Scandinavian Tobacco Group

Good day, and thank you for standing by. Welcome to the Scandinavian Tobacco Group Q1 2024 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. If you wish to ask a question via the webcast, please use the Q&A box available on the webcast link anytime during the webcast. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Torben Sand. Please go ahead.

Thank you and good morning and welcome to our webcast for the first quarter results for 2024. My name is Seth Torben Sand, and I'm Director of Investor Relations and Group Communications. And I am, as usual, joined by our CEO, Niels Frederiksen, and CFO, Marianne Hrøstrup-Bock. Please turn two slides to number three for the agenda for today's webcast. The agenda is as follows. Highlights of the first quarter, followed by an update on our strategy and other key events. This to be followed on an update on the performance in our three commercial divisions. And then we'll turn to key financial developments for the group, including an update on net debt and leverage. And finally, we will give you an update on our outlook and guidance for 2024. We will conclude the webcast with a Q&A session where we will be more than pleased to take any questions you might have. But before we start, I ask you, to pay attention to our disclaimer and forward-looking statements at the end of this slide presentation. With this, please turn to slide number four, and I'll leave the word to NOS.

Thank you, Torben, and welcome and good morning to everyone on the call. The financial performance in the first quarter of the year was weak, with net sales being slightly down and the EBITDA margin declining to pre-COVID level. A positive net sales performance by Next Generation Oil and handmade cigars could not offset lower volumes in our machine world cigar business and profitability was negatively impacted by mixed changes as well as the impact from lower volumes. Part of our strategy is to invest more in our growth enablers to secure long-term sustainable growth for Scandinavian Tobacco Group and the investments have started to deliver good results with our Next Generation Oil portfolio now accounting for about 5% of group net sales and with double-digit net sales growth rates for both our U.S. retail stores and international sales of handmade cigars. Combined, the growth enabler share of group net sales increased to 11% in the first quarter. Trends for the product categories, handmade cigars and smoking tobacco remained broadly unchanged, whereas first quarter volume data for machine-rolled cigars in Europe was below the structural development. In a moment, I'll give a little more insight into these overall trends, but let me first conclude my introduction by giving you a few key financial highlights for the first quarter. Reported net sales decreased by 0.7% to 1.9 billion kroner. Adjusting for acquisitions and exchange rates developments, organic net sales were negative by 2%. The EBITDA margin declined to 17.2% compared to 24.1%. in the first quarter last year. Pre-cash flow before acquisitions was negative by 126 million versus minus 179 million last year. And adjusted earnings per share came in at 1.8 Danish kroner versus 3.2 last year. Marianne will go into more details on the first quarter financial performance later. I will now turn to an update on our strategy, so please turn two slides to slide number six. Less than two months ago, I gave a detailed update on our strategy and the conclusion is that we have made significant progress in achieving our ambitions as laid out in the rolling towards 2025 strategy and that STG is today a stronger company well positioned for the future. Today, I will supplement it with a few additional updates. And let me start by saying that in March, we announced that we are creating one commercial organization. with a stronger focus on our core product categories, namely first, handmade cigars, second, machine-rolled cigars and smoking tobacco, and finally, next-generation oral. In this slide, we have illustrated the share of GroupNet sales for each of these product categories, including other, which comprises accessories, bar sales in our retail stores, and third-party contract manufacturing. Now handmade cigars, which include all markets, both the U.S. and international markets, online and retail sales increased by 4% organically, driven by international markets and retail. Pricing across all channels was positive, and in total handmade cigars accounted for 37% of group net sales in the first quarter. Machine rolled cigars and smoking tobacco, which is pipe tobacco and fine cut, experienced relatively high volume decreases. In a moment, I'll give you more detail to these drivers. But for now, let's say category comprise 46% of group net sales, following a 12% organic decline compared with the first quarter of last year. Next Generation Oil, comprising both our own brands like Strøm, XQS, as well as third-party distribution, more than doubled net sales and accounted for about 5% of group net sales in the quarter. We expect this share will increase going forward. Please turn to slide number seven. Here I want to give you a little more color on our plans to maintain the momentum for our growth enablers, which are, again, Next Generation Oil, retail stores in the U.S., and international sales for handmade cigars. Since we acquired the nicotine pouch brand XQS in May last year, the sales performance has consistently exceeded our expectations. By rolling out the brand through our existing distribution network in Sweden, we increased the number of selling points considerably, and through a dedicated strategy of launching new products to the market, the brand has almost doubled its market share and most recently reached more than 7% of the Swedish nicotine pouch market. Our strategy, as we've expressed before, is to launch XQS in more new markets in 2024, and two days ago, on May 1st, we