Carlsberg’s Russia Struggle Worsens as Heineken Is Wary

Carlsberg A/S (CARLB) and Heineken NV, (HEIA) two of the world’s top four brewers, signaled tougher times ahead for the beer industry as escalating political tensions in eastern Europe weigh on the region’s economy.

Carlsberg, Russia’s biggest brewer, cut its full-year forecasts for revenue and earnings even as quarterly profit beat estimates, causing the shares to slump as much as 6.9 percent. Heineken said it expects growth to moderate in the remainder of the year, though the shares surged 8 percent for their biggest gain since 2009 after the company posted first-half earnings that topped estimates and said profitability would improve.

Across the globe, beer companies are under pressure as drinkers shift to rival craft brews and increasingly trade up to spirits. The recent political tensions between Russia and its western trading partners has added to difficulties in a country where government measures to reduce drinking have been hurting sales for about the last five years.

“Conditions are difficult and apparently getting worse,” Frans Hoyer, an analyst at Jyske Bank, said of Russia. “Rather than finding some type of stabilization now given several years of volume decline, it looks we are in for another bout of decline in the next several quarters.”

Photographer: Freya Ingrid Morales/Bloomberg

Tuborg Classic beer cans move along the production line at the Carlsberg A/S brewery in Fredericia, Denmark. Close

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Photographer: Freya Ingrid Morales/Bloomberg

Tuborg Classic beer cans move along the production line at the Carlsberg A/S brewery in Fredericia, Denmark.

While Carlsberg gets more than a third of total selling volume from Russia, Heineken is less dependent on any one country. The Amsterdam-based brewer is also benefiting from a three-year cost-saving plan and said today that it’s targeting a 0.4 percentage point yearly expansion in the operating margin, with the improvement likely to be greater in 2014.

Heineken Jumps

Heineken’s results were “truly impressive” with almost every division beating estimates, Jonathan Fyfe, an analyst at Mirabaud Securities LLP, said in a note.

Heineken shares rose as much as 7.9 percent in Amsterdam and were up 6.3 percent at 56.25 euros as of 10:30 a.m. Carlsberg fell 3.8 percent to 519 Danish kroner in Copenhagen.

Carlsberg said operating profit on a so-called organic basis will rise at a low- to mid-single-digit pace for the year, less than its previous guidance for high-single digit percentage growth. The Copenhagen-based maker of Tuborg also forecast steeper drops in reported operating profit and net income than it had previously indicated.

‘Increasingly Uncertain’

“Due to the recent macro events the consumer sentiment and the outlook for some of the economies in eastern Europe are becoming increasingly challenging and uncertain,” Carlsberg said in a statement. “Consequently, we believe that the beer category will deteriorate further in the second half.”

Heineken, the world’s third-biggest brewer, said growth in revenue per hectoliter of beer sold and profit will slow in the second half from the first six months as some countries lag. The Dutch company still anticipates stronger sales in 2014.

“The economic outlook remains mixed,” Chief Executive OfficerJean-Francois van Boxmeer said in the statement.

At Carlsberg, the volume of beer sold in eastern Europe declined 13 percent in the second quarter on an organic basis, which excludes acquisitions and divestments. Higher prices in the region limited the drop in net revenue to 4 percent.

The Russian beer market contracted by 6 percent to 7 percent in the first half and the Danish company said its share of that declined by 1.2 percentage points to 37.4 percent.

The brewer reaffirmed its commitment to Russia, saying it continues to invest in its brands there and to maintain a high level of commercial activities.

‘Limited Impact’

Carlsberg reported a 5.9 percent gain in earnings before interest, taxes and one-time items in the quarter to 3.6 billion Danish kroner ($643 million). The average of 10 analyst estimates compiled by Bloomberg was for 3.38 billion kroner.

At Heineken, quarterly earnings before interest and taxation rose 9.6 percent to 1.45 billion euros ($1.93 billion), excluding some items. The median of 13 estimates compiled by Bloomberg was for a figure of 1.32 billion euros.

Heineken is the fourth biggest beermaker in Russia, meaning that the country is “a little bit less impactful than perhaps for other brewers,” van Boxmeer said in an interview with Bloomberg Television.

Sanctions imposed on Russia over the Ukraine crisis have had “a limited impact” on Heineken’s business in the country, because the company obtains most of its agricultural produce and packaging locally, according to the CEO.

To contact the reporter on this story: Katarina Gustafsson in Stockholm at kgustafsson@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net Paul Jarvis, Kim McLaughlin

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