E-Malt.com News article: Denmark: Royal Unibrew 9 month 2007 profits fall 31% due to higher costs, financial year guidance cut

Danish brewer Royal Unibrew AS announced its 2007 3rd quarter and 9 month results, in a press release, November 14.

Highlights (for Q3 2007)

• Profit before tax for Q3 2007 amounting to DKK 105.9 million, which is DKK 55.3 million below the figure for Q3 2006

• Gross margin lower than in 2006 due to higher production costs

• Profit before tax for the nine months to 30 September amounting to DKK 143.4 million compared to
DKK 207.1 million for the corresponding period of 2006

• Consolidated profit for the nine months to 30 September amounting to DKK 121.2 million compared to
DKK 155.0 million in 2006

• Net revenue for the nine months to 30 September up by 12% to DKK 2,925 million

• Free cash flow for the nine months to 30 September amounting to a negative DKK 58.1 million compared to DKK 114.3 million in 2006

• Profit before tax for 2007 now expected to amount to DKK 290‐310 million (including expected nonrecurring
net income –”special items” – of some DKK 80 million) compared to the previous expectation of a profit before tax of DKK 365‐385 million (including expected non‐recurring net income (”special items”) of some DKK 100 million)

• Specific initiatives to strengthen earnings in future years will be initiated (cf page 9).

Results Q3 2007

Due to, among other factors, a colder summer and autumn in Western Europe than in 2006, Royal Unibrew’s sales and net revenue developed less satisfactorily in Q3 than in H1. In consequence of this and in combination with higher raw materials prices and continued reduced efficiency at the Danish breweries, which did not normalise until in the latter part of Q3, EBIT did not develop satisfactorily as the EBIT realised was DKK 36 million lower than that of 2006 adjusting for the non‐recurring net income in 2006 of DKK 10 million.
In Q3 sales amounted to 2.0 million hectolitres, which is a 10% increase over 2006.

The increase is an expression of organic growth of a negative 2 percentage points, whereas 12 percentage points relate to the acquisition of the Lomza brewery in Poland and the Caribbean breweries in Antigua, Dominica and St. Vincent, which are all included for the full Q3 2007. The negative organic growth comprises positive growth in Lithuania, Sweden and the malt drinks markets, whereas sales in Denmark and Italy were marginally below those of 2006, and cross‐border trade was adversely affected by lower call rates for certain customer groups. In both the Danish market and in the cross‐border trade, the intense price competition continued.

Net revenue went up by 11% to DKK 1,099 million, of which 1 percentage point relates to organic growth. Gross profit in Q3 amounted to DKK 500 million compared to DKK 518 million in 2006. A total negative effect on gross margin in the order of DKK 30‐35 million is estimated from partly higher raw materials prices, which have, as expected, only partly been offset by increased net selling prices, and partly from low efficiency at the Danish breweries during a production reorganisation period at the breweries. Consequently, gross margin was 7 percentage points lower than in 2006. The mentioned production reorganisation and loss of efficiency resulted in certain delivery problems in the first part of the quarter.

EBIT for Q3 amounted to DKK 116.9 million, a 28% reduction from 2006, when EBIT was DKK 162.6 million including non‐recurring net income of some DKK 10 million. EBIT margin was 10.6% compared to 16.5% (15.5% excluding non‐recurring income) in 2006. Thus, the lower gross margin was partly offset by lower sales and distribution expenses measured proportionately to net revenue. Financial expenses increased by some DKK 6 million compared to Q3 2006 due to the increase in net interest‐ bearing debt, and income after tax from investments in associates was almost DKK 4 million below that of 2006, primarily due to lower earnings by Hansa Borg Bryggerierne in Norway. Profit before tax for Q3 amounted to DKK 105.9 million compared to DKK 161.2 million in 2006.

Results nine months to 30 September 2007

For the nine months to 30 September 2007, Royal Unibrew’s beer, malt and soft drinks sales amounted to 5.4 million hectolitres, which is a 9.4% increase over the same period of 2006. The increasing sales are partly attributable to the breweries in Poland and the Caribbean acquired in May and June/July by some 7.3 percentages points, and partly to organic sales growth of 2.1 percentage points primarily attributable to Lithuania, Latvia, Italy, Sweden and the malt drinks markets.