launched the product in the UK market. During 2023, We opened two new retail stores in Texas, bringing the total to nine by the end of 2023. This year we plan to open three more stores, which will add new opportunities for us to continue growing our retail sales in the U.S. in the years to come. We continue to investigate and search for new locations where the Superstore format can apply. However, it is not only new store sales that deliver growth for our retail business, During the first quarter, same-store sales, i.e., stores that have been open for more than 12 months, delivered a 4% increase in lit sales compared with the first quarter of last year. And finally, our international sales of handmade cigars outside the U.S. continue to deliver good growth, although with variations from market to market. We are convinced that we can improve our market share outside the U.S. from the current estimated about 5% market share. The opening of Club Macanudo concept stores, most recently in Jakarta, Indonesia, and Taipei, Taiwan, is one piece in the puzzle to increase the awareness and positioning of our international handmade cigar brands. Please turn to slide number eight. During the first quarter, our machine-rolled cigar business in Europe did not deliver as expected, with a double-digit decrease in organic knit sales despite sound price increases. The business has our very close attention, and we are committed to reverse the trend during the rest of the year and in 2025. Firstly, the total market volume in our seven core markets declined more than in previous quarters. Our preliminary data suggests that the decline rate was 5.1%, with the highest decline rates in markets like France, UK, and Belgium. The structural decline rate has been closer to minus 3%, for the past many years. At this point, we maintain the assumption that the total market decline will be close to the structural average also in 2024. And as the chart illustrates, there have been substantial variations from quarter to quarter in the past two years. From the first quarter of 2022 and until now, the decline rate has been in the range from minus 1.6% to minus 5.1%. One reason for these variations is that the data partly consists of sell-in data to the trade, for instance in France and Spain, and this implies that inventory changes in the trade might impact the data and might deviate from actual consumer trends. That is why it is important to look at the trend data and not only at the individual data points. Irrespective, there is no doubt that we are continuing to lose market share and something else needs to happen. This will include further investigations into whether our pricing strategy is appropriate given how competitors are pricing, not unsimilar to what we did in our U.S. online business in 2023 and where we can today see a more positive development. With this, I will now turn to a brief update of the performance by division. Please turn two slides ahead to slide number 10. I will start with Euro-branded. Reported net sales for the first quarter decreased by 4% to 617 million kroner, with organic net sales decreasing 8%. Acquisitions impacted reported net sales by 4%. The main driver behind the negative organic growth is lower volumes in machine-rolled cigars driven by key markets like France, Belgium, and the UK. Next Generation All and Handmade Cigars deliver double-digit net sales growth, and price remained a key contributor to offset volume declines in all core categories, but pricing cannot offset the level of volume decline we saw in Q1. The bid that before special items decreased by 61 million to 85 million kroner will then bid the margin of 13.8% versus 22.8% in the same quarter last year. The margin development is primarily driven by the scale impact of lower volumes, mixed changes, and to a lesser extent, the increased investments in supporting long-term growth for both next-generation oil and machine oil cigars. With this, please turn to slide number 11. For in the quarter, North America branded and rest of the world reported net sales decreased by 5% to 681 million kroner, and organic net sales were negative by 6%. The main drivers behind the organic development were a temporary volume impact in machine-rolled cigars in Canada following the implementation of plain packaging regulation in the market, as well as a decrease in smoking tobacco. We expect this trend to reverse in Q2. Handmade cigars in the U.S. continue to experience mid-single-digit volume declines, but this was mostly offset by price increases and international sales of handmade cigars increased as well, as previously mentioned. A bid that before special items decreased by 64 million kroner to 212 million kroner within a bid that margin of 31.2% versus 38.3% in the first quarter last year. The margin was negatively impacted by mixed changes like the net sales decrease in Canada and also a weak quarter for our lane business. We expect to see an improvement in the margin in Q2 as business mix normalizes. I'll now turn the attention to the performance of our North America online and retail division. Please turn to slide number 12. Reported net sales for the first quarter increased by 8% to 650 million kroner, with organic net sales growth of 9%. The positive development in organic net sales continues to be driven by new store openings in the retail business, a 4% increase in same-store sales, as well as an increase in third-party distribution of next-generation oil products. Online net sales of handmade cigars were positive, driven by a stabilization in volume sold and a positive price-mix impact. EBITDA before special items decreased slightly to 81 million kroner, with the EBITDA margin decreasing to 12.5 percent from 13.9 percent in the first quarter last year, and the decrease is driven by mixed changes and some timing effect of OPEX. I will now hand over the word to Marianne. Please turn two slides to slide number 14.