Scandinavian Tobacco Group

Good day and thank you for standing by. Welcome to the Scandinavian Tobacco Group full year and fourth quarter results webcast. At this time all participants are in a listen only mode. After this week's presentation there'll 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. To withdraw your question please press star 1 1 again. If you wish to ask a question via the webcast please use the Q&A box available on the webcast link anytime during the conference. Please be advised that today's conference has been recorded. I would now like to hand the conference over to your first speaker today, Torben Sand. Please go ahead.

Thank you, and welcome to all to Scandinavian Tobacco Group's webcast for the full year and fourth quarter results 2024. My name is Seth Torben Sand, and I am Director of Investor Relations and External Communications, and I am, as usual, joined by our CEO, Niels Frederiksen, and our CFO, Marianne Hrøslev-Bach. Please turn to slide number three for today's webcast agenda. Nils will start the presentation by giving an overview of the highlights of the year, as well as an update on our key strategic achievements. Then he will switch focus to an update on developments in our core markets, as well as insights to recent trends and developments in our product categories. Marianne will take over with an overview of the financial performance in our three commercial reporting divisions, where after she will turn the focus to key financial developments for the group, including an update on cash flow, leverage, and capital allocation. Nils will conclude the presentation with an update on our financial expectations for 2025. After the presentation by management, we will conduct a Q&A session where we will be more than pleased to take any questions you might have. And before we start, I ask you to pay attention to our disclaimer on forward-looking statements, which can be found at the end of this slide deck. With this, please turn to slide number five, and I will leave the word to Nils.