Total net revenue of the Group increased by more than 12% in the nine months to 30 September aggregating DKK 2,925 million. 5 percentage points of the increase were attributable to the breweries in Poland and the Caribbean acquired in May and June/July, respectively, whereas organic growth accounted for 7 percentage points. Net selling price per hectolitre went up by an average of 2.5%. The increase comprises a positive effect from price increases to offset increasing raw materials prices and a negative effect due to Announcement – RU43 /2007 – Page 6/20 a proportionately higher increase in sales in the Eastern European markets where net selling price is below average. The price increases introduced are primarily related to the Eastern European markets, Italy and malt drinks markets, whereas price competition continues to intensify in the North Western European markets.

Gross margin for the nine months to 30 September was 44.9% compared to 50.1% for the same period of last year. The lower gross margin is partly a consequence of inability due to the competitive situation, as expected, to offset increased production costs fully by increases in selling prices. Moreover, a production costs increase of some DKK 50 million is estimated to have occurred due to the lower efficiency at Danish breweries mentioned above. On average, production costs for the period were 13% higher than those of 2006. Moreover, gross margin was negatively affected by a larger sales increase in Eastern Europe than generally experienced.

The Group’s sales and distribution expenses went up by 2% from 2006. The main part of the increase is attributable to the acquisitions realised, and thus in 2007 the Group’s sales and distribution expenses were more or less at the 2006 level. Considerable amounts are still spent to strengthen the Group’s key brands: Royal Beer, Kalnapilis, Cido, Ceres (Italy), Vitamalt and Faxe (internationally). Administrative expenses went up by 16% from 2006. Almost half of the increase relates to acquisitions in the year. Other than that, the increase in expenses is primarily related to the realisation of the MACH II strategy, including expenses for implementing a shared IT platform, acquisition activities and general organisational strengthening. As part of the integration process, the Group’s IT platform was implemented at the acquired breweries in the Caribbean in June, whereas the use of the IT platform in Poland is generally upgraded in H2 2007 prior to implementation also at the acquired brewery in Poland, Lomza.

EBIT amounted to DKK 172.7 million compared to DKK 223.2 million including non‐recurring net income of some DKK 10 million in the nine months to 30 September 2006. The development excluding nonrecurring income comprises reductions in Q1 and Q3 of DKK 7.6 million and DKK 35.7 million, respectively, whereas an increase of DKK 2.8 million was realised in Q2. The EBIT margin represented 5.9% of net revenue for the full period compared to 8.6% in 2006 (8.2% excluding non‐recurring income). More than half of the gross margin reduction recorded in 2007 is therefore compensated by proportionately lower sales and distribution expenses.

”Income after tax from investments in associates” was DKK 2 million higher in 2007 than in 2006. The development comprises improved performance of the breweries related to malt markets and Greenland, and lower results of the breweries related to the Norwegian and Polish markets. Net interest expenses went up by DKK 14 million from 2006 in consequence of the increased indebtedness to finance the acquisitions (DKK 405 million) and share buy‐backs (DKK 85 million) made in accordance with the MACH II Strategic Plan.

The profit before tax amounted to DKK 143.4 million compared to DKK 207.1 million in the corresponding period of last year, whereas consolidated profit (after tax) amounted to DKK 121.1 million compared to DKK 155.0 million last year. Tax was positively affected by an adjustment of the deferred tax liability by DKK 13.8 million due to the reduction of the Danish corporation tax rate from 28% to 25%.

Developments in individual market segments

Western Europe

Total sales in Western Europe went up by 1%, whereas revenue increased by 3.8% from last year. The revenue increase was higher than the sales increase primarily due to a changed product mix and price increases introduced in certain markets. The increase was significantly reduced during Q3 as a result of the unfavourable weather and pressure on prices in particularly North Western Europe. Royal Unibrew’s market shares are generally estimated to have been maintained. EBIT and EBIT margin in Western Europe were reduced primarily due to the efficiency problems at Danish breweries mentioned above, which resulted in additional costs of some DKK 50 million.

The total Danish beer market declined in Q3 due to the weather and the introduction of the ban on smoking. On an accumulated basis, beer consumption at the end of Q3 is estimated to be 2% below the level for the nine months to 30 September 2006, and low‐price products continue to lose market shares. Royal Unibrew maintained its total share of the beer market, and in Q3 the Royal brand enjoyed a market share of more than 10%.

