Carlsberg Group Annual Report 2020

Plain-text annual report

ANNUAL REPORT 2020 CARLSBERG GROUP ANNUAL REPORT 2020 TO OUR SHAREHOLDERS 2 MANAGEMENT REVIEW FINANCIAL STATEMENTS TO OUR SHAREHOLDERS Letter from the Chair & the CEO ......... 3 IN BRIEF Strategic priorities ...................................... 5 Financial achievements ............................ 7 Our regions ................................................... 8 Our brands ................................................. 10 Key figures ................................................. 11 REVIEW AND EXPECTATIONS COVID-19 .................................................. 12 Group ........................................................... 15 Western Europe ....................................... 18 Asia ............................................................... 21 Eastern Europe ......................................... 24 Capital allocation .................................... 26 2021 earnings expectations ................ 27 STRATEGIC REVIEW Purpose and ambition ........................... 28 Business model ........................................ 29 Our strategy .............................................. 30 Measuring our progress ........................ 35 Addressing climate risks ....................... 36 Managing risks ......................................... 37 GOVERNANCE Corporate governance ........................... 40 Supervisory Board................................... 46 Executive Committee ............................. 49 Share information ................................... 51 Forward-looking statements and ESEF ............................................................. 52 CONSOLIDATED FINANCIAL STATEMENTS Statements ...........................................54 Notes ......................................................58 PARENT COMPANY FINANCIAL STATEMENTS Statements ........................................ 127 Notes ................................................... 130 REPORTS Management statement ................ 137 Auditor’s reports .............................. 138 OUR ANNUAL REPORTING Our annual reporting suite comprises three reports: Annual Report, Sustainability Report and Remuneration Report. Each includes content tailored to its specific audience, and cross-references to the other reports where relevant. The Sustainability Report carries an assurance statement by PwC on selected indicators. It serves as our annual Communication on Progress to the United Nations Global Compact and is, as such, our disclosure in accordance with section 99a of the Danish Financial Statements Act. It can be downloaded at this link: www.carlsberggroup.com/reports- downloads/carlsberg-group-2020- sustainability-report/ Front page: Read more about 1664 Blanc on page 14. To our shareholders LETTER FROM THE CHAIR & THE CEO COMMITMENT AND RESILIENCE COVID-19 presented significant challenges for our customers, people and business. We are proud of the great commitment of all our employees, which contributed to the resilience of the Group. During the year, our top priority was the health and wellbeing of our employees, while at the same time taking the required actions to protect the health of our business. Throughout the year, our on-trade customers in particular were severely impacted by the pandemic. We were impressed by the tremendous resilience and flexibility of our people, which allowed us to stabilise the business, support our customers and help societies. Read more about our wider response to the COVID-19 challenges on pages 12-14, including our specific actions in relation to societies and customers. A RESILIENT COMPANY The significantly strengthened performance of the Group in recent years was a key prerequisite for the high degree of resilience – in terms of our organisation and people, our financial position and our portfolio – which helped us navigate through the uncharted waters of the pandemic. ORGANISATION & PEOPLE RESILIENCE Early on, we were able to build on and adapt the way we work as a company. From the central office, we provided clear direction to the regions and markets with three priorities: protecting the health and safety of employees and maintaining service to customers; protecting operating profit and cash; and ensuring our readiness for better times. Subsequently, we empowered our country management teams to translate these priorities into local action plans – recognising that while the pandemic was global, government and consumer responses were very local. Across the Group, our employees showed a high degree of flexibility and engagement, quickly adapting to the changing market environment and operating conditions, and finding safe and efficient ways of working. Be it in markets or functions, everyone went the extra mile, despite working under very difficult circumstances. We are confident that being a purpose-driven company with a high level of employee satisfaction and engagement was crucial for our ability to navigate through these uncharted waters. FINANCIAL RESILIENCE As early as the beginning of the year, when COVID-19 hit China, we CARLSBERG GROUP ANNUAL REPORT 2020 TO OUR SHAREHOLDERS 3 2020 was a challenging year, significantly impacted by COVID-19. During the year, the health and wellbeing of our people was our first priority, followed by protecting the health of our business. Flemming Besenbacher, Chair Cees ’t Hart Cees ’t Hart Flemming Besenbacher CARLSBERG GROUP ANNUAL REPORT 2020 TO OUR SHAREHOLDERS 4 turned the focus onto reducing costs and preserving our top line. good earnings, we delivered a solid free cash flow of DKK 5.1bn. Regarding costs, we were able to leverage OCM, our well-established cost management system, to identify and execute cost savings. In terms of top line, our on-trade customers suffered and we saw a major channel shift – from on-trade to off-trade and e-commerce. Due to the lower volumes and the negative price/mix, revenue declined organically by 8.4%. Thanks to our cost reduction efforts, the organic decline in operating profit was confined to 3.1%, while reported operating margin increased by 70bp to 16.6%. In April, we suspended our full-year guidance for organic growth in operating profit due to the high level of volatility and uncertainty. In August, we issued a new guidance and, thanks to the resilience and strong performance of our global organisation, subsequently upgraded our guidance twice – in September and October. Our strong financial position enabled us to carry out inorganic transactions, including the acquisitions of Marston’s brewing activities in the UK, Wernesgrüner Brewery in Germany and the purchase of the Brooklyn brand rights in our markets. We also merged our businesses in China, see page 23. Furthermore, we made significant cash returns to our shareholders. In March, we paid a total dividend of DKK 3.1bn, and from January to mid-August our share buy-backs amounted to DKK 2.9bn. On 5 February 2021, we initiated a 3- month share buy-back programme of DKK 750m. Read more about the share buy-back programmes on page 26. At the Annual General Meeting on 15 March 2021, the Supervisory Board will propose a 5% increase in the dividend to DKK 22.0 per share and that 2.9m treasury shares be cancelled. We entered the crisis with a strong balance sheet and an organisation skilled in proactive cash management. By maintaining focus on all elements of working capital and reducing non- essential CapEx, and supported by PORTFOLIO RESILIENCE In recent years, our SAIL’22 choices have improved the strategic health of the Group and made our markets and product portfolio more resilient. We have rationalised and strengthened our brand portfolio, and today we have an attractive portfolio of categories and brands, as showcased on page 10. In particular, our investments in and focus on building the craft & speciality and alcohol-free brew categories have delivered strong growth. Craft & speciality grew by 1%, despite the category being more skewed towards the severely impacted on-trade channel. Alcohol- free brews grew by 11%, supported by increased awareness of health and wellbeing among consumers, possibly fuelled by the pandemic. RESPOND AND RESET Our strategic priorities (see pages 30-34) remain valid and will be instrumental for our growth aspirations, although we expect the challenges and uncertainty of 2020 to continue for some time to come. Consequently, we are taking steps to reorient the company for the sustained uncertainty. There are two elements to this. Respond is focused on being ready for and responsive to changes in consumer and customer demands. Reset addresses our cost base to align it with the changed market environment. Unfortunately, as part of this we have had to depart with good colleagues. Read more about Respond and Reset on pages 13-14. ADVANCING SUSTAINABILITY We are continuing to drive progress towards our ambitious targets in our sustainability programme Together Towards ZERO. To ensure the right focus for our activities, in 2020 we updated our materiality assessment and carried out a comprehensive water risk assessment in partnership with WWF. Recognising the impact of climate change on our business, we have become a supporter of the Task Force on Climate-related Financial Disclosures (TCFD). In this report, we take the first steps in disclosing climate-related risk to our business, using the TCFD framework. As part of our annual reporting suite, along with the Annual Report and the Remuneration Report, our Sustainability Report contains a wealth of data, insights into our achievements to date and our future plans, a summary of which can be found in this report on pages 6 and 33-35. CHANGES TO THE SUPERVISORY BOARD At the Annual General Meeting, the Supervisory Board will propose Henrik Poulsen, former CEO of Ørsted, as a new member. The Supervisory Board will also propose that Henrik Poulsen become Deputy Chairman of the Supervisory Board, replacing Lars Fruergaard Jørgensen. Lars Fruergaard Jørgensen will remain as a member of the Supervisory Board. In addition, Domitille Doat-Le Bigot has notified the Supervisory Board that she is not standing for re-election at the Annual General Meeting. THANK YOU We will remember 2020 for the significant challenges presented to everybody by COVID-19. We are deeply impressed by the high level of engagement and commitment of our colleagues during the year. We want to take this opportunity to say thank you to each and every one – current employees and those who unfortunately had to leave the Group. We would also like to acknowledge our shareholders for their support and trust during the year. Finally, we would like to thank all our suppliers and customers – not least our highly-challenged on-trade customers – for their cooperation during the difficult times in 2020. We will continue to support our on-trade customers the best way we can and we hope for a brighter and more cheerful 2021. Flemming Besenbacher Chair Cees ’t Hart CEO STRATEGIC PRIORITIES 2020 HIGHLIGHTS COVID-19 was a stress test for our SAIL’22 strategy. Notwithstanding the immense hardship posed by the pandemic for many people, including our on-trade customers, our strategic priorities proved resilient. CARLSBERG GROUP ANNUAL REPORT 2020 IN BRIEF 5 STRENGTHEN THE CORE STRENGTHEN THE CORE SUPPORTING THE ON-TRADE Across our markets, we developed innovative ways to support our on-trade customers during the challenging period of COVID-19, including digital solutions enabling them to leverage online channels such as online delivery platforms, launch their own website for takeaway, and navigate the world of digital and social marketing. Another initiative was Adopt a Keg, which rewarded consumers buying Carlsberg for home consumption with free draught beer that could be redeemed at local on-trade outlets. FUNDING THE JOURNEY CULTURE Our Funding the Journey culture, with its focus on efficiencies and costs, was the most important driver of our financial performance in 2020. Read more on pages 13 and 31. POSITION FOR GROWTH POSITION FOR GROWTH RESILIENCE OF OUR GROWTH PRIORITIES GROWING IN CHINA Our alcohol-free brew and craft & speciality portfolios demonstrated their strength during the year, delivering growth of 11% and 1% respectively. Our international speciality brand 1664 Blanc saw impressive growth of 8%, while Grimbergen declined by 2%, impacted by challenges in France. Our international cider brand, Somersby, grew by 2%. For a number of years, our Chinese business has delivered consistently strong results. Despite the significant nationwide lockdown at the beginning of 2020 and subsequent local lockdowns during the remainder of the year, volumes and revenue/hl grew. Key drivers were the premium brands, our big city strategy, and strong performance in e-commerce and modern off-trade. CREATE A WINNING CULTURE SUPPORTING OUR COMMUNITIES Our purpose of brewing for a better today and tomorrow is deeply rooted in our culture. We took pride in being able to assist local communities in the fight against COVID-19. Our many initiatives included the production of hand sanitiser, donations of protective and testing equipment and alcohol- free beverages to healthcare workers, and financial donations to local organisations. STRATEGIC PRIORITIES TOGETHER TOWARDS ZERO We believe sustainability and profitability can work together in harmony. Our aim is to create sustainable value growth by optimising the balance between our financial performance and sustainability progress. CARLSBERG GROUP ANNUAL REPORT 2020 IN BRIEF 6 ZERO CARBON FOOTPRINT -12% By 2030, we aim to eliminate carbon emissions at our breweries and cut our beer-in-hand carbon footprint by 30% compared with 2015. In 2020, we reduced relative carbon emissions by 12%, and from 2015 to 2019 we reduced our beer-in-hand footprint by 7%. ZERO WATER WASTE -7% We are committed to eliminating water waste from brewing and to safeguarding shared water resources in high-risk areas. By 2030, we aim to reduce our water consumption by 50% compared with 2015. In 2020, we reduced our water consumption by 7%, and since 2015 we have reduced it by 18%. TOGETHER TOWARDS ZERO TOGETHER TOWARDS ZERO ZERO IRRESPONSIBLE DRINKING 100% We are proud of our great beer brands, which for many people are at the heart of social occasions, and we want everyone to enjoy our products responsibly. All our beers and ciders carry messages or icons advising consumers not to drink-drive and not to drink when underage or pregnant. ZERO ACCIDENTS CULTURE -19% Safeguarding the health and safety of everyone working for Carlsberg is key to how we do business, and our 2030 target is to have zero lost- time accidents. In 2020, the lost-time accident rate went down by 19% to 3.0 from 3.7 in 2019. TOGETHER TOWARDS ZERO TOGETHER TOWARDS ZERO READ MORE ABOUT SAIL'22 ON PAGES 30-34. FINANCIAL ACHIEVEMENTS RESILIENCE, COST CONTROL AND CASH DELIVERY TOP- AND BOTTOM-LINE GROWTH, STRONG CASH FLOW AND IMPROVING RETURNS, ALBEIT RESULTS IN 2020 IMPACTED BY COVID-19 CHALLENGES CARLSBERG GROUP ANNUAL REPORT 2020 IN BRIEF 7 While results in 2020 were impacted by COVID-19, the Group showed a high degree of financial resilience thanks to our Funding the Journey culture and discipline. The market decline and prolonged on-trade closures in many markets impacted our top line negatively. However, our well-embedded Funding the Journey culture, with its relentless focus on costs and early intervention, enabled us to partly offset this headwind, limiting the decline in operating profit. The operating margin and ROIC improved, free cash flow was solid and financial leverage of 1.51x was well within our target of below 2x NIBD/EBITDA. Read about the results on pages 15-17 and in the consolidated financial statements. We also continued to return cash to shareholders by delivering on our dividend policy and conducting share buy-backs. Total cash return to shareholders in 2020 amounted to DKK 6bn. Read more on page 26. 1 Comparative figures for 2016-2018 and 2016 have not been restated to include IFRS 16 and IFRS 15 respectively . OUR REGIONS THREE REGIONS 24 NO. 1 OR 2 POSITIONS 75% of our volumes are sold in these 24 markets. The strength of our geographic exposure was evident during the COVID-19 pandemic, when the different timing of government actions and the impact and scale of market consequences provided early, valuable learnings, helping us navigate the uncharted waters. WESTERN EUROPE 54% SHARE OF GROUP REVENUE 46% SHARE OF GROUP OPERATING PROFIT Our beer markets in Western Europe are generally flat in volume terms. Our agenda in the region is to improve margins by premiumising our portfolio, executing value management, improving efficiencies and reducing cost. CARLSBERG GROUP ANNUAL REPORT 2020 IN BRIEF 8 EASTERN EUROPE 17% SHARE OF GROUP REVENUE 18% SHARE OF GROUP OPERATING PROFIT We have strong market positions in Eastern Europe. In 2020, we strengthened our market share in Russia by taking appropriate actions in response to a highly promotional market environment. ASIA 29% SHARE OF GROUP REVENUE 36% SHARE OF GROUP OPERATING PROFIT Our Asia footprint comprises diverse but complementary markets. It is our growth region, and our focus is on growing volumes, expanding our international brands and premiumising local brands while being cost-efficient. OUR REGIONS NEW REGIONAL STRUCTURE As of 1 January 2021, we have changed our regional structure to optimise regional management and ensure a better balance between our European regions. The new regions and share of Group are shown here. CARLSBERG GROUP ANNUAL REPORT 2020 IN BRIEF 9 WESTERN EUROPE ASIA Denmark, Finland, France, Germany, Norway, Poland, Portugal, Sweden, Switzerland, UK. Cambodia, China, Hong Kong SAR, India, Laos, Malaysia, Myanmar, Nepal, Singapore, Vietnam. CENTRAL & EASTERN EUROPE Former Eastern Europe: Azerbaijan, Belarus, Kazakhstan, Russia, Ukraine. Former Western Europe: Baltics, Bulgaria, Croatia, Greece, Italy, Serbia, Export & License. 29% 44% 36% SHARE OF GROUP VOLUME SHARE OF GROUP REVENUE SHARE OF GROUP OPERATING PROFIT 31% 29% 36% SHARE OF GROUP VOLUME SHARE OF GROUP REVENUE SHARE OF GROUP OPERATING PROFIT 40% 27% 28% SHARE OF GROUP VOLUME SHARE OF GROUP REVENUE SHARE OF GROUP OPERATING PROFIT SEE PAGES 121-122 FOR RESTATED FIGURES. OUR BRANDS AN ATTRACTIVE BEER PORTFOLIO Our beer portfolio spans our core beer brands, craft & speciality brands and alcohol-free brews. CORE BEER Our local power brands each have a long history in their markets, enjoying high levels of consumer loyalty. CRAFT & SPECIALITY (C&S) Our C&S portfolio includes our international speciality brands, local craft brands and the international cider brand Somersby. This attractive portfolio has delivered strong growth in recent years, supporting the continued margin progression of the Group. The importance of core beer was evidenced even further during the COVID crisis, as consumers turned to these well-known brands – often in multipacks – when doing their off- or online shopping. Despite severe restrictions imposed on the on-trade in 2020, our C&S volumes grew by 1%, with particularly strong growth in markets such as Poland, Norway, Switzerland, Russia and China. Our core international brands were impacted by COVID-19 government measures in significant markets. Tuborg volumes grew by 15% in Russia and increased slightly in China, but this was offset by challenges in other large markets, such as India and Nepal, and total brand volumes declined by 9%. Carlsberg volumes were down 10%, impacted by the market declines in India, Malaysia and Denmark and the closure of the night entertainment channel in China. ALCOHOL-FREE BREWS (AFB) AFB was positively impacted by an acceleration in consumer awareness of health and wellbeing, as the pandemic took its toll across the world. Driven by good results for the AFB offerings of our local power brands in Western Europe and Eastern Europe, our AFB volumes continued the positive trajectory, growing by 11%. CARLSBERG GROUP ANNUAL REPORT 2020 IN BRIEF 10 CORE BEER GROWTH CATEGORIES 90% 10% of own beer volumes INTERNATIONAL BRANDS CRAFT & SPECIALITY 82% 18% of own beer revenue LOCAL POWER BRANDS ALCOHOL-FREE BREWS KEY FIGURES FIVE-YEAR SUMMARY CARLSBERG GROUP ANNUAL REPORT 2020 IN BRIEF 11 Volumes (million hl) Beer Non-beer DKK million Income statement Revenue Gross profit EBITDA Operating profit before special items Special items, net Financial items, net Profit before tax Income tax Consolidated profit Attributable to Non-controlling interests Shareholders in Carlsberg A/S (net profit) Shareholders in Carlsberg A/S, adjusted² Statement of financial position Total assets Invested capital Invested capital excl. goodwill Net interest-bearing debt (NIBD) Equity, shareholders in Carlsberg A/S Statement of cash flows Cash flow from operating activities Cash flow from investing activities Free cash flow 2020 2019 2018¹ 2017¹ 2016¹ 2020 2019 2018¹ 2017¹ 2016¹ 110.1 20.0 113.0 21.9 112.3 20.8 107.1 19.2 116.9 21.9 Investments Acquisition of property, plant and equipment and intangible assets, net³ Acquisition and disposal of subsidiaries, net -4,396 -4,592 -4,027 -4,053 -3,840 -2,409 - -974 268 1,969 58,541 28,361 14,085 9,699 -247 -411 9,041 -2,233 6,808 65,902 62,503 60,655 32,638 15,007 10,465 501 -738 10,228 -2,751 7,477 31,220 13,420 9,329 -88 -722 8,519 -2,386 6,133 30,208 13,583 8,876 -4,565 3,523 -1,458 2,065 778 6,030 6,363 908 6,569 6,160 824 5,309 5,359 806 1,259 4,925 62,614 31,419 13,006 8,245 251 Financial ratios Gross margin EBITDA margin Operating margin Effective tax rate -788 -1,247 Return on invested capital (ROIC) 7,249 -2,392 4,857 371 4,486 3,881 ROIC excl. goodwill Equity ratio NIBD/equity ratio NIBD/EBITDA Interest cover Stock market ratios Earnings per share (EPS) Earnings per share, adjusted (EPS-A)² Free cash flow per share (FCFPS) Dividend per share (proposed) Payout ratio Payout ratio, adjusted4 Share price (B shares) Market capitalisation % % % % % % % x x x DKK DKK DKK DKK % % 48.4 24.1 16.6 24.7 8.9 23.2 33.1 0.49 1.51 23.59 41.3 43.6 34.5 22.0 55 50 49.5 22.8 15.9 26.9 8.8 22.4 35.3 0.41 1.25 14.17 43.7 41.0 65.9 21.0 49 50 50.0 21.5 14.9 28.0 8.1 20.9 38.5 0.36 1.29 12.92 34.8 35.2 40.2 18.0 52 51 49.8 22.4 14.6 41.4 6.9 15.7 41.1 0.40 1.45 11.26 8.3 32.3 56.9 16.0 194 50 50.2 20.8 13.2 33.0 5.9 12.7 40.0 0.48 1.96 6.61 29.4 25.4 56.5 10.0 34 39 DKK 975.2 993.8 692.6 745.0 609.5 DKKm 142,676 145,805 104,830 112,116 92,896 118,816 123,063 117,700 114,251 126,906 81,541 31,049 21,263 39,308 86,162 33,032 18,776 43,449 82,721 84,488 31,792 17,313 33,991 19,638 45,302 46,930 96,089 43,225 25,503 50,811 10,928 -5,871 5,057 12,239 -2,277 9,962 12,047 -5,891 6,156 11,834 -3,154 8,680 9,329 -713 8,616 Number of shares at year-end, excl. treasury shares Average number of shares, excl. treasury shares 1,000 145,102 147,996 152,457 152,390 152,552 1,000 146,104 150,411 152,428 152,496 152,552 Number of issued shares at year-end 1,000 148,157 152,557 152,557 152,557 152,557 ¹ Comparative figures for 2016-2018 and 2016 have not been restated to include IFRS 16 and IFRS 15 respectively. ² Adjusted for special items after tax. ³ Includes the acquisition of the Brooklyn brand rights, DKK 0.8bn in 2020. 4 Proposed dividend on number of shares at year-end as a percentage of net profit adjusted for special items after tax. Please refer to section 9.2 General accounting policies in the consolidated financial statements for a definition and calculation of key figures and financial ratios. CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 12 Review and expectations COVID-19 NAVIGATING UNCHARTED WATERS The COVID-19 pandemic affected lives worldwide. From the beginning, we had three priorities: protecting our people, protecting earnings and cash, and preparing for the rebound. Below, we summarise the impact of COVID-19 on our business and our mitigating actions – in light of our three priorities – during the year. MARKET IMPACT Beer is most often enjoyed in social settings, and markets across our regions were therefore impacted by restrictions and lockdowns, which prevented consumers from engaging in social activities. Some markets benefited from populations not being able to travel, while others suffered from lack of tourism or temporary ruralisation, as migrant workers left the cities. ON-TRADE For the Group, the on-trade channel accounts for around 25% of volumes (2019 figures). Exposure is at the same level in Western Europe, above average in Asia and very small in Eastern Europe. Across our markets, the on-trade in particular was affected by a range of government interventions, including lockdowns, restrictions on people gathering etc., although the length and severity of these measures differed between markets. In local markets, we found ways to support our on-trade customers. These included support for developing on-line delivery and take-away platforms, and encouraging consumers to return to their on-trade outlet by donating free draught beer. OFF-TRADE The impact on the off-trade varied significantly between markets, depending on government actions and their influence on consumer behaviour. In some markets, off- trade volumes grew by double-digit percentages, while other markets saw double-digit-percentage decline. CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 13 Overall, off-trade volumes increased, though not enough to offset the volume decline in the on-trade. E-COMMERCE During the year, we saw rapid acceleration on e-commerce and digital platforms. Our third-party e-commerce sales were up by approximately 60%, with particularly strong growth in Asia. SUPPORTING OUR PEOPLE During the year, our people worked under very difficult circumstances, whether at our breweries, in sales or from home. A total of 1,756 COVID- 19 cases were recorded among our 40,000 or so employees. Very sadly, five employees died from the infection. Our first priority was to protect the physical health of our people. In order to minimise the risk of infection, we implemented several initiatives. At the breweries, these included working in shifts and expanding the use of protective equipment. At our offices, we put in place rigorous procedures to minimise the risk of infection, and many employees worked from home. within the leadership team, setting priorities and aligning objectives across markets and functions. For the many employees required to work remotely, we offered virtual training and tools to help them cope with the new challenges. We intensified the top management communication by introducing regular CEO video messages on the intranet, virtual townhalls and fireside chat with the Executive Committee. SUPPORTING COMMUNITIES During the crisis, it was very important for us to support and contribute to the communities as best as we could. In local markets, our businesses engaged in the production of hand sanitiser, donated protective and testing equipment and alcohol-free beverages to healthcare workers, and made financial donations to local organisations. In addition, our largest shareholder, the Carlsberg Foundation, made donations amounting to more than DKK 100m to support COVID-19- related research, culture and civil society. Our second priority was to strengthen communication and safeguard the mental wellbeing of our people. We strengthened and increased our overall communication, including SECURING THE FINANCIAL HEALTH OF THE BUSINESS Group volumes were down organically by 3.8% and revenue/hl was -5%. The former was due to declines in Western Europe and Asia, while the latter was impacted by channel mix due to the decline in the on-trade as well as channel shift within the off-trade, increased demand for multipacks and mainstream brands, and country mix characterised by growth in markets with lower-than-average price levels. Responding to the impact of COVID- 19 on revenue, significant changes were implemented to safeguard the financial health of our company, both in terms of protecting the year’s results and cash, and ensuring that we will be able to capture long-term growth opportunities. SAFEGUARDING OPERATING PROFIT As early as January, we started taking steps to reduce costs. In the supply chain, we reduced the production planning cycle from one month to 1-2 weeks and the number of SKUs to increase flexibility in the light of unpredictable supply and demand. This led to sharper focus, less complexity and larger batch sizes. We reinforced our Funding the Journey culture, accelerated efficiencies and initiated further cost reductions. A key enabler was our well-embedded Operating Cost Management (OCM) toolkit, with 15 specific cost groups for which we rigorously initiated actions and monitored savings and gap-closing progress. Our early actions led to significant cost reductions during the year, with savings achieved in almost all cost groups, including professional services, travel, entertainment, people and marketing spend. Some savings will be permanent, while others, including marketing, will not. Our many actions limited the organic decline in operating profit to 3.1%. Notwithstanding COVID-19, our long-term strategic priorities and ambitions remain intact, and we continued to support and invest in our brands and activities to safe- guard the long-term health of the Group and our growth opportunities. PROTECTING CASH AND LIQUIDITY To protect cash flow and secure strong liquidity and financial flexibility, the Group implemented several initiatives, such as further stepping up our trade working capital management and reducing or deferring capital expenditures. In March, we established a new short-term bank credit facility, and in March and June respectively we issued two bonds at very attractive rates. Read about our financial performance, cash and liquidity on pages 15-17. Our strong balance sheet, combined with the measures taken to protect cash and liquidity during the crisis, meant that the Group’s financial position remained very strong throughout the year and that we were able to engage in M&A transactions despite the COVID-19 headwind. PREPARING FOR THE REBOUND The future remains uncertain, including the longer-term impact on the global economy and consumer spending. For the beer industry, the longer-term impact on the on-trade is uncertain, as are longer-term changes in consumer preferences in terms of channels, brands and price points. While our SAIL’22 strategy (see pages 30-35) remains unchanged, we reshaped and reoriented our organisation and plans to allow us to meet the known and unknown challenges we will face going forward. RESPOND FOR TOP-LINE GROWTH We will respond to the challenges ahead of us by sharpening our focus and building increased flexibility into our planning. We are prioritising fewer brands and activities. Within core beer, we are intensifying the focus on our local power brands and international premium brands, such as Carlsberg and Tuborg. With respect to innovation, we are targeting our efforts towards more focused and efficient initiatives. CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 14 Using our value management approach, we will ensure that we hit the right price points. We are working with and supporting the on- trade to prepare for the new reality. In addition, we are investing in and expanding our e-commerce activities. RESET FOR THE FUTURE Recognising the need to reset, we initiated a review of our total cost base towards the end of the year. This led to a significant reduction in costs in our central, regional and support functions as well as in the supply chain. Unfortunately, this meant that we had to depart with valued colleagues. In our markets, we are ensuring the right structures to accommodate a potentially smaller on-trade and changes within off-trade subchannels. We also scrutinised all other non- essential spending and anticipate targeted reductions going forward. The learnings from the COVID-19 pandemic, including a high degree of flexibility, rapid adaptation to sudden and very new challenges, and new ways of working, have been positive. We are taking steps to ensure that these learnings are embedded in our future ways of working. +8% 1664 BLANC VOLUME GROWTH Despite COVID-19, in 2020 we continued to invest in our key strategic priorities, including the launch of a new global communication platform for 1664 Blanc – Good Taste with a Twist – in order to invigorate this iconic French speciality beer. The campaign modernises the brand’s premium credentials and realigns it with its French heritage. Recognising COVID- 19’s impact on consumers’ lives, an online video series, Chef at Home, was a key part of the new platform. The videos were produced to elevate stay-at-home moments by offering tasty yet simple recipes inspired by French cuisine but with a twist. When developing the campaign, our central team liaised with the brand’s largest markets, including China and Russia. 1664 Blanc grew strongly in both markets. GROW CRAFT & SPECIALITY GROUP MARGIN IMPROVEMENT AND STRONG CASH FLOW CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 15 2020 was a challenging and very volatile year for the Group, significantly impacted by the COVID-19 pandemic. As a result of the high level of volatility and uncertainty during the year, we had to suspend the full- year guidance in April and did not issue new guidance until August, after which we issued two earnings upgrades. See table on the right- hand side. VOLUMES Group beer volumes were 110.1m hl, declining organically by 2.8%, as they were impacted by COVID-19 in most markets. Non-beer volumes were 20.0m hl, declining organically by 8.7%. In addition to COVID-19, non-beer volumes were impacted by lower sales of soft drinks at the German/Danish border. INCOME STATEMENT Revenue was DKK 58.5bn. Organic decline was 8.4%. Revenue per hl declined organically by 5%. Price/mix was negatively impacted by country, channel, product and packaging mix, and in Russia by higher promotions. Reported revenue declined by 11.2% due to currencies, mainly related to the Russian, Norwegian and Chinese currencies. Gross profit was DKK 28.4bn. The organic decline was 10%, while COGS per hl improved organically by 3%, positively impacted by efficiencies and country and product mix. The gross margin declined by 110bp to 48.4%, as supply chain efficiencies were not enough to offset the under-absorption of fixed costs and the channel and product mix. The gross margin was also impacted by country mix. Total volumes declined organically by 3.8%, while reported decline was 3.6% due to the acquisition of Marston’s brewing activities in the UK in October. Operating expenses declined organically by 14% as a result of tight cost control enabled by our Operating Cost Management toolkit. The main areas in which costs fell were marketing, travel, supply chain and employee-related costs. Reported operating expenses as a percentage of revenue declined by 200bp to 32.2%. Excluding marketing expenses, operating expenses declined organically by 13%. Operating profit before depreciation, amortisation and impairment losses (EBITDA) declined by 2.4% organically and in reported terms by 6.1%. The EBITDA margin improved by 130bp to 24.1%. Operating profit declined organically by 3.1%. We saw solid growth in Asia and Eastern Europe, while operating profit declined in Western Europe. Reported operating profit was DKK 9.7bn, corresponding to a decline of 7.3%. The reported operating margin improved by 70bp to 16.6%. Earnings expectations 2020 Date 4 February 2 April 13 August 17 September 27 October Volume (million hl) Beer Non-beer Total volume DKK million Revenue Operating profit before special items Operating margin (%) Expectation for operating profit Mid-single-digit percentage organic growth Guidance suspended Organic decline of 10-15% High-single-digit percentage organic decline Mid-single-digit percentage organic decline Change 2019 113.0 21.9 134.9 Organic Acq., net -2.8% -8.7% -3.8% 0.2% 0.0% 0.2% FX - - - 2020 110.1 20.0 130.1 Change Reported -2.6% -8.7% -3.6% 65,902 10,465 15.9 -8.4% -3.1% 0.3% -0.3% -3.1% -3.9% 58,541 9,699 16.6 -11.2% -7.3% 70bp CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 16 Section 1 in the consolidated financial statements contains more details on operating activities. Net special items (pre-tax) amounted to DKK -247m (2019: DKK +501m). Special items were positively impacted by reversal of provisions made in purchase price allocations in previous years, offset mainly by restructuring costs, including costs related to the Reset for the future initiative (see page 14), and impairment of brands, including the Angkor brand in Cambodia. Special items were also impacted by one-off costs related to COVID-19, including safety measures and donations. Read more about net special items in section 3.1 in the consolidated financial statements. Financial items, net, amounted to DKK -411m against DKK -738m in 2019. Excluding currency gains and losses, financial items, net, amounted to DKK -550m (2019: DKK -650m), positively impacted by lower other financial expenses. Currency gains were mainly related to USD/EUR deposits in Eastern Europe. Read more about net financial items in section 4.1 in the consolidated financial statements. Tax totalled DKK -2,233m against DKK -2,751m in 2019. The effective tax rate of 24.7% was positively impacted by the net impact of tax- exempt and non-deductible special items. Excluding these, the effective tax rate would have been 25.7%. Read more about tax in section 6 in the consolidated financial statements. Non-controlling interests were DKK 778m (2019: DKK 908m), mainly impacted by challenging market conditions in Malaysia and the new Carlsberg Marston’s Brewing Company in the UK, of which the Group owns 60%. Read more about non-controlling interests in section 5.3 in the consolidated financial statements. The Carlsberg Group’s share of consolidated profit (net profit) was DKK 6,030m against DKK 6,569m in 2019. The decline was due to lower operating profit and special items, partly offset by lower financial expenses, net, and the lower tax rate. Adjusted net profit (adjusted for special items after tax) was DKK 6,363m (2019: DKK 6,160m). STATEMENT OF FINANCIAL POSITION ASSETS Total assets amounted to DKK 118,816m at 31 December 2020 (31 December 2019: DKK 123,063m). The decline was mainly due to lower intangible assets, property, plant and equipment and trade receivables, partly offset by an increase in cash. Intangible assets amounted to DKK 66,061m at 31 December 2020 (31 December 2019: DKK 70,027m). The decline was mainly due to the depreciation of currencies in Eastern Europe and Asia. Property, plant and equipment totalled DKK 26,299m (31 December 2019: DKK 27,607m). The decline of DKK 1,308m was primarily due to depreciation, lower CapEx and currencies. Current assets amounted to DKK 18,996m (31 December 2019: DKK 17,948m). Trade receivables declined by DKK 1,614m, mainly attributable to lower sales due to COVID-19 and higher provisions for bad debt. Inventories of DKK 4,613m were slightly below last year (31 December 2019: DKK 4,751m). Cash and cash equivalents amounted to DKK 8,093m (31 December 2019: DKK 5,222m), positively impacted by the two EUR 500m bonds issued in March and June respectively. Section 2 in the consolidated financial statements contains more details on assets. EQUITY AND LIABILITIES Equity Equity amounted to DKK 43,362m at 31 December 2020 (31 December 2019: DKK 46,034m), DKK 39,308m of which was attributed to shareholders in Carlsberg A/S and DKK 4,054m to non-controlling interests. financial statements contains more details on borrowings. The net change in equity of DKK -2,672m was explained by the consolidated profit of DKK 6,808m, non-controlling interests of DKK 3,758m, which were impacted by fair value adjustments of contingent considerations, and acquisition of entities of DKK 1,027m, offset by the dividend payout, including non- controlling interests of DKK - 3,898m, the share buy-backs of DKK -2,900m and foreign exchange adjustment in other comprehensive income of DKK -7,640m. Liabilities Total liabilities were DKK 75,454m against DKK 77,029m at 31 December 2019. The decline was impacted by lower trade payables and other liabilities. Long- and short-term borrowings increased by DKK 5,259m compared with 31 December 2019. The increase was due to the issuance of two EUR 500m bonds in March and June respectively. At 31 December 2020, long-term borrowings were DKK 29,291m (31 December 2019: DKK 20,879m) and short-term borrowings were DKK 959m (31 December 2019: DKK 4,112m). Section 4 in the consolidated Tax liabilities, retirement benefit obligations etc. were DKK 17,714m (31 December 2019: DKK 22,839m). The decline was mainly due to fair value adjustments of contingent considerations. Current liabilities excluding short- term borrowings decreased to DKK 27,490m (31 December 2019: DKK 29,199m). Trade payables declined by DKK 551m, impacted by currencies partly offset by trade payables acquired in connection with the acquisition of Marston’s brewing activities in the UK. Other current liabilities, excluding deposits on returnable packaging, declined by DKK 889m, impacted by lower bonus accruals and VAT. CASH FLOW Free cash flow amounted to DKK 5,057m versus DKK 9,962m in 2019, mainly impacted by the lower EBITDA, a lower net contribution from the change in working capital and acquisitions. Net cash flow amounted to DKK 3,247m (2019: DKK -331m). The increase from 2019 was mainly due to external financing of DKK 5,060m (2019: DKK -935m), impacted by two bond placings of EUR 500m in March and June and lower non- CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 17 controlling interests of DKK -877m (2019: DKK -2,520m), partly offset by higher dividends of DKK 3,093m paid to shareholders in March (2019: DKK 2,738m) and a lower share buy-back in 2020 of DKK 2,900m compared to DKK 4,100m in 2019. CASH FLOW FROM OPERATING ACTIVITIES Cash flow from operating activities amounted to DKK 10,928m against DKK 12,239m in 2019. EBITDA was DKK 14,085m (2019: DKK 15,007m). The change in trade working capital was DKK +1,321m (2019: DKK +491m), mainly due to strong cash management discipline and lower trade receivables, the latter impacted by lower sales. Average trade working capital to revenue for the year was -18.6% compared to -16.8% for 2019, supported by the lower revenue. The change in other working capital was DKK -1,033m (2019: DKK +634m), mainly impacted by lower VAT payable, change in provisions and a reclassification to trade working capital. Restructuring costs paid amounted to DKK -531m (2019: DKK -445m). Net interest etc. paid amounted to DKK -424m (2019: DKK -894m). The decline was mainly due to the settlement of financial instruments. Corporation tax paid was DKK -1,958m (2019: DKK -2,234m). The decrease versus last year was mainly due to lower earnings. CASH FLOW FROM INVESTING ACTIVITIES Cash flow from investing activities was DKK -5,871m against DKK -2,277m in 2019. Operational investments totalled DKK -3,835m (2019: DKK -2,824m). In 2019, operation al investments were impacted by the disposal of the brewery sites in Norway and Germany. Acquisition of property, plant and equipment and intangible assets (CapEx) amounted to DKK -4,396m (2019: DKK -4,588m). Excluding the purchase of the Brooklyn brand rights, CapEx declined by DKK 1.0bn to DKK 3.6bn due to lower sales CapEx, fewer returnable glass bottles, fewer investments in draught lines, and cancellations or postponements of non-business-critical projects. Total financial investments amounted to DKK -2,036m (2019: DKK +551m). The increase was due to the acquisition of Marston’s brewing activities, the prepayment for the acquisition of Wernesgrüner Brewery and lower dividends received. Read more about the acquisitions in section 5.2 in the consolidated financial statements. RETURN ON INVESTED CAPITAL Return on invested capital (ROIC) improved by 10bp to 8.9%, mainly driven by the lower effective tax rate and supported by lower capital employed. The latter was positively impacted by trade working capital, a lower CapEx/depreciation ratio and currencies. ROIC excluding goodwill improved by 80bp to 23.2%. FINANCING At 31 December 2020, gross financial debt amounted to DKK 30,250m and net interest- bearing debt to DKK 21,263m. The difference of DKK 8,987m mainly comprised cash and cash equivalents of DKK 8,093m. At 31 December 2020, the average duration was 5.6 years. The net interest-bearing debt/EBITDA ratio increased to 1.51x (1.25x at year-end 2019). Read more about net interest-bearing debt in section 4.2 in the consolidated financial statements. Of the gross financial debt, 97% (DKK 29,291m) was long term, i.e. with maturity of more than one year from 31 December 2020. To secure continued strong liquidity and financial flexibility, we issued a 10-year EUR 500m bond with a coupon of 0.625% on 4 March and a 7-year EUR 500m bond with a coupon of 0.375% on 16 June. 81% of the net financial debt was denominated in EUR and DKK (after swaps). Read more about our funding and liquidity in section 4.7 in the consolidated financial statements. SHARE BUY-BACKS 2019 PROGRAMME In January 2020, the Group bought 393,501 shares under the share buy-back programme initiated in 2019. The total purchase price amounted to DKK 0.4bn. 2020 PROGRAMME In 2020, the Group carried out a share buy-back programme amounting to DKK 2.5bn. The Group bought 2,897,021 shares at an average repurchase price of DKK 863 per share, in total DKK 2.5bn. Read more about the share buy- back programmes, including the 2021 programme, on page 26. WESTERN EUROPE A YEAR OF VOLATILITY AND UNCERTAINTY CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 18 Western Europe had a volatile year. COVID-19 severely impacted results in Q2 and Q4, while Q3 brought some relief due to fewer restrictions during the summer months. Western Europe is our largest region, accounting for almost half of our operating profit. We are the second largest brewer in the region, with a particularly strong presence in the central and northern parts, where we hold no. 1 and 2 positions in several markets. In the Nordic markets, we are mainly competing against local or regional players. Elsewhere, we are in competition with large global players. Our Western Europe region also includes our global export and licence business. REGIONAL RESULTS The Western Europe region had a challenging and volatile year. The region delivered strong results in Q3, including beer volume growth supported by favourable weather, while Q2 and Q4 were challenging, with declining volumes due to restrictions and lockdowns, which particularly impacted the on-trade channel. Beer volumes declined organically by 4.8%, while the organic decline in total volumes was 7.3%. The decline in non-beer volumes was due to the lost German/Danish border trade from 1 January 2020, compounded by the impact from on-trade closures. The positive acquisition impact of 40bp came from the acquisition of Marston’s brewing activities, which was consolidated from the end of October. Revenue/hl was reduced organically by 6%, impacted in all markets by channel mix and, for the region, by country mix. Revenue declined organically by 12.8%, while reported revenue declined by 13.1% due to a negative currency impact, mainly related to the Norwegian krone, Volume (million hl) 2019 Organic Acq., net FX 2020 Reported Change Change Beer Non-beer Total volume DKK million Revenue Operating profit before special items Operating margin (%) 46.6 15.3 61.9 -4.8% -14.9% -7.3% 0.5% 0.0% 0.4% - - - 44.6 13.0 57.6 -4.3% -14.9% -6.9% 36,317 6,187 17.0 -12.8% -17.2% 0.6% -0.6% -0.9% -1.5% 31,547 4,993 -13.1% -19.3% 15.8 -120bp partly offset by the stronger Swiss franc. We achieved significant cost savings within supply chain, logistics, marketing and administration, though these savings were insufficient to cover the revenue decline. Operating profit therefore declined organically by 17.2%. The development was particularly bad in Q2 and Q4 due to the severe COVID-19-related market situation. The operating margin was 15.8% (-120bp). Some markets delivered good operating margin improvement, though this was offset by the significant headwinds in some markets. THE NORDICS Our Danish off-trade volumes grew, though not enough to compensate for lower on-trade and border volumes. Mainly due to the change to German/Danish border trade in soft drinks from 1 January 2020, total volumes in Denmark declined by more than 25%. Excluding the lost border trade, volumes declined by mid-single-digit percentages due to restrictions and lockdowns. Our Norwegian business delivered solid double-digit-percentage volume growth, supported by good weather during the summer, domestic tourism and less border trade in Sweden due to the closure of the border. Our local power brand Frydenlund, Tuborg and craft & CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 19 Consumption characteristics Our position Our operations Per capita beer consumption (litres) On-trade share of market, approx. (%) Market position (no.) Market share¹ (%) Breweries² 58 46 47 70 99 30 52 56 93 62-85 35 25-71 53 20 12 17 9 11 16 27 25 15 2-4 21 8-39 51 1 1 1 1 3 2 1 4 14 1-2 4 1-3 1 53 26 50 41 19 25 38 13³ 184 27-40 6 16-41 48 1 1 1 1 3 1 1 4 35 2 1 6 1 Our markets in Western Europe Markets Denmark Sweden Norway Finland Poland France Switzerland UK Germany The Baltics Italy South East Europe Portugal ¹ Sept. 2020 MAT. ² Breweries with capacity above 100,000 hl. ³ Including Marston’s. 4 Northern Germany. 