenceOur marketsMarket data19We hold strong no. 1or 2 positions in 80%of our markets.Consumption characteristics1Our positionOur operations2Population(millions)Est.GDP/capitaPPP (USD)Est. real GDPgrowth (%)Inflation,avg. consumerprices (%)Per capita beerconsumption(litres)On-trade shareof market,approx. (%)Marketposition (no.)Marketshare 80.547221341Western 5842.77,990-9.050.048122303The Baltics3South East Europe 4Eastern 5.014,1906.81.5294416 84,9002.20.02165220-Hong Kong7.356,6892.52.92429226-Source: Canadean, IMF, Carlsberg estimates. 1 2015E. 2 As per the publication of this report. 3 Estonia, Latvia, Lithuania. 4 Bulgaria, Croatia, Serbia, Greece. 5 Northern Germany. 6 Western China. 7 Excl. Habeco.

Carlsberg Group Annual Report 2015 The Group at a glanceFinancial performanceIn spite of the decline in netprofit, at the Annual GeneralMeeting the Supervisory Boardwill propose a dividend pershare of DKK 9.00, unchangedversus 2015. The dividendpayment equates to a payoutratio of 30% of adjusted netprofit and follows the upwardtrend of recent 5202014085202356144107206Free cash flow improvedsignificantly in 2015 versus2013 and 2014, which wereimpacted by high investmentsdriven by growth in Asia andrestructuring initiatives inWestern Europe. In 2015,CapEx decreased significantlyand financial investments, net,were positive due to low M&Aactivity. Moreover, the Groupsold the remaining land at theformer brewery site north ofCopenhagen. Disposing of noncore assets remains on theagenda, and in January 2016the Group announced the saleof Danish Malting Group (DMG).DIVIDEND AND PAYOUT RATIO(%)082013810215FREE CASH FLOW(DKKbn)414152014202013582013In recent years, operating profithas not delivered satisfactoryresults, mainly due to decliningresults in Eastern Europe.In 2015, strong growth inAsia was offset by decliningoperating profits in the othertwo regions due to deterioratingmacroeconomic conditions inRussia and lack of anticipatedsavings in Western Europe. Toimprove this negative trajectoryeffectively, Funding the Journeywas launched. In addition, thenew strategy will steer theGroup towards a sustainable,organic business growth model.606201062920OPERATING PROFIT(DKKbn)6410Return on invested capital(ROIC) is a key metric forthe Group. The currentlevel of ROIC and the flatdevelopment of recent yearsare not satisfactory. The shortterm benefits of Funding theJourney, the longer-termgrowth delivered by SAIL'22and improved asset utilisationshould increase ROIC. Thelarge impairment in 2015 willalso have a positive impact. Inaddition, disposal of non-coreassets will contribute to animprovement in ROIC.820Adjusted net profit is adjustedfor special items after tax.In 2015, adjusted net profitdeclined due to the loweroperating profit in addition tohigher other financial items,which impairment due toforeign exchange adjustments.Net interest costs have comedown consistently in recentyears as a result of loweraverage funding costs.146620Following a flat development in2014, net revenue was up 2%organically in 2015. The growthwas mainly driven by Asia, whichdelivered organic growth of 5%.Asia is the primary driver oftop-line growth, delivering bothvolume and value growth. InWestern Europe, market volumesare flat, while in Eastern Europethey are declining due to a verysevere macroeconomic climateand negative consumer sentiment.Asia's share of Group net revenuehas increased significantly inrecent years and the region isnow the second largest in theGroup. Consequently, the Groupis well positioned for long-termorganic growth.ROIC(%)1013ADJUSTED NET PROFIT(DKKbn)2068Our changed geographic exposure andstrong business fundamentals will enableus to leverage our strengths, deliveringfuture value growth to our shareholders.2013NET REVENUE(DKKbn)10Payout % (rhs)