In Italy sales declined in Q3 compared to last year; however, accumulated for the year sales are 4% ahead of 2006 primarily driven by Strong Ale. Minor price increases were introduced in Italy. Cross‐border trade between Denmark and Germany developed unsatisfactorily in Q3. Branded products were sold in discount campaigns and sales were adversely affected by the lower call rates for certain customers.

Eastern Europe

The Group’s sales and revenue in Eastern Europe increased by 19.3% and 31.9%, respectively, in 2007. Lomza, the Polish brewery, has been included in the Group as of 1 May 2007. Earnings in the region developed positively driven by satisfactory developments in the Baltic countries, which are now meeting the Group’s financial targets. However, the results for Eastern Europe were to some extent negatively affected by developments in Poland, which were below expectations.

Beer consumption in Lithuania in 2007 was 2% below that of 2006. In spite of the unfavourable weather conditions, Kalnapilio‐Tauro Grupe’s beer sales remained unchanged from 2006, which means that the market share on beer increased. Sales of both the Tauras brand and the Kalnapilis brand went up, whereas the Group’s low‐price products sales declined. The average net selling price went up by more than 20% and revenue for 2007 was 33% higher than in the same period of 2006. In terms of profit and cash flow, the Lithuanian activities also developed very satisfactorily. In Latvia beer and soft drinks sales grew by 2% and 14%, respectively, and the Group’s market shares increased in both segments. The market share achieved in the beer segment makes Lacplesa Alus the number 4 brewery business in terms of size, whereas Cido Grupa continues to be the market leader in the Latvian market for its products.

Sales and revenue in Poland went up materially from 2006 as Browar Lomza was included in the consolidated financial statements from the beginning of May. The strengthening of management of the subsidiary Royal Unibrew Polska realised in H1 had the desired effect and the updated turnaround plan is followed as planned. It is now expected that the unsatisfactory development in sales and revenue as well as profit for the year as compared to the plans made which was realised in H1 will come to an end, and that a positive development as compared to 2006 will be realised in H2. The integration between the Royal Unibrew Polska and the Browar Lomza activities with a view to realising positive synergies has been initiated and is progressing satisfactorily. The two companies are expected to merge in early 2008 with shared headquarters in Warsaw.

Malt and Overseas Markets

Group sales and revenue in these markets went up by 32.2% and 31.1% in 2007. These figures include breweries in Antigua and Dominica as of 1 June and the brewery in St. Vincent as of 1 July. The weakening of USD affected the profitability of products exported from Denmark, whereas the EBIT margin was also affected by the breweries acquired in the Caribbean. The integration and development of these breweries progressed as planned.

Showing sales and revenue growth of 76.2% and 102%, respectively, Africa is the market in which the main part of the organic growth was realised in 2007. The growth is materially related to the cooperation with Serengeti Breweries in Tanzania.

The malt drinks markets in the USA/Canada also saw satisfactory sales developments, whereas revenue development was curbed by the declining USD rate.

Balance sheet and cash flow statement

The equity of the Royal Unibrew Group amounted to DKK 1,157 million at 30 September 2007 equal to an equity ratio of 28.9% compared to 34.5% at 30 September 2006. The balance sheet total amounted to DKK 3,997 million at the end of the period equal to an increase of some 21% compared to 2006. The increase was primarily related to the recognition of the acquisitions in Poland and the Caribbean.

Interest‐bearing debt went up by DKK 647 million from the same date last year. The increase relates primarily to the acquisitions made as well as to share buy‐backs. Moreover, increased working capital investments affected interest‐bearing debt by some DKK 100 million.

Free cash flow for the period amounted to a negative DKK 58 million compared to DKK 114 million in the nine months to 30 September 2006. Net investments amounted to DKK 147 million compared to DKK 155 million in 2006. Cash flows from operating activities amounted to DKK 72 million for the first nine months of the year compared to DKK 246 million for the same period of last year, primarily due to the reduction in net profit adjusted for non‐cash operating items and the increased interest payments as well as higher working capital investments at 30 September 2007 due to, among other factors, the acquired businesses, the general activity increase and increases in selling and raw materials prices. The Group’s cash resources, committed, unutilised credit facilities, amount to some DKK 600 million at 30 September 2007 in addition to commitments for financing of acquisitions.