Thank you, Torben, and welcome and good morning to everyone on the call. When I reflect on the year we've now left behind, I'm pleased to report good progress in our strategy rolling towards 2025. We've grown our company, not only measured by net sales, but also by the platform we have strengthened for long-term success. We've invested in new growth opportunities, improved efficiency, and we've returned almost 1.5 billion kroner to our shareholders in a combination of dividends and share buybacks. Although 2024 became a challenging year with a volatile business environment and low visibility, we delivered a solid financial performance which was within the expectations we communicated in March last year and which were updated in November with the impacts from the acquisition of McFarland. For the first time ever, our group reported net sales exceeding 9 billion kroner, with growth being driven by the inclusion of McFarland for six months and by our growth enablers. Our core cigar business continues to be impacted by declining markets. The EBITDA margin of 22.6% was lower than the year before, but it was within the original guidance we communicated one year ago, despite the adverse impact of investments, whether in our growth enablers or in strengthening our market positions in the core categories. The free cash flow before acquisitions came in at $930 million, 931 million kroner for the year and adjusted earnings per share was 13.7 kroner. I'll now give you an update on some of the progress we are making with our strategy. Please turn to slide number six. More than four years ago, we launched rolling towards 2025 and we're now in the final year of the existing strategy period. Since its launch, we've added strong brands, We've expanded our product portfolio to nicotine pouches, and we made multiple acquisitions and launched a sustainability strategy. This year, we will develop and announce our strategy beyond 2025, and we expect to do so during the fourth quarter. As I mentioned in my opening remarks, we continue to make good progress with our strategy. Let me now give a few highlights on the recent developments. Acquisitions have been and will continue to be an important part of our vision to become a larger and more profitable company. In 2024, we acquired McBarn at a total transaction value of more than half a billion kroner, and McBarn has strengthened our position within the smoking tobacco categories, pipe tobacco and fine cut tobacco, and it has also added valuable brands to our portfolios, and when fully integrated, we expect synergies in the level of 150 million kroner with full impact in 2027. The main cost synergies will be within sales and marketing, head office functions, and the combination of our manufacturing footprint. With an expected return on invested capital well above our group ROIC, Denmark Bar & Acquisition is a good example of how we can continue to create value through M&A. We've also made significant progress in our sustainability agenda. Our annual report is now compliant with the EU Corporate Sustainability Reporting Directive, and we are proud of the progress we're making across our climate-related actions and in being community pioneers. The third highlight I would like to mention is the importance of our growth enablers. Combined, our NGP business, our retail stores in the US, and international sales of handmade cigars delivered double-digit net sales growth in 2024, and now account for 10% of group net sales. We will continue to invest in new cigar superstores, our international expansion of handmade cigars, and in the rollout of our nicotine house brands. We do so to further strengthen the platform for our future growth, and we are closely monitoring that they meet our financial criteria for delivering adequate ROIC over time. The retail superstores already do exactly this within three years of opening, whereas the payback for our NGP investments will take longer. However, we expect our NGP category will approach a bit of break-even this year. Please turn two slides to slide number eight. The market for hand-made cigars in the U.S. remains challenged by uncertain consumer sentiments. We estimate consumption declined by approximately amid single-digit incentives last year, and in the first months of this year, there's been no change in the development. Reflecting upon these uncertainties in U.S. consumer spending, we do not expect to see an improvement in the next quarters ahead of us. The move towards more value for money demand in the market that I addressed in last quarter's webcast and a higher promotional activity are putting pressure on the overall price mix for handmade cigars. we will continue to respond to protect our market share. However, given these US circumstances, our strategy to invest in growth opportunities across the handmade cigar category has turned out to be successful with valuable contributions to overall performance of the category from both our retail stores and international markets. Although the international sales of handmade cigars showed a lower than normal growth at 2% in the fourth quarter, this growth enabler has delivered has delivered double-digit growth for the past four to five years, and we expect growth to continue. In our retail superstores in the U.S., growth of handmade cigars was 6% compared with last year, and remember that total growth in our retail stores is even higher when we incorporate bar sales. Part of the growth stems from the opening of new stores, and during the quarter, we opened two new stores. Please turn to slide number nine. The total market for machine world cigars in Europe in our key markets is estimated to have declined by 2.8% compared with the full year decline rate of 3.5%. Consequently, the acceleration in volume declines in Europe at the beginning of last year eased off through the second half, although it remains uncertain whether this is only temporary or a sustainable improvement. The coming quarters will provide important data points in this respect. The initiatives and investments we have taken to recover market shares have stabilized our position, but it will take time to reach the full benefits of the actions we are taking, and these will continue in 2025. Our market share index remained unchanged at 28.1% versus the third quarter, but was slightly up against the full year market share at 27.9%. We will continue to invest in rebuilding our positions, although there is no assurance of a straight line recovery, and we must foresee fluctuations quarter by quarter. Smoking tobacco delivered a 50% increase in reported net sales, mostly driven by the inclusion of McBarn, but also driven by 12% organic growth, reflecting a strong performance in particular in fine cod. Part of the growth in the quarter is the result of phasing between quarters, which will impact the first quarter of this year. With this, now please turn to the next slide. I will now move to our product category next-generation products. During the fourth quarter, the category increased reported net sales by 9% compared to last year, while full-year growth was 118%. Behind these different growth rates, there are several important factors to be mindful of. Firstly, our nicotine pouch brand XQS, our global dry brand, continues to impress with high double-digit growth rates driven by market share growth in Sweden, which now has improved to more than 10% and a good development in the UK. Secondly, the discontinuation of SYN, the third-party nicotine power product distributed via our online business in the US, does impact growth significantly. The distribution was stopped from the 1st of July 2024, and this implies both organic growth and reported growth are impacted significantly. by the discontinuation from the third quarter of 2024 and will continue to be so until the second quarter of 2025. When the distribution was discontinued, it accounted for about 3% of group net sales. Overall, we are very pleased with our investments in the nicotine pouch market and in particular the performance of XQS. We are executing according to plan and a key milestone for us in the coming quarters is to integrate the McFarren brands ACE and GRID into the combined STG portfolio. With the addition of these two brands to the portfolio, we decided to seize the sales of the start brand. In total, we have invested less than 250 million kroner into our NGP category, including the acquisition price of XQS in 2023. We remain committed to deliver value from these investments over time, and with the category approaching a beta break even in 2025, we are getting closer to that. With this, I'll now leave the word to Marianne for more details on the divisional performance. Please turn two pages to slide number 12.