Carlsberg Group Annual Report 2015 The Group at a glance11Five-year summaryDKK .8Cash flow from operating activities8,8139,87122.222.021.522.723.3Cash flow from investing activities-4,883-3,9743,9305,897130Acquisition and disposal of property, plant and equipment, net -3,618Sales volumes, gross (million hl)BeerOther beveragesDKK 6,735-2,6186707,522Statement of cash flowsFree cash flowSales volumes, pro rata (million hl)BeerOther 21.5InvestmentsAcquisition and disposal of entities, 2.9Income statementNet revenue63,56166,46864,35064,50665,354Operating profit before depreciation, amortisationand impairment 39,2308,457Operating profit before special itemsSpecial items, netFinancial items, 1,531Profit before tax7,5308,1067,7826,686-1,733Corporation 8-2,582543638478524344Shareholders in Carlsberg A/S5,1495,6075,4714,414-2,926Shareholders in Carlsberg A/S, adjusted15,2035,5045,7725,4964,557Consolidated profitOperating margin%15.414.615.114.3Return on invested capital (ROIC)%8.48.08.18.08.1ROIC excl. goodwill%14.714.314.515.316.9Equity t/equity ratio (financial gearing)Debt/operating profit before depreciationand amortisationx2.392.352.552.742.34Interest coverx4.865.536.467.755.53-19.2Stock market ratiosAttributable to:Non-controlling interestsFinancial ratiosStatement of financial positionEarnings per share (EPS)DKK33.836.835.928.9Earnings per share, adjusted (EPS-A)1DKK34.136.137.836.029.9Cash flow from operating activities per share (CFPS)DKK57.764.653.448.466.3Free cash flow per share (FCFPS)DKK25.738.60.94.449.2Dividend per share (proposed)DKK5.56.08.09.09.0%16162231n.m.Total assets147,714 153,961 152,308 137,458 124,901Payout ratioInvested capital118,196 121,467 119,112 104,00690,102Payout ratio, adjusted1%161721253039,832Share price (B shares)DKK405.0554.0600.0478.8612.5Invested capital excluding goodwill62,19967,55361,94651,143Interest-bearing debt, net32,46032,48034,61036,56730,945Number of shares (year-end, excl. treasury shares) 1,000 152,523 152,555 152,533 152,538 152,552Equity, shareholders in Carlsberg A/S65,86670,26167,81152,43743,489Number of shares (average, excl. treasury shares) 1,000 152,538 152,543 152,548 152,535 152,5421Adjusted for special items after tax.

Carlsberg Group Annual Report 2015 CEO statementCEO statementorganisation. The profit warning issued inAugust only served to highlight the urgencywith which things needed to be changed.Cees 't HartPresident & CEOIn June 2015, I joined the Carlsberg Group.Let me begin by saying that I believe theGroup has a number of significant strengths.These include portfolios of strong brands,strong market positions in our geographies,and highly engaged and enthusiastic employees across the organisation.However, on joining Carlsberg, I also realised that changes were needed in order forus to improve the flat earnings developmentof recent years. We have to change the waywe do things and work together, rethink ourpriorities and establish a winning mindsetwith a clear and common ambition for theA NEW STRATEGYTo achieve this, we launched a strategic review process immediately after the summer,involving the top 60 leaders in the CarlsbergGroup. It has been an exciting process, notjust because of the discussions on the strategic review, but also because it has beenan important catalyst for breaking downthe geographical and functional silos that Ifound to be widespread in the organisation.In order to be successful, we must removethe barriers to efficient working and finda way to leverage both our scale and ourcloseness to the market. This will requireus to unite the efficiency of cross-marketspecialists and activities with the powerof successfully implementing practical andconsumer-oriented local solutions in themarkets. I am pleased with the progressthat I have seen in this respect.We have named the strategy SAIL’22, indicating that this is a journey and that it willguide the Group for the next seven years.At the time of writing, we are not yet readyto communicate the conclusions of thestrategic review, but we will do so on 16March 2016.However, I am able to provide a fewinsights into the thoughts behind thestrategy. First of all, the ambition is toaccelerate value creation for our shareholders. Secondly, the strategy will be anevolution rather than a revolution, buildingon the many strengths of the Group. TheCarlsberg Group will remain a beer-basedcompany and we will also in the future bein Western Europe, Eastern Europe andAsia. Coming out of the strategic revieware decisions on portfolio, capabilities andculture that together will turn the Groupinto a successful, professional and attract ive company in the markets in which wechoose to compete. You can read moreabout our ambitions for the new strategyon page 14.FUNDING THE STRATEGYIn order to execute the new strategysuccessfully, it is important to be able toprovide the necessary investments andsupport for those areas that we choose toprioritise. Unfortunately, the current stateof the business does not allow for suchinvestments. Consequently, we launchedFunding the Journey in the fourth quarterof 2015. This is a corporate initiative thatbrings together in one overall programmea range of individual programmes designedto save costs or improve profit.The initiatives can be divided into four mainareas: Value Mangement, Supply ChainEfficiency, Operating Expense Efficiencyand Right-sizing of Businesses. Many ofthe individual programmes already existed,while some are new. One of the initiatives,involving a review of the organisationwith the aim of simplifying and removing12duplication in processes, resulted in a planto reduce white-collar staff by approximately2,000 employees, corresponding to around15%. By the end of 2015, more than 1,700people had left or been given their notice. Inaddition, we took stock of the increasinglychallenging market conditions in Russia andChina, and this led to significant impairmentcharges. Furthermore, we implementedrestructuring measures in all three regions.In total, all these actions had a significantimpact on special items, which amounted toDKK 8.7bn.Importantly, Funding the Journey will generate the benefits that will allow us to investin our future growth. We have committedto delivering benefits of DKK 1.5-2.0bn, ofwhich part will be reinvested in the business to support the new strategy and partwill improve earnings and cash flow. Moredetails on Funding the Journey are providedon page 15.I am confident that the very strong fundamentals of the Carlsberg Group, combinedwith SAIL’22 and Funding the Journey,will enable us to build a business that willdeliver long-term sustainable organic valuegrowth to our shareholders and benefitother Group stakeholders.FINANCIAL RESULTSReported Group operating profit in 2015was DKK 8.5bn with an organic decline of7%. The decline was partly due to issuesoutside our control, namely the continuedworsening of the macroeconomic climate inRussia. However, we also failed to achievethe planned savings in Western Europe. Toavoid a similar situation going forward, the

