COPENHAGEN Danish brewer Carlsberg (CARLb.CO) has scrapped its profit margin target for eastern Europe, blaming volatile markets and rising costs, and damping hopes the region can offset sluggish demand in western Europe.
Shares in the world's fourth-biggest brewer fell as much as 7 percent on Monday after it said growth had stalled in its key Russian market and the cost of an efficiency drive in western Europe would hold back earnings growth this year.
"The change in long-term financial targets is probably the most disappointing element in the report," said Sydbank analyst Morten Imsgaard.
"It helps paint a picture of a brewery which is not entirely in control of factors which are decisive for earnings," he said.
Like bigger rivals AB Inbev (ABI.BR), SABMiller (SAB.L) and Heineken (HEIN.AS), Carlsberg is relying on emerging markets to offset weak beer sales in recession-hit western European markets as well as rising costs of energy and ingredients like barley.
The group, which makes just over 60 percent of its sales in western Europe, has built up a market leading position in Russia. But its business there has been has been hampered by a government drive aimed at curbing alcohol abuse, with measures taken including excise tax increases and a ban on advertising in all media, including the internet.
Carlsberg, whose brands include Baltika and Tuborg, said its sales growth in Russia stalled in the fourth quarter. That was better than a broader market decline of 2-3 percent, it said, but down from growth of about 2 percent in the third quarter.
"Several events, both within and beyond our control, have and will continue to impact margins," Carlsberg said as it scrapped its target for an operating profit margin of 26-29 percent for eastern Europe by 2015.
The group made an operating margin in the region of 21.7 percent in 2011.
Carlsberg did give a longer-term target for average growth in adjusted underlying earnings per share of more than 10 percent per year.
However, it forecast operating earnings this year would reach only around 10 billion Danish crowns ($1.79 billion) from 9.8 billion in 2012, lagging an average forecast of 11 billion in a Reuters poll of analysts.
In part, the group blamed the cost of an efficiency drive in western Europe, which includes centrally managing all procurement, production, planning and logistics.
It said this would help to improve the operating margin in western Europe by an average of 50 basis points or more per year for at least the next five years.
But the revamp would cost 300-400 million crowns this year, 400-500 million in 2014 and 500 million in 2015, it added.
Fourth-quarter operating profit before one-off items was 2.15 billion crowns, missing analysts' average forecast of 2.3 billion.
Eastern Europe accounted for 4.6 billion crowns, or around 29 percent, of sales in the fourth quarter. Western Europe accounted for 9.2 billion crowns, or 61 percent.
At 0930 GMT, Carlsberg shares were down 4.9 percent at 573 crowns, the biggest fall by a European blue-chip stock .FTEU3.