5 Including Wernesgrüner Brewery. Source: Carlsberg estimates. TOTAL VOLUME (m hl) REVENUE (DKKbn) OPERATING PROFIT (DKKbn) OPERATING MARGIN 68 64 60 56 52 48 40 36 32 28 24 20 2017 2018 2019 2020 2017 2018 2019 2020 7 6 5 4 3 2 20% 18% 16% 14% 12% 10% 2017 2018 2019 2020 2017 2018 2019 2020 speciality performed particularly well. Despite the Swedish government imposing less restrictive COVID-19 measures than most other countries, the on-trade channel was nevertheless negatively impacted. Coupled with the decline in the Norwegian border trade, our volumes were down by high-single- digit percentages. FRANCE In France, our business had a challenging year, with volumes declining by double-digit percentages. The on-trade channel was severely impacted by restrictions and lockdowns in Q2 and Q4. In addition, our brewery in Obernai was unable to run at normal capacity utilisation in H1 due to COVID-19 constraints, negatively impacting our promotional activities in the off-trade and market share. In H2, volumes and market shares improved following a normalisation of the supply chain and our promotional activities. SWITZERLAND Our business in Switzerland saw solid volume growth in the off-trade, but as the business is skewed towards the on-trade channel, total volumes were severely impacted by the lockdowns, declining by double-digit percentages. The brand mix was positive due to growth of local and international craft & speciality brands and alcohol-free beverages. POLAND In Poland, we delivered solid revenue growth due to volume growth and positive price/mix. Although the beer market declined slightly, it was less impacted by COVID-19 than most other Western European markets due to a relatively small on-trade channel. Our craft & speciality, with brands such as Somersby and Zatecky, and alcohol-free brews, especially within the flavoured subcategory, did particularly well. THE UK In the UK, our off-trade volumes grew. Due to the prolonged lockdown of the on-trade, total volumes declined by high-single- digit percentages. In May, the Group announced the acquisition of Marston’s brewing activities in the UK. The transaction was completed at the end of October and the integration is progressing well. OTHER MARKETS In Germany, our volumes were flat for the year. In December, we announced the acquisition of Wernesgrüner Brewery, the integration of which was concluded already in January 2021. CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 20 Markets such as Greece and Italy, being highly dependent on the on- trade and tourism, were severely impacted by the pandemic. Our Bulgarian business performed well, growing volumes in a declining market. The local power brand Pirinsko and craft & speciality brands such as Somersby and Zatecky Gus saw strong growth. ENGAGING IN M&A During the year, we strengthened our footprint in Western Europe through the acquisitions of Marston’s brewing activities in the UK, Wernesgrüner Brewery in Germany and the rights to the Brooklyn brand in all our markets across our three regions. In the UK, the new combined business, of which Carlsberg owns 60%, will significantly strengthen our business. Carlsberg Marston’s Brewing Company has a strong portfolio of international, national and regional beer brands within lager and ale that brings our customers a wider choice. The business will also benefit from the extended distribution to the Marston’s pub estate. In addition, the merger will result in substantial revenue and cost synergies. STRENGTHEN THE CORE ASIA STRONG PERFORMANCE The impact of COVID-19 differed significantly between our Asian markets. The important Chinese market recovered well during the year, contributing to the solid regional performance. The importance of Asia for the Group has increased significantly over the past decade, during which we have expanded our presence in the region organically and through acquisitions. Today, we have an attractive overall position, with no. 1 and 2 positions in six markets. China is the Group’s largest market in terms of volume, revenue and operating profit. The competitive landscape varies significantly between markets, with global players and local brewers both present. SAIL’22 specifically targets Asia as a key contributor to the Group’s top- and bottom-line growth, with premiumisation a key element, driven by both our international brands and premiumisation of our local power brands. Consequently, a significant proportion of our SAIL’22 investments is allocated to the region. REGIONAL RESULTS The development in Asia varied significantly between markets and during the year. Our Chinese business was severely impacted by COVID-19 in Q1, but rebounded in Q2. The other markets in the region were impacted slightly later, with a significant negative impact seen in Q2. A few markets have since experienced some degree of rebound, though the situation towards the end of the year remained challenging in most markets. Total volumes declined organically by 5.9%, as the recovery in China could not offset the market declines elsewhere in the region. Revenue/hl grew by 1%, curbing the decline in organic revenue to 5.0%. Revenue/hl was mainly impacted by CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 21 Volume (million hl) Beer Non-beer Total volume DKK million Revenue Operating profit before special items Operating margin (%) 2019 37.2 4.8 42.0 Organic Acq., net -6.7% -0.2% -5.9% 0.0% 0.0% 0.0% Change FX - - - Change Reported -6.7% -0.2% -5.9% 2020 34.8 4.8 39.6 18,416 3,931 21.3 -5.0% 5.0% 0.0% 0.0% -2.9% -3.5% 16,959 3,991 23.5 -7.9% 1.5% 220bp CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 22 Our markets in Asia Markets China Laos India Vietnam Cambodia Malaysia Nepal Myanmar Singapore Hong Kong Consumption characteristics Our position Per capita beer consumption (litres) On-trade share of market, approx. (%) 23 48 2 42 53 6 3 7 20 19 38 42 20 43 14 45 62 34 41 27 Market position (no.) Market share¹ (%) 5/1³ 1 7/65³ 95 3 4 4 2 1 4 2 1 15 8 5 43 60 9 24 29 Our operations Breweries² 25 2 8 1 1 1 1 1 - - ¹ Sept. 2020 MAT. ² Breweries with capacity above 100,000 hl. ³ Total China/western China. Source: Carlsberg estimates. country and channel mix. Reported revenue declined by 7.9% due to the devaluation of most Asian currencies against DKK. The cost mitigation actions in Asia were substantial and very successfully executed. Consequently, operating profit grew organically by 5.0% and the operating margin improved strongly, by 220bp to 23.5%. Marketing investments as a percentage of revenue for the full year were slightly down year on year, but with a significant difference between H1 and H2. In H1, we reduced marketing investments early on to mitigate the COVID-19 impact, while in H2 investments were back at the level we believe is required to sustain long-term sustainable growth in our Asian business. CHINA Our Chinese business performed very well in a highly volatile environment. Following a very challenging Q1 in which China was impacted by COVID-19, the business rebounded in Q2, and as a result our full-year volumes grew modestly, while the overall market declined. The key drivers for the year were expanded distribution of the Wusu brand outside its home province, solid growth of our premium brands and continued big city growth. Despite the negative channel mix resulting from the change from traditional off-trade to modern off- trade, revenue/hl increased by high- single-digit percentages due to strong growth of premium brands, and further enhanced in Q4 by strong growth of the Wusu brand TOTAL VOLUME (m hl) REVENUE (DKKbn) OPERATING PROFIT (DKKbn) OPERATING MARGIN 50 44 38 32 26 20 20 16 12 8 4 0 5 4 3 2 1 0 25% 23% 21% 19% 17% 15% 2017 2018 2019 2020 2017 2018 2019 2020 2017 2018 2019 2020 2017 2018 2019 2020 CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 23 outside its home province and the change in discount accruals. approximately 40% in India and approximately 50% in Nepal. VIETNAM, LAOS AND CAMBODIA In a highly volatile Vietnamese market impacted by the pandemic, compounded by severe flooding in the central part of the country – our stronghold – in Q4, our volumes declined by mid-single-digit percentages. Our local power brand Huda continued to perform well. In Laos, our total volumes declined slightly as growing soft drinks volumes largely compensated for lower beer and water volumes. The The Material Asset Restructuring of our Chinese assets was concluded in December, following which most of the Group’s Chinese assets and those of Chongqing Brewery Company (CBC) are now owned by Chongqing Jianiang Brewery Co. (Jianiang). Jianiang is owned 49% directly by the Carlsberg Group and 51% by CBC, the latter being listed on the Shanghai Stock Exchange. Carlsberg is the controlling shareholder in CBC, owning 60% of the shares. Consequently, Carlsberg’s total economic interest in Jianiang following the restructuring is 79%. INDIA AND NEPAL 2020 was a very challenging year for our businesses in India and Nepal, where the beer markets were significantly impacted by government lockdowns and restrictions. In both markets, our breweries were forced to close during Q2 and distribution was severely restricted or even prohibited. The situation improved slightly in H2, but volumes remained depressed. Consequently, full-year volumes declined significantly, by market was impacted by COVID-19 in H1, but recovered from May onwards. Lack of tourists in the country continues to impact the on- trade sector. Cambodia was impacted by restrictions and a significant decline in tourism. In addition, our beer volumes declined, especially at the beginning of the year. While we continued our work on rebuilding the business, the additional challenges brought by COVID-19 led us to revalue the Angkor brand, resulting in an impairment charge. Volumes grew in Q4, mainly driven by the soft drinks business, in spite of new COVID-19 outbreaks and restrictions in December. MALAYSIA AND SINGAPORE Malaysia was negatively impacted by restrictions related to the on- trade, distribution and production, the last of these leading to a closure of our brewery in Q2. In Singapore, our volumes declined modestly while a change in channel mix, due to on-trade restrictions, impacted price/mix negatively. TUBORG IN CHINA Since its launch in 2012, Tuborg has been on a remarkable journey in China. Targeting young adult Chinese consumers, the brand has successfully positioned itself as the favourite beer for high-energy social explorers, and today Tuborg is the second largest international beer brand in China. With sales skewed to the on-trade, our big city expansion has been an important growth driver in recent years, with around half of brand volumes now sold outside our stronghold in western China. To ensure the continued relevance of the brand, we launched Tuborg White in 2019 and Tuborg Pure Draft in 2020. From 2015 to 2019, Tuborg delivered strong growth of around 10% CAGR, while in 2020 volumes were flat due to the challenges of COVID-19. GROW IN ASIA EASTERN EUROPE SUCCESSFUL BUSINESS RESET The Eastern Europe region was less impacted by COVID- 19 due to low on-trade exposure. Responding to the promotional pressure in Russia, we successfully grew volumes and strengthened our market share. Eastern Europe is our smallest region, accounting for around one- fifth of operating profit. Our two main markets in the region are Russia and Ukraine, accounting for 67% and 20% respectively of regional volumes. We have no. 1 or 2 positions in all markets in Eastern Europe. In Russia and Ukraine, the competitive environment is split between a strong presence of global players and a large number of small, local brewers. In light of the relatively small size of the region, from 1 January 2021 the region has been expanded to include some of the former Western Europe markets and our export and licence business, changing its name to Central & Eastern Europe. See page 9. REGIONAL RESULTS In Eastern Europe, the impact of COVID-19 was relatively modest due to low on-trade exposure. However, particularly towards the end of the year, markets were negatively impacted by a change in channel, customer and product mix as a result of weakening consumer confidence. All markets, with the exception of Ukraine, delivered total volume growth for the year. For the region, beer volumes grew organically by 5.3%. Non-beer volumes grew strongly by 22.6%, mainly due to growth of energy drinks across the CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 24 Volume (million hl) Beer Non-beer Total volume DKK million Revenue Operating profit before special items Operating margin (%) 2019 29.2 1.8 31.0 Organic Acq., net 5.3% 22.6% 6.2% 0.0% 0.0% 0.0% Change FX - - - Change Reported 5.3% 22.6% 6.2% 2020 30.7 2.2 32.9 11,097 1,882 17.0 1.0% 10.9% 0.0% 0.0% -10.8% -9.0% 10,010 1,917 19.2 -9.8% 1.9% 220bp region. Total volumes were up organically by 6.2%. activities in Russia to regain some of the market share lost in recent years. Revenue grew organically by 1.0%. Revenue/hl of -5% was impacted by the higher level of promotional The region delivered strong organic operating profit growth of 10.9%, driven by strong performance in all markets outside Russia. The operating margin increased by 220bp to 19.2%. We achieved significant cost savings across the region. Combined with a favourable development in costs of goods sold, Our markets in Eastern Europe Market Russia Ukraine Belarus Kazakhstan Azerbaijan Consumption characteristics Our position Our operations Per capita beer consumption (litres) On-trade share of market, approx. (%) 57 40 52 32 5 10 8 5 5 44 Market position (no.) Market share¹ (%) Breweries² 2 2 1 2 1 27 30 32 40 76 8 3 1 1 1 ¹ Sept. 2020 MAT. ² Breweries with capacity above 100,000 hl. Source: Carlsberg estimates. CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 25 we were able to more than offset the impact of the high level of promotional investments in Russia. level of promotions and a negative channel and packaging mix. RUSSIA The Russian beer market grew slightly in 2020 despite COVID-19, due to a relatively small on-trade channel and supported by very favourable weather during the summer. The competitive environment remained challenging. t the end of Q1, we kicked off our changed commercial priorities with the aim of turning around the volume trajectory and restoring our market share. For the year, volumes grew by 9%. Revenue/hl declined by high-single- digit percentages due to the higher UKRAINE In Ukraine, our volumes declined slightly, largely in line with the market. Revenue/hl developed negatively, mainly due to channel and brand mix, and a higher level of promotions. Our local mainstream brands, 1664 Blanc and alcohol-free brews did well, while Carlsberg and Tuborg were impacted by the restrictions imposed on the on-trade. OTHER MARKETS The other markets in the region – Kazakhstan, Belarus and Azerbaijan – delivered double-digit revenue growth driven by solid volume growth and improved revenue/hl due to price increases and growth of craft & speciality and alcohol-free brews. TOTAL VOLUME (m hl) REVENUE (DKKbn) OPERATING PROFIT (DKKbn) OPERATING MARGIN 35 31 27 23 19 15 15 12 9 6 3 0 2017 2018 2019 2020 2017 2018 2019 2020 2.5 2.0 1.5 1.0 0.5 0.0 25% 20% 15% 10% 5% 0% 2017 2018 2019 2020 2017 2018 2019 2020 CAPITAL ALLOCATION CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 26 OPTIMAL CAPITAL ALLOCATION AND VALUE-ENHANCING ACQUISITIONS SAIL’22 has clear priorities for how we intend to deliver shareholder value: by growing operating profit organically, improving return on invested capital and ensuring optimal capital allocation. Our capital allocation principles are well defined: 1. Investing in our business to drive long-term sustainable growth. 2. Targeting NIBD/EBITDA of below 2.0x. 3. Targeting an adjusted payout ratio of around 50% (adjusted for special items after tax). 4. Distributing excess cash to shareholders through share buy-backs and/or extraordinary dividends. 5. Deviating from the above if value-enhancing acquisition opportunities arise. DELIVERING ON CAPITAL ALLOCATION PRINCIPLES Despite the headwind posed by COVID-19, we delivered on these priorities again in 2020. DRIVING LONG-TERM GROWTH Responding to the impact of COVID- 19 on revenue, significant changes were implemented to safeguard the financial health of our company, both in terms of protecting the year’s results and cash, and ensuring that we will be able to capture long-term growth opportunities. Consequently, we continued to support and invest in our brands and activities. Examples include the launch of Tuborg line extensions in China (see page 23) and the launch of a new global communication platform for 1664 Blanc (see page 14). LEVERAGE Due to our efforts to protect operating profit and cash in 2020, net interest- bearing debt to EBITDA at the end of the year was 1.51. This leverage was achieved even though we carried out share buy- backs, in total amounting to DKK 2.9bn, and completed several M&A transactions during the year. DIVIDEND PAYOUT In March, we paid out a dividend of DKK 21 per share, equal to a 17% increase on the previous year. In total, the dividend amounted to DKK 3.1bn, corresponding to an adjusted payout ratio of approximately 50%, in line with our dividend policy. As a result of the continued low financial leverage, at the Annual General Meeting in March the Supervisory Board will propose an increase in dividend of 5% to DKK 22 per share. This corresponds to an adjusted payout ratio of 50%. SHARE BUY-BACK IN 2020 From February to August, the Group carried out a share buy-back programme amounting to DKK 2.5bn, following the announcement on 4 February 2020 outlining the intention to buy back shares worth DKK 5bn over a 12-month period. The buy-back programme was to be split into two tranches of around six months each. Under the first tranche, the Group bought 2,897,021 shares at an average repurchase price of DKK 863 per share, in total DKK 2.5bn. Due to M&A activities and the continued uncertainty related to COVID-19, the second DKK 2.5bn tranche of the buy-back was not initiated. Combined with the share buy-back in January 2020 related to the 2019 share buy-back programme, 3,290,522 B shares were repurchased in fiscal 2020 at a total purchase price of DKK 2.9bn. At the Annual General Meeting on 15 March 2021, the Supervisory Board will recommend that 2,900,000 treasury shares not used for hedging of incentive programmes be cancelled. SHARE BUY-BACK IN 2021 Due to the continued business uncertainty related to the COVID-19 pandemic, especially at the beginning of 2021, the Group intends to execute the 2021 share buy-back programme quarter by quarter. Consequently, from 5 February until 23 April, the Group intends to buy back Carlsberg B shares amounting to DKK 750m. On 28 April, in connection with the Q1 trading statement, we will provide information on the next quarterly share buy-back in 2021. More information regarding the share buy-back can be found in the 2020 financial statement announcement of 5 February 2021. VALUE-ENHANCING M&A In addition to the share buy-back, we also engaged in M&A transactions during the year, amounting to DKK 3.2bn in total. In June, we acquired the rights to the Brooklyn brand in our markets. In October, we completed the acquisition of Marston’s brewing activities in the UK (see section 5.2 in the consolidated financial statements), and in Germany we acquired Wernesgrüner Brewery. In China, we merged our Chinese businesses, see page 22. Review and expectations 2021 EARNINGS EXPECTATIONS EARNINGS EXPECTATIONS CARLSBERG GROUP ANNUAL REPORT 2020 REVIEW AND EXPECTATIONS 27 Accordingly, forward-looking statements should not be relied on as a prediction of actual results. Please see page 52 for the full forward- looking statements notice. In most markets, the COVID- 19 pandemic continues to impact business performance, which means a challenging start to 2021. The uncertainty related to the extent and length of the pandemic, further government actions, consumer reactions and macroeconomic developments remains high and may have significant implications for business performance. As a result, 2021 guidance is: • Organic growth in operating profit within the range of 3% to 10%. The earnings outlook is based on the following assumptions related to COVID-19: • In Western Europe, the on-trade channel will likely be impacted by restrictions well into Q2, with a gradual recovery of the on-trade during the quarter. We are assuming that most restrictions will be lifted before the summer season. • In Asia, the impact of COVID-19 varies by market. The Chinese market is assumed to be back to its normal trajectory, though with some local disruptions, including during the Chinese New Year celebrations. In other markets, such as India and Nepal, the situation remains very difficult and highly volatile, though in most markets we are assuming a slow recovery during H1, driven by a gradual lifting of restrictions. • In Central & Eastern Europe , the markets in the southern part of the region, which have relatively higher on-trade exposure, will likely continue to be impacted by restrictions well into Q2, though we are assuming that most restrictions will be lifted before the summer season. In Russia, the on-trade channel is relatively small. However, consumer sentiment is increasingly being impacted by the consequences of the pandemic, and the competitive environment remains fierce. Based on the spot rates at 4 February, we assume a translation impact of around DKK -200m for 2021. Other relevant assumptions are: • Financial expenses, excluding currency losses or gains, are expected to be around DKK 600m. • The reported effective tax rate is expected to be around 25%. • Capital expenditure at constant currencies is expected to be DKK 4.0-4.5bn. Forward-looking statements This Annual Report contains forward-looking statements. Any such statements are subject to risks and uncertainties that could cause the Group’s actual results to differ materially from the results discussed in such forward-looking statements. This is particularly relevant in 2021, due to the very high uncertainty related to the continuing development and impact of COVID- 19. Strategic review PURPOSE AND AMBITION BREWING FOR A BETTER TODAY AND TOMORROW CARLSBERG GROUP ANNUAL REPORT 2020 STRATEGIC REVIEW 28 We pursue perfection every day. We strive to brew better beers. Beers that stand at the heart of moments that bring people together. We do not settle for immediate gain when we can create a better tomorrow for all of us. Our purpose is rooted in our heritage and in the mentality of our founders, who left a rich legacy that still greatly influences how we run our business today. Their pioneering spirit, passion for brewing and proactive contribution to society are what make us who we are. We live our purpose every day by focusing on our brands and the art of brewing, exciting our consumers with quality brews that strengthen our identity and pride as brewers, and by continuously aiming to do better. Our purpose demonstrated its value during the challenges of COVID-19. It was impressive to witness the high level of employee engagement and the innovative mindset at all levels of the organisation to help local communities, support our customers and minimise the impact of the pandemic on our business, while at the same time finding flexible and safe ways of working. We will continue to live our purpose, as it is key for the successful execution of our strategy and achieving our ambition of being successful, professional and attractive in our markets: Successful in achieving a sustainable balance of the Golden Triangle by improving long-term volumes, margins and earnings. Professional in being the preferred supplier for our customers. Attractive in creating value for our shareholders, facilitating a great working environment and high- performance culture for our employees, and being a responsible and sustainable corporate citizen for society at large. BUSINESS MODEL CARLSBERG GROUP ANNUAL REPORT 2020 STRATEGIC REVIEW 29 OUR BUSINESS MODEL ROOTED IN OUR PURPOSE Our business model is rooted in our purpose and ambition. It takes its starting point in our focus on our brands and the art of brewing, how we excite our consumers with quality brews and our continuous striving to do better. WE FOCUS ON THE MARKETS WHERE WE HAVE A NO. 1 OR 2 POSITION... … WHERE WE DELIVER AN ATTRACTIVE BEER PORTFOLIO FOR ALL CONSUMER OCCASIONS... … AND STRIVE TO EXCEL IN OUR SERVICE TO ON- AND OFF-TRADE CUSTOMERS... ... BY OPTIMISING OUR SUPPLY CHAIN AND IMPROVING PROCESSES AND SYSTEMS. Core beer is a volume business, and strong market positions are key drivers of profitability. We have particular focus on the 24 markets in Western Europe, Asia and Eastern Europe where we are no. 1 or 2. The strength of our beer portfolio lies in the strong local roots of our local power brands, combined with our excellent craft & speciality brands, alcohol-free brews and international beer brands. Our customers range from on-trade to off-trade, from online to offline. We aim to become their preferred beer supplier, providing products and services that deliver value growth for them and us. Our integrated supply chain focuses on optimising cost and asset utilisation and mastering cross-functional processes, while brewing high-quality beer and enabling our commercial growth agenda. BREWING FOR A BETTER TODAY AND TOMORROW In all our markets, we aim to lead in sustainability because it is central to our purpose and because we genuinely believe it is the right thing to do – delivering tangible benefits for our business and for society as a whole. BREWING FOR A BETTER TODAY AND TOMORROW Our brands offer us powerful opportunities for communicating with consumers. We use these opportunities to encourage moderate, responsible consumption of our products. We also increase the availability of alcohol-free brews. BREWING FOR A BETTER TODAY AND TOMORROW We develop digital solutions and services to help our customers grow their business. We engage in developing sustainable packaging solutions and launching initiatives to increase collection and recycling rates. BREWING FOR A BETTER TODAY AND TOMORROW Recognising the need for strong actions in the face of complex sustainability challenges, Together Towards ZERO sets clear and ambitious targets for carbon emissions, water usage and health & safety. OUR STRATEGY SHARPENED STRATEGIC FOCUS CARLSBERG GROUP ANNUAL REPORT 2020 STRATEGIC REVIEW 30 While COVID-19 had a significant impact on our business in 2020, our SAIL’22 strategy proved resilient during the pandemic. We introduced our seven-year strategy – SAIL’22 – in 2016. The key elements of SAIL’22 are shown below. The strategic priorities are further outlined in the 2016 Annual Report, available online at www.carlsberggroup.com. into the SAIL’22 period, we continue to see many opportunities within the framework, and we fully expect to keep our strategy for all seven years. STRATEGY REMAINS COVID-19 was a stress-test for SAIL’22 and our strategic priorities, which proved resilient during a very challenging year. Notwithstanding the fact that we are now five years SHARPENING FOCUS Each year, specific opportunities and plans evolve. In addition, COVID-19 made new emphases appropriate. While staying in line with our strategic priorities, we will further sharpen our focus on key brand, category and channel priorities, aspire to even better in-market execution, maintain even tighter control of costs, and develop even more flexibility in our ability to plan and amend plans. This will require us to continuously evolve the way we best achieve our winning, team-based performance culture. On the following pages, we provide further detail on the role and impact of our strategic priorities in 2020. STRENGTHEN THE CORE CARLSBERG GROUP ANNUAL REPORT 2020 STRATEGIC REVIEW 31 The importance of strong market positions, local power brands, execution capabilities and, in particular, our ability to control costs became evident in 2020. CHANGES IN CONSUMER BEHAVIOUR… Across our markets, COVID-19 drove changes in consumer behaviour, with increased demand in the off-trade for more mainstream brands and multipack offerings at the early stages of the pandemic, changing towards a pick-up of demand for more premium offerings later on. In addition, online shopping saw significant growth rates. … EMPHASISED THE IMPORTANCE OF OUR CORE BUSINESS Our focus on strengthening our core business was amplified by the pandemic, as seen by the strength of our local power brands, our improved digital capabilities and, in particular, our well-embedded Funding the Journey culture with its relentless focus on costs and efficiency. STRENGTHEN THE CORE LEVERAGE OUR STRONGHOLDS LEVERAGING LOCAL POWER BRANDS GROWING IN RUSSIA Our local power brands are an important part of our business. These brands have long histories and deep roots in their local markets. Aside from seeing increased interest from consumers looking for more authenticity, we premiumise the local power brands by launching “crafty” line extensions and alcohol-free variants. While results in 2020 were impacted by COVID-19, the resilience of these brands was evidenced by growth brands such as Frydenlund (Norway), Astra (Germany), Pirinsko (Bulgaria), Dali and Wusu (China), Baltika and Zatecky Gus (Russia) and Derbes (Kazakhstan). 2020 was a strong year for our Russian business in terms of volumes and market share. In response to high competition pressure in the market, we took significant promotional actions to protect our volumes and improve our market share. At the same time, we pursued the SAIL’22 growth priorities of craft & speciality and alcohol-free brews and stepped up our commercial capabilities, resulting in volume growth of 9%. FUNDING THE JOURNEY CULTURE OCM AND CASH MANAGEMENT Our Funding the Journey culture, with its focus on costs and cash, played a key role in 2020. As part of this, we have in recent years successfully implemented our Operating Cost Management (OCM) toolkit across the Group, improving our cost planning, increasing transparency and enabling detailed follow-up on operating costs. We began taking actions to offset the negative top-line impact of COVID-19 when the virus hit China very early in 2020. When the disease turned into a pandemic, we intensified our cost reduction actions, successfully leveraging our OCM toolkit, which played a key role in reducing the negative impact on earnings. See pages 13 and 15. EXCEL IN EXECUTION EXPANDING DIGITAL COVID-19 drove a rapid acceleration of e-commerce and digital platforms. Albeit still from a low base, third-party e-commerce sales were up by around 60%, mainly driven by Asia. Carl’s Shop – our B2B e-commerce platform – also showed very good results. The ability to use advanced analytics to tailor the most relevant experience for each on-trade customer helped to grow value per order and strengthen customer loyalty. POSITION FOR GROWTH GROWING CRAFT & SPECIALITY AND ALCOHOL-FREE BREWS DRAUGHTMASTER DRIVING PREMIUMISATION The roll-out of DraughtMaster across Western Europe continued and was almost completed in the Nordics, while trials were initiated in Asia. In 2020, we improved the equipment with a digital layer, delivering unique real- time consumption data. While volumes were impacted by COVID-19 restrictions, these actually served to further highlight the customer advantages of DraughtMaster, with less beer expiring thanks to the 31-day keg life and faster re-opening thanks to the self-cleaning system. DraughtMaster outlets also benefited from a better mix of C&S compared with outlets with traditional steel keg installations. Although growth was hampered by COVID-19, we continued to support the growth priorities of SAIL’22. RESILIENT PERFORMANCE FOR OUR GROWTH CATEGORIES… On-trade is an important channel for the craft & speciality (C&S) category. Despite the severe impact of government restrictions, our C&S portfolio grew by 1%. Our alcohol- free brews (AFB) grew by 11%, with continued growth in Western and Eastern Europe, while the category remained small in Asia. AFB benefited from increasing consumer awareness of health and wellbeing, further amplified by COVID-19. … WHILE MANY MARKETS IN ASIA WERE UNDER PRESSURE All markets in Asia were impacted by COVID-19, albeit at different speeds and magnitudes. Following a difficult Q1, we saw strong performance in China, and we remain confident that the region will rebound once the pandemic has been contained. CARLSBERG GROUP ANNUAL REPORT 2020 STRATEGIC REVIEW 32 WIN IN ALCOHOL-FREE BREWS GROW CRAFT & SPECIALITY GROWING ALCOHOL-FREE BREWS INVESTING IN BROOKLYN Our alcohol-free brews are wide-ranging, including lagers, IPAs and wheat beers. We are targeting new as well as already penetrated consumer occasions, leveraging our core beer and C&S brands to drive growth for our alcohol-free volumes. Poland is a good example of this strategy, with Somersby, Zatecky and Okocim alcohol-free variants all driving local AFB volume growth of 42% in 2020. Our cooperation with Brooklyn dates back to 2004, when we began importing the brand to Denmark. Since then, we have developed a close cooperation with this great New York craft brewer. In 2020, we further strengthened the collaboration when we acquired the rights to the Brooklyn brand in our markets. The deal will reduce complexity and increase profitability, supporting future growth of the brand. CREATE A WINNING CULTURE CARLSBERG GROUP ANNUAL REPORT 2020 STRATEGIC REVIEW 33 2020 was a defining year for our winning culture, passing the test during the immense challenges of the COVID-19 pandemic. Our Sustainability Report contains extensive reporting on our winning culture. It describes our approach and performance in relation to our most material social, environmental and ethical issues, including progress against the four ambitions of our sustainability programme, Together Towards ZERO. The report also elaborates on how we Live by our Compass and conduct our business responsibly, and how we support and develop our team-based performance culture. The Sustainability Report carries an assurance statement by PwC on selected indicators. It serves as our annual Communication on Progress to the United Nations Global Compact and is, as such, our disclosure in accordance with section 99a of the Danish Financial Statements Act. TOGETHER TOWARDS ZERO PROMOTING SUSTAINABLE AGRICULTURE Our business depends on a long-term, sustainable supply of crops, mainly barley and rice. We invest in next-generation crops through the work of scientists at the Carlsberg Research Laboratory. Their ground-breaking efforts include developing high-yielding barley varieties with additional sustainable process benefits, accounting for significant CO2 savings when fully implemented. Novel climate-tolerant varieties are also being developed that offer improved heat tolerance, salinity tolerance and drought resistance. Several promising genetic variants are currently being evaluated in drought trials in Australia and Russia, where we are seeing more than 10% higher yield levels with limited water supply. A specific focus has also been obtaining barley varieties targeting the very fertile soils in Russia, resulting in malting barley varieties with extract levels 1-2 percentage points higher than those of standard elite varieties. TEAM-BASED PERFORMANCE LIVE BY OUR COMPASS ENGAGING WITH EMPLOYEES ZERO TOLERANCE TO HARASSMENT The flexibility, agility and ability of our people to quickly adjust to the new reality that affected all areas of our business is a testimony to the embedding of our team- based, performance-driven culture across all our markets and functions. During the year, our focus was on the physical safety and mental wellbeing of colleagues, and we conducted local pulse surveys to check on employee wellbeing and enable local leaders to respond to COVID-19 challenges and better support their teams. Everyone must be treated with respect in our workplace and we have a zero tolerance approach to bullying, abuse, threats or any form of harassment, whether it be physical, verbal, sexual or psychological. Our Code of Ethics & Conduct protects this value and clearly states the consequences if anyone breaks the rules. We support and encourage anyone who may have experienced harassment to talk to their manager, their manager’s manager or their local HR team – or to report it via our confidential Speak Up line – so we can take action. LIVE BY OUR COMPASS TARGETING BRIBERY AND CORRUPTION We consider any form of bribery to be dishonest, morally wrong and unacceptable. Our Anti-Bribery and Corruption Policy and manuals spell out our zero-tolerance approach and guide employees on what constitutes a bribe and how to deal with specific situations. In 2020, we introduced new online training on anti-bribery and corruption for people in roles such as sales, procurement and finance. Over 19,100 employees completed the course, which includes real-life examples, experiences and dilemmas. TOGETHER TOWARDS ZERO REDUCING WATER WASTE Our dedicated team at the Dazhulin brewery in China has made it its mission to dramatically reduce water waste. Applying best practices from across the Group, it reduced the amount of water used to produce a hectolitre of beer by 18% – from 2.7 to 2.2 hl/hl – in just four months. This brings the brewery close to achieving our 2022 target to explore going below 2.0 hl/hl at sites with high water risk. Saving water also means saving energy, and combined with a move to 100% renewable electricity, the efficiencies almost halved the brewery’s carbon emissions. CARLSBERG GROUP ANNUAL REPORT 2020 STRATEGIC REVIEW 34 TOGETHER TOWARDS ZERO ZERO CARBON FOOTPRINT Our ambitious carbon targets, approved by the Science-Based Targets Initiative, are in line with the latest climate science to limit global warming to 1.5°C. In 2020, we reduced relative brewery carbon emissions by 12%. Since 2015, our relative brewery carbon emissions are down by 39% while our full relative value chain (beer-in-hand) emissions have been reduced by 7%. ZERO WATER WASTE Water is an essential ingredient in our products, and other key ingredients like grains and hops need it to grow. At 2.8 hl/hl in 2020, we have made a 18% improvement in water efficiency from our 2015 baseline. We assessed water risk across 81 of our breweries using WWF's leading Water Risk Filter tool and also used its scenario analysis tool to understand our global water risk in a changing climate. ZERO IRRESPONSIBLE DRINKING Our targets include 100% distribution of alcohol-free brews to expand consumer choice and 100% of our markets to improve on responsible drinking year on year. All our beers and ciders carry messages or icons advising consumers not to drink-drive and not to drink when underage or pregnant. In 2020, ingredients were listed on 99% of our packaging globally, while nutritional information was provided on 67%. ZERO ACCIDENTS CULTURE The health and safety of our people always come first, and we believe all accidents are preventable. We manage key risks through our health and safety management systems, stringent standards, training and compliance with our Life Saving Rules. In 2020, the lost-time accident rate declined to 3.0 from 3.7 in 2019. However, we deeply regret the death of a contract worker in Russia. MEASURING OUR PROGRESS CARLSBERG GROUP ANNUAL REPORT 2020 STRATEGIC REVIEW 35 STRENGTHEN THE CORE AND POSITION FOR GROWTH DELIVER VALUE FOR SHAREHOLDERS GROSS BRAND CONTRIBUTION FROM CORE BEER ORGANIC GROWTH IN OPERATING PROFIT 2018: +6% 2019: +3% 2020: -7% 2018: +26% 2019: +16% 2020: +1% 2018: +15% 2019: +7% 2020: +11% 2018: +15.8% 2019: +23.4% 2020: +5.0% Core beer accounts for 82% of own beer revenue and is key to our 24 no. 1 or 2 market positions. Ensuring continued relevance of our local power brands, including premiumisation, is an important part of the core beer priority of SAIL’22. We measure our success by our ability to grow gross brand contribution from core beer. Impacted by COVID-19, growth in recent years was not repeated in 2020, declining by 7%. WIN IN CRAFT & SPECIALITY Craft & speciality is an attractive category across our regions, driven by global consumer trends of premiumisation, authenticity and heritage. Positively contributing to price/mix and margins, our ambition is to grow the category. The strength of our brands became clear in 2020, when our craft & speciality portfolio volumes grew by 1% despite the negative impact on the important on-trade channel from COVID-19. WIN IN ALCOHOL-FREE BREWS Alcohol-free brews continued to grow in Western and Eastern Europe, further supported in 2020 by increased consumer health awareness due to COVID-19. Our attractive portfolio of alcohol-free brews leverages the well-established market position of our local power brands. In 2020, total volume growth of our alcohol-free brews was 11%, with growth of 16% in Western Europe and 14% in Eastern Europe. GROW IN ASIA In 2020, Asia accounted for 31% of Group volumes and 36% of operating profit. Growing in Asia, and particularly China, is a priority of SAIL’22. China recovered impressively from COVID-19, as did Laos, while markets such as India, Nepal and Malaysia suffered throughout the year. We saw strong growth for 1664 Blanc, while Tuborg was impacted by the severe market decline in India. Operating profit grew organically by 5.0%. Read more about our results in Asia on pages 21- 23. We aim to deliver organic growth in operating profit by delivering top-line growth and margin improvement. In 2020, COVID-19-related lockdowns and restrictions prevented us from continuing the organic growth trajectory of recent years. Our relentless focus on costs and early intervention enabled us to partly offset the top-line decline, containing the organic operating profit decline to 3.1%. 2018: +11.0% 2019: +10.5% 2020: -3.1% ROIC IMPROVEMENT We aim to continuously improve return on invested capital (ROIC) by improving earnings and reducing invested capital. In 2020, ROIC improved by 10bp to 8.9%, mainly driven by the lower effective tax rate and supported by lower capital employed. The latter was positively impacted by trade working capital, a lower CapEx/depreciation ratio and currencies. Excluding goodwill, ROIC increased by 80bp to 23.2%. 2018: +120bp 2019: +70bp 2020: +10bp 2018: 1.29x/2.4bn 2019: 1.25x/6.8bn 2020: 1.51x/6.0bn OPTIMAL CAPITAL ALLOCATION Our capital allocation targets include NIBD/EBITDA of below 2.0x and an adjusted dividend payout ratio of around 50%. At the end of 2020, NIBD/EBITDA was 1.51x. In 2020, the dividend per share was DKK 21. For 2020, the proposed dividend per share is DKK 22, equal to an adjusted payout ratio of 50%. In addition, in 2020 we carried out share buy-backs amounting to DKK 2.9bn in total. Total cash return to shareholders in fiscal 2020 was DKK 6.0bn. Read more about our capital allocation principles and share buy-backs on page 26. ADDRESSING CLIMATE RISKS CLIMATE- RELATED RISKS CARLSBERG GROUP ANNUAL REPORT 2020 STRATEGIC REVIEW 36 Climate change is already affecting our operations and markets. Across our regions, we see its impact through land degradation, spells of hot, dry weather, and intense rainfall. We are working to understand the related risks and opportunities, and to mitigate impact on our business. Our annual Sustainability Report details our approach and performance against the ambitious targets of Together Towards ZERO, and our actions to live up to the ambitious targets of the Paris Agreement on Climate Change to limit the increase in global average temperature to a maximum of 1.5°C. In 2020, we broadened the scope of our climate-related reporting by embracing the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). In the table, we outline the relevant sections for TCFD reporting in this Annual Report and in our Sustainability and Remuneration Reports. Task Force on Climate-related Financial Disclosures (TCFD) reporting recommendations Recommendation Our disclosure in brief Learn more Governance Disclose the organisation's governance around climate- related risks and opportunities. The Supervisory Board has ultimate responsibility for risk management, including climate-related risks. As part of the ongoing review of SAIL'22, the Supervisory Board reviews Together Towards ZERO, including progress towards our sustainability targets. The Executive Committee (ExCom) is responsible for sustainability, including climate change, with the CEO assuming ultimate responsibility. ExCom approves policies and targets for the entire organisation and monitors performance on a quarterly basis. Sustainability measures, including the reduction of carbon and water use, are included in the short-term incentive scheme for the CEO, CFO and other ExCom members. • Risk management framework, page 37. • Overview of Supervisory Board and Audit Committee work and responsibilities, pages 42-44. • Sustainability Report, description of governance, pages 52-53. • Remuneration Report, pages 6-7. Strategy Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation's businesses, strategy and financial planning, where such information is material. Risks Disclose how the organisation identifies, assesses and manages climate-related risks. Together Towards ZERO is an integrated part of our SAIL’22 strategy. It was developed in partnership with global experts using a science-based approach and has emission reduction targets that align with the ambitious goal of the Paris Agreement of a global temperature increase of maximum 1.5°C. Together Towards ZERO’s focus areas and targets are based on a sustainability materiality assessment, updated in 2020, to ensure focus across our business on the most relevant sustainability management topics, risks and opportunities, including carbon emissions and water consumption. From 2021, mid- and long-term risks, including climate-related risks and opportunities, will be reviewed annually at Group level. Every three years, and most recently in 2020, we carried out a materiality assessment to identify the most important sustainability management topics, risks and impacts. In 2020, climate change was among the highest-ranking issues for us to address. Working with WWF, we used the Water Risk Filter scenarios to understand how water risks across our breweries may evolve by 2030 and 2050 and identify priority sites for investments and community partnerships. We also updated our assessment of our beer-in-hand value chain footprint (Scope 1, 2 and 3 emissions) to measure our progress from the 2015 baseline and identify where to focus our efforts. • SAIL’22, Together Towards ZERO, pages 6 and 34. • Sustainability Report, carbon and water sections, pages 10-19 and 20-26. • Sustainability Report, materiality assessment, page 57. • Risk management framework, page 37. • Sustainability Report, carbon and water sections, pages 10-19 and 20-26. • Sustainability Report, materiality assessment, page 57. Metrics and targets Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities, where such information is material. Our annual Sustainability Report discloses our approach, 2022 and 2030 targets, key performance indicators and performance in line with our Together Towards ZERO programme, the UN Sustainable Development Goals and the UN Global Compact. We disclose a comprehensive set of five-year comparable quantitative data for energy, carbon, including Scope 1, 2 and 3 emissions (full Scope 3 data collected every three years), and water. We have also disclosed detailed information to CDP on our greenhouse gas emissions and approach to climate change management since 2007. • Sustainability Report, data summary table, pages 67-73. • Sustainability Report, SDG actions, pages 59-65. MANAGING RISKS MANAGING BUSINESS RISKS In conducting our business and executing our strategy, we seek to manage risks in such a way as to minimise their threats while making the best use of their opportunities. Our business is subject to a number of risks and uncertainties that could have both short-term and long-term implications for the Group. The purpose of our risk management approach is to address these risks and uncertainties in due time. GOVERNANCE STRUCTURE The Supervisory Board is ultimately responsible for risk management, and it has appointed the Audit Committee to act on its behalf in monitoring the effectiveness of the Group’s risk management. While recurring risks are evaluated on a quarterly basis, monitoring is mainly performed in connection with the half-year reviews. The Audit Committee has adopted guidelines for key areas of risk, monitors developments and ensures that plans are in place for managing individual risks, including strategic, operational, financial and compliance risks. The Executive Committee (ExCom) is responsible for reviewing the overall risk exposure associated with the Group’s activities. SHORT-TERM RISK ASSESSMENT Risks are assessed according to a two-dimensional heat map that estimates the impact of the risk on operating profit or brand/image and the likelihood of the risk materialising. Based on this assessment, ExCom identifies the high-risk issues for the coming year. ExCom assigns risk owners, who are responsible for mitigating the risks through a programme of risk management activities. Local and functional risk assessment follows the same principles and methodology as Group-level risk assessment. Risk reporting is incorporated in regular business reviews, and Group Risk Management is responsible for the framework and Group Finance for facilitating and following up on risk action plans for the most significant risks in connection with regular business reviews. MID- AND LONG-TERM RISK ASSESSMENT A review of mid- and long-term risks is conducted annually at Group level. Based on input from various central functions, including finance, legal, sustainability, human resources and investor relations, and regional teams, the Group strategy team identifies risks within the areas of commercial & competition, governance, consumer, macroeconomic and geopolitical environment, reputation, supply chain and climate. CARLSBERG GROUP ANNUAL REPORT 2020 STRATEGIC REVIEW 37 IDENTIFIED RISKS FOR 2021 RISKS WITH HIGHEST POTENTIAL IMPACT AND LIKELIHOOD • Impact from COVID-19 • Economic instability/recession • Partnerships • Legal and regulatory compliance • Cyber and IT security • Tax OTHER IDENTIFIED RISKS • Regulatory changes, incl. duties • Financial flexibility • Strategy execution • Western Europe operating model • Business interruption For climate-related risks, in 2020 we initiated the process of TCFD reporting, see page 36. Group’s risk exposure, applying our two-dimensional heat map methodology, and determine appropriate actions. Based on this risk identification, ExCom will evaluate and assess the RISKS IDENTIFIED FOR 2021 The identified risks for 2021 are shown in the box on the previous page. Based on the heat map assessment, the six highest ranked risks are elaborated in the following, including in each case a description of the risk and associated mitigation efforts. The risk movement paragraph indicates whether the likelihood of risk has increased or decreased, or remains unchanged, versus last year. CARLSBERG GROUP ANNUAL REPORT 2020 STRATEGIC REVIEW 38 IMPACT FROM COVID-19 Risk movement New. demand and supply-chain circumstances. Description COVID-19 continues to affect our people and our business. While government interventions vary by geography, lockdowns and other restrictive measures affect off-take in both the on-trade and off-trade channels. Further, supply chains may be impacted by raw material shortages and the ability to brew and distribute our products. Depending on geography and go- to-market models, our markets may therefore be impacted in terms of volume, mix, margin and cash flow performance. Despite the distribution of vaccines, we therefore anticipate a prolonged impact in 2021 from COVID-19. Further, we will continue our scenario planning for the mid term, pre-empting multiple possible outcomes in terms of business impact. Based on the scenario planning, we will continue to protect our operating profit and cash position, leveraging Funding the Journey, including our Operating Cost Management (OCM) toolkit. Read more about our cost mitigation actions in 2020 on pages 13 and 15. Our actions and activities will continue to be tailored to local markets to ensure an appropriate response to country-specific challenges and situations. Mitigation Our first priority will remain the health and safety of our employees. MACROECONOMIC UNCERTAINTY/ RECESSION Risk movement Increase versus last year. In 2021, our operating plan is based on our SAIL’22 priorities. In addition, we will continue to apply the learnings and ways of working from 2020. These include more frequent planning cycles, utilising our sales and operation planning (S&OP) practices to enable fast adaptation and response to changing market Description In continuation of the COVID-19 risk, the pandemic has led to increased macroeconomic uncertainty. Although the consequences for our business may be more longer-term, we must prepare now for this greater uncertainty. Mitigation Due to the current market volatility, our planning is more short-term and highly flexible to allow appropriate actions within a short time horizon. When the pandemic is under control, we will again become more longer term and reinstate our more thorough three-year planning cycle with its quarterly reviews and updates, while continuing to embed the positive learnings of COVID-19 and benefiting from the actions taken to reset our business and reduce costs (see pages 13-14). PARTNERSHIPS Risk movement Decrease versus last year. Description We cooperate with partners in some markets in Western Europe and Asia, and we also have local joint venture partners in some Asian and European markets. Disagreements with partners on the operational management and strategic direction of partnerships may limit our ability to manage the growth and risk profile of our business. Our partners’ potential pursuit of goals and priorities different from those of the Group might result in disagreements, thereby affecting operational and financial performance. See section 5.1 in the consolidated financial statements for further details of our partnerships and the related financial risks. Mitigation The Group continuously seeks to promote a fair and mutually beneficial development of the partnerships in order to ensure their continued success. We seek to have an ongoing dialogue with our partners to identify issues at an early stage. The relevant members of ExCom are actively involved in partner relationships, participating in the ongoing dialogues to ensure constructive negotiations and effective and fast resolution of potential issues. LEGAL AND REGULATORY COMPLIANCE Risk movement Unchanged versus last year. Description Legal and regulatory compliance risks include competition law and data protection compliance (GDPR), as well as non-compliance with anti-bribery & corruption regulations and trade sanctions. Failure to comply with regulations and Group CARLSBERG GROUP ANNUAL REPORT 2020 STRATEGIC REVIEW 39 quality for VAT and product classification for excise duties. policies may lead to fines, claims, and brand and reputation damage. In recent years, the Group has experienced competition-law dawn raids in a few jurisdictions. Non- compliance with competition law is a real and growing risk, and the Group is party to certain lawsuits and disputes. These and their significance are described in section 3.3 of the consolidated financial statements. Mitigation We continuously strengthen the Group-wide control framework covering legal compliance areas, including, but not limited to, competition law, anti-bribery & corruption, trade sanctions and data protection. requirements. Employees are required to complete these e- learning modules on an ongoing basis in order to further create awareness of relevant risks and how to mitigate them. In 2021, we will review, simplify and rationalise the suite of compliance policies, manuals, guidance etc. to facilitate greater understanding and awareness by the wider business of the behaviour expected of all employees to reduce compliance risk. In addition, we will further enhance the compliance control framework. Read more about our compliance efforts in the Responsible Business section of the Sustainability Report. We regularly review and update relevant Group legal and compliance policies, and conduct compulsory training of all relevant employees. CYBER AND IT SECURITY Risk movement Unchanged versus last year. We actively set a strong tone from the top and have developed toolkits to help managers in all markets to understand their role in shaping ethical behaviour every day. We have stepped up our training approach and updated our e- learning modules in the areas of anti-bribery & corruption, competition law and data protection, the latter to reflect GDPR Description Like all other businesses, the Carlsberg Group relies heavily on technology and IT infrastructure for its day-to-day business. A cyber attack or non-availability of IT systems could have severe financial, regulatory and reputational consequences for our business. Mitigation Our IT security organisation has regular dialogue with the Supervisory Board and ExCom to agree on risk mitigation plans and activities. As the cyber security threat assessment has intensified in recent years, we have strengthened our protective work to counter the risk. To further progress our protection against cyber security threats, a Chief Information Security Officer was appointed to lead an independent cyber security function within our IT organisation. Furthermore, we are developing and deploying a wide array of advanced defensive technologies, as well as continuing to embed our risk management framework at all layers of the organisation. We undertake regular testing of our security controls via an ongoing series of technological audits and breach simulations. TAX Risk movement Unchanged versus last year. Description Given the Group’s international presence and business set-up, its activities involve a high level of cross-border and inter-company transactions as well as different legal structures within and across markets. The increasing focus on corporate tax payments may increase the risk of tax audits, which could lead to reassessments of taxable income. In addition, changes in the legal and regulatory environment, as well as internal structures, may increase the risk of non-compliance with local and global tax laws and regulations. Mitigation The Group generates substantial revenues for governments through payment of corporate income tax, withholding taxes and indirect taxes such as excise duties. We pay taxes as required by law, and the foundation for handling our tax affairs is our Tax Policy, which stipulates good corporate citizenship and tax transparency. In 2020, we updated our Tax Policy to align with best practice and ensure common understanding across the Group. The Tax Policy is approved by the Supervisory Board, while the Executive Committee exercises oversight of the tax affairs in the Group. We are continuously strengthening our tax control framework and improving reporting transparency. This includes documentation of inter-company transactions to ensure compliance with tax legislation and improving data Governance CORPORATE GOVERNANCE FOCUS ON CORPORATE GOVERNANCE CARLSBERG GROUP ANNUAL REPORT 2020 GOVERNANCE 40 Our governance framework aims to ensure value creation, safeguard active and transparent stewardship across the Group and reduce risk. The basis of our corporate governance includes in particular the Danish Companies Act, the Danish Financial Statements Act, IFRS, the EU Market Abuse Regulation, Nasdaq Copenhagen A/S’ rules for issuers of shares, local legislation, the Company’s Articles of Association and the rules of procedure for the Supervisory Board. The Group has policies for a number of key areas, including, but not limited to, anti-bribery & corruption, labour & human rights, diversity & inclusion, competition law, trade sanctions, data protection, risk management, finance, marketing, Download our policies www.carlsberggroup.com/sustainability/ download/download-our-policies corporate communication, responsible drinking and public & government affairs. The Supervisory Board is responsible for overseeing that the Executive Committee has an adequate system and resources in place to ensure compliance with these policies. RECOMMENDATIONS ON CORPORATE GOVERNANCE The recommendations of the Danish Committee on Corporate Governance form part of Nasdaq Copenhagen A/S’ rules for issuers of shares. The Company complies with all but three of the recommendations, as explained below. With respect to the recommendation to publish quarterly reports, the Group publishes full- and half-year reports. The Supervisory Board finds that half-year financial reporting is more appropriate due to the seasonality of the Group’s business and the fact that the Group historically has seen high volatility in quarterly earnings and margins as a result of phasing of certain commercial activities, etc. to the challenges posed by the COVID-19 pandemic. The Supervisory Board considers the high volatility to be potentially misleading for understanding underlying Group performance. The Company issues Q1 and Q3 trading statements, which include volume and revenue data, along with comments on sales performance in the quarter. Regarding the recommendation that a majority of the members of a board committee should be independent, in 2020 the Audit Committee and the Remuneration Committee complied with this, while two of the four Nomination Committee members were independent. With respect to the recommendation to include external assistance in the board evaluation at least every third year, the Supervisory Board evaluation in 2020 was not facilitated by an external advisor due The Company’s statutory report on corporate governance includes the full list of the recommendations, with comments on the Group’s position on each recommendation. THE ANNUAL GENERAL MEETING The 2020 Annual General Meeting (AGM) took place on 16 March. The minutes of the meeting are available on www.carlsberggroup.com. Rules and deadlines applying to the AGM and other General Meetings are stipulated in the Company’s Articles of Association, which are available on www.carlsberggroup.com along with other AGM-related information. Download our statutory report on corporate governance www.carlsberggroup.com/who-we-are/ corporate-governance/#statutoryreports GOVERNANCE STRUCTURE The Supervisory Board has established three board committees: the Audit, Nomination and Remuneration Committees. For the time being, the Supervisory Board considers these committees to be sufficient; however, each year the Supervisory Board considers whether the number and scope of the committees are appropriate. The board committees prepare and facilitate Supervisory Board decisions. The Supervisory Board hires and supervises the Executive Board, which consists of the CEO and the CFO, who are not members of the Supervisory Board. The Group also has an Executive Committee (ExCom), which, in addition to the CEO and the CFO, consists of a wider group of Executive Vice Presidents, portrayed on pages 49-50. While the Executive Board members are formally registered as executive directors of the Company, ExCom collectively prepares and implements the Company’s strategic plans. the executive management of the Group. digital, finance, ESG, supply chain, procurement and emerging markets. COMPOSITION OF THE SUPERVISORY BOARD The Supervisory Board currently has ten members elected by the General Meeting and, in accordance with the Danish Companies Act, five members elected by the employees. None of the members of the Supervisory Board are or have been involved in The members elected by the General Meeting are elected individually and for a term of one year. Re-election is possible. Five of the ten members elected by the General Meeting are independent and have an international business background in addition to competences related to FMCG, The other five members are affiliated to the Carlsberg Foundation, the Company’s largest shareholder, and have an academic background. These members are bearers of the Carlsberg Group culture and the heritage and values stemming from founder J.C. Jacobsen, and the Supervisory Board sees these members as patrons of the same. Chairship meetings attended Board meetings attended Supervisory Board meetings Board member Flemming Besenbacher (Chair)1 Lars Fruergaard Jørgensen (Deputy Chair)1,2 Hans Andersen3 Carl Bache1 Magdi Batato1,2 Domitille Doat-Le Bigot1,2 Lilian Fossum Biner1,2 Richard Burrows1,2 Eva Vilstrup Decker3 Finn Lok3 Erik Lund3 Søren-Peter Fuchs Olesen1 Peter Petersen3 Majken Schultz1 Lars Stemmerik1 1 Elected by the General Meeting. 