Our strategic journey:
From a few markets to full Nordic coverage with additional opportunities in Western Europe
We are on a transformative journey where we have nearly doubled our net revenue in just three years. Combined with significant inflation during the last couple of years, the short-term dynamics of the business has noticeably altered. We are confident that the future for our company looks bright with high growth and strong margins.
To understand Royal Unibrews performance, three main factors have driven the development in recent years:
Firstly, acquisitions add revenue and earnings but comes with lower margins. They provide numerous opportunities for future growth by rolling out our growth framework and business model. Secondly, partnership opportunities have increased in step with our growing footprint which is value creating for our shareholders, despite coming with lower margin than our own brands. Thirdly, inflation has put pressure on performance across the Group as it takes time before price increases can be passed on to customers. This has been more pronounced for acquisitions, where dicipline has not been present to the same extent as in the rest of the Group due to change of ownership.
Acquisitions
We have added approximately DKK 4.6 billion in net revenue from acquisitions since 2021. The majority comes from what we refer to as platform acquisitions. Platform acquisitions require a longer period to realize synergies compared to other types of acquisitions, which typically materialize more quickly. In addition, platform acquisitions usually require investments in equipment and organizational capital, as well as a cultural shift before synergies start to manifest. However, historically, platform acquisitions have been the ones that provide the most significant value creation, accumulated over the long term. Most of the acquisitions we have made or may undertake are margin-dilutive, as our margins are initially positioned at the high end in the beverage sector. The acquisitions we have made in recent years have diluted our EBIT margin by approximately 5 percentage points, and it is clearly our goal to bring the profitability of most of these acquisitions over time closer to our Group average margin. Solera Beverage Group being a distribution business will not be capable of reaching Group average margins.
Partnerships
We have significantly expanded our partnerships in recent years. We have taken over the sales of PepsiCo’s snack portfolio in Norway, Sweden, and Finland (already partner in Denmark) as well as its beverage business on the border between Denmark and Germany. We have also extended our collaboration agreement with Diageo to include the Norwegian market, along with several additional new partnerships. The profitability of these partnerships varies depending on whether they are solely based on distribution or also involve production, sales, and marketing.
As a starting point, partnerships are dilutive to the EBIT margin. On average, however, the capital employed is low, making the return on invested capital very attractive. Additionally, it enhances our product portfolio with strong brands that further support the sales of our own products.
Short-term pressure on margins due to inflation
The war in Ukraine triggered a significant increase in energy prices and most of our input costs. This has led to a substantial increase in the cost of producing our products in recent years, following a decade where overall production costs had been declining. After the Ukraine war outbreak, we accumulated around DKK 1.5 billion in additional costs due to inflation in input prices. By the second quarter of 2023, we reached a point where we had neutralized the majority of this inflation on an absolute basis in most of our markets. The companies we acquired during the inflationary years still have a slight price gap, which we expect to close during 2024. Hence, inflation has resulted in a technical dilution of our EBIT margin by approximately 2 percentage points.
Opportunities for long-term growth
Our world has changed since we formulated our long-term EBIT margin target of 20-21%, and we are now starting to see ample growth opportunities. Thus, we have decided to replace it with a new long-term organic EBIT growth target. We have expanded our business with new platforms in Norway and the Netherlands, while at the same time significantly increased our partnership business with new and existing partners. A focus on organic earnings growth ensures that we make the right decisions in our efforts to achieve our target of maximizing value creation in the long run.
The growth formula we have pursued over the past many years is still valid, as we continue to have strong confidence in our multi-beverage strategy, and the potential for organic earnings growth is significant. Therefore, our new long-term financial target is to grow EBIT organically by an average 6-8% per year. We anticipate the EBIT margin to rise in the upcoming period as a result of our strategic focus on categories that are growing faster than the overall beverage market and with a higher margin. A high EBIT margin is essential for our long-term sustainability and ability to invest in growth and innovation.