Treasury Shares

In 2007, Royal Unibrew has acquired 122,803 shares for treasury. As per Announcement 31/2007 of 28 August 2007, 280,000 shares have, under the resolution passed at the Annual General Meeting in 2007, been cancelled in connection with the reduction of the share capital, after which the Company holds 194,054 treasury shares at 30 September 2007.

The Supervisory Board of Royal Unibrew A/S has (cf Announcement 18/2007 of 31 May 2007) decided to acquire up to 300,000 shares for treasury, however not exceeding a value of DKK 200 million, in the period up to the next Annual General Meeting on 28 April 2008. 77,243 shares at a value of DKK 53.5 million have been acquired at 30 September 2007. The share buy‐backs are an element in the future capital structure, see below.

Future capital structure

With a view to optimising Royal Unibrewʹs weighted average cost of capital (WACC) to increase shareholders’ return, it has been decided to adjust the Group’s capital structure by increasing its interestbearing debt to the effect that by the end of 2007 interest‐bearing debt represents approximately three times the Group’s EBITDA (cf Announcement BG02/2005 of 24 February 2005). At the end of 2006, interest‐bearing debt was 2 X EBITDA. In the nine months to 30 September 2007, interest‐ bearing debt increased from DKK 1,048 million to DKK 1,703 million, and interest‐bearing debt will amount to more than 3 X EBITDA at the end of 2007.

Initiatives after the end of Q3 2007

The results of the Royal Unibrew Group for the nine months to 30 September 2007 and the expected profit before tax for the full year 2007 are not up to expectations. The disappointing development in results is due to both external and internal circumstances.

The business is – globally – characterised by significantly increasing raw materials prices, and Royal Unibrew will continuously – where possible – seek to compensate for this by adjusting its selling prices. With a view to ensuring that the Group’s future profit development is strengthened in accordance with the targets established, a number of adjustments and optimisation efforts will be implemented:

• As already mentioned in the H1 Report for 2007, investments (some DKK 60 million) in both technology and capacity expansion of Danish production facilities have been initiated to remedy the capacity and efficiency problems, whose negative effect on the expected profit for 2007 is estimated at some DKK 50 million. The projects are progressing as planned, and these additional costs are not expected to affect profit in Q4 2007 or in future years.

• Throughout the Group, the cost level will be reduced partly by a general workforce reduction and partly by continuing the Group’s Business Excellence projects. Over the next months, the number of employees of the Group is expected to be reduced by some 300 (including the two brewery closures mentioned below), which combined with the planned Business Excellence projects is expected to result in annual savings in 2008 onwards of some DKK 35 million.

• In order to adapt the cost base in Denmark to the changed cost and competitive situation, the Maribo brewery will be closed in early 2008, which is expected to increase Royal Unibrew’s profit by some DKK 7 million on an annual basis. Relevant parts of the Maribo product range will be transferred to other production facilities of the Group. Costs of closure and impairment charges in connection with the closure are estimated at some DKK 15 million. Provision for this amount will be made in the Group’s financial statements for Q4 2007. Land and buildings in Maribo will be sold as soon as possible.

• In Latvia, production at the brewery in Lielvarde will be discontinued during the spring of 2008 and transferred to the Group’s brewery in Liepaja. The facilities in Lielvarde will subsequently be sold.

• The general increase in raw materials prices and the increased competition, not least in Denmark, have led to the initiation of an analysis of the total Danish supply process with a view to identifying additional efficiency potential. The above initiatives will, combined with the new Strategic Plan to be announced around the turn of the year, form the basis of bringing the Group’s ratios at least on level with the targets pursued so far, ie a two‐digit ROIC and EBIT margin plus a free cash flow of 7%.

Expectations to the 2007 financial statements

The Royal Unibrew Group’s profit for Q3 was lower than expected, primarily due to a sales level which did not meet expectations due to, among other factors, unfavourable weather and the ban on smoking. Against this background, the expectation for the consolidated profit before tax – without taking into account special items of a non‐recurring nature – is reduced to DKK 210‐230 million compared to the previous expectation of DKK 265‐285 million.

The aggregated consolidated profit before tax for 2007 is thus expected to amount to 290‐310 million. Total net revenue is now expected to amount to some dkk 3.9 billion. The group’s tax rate is expected to be some 25%, whereas the implemented reduction of the danish tax Rate has resulted in a one‐off reduction of tax for the year of dkk 14 million.


16 November, 2007