2 Independent. 3 Employee-elected. Attended meeting. Did not attend meeting. CARLSBERG GROUP ANNUAL REPORT 2020 GOVERNANCE 41 THE CARLSBERG FOUNDATION The Carlsberg Foundation is the Company’s largest shareholder. According to its Charter, the Foundation must own shares equivalent to at least 51% of the votes in Carlsberg A/S. At 31 December, the Carlsberg Foundation held 30% of the capital and 76% of the votes in Carlsberg A/S. The Foundation is a long-term, value- oriented shareholder, supporting the Group in creating sustainable value growth through the execution of SAIL’22 and adherence to the Company’s capital allocation priorities. The Foundation participates pro rata in the share buy-back programmes (see page 26), and in 2020 total cash returns received by the Foundation amounted to DKK 1.8bn. The dividends from Carlsberg A/S are given back to society by granting funds to foster and support academic research within natural sciences, humanities and social sciences, and funds for cultural and socially beneficial purposes. In 2020, this included COVID-19-related grants amounting to more than DKK 100m. The Foundation also grants funds to the Carlsberg Research Laboratory. CARLSBERG GROUP ANNUAL REPORT 2020 GOVERNANCE 42 The employee representatives are elected for a term of four years. They hold the same rights and obligations as the members elected by the General Meeting. The current employee representatives were elected in 2018 and the next election will take place in 2022. The Supervisory Board believes that the composition of the Board ensures an appropriate level of diversity and breadth in the members’ approach to their duties, thereby helping to ensure that decisions are well considered and that both short- and long-term perspectives are taken into account. Each year, the Supervisory Board considers the skills that should be represented on the Supervisory Board on the basis of a recommendation from the Nomination Committee. These skills are described in the Specification of Competences, available on www.carlsberggroup.com. The Nomination Committee and the Supervisory Board take the description of the required skills into consideration when recommending new candidates for the Supervisory Board. Information on the Supervisory Board members is available on pages 46-48. Detailed CVs can be found on www.carlsberggroup.com. DIVERSITY The Supervisory Board believes that its members should be chosen for their competences and recognises the benefits of diversity in respect of experience, culture, international experience and gender. Regarding the gender target, currently three Supervisory Board members elected by the General Meeting are women, i.e. 30%. Hence, the objective with regard to gender diversity on the Supervisory Board is currently not met. The Supervisory Board will continue to work towards increasing the number of women on the Supervisory Board. Diversity is therefore of high priority for the Supervisory Board and it has laid down the following specific objectives in relation to international experience and gender: • With regard to international experience, the objective is that 50% or more of the Supervisory Board members elected by the General Meeting should have substantial international experience from managing large corporations or institutions. • The proportion of the under- represented gender (currently women) on the Supervisory Board should reach at least 40% of the members elected by the General Meeting no later than 2021. The gender target applies to the boards of all Danish Carlsberg Group companies that are required to set such objectives. The Supervisory Board fulfils the objective regarding international experience. At Carlsberg Breweries A/S, the four Supervisory Board members elected by the General Meeting are men, being the members of the Chairship and of the Executive Board of Carlsberg A/S. At Carlsberg Danmark A/S and Carlsberg Supply Company Danmark A/S, one of three Supervisory Board members is a woman. The 2020 Sustainability Report contains information on our work with diversity and inclusion in the Carlsberg Group. THE WORK OF THE SUPERVISORY BOARD The Supervisory Board monitors that the Executive Board observes the goals, strategies and business procedures established by the Board. The Chair and Deputy Chair of the Supervisory Board constitute the Chairship. The specific duties of the Chair – and, in his absence, the Deputy Chair – are set out in the Rules of Procedure. In 2020, the Chairship and the Executive Board held nine meetings. The Supervisory Board of Carlsberg A/S also held nine meetings, of which one focused solely on COVID- 19 crisis management and strategic implications. The Executive Board always attends the Supervisory Board meetings and, in order to improve transparency, the members of ExCom are also invited and attend when it makes sense. This gives the Supervisory Board better insight into the business. In connection with most Supervisory Board meetings, the Supervisory Board and ExCom have “Board update” sessions at which key people from the Group present a market, a function or another relevant topic. In 2020, these covered updates on Carlsberg’s COVID-19 plans, perspective and impact on employees and business, digital including DraughtMaster, internal audit, research, IT security, market share development across markets and brands, and our business in Russia. Due to COVID-19, most Supervisory Board meetings in 2020 were conducted virtually as a necessary alternative to physical meetings. SUPERVISORY BOARD EVALUATION PROCESS Each year, the Chair of the Supervisory Board heads a structured evaluation of the Board’s work, accomplishments and composition. In addition, the Supervisory Board considers, based on input from the Nomination Committee as well as the Board evaluation process, whether its members’ expertise should be updated or strengthened with respect to their duties and whether the Board members – in light of their other management positions – have adequate time to fulfil their duties as Carlsberg Board members. The conclusions of the 2020 evaluation were that all members allocate sufficient time for their board work and duties and that all members are well prepared for the meetings. During the evaluation process in 2020, the Supervisory Board members generally expressed that they find the pre-read material and presentations of a high quality, that the topics and agendas cover relevant matters adequately, that meetings are well planned and the time and discussions well prioritised, and that they appreciate the open discussions at the Supervisory Board meetings with the Executive Board and other management members. The Supervisory Board also agreed that the cooperation with the Executive Board, in line with previous years, worked well and expressed satisfaction with management’s fast and resolute COVID-19 management, including crisis and action plans, and the way the Group steered through the turbulence and high degree of volatility and uncertainty posed by the pandemic. With respect to the three board committees, the Supervisory Board found them to be adequate and working well. The evaluation process led to a short catalogue of ideas for the Supervisory Board work. Together with management, the ideas will be considered and, where relevant, implemented. COVID-19 required some adjustments to the Supervisory Board’s ways of working. The digital nature of meetings to some extent hampered the fruitful discussions that usually take place during meetings. Nevertheless, the Supervisory Board is of the opinion that the virtual meetings were an acceptable alternative to physical meetings and that the quality of discussions and decision-making were not compromised. BOARD COMMITTEES THE NOMINATION COMMITTEE In 2020, the Nomination Committee consisted of four members. The Nomination Committee is appointed for one year at a time. Two Committee members qualify as being independent, while the other two members do not. The Nomination Committee works according to Terms of Reference, which are reviewed and approved annually by the Supervisory Board. Nomination Committee meetings Committee member Flemming Besenbacher (Chair) Carl Bache Richard Burrows Lars Fruergaard Jørgensen Attended meeting. Committee meetings attended CARLSBERG GROUP ANNUAL REPORT 2020 GOVERNANCE 43 SUPERVISORY BOARD 2020 MAIN TOPICS OF DISCUSSION Strategy • Review and discussion of the Group's COVID-19 strategy and plans. • Ongoing review of SAIL'22, including potential impact of COVID-19 on strategic priorities. • Review of the progress of the Group’s sustainability programme, Together Towards ZERO. • Review of and debate on R&D, innovation, branding, quality and other strategic initiatives. • Monitoring of the Funding the Journey culture in the Group's ways of working, including application of the Operating Cost Management toolkit to offset the negative volume and revenue impact from COVID-19. • Review and approval of the Group's capital structure, funding, dividend and share buy-backs. • Discussion of organisational restructuring following COVID-19. • Discussion and approval of the bonus structures in the Group’s incentive programme, ensuring support of and alignment with SAIL’22. Compliance • Review of Carlsberg’s compliance risks and set-up, including discussion of compliance-enhancing efforts. Governance and risk management • Review of the outcome of the Supervisory Board evaluation process, including follow-up on all suggestions. • Review and discussion of the Group internal audit & control reports, working processes and continued improvement. • Review and discussion of organic and • Review and discussion of the Group’s inorganic opportunities. Organisation, people, succession planning and talent management • Review of the Supervisory Board composition to ensure the right competences to support the strategy. • Succession planning for the executive management. • Review of the Group's approach to taking care of employees during the COVID-19 crisis. IT & cyber security strategy. • Review and approval of new tax policy. • Discussion of relevant issues and ways of working with the external auditor. • Approval of the external auditor for election at the 2020 AGM. CARLSBERG GROUP ANNUAL REPORT 2020 GOVERNANCE 44 The Terms of Reference are available on the Company’s website. In 2020, the Committee had particular focus on: • Planning the Board's evaluation process. • Reviewing the Specification of Competences for Board members to ensure that they reflect the skills and experiences needed to best support the execution of SAIL'22. • Succession planning at Supervisory Board and management level. • Evaluating the composition of ExCom and the composition, structure and size of the Board. THE REMUNERATION COMMITTEE The work of the Remuneration Committee is described in the Remuneration Report. THE AUDIT COMMITTEE In 2020, the Audit Committee consisted of four members, all qualifying as being independent of the Company. The Audit Committee is appointed for one year at a time. The Committee has the relevant financial expertise and necessary experience of the Company’s sector. The Audit Committee works according to Terms of Reference and a detailed annual meeting plan, which are reviewed and approved by the Supervisory Board prior to the beginning of each financial year. The Supervisory Board approved the Audit Committee meeting plan for 2021 and the current Terms of Reference at the Supervisory Board meeting in December 2020. The Audit Committee meetings Committee member Lilian Fossum Biner (Chair) Magdi Batato Richard Burrows Lars Fruergaard Jørgensen Flemming Besenbacher1 Committee meetings attended 1 Not a member of the Committee; attends meetings in his capacity as Chair of the Supervisory Board. Attended meeting. Did not attend extraordinary meeting. Not a member at the time. Terms of Reference are available on the Company’s website. In 2020, the Audit Committee had particular focus on a number of areas, including: • Monitoring the effectiveness of the control environment and overseeing the progress on improving and further developing the effectiveness of the controls over financial reporting. • Monitoring the external financial reporting and the work of the external auditors. • Reviewing the progress of the work of the Group Internal Audit function. • Reviewing the work regarding Speak Up matters (see page 45). • Managing financial risk. • Reviewing the risk management process. • Reviewing the new tax policy. AUDITING To safeguard the interests of shareholders and the general public, an independent auditor is appointed at the Annual General Meeting following a proposal from the Supervisory Board, which is based on a recommendation from the Audit Committee. INTERNAL CONTROL AND RISK MANAGEMENT RELATED TO THE FINANCIAL REPORTING PROCESS OVERALL CONTROL ENVIRONMENT The Supervisory Board and ExCom have overall responsibility for the Carlsberg Group’s control environment. The Audit Committee is responsible for monitoring the effectiveness of the internal control and risk management systems related to the financial reporting process. The Group has a number of policies and procedures in key areas of financial reporting, including the Finance Policy, the Accounting Manual, the Controller Manual, the Use of Auditors Policy, the Chart of Authority, the Risk Management Policy, the Financial Risk Management Policy, the Corporate Governance Policy, the Information Security & Acceptable Use Policy, the Records Management & Personal Data Protection Policy, the Stock Exchange Compliance Policy, the Tax Policy, and the Code of Ethics and Conduct. The policies and procedures apply to all subsidiaries, and similar requirements are set out in collaboration with the partners in joint ventures. The Group’s control framework for financial reporting is designed to reduce and mitigate financial risks identified and ensure reliable internal and external financial reporting. It defines who is responsible and provides assurance that key risks are covered by mitigating internal control assertions. As a consequence of the Group’s growth due to acquisitions, systems and processes are not standardised across entities. The current state of the control environment has improved in 2020 and is at an acceptable level, but not yet where the Group wants it to be. The Group will continue to strengthen the control environment through further standardisation, increased automation, strong analytics and transparent governance. The framework is monitored through entities’ self-assessment of the effectiveness of the implemented controls and continuous testing of performance by an established central internal control team. The monitoring of the performance of the controls focuses on the quality of the controls, the effectiveness with which they are performed and the efficiency of the overall controlling processes. CARLSBERG GROUP ANNUAL REPORT 2020 GOVERNANCE 45 RISK ASSESSMENT With the implementation of the control framework for financial reporting, the Group has identified the risks that could have a direct or indirect material impact on the financial statements. Group entities are required to document transaction processes and the controls in place to cover the key risks identified. The minimum requirements for documenting the risks must be set out in the framework and visualised in the processes. Group entities are required to reassess their controls biannually and must update changes to the control framework for financial reporting, including new risks and controls. CONTROL ACTIVITIES The Group has implemented a formalised financial reporting process for the strategy process, budget process, estimates and monthly reporting on actual performance. The accounting information reported by all Group companies is reviewed by controllers with regional or functional in-depth knowledge of the individual companies/functions and by technical accounting specialists. Controllers are continuously updated on best practice relating to internal financial controls, and trained in new accounting and reporting requirements. The entities in the Group are dependent on IT systems. Any weaknesses in the system controls or IT environment are compensated for by manual controls in order to mitigate any significant risk relating to the financial reporting. During 2019, a programme was initiated for most entities in Western Europe aimed at standardising financial reporting processes and implementing various tools. The programme was carried out as planned in 2020 and will continue in 2021. The Group has established a quality assurance team in order to ensure the quality of the controls that are part of the outsourced processes, including their performance. INFORMATION AND COMMUNICATION The Group has established information and communication systems to ensure accounting and internal control compliance. During the risk assessment process, Group entities are required to report on missing or inadequate controls. Each entity assesses any need for compensating controls, or for design and implementation of new controls. Furthermore, Group entities have mapped controls on segregation of duties to implement necessary compensating controls, and are now implementing stronger remediated controls for segregation of duties in the ERP systems. MONITORING The Audit Committee’s monitoring covers both the internal control environment and business risk. Monitoring of the internal control environment is covered by the Group’s control framework for financial reporting. drawn up for the year. The plan is reviewed and approved by the Audit Committee. In 2020, Group Internal Audit conducted audits mainly in the areas of financial reporting controls, compliance (internal and external regulation), information technology and third-party risk management. The Misconduct Investigation Handbook was updated in 2020 to clarify how investigations should be undertaken. During 2019, there was also a campaign to raise awareness of the various Speak Up channels available. A new campaign will be launched in 2021. SPEAK UP The Carlsberg Group has a Speak Up system that enables employees to report misconduct. Reports typically relate to suspected violations of the Carlsberg Code of Ethics and Conduct. Since the establishment of the Speak Up system, some reports and their subsequent investigation have led to disciplinary sanctions, including dismissal on the basis of violation of the Code of Ethics and Conduct and/ or Group policies. The incidents have not had any material impact on the financial results of the Group except for those items recognised in the statement of financial position. More information regarding the Speak Up system, including reported concerns and disciplinary actions, can be found in the Sustainability Report. The financial risks are assessed and reviewed at multiple levels in the Group, including monthly performance review meetings at ExCom level, periodic review of control documentation, and audits performed by Group Internal Audit. The Speak Up system is operated by an external provider and allows concerns to be brought to the attention of the Group Speak Up Review team anonymously, confidentially and via multiple channels. GROUP INTERNAL AUDIT Group Internal Audit provides objective and independent assessment of the adequacy, effectiveness and quality of the Group’s internal controls. Group Internal Audit works in accordance with a charter, which is reviewed on an annual basis and approved by the Audit Committee. Taking into account the annual review of business risks (see pages 37-39), an internal audit plan is The Speak Up Review team is responsible for reviewing all reported Speak Up matters. Furthermore, an Integrity Committee, chaired by the CFO, oversees the follow-up of major Speak Up investigations and provides a report to ExCom and the Audit Committee at least quarterly. The Speak Up Summary report also contains an overview of other open and closed investigations and the time taken to resolve cases. SUPERVISORY BOARD SUPERVISORY BOARD CARLSBERG GROUP ANNUAL REPORT 2020 GOVERNANCE 46 LARS FRUERGAARD JØRGENSEN DEPUTY CHAIR (SINCE 2019) Nationality: Danish Year of birth: 1966 Appointed (until): 2019 (2021) BOARD FUNCTION Non-executive, independent director. BOARD COMMITTEES Audit Committee, Nomination Committee. PROFESSION President & CEO, Novo Nordisk. OTHER COMPANY BOARD POSITIONS None other than Carlsberg A/S. SUPERVISORY BOARD MEMBERS FLEMMING BESENBACHER CHAIR (SINCE 2012) Nationality: Danish Year of birth: 1952 Appointed (until): 2005 (2021) BOARD FUNCTION Non-executive, non-independent director. BOARD COMMITTEES Nomination Committee (Chair). PROFESSION Professor, D.Sc., h.c. mult, FRSC; Chair of the Board of Directors of the Carlsberg Foundation. OTHER COMPANY BOARD POSITIONS Chair of the Board of Directors of Aarhus Vand. Member of the Board of Directors of Unisense. CARLSBERG GROUP ANNUAL REPORT 2020 GOVERNANCE 47 HANS ANDERSEN Nationality: Danish Year of birth: 1955 Appointed (until): 1998 (2022) MAGDI BATATO Nationality: Swiss Year of birth: 1959 Appointed (until): 2018 (2021) LILIAN FOSSUM BINER Nationality: Swedish Year of birth: 1962 Appointed (until): 2019 (2021) BOARD FUNCTION Employee representative. BOARD COMMITTEES None. PROFESSION Brewery worker, Carlsberg Supply Company Danmark A/S. OTHER COMPANY BOARD POSITIONS None other than Carlsberg A/S. CARL BACHE Nationality: Danish Year of birth: 1953 Appointed (until): 2014 (2021) BOARD FUNCTION Non-executive, non-independent director (member of the Board of Directors of the Carlsberg Foundation). BOARD COMMITTEES Nomination Committee. PROFESSION Professor, Ph.D., Dr.Phil.; head of the Doctoral School of the Humanities at the University of Southern Denmark. OTHER COMPANY BOARD POSITIONS None other than Carlsberg A/S. BOARD FUNCTION Non-executive, independent director. BOARD FUNCTION Non-executive, independent director. BOARD COMMITTEES Audit Committee, Remuneration Committee. PROFESSION Executive Vice President and Head of Operations, Nestlé S.A. OTHER COMPANY BOARD POSITIONS None other than Carlsberg A/S. BOARD COMMITTEES Audit Committee (Chair). PROFESSION Non-executive board director. OTHER COMPANY BOARD POSITIONS Member of the Board of Directors of Scania, a-connect, Givaudan and L E Lundbergföretagen. DOMITILLE DOAT-LE BIGOT Nationality: French Year of birth: 1972 Appointed (until): 2019 (2021) RICHARD BURROWS Nationality: Irish Year of birth: 1946 Appointed (until): 2009 (2021) BOARD FUNCTION Non-executive, independent director. BOARD FUNCTION Non-executive, independent director. BOARD COMMITTEES Remuneration Committee. PROFESSION Chief Digital Officer, Danone. OTHER COMPANY BOARD POSITIONS None other than Carlsberg A/S. Domitille Doat-Le Bigot has notified the Supervisory Board that she is not standing for re-election at the Annual General Meeting. BOARD COMMITTEES Remuneration Committee (Chair), Audit Committee, Nomination Committee. PROFESSION Non-executive board director. OTHER COMPANY BOARD POSITIONS Chair of the Board of Directors of British American Tobacco. CARLSBERG GROUP ANNUAL REPORT 2020 GOVERNANCE 48 EVA VILSTRUP DECKER Nationality: Danish Year of birth: 1964 Appointed (until): 2014 (2022) ERIK LUND Nationality: Danish Year of birth: 1964 Appointed (until): 2015 (2022) PETER PETERSEN Nationality: Danish Year of birth: 1969 Appointed (until): 2010 (2022) LARS STEMMERIK Nationality: Danish Year of birth: 1956 Appointed (until): 2010 (2021) BOARD FUNCTION Employee representative. BOARD COMMITTEES None. PROFESSION Senior Director, Carlsberg Breweries A/S. OTHER COMPANY BOARD POSITIONS None other than Carlsberg A/S. FINN LOK Nationality: Danish Year of birth: 1958 Appointed (until): 2014 (2022) BOARD FUNCTION Employee representative. BOARD COMMITTEES None. PROFESSION Ph.D. and Brew Master, Principal Scientist, Carlsberg A/S. OTHER COMPANY BOARD POSITIONS None other than Carlsberg A/S. BOARD FUNCTION Employee representative. BOARD COMMITTEES None. PROFESSION Head Brewer, Carlsberg A/S. OTHER COMPANY BOARD POSITIONS None other than Carlsberg A/S. SØREN-PETER FUCHS OLESEN Nationality: Danish Year of birth: 1955 Appointed (until): 2012 (2021) BOARD FUNCTION Non-executive, non-independent director (member of the Board of Directors of the Carlsberg Foundation). BOARD COMMITTEES Remuneration Committee. PROFESSION Professor, D.M.Sc; CEO of the Danish National Research Foundation. OTHER COMPANY BOARD POSITIONS None other than Carlsberg A/S. BOARD FUNCTION Employee representative. BOARD COMMITTEES None. PROFESSION President of the Staff Association; Process Lead, Carlsberg Supply Company Danmark A/S. OTHER COMPANY BOARD POSITIONS None other than Carlsberg A/S. MAJKEN SCHULTZ Nationality: Danish Year of birth: 1958 Appointed (until): 2019 (2021) BOARD FUNCTION Non-executive, non-independent director (member of the Board of Directors of the Carlsberg Foundation). BOARD COMMITTEES None. PROFESSION Professor, Ph.D., Copenhagen Business School. International Research Fellow, Saïd Business School, Oxford University. OTHER COMPANY BOARD POSITIONS None other than Carlsberg A/S. BOARD FUNCTION Non-executive, non-independent director (member of the Board of Directors of the Carlsberg Foundation). BOARD COMMITTEES None. PROFESSION Professor, D.Sc., University of Copenhagen. OTHER COMPANY BOARD POSITIONS None other than Carlsberg A/S. The Supervisory Board members’ full CVs, including their skills and competences, are available online www.carlsberggroup.com/who-we- are/about-the-carlsberg- group/supervisory-board/ EXECUTIVE COMMITTEE EXECUTIVE COMMITTEE CARLSBERG GROUP ANNUAL REPORT 2020 GOVERNANCE 49 CARLSBERG GROUP ANNUAL REPORT 2020 GOVERNANCE 50 EXECUTIVE COMMITTEE MEMBERS CEES ’T HART CEO Nationality: Dutch Year of birth: 1958 Appointed: 2015 Prior to joining the Carlsberg Group, Cees was CEO of the Dutch dairy company Royal FrieslandCampina, a position he had held since 2008. Prior to FrieslandCampina, Cees spent 25 years with Unilever, holding management positions across Eastern Europe, Western Europe and Asia and with the last position being member of the Europe Executive Board. Cees is Chair of the Supervisory Board of KLM and a member of the Board of AFKLM. HEINE DALSGAARD CFO Nationality: Danish Year of birth: 1971 Appointed: 2016 Heine joined the Carlsberg Group from ISS, one of the world’s largest facility services companies. He went to ISS in 2013, prior to the company’s IPO in 2014. Before ISS, he was Group CFO at Grundfos. Heine’s previous experience includes various senior management and financial positions at Carpetland, Hewlett Packard and Arthur Andersen. Heine is member of the Board of Directors and Chair of the Audit Committee of Novozymes. strong experience in the global drinks business, having served in a wide range of international sales and marketing roles for Grand Metropolitan plc, Foster’s Brewing Group and S&N plc. Europe & BBH and head of Export, License & Duty Free. In 2016, he became Managing Director of Carlsberg Malaysia. Prior to joining Carlsberg, Lars was with Action Nordic and Unilever Denmark. JOÃO ABECASIS PHILIP A. HODGES JACEK PASTUSZKA CHIEF COMMERCIAL OFFICER Nationality: Portuguese Year of birth: 1972 Appointed: 2019 EXECUTIVE VICE PRESIDENT GROUP SUPPLY CHAIN Nationality: Swiss/British Year of birth: 1966 Appointed: 2017 EXECUTIVE VICE PRESIDENT WESTERN EUROPE Nationality: Polish Year of birth: 1963 Appointed: 2015 João joined the Carlsberg Group in 2011 as CCO and later Managing Director of Super Bock, our associate in Portugal. In 2016, he became Vice President for smaller markets in the Western Europe region. He also served as interim Managing Director of Carlsberg Danmark. In 2017, he became Managing Director of our French business, Kronenbourg. Earlier in his career, João held a range of sales and marketing roles at Unilever. GRAHAM FEWKES EXECUTIVE VICE PRESIDENT ASIA Nationality: British Year of birth: 1968 Appointed: 2014 Philip joined the Carlsberg Group in 2017. His most recent position was at Mondelēz, where he was Senior Vice President, heading up the integrated supply chain in Europe for Mondelēz International. His previous experience includes managerial positions with Kraft Foods in Europe, Asia and the USA within supply chain and finance. LARS LEHMANN EXECUTIVE VICE PRESIDENT EASTERN EUROPE (FROM 1 JANUARY 2021: CENTRAL & EASTERN EUROPE) Nationality: Danish Year of birth: 1966 Appointed: 2019 Graham joined the Carlsberg Group as Vice President Commercial, Asia in 2008, before becoming Senior Vice President of Group Sales, Marketing & Innovation in 2014. Graham has Lars joined the Carlsberg Group in 2003 as Commercial Development Director. Since then, he has held several management positions, including VP Commercial for Eastern Jacek was appointed EVP, Western Europe in 2019. Before that, he was EVP, Eastern Europe. Jacek joined the Carlsberg Group in 2009 and has been Managing Director of our businesses in Poland, Norway and Russia. His prior career included various managerial sales positions in P&G in multiple markets, Commercial VP for Danone in Poland and the Baltics, and General Manager for AIG operations in Poland. CHRIS WARMOTH EXECUTIVE VICE PRESIDENT GROUP STRATEGY Nationality: British Year of birth: 1959 Appointed: 2014 Chris joined the Carlsberg Group as Senior Vice President, Asia in 2014. During his tenure, he has held several positions on the Executive Committee. Chris previously worked for H.J. Heinz, where he held various senior management positions in Continental and Eastern Europe and in Asia Pacific. Before Heinz, Chris worked for The Coca-Cola Company and P&G. CHANGES TO EXCOM IN 2021 Jacek Pastuszka will leave the Carlsberg Group at the end of February 2021. Graham Fewkes will take up the position as Executive Vice President, Western Europe, as of 1 March 2021. Leo Evers has been appointed to replace Graham as Executive Vice President, Asia. He joins Carlsberg from Heineken, where he has held several senior positions in Asia, including Regional Managing Director of Heineken Asia Pacific and Managing Director of Heineken Vietnam. SHARE INFORMATION INFORMATION FOR SHAREHOLDERS CARLSBERG GROUP ANNUAL REPORT 2020 GOVERNANCE 51 Carlsberg A/S is listed on Nasdaq Copenhagen. The Company has around 52,000 registered shareholders. The Company has two share classes: Carlsberg A and Carlsberg B. An A share carries 20 votes, while a B share carries two votes and is entitled to a preferential dividend. The B share is included in the Nasdaq OMX Nordic Large Cap and OMXC20 blue-chip indices. As a supplement to its Copenhagen listing, the Company has established a sponsored level 1 ADR (American Depository Receipt) programme with J.P. Morgan. The ADRs trade over- the-counter in the USA under the symbol CABGY. More information on the ADR programme is available on our investor website. MAJOR SHAREHOLDERS At 31 December 2020, the Company’s largest shareholder was CARLSBERG B SHARE 2020 (DKK) SHAREHOLDER GEOGRAPHIC SPLIT (excluding the Carlsberg Foundation and treasury shares) the Carlsberg Foundation with 30% of the capital and 76% of the votes. In accordance with section 29 of the Danish Securities Trading Act, Massachusetts Financial Services Company (Boston, USA) has notified Carlsberg that it too owns more than 5% of the share capital. SHAREHOLDER RETURN The Carlsberg Group’s dividend policy stipulates an adjusted payout ratio of around 50%. In addition, the Company conducted a share buy-back programme in 2020. For more information, see page 26. INVESTOR RELATIONS The Carlsberg Group aims to give shareholders and the market the best possible insight into factors considered relevant for ensuring market-efficient and fair pricing of the Company’s shares. This is achieved through the quality, consistency and continuity of the information provided to the market, which is handled by the Group’s Investor Relations department. We observe a four-week silent period prior to the publication of the annual and half-year reports, and a two-week silent period prior to the Q1 and Q3 trading statements. GROUP WEBSITE www.carlsberggroup.com provides comprehensive information about the Group and its shares and bonds, including Company announcements, annual and quarterly reports, share prices and financial data, investor presentations, webcasts and transcripts, and a financial and event calendar. At the end of 2020, a total of 29 brokers had coverage of the Company. The analysts’ names and consensus estimates can be found on the website. 1,100 900 700 500 300 100 n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D Share information Share class Number of issued shares¹ Number of issued shares, excl. treasury shares¹ Carlsberg Foundation Votes per share Par value A B Total 33,699,252 114,457,554 148,156,806 33,699,252 111,402,379 145,101,631 33,065,996 10,829,392 43,895,388 20 2 DKK 20 DKK 20 Share price, year-end DKK 1,010.0 DKK 975.2 Proposed dividend per share DKK 22.0 DKK 22.0 ¹ At 31 December 2020. Financial calendar 2021 Event Annual General Meeting Q1 trading statement H1 interim financial statement Q3 trading statement Date 15 March 28 April 18 August 28 October Forward-looking statements and ESEF CARLSBERG GROUP ANNUAL REPORT 2020 FORWARD-LOOKING STATEMENTS AND ESEF 52 FORWARD-LOOKING STATEMENTS AND ESEF This Annual Report contains forward-looking statements, including statements about the Group’s sales, revenues, earnings, spending, margins, cash flow, inventory, products, actions, plans, strategies, objectives and guidance with respect to the Group's future operating results. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe, anticipate, expect, estimate, intend, plan, project, will be, will continue, will result, could, may, might”, or any variations of such words or other words with similar meanings. Any such statements are subject to risks and uncertainties that could cause the Group’s actual results to differ materially from the results discussed in such forward-looking statements. Prospective information is based on management’s then current expectations or forecasts. Such information is subject to the risk that such expectations or forecasts, or the assumptions underlying such expectations or forecasts, may change. The Group assumes no obligation to update any such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward- looking statements. Some important risk factors that could cause the Group’s actual results to differ materially from those expressed in its forward-looking statements include, but are not limited to: economic and political uncertainty (including interest rates and exchange rates), financial and regulatory developments, demand for the Group’s products, increasing industry consolidation, competition from other breweries, the availability and pricing of raw materials and packaging materials, cost of energy, production- and distribution-related issues, information technology failures, breach or unexpected termination of contracts, market- driven price reductions, market acceptance of new products, changes in consumer preferences, launches of rival products, stipulation of fair value in the opening balance sheet of acquired entities, litigation, environmental issues and other unforeseen factors. New risk factors can arise, and it may not be possible for management to predict all such risk factors, nor to assess the impact of all such risk factors on the Group’s business or the extent to which any individual risk factor, or combination of factors, may cause results to differ materially from those contained in any forward- looking statement. Accordingly, forward-looking statements should not be relied on as a prediction of actual results. ESEF data Domicile of entity Description of nature of entity’s operations and principal activities Country of incorporation Principal place of business Legal form of entity Denmark Brewing company Denmark Global A/S Name of reporting entity or other means of identification Carlsberg A/S Address of entity's registered office 1 J. C. Jacobsens Gade 1799 Copenhagen V Consolidated financial statements CONSOLIDATED FINANCIAL STATEMENTS CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 53 CONSOLIDATED FINANCIAL STATEMENTS Income statement ................................... 54 Statement of comprehensive income ......................................................... 54 Statement of financial position ......... 55 Statement of changes in equity ........ 56 Statement of cash flows ...................... 57 Notes ............................................................ 58 PARENT COMPANY FINANCIAL STATEMENTS Statements .............................................. 127 Notes ......................................................... 130 REPORTS Management statement ................... 137 Auditor’s reports ................................... 138 SECTION 1 OPERATING ACTIVITIES 1.1 Segmentation of operations ..................60 1.2 Operating expenses, inventories and deposit liabilities ................................63 1.3 Foreign exchange risk related to earnings ........................................................65 1.4 Cash flow from operating activities ........................................................66 1.5 Trade receivables and on-trade loans ..............................................................67 SECTION 2 ASSET BASE AND RETURNS 2.1 Segmentation of assets and returns ...........................................................71 Impairment ..................................................72 2.2 2.3 Intangible assets and property, plant and equipment ................................78 SECTION 3 SPECIAL ITEMS AND PROVISIONS 3.1 Special items ...............................................82 3.2 Provisions .....................................................84 3.3 Contingent liabilities .................................85 SECTION 4 FINANCING COSTS, CAPITAL STRUCTURE AND EQUITY 4.1 Financial income and expenses ............87 4.2 Net interest-bearing debt .......................88 4.3 Capital structure ........................................88 4.4 Borrowings and cash................................91 Interest rate risk .........................................92 4.5 4.6 Foreign exchange risk related to net investments and financing activities ........................................................93 4.7 Funding and liquidity risk ........................95 4.8 Derivative financial instruments............97 SECTION 5 ACQUISITIONS, DISPOSALS, ASSOCIATES AND JOINT VENTURES 5.1 Investment model and risks ...................99 5.2 Acquisitions and disposals ................... 100 5.3 Non-controlling interests .................... 102 5.4 Contingent considerations ................... 103 5.5 Associates and joint ventures ............. 104 SECTION 6 TAX 6.1 Income tax ................................................ 105 6.2 Tax assets and liabilities ...................... 106 SECTION 7 STAFF COSTS AND REMUNERATION 7.1 Staff costs ................................................. 108 7.2 Remuneration .......................................... 109 7.3 Share-based payments ........................ 109 7.4 Retirement benefit obligations and similar obligations ......................... 111 SECTION 8 OTHER DISCLOSURE REQUIREMENTS 8.1 Earnings per share ................................. 114 8.2 Fees to auditors ...................................... 115 8.3 Related parties ........................................ 115 8.4 Events after the reporting period ...... 115 SECTION 9 BASIS FOR PREPARATION 9.1 Significant accounting estimates and judgements ...................................... 116 9.2 General accounting policies ................ 116 9.3 Changes in accounting policies .......... 120 9.4 New legislation ....................................... 120 9.5 New segmentation* ............................... 121 SECTION 10 GROUP COMPANIES 10 Group companies.................................... 123 * The segmented quarterly information on page 122 is part of the Management Review. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 54 INCOME STATEMENT STATEMENT OF COMPREHENSIVE INCOME DKK million Revenue Cost of sales Gross profit Sales and distribution expenses Administrative expenses Other operating activities, net Share of profit after tax of associates and joint ventures Operating profit before special items Special items, net Financial income Financial expenses Profit before tax Income tax Consolidated profit Attributable to Non-controlling interests Shareholders in Carlsberg A/S (net profit) DKK Earnings per share Earnings per share of DKK 20 Diluted earnings per share of DKK 20 Section 1.1 1.2.1 2020 58,541 -30,180 28,361 2019 DKK million 65,902 -33,264 32,638 Consolidated profit Other comprehensive income 1.2.3 -15,373 -17,826 Retirement benefit obligations -3,453 -151 315 9,699 -247 373 -784 9,041 -2,233 6,808 -4,733 Share of other comprehensive income in associates and joint ventures 108 278 10,465 501 360 -1,098 10,228 -2,751 7,477 Income tax Items that will not be reclassified to the income statement Foreign exchange adjustments of foreign entities Fair value adjustments of hedging instruments Other Income tax Items that will be reclassified to the income statement Other comprehensive income Total comprehensive income Attributable to 778 6,030 908 6,569 Non-controlling interests Shareholders in Carlsberg A/S 1.2.4 5.5 3.1 4.1 4.1 6.1 1.1 8.1 41.3 41.1 43.7 43.4 Section 2020 6,808 2019 7,477 7.4 5.5 6.1 4.1 4.1 6.1 1 -4 -42 -45 -7,640 198 - -22 -7,464 -7,509 -701 -571 4 38 -529 3,485 -323 14 17 3,193 2,664 10,141 456 -1,157 905 9,236 STATEMENT OF FINANCIAL POSITION CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 55 DKK million ASSETS Non-current assets Intangible assets Property, plant and equipment Investments in associates and joint ventures Receivables Tax assets Total non-current assets Current assets Inventories Trade receivables Tax receivables Other receivables Prepayments Cash and cash equivalents Total current assets Total assets Section 31 Dec. 2020 31 Dec. 2019 DKK million Section 31 Dec. 2020 31 Dec. 2019 2.2, 2.3 2.2, 2.3 5.5 1.5 6.2 66,061 26,299 4,188 1,505 1,767 70,027 27,607 4,364 1,179 1,938 EQUITY AND LIABILITIES Equity Share capital Reserves Retained earnings Equity, shareholders in Carlsberg A/S Non-controlling interests 99,820 105,115 Total equity 1.2.1 1.5 1.5 4.4.2 4,613 3,725 211 1,585 769 8,093 18,996 4,751 5,339 199 1,661 776 5,222 17,948 Non-current liabilities Borrowings Retirement benefit obligations Tax liabilities Provisions Other liabilities Total non-current liabilities 118,816 123,063 Current liabilities Borrowings Trade payables Deposits on returnable packaging materials Provisions Tax payables Other liabilities Total current liabilities Total liabilities Total equity and liabilities 4.3.2 4.2, 4.4.1 7.4 6.2 3.2 5.4 4.2, 4.4.1 1.2.2 3.2 2,963 -40,824 77,169 39,308 4,054 43,362 29,291 2,934 6,265 3,319 5,196 47,005 959 16,598 1,276 1,277 925 7,414 28,449 75,454 118,816 3,051 -33,651 74,049 43,449 2,585 46,034 20,879 3,299 6,447 4,037 9,056 43,718 4,112 17,149 1,545 1,663 999 7,843 33,311 77,029 123,063 STATEMENT OF CHANGES IN EQUITY CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 56 DKK million 2020 Equity at 1 January Consolidated profit Other comprehensive income Total comprehensive income for the year Cancellation of treasury shares Share-based payments Dividends paid to shareholders Share buy-back Non-controlling interests Acquisition of entities Total changes in equity Equity at 31 December DKK million 2019 Equity at 1 January Consolidated profit Other comprehensive income Total comprehensive income for the year Share-based payments Dividends paid to shareholders Share buy-back Non-controlling interests Total changes in equity Equity at 31 December Section Shareholders in Carlsberg A/S Share capital 3,051 Currency translation -32,930 Hedging reserves Total reserves -721 -33,651 - - - -88 - - - - - - -7,285 -7,285 - - - - - - - 112 112 - - - - - - - -7,173 -7,173 - - - - - - -88 -7,285 2,963 -40,215 112 -609 -7,173 -40,824 4.3.4 4.3.2 7.3 4.3.3 4.3.3 5.3 5.3 Section Shareholders in Carlsberg A/S Share capital Currency translation 3,051 -36,116 Hedging reserves -721 4.3.4 7.3 4.3.3 4.3.3 - - - - - - - - 3,051 - 3,186 3,186 - - - - 3,186 -32,930 Total reserves -36,837 - 3,186 3,186 - - - - 3,186 - - - - - - - - Retained earnings 74,049 6,030 -14 6,016 88 47 -3,093 -2,900 3,144 -182 3,120 77,169 Retained earnings 79,088 6,569 -518 6,051 214 -2,738 -4,100 -4,466 -5,039 Non- controlling interests Total equity 2,585 46,034 778 -322 456 - -5 -805 - 614 1,209 1,469 4,054 6,808 -7,509 -701 - 42 -3,898 -2,900 3,758 1,027 -2,672 43,362 Total 43,449 6,030 -7,187 -1,157 - 47 -3,093 -2,900 3,144 -182 -4,141 39,308 Non- controlling interests Total Total equity 45,302 2,586 47,888 6,569 2,668 9,237 214 -2,738 -4,100 -4,466 -1,853 908 -4 904 3 -853 - -55 -1 7,477 2,664 10,141 217 -3,591 -4,100 -4,521 -1,854 -721 -33,651 74,049 43,449 2,585 46,034 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 57 STATEMENT OF CASH FLOWS DKK million Operating profit before special items Depreciation, amortisation and impairment losses Section 2.3 Operating profit before depreciation, amortisation and impairment losses Other non-cash items Change in trade working capital Change in other working capital Restructuring costs paid Interest etc. received Interest etc. paid Income tax paid Cash flow from operating activities Acquisition of property, plant and equipment and intangible assets Disposal of property, plant and equipment and intangible assets Change in on-trade loans Total operational investments Free operating cash flow Acquisition and disposal of subsidiaries, net Acquisition and disposal of associates and joint ventures, net Acquisition and disposal of financial investments, net Change in financial receivables Dividends received Total financial investments Other investments in real estate Total other activities Cash flow from investing activities Free cash flow Shareholders in Carlsberg A/S Share buy-back Non-controlling interests External financing Cash flow from financing activities Net cash flow Cash and cash equivalents at 1 January 1.4 1.4 5.2 5.2 4.3.2 4.3.3 4.3.3 4.4.1 Foreign exchange adjustment of cash and cash equivalents Cash and cash equivalents at 31 December 4.4.2 2020 9,699 4,386 14,085 -532 1,321 -1,033 -531 97 -521 -1,958 10,928 -4,396 222 339 -3,835 7,093 -2,409 8 6 42 317 -2,036 - - -5,871 5,057 -3,093 -2,900 -877 5,060 2019 10,465 4,542 15,007 -320 491 634 -445 139 -1,033 -2,234 12,239 -4,588 1,714 50 -2,824 9,415 - -41 25 -59 626 551 -4 -4 -2,277 9,962 -2,738 -4,100 -2,520 -935 -1,810 -10,293 3,247 5,149 -438 7,958 -331 5,434 46 5,149 Acquisition of property, plant and equipment and intangible assets includes the purchase of the Brooklyn brand rights. Cash and cash equivalents are reported less bank overdrafts. SECTION 1 OPERATING ACTIVITIES 58.5bn REVENUE (DKK) Revenue declined by 11.2%, amounting to DKK 58,541m (2019: DKK 65,902m). Revenue was negatively impacted by COVID-19 in most markets and by negative currency developments, mainly in Russia, Norway and China. REVENUE DEVELOPMENT (%) -8.4% 0.3% -3.1% 68 66 64 62 60 58 56 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 58 48.4% GROSS MARGIN Cost of sales per hl improved organically by 3%, positively impacted by country and product mix. The gross margin declined by 110bp to 48.4%, as supply chain efficiencies were not enough to offset the under-absorption of fixed costs and the channel and product mix. The gross margin was also impacted by country mix. 9.7bn OPERATING PROFIT (DKK) Operating expenses, including marketing investments, declined organically by 14% as a result of tight cost control. The main areas in which costs fell were marketing, travel, supply chain and administration, including employee- related costs. Reported operating expenses as a percentage of revenue declined by 200bp. Excluding marketing expenses, operating expenses declined organically by 13%. Operating profit before depreciation, amortisation and impairment losses (EBITDA) declined by 2.4% organically and by 6.1% in reported terms. The EBITDA margin improved by 130bp to 24.1%. 6.0bn The Asian and Eastern European regions delivered solid organic operating profit growth and strong operating margin improvements, while operating profit declined in Western Europe. Operating profit before special items was DKK 9,699m (2019: DKK 10,465m). The Group’s operating margin increased by 70bp to 16.6%. OPERATING PROFIT DEVELOPMENT (%) -3.1% -0.3% -3.9% 11 10 9 8 7 NET PROFIT (DKK) Special items, net, amounted to DKK -247m (2019: DKK 501m). Special items were positively impacted by reversal of a provision made in a purchase price allocation, offset mainly by restructuring costs related to Reset for the future, and write-down of a brand in Cambodia. Financial items, net, amounted to DKK -411m against DKK -738m in 2019. Excluding currency gains and losses, financial expenses, net, amounted to DKK 550m (2019: DKK 650m), positively impacted by lower other financial expenses. Tax totalled DKK -2,233m against DKK -2,751m in 2019. The effective tax rate of 24.7% was positively impacted by tax-exempt and non-deductible special items. Excluding these, the effective tax rate would have been 25.7%. Consolidated profit was DKK 6,808m compared to DKK 7,477m in 2019. The decline was due to lower operating profit and special 10.9bn OPERATING CASH FLOW (DKK) Cash flow from operating activities amounted to DKK 10,928m against DKK 12,239m in 2019. The change in trade working capital was DKK +1,321m (2019: DKK +491m), mainly due to lower trade receivables, impacted by lower sales as a result of the increased COVID-19- related restrictions towards the end of the year. Average trade working capital to revenue improved from -16.8% in 2019 to -18.6%. The change in other working capital was DKK -1,033m (2019: DKK +634m), partly impacted by phasing and lower VAT payable. Restructuring costs paid amounted to DKK -531m (2019: DKK -445m). Net interest etc. paid amounted to DKK -424m (2019: DKK -894m). The decline was mainly due to the settlement of financial instruments. Corporation tax paid was DKK -1,958m (2019: DKK -2,234m). The decrease versus last year was mainly due to lower earnings. items, partly offset by lower financial expenses, net, and the lower tax rate. The Carlsberg Group’s share of consolidated profit was DKK 6,030m (2019: DKK 6,569m). Non-controlling interests were DKK 778m (2019: DKK 908m), impacted by challenging market conditions in Malaysia, and the new joint venture with Marston's in the UK, of which the Group owns 60%. 41.3 EARNINGS PER SHARE (DKK) Earnings per share were DKK 41.3 (2019: DKK 43.7). Adjusted for special items after tax, earnings per share were DKK 43.6 (2019: DKK 41.0), corresponding to a 6.3% improvement. EARNINGS PER SHARE (DKK) 50 40 30 20 10 0 EPS EPS-A CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 59 5.1bn FREE CASH FLOW (DKK) Free cash flow amounted to DKK 5,057m (2019: DKK 9,962m), while free operating cash flow amounted to DKK 7,093m (2019: DKK 9,415m). Operational investments totalled DKK -3,835m (2019: DKK -2,824m), impacted by the purchase of the Brooklyn brand rights. In 2019, operational investments were impacted by the disposal of the brewery site in Norway. Total financial investments amounted to DKK -2,036m (2019: DKK +551m), impacted by the acquisition of Marston’s brewing activities, the prepayment of the purchase price for Wernesgrüner Brewery, Germany, and lower dividends received. FREE CASH FLOW (DKKm) 10 8 6 4 2 0 Free operating cash flow Free cash flow Total cash flow to investments in entities and brand rights, including acquisition of non- controlling interests, amounted to DKK 3.2bn (2019: DKK 1.7bn). For 2020, this primarily included the acquisitions of Marston’s brewing activities in the UK, and the acquisition of Wernesgrüner Brewery and the Brooklyn brand rights. 3.2bn ACQUISITIONS (DKK) The cash flow for the purchase of the Brooklyn brand rights was included in operational investments. The cash consideration paid on acquisition of 60% of Marston’s brewing activities in the UK and the prepayment on the acquisition of Wernesgrüner Brewery amounted to DKK 2.4bn and was recognised as financial investments in the cash flow statement. The prepayment on the acquisition of Wernesgrüner Brewery was recognised as a non-current receivable. The transaction was completed on 1 January 2021. Total cash flow to investments in brand rights and entities thereby amounted to DKK 3.2bn. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 60 SECTION 1.1 SEGMENTATION OF OPERATIONS REVENUE The Group’s revenue arises primarily from the sale of beverages to our customers. Revenue from brand licensing, sale of by-products and other revenue in aggregate accounts for around 3% of the Group’s revenue and is not considered material. Revenue declined by DKK -7,361m in 2020 and was negatively impacted by the lower volumes in Western Europe and Asia and deterioration in price/mix in Western Europe and Eastern Europe, along with a negative currency impact in all three regions. Not allocated revenue, DKK 25m (2019: DKK 72m), consisted of DKK 1,112m (2019: DKK 1,355m) in revenue and DKK -1,087m (2019: DKK -1,283m) from eliminations of sales between the geographical segments. Revenue in Denmark was impacted by lower sales of soft drinks at the German/Danish border. The DKK value of revenue in Russia for 2020 was impacted by the 11.4% decrease in the average RUB/DKK rate. CHANGES TO SEGMENTATION The Group’s regional structure was changed effective 1 January 2021, with the aim of rebalancing the European regions in terms of size and number of business units. Segmentation of income statement DKK million 2020 Revenue Total cost Share of profit after tax of associates and joint ventures Operating profit before special items Western Europe 31,547 -26,763 209 4,993 Asia 16,959 -13,057 89 3,991 Not allocated Beverages, total Non- beverage Carlsberg Group, total Eastern Europe 10,010 -8,093 - - 1,917 -1,183 25 58,541 -1,208 -49,121 Special items, net Financial items, net Profit before tax Income tax Consolidated profit Operating margin 2019 Revenue Total cost Share of profit after tax of associates and joint ventures Operating profit before special items Special items, net Financial items, net Profit before tax Income tax Consolidated profit Operating margin The segmentation used in the Annual Report 2020 is unchanged. Please refer to section 9.5 for further disclosures. - -36 17 -19 -3 -8 -30 7 -23 - -101 42 -59 -67 -10 -136 15 -121 58,541 -49,157 315 9,699 -247 -411 9,041 -2,233 6,808 16.6% 65,902 -55,715 278 10,465 501 -738 10,228 -2,751 7,477 15.9% 298 9,718 -244 -403 9,071 -2,240 6,831 16.6% 65,902 -55,615 236 10,524 568 -728 10,364 -2,766 7,598 16.0% 15.8% 23.5% 19.2% 36,317 -30,320 190 6,187 18,416 -14,536 51 3,931 11,097 -9,215 - 72 -1,543 -5 1,882 -1,476 17.0% 21.3% 17.0% Revenue and excise duties Geographical allocation of revenue DKK million Revenue, including excise duties Excise duties Revenue 2020 2019 DKK million 2020 2019 83,182 -24,641 58,541 93,483 Denmark (Carlsberg A/S’ domicile) -27,581 China 65,902 Russia Other countries Total 3,512 9,858 6,405 38,766 58,541 4,736 8,999 7,307 44,860 65,902 SECTION 1.1 (CONTINUED) SEGMENTATION OF OPERATIONS OPERATING PROFIT BEFORE SPECIAL ITEMS Not allocated operating profit before special items, DKK -1,183m (2019: DKK -1,476m), related to central costs not managed by the regions, including costs of developing branding activities to support the SAIL’22 initiatives and general costs of centralised functions as well as various eliminations of DKK 62m (2019: DKK 71m). VOLUMES Organic growth in total volumes was impacted by declining volumes in Western Europe and Asia primarily due to COVID-19, partly offset by growth in Eastern Europe. NON-CONTROLLING INTERESTS The Group’s non-controlling interests consist of Lao Brewery, Chongqing Brewery Group, Carlsberg Malaysia Group and other minor interests, primarily in the Asia region. Also included are two months of earnings in the newly established Carlsberg Marston's Brewing Company Limited. Non-controlling interests are not individually material to the Group’s total profit. Non-controlling interests hold 40% of the shares in Carlsberg Marston's Brewing Company Limited, which includes Marston’s brewing activities and the Group’s activities in the UK. The material asset restructuring whereby Carlsberg and Chongqing Brewery Co. contributed their controlled assets to Chongqing Jianiang Brewery was completed in December 2020. The transaction had an immaterial impact on the allocation of the consolidated profit for the year between the shareholders in Carlsberg A/S and non- controlling interests for 2020. With the full-year effect of these transactions, non-controlling interests’ share of the result in Carlsberg Marston's Brewing Company Group financial performance Volumes (million hl) Beer Non-beer Total volume DKK million Revenue Change 2019 113.0 21.9 134.9 Organic Acq., net -2.8% -8.7% -3.8% 0.2% 0.0% 0.2% FX - - - 2020 110.1 20.0 130.1 Change Reported -2.6% -8.7% -3.6% Operating profit before special items 10,465 Operating margin (%) 15.9 65,902 -8.4% -3.1% 0.3% -0.3% -3.1% -3.9% 58,541 -11.2% 9,699 16.6 -7.3% 70bp CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 61 Management makes judgements when deciding whether supporting activities with a customer should be classified as a discount or a marketing expense. Generally, activities with the individual customer are accounted for as a discount, whereas costs related to broader marketing activities are classified as marketing expenses. Whether the Group is acting as a principal or an agent is evaluated by management on a country-by- country basis. The Group has concluded that it is the principal in its revenue arrangements because it controls the goods before transferring them to the customer. Excise duties, taxes and fees The classification of duties, taxes and fees paid to local authorities or brewery organisations etc. requires judgements on the classification to be made by management. Locally imposed duties, taxes and fees are typically based on product type, alcohol content, consumption of certain raw materials, such as glue, plastic or metal in caps, and energy consumption. These are classified as either sales- or production-related. Excise duties are generally imposed by the tax authorities as taxes on consumption and are collected by the Group on behalf of the authorities when the goods are transferred to the customers and thereby ready for consumption. Taxes and fees related to the input/use of goods in production, distribution etc. are recognised as part of the cost of the goods or services purchased. The type of authority or organisation imposing the duty, tax or fee and the objective of these are key factors when determining the classification. Limited, UK, and Chongqing Brewery Group, China, is expected to increase for 2021. The transactions are described in more detail in sections 5.2 and 5.3. ACCOUNTING ESTIMATES AND JUDGEMENTS The Group considers all terms and activities in contracts with customers in order to determine the performance obligation, the transaction price and the allocation of the transaction price. If the consideration in a contract includes a variable amount, the Group estimates the consideration to which it will be entitled in exchange for transferring goods to the customer. The variable consideration is estimated at contract inception based on expected sales volumes using historical and year-to-date sales data and other information about trading with the individual customer or with a group of customers. The Group estimates discounts using either the expected value method or the most likely amount method, depending on which method better predicts the amount of consideration to which it will be entitled. The most likely amount method is used for contracts with a single contract sum, while the expected value method is used for contracts with more than one threshold due to the complexity and the activities agreed with the individual customer. Certain contracts related to specific major events that are held within such a short time period that it is not possible to sell all the goods during the event (e.g. football matches) give the customer the right to return the goods within a specified period. The Group uses the expected value method to estimate the goods that will not be returned, as this method best predicts the amount of variable consideration to which the Group will be entitled. For goods that are expected to be returned, the Group recognises a refund liability instead of revenue. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 62 SECTION 1.1 (CONTINUED) SEGMENTATION OF OPERATIONS ACCOUNTING POLICIES Revenue Recognition and measurement Revenue from contracts with customers comprises sales of goods, royalty income, rental income from non-stationary equipment, service fees and sales of by-products. Revenue from the sale of own-produced finished goods, goods for resale (third-party products) and by-products is recognised at the point in time when the control of goods and products is transferred to the customer, which is generally upon delivery. For contracts providing the customer with a right of return within a specified period, the Group considers the timing of recognition. The Group considers whether contracts include separate performance obligations to which a portion of the transaction price needs to be allocated. In determining the transaction price, the Group considers the effects of variable consideration. No element of financing is deemed present, as payment is generally made on the basis of cash on delivery or up to 30 days of credit. Variable consideration The Group offers various discounts depending on the nature of the customer and business. Discounts comprise off-invoice discounts, volume- and activity-related discounts, including specific promotion prices offered, and other discounts. Furthermore, discounts include the difference between the present value and the nominal amount of on-trade loans to customers, cf. section 1.5. Segment information The Group’s beverage activities are segmented according to the three geographical regions where sales take place. These regions make up the Group’s reportable segments. The segmentation reflects the geographical and strategic management, decision and reporting structure applied by the Executive Committee for monitoring the Group’s strategic and financial targets. Segments are managed based on business performance measured as operating profit before special items. Not allocated comprises income and expenses incurred for ongoing support of the Group’s overall operations and strategic development. The expenses include costs of running central functions and marketing, including global sponsorships. Off-invoice discounts arise from sales transactions where the customer immediately receives a reduction in the sales price. This also includes cash discounts and incentives for early payments. The non-beverage segment, comprising research and real estate activities, is managed separately and therefore shown separately instead of geographically segmented. Reported figures Reported figures are analysed by looking at the impact of organic growth, net acquisitions and foreign exchange effects. The net acquisition effect is calculated as the effect of acquisitions and divestments, including any share obtained from an increase/decrease in ownership of associates and joint ventures, for a 12-month period from the acquisition/divestment date. The foreign exchange effect is calculated as the difference between the figures for the current reporting period translated at the current exchange rates and at the exchange rates applied in the previous reporting period. Organic growth is the remaining growth that is not related to acquisitions, divestments or foreign exchange effects. Royalty and licence fees are recognised when earned according to the terms of the licence agreements. Revenue from contracts with customers is measured at an amount that reflects the expected consideration for those goods. Amounts disclosed as revenue exclude discounts, VAT and excise duties collected on behalf of authorities. Volume- and activity-related discounts is a broad term covering incentives for customers to sustain business with the Group over a longer time and may be related to a current campaign or a sales target measured in volumes or total value. Examples include discounts paid as a lump sum, discounts for meeting certain sales targets or progressive discounts offered in step with increasing sales to a customer. Other discounts include listing fees, i.e. fees for certain listings on shelves, in coolers or in favourable store locations, as specific promotions of this nature are closely related to the volumes sold. The geographical allocation of revenue and non- current assets is based on the selling entities’ domicile and comprises countries individually accounting for more than 10% of the Group’s consolidated revenue as well as the domicile country. Decisions on restructuring, acquisition and divestment of entities included in special items as well as on financing (financial income and expenses) and tax planning (income tax) are made based on information for the Group as a whole and therefore not segmented. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 63 SECTION 1.2 OPERATING EXPENSES, INVENTORIES AND DEPOSIT LIABILITIES Inventories DKK million Raw materials Work in progress Finished goods Total 2020 2,072 295 2,246 4,613 2019 2,116 333 2,302 4,751 1.2.1 COST OF SALES AND INVENTORIES Cost of sales decreased by 9% compared with 2019, mainly as a result of lower volumes in Western Europe and Asia, and lower input costs in Eastern Europe due to foreign exchange. Cost of sales per hl decreased by approximately 6% compared with 2019. Commodity risks are associated in particular with purchasing of cans (aluminium), malt (barley), glass, paper, sugar and energy. The management of commodity risks is coordinated centrally and aimed at achieving stable and predictable prices in the medium term, and avoiding capital and liquidity being tied up unnecessarily. Cost of sales DKK million Cost of materials Direct staff costs Amortisation and depreciation Indirect production overheads Purchased finished goods and other costs Total 2020 2019 17,830 19,222 1,297 1,441 As the underlying markets for the specified categories vary, so does the way in which they are hedged against price increases. 2,704 2,637 4,062 4,433 The most common form of hedging is fixed- price purchase agreements with suppliers in local currencies. 4,287 5,531 30,180 33,264 It is Group policy to fix the prices of 70% of malt (barley) purchases for a given year no later than at the end of the third quarter of the previous year and to hedge up to around 90% at the beginning of the year. A significant part of the Group’s exposure for 2020 was therefore hedged through fixed-price purchase agreements entered into during 2019. Likewise, the majority of the exposure for 2021 has been hedged during 2020. The percentage that is hedged or at fixed prices is higher for Western Europe and Eastern Europe than for Asia, which is partly due to the timing of the harvest season in Asia. In the majority of purchase agreements for cans, the Group’s purchase price is variable and based on the global market price of aluminium (London Metal Exchange, LME). The Group is thereby able to hedge the underlying aluminium price risk by applying a hedge ratio of 1:1. In 2020, the majority of the aluminium price risk was hedged with financial instruments or with fixed prices via the suppliers to the Group. The same has been done for 2021. The fair values of the financial instruments are specified in section 4.8. Inventories decreased by 3% compared with 2019, mainly impacted by minor changes to phasing of campaigns. In general, write-offs of inventories did not increase significantly in 2020, as the Group managed to adapt the business and decrease production in line with customer demand. Hedging of raw material price risk DKK million 2020 Aluminium 2019 Aluminium Sensitivity assuming 100% efficiency Time of maturity Change +10% Change +10% Effect on OCI Tonnes purchased Average price (DKK) 2021 80 66,323 11,132 66,323 Effect on OCI Tonnes purchased Average price (DKK) 2020 77 63,861 12,512 63,861 ACCOUNTING ESTIMATES AND JUDGEMENTS At least once a year, management assesses whether the standard cost of inventories approximates the actual cost. During the year, the standard cost is revised if it deviates by more than 5% from the actual cost. Indirect production overheads are calculated on the basis of relevant assumptions as to capacity utilisation, production time and other factors. Management also assesses the impact on standard cost of government and other grants received to fund operating activities. This includes assessing the terms and conditions of grants received and the risk of any repayment. The calculation of the net realisable value of inventories is relevant to packaging materials, point- of-sale materials and spare parts. The net realisable value is normally not calculated for beer and soft drinks due to their limited shelf-life, which means that slow-moving goods must be scrapped instead. ACCOUNTING POLICIES Cost of sales comprises cost of materials used in own-produced finished goods, including malt (barley), hops, glass, cans, other packaging materials, direct labour, indirect production overheads and standard cost variations. Further, it comprises purchased finished goods that include cost of point- of-sale materials and third-party products sold to customers. Indirect production overheads comprise indirect supplies, wages and salaries, amortisation of brands and software, as well as maintenance and depreciation of machinery, plant and equipment used for production. The cost of purchased finished goods, raw and packaging materials and point-of-sale materials includes the purchase cost and costs directly related to bringing inventories to the relevant place of sale and getting them ready for sale, for example insurance, freight and duties. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 64 ACCOUNTING ESTIMATES AND JUDGEMENTS Sales and distribution expenses as a consequence of the impact of COVID-19 as further described in section 1.5.1. 2020 4,390 5,101 5,882 2019 5,581 5,768 6,477 Other operating activities, net 15,373 17,826 DKK million 2020 2019 SECTION 1.2 (CONTINUED) OPERATING EXPENSES, INVENTORIES AND DEPOSIT LIABILITIES Inventories are measured at the lower of standard cost (own-produced finished goods) and weighted average cost (other inventories), or net realisable value. The net realisable value is the estimated selling price less costs of completion and costs necessary to make the sale, also taking into account marketability, obsolescence and developments in expected selling price. The cost of scrapped/impaired goods is expensed in the function (line item) responsible for the loss, i.e. losses during distribution are included in distribution expenses, while scrapping of products due to sales not meeting forecasts is included in sales expenses. 1.2.2 DEPOSITS ON RETURNABLE PACKAGING MATERIALS Deposits on returnable packaging materials amounted to DKK 1,276m (2019: DKK 1,545m). The capitalised value of returnable packaging materials was DKK 1,791m (2019: DKK 2,102m). The decline in deposits is a consequence of the lower volumes sold, which led to a lower need for reinvestment and thereby a lower capitalised value of returnable packaging materials. The capitalised value of returnable packaging materials exceeds the deposits because each of the returnable packaging items circulates a number of times in the market and some markets have regulations that require the deposit value to be set lower than the cost of the returnable packaging materials. Management assesses the local business model to determine whether the Group has a legal or constructive obligation to accept returns of packaging materials from the market and the level of control. This entails the Group considering, among other things, the return rate and the annual circulation in the individual markets. These factors are assessed annually. Returnable packaging materials controlled by the Group are capitalised as property, plant and equipment and depreciated over the expected useful life. DKK million Marketing expenses Sales expenses Distribution expenses Total ACCOUNTING POLICIES The deposit on returnable packaging materials is estimated based on movements during the year in recognised liabilities, loss of returnable packaging materials in the market, planned changes in packaging types and historical information about return rates. ACCOUNTING POLICIES Returnable packaging materials that the Group controls through a legal or constructive obligation are capitalised as property, plant and equipment. Returnable packaging materials are depreciated over 3-10 years. The accounting policies for property, plant and equipment are further described in section 2.3. The obligation to refund deposits on returnable packaging materials is measured on the basis of deposit price, an estimate of the number of bottles, kegs, cans and crates in circulation, and expected return rates. 1.2.3 SALES AND DISTRIBUTION EXPENSES Total sales and distribution expenses decreased by 14% in reported terms and by 11% organically, as a result of tight cost control in response to the COVID-19 lockdowns and restrictions. Marketing expenses consist of expenses for brand marketing and trade marketing. Brand marketing is an investment in the Group’s brands and consists of brand-specific investments in the development of communication vehicles, the use of these to drive the sale of branded products, sales campaigns and sponsorships. Trade marketing is promotional activities directed towards customers, such as the supply of point-of- sale materials, promotional materials and trade offers. Sales expenses comprise costs relating to general sales activities, write-downs for bad debt losses, wages and salaries as well as depreciation and impairment of sales equipment. Distribution expenses comprise costs incurred in distributing goods, wages and salaries, and depreciation and impairment of distribution equipment. 1.2.4 OTHER OPERATING ACTIVITIES, NET Other operating activities are secondary to the principal activities of the Group and include income and expenses relating to rental properties, restaurants, on-trade loans, research activities, and gains and losses on disposal of intangible assets and property, plant and equipment. On-trade loans, net, are impacted by impairment of outstanding loans Gains and losses on disposal of property, plant and equipment and intangible assets, net On-trade loans, net Real estate, net Research centres, net Other, net Total ACCOUNTING POLICIES 53 -204 38 -123 85 -151 56 44 11 -133 130 108 Gains and losses on disposal of intangible assets and property, plant and equipment are determined as the sales price less selling costs and the carrying amount at the disposal date. On-trade loans, net, comprise the effective interest on the loans measured at amortised cost less impairment. Expenses relating to research activities comprise research in Denmark and France less funding received from the Carlsberg Foundation for the operation of the Carlsberg Research Laboratory and grants received to fund research. The funding and grants are recognised in the income statement in the same period as the activities to which they relate. Product development costs are included in cost of sales. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 65 Impact on operating profit Developments in exchange rates between DKK and the functional currencies had a negative impact of 3.9% on operating profit measured in DKK. Entities in The eurozone China Russia United Kingdom Switzerland Norway Sweden Laos Functional currency Change in average FX rate 2019 to 2020 EUR CNY RUB GBP CHF NOK SEK LAK -0.16% -2.10% -11.40% -1.60% 3.80% -8.20% 1.00% -5.50% SECTION 1.3 FOREIGN EXCHANGE RISK RELATED TO EARNINGS The majority of the Group’s activities take place outside Denmark and in currencies other than DKK. Foreign exchange risk is therefore a principal financial risk for the Group, and exchange rate fluctuations can have a significant impact on the income statement. TRANSACTION RISKS ON PURCHASES AND SALES The Group is exposed to transaction risks on purchases and sales in currencies other than the local functional currencies. The Group aims to hedge 70-90% of future cash flows in currencies other than the local functional currency on a four-quarter rolling basis. REVENUE BY CURRENCY (%) 2020 (2019) EUR 18% (19%) RUB 11% (11%) NOK 6% (5%) CHF 5% (5%) LAK 4% (4%) CNY 17% (14%) DKK 8% (10%) GBP 5% (5%) SEK 4% (4%) Other 22% (23%) The EUR/DKK exposure is considered to be limited and is not hedged. Western Europe For the entities in Western Europe, a major part of the purchases in foreign currencies is in EUR. This also applies for markets with a functional currency other than EUR. Hedging of EUR against the local currencies will effectively eliminate a significant part of the currency risk in the entities’ operating profit in local currency. At Group level, these hedges are effectively a hedge of (parts of) the revenue in the relevant currency and are accounted for as cash flow hedges, cf. section 4.8. The hedged amounts and the sensitivity analysis regarding these hedges are shown in section 4.6.4. Asia The transaction risk is considered to be less significant due to lower sales and purchases in currencies other than the local functional currencies as well as the high correlation between USD and most of the Asian currencies. Furthermore, the currencies are expensive to hedge and, in some cases, not possible to hedge at all. As a consequence, the risk is not hedged. Eastern Europe Baltika Breweries and the other entities in Eastern Europe have expenses in both USD and EUR, and appreciation of RUB and other currencies vis-à-vis EUR and USD has a positive impact on operating profit, while depreciation has a negative effect. The Group has chosen not to systematically hedge the transaction risk due to the significant cost of hedging these currencies over a longer period of time. For 2020 and 2021, the Group has chosen to hedge a portion of Baltika Breweries’ and Carlsberg Ukraine’s expenses in USD. The volatility of the Eastern European currencies will continue to affect operating profit measured in both DKK and local currencies. Furthermore, some of the entities in Eastern Europe hold intercompany deposits in EUR and USD. The revaluation of these is recognised in financial items. TRANSLATION RISK The Group is exposed to risk from translation of foreign entities into the Group’s presentation currency, DKK. The single largest translation exposure in respect of operating profit in 2020 was RUB due to the double-digit depreciation of the currency compared with 2019. Looking into 2021, the largest exposure in terms of EBIT and currency volatility is CNY, while RUB remains the single largest exposure on translation of net investments in foreign entities. The exposure to fluctuations in EUR/DKK is considered to be limited due to Denmark’s fixed exchange rate policy towards EUR and is consequently not hedged. The Group has chosen not to hedge the exposure arising from translation of revenue or earnings in foreign currencies. To reduce the risk, the Group has raised debt denominated in the currencies in which the Group generates significant earnings and cash flow. Income tax paid amounted to DKK -1,958m (2019: DKK -2,234m). The decrease in tax paid was the result of lower operating profit in some markets, mainly Laos, Greece, Norway and Russia. Cash flow from disposal of property, plant and equipment and intangible assets was DKK 222m (2019: DKK 1,714m). In 2019, the cash flow included the proceeds from disposal of the former brewery sites in Trondheim, Norway, and Hamburg, Germany, totalling DKK 1,503m. Average trade working capital improved from -16.8% to -18.6% of revenue, primarily due to the decrease in revenue. SECTION 1.4 CASH FLOW FROM OPERATING ACTIVITIES Change in trade working capital amounted to DKK 1,321m (2019: DKK 491m), primarily due to a decline in trade receivables due to lower sales and increased impairments. This was partly offset by a decrease in deposit liabilities. Other working capital decreased by DKK 1,033m (2019: increase of DKK 634m), mainly impacted by lower VAT payable and changes in provisions. The change in on-trade loans amounted to DKK 339m (2019: DKK 50m). Restructuring costs paid amounted to DKK -531m (2019: DKK -445m), a large part of which relates to termination benefits to employees made redundant due to optimisations and reorganisations across the Group. Net interest etc. paid amounted to DKK -424m (2019: DKK -894m). The decrease in net interest was mainly due to settlements of derivative financial instruments as well as lower interest income. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 66 Other specifications of cash flow from operating activities DKK million Other non-cash items Share of profit after tax of associates and joint ventures Gain on disposal of property, plant and equipment and intangible assets, net Share-based payments Transfer of long-term medical insurance obligation Other items Total Trade working capital Inventories Trade receivables Trade payables, duties payable and deposits on returnable packaging materials Total Other working capital Other receivables Other payables Retirement benefit obligations and other liabilities related to operating profit before special items Unrealised foreign exchange gains/losses Total On-trade loans Loans provided Repayments Amortisation of on-trade loans Total Section 2020 2019 5.5 2.3 7.4 -315 -53 42 -199 -7 -278 -56 217 -162 -41 -532 -320 -1 1,484 -162 1,321 111 -403 -601 -140 -1,033 -188 82 597 491 254 268 154 -42 634 -464 -685 353 450 339 426 309 50 SECTION 1.5 TRADE RECEIVABLES AND ON-TRADE LOANS The Group’s non-current receivables consist mainly of on-trade loans that fall due more than one year from the reporting date. As at 31 December 2020, it also includes the prepayment for the acquisition of Wernesgrüner Brewery, Germany. Of the total non-current receivables, DKK 258m (2019: DKK 207m) falls due more than five years from the reporting date. Credit risk on receivables DKK million 2020 Receivables from sales of goods and services Not past due Overdue 1-30 days Overdue 31-90 days Overdue > 90 days Receivables from sales of goods and services On-trade loans Not past due Overdue 1-30 days Overdue 31-90 days Overdue > 90 days On-trade loans Other receivables Not past due Overdue 1-30 days Overdue 31-90 days Overdue > 90 days Other receivables Total Total 2019 Gross receivables Loss allowance Receivables, net 3,178 349 178 406 4,111 797 14 31 796 1,638 1,595 12 53 127 1,787 7,536 8,891 -182 -87 -75 -355 -699 -101 - -3 -395 -499 -3 - - -21 -24 -1,222 -712 2,996 262 103 51 3,412 696 14 28 401 1,139 1,592 12 53 106 1,763 6,314 8,179 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 67 The average effective interest rate on loans to the on-trade was 3.2% (2019: 4.5%). The carrying amount of receivables approximates their fair value. For on-trade loans, the fair value is calculated as discounted cash flows using the interest rate at the reporting date. ON-TRADE LOANS Under certain circumstances, the Group grants loans to on-trade customers in France, the UK, Switzerland, Germany and Sweden. On-trade loans are spread across a large number of customers/debtors and consist of several types of loan, including loans repaid in cash or through reduced discounts and guarantees for loans provided by third parties, cf. section 3.3. The operating entities monitor and control these loans in accordance with Group guidelines. Receivables included in the statement of financial position Weighted average loss rate 6% 25% 42% 87% 13% - 2020 10% 50% Receivables from sales of goods and services On-trade loans Other receivables Operating receivables Prepayment for acquisition 0% Total receivables - - 17% 2019 Receivables from sales of goods and services On-trade loans Other receivables Total Non- current Current Total Receivables Trade receivables Other receivables - 826 178 1,004 501 1,505 3,412 313 - 3,725 - - - 1,585 1,585 - 3,725 1,585 - 975 204 4,889 450 - 1,179 5,339 - - 1,661 1,661 3,412 1,139 1,763 6,314 501 6,815 4,889 1,425 1,865 8,179 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 68 SECTION 1.5 (CONTINUED) TRADE RECEIVABLES AND ON-TRADE LOANS OTHER RECEIVABLES Other receivables primarily comprise VAT and similar government receivables, interest receivables and other financial receivables, which are associated with low risk. The credit risk related to other receivables remains almost unchanged compared with previous years, as they are less impacted by the COVID-19 pandemic. On-trade loans recognised in other operating activities, net DKK million 2020 2019 1.5.1 CREDIT RISK In 2020, receivables not past due amounted to 74% (2019: 77%) of total gross receivables. The closure of on-trade businesses and other COVID-19 restrictions are impacting our customers, increasing in particular the past-due share of gross loans to on-trade customers to 51% (2019: 29%). Total impairment losses on trade loans were DKK 499m (2019: DKK 214m). The past-due share for trade receivables has increased from 21% to 23%. The credit risk is being closely managed in the markets and assessed in light of the changing restrictions, and the COVID-19 impact on the global risk pattern is being evaluated at Group level. government restrictions in response to the COVID-19 pandemic. This makes our customers extremely vulnerable and dependent on ongoing government support in the form of subsidies and extended payment terms. The increased credit risk on both trade receivables and on-trade loans already seen across all markets in 2020 is expected to continue into 2021. The estimated impairment losses consider the expected impact both from the continuing restrictions and when government financial support schemes and extended payment terms come to an end when markets reopen. The distribution of receivables broken down by country is affected by market-specific changes in payment patterns. For receivables from sale of goods and services, the distribution is furthermore impacted by the amounts of receivables sold. The relative share of receivables in the UK has increased following the acquisition of Marston’s brewing activities. The overall level of receivables sold is similar to 2019. Interest and amortisation of on-trade loans Losses and write-downs on on-trade loans On-trade loans, net 50 -254 -204 75 -31 44 Throughout the year and continuing into 2021, our customers in most markets were impacted by lockdowns, full or partial closure of on- trade businesses, restrictions on cultural and sports activities, social distancing and other RECEIVABLES FROM SALES OF GOODS AND SERVICES (BROKEN DOWN BY COUNTRY) ON-TRADE LOANS (BROKEN DOWN BY COUNTRY) 2020 (2019) 2020 (2019) Development in impairment losses on receivables DKK million 2020 Impairment at 1 January Impairment losses recognised Realised impairment losses Reversed impairment losses Transfer Foreign exchange adjustments Impairment at 31 December Receivables from sales of goods and services -477 -323 38 85 -71 49 -699 On-trade loans Other receivables -214 -317 -25 62 -7 2 -499 -21 -2 - 7 -13 5 -24 2019 Total -654 -187 97 57 - -25 Total -712 -642 13 154 -91 56 -1,222 -712 Russia 14% (14%) Sweden 10% (8%) France 27% (29%) Switzerland 24% (27%) UK 10% (4%) France 6% (8%) Norway 6% (6%) Poland 5% (3%) Denmark 5% (5%) Other 44% (52%) Germany 23% (20%) UK 18% (16%) Sweden 8% (9%) CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 69 previous years expected credit losses were applied to on-trade loans. ACCOUNTING POLICIES Expected credit losses are assessed for portfolios of receivables based on customer segments, historical information on payment patterns, terms of payment, concentration maturity, the impact of continuing COVID-19 restrictions and the expected impact of government schemes coming to an end when markets reopen. The expected impact includes the risk of insolvencies due to lack of liquidity when the extended government payment terms cease. The portfolios are based on on-trade and off-trade customers, and on-trade receivables and loans. On-trade loans carry a higher risk than trade receivables and are concentrated on a few markets. The local entities manage and control these loans in accordance with Group guidelines. The credit risk on on-trade loans can be reduced through collateral and pledges of on-trade movables (equipment in bars, cafés etc.). The fair value of the pledged on-trade movables cannot be estimated reliably but is assessed to be insignificant, as they cannot readily be used again. Receivables are recognised initially at fair value and subsequently measured at amortised cost less loss allowance or impairment losses. Trade receivables comprise sale of goods and services as well as short- term on-trade loans to customers. Other receivables comprise VAT receivables, loans to partners, associates and joint ventures, interest receivables and other financial receivables. Regarding the on-trade loans, any difference between the present value and the nominal amount at inception is treated as a prepaid discount to the customer, and is recognised in the income statement in accordance with the terms of the agreement. The market interest rate is used as the discount rate, corresponding to the money market rate based on the maturity of the loan with the addition of a risk premium. The effective interest on these loans is recognised in other operating activities, net. The amortisation of the difference between the discount rate and the effective interest rate is included as a discount in revenue. The Group applies the simplified approach to measure expected credit losses. This entails recognising a lifetime expected loss allowance for all trade receivables. Loss rates are determined based on grouping of trade receivables sharing the same credit risk characteristics and past due days. Regarding on-trade loans and loans to associates, a loss allowance is recognised based on 12-month or lifetime expected credit losses, depending on whether a significant increase in credit risk has arisen since initial recognition. SECTION 1.5 (CONTINUED) TRADE RECEIVABLES AND ON-TRADE LOANS ACCOUNTING ESTIMATES AND JUDGEMENTS On-trade loan agreements are complex, cover several aspects of the customer relationship and may vary from agreement to agreement. Management assesses the recognition and classification of income and expenses for each agreement, including the allocation of payments from the customer between revenue, discounts, interest (other operating activities) and repayment of the loan. Management also assesses both individually and on a portfolio basis whether developments in local conditions for on-trade customers could impact the expected credit losses. Exposure to credit risk on receivables is managed locally, and credit limits are set as deemed appropriate for the customer, taking into account the current local market conditions. The local entities assess the credit risk and adhere to Group guidelines, which include setting credit limits, encouraging cash payment, purchasing credit insurance and taking collateral. In assessing credit risk, management analyses the need for impairment of trade receivables and on- trade loans due to customers’ inability to pay. Many customers are currently dependent on government subsidies and support in the form of extended payment terms. The credit risk has thereby increased significantly during 2020 and is expected to continue to increase into 2021. At year-end 2020, management has therefore assessed the lifetime expected credit losses for both trade receivables and on-trade loans, while in SECTION 2 ASSET BASE AND RETURNS CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 70 118.8bn TOTAL ASSETS (DKK) Total assets decreased by DKK 4.2bn, mainly due to a decrease in intangible assets and property, plant and equipment, which was partly offset by an increase in cash and the acquisition of Marston’s brewing activities. Intangible assets amounted to DKK 66.1bn at 31 December 2020 (2019: DKK 70.0bn), and were impacted by the depreciation of the Russian rouble and the impairment of a brand in Cambodia, and partly offset by the purchase of the Brooklyn brand rights and goodwill from the Marston’s acquisition. Property, plant and equipment decreased by DKK 1.3bn to DKK 26.3bn (2019: DKK 27.6bn), mainly impacted by depreciation and changes in foreign exchange rates. Current assets increased by DKK 1.0bn to DKK 19.0bn. The increase was mainly driven by an increase in cash of DKK 2.9bn and partly offset by lower receivables and inventories. 3.6bn CAPEX (DKK) CapEx, excluding the purchase of the Brooklyn brand rights, declined by DKK 1.0bn due to lower investment in sales CapEx, fewer returnable glass bottles due to lower demand, less need for capacity expansions in draught lines, and general cancellation and postponement of projects that are not business critical at a time when the Group is impacted by the COVID-19 pandemic. CapEx to amortisation and depreciation, excluding right- of-use assets, decreased to 90% (2019: 111%). Including purchase of the Brooklyn brand rights, the ratio amounts to 110%. 8.9% ROIC Return on invested capital (ROIC) increased by 10bp to 8.9%, positively impacted by the lower invested capital and a lower effective tax rate, which more than offset the lower profitability. ROIC excluding goodwill increased by 80bp to 23.2%. ASSET BASE (DKKbn) 7.6 - 8.2 97.6 - 4.3 - 0.4 92.3 CAPEX* AND AMORTISATION/ DEPRECIATION (DKKbn) RETURN ON INVESTED CAPITAL (% 12-MONTH AVERAGE) 5.0 4.0 3.0 2.0 8.0% 7.0% 6.0% 5.0% 24 20 16 12 8 4 CapEx Amortisation and depreciation CapEx/revenue *Excluding the purchase of the Brooklyn brand rights. ROIC ROIC excl. goodwill CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 71 SECTION 2.1 SEGMENTATION OF ASSETS AND RETURNS Both acquisitions had a limited impact on average invested capital, as Carlsberg Marston’s Brewing Company has only been included for two months and the Brooklyn brand rights for six months. The impact on total assets from fluctuations in the Russian rouble was a decrease of DKK 7.5bn (2019: increase of DKK 4.0bn). Not allocated comprises supporting companies without brewing activities and eliminations of investments in subsidiaries, receivables and loans. Invested capital increased following the acquisition of the Brooklyn brand rights and the prepayment for the acquisition of Wernesgrüner Brewery. Geographical allocation of non-current assets At year-end, invested capital was down by DKK 4.6bn, primarily due to the depreciation of the Russian rouble. The decrease was partly offset by the acquisition of Marston’s brewing activities, which increased consolidated assets by DKK 3.3bn, and by the acquisition of the Brooklyn brand rights. Non-current assets comprise intangible assets and property, plant and equipment owned by the segment/country, even if the income is earned outside the segment/country that owns the asset. Furthermore, they include non- current financial assets other than financial instruments and tax assets. DKK million Denmark (Carlsberg A/S' domicile) Russia China Other countries Total 2020 2019 4,260 18,509 14,320 59,459 96,548 3,472 24,518 14,569 59,439 101,998 ACCOUNTING ESTIMATES AND JUDGEMENTS The calculation of return on invested capital (ROIC) uses operating profit before special items adjusted for tax based on the effective tax rate, and invested capital including assets held for sale and trade receivables sold, and excludes contingent considerations and income tax. ACCOUNTING POLICIES The Group’s assets and returns are segmented on the basis of geographical regions in accordance with the management reporting for the current year, cf. section 1.1. Cash and cash equivalents -8,093 -5,222 Invested capital DKK million Total assets Less Tax assets Financial receivables, hedging instruments and receivables sold Assets included Trade payables Deposits on returnable packaging materials Provisions, excl. restructurings Other liabilities, excl. hedging instruments Liabilities offset Invested capital Goodwill Invested capital excl. goodwill 2020 2019 118,816 123,063 DKK million -1,767 -1,938 2020 Invested capital 1,904 1,899 110,860 117,802 -16,598 -17,149 Invested capital excl. goodwill Acquisition of property, plant and equipment and intangible assets Amortisation and depreciation Impairment losses Return on invested capital (ROIC) -1,276 -1,545 ROIC excl. goodwill -4,322 -5,389 2019 -7,123 -7,557 -29,319 -31,640 81,541 86,162 Invested capital Invested capital excl. goodwill Acquisition of property, plant and equipment and intangible assets -50,492 -53,130 Amortisation and depreciation Impairment losses 31,049 33,032 Return on invested capital (ROIC) Invested capital, average 82,227 86,952 ROIC excl. goodwill Western Europe 41,795 19,151 1,474 2,095 50 9.4% 20.2% Asia 18,045 2,682 1,395 1,499 292 15.8% 88.8% Eastern Europe 20,915 8,430 552 654 10 7.0% 17.4% Not allocated Beverages, total Non- beverage 6 6 80,761 30,269 965 78 5 - - 4,386 4,326 357 9.0% 24.4% 780 780 10 10 - - - Carlsberg Group, total 81,541 31,049 4,396 4,336 357 8.9% 23.2% 39,299 18,372 20,464 4,110 27,193 11,344 -2,347 -2,347 84,609 31,479 1,553 1,553 86,162 33,032 2,100 2,025 42 11.5% 23.7% 1,539 1,450 29 14.2% 67.5% 602 710 50 5.8% 13.9% 330 319 - - - 4,571 4,504 121 8.9% 23.1% 21 8 - - - 4,592 4,512 121 8.8% 22.4% CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 72 In 2020, the Group recognised reversal of impairment losses of DKK 2m (2019: DKK 3m) in Eastern Europe relating to assets that have been brought back into production. With the exception of the Angkor brand, the assessment has not identified any indication of impairment of non-current assets as a result of the COVID-19 pandemic. SECTION 2.2 IMPAIRMENT 2.2.1 RECOGNISED IMPAIRMENTS In 2020 and 2019, the impairment tests of goodwill and brands with indefinite useful life were prepared at the reporting date. Impairment losses of DKK 200m relating to the Angkor brand (Cambodia), a minor local brand of DKK 31m, other intangible assets of DKK 4m and DKK 124m (2019: DKK 124m) relating to property, plant and equipment have been recognised. The impairment loss on the Angkor brand is due to a significant decline in volumes impacted by COVID-19 restrictions in the market. In 2019, impairment losses primarily related to steel keg installations and filling lines in the Nordic countries, which were impacted by the roll-out of the DraughtMaster system. Impact of COVID-19 The COVID-19 pandemic and the consequent impact on volumes, earnings and cash flows indicate possible impairment of non-current assets. The Group has carefully assessed the expected recovery from the pandemic in terms of both volumes and earnings. Since the beverage industry is resilient and volumes have to some extent shifted from on-trade to off-trade, it is expected that these will shift back to the on- trade and earnings return to the level before the pandemic. The expected timing and speed of the recovery differ from market to market, depending on the extent of government restrictions as well as consumer behaviour. Impairment of brands and other non-current assets DKK million 2020 2019 Brands and other intangible assets Brands Other intangible assets Total Property, plant and equipment Plant, machinery and equipment Plant, machinery and equipment (reversal of impairment losses) Total Total impairment losses, net Of which recognised in special items, cf. section 3.1 231 4 235 124 -2 122 357 307 6 7 13 111 -3 108 121 91 Significant amounts of goodwill and brands Goodwill and brands with indefinite useful life relating to the acquisitions of Baltika Breweries, Kronenbourg, Chongqing Brewery Group and the 40% non-controlling interest in Carlsberg Breweries A/S each accounted for 10% or more of the total carrying amount of goodwill and brands with an indefinite useful life at the reporting date. Goodwill from these acquisitions has been allocated to CGUs based on the geographical segmentation. The international brands acquired with the 40% non-controlling interest in Carlsberg Breweries A/S and the Baltika brand are individually material and specified in section 2.2.3. ACCOUNTING ESTIMATES AND JUDGEMENTS Identification of cash-generating units The Group’s management structure reflects the geographical segments, cf. section 1.1, and decisions are made by the regional managements responsible for performance, operating investments and growth initiatives in their respective regions. There is significant vertical integration of the production, logistics and sales functions, supporting and promoting optimisations across the Group or within regions. Assets, other than goodwill and brands with regional and global presence, are allocated to individual cash- generating units (CGUs), being the level at which the assets generate largely independent cash inflows. As the Group operates with local sales and production organisations, the cash inflows are generated mostly locally, and the CGUs are therefore usually identified at country level. Within 12 months from the date of acquisition, the determination of CGU allocation is made, and cash inflows are assessed in connection with the purchase price allocation. Goodwill Goodwill does not generate largely independent cash inflows on its own and is therefore allocated to the Group’s geographical segments, which is the level at which it is monitored for internal management purposes. At the time of acquisition of entities, goodwill is allocated to a CGU, cf. section 5.2. The structure and groups of CGUs are reassessed every year. The Group gained control of Marston’s brewing activities in 2020 and of the Acrospires activities in 2019. The goodwill recognised on these acquisitions was allocated to the Western Europe CGU. Brands Cash flows for brands are separately identifiable and are therefore tested individually for impairment. This test is performed in addition to the test for impairment of goodwill. The following brands are considered significant when comparing their carrying amount with the total carrying amount of brands with indefinite useful life: • Baltika brand • International brands International brands is a group of brands recognised in connection with the acquisition of the 40% non- controlling interest in Carlsberg Breweries A/S and allocated to Western Europe. The amount is not allocated to individual brands. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 73 SECTION 2.2 (CONTINUED) IMPAIRMENT Corporate assets The Group has identified capitalised software relating to the Group’s ERP systems as corporate assets, and as such these are peripheral to the generation of cash inflow. The Group’s ERP landscape is closely linked to the internal management structure, and the identified assets are therefore tested for impairment at the CGU level to which goodwill is allocated. Other non-current assets Other non-current assets are tested for impairment when indications of impairment exist. For property, plant and equipment, management performs an annual assessment of the assets’ future application, for example in relation to changes in production structure, restructurings or brewery closures. In 2020, the assessment also included the impact of the COVID-19 pandemic. For investments in associates and joint ventures, examples of indications of impairment are loss- making activities or major changes in the business environment. ACCOUNTING POLICIES Goodwill and brands with indefinite useful life are subject to an annual impairment test, performed initially before the end of the year of acquisition. The test is performed at the level where cash flows are considered to be generated: either at CGU level or at the level of a group of CGUs. All assets are tested if an event or circumstance indicates that the carrying amount may not be recoverable. If an asset’s carrying amount exceeds its recoverable amount, an impairment loss is recognised. The recoverable amount is the higher of the asset’s fair value less costs of disposal and its value in use. For all assets, the value in use is assessed based on budget and target plan with reference to the expected future net cash flows. The assessment is based on the lowest CGU affected by the changes that indicate impairment. The cash flow is discounted by a discount rate adjusted for any risk specific to the asset, if relevant to the applied calculation method. Impairment losses on goodwill and brands, significant losses on property, plant and equipment, associates and joint ventures, and losses arising on significant restructurings of processes and structural adjustments are recognised as special items. Minor losses are recognised in the income statement in the relevant line item. Impairment of goodwill is not reversed. Impairment of other assets is reversed only to the extent of changes in the assumptions and estimates underlying the impairment calculation. Impairment is only reversed to the extent that the asset’s new carrying amount does not exceed the carrying amount of the asset after amortisation/depreciation had the asset not been impaired. 2.2.2 IMPAIRMENT TEST OF GOODWILL The carrying amount of goodwill allocated to groups of CGUs DKK million Western Europe Asia Eastern Europe Total 2020 22,644 15,363 12,485 2019 20,927 16,354 15,849 50,492 53,130 Estimating expected cash flow involves developing multiple probability-weighted scenarios to reflect different outcomes in terms of timing and amount. Measurement of the forecast period growth rates reflects risk adjustments made to calculate the expected cash flows. Key assumptions 2020 Western Europe Asia Eastern Europe Forecast cash flow growth Terminal period growth Pre-tax discount rate -5% 2% -14% 0.0% 1.0% 4.0% 1.5% 4.1% 6.7% The average cash flow growth in the forecast period reflects the significant risk adjustments included in the forecast specifically for the impairment test. The risk adjustment considers only negative alternative scenarios to account for the particular uncertainty related to the continued impact on earnings and cash flow from the COVID-19 pandemic, the time and speed of the recovery, and the volatile macroeconomic and competitive situation in Eastern Europe. Potential upsides are not identified and adjusted in the cash flows used for impairment testing. Growth is projected in nominal terms and therefore does not translate into cash flow at the same growth rate in the Group’s presentation currency, DKK. WESTERN EUROPE The region primarily comprises mature beer markets, and market volumes tend to be flat. In recent years, the region has seen improving beer category dynamics through innovations, increased interest in craft & speciality beers and alcohol-free brews, and an overall improved category perception. The region is generally characterised by well- established retail structures and a strong tradition of beer consumption. Consumption is generally resilient, but the on-trade tends to suffer in a weak macroeconomic environment. In 2020 however, the region suffered as a result of lockdowns across markets due to COVID-19. These will continue into 2021 but are not expected to have a significant long- term effect. In the short term, the focus will be on recovering and regaining ground after the COVID-19 pandemic, and secondly on improving margins by driving a positive price/mix development and reducing the cost base across the value chain. This process is part of the SAIL’22 initiatives. ASIA The importance of Asia for the Group has increased significantly over the past decade, during which the Group has strengthened its presence in the region, both organically and through acquisitions. The Asian markets are very diverse but offer prospects for volume and value growth, underpinned by young populations, urbanisation, rising disposable income levels, growing economies and, in some markets, relatively low per capita beer consumption. However, as many Asian markets are emerging markets, development is subject to volatility. Both the on-trade and off-trade channels are generally characterised by a strong traditional outlet segment but with the modern outlet segment growing in most markets. