Danish beer giant Carlsberg (CABGY, Financial) has reported its fiscal 2014 consolidated profits plunged to 4.41 billion Danish kroner from last year’s 5.47 billion kroner. Carlsberg’s earnings per share hit 28.9 kroner, a steep drop from 35.9 kroner a year ago.
Amid falling profits and cost-cutting measures being implemented, Carlsberg A/S said it would replace its chief executive. The Danish beer giant is struggling with costly investments in Russia, and its fourth-quarter profits have taken a nose dive due to the weakening Russian ruble and a drop in beer sales in Eastern Europe due to a paradigm shift in the choice trend of drinks and the winter chills. The company has also stated its chief executive, Jorgen Buhl Rasmussen, would retire and be replaced by Cees’t Hart.
Current events
The executive shift was "not controversial but unexpected," according to analyst Kepler Cheuvreux, and Mr. Rasmussen has had an impeccable track record with the company.
This movement change comes as Carlsberg said in a press release that “its net profit in the three months ending Dec 31 is reported at 278 million Danish kroner ($42 million), down from 1.25 billion kroner in the prior-year period, and well below analysts’ forecasts of 981 million kroner. Sales in this period have dropped 8% to 14.33 billion kroner from 15.66 billion kroner, but despite these falls, the board proposed a 13% rise in its dividend to 9 kroner a share”.
In its statement, Carlsberg has further warned that the expected GDP decline and currency devaluation in Russia and Ukraine would apply tremendous pressure on the group’s overall performance.
In order to counter the weak ruble and downbeat outlook for the region, the company said it would cut costs. "To mitigate this in our planning for 2015 we have taken rough decisions aiming at further improving our cost-effectivenes while also continuing to invest in our brands and our longer-term capabilities for competitiveness," said Carlsberg.
The world’s fourth-largest beer maker announced that it will be succeeded for the first time in its 168 years by a non Dane. Burt Rasmussen, who had served as president and CEO since 2007, will be replaced by Cees’t Hart. The Dutchman has served as CEO of dairy producer Royal FrieslandCampina since 2008 and previously served as an executive at consumer products giant Unilever for 25 years, where he held various executive positions across Eastern and Western Europe and Asia.
Road ahead
Cees’t Hart’s experience will be the key factor as Carlsberg will look to tap into it to levitate its financial situation in Russia, an important market for the company. The climate for alcohol in Russia has taken a turn for the worse with the Russian government increasing excise taxes and banning many forms of alcohol ads in an attempt to dissuade excessive drinking.
Carlsberg has since gone about undertaking new activities and countermeasures to boost sales of beer in Eastern Europe. Carlsberg maintains this offers long-term growth opportunities like price increases and reduced container sizes. Mr. Rasmussen claims that the value of volumes in Russia is expected to increase this year as a result of price increases. The company expects operating profit to grow organically by mid to high single digit percentages.
Carlsberg’s Russian business represents the biggest acquisition in the brewer’s history and once upon a time was the company’s shining glory. In the first six years after the Danish company took full control of Russia’s Baltika breweries in 2008, one euro bought around 40 rubles on average. Since the beginning of 2014, the rate has averaged about 55. Since mid-February 2015, one euro bought 70 rubles. Twelve-month forward rates suggest that the ruble will weaken further to about 82 per euro.
Final take
Analysts are predicting troubled times ahead for Carlsberg as the brewer’s global market will have to triple sales to balance out the losses in Russia. Share prices will continue to fall and there is a very bearish outlook on Carlsberg for the current time being. It is advisable not to pick up their stocks but give the company two quarters to gain ground and bring its share prices back to the average maintained last year.
