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Carlsberg CEO warns of possible Russian brewery closures as Ukraine standoff bites

Carlsberg CEO warns of possible Russian brewery closures

Carlsberg’s CEO warned today that its Russian subsidiary Baltika Breweries is considering brewery closures due to a fragile consumer confidence affected by the ongoing Ukraine crisis.

Discussing Carlsberg’s Q2 and H1 2014 results today, Jorgen Buhl Rasmussen said the brewer’s staff in Russia and Ukraine are “doing an excellent job mitigating the impact of the challenges”.

Group net revenue for H1 2014 rose 4% to DKK 32.1bn ($5.71bn) with net profit flat at DKK 2.238bn.

Standout international premium brands in H1 included cider Somersby (+48% the fastest-growing cider among the global Top 10), 1664 (+15%), Tuborg (+26%) and Grimbergen (+39%).

Carlsberg grew its market share in Asia in H1, retained it in Western Europe, but lost share in Eastern Europe (organic beer volume also fell 13%), principally due to Russia-Ukraine geopolitical tensions.

But Russian market volumes fell 6.6% for H1 2014 due to a slower economic growth which hit consumer spending, while Baltika’s volume and value share fell 1.2% and 0.5% respectively.

Russia accounts for about a third of Carlsberg's group profit pool, and Isaac Sheps, president of Saint Petersburg-based Baltika Breweries, said today: “In the face of serious market challenges and negative sales dynamics Baltika has managed to achieve organic growth in operating profit and improve profitability.”

Carlsberg’s CEO also warned that the brewer would also consider further staff cuts in Eastern Europe at Baltika Breweries if lower volume trends continue.

Rasmusson told investors and analysts: “Due to recent macro events, the general consumer sentiment and the outlook for some of the economies in Eastern Europe are becoming increasingly challenging and uncertain,” he said.

With consumer spending likely to be weaker than previously thought, Carlsberg expects beer sales to fall further in H2 2014.

“This will impact us in two ways. Firstly, we expect the Russian and Ukrainian beer markets to decline more than previously expected, with Russia declining by high single digit percentages for the full year,” Rasmussen said.

“Secondly, we expect our partners in Russia to build less inventories at year end than previously due to potentially restrictive financing opportunities as well as a possible freeze of excise duties for 2015,” he added.

Carlsberg is implementing structural changes across logistics (one supply chain across all markets) sales (fewer sub regions) and administrative functions in Eastern Europe to boost profitability.

“In addition we are considering brewery closures as well. We will not comment further on such closures but will come back to you once decisions have been made,” Buhl Rasmussen said.

Referring specifically to Russia he admitted that Carlsberg had excess capacity, which “of course leads to considerations around how the brewery landscape should be some years out”.

Rasmussen told Nomura analyst Ian Shackleton that sanctions on other Western food imports had not had directly hit Carlsberg’s beer sales in Russia.  

“But at the same time due to the worsening macro economy we do see the consumers less willing to spend…in that sense you could say it impacts how we run the business,” he said.

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