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 74 SECTION 2.2 (CONTINUED) IMPAIRMENT In 2020, markets in the region were impacted by COVID-19 at different times and to different extents, with some markets already seeing a strong rebound in the second half of the year. The focus in the region is on revenue growth. Activities include the continued expansion of our international premium brands, in particular Tuborg, 1664 Blanc and Carlsberg, and the strengthening and premiumisation of our local power brands in combination with a continued focus on costs and efficiencies. EASTERN EUROPE The two main markets in the region are Russia and Ukraine, which account for 67% and 20% respectively of regional volumes. In recent years, the modern off-trade, consisting of hypermarkets and supermarkets, has grown significantly and now accounts for approximately 50% of the market in Russia. Another growing channel is the so-called beer boutiques, which is estimated to account for around 20% of the market. The region saw limited impact from COVID-19 due to the low on-trade exposure. The competitive environment has been challenging in recent years, particularly in Russia, which has seen an increased focus on volume. To offset previous years’ volume declines caused by the focus on value in this market, the Group chose to focus more on volume, which resulted in significant volume growth in 2020. We expect the focus on volume and the related margin pressure to continue in the coming year. Management expects the current macroeconomic situation and developments to continue in the short term, with inflation stabilising at the current level. In the medium to long term, interest rates are expected to decline and stabilise at a level slightly lower than currently observed in the market, although still with some volatility. NEW SEGMENTATION FOR 2021 As described in section 9.5, the Group’s segmentation and regional split of entities changed as of 1 January 2021, and the allocation of CGUs changed accordingly. This change will not have any impact on the conclusion of the impairment test of goodwill. ACCOUNTING ESTIMATES AND JUDGEMENTS Goodwill The value in use is the discounted value of the expected future risk-adjusted cash flows. This involves developing multiple probability-weighted scenarios to reflect different outcomes in terms of timing and amount. Key assumptions The cash flow is based on the budget and target plans for the next three years. Cash flows beyond the three-year period are extrapolated using the terminal period growth rate. The budget and plans for 2021- 2023 take a cautious view of the extent and speed of the recovery from the COVID-19 pandemic. The probability weighting applied is based on past experience and the uncertainty of the prepared budget and target plans. Potential upsides and downsides identified during the budget process and in the daily business are reflected in the future cash flow scenarios for each CGU. uncertainty regarding the recovery from the pandemic. The risk-adjusted cash flows are discounted using a discount rate that reflects the risk-free interest rate for each CGU with the addition of a spread. The interest rates used in the impairment tests are based on observable market data. Please refer to the description of discount rates in section 2.2.3. The key assumptions on which management bases its cash flow projections are: • Volumes • Sales prices • Input costs • Operating investments • Terminal period growth The assumptions are determined at CGU level and are based on past experience, external sources of information and industry-relevant observations for each CGU. Local conditions, such as expected developments in macroeconomic and market conditions specific to the individual CGUs, are considered. The assumptions are challenged and verified by management at CGU and Group level. The budget and target plan process take into account events or circumstances that are relevant to reliably project the short-term performance of each CGU. Examples include significant campaign activities, changes in excise duties etc., which may have a short-term impact but are non-recurring. Given their short-term nature, they are not taken into consideration when estimating the terminal period growth rate. Impact of COVID-19 For 2020, the current and expected future impact of the COVID-19 pandemic has been carefully considered. The beverage industry is generally resilient, and it is expected that volumes and earnings will recover to pre-pandemic levels within the next few years. The decline in earnings in 2020 is therefore not expected to continue in the long term. However, to avoid overlooking any long-term impact, additional risk adjustments have been made for the Likewise, any impact on the development in volumes, sales prices, input cost and operating investments has been considered. Such impact primarily relates to the expected timing of a given development when this has been slowed down by the pandemic. Volumes Projections are based on past experience, external market data, planned commercial initiatives, such as marketing campaigns and sponsorships, and the expected impact on consumer demand and the level of premiumisation. If relevant, the projections are adjusted for the expected changes in the level of premiumisation. No changes in market share are assumed in the medium or long term. Demographic expectations general to the industry, such as the development in population, consumption levels, generation-shift patterns, rate of urbanisation and of macroeconomic trends, are also considered in medium- and long-term projections. Events and circumstances can impact the timing of volumes entering the market. This can be affected by excessive stocking related to an increase in excise duties, campaign activities, and the timing of national holidays and festivals. Such short-term effects are not material to volume projections and do not impact the long-term projections. Sales prices The level of market premiumisation and the locally available portfolio are key drivers in identifying price points. When planning pricing structures, factors including price elasticity, local competition and inflation expectations can also impact the projection. Increases in excise duties are typically passed on to the customers immediately or with a delay of no more than a few months. Since the increase is a pass-through cost and thereby compensated for by price increases at the time of implementation, it does not impact the long-term sales price growth and is therefore not taken into consideration in the projections unless circumstances specifically indicate CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 75 SECTION 2.2 (CONTINUED) IMPAIRMENT otherwise. No changes to duties in the short or medium term are taken into consideration unless there is a firm plan to introduce changes. Input costs Input costs in the budget and target plans are based on past experience and on: • Contracted raw and packaging materials • Contracted services within sales, marketing, production and logistics • Planned commercial investments • Cost optimisations not related to restructurings • Expected inflation In the long term, projections follow the level of inflation unless long-term contracts are in place. Operating investments Projections are based on past experience of the level of necessary maintenance of existing production capacity, including replacement of parts. This also includes planned production line overhauls and improvements to existing equipment. Non-contracted capacity increases and new equipment are not included. Terminal period growth Growth rates are projected to be equal to or below the expected rate of general inflation and assume no nominal economic growth. The projected growth rates and the applied discount rates are compared to ensure a sensible correlation between the two. In 2020, significant brands represented 55% (2019: 60%) of the total carrying amount of brands with indefinite useful life. The decrease in the carrying amount of the Baltika brand compared with 2019 is due only to the depreciation of RUB. Other brands comprise a total of 19 brands (2019: 18 brands) that individually are not material compared with the total carrying amount. BALTIKA BREWERIES Despite COVID-19, the Russian beer market grew slightly again in 2020, due to the relatively small on-trade sector and supported by very favourable weather during the summer. Showing a positive trend in 2020, the Baltika brand has performed broadly in line with the growth projections made when the expected future growth for the brand was reassessed when the brand was impaired in 2017. ANGKOR BRAND The Angkor brand was recognised in connection with the acquisition of Cambrew Brewery, Cambodia, in 2018. Following the acquisition, the volumes have not developed as expected due to failed attempt to relaunch the brand combined with the impact of COVID-19. The long-term expectations therefore remain significantly below the expectations at the time of acquisition, which is why the brand has been impaired by DKK 200m to DKK 86m. ACCOUNTING ESTIMATES AND JUDGEMENTS Brands The test for impairment of brands is performed using the relief from royalty method and is based on the expected future cash flows generated from the royalty payments avoided for the individual brand for the next 20 years and projections for subsequent years. The risk-free cash flows are discounted using a discount rate reflecting the risk-free interest rate with the addition of the risk premium associated with the individual brand. Key assumptions The key assumptions on which management bases its cash flow projection include the expected useful life, revenue growth, a theoretical tax amortisation benefit, the royalty rate and the discount rate. Expected useful life Management has assessed that the value of brands with indefinite useful life can be maintained for an indefinite period, as these are well-established brands in their markets, some of which have existed for centuries. The beer industry is characterised as being 2.2.3 IMPAIRMENT TEST OF BRANDS Brands with indefinite useful life Key assumptions DKK million Baltika brand International brands Significant brands 2020 4,876 3,000 7,876 2019 6,402 2020 3,000 9,402 Baltika brand International brands Average revenue growth 4.4% 1.1% Terminal period growth Pre-tax discount rate Post-tax discount rate 4.0% 1.4% 11.3% 3.7% 10.0% 3.6% very stable with consistent consumer demand and a predictable competitive environment, and is expected to be profitable for the foreseeable future. Control of the brands is legally established and is enforceable indefinitely. In management’s opinion, the risk of the useful life of these brands becoming finite is minimal because of their individual market positions and because current and planned marketing initiatives are expected to sustain their useful life. Revenue growth At the time of acquisition of any individual brand, a revenue growth curve is forecast based on a long- term strategic view of the risk and opportunities relevant to the brand. The curve is forecast for a 20- year horizon. This horizon reliably reflects the lengthy process of implementing brand strategies to support a brand occupying its intended place in the Group’s portfolio. The forecast period applied is comparable with the common term of the majority of licence agreements to which the Group is party. In the local markets, the product portfolio usually consists of local power brands and international premium brands. When projecting revenue growth for local brands, in addition to their commercial strength – such as market share and segment position – the forecast takes into consideration the demographics of the primary markets, including expected developments in population, consumption levels, generation-shift patterns, rate of urbanisation, beer market maturity, level of premiumisation, circumstances generally limiting the growth opportunities for alcoholic beverages etc. For brands with global or regional presence, enhanced investments in product development and marketing are expected. The expected growth rate for these brands is generally higher than for more localised brands, and is usually highest early in the 20-year period. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 76 SECTION 2.2 (CONTINUED) IMPAIRMENT Depending on the nominal growth expectations for the individual brand, the revenue growth in individual years may be above, equal to or below the forecast inflation level in the markets where the brand is present. When preparing budgets, consideration is given to events or circumstances that are relevant to reliably project the short-term performance of each brand. Examples include significant campaign activities, changes in excise duties etc., which may have a short-term impact but are non-recurring and quickly absorbed by the business. Since the impact is not material to the long-term projections, it is not taken into consideration when estimating the long-term and terminal period growth rates. Please refer to the description of the impact of increases in excise duties in the description of sales prices in section 2.2.2. In 2020, the current drop in revenue due to the COVID-19 pandemic and the expected recovery from this have been carefully considered. As the beverage industry is generally resilient, the decline in revenue in 2020 is expected to have only a short-term impact. Revenue is expected to recover to pre-pandemic levels in the medium and long term. The timing of the recovery has been carefully considered, particularly for brands with lower headroom to the carrying amount. Tax benefit The theoretical tax benefit applied in the test uses tax rates and amortisation periods based on current legislation. The impairment test applies tax rates in the range of 15-31% and amortisation periods of 5- 10 years. Royalty rate Royalties generated by a brand are based on the Group’s total income from the brand and are earned globally, i.e. the income is also earned outside the CGU that owns the brand. If external licence agreements for the brand already exist, the market terms of such agreements are taken into consideration when assessing the royalty rate that the brand is expected to generate in a transaction with independent parties. The royalty rate is based on the actual market position of the individual brand in the global, regional and local markets, and assumes a 20-year horizon. This term is common to the beverage industry when licensing brands. For some brands, the share of the total beer market profit exceeds the volume share to an extent that creates significant market entry barriers for competing brands and justifies a higher royalty rate. In 2020, the royalty rate for one of the brands was adjusted downwards from 15% to 13% due to increased competition in the market and declining margins. Royalty rates International, premium and speciality beers Strong regional and national brands Local and mainstream brands 3.5-13.0% 3.0-5.0% 2.0-3.5% Discount rates The discount rate is a weighted average cost of capital (WACC) that reflects the risk-free interest rate with the addition of a risk premium relevant to each brand. The risk-free interest rates used in the impairment tests are based on observed market data. For countries where long-term risk-free interest rates are not observable or valid due to specific national or macroeconomic conditions, the interest rate is estimated based on observations from other markets and/or long-term expectations expressed by international financial institutions considered reliable by the Group. The added credit risk premium (spread) for the risk- free interest rate is fixed at market price or slightly higher, reflecting the expected long-term market price. The aggregate interest rate, including spread, thereby reflects the long-term interest rate applicable to the Group’s investments in the individual markets. Interest rates applied in Eastern Europe In recent years, the macroeconomic situation has deteriorated significantly in Eastern Europe, resulting in interest rates and inflation increasing to a level significantly higher than the Group’s long-term expectations. In 2020, observable interest rates and inflation have normalised to the level expected by key international financial institutions. The observable risk-free interest and inflation have therefore been applied in the impairment test for 2020. The Group continues to monitor market developments and compare these with the expectations of key international financial institutions to determine if the observable data can be applied. The use of expected future interest rates in previous years in lieu of appropriate observable interest rates did not impact the conclusion of the impairment test because the relationship between discount rates and growth rates (the real interest rate) was expected to be constant. Expectations for the long-term real interest rate remain a key assumption for the impairment testing in general, and for CGUs with exposure to the Russian market in particular. The impairment test of the Baltika brand is sensitive to changes in the real interest rate. Since no expected future long-term real interest rate can be directly observed, the estimate of a real interest rate is subjective and associated with risk. Interest rates applied in Western Europe Western Europe is experiencing very low interest rates, which in several countries are even lower than inflation, resulting in negative real interest rates. The Group generally applies a growth rate in the terminal period that is equal to or slightly lower than expected inflation. Management does not expect assets and CGUs subject to impairment testing to have a negative real interest rate in perpetuity. To avoid applying negative real interest rates in perpetuity, the discount rate used to calculate net present value of the cash flows in the terminal period has been adjusted to incorporate an interest rate that is at least equal to the expected rate of inflation. 2.2.4 SENSITIVITY TESTS Sensitivity tests have been performed to determine the lowest forecast and terminal period growth rates and/or highest discount rates that can occur in the groups of CGUs and brands with indefinite useful life without leading to any impairment loss. The risk-free interest rates observable for Western Europe remained low at the end of 2020. The sensitivity tests calculate the impact of higher interest rates and allow for a double- digit percentage-point increase in risk-free interest rates. Due to a challenging macroeconomic situation in some CGUs and groups of CGUs, the Group performed additional sensitivity tests to ensure that no potential impairment had been overlooked. These additional sensitivity tests did not identify any potential impairment. GOODWILL The test for impairment of goodwill did not identify any CGUs or groups of CGUs to which goodwill is allocated where a reasonably possible negative change in a key assumption would cause the carrying amount to exceed the recoverable amount. SECTION 2.2 (CONTINUED) IMPAIRMENT The goodwill allocated to Eastern Europe was primarily recognised when the Group completed the step acquisition of the remaining 50% of the Baltic Beverage Holding Group from Scottish & Newcastle in 2008. However, the impairment test includes 100% of the cash flow generated by Eastern Europe, resulting in the recoverable amount significantly exceeding the carrying amount. BRANDS Following the impairment losses recognised in 2017 and 2015 for the Baltika brand, a reasonably possible negative change in a key assumption would cause the carrying amount to exceed the recoverable amount. The sensitivity to changes in the assumptions is shown in the table below. Key assumptions The key assumptions relevant to the assessment of the recoverable amount are: • Volume • Price • Discount rate The assumptions for volume and pricing are closely linked, which, together with the presence of multiple sub-brands in different geographies within each brand, makes individual sensitivity testing on the basis of these two assumptions highly impractical. Instead, sensitivity testing is performed for the overall revenue growth rate, in both the forecast period and the terminal period. The sensitivity test for the maximum decline in growth rate in the forecast period assumes a year-on-year decline in the nominal growth rate, thereby estimating the accumulated effect of a negative change for the full forecast period. The sensitivity tests were completed with all other assumptions unchanged, as it is relevant to assess the sensitivity to, for example, a decline in the growth rate independently of changes in the discount rate. This is because the growth rate in itself might be impacted by changes in brand strategy and other market factors. The sensitivity calculated also assumes a straight-line impact despite the fact that changes in market dynamics and adjustments to these will in practice have different impacts in the individual years and might not apply in the long term. Interest rates in Western Europe have been low for several years and are currently lower than inflation. An increase in the interest rates without a corresponding change in inflation would result in a lower recoverable amount for brands and could potentially lead to impairment. Management considers the risk of a significant write-down to be very low. Baltika brand The Baltika brand was written down to its recoverable amount at the end of 2017. As a result, even a small negative change in the key assumptions could lead to further impairment. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 77 result in a reduction in the recoverable amount of DKK 1.3bn. Angkor brand As the Angkor brand was written down to the recoverable amount in 2020, a reasonably possible negative change in the key assumptions could lead to further impairment. Following the impairment, the carrying amount of the brand amounts to DKK 86m. Any increase in the risk-free interest rate or decrease in the terminal growth rate would therefore result in a minor additional impairment. At 31 December 2020, the carrying amount of the Baltika brand was DKK 4,876m (2019: DKK 6,402m). The decline in the carrying amount is due to the depreciation of RUB. Changes in the market dynamics in Russia and the increasingly challenging competitive environment could have a significant negative impact on the recoverable amount. Macroeconomic recovery could lead to further premiumisation or localisation, which could drive consumers towards international brands or local/regional brands. An increase in the real interest rate from the current level (2.7%), either because of a higher interest rate or lower inflation, could significantly reduce the recoverable amount. A 1 percentage point increase in the risk-free interest rate would result in a reduction in the recoverable amount of DKK 0.7bn, and a 1 percentage point decrease in the terminal growth rate would result in a reduction in the recoverable amount of DKK 0.3bn. The combined effect of a 1 percentage point negative change in the interest rate, the terminal growth rate and the average growth rate in the forecast period (year on year) would Sensitivity test DKKbn ∆ Baltika brand Average forecast growth rate Terminal period growth rate Risk-free interest rate -1 %-point -1 %-point +1 %-point -0.5 -0.3 -0.7 SECTION 2.3 INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT DKK million 2020 Cost Cost at 1 January Acquisition of entities Additions, including right-of-use assets Disposals Transfers Foreign exchange adjustments etc. Cost at 31 December Disposals Amortisation and depreciation Impairment losses Transfers Foreign exchange adjustments etc. Amortisation, depreciation and impairment losses at 31 December Carrying amount at 31 December Right-of-use assets included at 31 December Amortisation and depreciation Carrying amount at 31 December CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 78 Intangible assets Property, plant and equipment Asset base Goodwill Brands Other intangible assets Total Land and buildings Plant and machinery Other equipment, fixtures and fittings Total Total 54,748 27,548 4,967 87,263 18,978 30,595 15,760 65,333 152,596 1,812 - - - - 804 - - -4,496 -4,296 52,064 24,056 - 245 -66 -6 -173 4,967 1,812 1,049 -66 -6 -8,965 81,087 - - - - -46 1,572 50,492 - 20 231 - -2,417 9,427 14,629 -42 167 4 - -127 4,027 940 -42 187 235 - -2,590 15,026 66,061 634 224 -603 1,049 -1,054 19,228 8,258 -464 653 8 9 -299 8,165 11,063 258 1,781 -846 -1,222 -2,087 28,479 18,827 -815 1,448 84 10 -1,399 18,155 10,324 373 1,818 -1,392 195 -1,140 15,614 10,641 -1,253 2,048 30 1 -765 10,702 4,912 1,265 3,823 -2,841 22 -4,281 63,321 3,077 4,872 -2,907 16 -13,246 144,408 37,726 54,962 -2,532 4,149 122 20 -2,463 37,022 26,299 -2,574 4,336 357 20 -5,053 52,048 92,360 - - - - - - - - 178 942 11 25 207 415 396 1,382 396 1,382 Amortisation, depreciation and impairment losses Amortisation, depreciation and impairment losses at 1 January 1,618 11,593 4,025 17,236 SECTION 2.3 (CONTINUED) INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT DKK million 2019 Cost Cost at 1 January Recognition of right-of-use assets Restated cost at 1 January Acquisition of entities Additions, including right-of-use assets Disposals Transfers Foreign exchange adjustments etc. Cost at 31 December Disposals Amortisation and depreciation Impairment losses Transfers Foreign exchange adjustments etc. Amortisation, depreciation and impairment losses at 31 December Carrying amount at 31 December Right-of-use assets included at 31 December Amortisation and depreciation Carrying amount at 31 December CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 79 Intangible assets Property, plant and equipment Asset base Goodwill Brands Other intangible assets Total Land and buildings Plant and machinery 52,752 25,028 5,683 83,463 - - - - 52,752 25,028 5,683 83,463 22 - - - 301 - - - 1,974 2,219 4 118 -925 3 84 327 118 -925 3 4,277 17,321 1,005 18,326 - 424 -873 515 586 28,960 23 28,983 115 2,139 -1,028 -680 1,066 Other equipment, fixtures and fittings 14,197 564 14,761 4 2,448 -2,011 156 402 60,478 1,592 62,070 119 5,011 -3,912 -9 2,054 54,748 27,548 4,967 87,263 18,978 30,595 15,760 65,333 Total Total - - - - 12 1,618 53,130 - 21 6 - 1,261 11,593 15,955 4,467 -914 405 7 -3 63 4,025 942 16,378 -914 426 13 -3 1,336 17,236 70,027 7,779 -434 624 35 10 244 8,258 10,720 17,447 -884 1,420 64 -16 796 18,827 11,768 10,131 -1,825 2,042 9 9 275 10,641 5,119 35,357 -3,143 4,086 108 3 1,315 37,726 27,607 - - - - - - - - 167 1,013 8 26 227 469 402 1,508 402 1,508 143,941 1,592 145,533 446 5,129 -4,837 -6 6,331 152,596 51,735 -4,057 4,512 121 - 2,651 54,962 97,634 Amortisation, depreciation and impairment losses Amortisation, depreciation and impairment losses at 1 January 1,606 10,305 SECTION 2.3 (CONTINUED) INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment under construction amounted to DKK 1,121m (2019: DKK 1,514m). The decrease mainly relates to the new central office in Copenhagen being ready for use on 1 March 2020. Property, plant and equipment under construction are recognised in plant and machinery until completion. Other equipment, fixtures and fittings include transport, office and draught beer equipment, coolers and returnable packaging materials. Other intangible assets include software, land use rights and beer delivery rights. RIGHT-OF-USE ASSETS The Group leases various properties and warehouses, production equipment, cars and trucks. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. At 31 December 2020, the carrying amount of right-of-use assets amounted to DKK 1,382m. During the year, additions amounted to DKK 476m and depreciation to DKK 396m. Lease expenses recognised in the income statement, relating to short-term leases and leases of low-value assets, amounted to DKK 44m. Such contracts comprise the lease of copy and printing machines, coffee machines, small IT devices and similar equipment. For disclosures of the interest expenses and lease liabilities, please refer to sections 4.1, 4.4.1 and 4.7. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 80 CAPITAL COMMITMENTS The Group has entered into various capital commitments that will not take effect until after the reporting date and have therefore not been recognised in the consolidated financial statements. Capital commitments amounted to DKK 41m (2019: DKK 56m). ACCOUNTING ESTIMATES AND JUDGEMENTS Useful life and residual value of intangible assets with finite useful life and property, plant and equipment Useful life and residual value are initially assessed both in acquisitions and in business combinations. Management assesses brands and property, plant and equipment for changes in useful life. If an indication of a reduction in the value or useful life exists, such as changes in production structure, restructuring and brewery closures, the asset is tested for impairment. If necessary, the asset is written down or the amortisation/depreciation period is reassessed and, if necessary, adjusted in line with the asset’s changed useful life. When changing the amortisation or depreciation period due to a change in the useful life, the effect on amortisation/ depreciation is recognised prospectively as a change in accounting estimates. Lease and service contracts At inception of a contract, management assesses whether the contract is or contains a lease. Management considers the substance of any service being rendered to classify the arrangement as either a lease or a service contract. Particular importance is attached to whether fulfilment of the contract depends on the use of specific assets. The assessment involves judgement of whether the Group obtains substantially all the economic benefits from the use of the specified asset and whether it has the right to direct how and for what purpose the asset is used. If these criteria are satisfied at the commencement date, a right-of-use asset and a lease liability are recognised in the statement of financial position. In determining the lease term, management considers all the facts and circumstances that create an economic incentive to exercise an extension option or not to exercise a termination option. Extension or termination options are only included in the lease term if the lease is reasonably certain to be extended or not terminated. The term is reassessed if a significant change in circumstances occurs. The assessment of purchase options follows the same principles as those applied for extension options. The lease payment for cars and trucks often includes costs of service and insurance. If these costs are not objectively accessible, the Group estimates the costs when separating the service component from the lease. Amortisation, depreciation and impairment losses DKK million Cost of sales Sales and distribution expenses Administrative expenses Special items Total Intangible assets Property, plant and equipment 2020 38 71 78 235 422 2019 46 209 171 13 439 2020 2,666 1,249 284 72 4,271 2019 2,591 1,267 258 78 Gain/loss on disposal of assets DKK million Gain on disposal of property, plant and equipment and intangible assets Loss on disposal of property, plant and equipment and intangible assets 4,194 Total 2020 76 -23 53 2019 90 -34 56 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 81 SECTION 2.3 (CONTINUED) INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT ACCOUNTING POLICIES Cost Intangible assets and property, plant and equipment are initially recognised at cost and subsequently measured at cost less accumulated amortisation or depreciation and impairment losses. Cost comprises the purchase price and costs directly attributable to the acquisition until the date when the asset is available for use. The cost of acquired brand rights is accounted for using the accumulated cost approach if the total consideration includes an earn- out dependent on the brands’ future performance. The cost of self-constructed assets comprises direct and indirect costs of materials, components, sub- suppliers, wages and salaries, and capitalised borrowing costs on specific or general borrowings attributable to the construction of the asset, and is included in plant and machinery. Research and development costs are recognised in the income statement as incurred. Development costs of intangible assets, for example software, are recognised as other intangible assets if the costs are expected to generate future economic benefits. For assets acquired in business combinations, including brands and property, plant and equipment, cost at initial recognition is determined by estimating the fair value of the individual assets in the purchase price allocation. Goodwill is only acquired in business combinations and is measured in the purchase price allocation. Goodwill is not amortised but is subject to an annual impairment test, cf. section 2.2. Where individual components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items. Subsequent costs, for example in connection with replacement of components of property, plant and equipment, are recognised in the carrying amount of the asset if it is probable that the costs will result in future economic benefits for the Group. The replaced components are derecognised from the statement of financial position and recognised as an expense in the income statement. Costs incurred for ordinary repairs and maintenance are recognised in the income statement as incurred. Useful life, amortisation, depreciation and impairment losses Useful life and residual value are determined at the acquisition date and reassessed annually. If the residual value exceeds the carrying amount, depreciation is discontinued. Amortisation and depreciation are recognised on a straight-line basis over the expected useful life of the assets, taking into account any residual value. The expected useful life and residual value are determined based on past experience and expectations of the future use of assets. Depreciation is calculated on the basis of the cost less the residual value and impairment losses. Amortisation and depreciation are recognised as cost of sales, sales and distribution expenses, and administrative expenses depending on the use of the asset. The expected useful life is as follows: Brands with finite useful life Normally 20 years Software Delivery rights Normally 3-5 years. Group-wide systems developed as an integrated part of a major business development programme: 5-7 years Depending on contract; if no contract term has been agreed, normally not exceeding 5 years Customer agreements/ relationships Depending on contract with the customer; if no contract exists, normally not exceeding 20 years Buildings Technical installations Brewery equipment Filling and bottling equipment Technical installations in warehouses On-trade and distribution equipment Fixtures and fittings, other plant and equipment Returnable packaging materials Hardware Land 20-40 years 15 years 15 years 8-15 years 8 years 5 years 5-8 years 3-10 years 3-5 years Not depreciated Impairment Impairment losses of a non-recurring nature are recognised under special items. Leases At the commencement date, the Group recognises a lease liability and a corresponding right-of-use asset at the same amount, except for short-term leases of 12 months or less and leases of low-value assets. A right-of-use asset is initially measured at cost, which consists of the initial lease liability and initial direct costs less any lease incentives received. The Group has applied the practical expedient option allowed under IFRS by using a portfolio approach for the recognition of lease contracts related to assets of the same nature and with similar lease terms, i.e. cars and trucks. Subsequently, the right-of-use asset is measured at cost less depreciation and impairment losses and adjusted for remeasurement of the lease liability. The right-of-use asset is depreciated over the earlier of the lease term or the useful life of the asset. The impairment testing of right-of-use assets follows the same principles as those applied for property, plant and equipment, cf. section 2.2. Right-of-use assets are recognised as property, plant and equipment. The Group has elected not to recognise right-of-use assets and liabilities for leases with a term of 12 months or less and leases of low-value assets. Lease payments related to such leases are recognised in the income statement as an expense on a straight-line basis over the lease term. Government grants and other funding Grants and funding received for the acquisition of assets and development projects are recognised in the statement of financial position by deducting the grant from the carrying amount of the asset. The grant is recognised in the income statement over the life of the asset as a reduced depreciation charge. SECTION 3 SPECIAL ITEMS AND PROVISIONS 700m SPECIAL ITEMS, INCOME (DKK) Impacted by reversal of provisions made in purchase price allocations in previous years. SECTION 3.1 SPECIAL ITEMS SPECIAL ITEMS, INCOME In 2020, the Group recognised reversal of provisions made in purchase price allocations in a prior year (DKK 586m) and a gain on disposal of the last part of the former brewery site in Hamburg, Germany (DKK 62m). -947m SPECIAL ITEMS, EXPENSES (DKK) Primarily impacted by restructurings across the Group and write-down of the Angkor brand and brewery equipment in Cambodia. In 2019, the Group recognised gains on the disposal of a brewery site in Trondheim, Norway, and the former brewery site in Hamburg, Germany. SPECIAL ITEMS, EXPENSES In 2020 and 2019, the Group carried out various restructuring projects as part of the continued focus on cost and efficiency initiatives. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 82 initiated. The restructuring projects entailed changes within almost all functions, including termination of employees. In addition, costs incurred to ensure the health and safety of our employees, such as personal protective equipment, hand sanitiser and masks, and donations to local communities during the pandemic have been recognised as special items. These costs are considered to be by nature non-recurring and collectively significant to the Group’s performance. Special items DKK million Special items, income Reversal of provisions made in purchase price allocations in a prior year Gain on disposal of entities and assets Disposal of property, plant and equipment previously impaired, including adjustments to gains and reversal of provisions made in prior years Total The COVID-19 pandemic had a negative impact on the Group’s performance in 2020, with government impositions such as lockdowns, travel restrictions, limited social gatherings and social distancing resulting in the closure or reduced operation of on-trade outlets and other businesses. To ensure that the Group is fit for the post-COVID-19 reality, a programme to reset the business was Special items, expenses Impairment of brands, cf. section 2.2 Impairment of property, plant and equipment Reset, other restructurings and provisions Provision related to disposal of real estate COVID-19, personal protective equipment and donations Adjustment of contingent consideration Costs related to acquisition of entities etc. Total Special items, net 2020 2019 586 62 52 700 -231 -74 -419 - -69 -29 -125 -947 -247 - 1,061 3 1,064 -6 - -441 -110 - - -6 -563 501 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 83 SECTION 3.1 (CONTINUED) SPECIAL ITEMS The year was also impacted by write-downs, primarily of the Angkor brand and brewing equipment in Cambodia due to a significant decline in volumes following an unsuccessful attempt to relaunch the brand coupled with the impact of COVID-19 restrictions in the market. In 2019, special items also included an increase in provisions retained by the Group on disposal of a former brewery site in previous years. ACCOUNTING ESTIMATES AND JUDGEMENTS ACCOUNTING POLICIES The use of special items entails management judgement in the separation from ordinary items. Management carefully considers individual items and projects (including restructurings) in order to ensure the correct distinction and split between operating activities and significant income and expenses of a special nature. Management initially assesses the entire restructuring project and recognises all present costs of the project. The projects are assessed on an ongoing basis, with additional costs possibly being incurred during the lifetime of the project. The estimate includes expenses related to termination of employees, onerous contracts, break fees and other obligations arising in connection with restructurings. Management reassesses the useful life and residual value of non-current assets used in an entity undergoing restructuring. Special items include significant income and expenses of a special nature in terms of the Group’s revenue- generating activities that cannot be attributed directly to the Group’s ordinary operating activities. Special items also include significant non-recurring items, including termination benefits related to retirement of members of the Executive Committee, impairment of goodwill and brands, significant provisions in relation to certain disputes and lawsuits, gains and losses on the disposal of activities and associates, revaluation of the shareholding in an entity held immediately before a step acquisition of that entity, and transaction costs in a business combination. Significant restructuring of processes and structural adjustments are included in special items. Special items are shown separately from the Group’s ordinary operations to facilitate a better understanding of the Group’s financial performance. Impact of special items on operating profit DKK million 2020 2019 If special items had been recognised in operating profit before special items, they would have been included in the following line items: Cost of sales Sales and distribution expenses Administrative expenses Other operating income Other operating expenses Special items, net -111 -305 -307 668 -192 -247 -296 -77 55 1,061 -242 501 SECTION 3.2 PROVISIONS Restructuring provisions relate to termination benefits to employees made redundant, primarily as a result of a restructuring project accounted for as special items. The restructuring provision in 2020 of DKK 274m primarily related to Reset for the future. Other restructurings mainly relates to Kronenbourg, Ringnes, Carlsberg Sverige and certain local supply companies. Other provisions of DKK 3,846m related to ongoing disputes and lawsuits, profit sharing in France and employee obligations other than retirement benefits. The provision has been impacted by reversal of provisions made in purchase price allocations in previous years, as described in section 3.1, and reversal of provisions in relation to real estate and other contractual obligations that did not materialise, in total DKK 1,136m. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 84 A provision for onerous contracts is recognised when the benefits expected to be derived by the Group from a contract are lower than the unavoidable costs of meeting its obligations under the contract. ACCOUNTING ESTIMATES AND JUDGEMENTS ACCOUNTING POLICIES In connection with restructurings, management assesses the timing of the costs to be incurred, which influences the classification as current or non-current liabilities. Provision for onerous contracts is based on agreed terms with the other party and expected fulfilment of the contract, based on the current estimate of volumes, use of raw materials etc. Management assesses provisions, contingent assets and liabilities, and the likely outcome of pending or probable lawsuits etc. on an ongoing basis. The outcome depends on future events, which are by nature uncertain. In assessing the likely outcome of lawsuits and tax disputes etc., management relies on external legal advice and established precedents. Provisions, including profit-sharing provisions, are recognised when, as a result of events arising before or at the reporting date, the Group has a legal or a constructive obligation and it is probable that there may be an outflow of economic benefits to settle the obligation. Provisions are discounted if the effect is material to the measurement of the liability. The Group’s average borrowing rate is used as the discount rate. Restructuring costs are recognised when a detailed, formal restructuring plan has been announced to those affected no later than at the reporting date. On acquisition of entities, restructuring provisions in the acquiree are only included in the opening balance when the acquiree has a restructuring liability at the acquisition date. Provisions DKK million Provisions at 1 January 2020 Additional provisions recognised Used during the year Reversal of unused provisions Transfers Discounting Foreign exchange adjustments etc. Provisions at 31 December 2020 Recognised in the statement of financial position Non-current provisions Current provisions Total Restructurings 311 188 -198 -22 8 1 -14 274 80 194 274 Onerous contracts 400 178 -28 -62 - 4 -16 476 443 33 476 Other 4,989 357 -266 Total 5,700 723 -492 -1,136 -1,220 29 23 -150 3,846 37 28 -180 4,596 2,796 1,050 3,846 3,319 1,277 4,596 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 85 Although no final rulings have been made in the ongoing cases, there is still significant risk related to these cases due to the inherent uncertainty. Management and the general counsel continuously assess these risks and their likely outcome. It is the opinion of management and the general counsel that, apart from items recognised in the statement of financial position, the outcome of these lawsuits, disputes etc. cannot be reliably estimated in terms of amount or timing. The Group does not expect the ongoing lawsuits and disputes to have a material impact on the Group’s financial position, net profit or cash flow, in excess of items recognised in the statement of financial position. GUARANTEES AND COMMITMENTS The Group has issued guarantees for loans etc. raised by third parties (non-consolidated entities) of DKK 304m (2019: DKK 395m). In 2020 and 2019, no guarantees were issued for loans raised by associates and joint ventures. Certain guarantees etc. are issued in connection with disposal of entities and activities, and in connection with on-trade loans. Apart from items recognised in the statement of financial position or disclosed in the consolidated financial statements, these guarantees etc. will not have a material effect on the Group’s financial position. Capital commitments, lease liabilities and service agreements are described in section 2.3. SECTION 3.3 CONTINGENT LIABILITIES The Group operates in very competitive markets where consolidation is taking place within the industry and among our customers and suppliers, all of which in different ways influences our business. In the ordinary course of business, the Group is party to certain lawsuits, disputes etc. of varying content and scope, some of which are referred to below. The resolution of these lawsuits, disputes etc. is associated with uncertainty, as they depend on relevant applicable proceedings, such as negotiations between the parties affected, government actions and court rulings. In 2020, the German Supreme Court overruled the Higher Regional Court of Düsseldorf, which in 2019 had ruled in favors of Carlsberg Deutschland in relation to the competition case from 2014, in which the Federal Cartel Office in Germany issued a decision and imposed a fine of EUR 62m for alleged infringement of the competition rules in 2007. The German Supreme Court referred the competition case back to a new Senate for full new proceedings. In 2018 and 2019, the Group's associate Super Bock in Portugal received three separate statements of objections from the local competition authority. Two of these cases are still awaiting a final decision, whereas the third case has been dropped by the Portuguese competition authority without any consequence for Super Bock. A private consumer protection organisation in Portugal has made public that it intends to raise a civil claim of EUR 400m against Super Bock for compensation to Portuguese consumers for alleged harm on account of Super Bock’s alleged anticompetitive practices. In 2018, a dawn raid was conducted at the Group’s subsidiary in India. At 31 December 2020, the case was still ongoing, and Carlsberg India is still awaiting the final decision of the competition authorities, which could entail a fine. The Group is party to arbitration proceedings in Singapore with a partner who is the non- controlling shareholder of the Group entities in question. The dispute relates to the Shareholders’ Agreement between Carlsberg and the partner. SECTION 4 FINANCING COSTS, CAPITAL STRUCTURE AND EQUITY CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 86 21.3bn NET INTEREST-BEARING DEBT (DKK) At 31 December 2020, gross financial debt amounted to DKK 30.3bn (2019: DKK 25.0bn). Net interest-bearing debt was DKK 21.3bn, an increase of DKK 2.5bn versus year-end 2019. The financial position was impacted by lower- than-normal free cash flow due to the COVID- 19 impact on the business and the issue of two bonds for a total of EUR 1bn. The leverage ratio, measured as net interest- bearing debt to operating profit before depreciation, amortisation and impairment losses, was 1.51x at year-end (2019: 1.25x). CHANGES IN NET INTEREST-BEARING DEBT (DKKbn) 18.8 -10.9 2.4 0.1 3.1 3.5 2.9 0.8 0.2 0.4 21.3 2.9bn SHARE BUY-BACK (DKK) During 2020, the Company repurchased shares worth DKK 2.9bn under the share buy-back programmes initiated in 2019 and 2020. 43.4bn EQUITY (DKK) Equity amounted to DKK 43.4bn at 31 December 2020 (2019: DKK 46.0bn), DKK 39.3bn of which was attributable to shareholders in Carlsberg A/S and DKK 4.1bn to non-controlling interests. The change in equity of DKK -2.6bn was the result of the consolidated profit of DKK 6.8bn, foreign exchange on translation of DKK 7.6bn, the dividend payout of DKK 3.9bn, the share buy-back of DKK 2.9bn, acquisition of entities of DKK 1.0bn and non-controlling interests of DKK 3.8bn. The non-controlling interests were impacted by the acquisition of 60% of Marston’s brewing activities in the UK, the simultaneous disposal of 40% of the Group's subsidiaries in the UK, and the injection of the Group’s Chinese entities into Chongqing Jianiang, cf. section 5.3. -411m NET FINANCIAL ITEMS (DKK) Financial items, net, amounted to DKK -411m against DKK -738m in 2019. Excluding currency gains and fair value adjustments, financial items, net, amounted to DKK -550m (2019: DKK -650m), positively impacted by a reduction in other financial expenses. LEVERAGE RATIO (NIBD/EBITDA) 2.2 1.8 1.4 1.0 2016 2017 2018 2019 2020 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 87 SECTION 4.1 FINANCIAL INCOME AND EXPENSES Interest income primarily relates to interest on cash and cash equivalents measured at amortised cost. Foreign exchange gains, net, include fair value adjustments of hedges and foreign exchange gains. The fair value adjustment of hedges not designated as hedging instruments amounted to DKK -49m (2019: DKK 88m), cf. section 4.8. Foreign exchange gains amounted to DKK 188m (2019: DKK -176m). Of the net change in fair value of cash flow hedges transferred to the income statement, DKK -30m (2019: DKK -102m) has been included in revenue and cost of sales and DKK -2m (2019: DKK 7m) in financial items. FINANCIAL ITEMS, NET (DKKbn) -1.6 -1.4 -1.2 -1 -0.8 -0.6 -0.4 -0.2 0 Financial items recognised in the income statement DKK million Financial income Interest income Foreign exchange gains, net Interest on plan assets, defined benefit plans Other Total Financial expenses Interest expenses Capitalised financial expenses Foreign exchange losses, net Interest cost on obligations, defined benefit plans Interest expenses, lease liabilities Other Total Financial items, net, recognised in the income statement Financial items excluding foreign exchange, net Financial items, net Financial items, net, excl. fair value and FX adjustments 2020 2019 81 139 114 39 373 -484 1 - -160 -12 -129 -784 -411 -550 135 - 189 36 360 -519 18 -88 -256 -12 -241 -1,098 -738 -650 Financial items recognised in other comprehensive income DKK million 2020 2019 Foreign exchange adjustments of foreign entities Foreign currency translation of foreign entities Recycling of cumulative translation differences of entities acquired in step acquisitions or disposed of Total Fair value adjustments of hedging instruments Change in fair value of effective portion of cash flow hedges Change in fair value of cash flow hedges transferred to the income statement Change in fair value of net investment hedges Total -7,640 3,479 - -7,640 6 3,485 103 32 63 198 -93 95 -325 -323 Financial items, net, recognised in other comprehensive income -7,442 3,162 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 88 SECTION 4.2 NET INTEREST- BEARING DEBT SECTION 4.3 CAPITAL STRUCTURE 4.3.1 CAPITAL STRUCTURE Management regularly assesses whether the Group’s capital structure is in the interests of the Group and its shareholders. The overall objective is to ensure a continued development and strengthening of the Group’s capital structure that supports long-term profitable growth and a solid increase in key earnings and ratios. This includes assessment of and decisions on the split of financing between share capital and borrowings, which is a long-term strategic decision to be made in connection with significant investments and other transactions. Of the gross financial debt at year-end, 97% (2019: 84%) was long term, i.e. with maturity of more than one year. Long-term and short-term borrowings amounted to DKK 30.3bn at 31 December 2020 (2019: DKK 25.0bn). Long-term borrowings totalled DKK 29.3bn (2019: DKK 20.9bn) and short-term borrowings totalled DKK 1.0bn (2019: DKK 4.1bn). The increase in long-term borrowings is mainly due to the issue of a 10-year EUR 500m bond maturing in March 2030 and a 7-year EUR 500m bond maturing in June 2027. Both bonds were issued to secure continued strong liquidity and financial flexibility. The difference of DKK 9.0bn between gross financial debt and net interest-bearing debt mainly comprised cash and cash equivalents and on-trade loans. Carlsberg A/S’ share capital is divided into two classes (A shares and B shares). Combined with the Carlsberg Foundation’s position as majority shareholder (in terms of control), management considers that this structure will remain advantageous for all of the shareholders, enabling and supporting the long-term development of the Group. The Group targets a leverage ratio below 2.0x. At the end of 2020, the leverage ratio was 1.51x (2019: 1.25x). The Group currently uses share buy-back programmes to return excess cash to shareholders. The share buy-back programmes are initiated based on a cautious evaluation of the Group’s funding flexibility and credit resources available. The size and duration of each programme depend on the expected organic and inorganic investments needed to grow the business and the Group’s intention to maintain a leverage ratio below 2.0x. Net interest-bearing debt Class A shares Class B shares Total share capital Share capital The Group generally intends to cancel treasury shares that are not used for hedging of incentive programmes. The Group is rated by Moody’s Investors Service and Fitch Ratings. Management assesses the risk of changes in the Group’s investment-grade rating as an element in strategic decisions on capital structure. Identification and monitoring of risks that could change the rating were carried out on an ongoing basis throughout the year. 4.3.2 SHARE CAPITAL At the Annual General Meeting on 16 March 2020, it was decided to reduce the share capital of Carlsberg A/S by a nominal amount of DKK 88,000,000 to a nominal amount of DKK 2,963,136,120 by cancelling 4,400,000 of the B shares held by the Company, each with a nominal value of DKK 20. The cancellation was completed on 14 April 2020. These shares had been repurchased as part of the Company’s share buy-back programme running from 6 February 2019 to 30 January 2020. DKK million 2020 2019 Non-current borrowings 29,291 20,879 Current borrowings Gross financial debt Cash and cash equivalents Net financial debt Loans to associates, interest-bearing portion On-trade loans, net Other receivables, net 959 4,112 30,250 24,991 -8,093 22,157 -209 -618 -67 -5,222 19,769 -226 -668 -99 Net interest-bearing debt 21,263 18,776 Shares of DKK 20 Nominal value, DKK ’000 Shares of DKK 20 Nominal value, DKK ’000 Shares of DKK 20 Nominal value, DKK ’000 1 January 2019 33,699,252 673,985 118,857,554 2,377,151 152,556,806 3,051,136 No change in 2019 - - - - - - 31 December 2019 33,699,252 673,985 118,857,554 2,377,151 152,556,806 3,051,136 Cancellation of treasury shares - - -4,400,000 -88,000 -4,400,000 -88,000 31 December 2020 33,699,252 673,985 114,457,554 2,289,151 48,156,806 2,963,136 4.3.3 EQUITY DIVIDENDS The Group proposes a dividend of DKK 22.00 per share (2019: DKK 21.00 per share), amounting to DKK 3,259m (2019: DKK 3,204m). The proposed dividend has been included in retained earnings at 31 December 2020. A shares carry 20 votes per DKK 20 share. B shares carry two votes per DKK 20 share. A preferential right to an 8% non-cumulative dividend is attached to B shares. Apart from votes and dividends, all shares rank equally. