Since one key strategic choice is to drive shareholder value and improve operating performance like ROIC, we will now analyze how SAIL’22 affects Carlsberg’s operating performance.
To make the effect quantifiable, we use a framework derived by Smart and Waldfogel (1994). As already explained in chapter three, the formula takes two factors into account: The first part of the formula calculates the difference between the current performance and the performance that was expected before the restructuring started or even was announced. The difference should then reveal the effect of the operational restructuring initiative. In the second part, the formula takes into account macro-economic challenges that were outside the company’s control and thus affected the whole industry (Smart and Waldfogel, 1994). To exclude these factors, we calculate the first part of the formula for a control company which did not conduct a restructuring initiative during the considered period. Since the difference cannot be caused by restructuring activities, we assume it is initiated
35 Calculation and development of ROE, parent in appendix 36
from unexpected macroeconomic challenges. This difference is then deducted from the initially calculated restructuring effect.
The first part of the formula incorporates the performance of the current year, i.e. 2017 as well as the performance that was expected before the initiative was announced. In Carlsberg’s case, it thus is reasonable to use the performance ratio that was expected for 2017 in 2014, i.e. three years ago.
Since we cannot forecast the performance for 2017 objectively from the perspective of 2014, we used external forecasts from 2014. We derived this data from Thomson Reuters (Datastream, 2018).
However, forecasts from 2014 for 2017 were only available for ROE. Other operational performance measures such as ROIC or OM were not forecasted and thus cannot be used. Since the profitability analysis earlier in the chapter showed that the trends and differences within the three ratios (ROE, ROIC and OM) are similar, we assume that the effects of restructuring, i.e. the results from this calculation, would be similar as well and the effect on ROE reflects the effect on Carlsberg’s total operating performance.
To be consistent throughout the calculation and only use comparable data, we use the ROE for 2017 that is calculated by Thomson Reuters. However, the current as well as historical returns on equity calculated by Thomson Reuters are exactly the same returns we calculated when excluding minority interests. Thus, the calculation is in line with our prior analysis and matches our assumptions on what should be included as operating expense.
Similarly to previous chapters, we choose the control companies based on product offering, company size and geographic reach and deduct the values from Heineken as well as CRBH from Carlsberg’s value.
Hence, we use the following formulas to calculate the restructuring effect on return on equity (REROE):
H.H<.e= fH<.ghei0JMjkSLM[− .ghel(H<.ghei0JMjkSLM[)m − fH<.gheinLopL)Lp− .ghel(H<.gheinLopL)Lp)m H.H<.g = fH<.ghei0JMjkSLM[− .ghel(H<.ghei0JMjkSLM[)m − fH<.ghei0*_n− .ghel(H<.ghei0*_n)m
A result of 0 percent would mean that the restructuring does not have an impact of Carlsberg’s operating performance. When using Heineken as the control company, we receive -6,83 percent as result with CRBH as control factor the result is -5,36 percent. This means that the restructuring initiative has a negative effect.
When taking a closer look at the calculation it becomes clear that the reason for this result is that Carlsberg’s ROE is much lower than expected (8,9 percent expected, 2,58 percent in 2017) whereas Heineken exceeds the expectations and CRBH achieves a ROE in 2017 that is close to the ROE that was expected in 2014.
However, earlier in this chapter we identified that the main reason for the weak operating performance of Carlsberg are the impairments of brands which are included in ROE. These impairments are primarily caused by the challenging macroeconomic circumstances in Russia.
Neither Heineken nor CRBH has a comparably high share of sales in Russia. Therefore, in our case the formula fails to exclude uncontrollable macroeconomic challenges through control companies.
Yet, it is very difficult to find more suitable control companies as Carlsberg is the market leader in Russia and no other brewery suffers comparably from the negative economic effect.
Therefore, we decide to conduct the calculation for 2016. Here, we use the ROE from 2016 as the current performance measure and deduct the ROE that was expected for 2016 in 2014.
This results in a positive effect of restructuring. With Heineken as a control company, the result is 3,52 percent, with CRBH as control company we receive a result of 1,768 percent. This means that the restructuring initiative SAIL’22 increased the return on equity by around 2-3 percent and thus has a positive effect on Carlsberg’s operating performance36.
However, it must be considered that the restructuring process is still in an early stage and this result might change throughout the further implementation of activities.
36 Calculation of REROE in appendix 37
7 Forecasting
In this chapter, we change the focus of our analysis from a historical view to a forward-looking perspective to forecast Carlsberg’s future financial performance. Forecasting is a crucial part of the valuation process as the valuation relies on the results of the forecasting (Petersen and Plenborg, 2012). The in this section developed pro forma income statement and balance sheet follow the same approach as the reformulated income statement and balance sheet from section 6.2, as again the separation of operating and financing activities is important to determine the driving force behind value creation. Operating activities are therefore fundamental when forecasting future earnings.
The forecasted numbers are based on the findings and conclusion of the strategic and financial analysis of the company as well as our assumptions of the restructuring program SAIL’22. Therefore, the forecast has to be consistent and incorporate risk and success factors as well as key drivers of profitability.
The forecasting is separated in three periods, the historical period which is used as a foundation as it gives insights into the historical trends and value drivers. The explicit forecasting period reflects the future development of each value driver. The drivers are expected to change during this period.
The terminal period refers to a ‘steady state’ setting and represents Carlsberg’s long-term growth capability (Petersen and Plenborg, 2012).
There are various ways to conduct forecasting. We decided to use a sales-driven forecasting approach as the different accounting items develop according to the expected level of activity (Petersen and Plenborg, 2012). As previously mentioned Carlsberg mainly earns money through sales of beer, cider and alcohol free beverages and most expenses are related to the production and selling of those beverages. Therefore, most expenses vary with the level of sales.