Carlsberg Group Annual Report 2015 CEO statementactivities under Funding the Journey and theexpected benefits will be closely monitored,and clear roles and responsibilities havebeen assigned.Free cash flow improved significantly on thepast couple of years, reaching DKK 7.5bn.The strong improvement was driven by improved trade working capital, lower capitalexpenditures and financial investments,as well as a positive contribution from thesales of the last plot of land at the Tuborgsite north of Copenhagen and the formerbrewery in Leeds in the UK.COMMERCIAL HIGHLIGHTS OF 2015One of the great strengths of the CarlsbergGroup is undoubtedly our very strong anddiverse brand portfolio, which comprises aninteresting range of premium internationalbrands, covering all key segments from craftto heritage to younger-oriented fun, and animpressive number of local power brands,nearly all of which have deep roots in theirlocal markets.In 2015, we continued the further roll-out ofour international premium brands, launchedinnovations across our markets and revitalised certain local power brands.The Carlsberg brand continued to delivergrowth in Asia, but declined in Western andEastern Europe as a result of the overallmarket decline and cycling difficult comparables due to the previous year’s WorldCup. We began activating the sponsorshipof UEFA EURO 2016 . This event will takeplace in June and July and will be an im portant event for the brand. Moreover, animportant activity for the brand in 2015 wasthe revitalisation of the tagline "Probablythe best.".Tuborg celebrated another year of strongperformance, growing 15%. The growth wasparticularly pronounced in China and India asa result of increased distribution, increasedsales per outlet and well-executed abovethe-line campaigns that have led to increasedbrand awareness and consumer demand.Grimbergen, our Belgian abbey beer positioned in the craft beer segment, also grewby 15%. Again in 2015, it was the fastestgrowing internationally distributed abbeybeer, now being available in 38 markets.The growth was backed by a new international TV campaign, continued growth inFrance, packaging innovations and furthergeographic expansion.Innovations are important for supportingour local portfolios and driving value. Welaunched a number of new concepts in addition to the further roll-out in more markets of recent years’ innovations. Examplesinclude Brewmasters Collection, which playsin the affordable craft beer category. TheCollection is progressing well and is nowavailable in five markets. Within the growing non-/low-alcoholic segment, Nordic tookleadership of the category in Denmark,Radler continued to grow across manymarkets, and Tourtel Twist, launched at thebeginning of the year, has been very successful in France.A SUSTAINABLE BUSINESSIn the Carlsberg Group, we make a concertedeffort to implement sustainable businesspractices throughout our value chain.In 2015, we continued to implement activitiesacross our three sustainability themes:Resources & Environment, Health &Well-being and People & Policies.You can learn more in our SustainabilityReport, which is available online at www.carlsberggroup.com/sustainability/reports. Insummary, we pursued our sustainability ambitions, though we did not achieve everythingwe set out to do in 2015. However, amongmany other initiatives, we launched a threeyear project to develop a fully bio-based andbiodegradable beer bottle, organised the firstGlobal Beer Responsibility Day together withour industry peers, and continued to makeprogress towards our 2017 targets across oursustainability themes.A FOCUSED EXECUTIVE COMMITTEEA number of changes took place in the Executive Committee – the top managementteam of the Group – in 2015. At the verybeginning of the year, Andraea DawsonShepherd joined the team as Senior VicePresident, Group Corporate Affairs, andSenior Vice President Bengt Erlandsson,long-time head of Procurement, decidedto retire and was not replaced.As I wish to have a dynamic and fastdecision-making top management team,it was my decision to shrink the ExecutiveCommittee, and in

2015 Highlights In mid-June 2015, Cees 't Hart was appointed new CEO of the Carlsberg Group. Read Cees' letter to shareholders on page 12 and see his CV on page 54. In August, a strategic revie