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 89 SECTION 4.3 (CONTINUED) CAPITAL STRUCTURE Dividends to be paid out in 2021 for 2020, net of dividends on treasury shares held at 31 December 2020, will amount to DKK 3,192m (paid out in 2020 for 2019: DKK 3,108m). At 31 December 2020, dividends to non- controlling interests of DKK 51m (2019: DKK 41m) were payable. SHARE BUY-BACK AND TREASURY SHARES As of 31 January 2020, the Company had repurchased 393,501 B shares under the share buy-back programme initiated in 2019 at a total purchase price of DKK 0.4bn. On 4 February 2020, the Company announced its intention to continue the share buy-back programme and repurchase shares worth DKK Equity (DKKbn) 5bn over a 12-month period. In the first tranche, which was finalised on 7 August 2020, the Company repurchased 2,897,021 B shares at a total purchase price of DKK 2.5bn. Due to the continued uncertainties related to COVID- 19, and the acquisitions of Marston’s brewing activities and the Brooklyn brand rights, the Board decided not to initiate the second tranche of the share buy-back. According to the authorisation of the Annual General Meeting, the Supervisory Board may, in the period until 13 March 2023, allow the Company to acquire treasury shares up to a total holding of 10% of the nominal share capital at a price quoted on Nasdaq Copenhagen at the time of acquisition with a deviation of up to 10%. The permitted holding of treasury shares covers those acquired in share buy-back programmes. The Company holds no class A shares. Transactions with shareholders in Carlsberg A/S ACCOUNTING POLICIES Proposed dividends The proposed dividend is recognised as a liability at the date when it is adopted at the Annual General Meeting (declaration date). Treasury shares Cost of acquisition, consideration received and treasury share dividends received are recognised directly in equity as retained earnings. Capital reductions from the cancellation of treasury shares are deducted from the share capital at an amount corresponding to the nominal value of the shares and added to retained earnings. Proceeds from the sale of treasury shares in connection with the settlement of share-based payments are recognised directly in equity. DKK million Dividends paid to shareholders Share buy-back Total 2020 2019 -3,093 -2,900 -5,993 -2,738 -4,100 -6,838 Transactions with non-controlling interests DKK million Dividends paid to NCI Consideration paid for acquisition of NCI Total 2020 -796 -81 -877 2019 -850 -1,670 -2,520 The acquisition of non-controlling interests in 2019 related to shares in Cambrew and Carlsberg Ukraine, cf. section 5.3. 6.8 - 7.6 46.0 - 3.9 - 2.9 3.8 1.0 0.2 43.4 Treasury shares Fair value, DKKm Shares of DKK 20 Nominal value, DKKm Percentage of share capital 1 January 2019 Acquisition of treasury shares Used to settle share-based payments 31 December 2019 Acquisition of treasury shares Cancellation of treasury shares Used to settle share-based payments 69 99,453 4,518,999 -58,057 4,532 4,560,395 3,290,522 -4,400,000 -395,742 31 December 2020 2,979 3,055,175 2.0 90.4 -1.2 91.2 65.8 -88.0 -7.9 61.1 0.1% 3.0% -0.1% 3.0% 2.3% -2.9% -0.3% 2.1% CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 90 SECTION 4.3 (CONTINUED) CAPITAL STRUCTURE 4.3.4 OTHER COMPREHENSIVE INCOME Other comprehensive income has mainly been impacted by a negative foreign exchange adjustment from the depreciation of RUB. 4.3.5 FINANCIAL RISK MANAGEMENT The Group’s activities mean it is exposed to a variety of financial risks, including market risk (foreign exchange risk, interest rate risk and commodity risk), credit risk and liquidity risk. These risks are described in the following sections: The Group’s financial risks are managed by Group Treasury in accordance with the Financial Risk Management Policy approved by the Supervisory Board as an integrated part of the overall risk management process. The risk management governance structure is described in the Management review. Debt instruments and deposits in foreign currency reduce the overall risk, but will not as a general rule achieve the objective of reducing volatility in specific items in the income statement. • Foreign exchange risk: sections 1.3 and 4.6 • Interest rate risk: section 4.5 • Commodity risk: section 1.2.1 • Credit risk: sections 1.5.1 and 4.4.2 • Funding and liquidity risk: section 4.7 To reduce exposure to these risks, the Group enters into a variety of financial instruments and generally seeks to apply hedge accounting to reduce volatility in the income statement. Other comprehensive income as recognised in the statement of changes in equity DKK million 2020 Foreign exchange adjustments of foreign entities Value adjustments of hedging instruments Retirement benefit obligations Other Income tax Total 2019 Foreign exchange adjustments of foreign entities Value adjustments of hedging instruments Retirement benefit obligations Other Income tax Total Currency translation -7,330 63 - - -18 -7,285 3,490 -325 - - 20 3,185 Hedging reserves Retained earnings - - -1 -4 -9 Total -7,330 195 -1 -4 -47 -14 -7,187 - - -570 16 36 3,490 -325 -570 16 56 -518 2,667 Non- controlling interests Other comprehensive income -310 -7,640 3 2 - -17 -322 -5 2 -1 2 -1 -3 198 1 -4 -64 -7,509 3,485 -323 -571 18 55 2,664 - 132 - - -20 112 - - - - - - SECTION 4.4 BORROWINGS AND CASH 4.4.1 BORROWINGS Non-current funding increased by DKK 8.4bn due to the issue of a 10-year EUR 500m bond maturing in March 2030 and a 7-year EUR 500m bond maturing in June 2027. Both bonds were issued to secure continued strong liquidity and financial flexibility. Gross financial debt DKK million 2020 2019 Changes in gross financial debt DKK million Gross financial debt at 1 January Recognition of lease liabilities Restated gross financial debt at 1 January Proceeds from issue of bonds Repayment of bonds Instalments on and proceeds from borrowings, long-term Instalments on and proceeds from European Commercial Papers Release of prepayment received for disposal of the former brewery site in Hamburg, Germany Instalments on lease liabilities Non-current Issued bonds Bank borrowings Lease liabilities Other borrowings Total Current Bank borrowings Lease liabilities Other borrowings Total Total borrowings Fair value 27,002 19,673 922 1,080 287 27 Other 1,165 External financing 14 Change in bank overdrafts Increase in lease liabilities, net Other, including foreign exchange adjustments and amortisation Gross financial debt at 31 December 29,291 20,879 472 398 89 959 347 424 3,341 4,112 30,250 24,991 31,732 26,414 2020 2019 24,991 23,983 - 1,592 24,991 25,575 7,402 2,946 - -5,598 1,155 -236 -3,264 3,264 - -1,026 -414 181 5,060 62 -414 129 -935 -82 190 411 -53 22 30,250 24,991 An overview of issued bonds is provided in section 4.5. ACCOUNTING POLICIES Borrowings Borrowings are initially recognised at fair value less transaction costs and subsequently measured at amortised cost using the effective interest method. Accordingly, the difference between the fair value less transaction costs and the nominal value is recognised under financial expenses over the term of the loan. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 91 Lease liability The lease liability is measured at the present value of the remaining lease payments at the reporting date, discounted using the incremental borrowing rate for similar assets, taking into account the terms of the leases. A remeasurement of the lease liability, for example a change in the assessment of an option to purchase, results in a corresponding adjustment of the related right-of-use assets, cf. section 2.3. Extension or termination options are included in the lease term if the lease is reasonably certain to be extended or not terminated. Consequently, all cash outflows that are reasonably certain to impact the future cash balances are recognised as lease liabilities at initial recognition of lease contracts. The Group reassesses the circumstances leading to it not recognising extension or termination options on an ongoing basis. 4.4.2 CASH Cash and cash equivalents include short-term marketable securities with a term of three months or less at the acquisition date that are subject to an insignificant risk of changes in value. Short-term bank deposits amounted to DKK 353m at 31 December 2020 (2019: DKK 188m). The average interest rate on these deposits was 2.7% (2019: 4.3%). During 2020, the Group had an increased focus on liquidity and maintaining sufficient cash at bank to better protect against the uncertainties and increased risks in relation to COVID-19. Total cash at bank amounted to DKK 8,093m in 2020 (2019: DKK 5,222m). Cash and cash equivalents DKK million Cash and cash equivalents Bank overdrafts Cash and cash equivalents, net 2020 8,093 -135 2019 5,222 -73 7,958 5,149 ASSESSMENT OF CREDIT RISK The Group is exposed to credit risk on cash and cash equivalents (including fixed deposits), investments and derivative financial instruments with a positive fair value, due to uncertainty as to whether the counterparty will be able to meet its contractual obligations as they fall due. The Group has established a credit policy under which financial transactions may be entered into only with financial institutions with a solid credit rating. The Group primarily enters into financial instruments and transactions with the Group’s relationship banks, i.e. banks extending loans to the Group. Group Treasury manages and monitors the Group’s gross credit exposure to banks and operates with individual limits on banks, based on rating and access to netting of assets and liabilities. EXPOSURE TO CREDIT RISK The carrying amount of DKK 8,093m (2019: DKK 5,222m) represents the maximum credit exposure related to cash and cash equivalents. The credit risk on receivables is described in section 1.5.1. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 92 SECTION 4.5 INTEREST RATE RISK The Group’s exposure to interest rate risk is considered limited. At the reporting date, 127% of the net financial debt consisted of fixed-rate borrowings with interest rates fixed for more than one year (2019:100%). As 110% of the Group’s net debt is in EUR, the interest rate exposure primarily relates to the development in the interest rates for EUR. The share of fixed-rate net financial debt in CNY is negative (-78%) as the cash position exceeds the total debt. For USD and EUR, the share is positive (225% and 111% respectively) as the cash position exceeds the current debt. The interest rate risk is measured by the duration of the net financial debt. The target is to have a duration between three and eight years. At 31 December 2020, the duration was 5.6 years (2019: 4.4 years). Interest rate risk is mainly managed using fixed-rate bonds. Net financial debt by currency DKK million Interest rate SENSITIVITY ANALYSIS It is estimated that a 1 percentage point interest rate increase would lead to a decrease in interest expenses of DKK 60m (2019: DKK 0m). The impact is due to the relatively high portion of cash. The analysis assumes a parallel shift in the relevant yield curves. If the market interest rate had been 1 percentage point higher at the reporting date, it would have led to a financial gain of DKK 1,242m (2019: DKK 865m), and a similar loss had the interest rate been 1 percentage point lower. However, since all fixed-rate borrowings are measured at amortised cost, there is no impact on other comprehensive income or the income statement. The sensitivity analysis is based on the financial instruments recognised at the reporting date. The sensitivity analysis assumes a parallel shift in interest rates and that all other variables remain constant, in particular foreign exchange rates and interest rate differentials between the different currencies. The analysis was performed on the same basis as for 2019. The Group did not enter into any new interest rate swaps in 2020 or 2019. 2020 EUR CNY PLN USD CHF RUB Other Total 2019 EUR CNY PLN USD CHF RUB Other Total Net financial debt 24,298 -1,058 -29 119 33 113 -1,319 22,157 22,822 -1,770 14 -101 122 59 -1,377 19,769 Floating -2,786 -1,884 -29 -149 33 113 -1,319 -6,021 3,072 -1,770 14 -101 122 59 -1,377 27,084 826 - 268 - - - 28,178 19,750 - - - - - - 19 19,750 Fixed Floating % Fixed¹ % Interest rate risk -11% 178% 100% -125% 100% 100% 100% -27% 13% 100% 100% 100% 100% 100% 100% 0% 111% -78% - 225% - - - 127% 87% - - - - - - 100% DKK million 2020 Issued bonds Average effective interest rate Interest rate Fixed for Carrying amount Interest rate risk EUR 750m maturing 15 November 2022 EUR 500m maturing 6 September 2023 EUR 1,000m maturing 28 May 2024 EUR 500m maturing 30 June 2027 EUR 400m maturing 1 July 2029 EUR 500m maturing 11 March 2030 Total issued bonds Total issued bonds 2019 Fixed Fixed Fixed Fixed Fixed Fixed 2.7% 0.7% 2.6% 0.5% 1.0% 0.7% 1.6% 2.0% 1-2 years 2-3 years 3-4 years > 5 years > 5 years > 5 years 5,570 3,703 7,403 Fair value Fair value Fair value 3,691 Fair value 2,942 Fair value 3,693 Fair value 27,002 19,673 Bank borrowings and other borrowings Floating-rate Fixed-rate Total bank borrowings and other borrowings Total bank borrowings and other borrowings 2019 Floating Fixed 1.1% 2.9% < 1 year > 1 year 2,072 Cash flow Fair value 1,176 3,248 5,318 ¹The percentage of net debt at fixed interests are above 100% in some currencies, as the total cash exceeds the current debt. In some currencies the percentage of net debt at fixed interests is negative, as the total cash exceeds the total debt. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 93 SECTION 4.6 FOREIGN EXCHANGE RISK RELATED TO NET INVESTMENTS AND FINANCING ACTIVITIES 4.6.1 CURRENCY PROFILE OF BORROWINGS The Group is exposed to foreign exchange risk on borrowings denominated in a currency other than the functional currency of the local entities reporting the debt, as well as the risk that arises when net cash inflow is generated in one currency and loans are denominated and have to be repaid in another currency. 4.6.2 HEDGING OF NET INVESTMENTS IN FOREIGN SUBSIDIARIES The Group holds a number of investments in foreign subsidiaries where the translation of net assets to DKK is exposed to foreign exchange risks. The Group hedges part of this foreign exchange exposure by entering into forward exchange contracts (net investment hedges). This mainly applies to net investments in CHF, CNY, MYR, NOK and PLN. The basis for hedging is reviewed at least once a year, and the two parameters, risk reduction and cost, are balanced. In economic terms, having debt in foreign currency or creating synthetic debt via forward exchange contracts constitutes hedging of the DKK value of future cash flows arising from operating activities or specific transactions. The most significant net risk relates to foreign exchange adjustment of net investments in RUB. This is because of the size of the net investments in RUB combined with the currency’s high volatility. Where the fair value adjustments of forward exchange contracts do not exceed the fair value adjustments of the investment, the adjustments of the financial instruments are recognised in other comprehensive income. At 31 December 2020, all adjustments of financial instruments have been recognised in other comprehensive income. Fair value adjustments of loans designated as strategic intra-group loans have also been recognised in other comprehensive income. The fair value of derivatives used as net investment hedges recognised at 31 December 2020 amounted to DKK 84m (2019: DKK -91m). The closing balance in the equity reserve for currency translation of hedges of net investments amounted to DKK -1,611m (2019: DKK -1,628m). Positive fair values of derivatives are recognised as other receivables and negative values as other liabilities. Net investment hedges Currency profile of borrowings DKK million Before and after derivative financial instruments DKK million 2020 CHF NOK EUR USD CNY Other Total Total 2019 Original principal 119 190 Effect of swap 1,477 619 After swap 1,596 809 27,730 -6,327 21,403 495 864 852 30,250 24,991 1,689 1,833 709 - - 2,184 2,697 1,561 30,250 24,991 RUB CNY MYR HKD CHF GBP NOK SEK PLN SGD USD Other Total Hedging of investment, amount in local currency Intra-group loans, amount in local currency Other comprehensive income (DKK) Average hedged rate Fair value of derivatives Fair value of derivatives 2020 2019 2020 - 2019 - -2,407 -1,500 -292 -318 2020 2019 - - - - - - - - -1,077 -27 -305 -273 - - -1,300 -1,300 - -135 - - - - -135 - - - - - 3,000 3,773 - 47 - - - 59 3,000 3,335 - -154 -28 - 2020 32 -29 24 53 6 -27 -105 86 12 16 -5 - 63 2019 -77 -63 -35 22 2020 - 2019 - 0.9176 0.9257 1.5145 1.5656 - - -50 6.9925 6.7148 30 - -114 -8 -33 3 - -325 - - 0.6874 0.7398 - - 1.6201 1.7346 - - - - - - Asset Liability Asset Liability - 56 8 - 40 - - - - - - - - - - - - - -19 - -1 - - - 104 -20 - - - - - - - - - - - - - - -20 -11 - -45 - -14 - -1 - - - -91 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 94 SECTION 4.6 (CONTINUED) FOREIGN EXCHANGE RISK RELATED TO NET INVESTMENTS AND FINANCING ACTIVITIES 4.6.3 EXCHANGE RATE RISK ON CASH AND BORROWINGS The main principle for funding of subsidiaries is that cash, loans and borrowings should be denominated in local currency or hedged to local currency to avoid foreign exchange risk. However, in some Group entities, net debt is denominated in a currency other than the functional currency of the local entity without the foreign exchange risk being hedged. This applies primarily to a few entities in Eastern Europe that hold cash and loans in EUR and USD and in this way obtain proxy hedging of the foreign exchange risk associated with the purchase of goods in foreign currency in these markets. 4.6.4 IMPACT ON FINANCIAL STATEMENTS AND SENSITIVITY ANALYSIS IMPACT ON INCOME STATEMENT For the impact of currency on operating profit and financial items, please refer to sections 1.3 and 4.1 respectively. Exchange rate sensitivity - other comprehensive income 2020 DKK million NOK/DKK SEK/DKK PLN/DKK CHF/DKK RUB/DKK GBP/DKK Other Total Average hedged rate Notional amount Change Effect on OCI Average hedged rate 0.6913 0.7078 1.6649 6.9217 0.0854 8.3212 N/A -663 -668 -508 -456 -140 -111 -142 5% 5% 5% 5% 10% 5% 5% -33 -33 -25 -23 -14 -6 -7 -141 0.7383 0.7009 1.7015 6.7438 0.0991 8.3781 N/A IMPACT ON STATEMENT OF FINANCIAL POSITION Fluctuations in foreign exchange rates will affect the level of debt, as funding is obtained in a number of currencies. In 2020, net interest-bearing debt increased by DKK 297m (2019: decreased by DKK 14m) due to changes in foreign exchange rates. SENSITIVITY ANALYSIS An adverse development in the exchange rates would, all other things being unchanged, have had the hypothetical impact on the income statement and other comprehensive income (OCI) for 2020 illustrated in the tables. The calculations have been made based on items in the statement of financial position at 31 December 2020. Exchange rate sensitivity - income statement 2020 DKK million EUR/GBP EUR/NOK EUR/PLN EUR/KZT EUR/RUB EUR/SEK EUR/CHF Total 2020 USD/RUB USD/UAH Total EUR receivable EUR payable 550 118 232 - 5 159 100 -348 -873 -238 -18 -71 -296 -174 USD receivable - - USD payable -1 -1 EUR cash -483 586 54 367 274 78 -270 USD cash 284 88 Gross exposure Exposure, net of hedging Change Effect on P/L -281 -169 48 349 208 -59 -344 -281 -169 48 349 208 -59 -344 5% 5% 5% 10% 10% 5% 5% Gross exposure Exposure, net of hedging 283 87 283 87 Change 10% 10% -14 -8 2 35 21 -3 -17 16 Effect on P/L 28 9 37 2019 Effect on OCI -34 -32 -26 -24 -29 -6 -1 -152 2019 Effect on P/L -6 -9 - 28 15 -1 -1 26 2019 Effect on P/L 29 16 45 SECTION 4.6 (CONTINUED) FOREIGN EXCHANGE RISK RELATED TO NET INVESTMENTS AND FINANCING ACTIVITIES Income statement The hypothetical impact ignores the fact that the subsidiaries’ initial recognition of revenue, cost and debt would be similarly exposed to the exchange rate developments. Other comprehensive income Other comprehensive income is affected by changes in the fair value of currency derivatives designated as cash flow hedges of future purchases and sales. Applied exchange rates DKK Swiss franc (CHF) Chinese yuan (CNY) Euro (EUR) Pound sterling (GBP) Laotian kip (LAK) Norwegian krone (NOK) Polish zloty (PLN) Russian rouble (RUB) Swedish krona (SEK) Ukrainian hryvnia (UAH) CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 95 APPLIED EXCHANGE RATES The average exchange rate was calculated using the monthly exchange rates weighted according to the phasing of the revenue per currency throughout the year. SECTION 4.7 FUNDING AND LIQUIDITY RISK The Group's overall objective is to ensure continuous access, at the right price, to the financial resources needed for operations and growth. Liquidity risk results from the Group’s potential inability to meet the obligations associated with its financial liabilities, for example settle- ment of financial debt and paying suppliers. The aim is to ensure effective liquidity management, which involves obtaining sufficient committed credit facilities to ensure adequate financial resources and, to some extent, tapping a range of funding sources. DIVERSIFIED FUNDING SOURCES The Group is diversifying its access to funding to avoid relying on one single source of funding. At 31 December 2020, bonds accounted for 89% of the gross funding. Committed credit facilities and credit resources available DKK million 2020 Current < 1 year Closing rate Average rate Total current committed loans and credit facilities 2019 Non-current 6.7135 1-2 years 0.9654 2-3 years 7.4659 8.5218 3-4 years 4-5 years 0.0008 > 5 years 2020 6.8521 0.9284 7.4393 8.2378 0.0007 0.7053 1.6327 0.0820 0.7397 0.2142 2019 6.8712 0.9555 7.4697 8.7664 0.0008 0.7587 1.7548 0.1077 0.7155 0.2827 2020 6.9656 0.9452 7.4539 8.3838 0.0007 0.6958 1.6770 0.0915 0.7120 0.2438 0.7582 1.7377 0.1033 0.7049 0.2594 Total non-current committed loans and credit facilities 44,170 29,291 14,879 14,939 Cash and cash equivalents Current portion of utilised credit facilities - - Credit resources available (total non-current committed loans and credit facilities less net debt) 8,093 -959 5,222 -4,112 22,013 16,049 Total committed loans and credit facilities Utilised portion of credit facilities Unutilised credit facilities 2019 Unutilised credit facilities 2,145 2,145 959 959 1,186 1,186 1,531 1,531 6,730 3,959 7,701 6,730 3,959 7,701 - - - - - - 14,954 75 14,879 14,939 10,826 10,826 - - uncertainty. In addition, Carlsberg issued a 7- year EUR 500m bond in June, which was used to repay the bank loan issued in March. CREDIT RESOURCES AVAILABLE The Group uses the term “credit resources available” to determine the adequacy of access to credit facilities. The credit resources available include cash and unutilised credit facilities with more than 12 months to maturity less utilised credit facilities with less than 12 months to maturity and uncommitted working capital facilities. Net financial debt is used internally to monitor the Group’s credit resources available. Net financial debt is the Group’s net interest- bearing debt, excluding interest-bearing assets other than cash, as these assets are not actively managed in relation to liquidity risk. Net financial debt is shown in section 4.2. SECTION 4.7 (CONTINUED) FUNDING AND LIQUIDITY RISK The Group still has access to a committed EUR 2bn revolving credit facility (RCF) maturing in 2025 that is currently not being utilised. In addition, the Group has committed cash pool bank overdraft facilities to cover the day-to- day liquidity needs and uncommitted access to the Euro Commercial Paper (ECP) market, which provides short-term funding. FUNDING STRATEGY AND REACTION TO COVID-19 Since March 2020 and the first COVID-19 lockdowns in Western Europe, the Group has maintained a central cash position of minimum EUR 200m as a safety measure. In addition, a special effort has been made to improve cash flow forecasting, including introducing frequent short-term cash flow updates. In March, Carlsberg issued a 10-year EUR 500m bond and secured a EUR 500m bank loan as a precaution against the market Time to maturity for non-current borrowings CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 96 At 31 December 2020, the Group had total credit resources available of DKK 22,013m, consisting of cash and cash equivalents of DKK 8,093m plus committed unutilised non-current credit facilities of DKK 14,879m less utilisation of current facilities of DKK -959m. Including current credit facilities of DKK 1,186m, total committed unutilised credit facilities amounted to DKK 16,065m. Credit resources available increased by DKK 6.0bn compared with 2019, primarily due to the issuance of the two bonds for a total of EUR 1.0bn. Both bonds were issued to secure continued strong liquidity and financial flexibility. The credit resources available and the access to unused committed credit facilities are considered reasonable in light of the Group’s current needs in terms of financial flexibility. In addition to efficient working capital manage- ment and credit risk management, the Group mitigates liquidity risk by arranging borrowing facilities with solid financial institutions. The Group uses cash pools for day-to-day liquidity management in most of the entities in Western Europe, as well as intra-group loans to subsidiaries. Eastern Europe and Asia are less integrated in terms of cash pools, and liquidity is managed via intra-group loans. The table lists the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements, and thus summarises the gross liquidity risk. Maturity of financial liabilities DKK million 2020 Contractual cash flows Maturity < 1 year Maturity > 1 year < 5 years Maturity > 5 years Carrying amount Derivative financial instruments Derivative financial instruments, payables 142 142 - - 127 DKK million 2020 Issued bonds Bank borrowings Lease liabilities Other non-current borrowings Total Total 2019 1-2 years 2-3 years 3-4 years 4-5 years > 5 years Total Interest expenses Non-derivative financial instruments Gross financial debt 5,570 3,703 723 345 92 6,730 412 70 96 90 3,959 5,729 7,403 127 81 90 7,701 3,821 - 2 72 1 75 - 486 14 10,326 27,002 Trade payables and other liabilities 922 Contingent liabilities 1,080 Contingent considerations 287 Non-derivative financial instruments 55,548 19,739 24,682 11,127 10,826 29,291 Financial liabilities 7,465 3,452 20,879 Financial liabilities 2019 55,690 19,881 24,682 11,127 55,192 23,887 27,696 3,609 18,552 10,915 30,250 30,426 1,654 17,874 304 5,290 959 492 17,874 304 110 950 212 - - 5,180 - - - N/A 17,874 304 5,290 - - - CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 97 SECTION 4.7 (CONTINUED) FUNDING AND LIQUIDITY RISK The risk implied by the values reflects the one- sided scenario of cash outflows only. Trade payables and other financial liabilities originate from the financing of assets in ongoing operations, such as property, plant and equipment, and investments in working capital, for example inventories and trade receivables. The nominal amount/contractual cash flow of gross financial debt totalled DKK 30,426m (2019: DKK 25,144), whereas the total carrying amount was DKK 30,250m (2019: DKK 24,991m). The difference between these amounts arises at initial recognition and is treated as a cost that is capitalised and amortised over the duration of the borrowings. The interest expense is the contractual cash flows expected on the gross financial debt existing at 31 December 2020. The cash flow is estimated based on the notional amount of the above-mentioned borrowings and expected interest rates at year-end 2020 and 2019. Interest on debt recognised at year-end 2020 and 2019 for which no contractual obligation exists (current borrowing and cash pools) has been included for a two-year period. The synthetic interest on lease liabilities has also been included for a two-year period. The interest applied to the part of the debt where no contractual obligation exists is 2.5% (2019: 1%). SECTION 4.8 DERIVATIVE FINANCIAL INSTRUMENTS The Group enters into various derivative financial instruments to hedge foreign exchange and commodity risks, cf. sections 1.2 and 1.3, and seeks to apply hedge accounting when this is possible. Hedging of future, highly probable forecast transactions is designated as cash flow hedges. The Group monitors the cash flow hedge relationships twice a year to assess whether the hedge is still effective. Positive fair values of derivatives are recognised as other receivables and negative values as other liabilities. The impact on other comprehensive income and the fair value of derivatives classified as cash flow hedges is presented in the cash flow hedge table. Cash flow hedges comprise aluminium hedges, where the hedged item is aluminium cans that will be used in a number of Group entities in 2021. The hedging instrument is aluminium swaps. The impact on other comprehensive income from other instruments relates to hedges of Group entities’ exposure to changes in aluminium prices. The impact on other comprehensive income from exchange rate instruments relates to hedges of Group entities’ purchases and sales in currencies other than their functional currencies. Cash flow hedges DKK million 2020 Exchange rate instruments Other instruments Total 2019 Exchange rate instruments Other instruments Total Other comprehensive income Fair value receivables Fair value payables Fair value, net 51 84 135 13 60 73 -21 - -21 -8 60 52 Other comprehensive income Fair value receivables Fair value payables Fair value, net -60 62 2 - - - -56 -24 -80 -56 -24 -80 Expected recognition Financial derivatives not designated as hedging instruments (economic hedges) 2021 -8 60 52 2020 -56 DKK million 2020 Exchange rate instruments Ineffectiveness Total 2019 Exchange rate instruments -24 Ineffectiveness -80 Total Income statement Fair value receivables Fair value payables Fair value, net -47 -2 -49 81 7 88 - - - 56 - 56 -78 - -78 -13 - -13 -78 - -78 43 - 43 SECTION 4.8 (CONTINUED) DERIVATIVE FINANCIAL INSTRUMENTS As of 31 December 2020, the hedging reserve within equity included DKK 843m in relation to cash flow hedges for which hedge accounting is no longer applied. Fair value adjustments of derivative financial instruments that are not designated either as net investment hedges or as cash flow hedges are recognised in financial income and expenses. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 98 ACCOUNTING ESTIMATES AND JUDGEMENTS ACCOUNTING POLICIES When entering into financial instruments, management assesses whether the instrument is an effective hedge of recognised assets and liabilities, expected future cash flows or financial investments. The effectiveness of recognised hedging instruments is assessed at least twice a year. Fair values of derivative financial instruments are calculated on the basis of level 2 input consisting of current market data and generally accepted valuation methods. Internally calculated values are used, and these are compared with external market quotes on a quarterly basis. For currency and aluminium derivatives, the calculation is as follows: a) The forward market rate is compared with the agreed rate on the derivatives, and the difference in cash flow at the future point in time is calculated. b) The amounts are discounted to present value. When entering into a contract, management assesses whether the contract contains embedded derivatives and whether they meet the criteria for separate classification and recognition. The Group currently does not have any embedded derivatives that meet the criteria for separate classification and recognition. Derivative financial instruments are initially recognised at fair value on the trade date and subsequently remeasured at their fair value at the reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as one of: • Fair value hedges of the fair value of recognised assets or liabilities • Cash flow hedges of particular risks associated with the cash flow from forecast transactions • Net investment hedges of currency fluctuations in subsidiaries, associates or joint ventures. The fair values of derivative financial instruments are presented in other receivables or payables, and positive and negative values are offset only when the Group has the right and the intention to settle several financial instruments net. Changes in the fair value of a fair value hedge and of derivative financial instruments not designated in a hedge relationship are recognised in financial income or expenses in the income statement. Changes in the effective portion of the fair value of derivative financial instruments that are designated and qualify as a cash flow hedge are recognised in the hedging reserve within equity. When the hedged transaction materialises, amounts previously recognised in other comprehensive income are transferred to the same item as the hedged item. Derivatives designated as and qualifying for recognition as a cash flow hedge of financial investments are recognised in other comprehensive income. On complete or partial disposal of the financial investment, the portion of the hedging instrument that is recognised in other comprehensive income and relates to that financial investment is recognised in the income statement when the gain or loss on disposal is recognised. Hedges of net investments in foreign subsidiaries, associates and joint ventures are accounted for in the same way as cash flow hedges. SECTION 5 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 99 ACQUISITIONS, DISPOSALS, ASSOCIATES AND JOINT VENTURES Marston’s brewing activities Forming the jointly owned entity Carlsberg Marston’s Brewing Company by injection of the Group’s UK brewing activities and the brewing activities from Marston’s PLC. China Reorganisation of the Group’s Chinese entities into the Chongqing Brewery Group. Wernes- grüner Prepayment on the acquisition of Wernesgrüner Brewery, Germany. The acquisition completed 1 January 2021. SECTION 5.1 INVESTMENT MODEL AND RISKS MARKET ACCESS In the beer industry, access to local markets is highly dependent on establishing good relationships with customers in the on- and off-trade channels, national distributors, local suppliers and relevant authorities governing the beverage industry. Often, the most efficient way of establishing such relations is by acquiring a local brewer or engaging with a local partner that already has the relevant relationships. Therefore, when the Group expands its business, it often does so in collaboration with a local partner. Such a partnership can take different legal forms and impacts the consolidated financial statements to a varying degree accordingly. INVESTMENT MODEL Entering into a partnership can reduce the financial exposure and mitigate the business risks associated with entering new markets or expanding the activities in an existing market. The financial exposure, however, varies depending on the structure of the partnership. Business and financial success, and the related risks, depend on the ability of the Group and the local partner to forge a strong and aligned cooperation. In some markets, the Group enters as a non- controlling shareholder, providing a degree of financing and contributing knowledge of the beer industry. The Group thus leaves the controlling influence with the partner and recognises the investment as an associate. Other investments are structured as joint ventures, where the Group and the local partner jointly make the operational decisions and share strategic and tactical responsibility. More commonly, the Group structures its partnerships such that it exercises management control, usually by way of majority of the voting rights. These investments are fully consolidated subsidiaries, which are just as important as other types of partnership for success in the local markets, but mean that the Group has increased financial exposure. Investments in businesses in which the Group exercises management control often involve put and/or call options or a similar structure. IMPACT ON FINANCIAL STATEMENTS Investments in associates and joint ventures are consolidated in the financial statements using the equity method. The accounting risks associated with these entities are limited to the investment made, the proportionate share of the net profit and any specific additional commitments to banks or other parties, as well as specific guarantees or loans the Group provides to the partnership. In businesses where the Group exercises management control, the consolidated financials are impacted by full exposure to the earnings and other financial risks. From an accounting point of view, the Group treats any put options held by partners in such entities as if they had already been exercised by the partner, i.e. anticipating that the acquisition will occur. The accounting impact is that the non- controlling interests are not recognised, and no part of net profits or equity is attributed to them. Instead, the dividends the partner receives from the business are – for accounting purposes – classified as financial expenses. SECTION 5.1 (CONTINUED) INVESTMENT MODEL AND RISKS SECTION 5.2 ACQUISITIONS AND DISPOSALS Common to all partnerships is the risk of disagreement and, ultimately, dissolution. Disagreements with partners on the operational management and strategic directions of partnerships may limit our ability to manage the growth and risk profile of our business. The Group continuously seeks to promote a fair and mutually beneficial development of the partnerships, which is crucial for the development to be successful. However, in certain partnerships the partners’ pursuit of goals and priorities that are different from those of the Group might result in disagreements, affecting operational and financial performance. Such different goals and priorities can become more pronounced in the period before a partner has the right to exit the partnership. A dissolution will initially impact the accounting treatment of an investment. The accounting treatment will depend on whether the Group or our partner is exiting the business. In the long term, however, the impact can be significant to the operation of the local entity and the collaboration with customers, distributors, authorities etc. if the partner was instrumental in managing these relationships. Therefore, the risk of a partnership dissolution may have a negative impact on the underlying business and the financial performance recognised in the consolidated financial statements. ACQUISITION OF ENTITIES Marston’s brewing activities In October 2020, Carlsberg UK and Marston’s PLC injected their respective brewing activities into a jointly owned company named Carlsberg Marston’s Brewing Company Limited. Carlsberg is the controlling shareholder with a shareholding of 60%. The jointly owned company was formed to strengthen the Group’s presence in the important UK market through a stronger beer portfolio. The calculated goodwill represents staff competences and synergies from expected optimisations of sales and distribution, supply chain and procurement, possible product innovations, the increase in market share and access to new customers. The total cost of the acquisition comprises the cash consideration paid, a contingent consideration and the fair value of the 40% of Carlsberg UK businesses that were effectively transferred to Marston’s PLC when the Carlsberg entities were injected into the jointly owned company. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 100 The purchase price allocation of the fair value of identified assets, liabilities and contingent liabilities is ongoing. Adjustments are therefore expected to be made to several items in the opening balance, including brands and property, plant and equipment. The accounting treatment of the acquisition will be completed within the 12-month period required by IFRS. Acquisition of Marston's brewing activities DKK million Consideration paid Fair value of contingent consideration Fair value of non-controlling shareholding in Carlsberg UK transferred to the seller Foreign currency exchange translation difference Total cost of acquisition Acquired assets and liabilities Intangible assets Property, plant and equipment Financial assets Inventories Trade and other receivables Borrowings and lease liabilities Trade payables Other payables Acquired assets and liabilities Non-controlling interests Acquired assets and liabilities attributable to shareholders in Carlsberg A/S 2020 1,908 61 548 13 2,530 1,812 1,265 66 235 414 -174 -302 -307 3,009 -479 2,530 Other In 2020, the Group adjusted a purchase price allocation made in prior years due to an error in the recognised fair value of land. The adjustment reduced the recognised value of land by DKK 273m and deferred tax by DKK 56m, and increased goodwill by DKK 217m. The comparative figures have been restated accordingly. In 2019, the Group completed a minor acquisition of DKK 18m. ACQUISITION OF BRAND RIGHTS In 2020, the Group acquired the Brooklyn brand rights in our markets. The brand rights are recognised as an intangible asset. The acquisition is described in section 2. ACQUISITION OF ENTITIES IN 2021 On 31 December 2020, the Group prepaid DKK 501m for the acquisition of Wernesgrüner Brewery, Germany. The transaction has been completed, and the entity will be fully consolidated as of 1 January 2021. The acquisition is not material to the Group’s financial statements. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 101 ACCOUNTING ESTIMATES AND JUDGEMENTS cash flows associated with the brand, including the related value of customer relations etc. SECTION 5.2 (CONTINUED) ACQUISITIONS AND DISPOSALS CASH FLOW Cash flow to acquire shareholdings in associates and when gaining control of subsidiaries is included in financial investments, while the cash flow on acquisition of an additional shareholding in a subsidiary, i.e. acquiring non-controlling interests, is recognised in financing activities. Elements of cash consideration paid and received DKK million 2020 2019 Cash consideration received/paid, subsidiaries, net Prepayment for acquisition of entities not completed at the reporting date Cash consideration received/paid, associates Cash and cash equivalents acquired/disposed of Total cash consideration received/paid, net - of which consideration paid for entities acquired - of which consideration received for entities disposed -1,908 -18 -501 8 - -2,401 -2,409 8 - -41 18 -41 -18 - Cash flow from acquisition of shareholdings Assessment of control The classification of entities where Carlsberg controls less than 100% of the voting rights is based on an assessment of the contractual and operational relationship between the parties. This includes assessing the conditions in shareholder agreements, contracts etc. Consideration is also given to the extent to which each party can govern the financial and operating policies of the entity, how the operation of the entity is designed, and which party possesses the relevant knowledge and competences to operate the entity. Another factor relevant to this assessment is the extent to which each of the parties can direct the activities and affect the returns, for example by means of rights, reserved matters or casting votes. Purchase price allocation For acquisitions of entities, the assets, liabilities and contingent liabilities of the acquiree are recognised using the acquisition method. The most significant assets acquired generally comprise goodwill, brands, property, plant and equipment, receivables and inventories. No active market exists for the majority of the acquired assets and liabilities, in particular in respect of acquired intangible assets. Accordingly, management makes estimates of the fair value of acquired assets, liabilities and contingent liabilities. Depending on the nature of the item, the determined fair value of an item may be associated with uncertainty and possibly adjusted subsequently. The unallocated purchase price (positive amount) is recognised in the statement of financial position as goodwill and allocated to the Group’s cash- generating units. Cash flow from acquisitions, net, included in investing activities Consideration paid for acquisition of non- controlling interests Total -2,401 -41 -81 -1,670 -2,482 -1,711 Brands The value of the brands acquired and their expected useful life are assessed based on the individual brand’s market position, expected long-term developments in the relevant markets and profitability. The estimated value includes all future Management determines the useful life based on the brand’s relative local, regional and global market strength, market share, and the current and planned marketing efforts that are helping to maintain and increase its value. When the value of a well- established brand is expected to be maintained for an indefinite period in the relevant markets, and these markets are expected to be profitable for a long period, the useful life of the brand is determined to be indefinite. Brands are measured using the relief from royalty method, under which the expected future cash flows are based on key assumptions about expected useful life, royalty rate, growth rate and a theoretically calculated tax effect. A post-tax discount rate is used that reflects the risk-free interest rate with the addition of a risk premium associated with the particular brand. The model and assumptions applied are consistent with those used in impairment testing, and are described in further detail in section 2.2.3. Customer agreements and portfolios The value of acquired customer agreements and customer portfolios is assessed based on the local market and trading conditions. For most entities, there is a close relationship between brands and sales. Consumer demand for beer and other beverages drives sales, and therefore the value of a brand is closely linked to consumer demand, while there is no separate value attached to customers (shops, bars etc.), as their choice of products is driven by consumer demand. The relationship between brands and customers is carefully considered so that brands and customer agreements are not both recognised on the basis of the same underlying cash flows. Property, plant and equipment The fair value of land and buildings, and standard production and office equipment is based, as far as possible, on the fair value of assets of similar type and condition that may be bought and sold in the open market. Property, plant and equipment for which there is no reliable evidence of the fair value in the market (in particular breweries, including production equipment) are valued using the depreciated replacement method. This method is based on the replacement cost of a similar asset with similar functionality and capacity. The calculated replacement cost is then reduced to reflect functional and physical obsolescence. The expected synergies and the user-specific intentions for the expected use of assets are not included in the determination of the fair value. Acquisition of Marston’s brewing activities Purchase price allocation Management believes that the purchase price for Marston’s brewing activities accounted for in the consolidated financial statements reflects the best estimate of the total fair value of the business. The fair value of the contingent consideration is primarily based on the expected development in market conditions. The provisional opening balance recognised in the consolidated financial statements is based on the carrying amounts at the time of injection of Marston’s PLC’s brewing activities into a newly established entity held by the joint venture. The purchase price allocation of the identified assets, liabilities and contingent liabilities will be completed within 12 months of the acquisition. This is primarily expected to impact the value of brands, property, plant and equipment, trade loans and trade receivables. Brands The value of the brands will be estimated using the Group’s principle described above. It is expected that significant brands will be assumed to have an indefinite useful life. Property, plant and equipment The fair value and expected useful life of the brewery equipment and related buildings of the six acquired breweries will be determined with assistance from leading external engineering experts in the brewery industry. and liabilities belonging to the foreign entity and translated into the foreign entity’s functional currency at the exchange rate at the transaction date. The acquired entities’ identifiable assets, liabilities and contingent liabilities are measured at fair value at the acquisition date. Identifiable intangible assets are recognised if they are separable or arise from a contractual right. Deferred tax on revaluations is recognised. The identifiable assets, liabilities and contingent liabilities on initial recognition at the acquisition date are subsequently adjusted up until 12 months after the acquisition. The effect of the adjustments is recognised in the opening balance of equity, and the comparative figures are restated accordingly if the amount is material. Changes in estimates of contingent purchase considerations are recognised in the income statement under special items, unless they qualify for recognition directly in equity. Disposals Gains or losses on the disposal or liquidation of subsidiaries, associates and joint ventures are stated as the difference between the sales price and the carrying amount of net assets (including goodwill) at the date of disposal or liquidation, foreign exchange adjustments recognised in other comprehensive income, and costs to sell or liquidation expenses. SECTION 5.2 (CONTINUED) ACQUISITIONS AND DISPOSALS Trade loans and receivables The fair value of the trade loans and receivables will be estimated in line with the Group’s principle for assessment of credit risk and recognition of impairment losses to reflect the amount that is expected to be collected. The valuation will take into consideration the expected increase in losses in the on-trade segment due to the restrictions and lockdowns under COVID-19. Goodwill Goodwill will be allocated to the CGU covering the Western Europe region in line with the allocation of the Group’s existing UK business. ACCOUNTING POLICIES Acquisitions The acquisition date is the date when the Group effectively obtains control of an acquired subsidiary or significant influence over an associate or a joint venture. The cost of a business combination comprises the fair value of the consideration agreed upon, including the fair value of any consideration contingent on future events. In a step acquisition, the Group gains control of an entity in which it already held a shareholding. The shareholding held before the step acquisition is remeasured at fair value at the acquisition date, added to the fair value of the consideration paid for the shareholding acquired in the step acquisition and accounted for as the total cost of the shareholding in the acquired entity. The gain or loss on the remeasurement is recognised in the income statement under special items. Goodwill and fair value adjustments in connection with the acquisition of an entity are treated as assets CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 102 SECTION 5.3 NON-CONTROLLING INTERESTS MATERIAL ASSET RESTRUCTURING IN CHINA In December 2020, Carlsberg and Chongqing Brewery Co. completed a material asset restructuring and contributed their controlled Chinese assets to Chongqing Jianiang Brewery. Chongqing Jianiang Brewery is jointly owned by Chongqing Brewery Co. (51%) and the Carlsberg Group (49%). The ownership remains unchanged following the completion of the restructuring, and the ownership of the listed company Chongqing Brewery Co. is also unchanged at 60%. The Group thereby directly and indirectly holds 79% of Chongqing Jianiang Brewery. At completion, the Group’s ownership of the assets it injected (previously 70-100% owned) thereby declined to 56-79%, while the Group’s ownership of the assets injected by Chongqing Brewery Co. increased from 60% to 79%. Effectively, the transactions thereby exchange shareholdings of the injected entities between the Group and the non-controlling shareholders in Chongqing Brewery Co. The fair value of the entities injected by the Carlsberg Group exceeds that of the entities injected by Chongqing Brewery Co. In addition to the exchange of shareholdings, Chongqing Brewery Co. will therefore pay a cash amount to the Group. The amount will be determined based on 2020 earnings and paid in April 2021. The transaction is accounted for as an equity transaction with the non-controlling interests and resulted in a net increase in equity for Transactions with non-controlling interests DKK million 2020 Changes in equity Shareholders in Carlsberg A/S Non-controlling interests Total equity Change in ownership from asset restructuring in China Transaction cost related to asset restructuring in China Fair value adjustments of contingent consideration and other transactions with non-controlling interests Recognised in equity 2019 Disposal of 40% of Carlsberg UK to Marston's Non-controlling interest in Marston's brewing activities retained by Marston's Acquisition of entities -553 -51 3,748 3,144 -4,466 -182 - -182 553 -26 87 614 -55 730 479 1,209 - -77 3,835 3,758 -4,521 548 479 1,027 SECTION 5.3 (CONTINUED) NON-CONTROLLING INTERESTS SECTION 5.4 CONTINGENT CONSIDERATIONS Contingent considerations relate to options held by non-controlling interests in subsidiaries to sell their shares to the Group and to deferred payments in the acquisition of entities depending on market developments. At the end of the reporting period, the contingent considerations primarily related to put options on the shares in Carlsberg South Asia Pte Ltd (the parent company holding 100% and 90% of the shares in the businesses in India and Nepal respectively), in Brewery Alivaria, Belarus, in a craft brewery in Western Europe, and to the contingent consideration in the acquisition of Marston’s brewing activities. In accordance with the Group’s accounting policy, shares subject to put options are consolidated as if the shares had already been acquired. The ownership percentage at which these subsidiaries are consolidated therefore differs from the legal ownership interest retained by the Group. Both the legal and the consolidated ownership is stated in section 10. non-controlling interests and a corresponding decrease for shareholders in Carlsberg A/S. The transaction was completed in December 2020 and had an insignificant impact on the allocation of profit for December 2020. At completion, the transferred shareholdings impacted the allocation of equity between shareholders in Carlsberg A/S and non- controlling interests by DKK 553m. CHANGES IN THE UK AS A RESULT OF THE ACQUISITION OF MARSTON’S BREWING ACTIVITIES In October 2020, Carlsberg UK and Marston’s PLC injected their respective brewing activities into a jointly owned company named Carlsberg Marston’s Brewing Company Limited. The transaction is further described in section 5.2. Carlsberg is the controlling shareholder in the joint venture with a shareholding of 60%, having effectively transferred 40% of its businesses in the UK. The fair value of the transferred shareholding is part of the total consideration paid for the brewing activities injected by Marston’s PLC. At completion, the transferred shareholding impacted the allocation of equity between shareholders in Carlsberg A/S and non- controlling interests by DKK 730m. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 103 The carrying amount of contingent considerations is determined in accordance with the terms of the agreements made with the holders of the options. Therefore, not all are measured at fair value. The valuation of put options at fair value decreased due to the COVID-19 impact on the businesses. The size of the decline differs from market to market depending on the impact of the pandemic, government actions, including lockdowns, and the expected time to return to the market conditions and earnings seen before the outbreak. Interest rates of 4.8-7.4% and residual growth rates of 4.0-5.0% were applied in the valuation of contingent considerations. Other contingent considerations are linked to the development in the share price of selected beverage companies. Movements during the year comprise acquisition of entities and fair value adjustments of contingent considerations, net of exercised put options during the year. Of the contingent considerations, DKK 5bn (2019: DKK 9bn) is expected to fall due within one to five years, whereas the rest will fall due within 12 months. The majority of the contingent considerations are expected to fall due within the next few years. In one of the agreements, the partner can initiate the put option process from 1 January 2021. Our partner has not yet initiated the put option process, and it is not expected that the options will be exercised during 2021. TRANSACTIONS IN 2019 In 2019, the remaining outstanding shares in Caretech Limited (the parent company in the Cambrew Group) were acquired. The related contingent consideration was derecognised. A loss of DKK 526m was recognised in equity on exercise of these put options. Contingent considerations DKK million Contingent considerations at 1 January Movements, net Contingent considerations at 31 December 2020 9,023 -3,733 5,290 2019 6,168 2,855 9,023 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 104 Carlsberg A/S to the non-controlling interests’ share of equity. Fair value adjustments of put options granted to non- controlling interests are recognised directly in the statement of changes in equity. For associates in which the Group holds an ownership interest of less than 20%, the Group participates in the management of the company and is therefore exercising significant influence. Other contingent considerations (earn-outs), which are not linked to a future transfer of additional shareholdings, are measured in accordance with the terms of the contract with the seller. The revaluation of such contingent considerations is recognised in special items. Fair value of investment in listed associates DKK million The Lion Brewery Ceylon, Sri Lanka 2020 382 2019 443 None of the associates and joint ventures are material to the Group. ACCOUNTING POLICIES Investments in associates and joint ventures are recognised according to the equity method, which entails measurement at cost and adjustment for the Group’s share of the profit or loss and other comprehensive income of the associate after the date of acquisition. The share of the result must be calculated in accordance with the Group’s accounting policies. The proportionate share of unrealised intra- group profits and losses is eliminated. Investments in associates and joint ventures with negative net asset values are measured at DKK 0. If the Group has a legal or constructive obligation to cover a deficit in the associate or joint venture, the deficit is recognised under provisions. Any amounts owed by associates and joint ventures are written down to the extent that the amount owed is deemed irrecoverable. SECTION 5.4 (CONTINUED) CONTINGENT CONSIDERATIONS ACCOUNTING ESTIMATES AND JUDGEMENTS The fair value of contingent considerations linked to put options is calculated on the basis of level 3 input consisting of non-observable data, such as entity- specific discount rates and industry-specific expectations of price developments, and generally accepted valuation methods, including discounted cash flows and multiples. Estimates are based on updated information since initial recognition of the contingent consideration, including new budgets and sales forecasts, discount rates etc. The assumptions applied are in line with those used in the impairment tests as described in section 2.2, but reflecting the different models and valuation techniques needed. The fair values of other contingent considerations are measured at the expected future price of certain selected shares. ACCOUNTING POLICIES On acquisition of non-controlling interests, i.e. subsequent to the Group obtaining control, acquired net assets are not measured at fair value. The difference between the cost and the non-controlling interests’ share of the total carrying amount, including goodwill, is transferred from the non-controlling interests’ share of equity to equity attributable to shareholders in Carlsberg A/S. The amount deducted cannot exceed the non-controlling interests’ share of equity immediately before the transaction. On disposal of shareholdings to non-controlling interests, the difference between the sales price and the share of the total carrying amount, including goodwill acquired by the non-controlling interests, is transferred from equity attributable to shareholders in SECTION 5.5 ASSOCIATES AND JOINT VENTURES Investments in associates and joint ventures include the businesses in Portugal (60%) and Myanmar (51%) and five associates in China (each 50%). The total investment in these associates amounted to DKK 2,589m at 31 December 2020 (2019: DKK 2,658m). In 2019, the Group increased its ownership of Super Bock, Portugal, to 60%. Nevertheless, Super Bock remains an associate of the Group due to the ownership structure. Please refer to section 10 for further details. Despite the legal 51% ownership share in Myanmar Carlsberg, the entity is classified as an associate due to the structure of the agreement with the partner. Key figures for associates and joint ventures DKK million Carlsberg Group share 2020 Associates Joint ventures Total 2019 Associates Joint ventures Total Profit after tax Other comprehensive income Total comprehensive income Investments in associates and joint ventures 315 - 315 278 - 278 -4 - -4 4 - 4 311 - 311 282 - 282 4,191 -3 4,188 4,366 -2 4,364 SECTION 6 TAX 24.7% TAX RATE The tax rate is down from 26.9% in 2019. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 105 SECTION 6.1 INCOME TAX The nominal weighted tax rate for the Group is calculated as domestic tax rates applicable to profits in the entities as a proportion of each entity’s share of the Group’s profit before tax. The nominal weighted tax rate declined compared with 2019, as Russia (tax rate 20%) and Laos (tax rate 20%) contributed a proportionally larger share, countered by Norway (tax rate 22%). The effective tax rate of 24.7% (2019: 26.9%) was positively impacted by the non-taxable and non-deductible transactions in special items. Excluding these items, the effective tax rate would be 25.7%. The Group’s total tax cost at the effective tax rate was DKK 354m higher than the Group’s nominal weighted tax, negatively impacted by withholding taxes (particularly on dividends), non-capitalised tax assets and non-deductible expenses (particularly marketing expenses and intercompany charges). It is not possible to deduct all interest and fair value adjustments arising in Denmark due to thin capitalisation rules. Tax on such adjustments therefore fluctuates from year to year. ACCOUNTING POLICIES Income tax comprises current tax and changes in deferred tax for the year, including changes as a result of a change in the tax rate. The tax expense relating to the profit/loss for the year is recognised in the income statement, while the tax expense relating to items recognised in other comprehensive income is recognised in the statement of comprehensive income. If the Group obtains a tax deduction on computation of the taxable income in Denmark or in foreign jurisdictions as a result of share-based payment programmes, the tax effect of the programmes is recognised in tax on profit/loss for the year. However, if the total tax deduction exceeds the total expense, the tax benefit of the excess deduction is recognised directly in equity. Reconciliation of the effective tax rate for the year Nominal weighted tax rate Change in tax rate Adjustments to tax for prior years Non-capitalised tax assets, net movements Non-taxable income Non-deductible expenses Tax incentives etc. Special items Withholding taxes Other, including tax in associates and joint ventures Effective tax rate for the year Effective tax rate for the year, excluding the effect of non-taxable and non-deductible transactions in special items 2020 2019 % DKK million % DKK million 20.8 0.1 0.4 1.5 -0.7 1.6 -0.5 - 1.9 -0.4 24.7 1,879 9 40 138 -59 148 -45 -3 167 -41 2,233 21.8 -0.1 0.2 1.5 -0.5 1.7 -0.3 -0.9 3.9 -0.4 26.9 2,225 -8 24 156 -54 172 -27 -87 395 -45 2,751 25.7 - 26.9 - CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 106 SECTION 6.1 (CONTINUED) INCOME TAX Income tax expenses DKK million Income statement Other comprehensive income Total comprehensive income Income statement Other comprehensive income Total comprehensive income 2020 2019 Tax for the year can be specified as follows Current tax Change in deferred tax and non-current tax payables during the year Change in deferred tax as a result of change in tax rate Adjustments to tax for prior years Total 2,024 160 9 40 2,233 22 42 - - 64 2,046 202 9 40 2,127 608 -8 24 2,297 2,751 5 -60 - - -55 2,132 548 -8 24 2,696 Tax recognised in other comprehensive income DKK million Foreign exchange adjustments Hedging instruments Retirement benefit obligations Share of other comprehensive income in associates and joint ventures Other Total Recognised item before tax 7,640 -198 -1 4 - 7,445 Tax income/ expense - 22 42 - - 64 2020 After tax 7,640 -176 41 4 - Recognised item before tax -3,485 323 571 -4 -14 7,509 -2,609 Tax income/ expense - -20 -38 - 3 -55 2019 After tax -3,485 303 533 -4 -11 -2,664 SECTION 6.2 TAX ASSETS AND LIABILITIES Of the total deferred tax assets recognised, DKK 201m (2019: DKK 312m) related to tax loss carryforwards, the utilisation of which depends on future positive taxable income exceeding the realised deferred tax liabilities. It is management’s opinion that these tax loss carryforwards can be utilised. Tax assets not recognised of DKK 936m (2019: DKK 678m) primarily related to tax losses that are not expected to be utilised in the foreseeable future. Of these, tax losses that will not expire amounted to DKK 962m (2019: DKK 472m). Remaining tax losses of DKK 355m (2019: DKK 206m) will expire within five years. Deferred tax of DKK 41m (2019: DKK 54m) was recognised in respect of the tax of 5% payable on planned dividends from certain entities in Eastern Europe. Planned distribution of reserves for other subsidiaries will not trigger a significant tax liability based on current tax legislation. Deferred tax on temporary differences relating to investments in subsidiaries, associates and joint ventures was recognised at DKK 0m (2019: DKK 180m). The deferred tax plus the additional tax on the gain on the Group’s internal transfer of shares is expected to materialise within the next few years. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 107 SECTION 6.2 (CONTINUED) TAX ASSETS AND LIABILITIES Changes in deferred tax and non-current tax payables for the year amounted to DKK 160m (2019: DKK 608m). Non-current tax liabilities recognised in the statement of financial position DKK million Deferred tax liabilities Non-current tax payables Non-current tax liabilities at 31 December 2020 4,779 1,486 2019 4,652 1,795 6,265 6,447 ACCOUNTING ESTIMATES AND JUDGEMENTS The Group recognises deferred tax assets, including the expected tax value of tax loss carryforwards, if management assesses they can be offset against positive taxable income in the foreseeable future. This judgement is made annually and based on budgets and business plans for the coming years, including planned commercial initiatives. Carlsberg operates in a large number of tax jurisdictions where tax legislation is highly complex and subject to interpretation. Management makes judgements on uncertain tax positions to ensure recognition and measurement of tax assets and liabilities. ACCOUNTING POLICIES Current tax payable and receivable are recognised in the statement of financial position as tax computed on the taxable income for the year, adjusted for tax on the taxable income of prior years and for tax paid on account respectively. Deferred tax on all temporary differences between the carrying amount and the tax base of assets and liabilities is measured using the balance sheet liability method. However, deferred tax is not recognised on temporary differences relating to goodwill that is not deductible for tax purposes or on office premises and other items where temporary differences, apart from business combinations, arise at the acquisition date without affecting either profit/loss for the year or taxable income. deferred tax liabilities in the same legal tax entity and jurisdiction. Deferred tax assets and tax liabilities are offset if the entity has a legally enforceable right to offset current tax liabilities and tax assets or intends either to settle current tax liabilities and tax assets or to realise the assets and settle the liabilities simultaneously. Deferred tax assets are recognised only to the extent that it is probable that the assets will be utilised. Where alternative tax rules can be applied to determine the tax base, deferred tax is measured based on the planned use of the asset or settlement of the liability. Deferred tax is recognised on expected dividend payments from subsidiaries, associates and joint ventures in countries levying withholding tax on distributions. Deferred tax assets related to tax loss carryforwards are recognised under other non-current assets at the expected value of their utilisation, either as a set-off against tax on future income or as a set-off against Deferred tax is measured according to the tax rules at the reporting date and at the tax rates applicable when the deferred tax is expected to materialise as current tax. The change in deferred tax as a result of changes in tax rates is recognised in the income statement. Changes to deferred tax on items recognised in other comprehensive income are, however, recognised in other comprehensive income. Specification of deferred tax Changes to non-current tax assets and liabilities Deferred tax assets Deferred tax liabilities DKK million Tax assets and liabilities at 1 January, net Adjustments to prior years Acquisition of entities Recognised in other comprehensive income Recognised in the income statement, net Change in tax rate Foreign exchange adjustments Tax assets and liabilities at 31 December, net Recognised as follows Tax liabilities Tax assets Tax assets and liabilities at 31 December, net 2020 4,509 107 - 42 160 9 -329 4,498 2019 3,910 -206 40 -60 608 -8 225 4,509 DKK million Intangible assets Property, plant and equipment Current assets Provisions and retirement benefit obligations Fair value adjustments Tax losses etc. Total before offset Offset 2020 388 281 386 929 35 1,204 3,223 2019 465 432 367 1,022 - 1,403 3,689 -1,456 -1,751 Deferred tax assets and liabilities at 31 December 1,767 1,938 Expected to be used as follows 6,265 -1,767 4,498 6,447 -1,938 Within one year After more than one year 4,509 Total 964 803 1,767 695 1,243 1,938 2020 3,280 1,583 25 228 10 1,109 6,235 -1,456 4,779 1,701 3,078 4,779 2019 3,680 1,734 28 26 - 935 6,403 -1,751 4,652 2,115 2,537 4,652 SECTION 7 STAFF COSTS AND REMUNERATION Reset To prepare for a new post-COVID-19- reality, we initiated a review and reset of our total cost base towards the end of the year, called Reset for the future. Employees by segment (%) 2020 (2019) Pensions Defined benefit obligations were affected by lower discount rates across all markets as a result of the COVID-19 pandemic, and by the transfer of the large medical insurance scheme to the municipal government, releasing the Group from the obligation. Western Europe 29% (28%) Asia 38% (38%) Eastern Europe 30% (32%) Other 3% (2%) by function (%) 2020 (2019) Production 31% (32%) Sales & Distribution 59% (59%) Administration 10% (9%) CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 108 During 2020, the average number of employees decreased due to terminations as part of Reset for the future, partly offset by the acquisition of Marston’s brewing activities. As the restructurings and acquisition were completed in the second half of the year, the full impact is not visible in the average number of employees for the year. SECTION 7.1 STAFF COSTS Staff costs decreased for several entities in 2020 as a consequence of lower performance-related payouts due to COVID-19 and compared with the relatively high payouts for 2019 due to good financial performance. This was partly offset by increased redundancies etc. Staff costs DKK million Salaries and other remuneration Severance payments Social security costs Retirement benefit costs – defined contribution plans Retirement benefit costs – defined benefit plans Share-based payments Other employee benefits Total Average number of employees Staff costs are included in the following line items in the income statement Cost of sales Sales and distribution expenses Administrative expenses Other operating activities, net Financial expenses (pensions) Special items (restructurings) Total 2020 7,841 177 1,172 303 -19 66 91 9,631 40,010 2,672 5,087 1,902 68 -189 91 2019 8,549 88 1,344 300 32 217 60 10,590 41,248 2,866 5,575 2,192 63 -133 27 9,631 10,590 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 109 PERFORMANCE SHARES The number of performance shares granted is the maximum number of performance shares that can vest. The number of shares outstanding at the end of the period is the number expected to vest, based on the extent to which the vesting conditions are expected to be met. The number of shares expected to vest is revised on a regular basis. Regular performance shares In 2020, 190 employees (2019: 192 employees) across the Group were awarded performance shares. Vesting is subject to achievement of four KPIs: total shareholder return, adjusted EPS growth, organic revenue growth and growth in ROIC. The average share price at vesting was DKK 770 (2019: DKK 803). The average contractual life at the end of 2020 was 1.2 years (2019: 1.5 years). ACCOUNTING POLICIES Staff costs are recognised in the financial year in which the employee renders the related service. The cost of share-based payments, which is expensed over the vesting period of the programme according to the service conditions, is recognised in staff costs and provisions or equity, depending on how the programme is settled with the employees. Key management personnel comprise the Executive Committee, excluding the executive directors. Other management personnel included in the share-based payment schemes comprise vice presidents and other key employees in central functions as well as the management of significant subsidiaries. SECTION 7.2 REMUNERATION The remuneration of the Supervisory Board, the executive directors and key management personnel is described in detail in the Remuneration Report. The remuneration of key management personnel decreased in 2020, primarily as a result of the COVID-19 impact on the KPIs measured in both short- and long-term incentive programmes. In 2020, the Supervisory Board received total remuneration of DKK 9.86m (2019: DKK 9.59m), comprising fixed salary only. All elements except for share-based payments are classified as short-term employee benefits. Share-based payments are classified as a long-term employee benefit. Remuneration DKK million Fixed salary Cash bonus Other benefits Severance payments Remuneration settled in cash Non-monetary benefits Share-based payments Remuneration, non-monetary and share-based Total cash and non-cash Executive directors Key management personnel 2020 20.7 9.3 1.1 - 31.1 0.4 26.0 26.4 57.5 2019 20.2 18.5 1.1 - 39.8 0.4 37.0 37.4 77.2 2020 29.7 12.4 8.5 8.3 58.9 1.1 10.5 11.6 70.5 2019 26.5 24.5 7.0 - 58.0 0.7 21.4 22.1 80.1 SECTION 7.3 SHARE-BASED PAYMENTS The Group has set up share-based incentive programmes to attract, retain and motivate the Group’s executive directors and other levels of management personnel, and to align their interests with those of the shareholders. There is no share-based incentive programme for the Supervisory Board. The Group has two types of share-based payment: share options and performance shares. Share options entitle the holder to purchase class B shares in Carlsberg A/S at a predetermined price after completing three years of service. Share options are exercisable for five years. Entitlement to performance shares also requires fulfilment of service in the vesting period (2-3 years), but does not have any exercise price. Instead, the shares are transferred to the recipients based on achievement of the KPIs attached to the shares. Performance shares have been awarded under three programmes that differ in terms of KPI structure and vesting period. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 110 SECTION 7.3 (CONTINUED) SHARE-BASED PAYMENTS Fund & Grow performance shares The Fund & Grow performance share programme was set up in 2018 to align the initiatives driven by Group management in our SAIL’22 strategy with the interests of our shareholders. Shares were granted to 204 employees across the Group, not including the executive directors. The programme vested in 2020 with all KPIs fully achieved. Share options No share options have been granted since 2016. The outstanding options are all exercisable at the end of the reporting period. The average contractual life was 2.8 years (2019: 3.6 years). Share option disclosures DKK million Fair value at 31 December 2020 52 2019 54 ACCOUNTING ESTIMATES AND JUDGEMENTS ACCOUNTING POLICIES The volatility of performance shares is based on the historical volatility of the price of Carlsberg A/S’ class B shares over the previous three years. For share options, the volatility is based on similar data over the previous eight years. The share price and the exercise price of share options are calculated as the average price of Carlsberg A/S’ class B shares on Nasdaq Copenhagen during the first five trading days after publication of Carlsberg A/S’ financial statements. The risk-free interest rate is based on Danish government bonds of the relevant maturity. The expected life is based on exercise at the end of the exercise period. The fair value of granted performance shares is estimated using a stochastic (quasi-Monte Carlo) valuation model of market conditions and a Black- Scholes call option-pricing model of other conditions, taking into account the terms and conditions upon which the performance shares were granted. On initial recognition of performance shares, an estimate is made of the number of awards expected to vest and subsequently revised for any changes. Accordingly, recognition is based on the number of awards that ultimately vest. Performance shares 31 December 2018 Granted Forfeited/adjusted Exercised/settled 31 December 2019 Granted Forfeited/adjusted/transferred Exercised/settled 31 December 2020 Performance share disclosures DKK million Fair value at grant date Cost of shares granted in the year Total cost of performance shares Cost not yet recognised Fair value at 31 December Executive directors 203,484 61,331 -17,353 -58,057 189,405 48,991 -28,919 -66,865 142,612 Key management personnel Other management personnel 88,919 27,569 -18,240 - 98,248 22,550 513,661 167,918 -64,592 - 616,987 130,515 Total 806,064 256,818 -100,185 -58,057 904,640 202,056 -16,970 -160,696 -206,585 -49,277 -307,465 -423,607 54,551 279,341 476,504 Key information Assumptions Expected volatility Risk-free interest rate Expected dividend yield Expected life of options, years Fair value at measurement date Regular performance shares Fund & Grow performance shares 2020 2019 2019 16.0%/21.0% 0.0% 0.0/3.0% 3.0 16% 0.0% 2.3% 3.0 N/A 0.0% 2.2% 2.0 DKK 567-894 DKK 648-651 DKK 684 Share options Regular Fund & Grow 2020 131 30 56 132 458 2019 167 46 104 162 510 2020 2019 - - 10 7 - - - 112 14 31 December 2018 31 December 2019 361 31 December 2020 Exercise price Number Fixed, weighted average 518 518 518 Executive directors 114,984 114,984 114,984 Other management personnel - - - Total 114,984 114,984 114,984 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 111 associated with future developments in interest rates, inflation, mortality and disability etc. Obligation, net 2020 2019 The most significant plans are in the UK and Switzerland, representing 50% and 38% respectively (2019: 47% and 39%), while the eurozone countries represented 5% (2019: 5%) of the gross obligation at 31 December 2020. The majority of the obligations are funded, with assets placed in independent pension funds, mainly in Switzerland and the UK. In some countries, primarily Germany, Sweden and China, the obligation is unfunded. The retirement benefit obligations for these unfunded plans amounted to DKK 1,589m (2019: DKK 1,802m) or 12% (2019: 13%) of the gross obligation. In 2020, the Group’s obligation, net, on defined benefit plans decreased by DKK 365m compared with 2019 because of general decreases in the net obligation across the Group. Two particularly significant factors in this were the DKK 213m decrease in China, as a result of the municipal government in Xinjiang assuming responsibility for the long- term medical insurance scheme, and the DKK 305m net decrease in Switzerland, reflecting higher benefits paid out and an increase in the assets plan. This effect was partially offset by changes in actuarial assumptions in the UK, primarily lower discount rates, as an effect of the COVID-19 pandemic, which increased the net obligation, mainly due to actuarial losses of DKK 150m. DKK million Present value of obligation Fair value of plan assets Obligation, net Present value of obligation Fair value of plan assets Obligation, net Obligation at 1 January 13,771 10,472 3,299 12,239 9,331 2,908 Recognised in the income statement Current service cost Past service cost Net interest on the net defined benefit obligation (asset) Curtailments and settlements Total Remeasurements Gain/loss from changes in demographic assumptions Gain/loss from changes in financial assumptions Asset ceiling Total Other changes Contributions to plans Benefits paid Acquisition and disposal of entities, net Transfers Foreign exchange adjustments etc. Total 223 -242 160 - 141 51 682 - 733 - -608 - -28 -421 -1,057 - - 114 - 114 223 -242 46 - 27 199 -169 256 2 288 - - 189 - 189 199 -169 67 2 99 - 51 -98 - -98 734 - 734 -52 1,452 - -1 - 1,354 717 66 783 735 -66 571 182 -504 - 7 -351 -666 -182 -104 - -35 -70 -391 - -594 225 -486 -225 -108 1 1 482 -110 - - 430 169 1 1 52 -279 3,299 Obligation at 31 December 13,588 10,654 2,934 13,771 10,472 The total return on plan assets for the year amounted to DKK 850m (2019: DKK 906mm). SECTION 7.4 RETIREMENT BENEFIT OBLIGATIONS AND SIMILAR OBLIGATIONS A number of employees are covered by retirement benefit plans. The nature of the plans varies depending on labour market conditions in the individual countries. Benefits are generally based on wages/salaries and length of employment. Retirement benefit obligations cover both present and future retirees’ entitlement to retirement benefits. DEFINED CONTRIBUTION PLANS A defined contribution plan is a post- employment benefit plan under which the Group pays contributions to a separate independent company. The Group’s legal or constructive obligation is limited to the contributions. 61% (2019: 61%) of the Group’s retirement benefit costs related to defined contribution plans. In 2020, the expense recognised in relation to these contributions was DKK 303 (2019: DKK 300m). DEFINED BENEFIT PLANS The defined benefit plans guarantee employees a certain level of pension benefits for life. The pension is based on seniority and salary at the time of retirement. The Group assumes the risk CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 112 SECTION 7.4 (CONTINUED) RETIREMENT BENEFIT OBLIGATIONS AND SIMILAR OBLIGATIONS The Group expects to contribute DKK 74m (2019: DKK 79m) to the plan assets in 2021. Plan assets do not include shares in or properties used by Group companies. Amounts recognised in other comprehensive income for 2020 totalled DKK -429m (2019: net gain of DKK 681m), comprising foreign exchange adjustment, DKK 129m, and net actuarial loss, DKK 300m, which in 2019 included reversal of an asset ceiling in the UK of DKK 66m. The accumulated actuarial loss and foreign exchange adjustment recognised at 31 December 2020 was DKK 3,287m (2019: DKK 3,710m), with actuarial net losses of DKK 3,733m (2019: DKK 3,734m). Assumptions applied In 2020, the discount rate used for the defined benefit plans in Western Europe was determined by reference to market yields on corporate bonds. In the Asian countries, where no deep market in high-quality corporate bonds exists, the discount rate was determined by reference to market yields on government bonds. The mortality tables used in Carlsberg UK are S3PMA/S3PFA tables for post-retirement and AMC00/AFC00 for pre-retirement, both with CMI_2019 projections, while the Swiss entities use BVG 2015 for valuation of their retirement benefit obligations. Sensitivity analysis The sensitivity analysis is based on a change in one of the assumptions, while all other assumptions remain constant. This is highly unlikely, however, as a change in one assumption would probably affect other assumptions as well. When calculating the obligation on the basis of a changed assumption, the same method has been applied as when calculating the defined benefit obligation. Expected maturity and duration Defined benefit obligations are primarily expected to mature after five years. The expected duration of the obligations at year- end 2020 was 21 years. The duration is calculated using a weighted average of the duration divided by the obligation. Breakdown of plan assets Shares Bonds and other securities Real estate Cash and cash equivalents Total Assumptions applied 2020 Discount rate Growth in wages and salaries 2019 Discount rate Growth in wages and salaries Sensitivity analysis DKK million Discount rate Growth in wages and salaries Mortality 2020 2019 DKK million 992 7,578 1,914 170 % 9 71 18 2 DKK million 1,004 7,080 2,231 157 10,654 100 10,472 % 10 68 21 1 100 CHF 0.2% 1.0% 0.1% 1.0% UK EUR 1.6% 0.3 - 0.7% 2.1% 0.2 - 2.7% Other 1.8% 2.0% Weighted average 0.6% 1.2% 2.2% 2.2% 0.3-0.9% 0.0-2.7% 2.5% 3.1% 1.3% 1.8% 2020 +0.5% -0.5% +0.5% -1,514 1,715 -1,063 74 -67 70 +1 year -1 year +1 year 452 -378 580 2019 -0.5% 1,216 -65 -1 year -582 Maturity of retirement benefit obligations DKK million 2020 2019 < 1 year 1-5 years > 5 years Total 611 449 2,313 10,664 13,588 2,121 11,201 13,771 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 113 SECTION 7.4 (CONTINUED) RETIREMENT BENEFIT OBLIGATIONS AND SIMILAR OBLIGATIONS ACCOUNTING ESTIMATES AND JUDGEMENTS The value of the Group’s defined benefit plans is based on valuations from external actuaries. The valuation is based on a number of actuarial assumptions, including discount rates, expected return on plan assets, expected growth in wages and salaries, mortality and retirement benefits. The present value of the net obligation is calculated by using the projected unit credit method and discounting the defined benefit plan by a discount rate for each country. The discount rate is determined by reference to market yields on high-quality corporate bonds. Where high-quality corporate bonds are not available, the market yields on government bonds are used instead. Mortality assumptions are based on the Group entity’s best estimate of the mortality of plan members during and after employment, and include expected changes in mortality. Due to the broad range of entities comprising the retirement benefit obligation, several different mortality tables are used to calculate the future retirement benefit obligation. ACCOUNTING POLICIES Contributions paid to a defined contribution plan are recognised in the income statement in the period during which services are rendered by employees. Any contributions outstanding are recognised in the statement of financial position as other liabilities. The Group’s net obligation recognised in the statement of financial position in respect of defined benefit plans is the present value of the defined benefit obligation at the reporting date less the fair value of plan assets calculated by a qualified actuary. The present value is determined separately for each plan by discounting the estimated future benefits that employees have earned in return for their service in the current and prior years. The costs of a defined benefit plan are recognised in the income statement and include service costs, net interest based on actuarial estimates and financial expectations at the beginning of the year. Service costs comprise current service cost and past service cost. Current service cost is the increase in the present value of the defined benefit obligation resulting from employee services in the current period. Past service cost is the change in the present value of the obligation regarding employee services in prior years that arises from a plan amendment or a curtailment. Past service costs are recognised immediately, provided employees have already earned the changed benefits. Realised gains and losses on curtailment or settlement are recognised under staff costs. Interest on retirement benefit obligations and the interest on return on plan assets are recognised as financial income or financial expenses. Differences between the development in retirement benefit assets and liabilities and realised amounts at year-end are designated as actuarial gains or losses and recognised in other comprehensive income. As they will never be reclassified to the income statement, they are included in retained earnings. If a retirement benefit plan constitutes a net asset, the asset is recognised only if it offsets future refunds from the plan or will lead to reduced future payments to the plan. Realised gains and losses on the adjustment of retirement benefit obligations as a result of termination of a significant number of positions in connection with restructurings are recognised under special items. SECTION 8 OTHER DISCLOSURE REQUIREMENTS CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 114 6,363m Profit attributable to shareholders in Carlsberg A/S, adjusted for special items after tax (DKK). 43.6 Earnings per share, adjusted for special items after tax (DKK). SECTION 8.1 EARNINGS PER SHARE During 2020, the Group repurchased a total of 2.9m B shares under the share buy-back programme. The continued share buy-back programme decreased the average number of shares by 4.3m. This increased adjusted earnings per share by DKK 1.2. The adjustment for special items after tax more than offset the lower profit for the year compared with the previous year and increased adjusted earnings per share by DKK 1.4. For all share-based incentive instruments, the average market price of Carlsberg B shares exceeded the exercise price and the fair value at the grant date. As a result, diluted earnings per share included all share-based incentive instruments that could potentially dilute earnings in the future. Earnings per share DKK Earnings per share of DKK 20 (EPS) Diluted earnings per share of DKK 20 (EPS-D) Earnings per share, adjusted (EPS-A) Average number of shares 1,000 shares Average number of issued shares Average number of treasury shares Average number of shares Average dilutive effect of share-based incentives Diluted average number of shares Profit attributable to shareholders DKK million Consolidated profit Non-controlling interests Profit attributable to shareholders in Carlsberg A/S (net profit) Special items after tax Profit attributable to shareholders in Carlsberg A/S, adjusted 2020 41.3 41.1 43.6 2019 43.7 43.4 41.0 149,407 -3,303 146,104 646 152,557 -2,146 150,411 817 146,750 151,228 6,808 -778 6,030 333 6,363 7,477 -908 6,569 -409 6,160 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 115 SECTION 8.2 FEES TO AUDITORS The following transactions took place between the Carlsberg Foundation and the Group in 2020: charge from the Group as part of the sponsorship of certain events at an accumulated value of DKK 0.01m. The income statement and the statement of financial position include the following transactions Fees to auditors appointed by the Annual General Meeting DKK million 2020 2019 PwC, including network firms Statutory audit Assurance engagements Tax advisory Other services Total 21 1 2 2 26 20 1 2 7 30 Fees for services other than the statutory audit of the financial statements provided by PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab, Denmark, amounted to DKK 2m (2019: DKK 8m), including advice relating to information security, internal controls, and other assurance opinions and agreed-upon procedures, as well as accounting advice. SECTION 8.3 RELATED PARTIES RELATED PARTIES EXERCISING CONTROL The Carlsberg Foundation, H.C. Andersens Boulevard 35, 1553 Copenhagen V, Denmark, exercises control over Carlsberg A/S. The Foundation holds 29.6% of the shares and 75.6% of the voting power in Carlsberg A/S, excluding treasury shares. The Carlsberg Foundation received a dividend of DKK 21.00 per share from Carlsberg A/S, the same as every other shareholder. The dividend received amounted to DKK 970m. Through its pro-rata participation in the share buy-back programme, the Carlsberg Foundation sold B shares to Carlsberg A/S at a fair value of DKK 880m. The Foundation thereby reduced its shareholding to 29.6% at 31 December 2020 (2019: 29.4%). The shares were sold back at the average weekly share buy-back market prices. FUNDING AND GRANTS Carlsberg A/S received statutory grants and further funding from the Carlsberg Foundation, DKK 30.3m, for the basic research and development activities at the Carlsberg Research Laboratory (2019: DKK 39m). Of the total grants, DKK 22m (2019: DKK 41m) was deferred to be used for research projects in the future. In 2020, the Carlsberg Foundation contributed DKK 52m that will be used to support the rebuilding of the Carlsberg Visitor Centre during 2021 and 2022 to better showcase Carlsberg’s rich history and value creation. OTHER ACTIVITIES Carlsberg A/S held the Annual General Meeting at Ny Carlsberg Glyptotek at a cost of DKK 0.2m. Furthermore, Ny Carlsberg Glyptotek received event products free of The Group’s delivery of beer and soft drinks to the Carlsberg Foundation is charged at ordinary listing price minus a discount. In 2020, the deliveries amounted to DKK 0.1m (total sales of goods) (2019: DKK 0.2m). Carlsberg A/S leases parking spaces from the Carlsberg Foundation to provide parking for employees at the Research Laboratory and Visit Carlsberg. Furthermore, Carlsberg Breweries A/S leases storage facilities in the researcher apartments. These lease agreements are with subsidiaries of the Foundation. Both of the annual lease payments amount to DKK 0.2m and the leases are on market terms. It is estimated that the benefit for the Carlsberg Group corresponds to the value of the other activities provided to the Carlsberg Foundation, which in turn corresponds to what each party would have had to pay to have the same deliverables provided by external parties. OTHER RELATED PARTIES Related parties also comprise Carlsberg A/S’ Supervisory Board and Executive Board, their close family members and companies in which these persons have significant influence. During the year, there were no transactions between these parties and the Group, except for remuneration as disclosed in section 7 of the consolidated financial statements. DKK million 2020 2019 Associates and joint ventures Revenue Cost of sales Sales expenses Interest income Loans Receivables Trade payables and other liabilities 78 72 -756 -703 -14 15 213 - - - 241 48 -10 -2 SECTION 8.4 EVENTS AFTER THE REPORTING PERIOD On 1 January 2021, the Group completed the minor acquisition of Wernesgrüner Brewery, Germany, which will be fully consolidated as of the acquisition date. Apart from this and the events recognised or disclosed in the consolidated financial statements, no events have occurred after the reporting period of importance to the consolidated financial statements. SECTION 9 BASIS FOR PREPARATION CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 116 Changes in 2021 SEGMENTATION The regional structure of the Group changed as of 1 January 2021 to rebalance the European regions in terms of size and number of business units. Consequently, the segmentation changed on the same date (in line with the structure). SECTION 9.1 SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS In preparing the consolidated financial statements, management makes various accounting estimates and judgements that form the basis of presentation, recognition and measurement of the Group’s assets, liabilities, income and expenses. The estimates and judgements made are based on historical experience and other factors that management assesses to be reliable, but that, by nature, are associated with uncertainty and unpredictability and may therefore prove incomplete or incorrect. Areas involving significant estimates and judgements: Impairment testing, useful life and residual value Section 2 Restructurings, provisions and contingencies Section 3 Receivables Tax assets and liabilities Defined benefit obligations Acquisitions and disposals, including contingent considerations Section 1 Section 6 Section 7 Section 5 SECTION 9.2 GENERAL ACCOUNTING POLICIES The Group’s 2020 consolidated financial statements have been prepared in accordance with IFRS as adopted by the EU and further requirements in the Danish Financial Statements Act. The consolidated financial statements are presented in Danish kroner (DKK), which is the Parent Company’s functional currency, and all values are rounded to the nearest DKK million, except when otherwise stated. The accounting policies set out below have been used consistently in respect of the financial year and the comparative figures. DEFINING MATERIALITY Significant items are presented individually in the financial statements as required by IAS 1. Other items that are considered relevant to stakeholders and necessary for an understanding of the Group’s business model, including research, real estate and geographical diversity, are also presented individually in the financial statements. The consolidated financial statements are prepared as a consolidation of the financial statements of the Parent Company, Carlsberg A/S, and its subsidiaries according to the Group’s accounting policies. Entities over which the Group exercises significant influence, but which it does not control, are considered associates. Significant influence is generally obtained by direct or indirect ownership or control of less than 50% of the voting rights or participation in the management of the company. The assessment of whether Carlsberg A/S exercises control or significant influence includes potential voting rights exercisable at the reporting date. Entities that by agreement are managed jointly with one or more other parties are considered joint ventures. On consolidation, intra-group income and expenses, shareholdings, balances and dividends, and realised and unrealised gains are eliminated. Unrealised gains on transactions with associates and joint ventures are eliminated in proportion to the Group’s ownership share of the entity. SECTION 9.2 (CONTINUED) GENERAL ACCOUNTING POLICIES Unrealised losses are eliminated in the same way as unrealised gains to the extent that impairment has not taken place. The accounting items of subsidiaries are included in full in the consolidated financial statements. Non-controlling interests’ share of subsidiaries’ profit/loss for the year and of equity are included in the Group’s profit/loss and equity but are disclosed separately. Entities acquired or established in the year are recognised in the consolidated financial statements from the date of acquisition or formation. Entities disposed of or discontinued are recognised in the consolidated income statement until the date of disposal or discontinuation. The comparative figures are not restated. FOREIGN CURRENCY TRANSLATION A functional currency is determined for each of the reporting entities in the Group. The functional currency is the primary currency used for the reporting entity’s operations. Transactions denominated in currencies other than the functional currency are considered transactions denominated in foreign currencies. On initial recognition, transactions denominated in foreign currencies are translated to the functional currency at the exchange rates at the transaction date. Foreign exchange differences arising between the exchange rates at the transaction date and at the date of payment are recognised as financial income or expenses. Receivables, payables and other monetary items denominated in foreign currencies are translated at the exchange rates at the reporting date. The difference between the exchange rates at the reporting date and at the date at which the receivable or payable arose or the exchange rate in the latest consolidated financial statements is recognised as financial income or expenses. On recognition of entities with a functional currency other than the presentation currency, the income statement and statement of cash flows are translated at the exchange rates at the transaction date, and the statement of financial position items are translated at the exchange rates at the reporting date. Foreign exchange differences arising on translation of the opening balance of equity, and of the income statement on the reporting date, are recognised in other comprehensive income and attributed to a separate translation reserve in equity. Foreign exchange differences arising on the translation of the proportionate share of associates and joint ventures are likewise recognised in other comprehensive income. Foreign exchange adjustment of balances with entities that are considered part of the investment in the entity is recognised in other comprehensive income. Correspondingly, foreign exchange gains and losses on the part of loans and derivative financial instruments that are designated as hedges of investments in foreign entities, and that effectively hedge CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 117 against corresponding foreign exchange gains and losses on the investment in the entity, are also recognised in other comprehensive income and attributed to a separate translation reserve in equity. When the gain or loss from a complete or partial disposal of an entity is recognised, the share of the cumulative exchange differences recognised in other comprehensive income is recognised in the income statement. The same approach is adopted on repayment of balances that constitute part of the net investment in the entity. INCOME STATEMENT The presentation of the Group’s income statement is based on the internal reporting structure, as IFRS does not provide a specific disclosure requirement. Special items are not directly attributable to ordinary operating activities and are shown separately in order to facilitate a better understanding of the Group’s financial performance. CASH FLOW Cash flow is calculated using the indirect method and is based on operating profit before special items adjusted for depreciation, amortisation and impairment losses. Cash flow cannot be derived directly from the statement of financial position and income statement. FINANCIAL RATIOS AND NON-IFRS FINANCIAL MEASURES The Group uses certain additional financial measures to provide management, investors and investment analysts with additional measures to evaluate and analyse the Company’s results. These non-IFRS financial measures are defined and calculated by the Group, and therefore may not be comparable with other companies’ measures. The non-IFRS financial measures disclosed in the Annual Report are: • Earnings per share, adjusted, and payout ratio, adjusted • Organic development The Danish Finance Society does not acknowledge use of special items and states that adjustments of tax should be based on the marginal tax rate. When calculating financial measures, the Group uses operating profit before special items as well as the effective tax rate for measures adjusted for tax. Other financial ratios are calculated in accordance with the Danish Finance Society’s online guidelines on the calculation of financial ratios, “Recommendations and Financial Ratios”, unless specifically stated. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 118 The annual report submitted to the Danish Financial Supervisory Authority (the Officially Appointed Mechanism) consists of the XHTML document together with the technical files, all of which are included in the ZIP file CARL- 2020-12-31.ZIP. Key definitions XHTML (eXtensible HyperText Markup Language) is a text-based language used to structure and mark up content such as text, images and hyperlinks in documents that are displayed in a web-browser. iXBRL tags (or Inline XBRL tags) are hidden metainformation embedded in the source code of an XHTML document that enables the conversion of XHTML-formatted information into a machine-readable XBRL data record using appropriate software. A financial reporting taxonomy is an electronic dictionary of business reporting elements used to report business data. A taxonomy element is an element defined in a taxonomy that is used for the machine-readable labelling of information in an XBRL data record. SECTION 9.2 (CONTINUED) GENERAL ACCOUNTING POLICIES 9.2.1 REPORTING UNDER THE ESEF REGULATION The Commission Delegated Regulation (EU) 2019/815 on the European Single Electronic Format (ESEF Regulation) has introduced a single electronic reporting format for the annual financial reports of issuers with securities listed on the EU regulated markets. The combination of XHTML format and iXBRL tags enables the annual financial reports to be read by both humans and machines, thus enhancing accessibility, analysis and comparability of the information included in the annual financial reports. The Group’s iXBRL tags have been prepared in accordance with the ESEF taxonomy, which is included in the ESEF Regulation and developed based on the IFRS taxonomy published by the IFRS Foundation. The line items in the consolidated financial statement are tagged to elements in the ESEF taxonomy. For financial line items that are not directly defined in the ESEF taxonomy, an extension to the taxonomy has been created. Extensions are anchored to elements in the ESEF taxonomy, except for extensions that are subtotals. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 119 SECTION 9.2 (CONTINUED) GENERAL ACCOUNTING POLICIES Glossary and calculation of key figures and financial ratios disclosed in the Annual Report FINANCIAL RATIOS Gross margin EBITDA margin1 Gross profit as a percentage of revenue. Operating profit before depreciation, amortisation and impairment losses as a percentage of revenue. Operating margin Operating profit before special items1 as a percentage of revenue. Return on invested capital (ROIC) Operating profit before special items1 adjusted for tax as a percentage of average invested capital2 calculated as a 12-month rolling average (MAT). STOCK MARKET RATIOS (CONTINUED) Payout ratio Payout ratio, adjusted Proposed dividend for the year as a percentage of consolidated profit, excluding non-controlling interests. Proposed dividend for the year on number of shares at year-end as a percentage of consolidated profit, adjusted for special items after tax1, excluding non-controlling interests. Market capitalisation Number of shares at year-end multiplied by the share price. Average number of issued shares Number of issued shares as an average for the year. Average number of shares Number of issued shares, excluding treasury shares, as an average for the year. Number of shares at year-end Total number of issued shares, excluding treasury shares, at year-end. Return on invested capital excluding goodwill (ROIC excl. goodwill) Operating profit before special items1 adjusted for tax as a percentage of average invested capital2 excluding goodwill calculated as a 12-month rolling average (MAT). GLOSSARY EBITDA1 Expression used for operating profit before depreciation, amortisation and impairment losses. Effective tax rate1 Income tax as a percentage of profit before tax. Equity ratio Equity attributable to shareholders in Carlsberg A/S at year-end as a percentage of total assets at year-end. NIBD/equity ratio1 Net interest-bearing debt3 at year-end divided by total equity at year-end. NIBD/EBITDA1 Net interest-bearing debt3 divided by operating profit before depreciation, amortisation and impairment losses. Interest cover1 Operating profit before special items divided by interest expenses, net. STOCK MARKET RATIOS Earnings per share (EPS) Earnings per share, diluted (EPS-D) Consolidated profit for the year, excluding non-controlling interests, divided by the average number of shares. Consolidated profit for the year, excluding non-controlling interests, divided by the average number of shares, fully diluted for share options and performance shares in the money. Earnings per share, adjusted (EPS-A) Consolidated profit for the year adjusted for special items after tax1, excluding non-controlling interests, divided by the average number of shares. Free cash flow per share (FCFPS)1 Free cash flow4 divided by the average number of shares, fully diluted for share options and performance shares in the money. Leverage ratio1 Expression used for NIBD/EBITDA. NCI OCI Off-trade On-trade Abbreviation for non-controlling interests. Abbreviation for other comprehensive income. Expression used for sale of beverages for consumption off the premises (e.g. retailers). Expression used for sale of beverages for consumption on the premises (e.g. restaurants, hotels and bars). Operating profit Expression used for operating profit before special items1. Organic development1 Measure of growth excluding the impact of acquisitions, divestments and foreign exchange from year-on-year comparisons. Volumes1 The Group’s sale of beverages in consolidated entities and sale of the Group’s products under licence agreements. 1 This key figure, ratio or elements thereof are not defined or deviate from the definitions of the Danish Finance Society. 2 The calculation of invested capital is specified in section 2.1. 3 The calculation of net-interest bearing debt is specified in section 4.2. 4 The calculation of free cash flow is specified in the statement of cash flows. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 120 SECTION 9.4 NEW LEGISLATION NEW AND AMENDED IFRS STANDARDS The following Amendments to IFRS became effective as of 1 January 2021: • Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 “Interest rate benchmark reform – Phase 2” • Amendment to IFRS 4 “Insurance Contracts” The amendment to IFRS 3 is expected to be adopted by the EU in early 2021. The Group will adopt the amendment when it becomes mandatory. The implemented Amendments are not expected to have any significant impact on the financials or the Group’s accounting policies, as they cover areas that are not material and/or relevant for the Group or do not change the accounting policies applied in 2020. NEW AND AMENDED IFRS STANDARDS AND INTERPRETATIONS NOT YET ADOPTED BY THE EU The following Amendments that become effective in future years have been issued but not yet adopted by the EU: • Amendments to IFRS 3 “Business Combinations” • Amendment to IAS 16 “Property, Plant and Equipment” • Amendment to IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” • Annual Improvements 2018-2020 • Amendment to IAS 1 “Presentation of Financial Statements: Classification of Liabilities as Current or Non-current and Classification of Current or Non-current – Deferral of Effective Date” The new Standard is not mandatory for the financial reporting for 2020. The Group expects to adopt the new Standard when it becomes mandatory. SECTION 9.3 CHANGES IN ACCOUNTING POLICIES CHANGED ACCOUNTING POLICIES AND CLASSIFICATION IN THE ANNUAL REPORT 2020 The Annual Report 2020 has been prepared using the same accounting policies for recognition and measurement as those applied to the consolidated financial statements for 2019, except for the following Amendments that were adopted as of 1 January 2020: • Amendments to IAS 1 and IAS 8 “Definition of Material” • Amendments to IFRS 3 “Business Combinations” • Amendments to IFRS 9, IAS 39 and IFRS 7 “Interest rate benchmark reform” • Amendments to “References to the Conceptual Framework in IFRS Standards” The, Amendments had no impact on the Group’s accounting policies, as they cover areas that are not material and/or relevant for the Group or do not change the accounting policies applied in 2020. SECTION 9.5 NEW SEGMENTATION NEW SEGMENTATION FOR 2021 The regional structure of the Group changed as of 1 January 2021, with the aim of rebalancing the European regions in terms of size and number of business units. IFRS 8 requires that an entity discloses information about its operating segments, including profit and loss for each reportable segment. These segment disclosures should follow the “management approach”, meaning they should be the same segments as are regularly reported to management. The effect of the new segmentation With the new segmentation the entities in the Baltic and Balkan countries, Greece and Italy (collectively known as the Southern Europe & Baltics markets) as well as Carlsberg Export & License move from the Western Europe region to Eastern Europe. Eastern Europe will then be renamed Central & Eastern Europe to better reflect its new composition. The disclosure in the Annual Report follows the same regional segmentation as was used in the internal reporting to the Executive Committee throughout 2020. New segmentation As the management structure was unchanged during 2020, the segmentation used in the Annual Report 2020 continues without any changes compared with 2019. DKK Million Revenue Total cost The segmentation changed as of 1 January 2021, when the new management structure took effect. To provide transparency, it has been decided to disclose the effect of the new segmentation had it become effective at 1 January 2020 and as it will be disclosed in the comparative figures for 2020 in the Annual Report 2021. Share of profit after tax of associates and joint ventures Operating profit before special items Operating margin Invested capital Invested capital excl. goodwill Acquisition of property, plant and equipment and intangible assets Amortisation and depreciation Impairment losses Return on invested capital (ROIC) ROIC excl. goodwill CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 121 Reported Restated Western Europe Asia Eastern Europe Western Europe Asia 2020 Central & Eastern Europe 31,547 16,959 10,010 25,875 16,959 15,682 -26,763 -13,057 -8,093 -22,143 -13,057 -12,713 209 4,993 15.8% 89 3,991 23.5% - 1,917 19.2% 194 3,926 15.2% 89 3,991 23.5% 15 2,984 19.0% 41,795 18,045 20,915 35,746 18,045 26,964 19,151 1,474 2,095 50 9.4% 20.2% 2,682 8,430 16,142 2,682 11,439 1,395 1,499 292 15.8% 88.8% 552 654 10 7.0% 17.4% 1,258 1,712 44 8.7% 18.8% 1,395 1,499 292 15.8% 88.8% 768 1,037 16 8.5% 19.8% Part of management review - not audited New segmentation Beer (million hl) Western Europe Asia Central & Eastern Europe Total Non-beer (million hl) Western Europe Asia Central & Eastern Europe Total Total beverages (million hl) Western Europe Asia Central & Eastern Europe Total Revenue (DKK million) Western Europe Asia Central & Eastern Europe Not allocated Total CARLSBERG GROUP ANNUAL REPORT 2020 PART OF MANAGEMENT REVIEW - NOT AUDITED 122 Q1 Q2 H1 Q3 Q4 H2 FY 5.6 7.8 9.0 22.4 2.5 1.3 0.7 4.5 8.1 9.1 9.7 26.9 7.7 9.8 13.4 30.9 2.8 1.0 1.2 5.0 10.5 10.8 14.6 35.9 13.3 7.8 17.6 22.4 53.3 5.3 2.3 1.9 9.5 18.6 19.9 24.3 62.8 10.5 15.6 33.9 3.2 1.2 1.2 5.6 11.0 11.7 16.8 39.5 5.7 6.7 10.5 22.9 2.7 1.3 0.9 4.9 8.4 8.0 11.4 27.8 13.5 26.8 17.2 26.1 56.8 5.9 2.5 2.1 10.5 19.4 19.7 28.2 67.3 34.8 48.5 110.1 11.2 4.8 4.0 20.0 38.0 39.6 52.5 130.1 5,613 4,052 3,275 6 6,888 4,411 4,582 3 12,501 8,463 7,857 9 7,674 4,703 4,873 9 5,700 3,793 2,952 7 13,374 8,496 7,825 16 12,946 15,884 28,830 17,259 12,452 29,711 25,875 16,959 15,682 25 58,541 CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 123 Consolidated financial statements SECTION 10 GROUP COMPANIES This section lists the subsidiaries, associates and joint ventures in the Group. Parent direct ownership shows the legal ownership held by the immediate holding company in the Group. Cross-holdings held by fully owned companies in the Group are aggregated. Consolidated ownership shows the share of the result of the entity that is attributed to the shareholders of Carlsberg A/S in the consolidated financial statements. Carlsberg Breweries A/S Western Europe Carlsberg Danmark A/S Carlsberg Supply Company Danmark A/S Carlsberg Sweden Holding 2 AB Carlsberg Sverige AB Carlsberg Supply Company Sverige AB Ringnes Norge AS Ringnes AS Ringnes Brygghus AS Ringnes Supply Company AS Ringnes Farris Eiendom AS Ringnes Imsdal Eiendom AS Ringnes Administrasjon Eiendom AS Ringnes Gjelleråsen Eiendom AS Solo AS Oy Sinebrychoff Ab Sinebrychoff Supply Company Oy Carlsberg Deutschland Holding GmbH Holzmarkt Brewing Company GmbH Carlsberg Deutschland Logistik GmbH Tuborg Deutschland GmbH Market Note Denmark Denmark Denmark Sweden Sweden Sweden Norway Norway Norway Norway Norway Norway Norway Norway Norway Finland Finland Germany Germany Germany Germany Number of subsidiaries Parent direct ownership Consolidated ownership Western Europe Market Note 3 100% 100% Carlsberg Deutschland GmbH 1 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 91% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 91% 100% 100% 100% 100% 100% 100% Duckstein GmbH Holzmarkt Beteiligungsgesellschaft mbH Holsten-Brauerei AG Germany Germany Germany Germany Carlsberg Supply Company Deutschland GmbH Germany Carlsberg Supply Company Polska SA Carlsberg Polska Sp. z o.o. Saku Ölletehase AS Aldaris JSC Svyturys-Utenos Alus UAB Carlsberg UK Holdings Limited Poland Poland Estonia Latvia Lithuania UK Carlsberg Marston's Brewing Company Limited UK Marston's Beer Company Limited Carlsberg UK Limited Carlsberg Supply Company UK Limited LF Brewery Holdings Limited LF Brewery Limited Emeraude S.A.S. Kronenbourg S.A.S. Kronenbourg Supply Company S.A.S. Kronenbourg Breweries Canada Inc. Fondation Kronenbourg S.A.S. Onyx UK UK UK UK UK France France France Canada France France Number of subsidiaries 4 4 4 8 Parent direct ownership Consolidated ownership 100% 100% 100% 100% 100% 100% 100% 100% 100% 99% 100% 60% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 99% 100% 60% 60% 60% 60% 60% 60% 100% 100% 100% 100% 100% 100% Consolidated financial statements CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 124 Number of subsidiaries 2 Western Europe Market Note Feldschlösschen Getränke Holding AG Feldschlösschen Getränke AG Schlossgarten Gastronomie AG SB Swiss Beverage AG Feldschlösschen Supply Company AG Carlsberg Supply Company AG Nya Carnegiebryggeriet AB E.C. Dahls Bryggeri AS HK Yau Limited UAB "Svyturys Brewery" Monster the Cat GmbH Carlsberg Italia S.p.A. Carlsberg Horeca Srl T&C Italia Srl Olympic Brewery SA Hellenic Beverage Company SA Carlsberg Serbia Ltd Carlsberg BH d.o.o. Carlsberg Montenegro d.o.o. Carlsberg Croatia d.o.o. Carlsberg Bulgaria AD Carlsberg Hungary Kft. Grimbergen Abbey Brewery Zatecky Pivovar spol. S.r.o. CTDD Beer Imports Ltd Carlsberg Canada Inc. Carlsberg USA Inc. Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Sweden Norway Hong Kong Lithuania Switzerland Italy Italy Italy Greece Greece Serbia Bosnia and Herzegovina Montenegro Croatia Bulgaria Hungary Belgium Czechia Canada Canada USA Parent direct ownership Consolidated ownership Asia Market Note Hong Kong Hong Kong 100% 100% 100% 100% 100% 100% 98% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 98% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Carlsberg Supply Company Asia Ltd Carlsberg Brewery Hong Kong Ltd Guangzhou Carlsberg Consultancy and Management Services Co Ltd Chongqing Brewery Co., Ltd Chongqing Jianiang Brewery Ltd Kunming Huashi Brewery Company Limited Carlsberg (China) Breweries and Trading Company Limited Carlsberg Brewery (Guangdong) Ltd Xinjiang Wusu Breweries Co., Ltd China China China China China China China Ningxia Xixia Jianiang Brewery Limited China Carlsberg Beer Enterprise Management (Chongqing) Company Limited Carlsberg Brewery (Anhui) Company Ltd Carlsberg Tianmuhu Brewery (Jiangsu) Company Ltd Carlsberg Brewery Malaysia Berhad Carlsberg Marketing Sdn BHD Euro Distributors Sdn BHD Carlsberg Singapore Pte Ltd Maybev Pte Ltd Carlsberg South Asia Pte Ltd South Asian Breweries Pte. Ltd Carlsberg India Pvt. Ltd Gorkha Brewery Pvt. Ltd G.B. Marketing Pvt Ltd Carlsberg Vietnam Trading Co. Ltd China China China Malaysia Malaysia Malaysia Singapore Singapore Singapore Singapore India Nepal Nepal Vietnam Number of subsidiaries Parent direct ownership Consolidated ownership 5 4 100% 100% 100% 60% 51% 100% 100% 99% 100% 70% 100% 75% 100% 51% 100% 100% 100% 51% 67% 100% 100% 90% 90% 100% 100% 100% 100% 60% 79% 79% 79% 79% 79% 56% 79% 60% 79% 51% 51% 51% 51% 26% 100% 100% 100% 90% 90% 100% A B A C D D D D, E D, E A Listed company. B Chongqing Jianiang Brewery Ltd is owned by Chongqing Brewery Co., Ltd (51%) and Carlsberg Brewery Hong Kong Ltd (49%), resulting in a consolidated ownership of 79%. C Maybev Pte Ltd is owned by Carlsberg Singapore Pte Ltd (51%), which is owned by Carlsberg Brewery Malaysia Berhad (51%), resulting in a consolidated ownership of 26%. D The Group owns 67% of Carlsberg South Asia Pte Ltd, which is the holding company of South Asian Breweries Pte. Ltd, Carlsberg India Pvt. Ltd and Gorkha Brewery Pvt. Ltd (Nepal). The consolidation percentage of Carlsberg South Asia Pte Ltd is 100% due to a written put option. E Company not audited by PwC. CARLSBERG GROUP ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 125 Asia Carlsberg Vietnam Breweries Ltd Lao Brewery Co. Ltd Paduak Holding Pte. Ltd Caretech Limited Cambrew Limited Cambrew Properties Ltd Angkor Beverage Co Ltd CB Distribution Co., Ltd Carlsberg Asia Pte Ltd KS Holding 1 Pte Ltd Eastern Europe Hoppy Union LLC Baltika Breweries LLC Carlsberg Azerbaijan LLC Baku Piva JSC PJSC Carlsberg Ukraine OJSC Brewery Alivaria Carlsberg Kazakhstan Ltd Baltic Beverages Invest AB Baltic Beverages Holding AB Note Number of subsidiaries Parent direct ownership Consolidated ownership Non-beverage Market Vietnam Laos Singapore Hong Kong Cambodia Cambodia Cambodia Thailand Singapore Singapore 1 2 100% 61% 100% 100% 100% 99% 100% 100% 100% 100% 100% 61% 100% 100% 100% 99% 100% 100% 100% 100% Market Note Number of subsidiaries Parent direct ownership Consolidated ownership F G Russia Russia Azerbaijan Azerbaijan Ukraine Belarus Kazakhstan Sweden Sweden 3 1 1 100% 100% 100% 91% 100% 78% 100% 100% 100% 100% 100% 100% 91% 100% 89% 100% 100% 100% F Baltika Breweries is owned by Carlsberg Sverige AB. G The consolidation percentage is higher than the ownership share due to written put options. Not allocated Carlsberg Finans A/S Carlsberg International A/S Visit Carlsberg A/S Carlsberg Invest A/S Carlsberg Global Business Services A/S Carlsberg Insurance A/S Carlsberg Central Office A/S Carlsberg Shared Services Sp. z o.o. Market Note Number of subsidiaries Parent direct ownership Consolidated ownership Denmark Denmark Denmark Denmark Denmark Denmark Denmark Poland 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Ejendomsaktieselskabet Tuborg Nord C Carlsberg Ejendomme Holding A/S Boliginteressentskabet Tuborg H A separate annual report is not prepared. Market Note Denmark Denmark Denmark H Number of subsidiaries Parent direct ownership Consolidated ownership 100% 100% 100% 100% 100% 100% Associates and joint ventures Market Note E I I E Carlsberg Byen P/S Shangri-la Beverages AG Sinergie Proattive Srl Viacer S.G.P.S., Lda Super Bock Group, S.G.P.S., S.A. Denmark Switzerland Italy Portugal Portugal Serviced Dispense Equipment (Holdings) Limited UK Nuuk Imeq A/S Chongqing Jiawei Beer Co. Ltd Tibet Lhasa Brewery Company Limited Lanzhou Huanghe Jianiang Brewery Company Limited Greenland China China China Qinghai Huanghe Jianiang Brewery Company Ltd China Jiuquan West Brewery Company Limited China Tianshui Huanghe Jianiang Brewery Company Ltd China Capital Brewing Company Ltd Hong Kong Lion Brewery (Ceylon) PLC Sri Lanka A, E, J Hanoi Beer Alcohol and Beverage Joint Stock Corporation Carlsberg Distributors Taiwan Limited NCC Crowns Private Limited Bottlers Nepal Limited Myanmar Carlsberg Co. Ltd E Vietnam Taiwan India Nepal Myanmar E Number of subsidiaries 94 13 2 4 1 1 1 Parent direct ownership Consolidated ownership 25% 35% 50% 29% 56% 33% 32% 33% 50% 50% 50% 50% 50% 49% 25% 17% 50% 33% 22% 51% 25% 35% 50% 29% 60% 20% 32% 26% 50% 50% 50% 50% 50% 49% 13% 18% 50% 33% 20% 51% I Viacer S.G.P.S (Viacer) is the controlling shareholder of Super Bock Group, S.G.P.S. (Super Bock) with a 56% shareholding, with Carlsberg Breweries A/S owning the remaining 44%. In addition, Carlsberg Breweries A/S has a direct ownership in Viacer of 29% without exercising control. Therefore, both Viacer and Super Bock are considered associates of the Group. The Group's direct and indirect ownership of Super Bock totals 60%. J Lion Brewery (Ceylon) PLC is owned by Carlsberg Brewery Malaysia Berhad (25%). Carlsberg owns 51% of Carlsberg Brewery Malaysia Berhad, resulting in 13% of the result being attributed to the shareholders in Carlsberg A/S. Parent Company financial statements PARENT COMPANY FINANCIAL STATEMENTS CARLSBERG GROUP ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENTS 126 PARENT COMPANY FINANCIAL STATEMENTS Income statement ................................ 127 Statement of comprehensive income ...................................................... 127 Statement of financial position ...... 128 Statement of changes in equity ..... 129 Statement of cash flows ................... 129 Notes ......................................................... 130 SECTION 1 SUBSIDIARIES AND RELATED PARTIES Investments in subsidiaries ....................... 130 1.1 1.2 Related parties ............................................. 130 SECTION 2 CAPITAL STRUCTURE 2.1 Financial items ............................................. 131 2.2 Net interest-bearing debt ......................... 131 2.3 Share capital ................................................. 132 SECTION 3 STAFF COSTS AND REMUNERATION 3.1 Staff costs and remuneration .................. 133 3.2 Retirement benefit obligations ................ 133 SECTION 4 OTHER DISCLOSURE REQUIREMENTS 4.1 Other operating activities, net ................. 134 4.2 Cash flow ....................................................... 134 4.3 Provisions ....................................................... 134 4.4 Asset base and leases ............................... 134 4.5 Fees to auditors ........................................... 134 4.6 Tax ................................................................... 135 4.7 Contingent liabilities and other commitments ............................................... 136 4.8 Events after the reporting period ........... 136 SECTION 5 GENERAL ACCOUNTING POLICIES 5 General accounting policies ..................... 136 CARLSBERG GROUP ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENTS 127 INCOME STATEMENT STATEMENT OF COMPREHENSIVE INCOME DKK million Administrative expenses Other operating activities, net Operating profit before special items Special items Financial income Financial expenses Profit before tax Income tax Profit for the year Attributable to Dividend to shareholders Reserves Profit for the year Section 4.1 2.1 2.1 4.6 2020 -42 -4 -46 -2 3,211 -14 3,149 11 3,160 3,259 -99 3,160 2019 -73 -29 -102 -3 2,748 -11 2,632 23 2,655 3,204 -549 2,655 DKK million Profit for the year Other comprehensive income Retirement benefit obligations Income tax Items that will not be reclassified to the income statement Other comprehensive income Total comprehensive income Section 2020 3,160 2019 2,655 3.2 4.6 -1 - -1 -1 -2 - -2 -2 3,159 2,653 CARLSBERG GROUP ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENTS 128 STATEMENT OF FINANCIAL POSITION DKK million ASSETS Non-current assets Intangible assets Property, plant and equipment Investments in subsidiaries Financial investment Receivables Tax assets Total non-current assets Current assets Receivables Tax receivables Other receivables Total current assets Total assets Section 31 Dec. 2020 31 Dec. 2019 DKK million Section 31 Dec. 2020 31 Dec. 2019 4.4 4.4 1.1 4.6 1.2 1.2 EQUITY AND LIABILITIES 3 218 Equity 5 Share capital 218 Retained earnings 38,733 40,353 Total equity 1 323 93 - 322 111 Non-current liabilities Retirement benefit obligations 39,371 41,009 Provisions Total non-current liabilities 275 9 371 655 86 6 Current liabilities Borrowings 1,205 Trade payables 1,297 Provisions 40,026 42,306 Other liabilities Total current liabilities Total liabilities Total equity and liabilities 2.3 3.2 4.3 2,963 35,589 38,552 3,051 37,974 41,025 30 13 43 33 48 81 1.2 1,263 1,033 4.3 39 39 90 1,431 1,474 40,026 52 34 81 1,200 1,281 42,306 CARLSBERG GROUP ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENTS 129 STATEMENT OF CHANGES IN EQUITY STATEMENT OF CASH FLOWS DKK million 2020 Equity at 1 January Profit for the year Other comprehensive income Total comprehensive income for the year Cancellation of treasury shares Share-based payments Share-based payments to employees in subsidiaries Share buy-back Dividends paid to shareholders Total changes in equity Equity at 31 December 2019 Equity at 1 January Profit for the year Other comprehensive income Total comprehensive income for the year Share-based payments Share-based payments to employees in subsidiaries Share buy-back Dividends paid to shareholders Total changes in equity Equity at 31 December Section Shareholders in Carlsberg A/S DKK million Share capital 3,051 - - -88 - - - - -88 Retained earnings 37,974 3,160 -1 3,159 88 8 353 -2,900 -3,093 -2,385 Operating profit before special items Total equity Depreciation and amortisation 41,025 3,160 -1 3,159 - 8 353 -2,900 -3,093 -2,473 Operating profit before depreciation and amortisation Other non-cash items Change in working capital¹ Restructuring costs paid Interest etc. received Interest etc. paid Income tax paid Cash flow from operating activities Acquisition of property, plant and equipment and intangible assets Disposal of property, plant and equipment and intangible assets 2,963 35,589 38,552 Total operational investments 3,051 - - - - - - - - 41,937 2,655 -2 2,653 13 209 -4,100 -2,738 -3,963 3,051 37,974 44,988 2,655 -2 2,653 13 209 -4,100 -2,738 -3,963 41,025 Acquisition and disposal of subsidiaries Disposal of securities Dividends from subsidiaries and joint ventures Capital reductions in subsidiaries Total financial investments Other investments in real estate Total other activities Cash flow from investing activities Free cash flow Shareholders in Carlsberg A/S External financing Cash flow from financing activities Net cash flow Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 3.1 2.3 2.3 3.1 2.3 2.3 Section 4.4 1.2 1.2 2.3 2.2 2020 -46 10 -36 - 88 -2 2 -13 28 67 -10 1 -9 - 5 3,204 2,500 5,709 - - 5,700 5,767 -5,993 226 -5,767 - - - 2019 -102 8 -94 18 29 - 3 -11 31 -24 -17 2 -15 9 - 2,746 4,500 7,255 -4 -4 7,236 7,212 -6,838 -374 -7,212 - - - SECTION 1 SUBSIDIARIES AND RELATED PARTIES CARLSBERG GROUP ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENTS 130 SECTION 1.1 INVESTMENTS IN SUBSIDIARIES The carrying amount includes goodwill of DKK 11,206m (2019: DKK 11,206m) on acquisition of subsidiaries. Share-based payments to employees in subsidiaries comprise exercised as well as outstanding share-based incentive instruments. Investments in subsidiaries DKK million 2020 2019 Cost Cost at 1 January 40,353 45,238 Disposals Capital reduction Share-based payments to employees, net - -2,500 -13 -4,500 880 -372 Cost at 31 December 38,733 40,353 Carrying amount at 31 December 38,733 40,353 Please see section 10 in the consolidated financial statements for a list of companies in the Carlsberg Group. ACCOUNTING ESTIMATES AND JUDGEMENTS Indications of impairment of investments in subsidiaries are assessed annually by management. Impairment tests are conducted in the same way as for goodwill in the Group, cf. section 2.2 in the consolidated financial statements. It is management’s assessment that no indications of impairment existed at year-end 2020. Impairment tests have therefore not been carried out for subsidiaries. ACCOUNTING POLICIES Dividends on investments in subsidiaries are recognised in the income statement of the Parent Company in the financial year in which the dividend is declared. Investments in subsidiaries are measured at the lower of cost and recoverable amount. Share-based payments granted to employees of the Company’s subsidiaries and the recharge of losses to the subsidiaries in connection with the employees’ exercise of share-based awards are recognised as contributions to and reductions of the investment in the subsidiaries respectively. SECTION 1.2 RELATED PARTIES The Carlsberg Foundation, H.C. Andersens Boulevard 35, 1553 Copenhagen V, Denmark, exercises control over Carlsberg A/S. The Foundation holds 29.6% of the shares and 75.6% of the voting power in Carlsberg A/S, excluding treasury shares. The following transactions took place between the Carlsberg Foundation and the Carlsberg Group in 2020: • The Carlsberg Foundation received a dividend from Carlsberg A/S and participated pro rata in the Carlsberg A/S share buy-back. • Carlsberg A/S received statutory funding and grants for research and development. • Carlsberg A/S leased parking spaces from the Carlsberg Foundation. • The Carlsberg Foundation supported the rebuilding of the Carlsberg Visitor Centre. • Carlsberg Breweries leased storage facilities in the researcher apartments. • Carlsberg A/S held the Annual General Meeting at Ny Carlsberg Glyptotek and provided the Ny Carlsberg Glyptotek with products at a discount or free of charge as part of the sponsorship of certain events. • The Group delivered beer and soft drinks to the Carlsberg Foundation. These transactions are described in further detail in section 8.3 of the consolidated financial statements. It is estimated that the benefit for the Carlsberg Group corresponds to the value of the services provided to the Carlsberg Foundation, which in turn corresponds to what each party would have had to pay to have the same deliverables provided by external parties. OTHER RELATED PARTIES Related parties also comprise Carlsberg A/S’ Supervisory Board and Executive Board, their close family members and companies in which these persons have significant influence. During the year, there were no transactions between these parties and the Group, except for remuneration as disclosed in section 3. CARLSBERG GROUP ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENTS 131 SECTION 2 CAPITAL STRUCTURE SECTION 1.2 (CONTINUED) RELATED PARTIES SECTION 2.1 FINANCIAL ITEMS No losses on loans to or receivables from subsidiaries or joint ventures were recognised or provided for in either 2020 or 2019. Interest income relates to interest from cash and cash equivalents and loans to subsidiaries, whereas interest expenses relate to interest on borrowings. SECTION 2.2 NET INTEREST- BEARING DEBT Transactions with subsidiaries 2020 2019 Financial items recognised in the income statement DKK million 2020 DKK million Other operating activities, net Interest income Interest expenses Dividends received Capital reduction Loans Receivables Borrowings Trade payables Other payables 40 2 -11 3,204 -2,500 321 275 -1,263 -17 -1 The fair value of receivables and borrowings in subsidiaries corresponds to the carrying amount in all material respects. 31 2 -14 2,746 -4,500 319 84 Financial income Interest income Dividends from subsidiaries Gain on disposal of financial assets -1,033 Total -7 -6 Financial expenses Interest expenses Other Total Financial items, net Net interest-bearing debt DKK million 2019 Current borrowings Gross interest-bearing debt Receivables 2 2 Loans to subsidiaries 3,204 2,746 Net interest-bearing debt 5 3,211 -11 -3 -14 3,197 - 2,748 -14 3 -11 2,737 Changes in net interest-bearing debt Net interest-bearing debt at 1 January Cash flow from operating activities, excluding interest-bearing part Cash flow from investing activities Share buy-back Dividends to shareholders Total change Net interest-bearing debt at 31 December 2020 1,263 1,263 -1 -321 941 711 -67 -5,700 2,900 3,093 226 937 2019 1,033 1,033 -3 -319 711 1,085 24 -7,236 4,100 2,738 -374 711 No financial items were recognised in other comprehensive income. The average effective interest rate on loans to subsidiaries was 0.6% (2019: 0.6%) and on loans from subsidiaries 0.4% (2019: 0.5%). CARLSBERG GROUP ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENTS 132 Transactions with shareholders in Carlsberg A/S Dividends to shareholders Acquisition of treasury shares Total 2020 2019 -3,093 -2,738 -2,900 -5,993 -4,100 -6,838 In the 2020 financial year, the Company acquired class B treasury shares of a nominal amount of DKK 66m (2019: DKK 90m) at an average price of DKK 882 (2019: DKK 907). Class B treasury shares are acquired and disposed of as part of the share buy-back programme and to facilitate settlement of the share-based incentive programmes. At 31 December 2020, the fair value of treasury shares amounted to DKK 2,979m (2019: DKK 4,532m). The holdings of treasury shares are specified in section 4.3 in the consolidated financial statements. SHARE BUY-BACK AND TREASURY SHARES As of 31 January 2020, the Company had repurchased 393,501 B shares under the share buy-back programme initiated in 2019 at a total purchase price of DKK 0.4bn. On 4 February 2020, the Company announced its intention to continue the share buy-back programme to repurchase shares worth DKK 5bn over a 12-month period. In the first tranche, which was finalised on 7 August, the Company repurchased 2,897,021 B shares at a total purchase price of DKK 2.5bn. Due to the continued uncertainties related to COVID-19 and the acquisitions of Marston’s brewing activities and the Brooklyn brand rights, the Board decided not to initiate the second tranche of the share buy-back. According to the authorisation of the Annual General Meeting, the Supervisory Board may, in the period until 13 March 2023, allow the Company to acquire treasury shares up to a total holding of 10% of the nominal share capital at a price quoted on Nasdaq Copenhagen at the time of acquisition with a deviation of up to 10%. The permitted holding of treasury shares covers those acquired in share buy-back programmes. The Company holds no class A shares. SECTION 2.3 SHARE CAPITAL SHARE CAPITAL At the Annual General Meeting on 16 March 2020, it was decided to reduce the share capital of Carlsberg A/S by a nominal amount of DKK 88,000,000 to a nominal amount of DKK 2,963,136,120 by cancelling of 4,400,000 of the B shares of the Company, each with a nominal value of DKK 20. The cancellation was completed on 14 April 2020. These shares had been repurchased as part of the Company’s share buy-back programme running from 6 February 2019 to 30 January 2020. DIVIDENDS The proposed dividend of DKK 22.00 per share (2019: DKK 21.00 per share), amounting to DKK 3,259m (2019: DKK 3,204m), has been included in retained earnings at 31 December 2020. Dividends to be paid out in 2021 for 2020, net of dividends on treasury shares held at 31 December 2020, will amount to DKK 3,192m. Dividends paid out in 2020 for 2019, net of dividends on treasury shares, amounted to DKK 3,093m (paid out in 2019 for 2018: DKK 2,728m). Dividends paid out to shareholders in Carlsberg A/S do not impact taxable income in Carlsberg A/S. Share capital Class A shares Class B shares Total share capital Shares of DKK 20 Nominal value, DKK ’000 Shares of DKK 20 Nominal value, DKK ’000 Shares of DKK 20 Nominal value, DKK ’000 1 January 2019 33,699,252 673,985 118,857,554 2,377,151 152,556,806 3,051,136 No change in 2019 - - - - - - 31 December 2019 33,699,252 673,985 118,857,554 2,377,151 152,556,806 3,051,136 Cancellation of treasury shares - - -4,400,000 -88,000 -4,400,000 -88,000 31 December 2020 33,699,252 673,985 114,457,554 2,289,151 148,156,806 2,963,136 A shares carry 20 votes per DKK 20 share. B shares carry two votes per DKK 20 share. A preferential right to an 8% non-cumulative dividend is attached to B shares. Apart from votes and dividends, all shares rank equally. SECTION 3 STAFF COSTS AND REMUNERATION CARLSBERG GROUP ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENTS 133 SECTION 3.1 STAFF COSTS AND REMUNERATION The remuneration of the Supervisory Board, the executive directors and key management personnel is described in detail in the Remuneration Report. In 2020, the Supervisory Board received total remuneration of DKK 9.86m (2019: DKK 9.59m), comprising fixed salary only. Staff costs and remuneration DKK million Salaries and other remuneration Retirement benefit costs - defined contribution plans Share-based payments Total SHARE-BASED INCENTIVE PROGRAMMES The executive directors in the Parent Company are the same as for the Carlsberg Group. Please refer to section 7.3 in the consolidated financial statements for share-based incentive programmes for the executive directors. PERFORMANCE SHARES Besides the executive directors, one employee in the Parent Company participates in the Group’s performance share programmes as described in section 7.3 in the consolidated financial statements. Refunds etc. between Carlsberg A/S and its subsidiaries are recognised directly in equity. ACCOUNTING POLICIES Staff costs are recognised in the financial year in which the employee renders the related service. The fair value of share-based incentives, which is expensed over the vesting period of the programme according to the service conditions, is recognised in staff costs and offset directly against equity. The fair value of share-based incentives granted to employees in subsidiaries is recognised as investments in subsidiaries and offset directly against equity. SECTION 3.2 RETIREMENT BENEFIT OBLIGATIONS Retirement benefit obligations and similar obligations comprise payments to retired directors that are not covered by an insurance company. The plan is unfunded. The difference between the purchase price and the selling price for the exercise of share-based incentives is settled between Carlsberg A/S and the individual subsidiary and offset directly against investments in subsidiaries. Total obligations amounted to DKK 30m (2019: DKK 33m) and include actuarial losses of DKK 1m (2019: DKK 2m) and benefits paid in the year of DKK 4m (2019: DKK 3m). The difference between the fair value of the Parent Company’s equity instruments and the exercise price of outstanding share-based incentives is recognised as a receivable and offset directly against investments in subsidiaries. Share-based incentives granted to the Parent Company’s own employees are recognised and measured in accordance with the accounting policies used by the Group. 2020 99 5 26 130 29 63 92 38 130 2019 112 5 38 155 42 63 105 50 155 Of the expected payment obligation, DKK 3m is due within one year and DKK 14m after more than five years from the reporting date. The underlying actuarial assumptions are based on local economic and labour market conditions. The discount rate was 0.5% (2019: 0.5%). The rate of increase in future retirement benefit obligations was 0% (2019: 1%). During the year, DKK 0m (2019: DKK 0m) was recognised in the income statement and DKK -1m (2019: DKK -2m) in other comprehensive income. Staff costs are included in the following items in the income statement Administrative expenses Other operating activities, net Total staff costs recognised by the Parent Company Staff costs recognised by other Group companies Total The Company had an average of 95 (2019: 97) full-time employees during the year. SECTION 4 OTHER DISCLOSURE REQUIREMENTS CARLSBERG GROUP ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENTS 134 SECTION 4.1 OTHER OPERATING ACTIVITIES, NET Other operating activities are secondary to the principal activities of the Group and include income and expenses relating to rental properties, research activities, and gains and losses on the disposal of intangible assets and property, plant and equipment. In 2020, real estate, net, amounted to DKK 9m (2019: DKK -1m), driven by parking lot income in Tuborg Harbour. Other operating activities, net DKK million 2020 2019 Gains on disposal of real estate Real estate, net Research activities, including the Carlsberg Research Laboratory, net Other, net Total - 9 -13 - -4 1 -1 -27 -2 -29 Foundation for the operation of the Carlsberg Research Laboratory and other grants. ACCOUNTING POLICIES The funding and grants are recognised in the income statement in the same period as the activities to which they relate. SECTION 4.2 CASH FLOW Change in working capital consists of other receivables of DKK 20m (2019: DKK -5m), trade payables and other liabilities of DKK 102m (2019: DKK 40m) and retirement benefit obligations and other provisions of DKK -34m (2019: DKK -6m). Other activities cover real estate activities. SECTION 4.3 PROVISIONS Research expenses are partially financed through funding received from the Carlsberg Provisions primarily comprise warranty provisions regarding real estate disposed of and provisions for ongoing disputes. At 31 December 2020, provisions amounted to DKK 51m (2019: DKK 82m). Provisions amounting to DKK 10m (2019: DKK 5m) were utilised during the year. In 2020, unutilised provisions of DKK 20m were reversed. Of total provisions, DKK 39m (2019: DKK 34m) falls due within one year and the remaining DKK 13m (2019: DKK 48m) between one and five years. As in previous years, no provisions fell due after more than five years from the end of the reporting period. SECTION 4.4 ASSET BASE AND LEASES The carrying amount of intangible assets was DKK 3m (2019: DKK 5m), and the carrying amount of property, plant and equipment was DKK 218m (2019: DKK 218m). Property, plant and equipment comprised land and buildings of DKK 180m (2019: DKK 182m) and plant and machinery of DKK 38m (2019: DKK 36m). Depreciation and amortisation of DKK 10m (2019: DKK 8m) were included in administrative expenses. Carlsberg A/S has no lease contracts to be recognised. The lease expenses recognised in the income statement related to short-term leases and leases of low-value assets and amounted to DKK 1m (2019: DKK 1m). Such contracts comprise the lease of copy and printing machines, coffee machines, small IT devices and similar equipment. SECTION 4.5 FEES TO AUDITORS Fees to auditors appointed by the Annual General Meeting DKK million Statutory audit Assurance engagements Tax advisory Other services Total 2020 0.3 - - - 0.3 2019 0.3 - - - 0.3 SECTION 4.6 TAX Deferred tax assets amounted to DKK 103m (2019: DKK 121m) and comprised tax on property, plant and equipment of DKK 31m (2019: DKK 34m), provisions and retirement benefit obligations of DKK 13m (2019: DKK 19m), and tax losses etc. of DKK 59m (2019: DKK 68m). The utilisation of tax loss carryforwards depends on future positive taxable income exceeding the realised deferred tax liabilities. Deferred tax liabilities amounted to DKK 10m (2019: DKK 10m). The net change in deferred tax assets of DKK 18m comprised tax recognised in total comprehensive income of DKK 11m (2019: DKK 23m) and a joint taxation contribution of DKK -29m (2019: DKK -29m). The total tax for the year recognised in the income statement comprised income of DKK 11m (2019: DKK 23m). Of the deferred tax assets, DKK 5m (2019: DKK 6m) is expected to be used within one year. All tax assets have been recognised. The administration company, Carlsberg A/S, has unlimited and joint legal responsibility with the other Danish companies under the joint taxation scheme for withholding taxes on dividends, interest and royalties. CARLSBERG GROUP ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENTS 135 Reconciliation of tax for the year ACCOUNTING POLICIES DKK million Calculated tax on profit Adjustments to tax for prior years Non-deductible expenses Tax-free dividend and tax-exempt items Tax for the year 2020 693 -1 3 -706 -11 2019 579 - 3 -605 -23 ACCOUNTING ESTIMATES AND JUDGEMENTS Carlsberg A/S recognises deferred tax assets, including the tax base of tax loss carryforwards, if management assesses that these tax assets can be offset against positive taxable income in the foreseeable future. This judgement is made annually and based on budgets and business plans for the coming years. Carlsberg A/S is the administration company and is subject to the Danish rules on mandatory joint taxation of the Carlsberg Group’s Danish companies. Carlsberg A/S accordingly pays all income taxes to the tax authorities under the joint taxation scheme. Danish subsidiaries are included in the joint taxation from the date when they are included in the consolidated financial statements and up to the date when they are excluded from the consolidation. The jointly taxed Danish companies are taxed under the on-account tax scheme. On payment of joint taxation contributions, the current Danish income tax is allocated between the Danish jointly taxed companies in proportion to their taxable income. Companies with tax losses receive joint taxation contributions from other companies that have used the tax losses to reduce their own taxable profit (full absorption). Tax on profit/loss for the year comprises profit/loss from real estate partnerships (joint ventures), as these are not individually taxed but included in the taxable income of the partners. In addition, tax on profit/loss and deferred tax are calculated and recognised as described in section 6 in the consolidated financial statements. Income tax expenses DKK million Tax for the year Income statement Other comprehensive income Total comprehensive income Income statement Other comprehensive income Total comprehensive income 2020 2019 Change in deferred tax and non-current tax liabilities during the year Total -11 -11 - - -11 -11 -23 -23 - - -23 -23 SECTION 5 CARLSBERG GROUP ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENTS 136 GENERAL ACCOUNTING POLICIES SECTION 4.7 CONTINGENT LIABILITIES AND OTHER COMMITMENTS Carlsberg A/S has issued guarantees to subsidiaries for pension obligations of DKK 350m (2019: DKK 337m). Carlsberg A/S is jointly registered for Danish VAT and excise duties with Carlsberg Breweries, Carlsberg Danmark, Carlsberg Supply Company Danmark and various other Danish subsidiaries, and is jointly and severally liable for payment of VAT and excise duties. Carlsberg A/S is party to certain lawsuits, disputes etc. of various scopes. In management’s opinion, apart from items recognised in the statement of financial position or disclosed in the financial statements, the outcome of these lawsuits, disputes etc. will not have a material negative effect on the Company’s financial position. SECTION 4.8 EVENTS AFTER THE REPORTING PERIOD Apart from the events recognised or disclosed in the financial statements, no events have occurred after the reporting date of importance to the financial statements. The 2020 financial statements of Carlsberg A/S have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and further requirements in the Danish Financial Statements Act. The financial statements are presented in Danish kroner (DKK), which is the presentation currency. The accounting policies for the Parent Company are the same as for the Group, cf. section 9 in the consolidated financial statements and the individual sections. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS In preparing Carlsberg A/S’ financial statements, management makes various accounting estimates and judgements that form the basis of presentation, recognition and measurement of the Company’s assets and liabilities. The estimates and judgements made are based on historical experience and other factors that management assesses to be reliable, but that by their very nature are associated with uncertainty and unpredictability. These estimates and judgements may therefore prove incomplete or incorrect, and unexpected events or circumstances may arise. The significant accounting estimates and judgements made and accounting policies specific to the Parent Company are presented in the explanatory notes. Financial statements REPORTS MANAGEMENT STATEMENT The Supervisory Board and the Executive Board have today discussed and approved the Annual Report of the Carlsberg Group and the Parent Company for 2020. The Annual Report has been prepared in accordance with International Financial Reporting Standards as adopted by the EU and further requirements in the Danish Financial Statements Act. In our opinion, the consolidated financial statements and the Parent Company’s financial statements give a true and fair view of the Carlsberg Group’s and the Parent Company’s assets, liabilities and financial position at 31 December 2020 and of the results of the Carlsberg Group’s and the Parent Company’s operations and cash flows for the financial year 2020. Further, in our opinion the Management review includes a fair review of the development in the Carlsberg Group’s and the Parent Company’s operations and financial matters, of the result for the year, and of the Carlsberg Group’s and the Parent Company’s financial position, as well as describing the significant risks and uncertainties affecting the Carlsberg Group and the Parent Company. In our opinion, the Annual Report of the Carlsberg Group and the Parent Company for the financial year 1 January to 31 December 2020 identified as CARL 2020-12-31.ZIP has been prepared, in all material respects, in compliance with the ESEF Regulation. We recommend that the Annual General Meeting approve the Annual Report. Copenhagen, 5 February 2021 CARLSBERG GROUP ANNUAL REPORT 2020 FINANCIAL STATEMENTS 137 Executive Board of Carlsberg A/S Cees ’t Hart President & CEO Heine Dalsgaard CFO Supervisory Board of Carlsberg A/S Flemming Besenbacher Chair Lars Fruergaard Jørgensen Deputy Chair Hans Andersen Carl Bache Magdi Batato Domitille Doat-Le Bigot Lilian Fossum Biner Richard Burrows Eva Vilstrup Decker Finn Lok Erik Lund Søren-Peter Fuchs Olesen Peter Petersen Majken Schultz Lars Stemmerik REPORTS INDEPENDENT AUDITOR’S REPORTS CARLSBERG GROUP ANNUAL REPORT 2020 FINANCIAL STATEMENTS 138 What we have audited The Consolidated Financial Statements and Parent Company Financial Statements of Carlsberg A/S for the financial year 1 January to 31 December 2020 comprise income statement and statement of comprehensive income, statement of financial position, statement of changes in equity, statement of cash flows and notes, including summary of significant accounting policies for the Group as well as for the Parent Company. Collectively referred to as the “Financial Statements”. TO THE SHAREHOLDERS OF CARLSBERG A/S REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS OUR OPINION In our opinion, the Consolidated Financial Statements and the Parent Company Financial Statements (pp [53-121] and [123-136]) give a true and fair view of the Group’s and the Parent Company’s financial position at 31 December 2020 and of the results of the Group’s and the Parent Company’s operations and cash flows for the financial year 1 January to 31 December 2020 in accordance with International Financial Reporting Standards as adopted by the EU and further requirements in the Danish Financial Statements Act. Our opinion is consistent with our Auditor’s Long-form Report to the Audit Committee and the Board of Directors. BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (ISAs) and the additional requirements applicable in Denmark. Our responsibilities under those standards and requirements are further described in the Auditor’s responsibilities for the audit of the Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) and the additional requirements applicable in Denmark. We have also fulfilled our other ethical responsibilities in accordance with the IESBA Code. To the best of our knowledge and belief, prohibited non-audit services referred to in Article 5(1) of Regulation (EU) No 537/2014 were not provided. Appointment We were first appointed auditors of Carlsberg A/S on 30 March 2017 for the financial year 2017. We have been reappointed annually by shareholder resolution for a total period of uninterrupted engagement of four years including the financial year 2020. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Statements for 2020. These matters were addressed in the context of our audit of the Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter Revenue recognition Recognition of revenue is complex due to the variety of different revenue streams, ranging from sales of goods, royalty income and sales of by-products recognised when all significant risks and rewards have been transferred to the customer or in terms of the licence agreement. Furthermore, the various discounts and locally imposed duties and fees in regard to revenue recognition are complex and introduce an inherent risk to the revenue recognition process. We focused on this area, as there is a risk of non-compliance with accounting standards due to complexity arising from different customer behaviours, structures, market conditions and terms in the various countries. Revenue recognition and accounting treatment are described in section 1.1 “Segmentation of operations – Accounting estimates and judgements” in the Consolidated Financial Statements. How our audit addressed the key audit matter Key audit matter How our audit addressed the key audit matter Recoverability of the carrying amount of goodwill and brands CARLSBERG GROUP ANNUAL REPORT 2020 FINANCIAL STATEMENTS 139 Our audit procedures included considering the appropriateness of the revenue recognition accounting policies and assessing compliance with the accounting standards. We tested the relevant controls, including applicable information systems and Management’s monitoring of controls used to ensure the completeness, accuracy and timing of revenue recognised. We discussed the judgements related to the recognition and classification of revenue with Management. Further, we performed substantive procedures regarding invoicing, significant contracts, significant transaction streams (including discounts), and locally imposed duties and fees and cut-off at year- end in order to assess the accounting treatment and principles applied. We applied data analysis in our testing of revenue transactions in order to identify transactions outside the ordinary transaction flow, including journal entry testing. In addressing the risks, we walked through and tested relevant controls related to assessing the carrying amount of goodwill and brands. We considered the appropriateness of Management’s defined CGUs within the business. We evaluated whether there were factors requiring Management to change its definition. We examined the methodology used by Management to assess the carrying amount of goodwill and brands assigned to CGUs, and the process for identifying CGUs that require impairment testing to determine compliance with IFRS. We performed detailed testing for the assets where an impairment review was required or indications of impairment were identified. For those assets, we analysed the reasonableness of significant assumptions in relation to the ongoing operation of the assets. We corroborated estimates of future cash flows and challenged whether they are reasonable and supported by the most recent approved Management budgets, including expected future performance of the CGUs, and challenged whether these are appropriate in light of future macroeconomic expectations in the markets. We evaluated the assumptions used by Management, including assessment of price and volume forecasts, discount rates and long-term growth rates, and tested the mathematical accuracy of the relevant value-in-use models prepared by Management. We made use of our internal valuation specialists in the audit. Further, we assessed the appropriateness of disclosures, including sensitivity analyses prepared for the significant assumptions. The principal risks are in relation to Management’s assessment of the future timing and amount of cash flows that are used to project the recoverability of the carrying amount of goodwill and brands. There are specific risks related to macroeconomic conditions and volatile earnings caused by volume decline, intensified competition and changed regulations in key markets – conditions that could also result in Management deciding to change brand strategy to drive business performance. Bearing in mind the generally long- lived nature of the assets, the significant assumptions are Management’s view of prices, volumes, discount rates, growth rates, royalty rates, expected useful life and costs, and future free cash flows as well as the judgement in defining cash- generating units (CGUs). We focused on this, as there is a high level of subjectivity exercised by Management in estimating future cash flows and the models used are complex. The key assumptions and accounting treatment are described in section 2.2 “Impairment” in the Consolidated Financial Statements. CARLSBERG GROUP ANNUAL REPORT 2020 FINANCIAL STATEMENTS 140 STATEMENT ON THE MANAGEMENT REVIEW Management is responsible for Management’s Review, pp [3-52] and [122]. Our opinion on the Financial Statements does not cover Management’s Review, and we do not express any form of assurance conclusion thereon. In connection with our audit of the Financial Statements, our responsibility is to read Management’s Review and, in doing so, consider whether Management’s Review is materially inconsistent with the Financial Statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. Moreover, we considered whether Management’s Review includes the disclosures required by the Danish Financial Statements Act. Based on the work we have performed, in our view, Management’s Review is in accordance with the Consolidated Financial Statements and the Parent Company Financial Statements and has been prepared in accordance with the requirements of the Danish Financial Statements Act. We did not identify any material misstatement in Management’s Review. MANAGEMENT’S RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation of consolidated financial statements and parent company financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and further requirements in the Danish Financial Statements Act, and for such internal control as Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the Financial Statements, Management is responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Group or the Parent Company or to cease operations, or has no realistic alternative but to do so. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and the additional requirements applicable in Denmark will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Financial Statements. As part of an audit in accordance with ISAs and the additional requirements applicable in Denmark, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the Financial Statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s and the Parent Company’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management. • Conclude on the appropriateness of Management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s and the Parent Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the Financial Statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group or the Parent Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the Financial Statements, including the disclosures, and whether the Financial Statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the Consolidated Financial Statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the Financial Statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. REPORT ON COMPLIANCE WITH THE ESEF REGULATION As part of our audit of the Financial Statements we performed procedures to express an opinion on whether the annual report of Carlsberg A/S for the financial year 1 January to 31 December 2020 with the filename CARL- 2020-12-31.zip is prepared, in all material respects, in compliance with the Commission Delegated Regulation (EU) 2019/815 on the European Single Electronic Format (ESEF Regulation), which includes requirements related to the preparation of the annual report in XHTML format and iXBRL tagging of the Consolidated Financial Statements. Management is responsible for preparing an annual report that complies with the ESEF Regulation. This responsibility includes: • Preparing the annual report in XHTML format; • The selection and application of appropriate iXBRL tags, including extensions to the ESEF taxonomy and the anchoring thereof to elements in the taxonomy, for all financial information required to be tagged, using judgement where necessary; CARLSBERG GROUP ANNUAL REPORT 2020 FINANCIAL STATEMENTS 141 • Ensuring consistency between iXBRL-tagged, data and the Consolidated Financial Statements presented in human-readable format; and • For such internal control as Management determines necessary to enable the preparation of an annual report that is compliant with the ESEF Regulation. Our responsibility is to obtain reasonable assurance on whether the annual report has been prepared, in all material respects, in compliance with the ESEF Regulation based on the evidence we have obtained, and to issue a report that includes our opinion. The nature, timing and extent of procedures selected depend on the auditor’s judgement, including the assessment of the risks of material departures from the requirements set out in the ESEF Regulation, whether due to fraud or error. The procedures include: • Testing whether the annual report has been prepared in XHTML format; • Obtaining an understanding of the company’s iXBRL tagging process and of internal control over the tagging process; • Evaluating the completeness of the iXBRL tagging of the Consolidated Financial Statements; • Evaluating the appropriateness of the company’s use of iXBRL elements selected from the ESEF taxonomy and the creation of extension elements where no suitable element in the ESEF taxonomy has been identified; • Evaluating the use of anchoring of extension elements to elements in the ESEF taxonomy; and • Reconciling the iXBRL-tagged data with the audited Consolidated Financial Statements. In our opinion, the annual report of Carlsberg A/S for the financial year 1 January to 31 December 2020 with the file name CARL- 2020-12-31.zip has been prepared, in all material respects, in compliance with the ESEF Regulation. Copenhagen, 5 February 2021 PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab CVR No 3377 1231 Mogens Nørgaard Mogensen State Authorised Public Accountant mne21404 Gert Fisker Tomczyk State Authorised Public Accountant mne9777 CARLSBERG GROUP ANNUAL REPORT 2020 FINANCIAL STATEMENTS 142 Carlsberg Group Annual Report Carlsberg A/S 1 J. C. Jacobsens Gade 1799 Copenhagen V Denmark Phone +45 3327 3300 www.carlsberggroup.com CVR No. 61056416 Editor: Carlsberg Group Investor Relations Design & layout: Operate & SkabelonDesign Photos: Nana Reimers et al. Proofreading: Borella projects

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