Scandinavian Tobacco Group

Good day and thank you for standing by. Welcome to the Scandinavian Tobacco Group 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 this 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 is being recorded. I would now like to hand the conference over to your speaker today, Torben Sand. Please go ahead.

Thank you. Good morning and welcome to the Scandinavian Tobacco Group's webcast for the first quarter results 2025. My name is Seth Torben Sand and I am Director of Investor Relations and External Communications and I am joined by our CEO, Niels Fredriksen, and our CFO, Marianne Roslug-Bock. Now, please turn to slide number three for today's webcast agenda. Nils will start the presentation by giving you a brief background on the adjusted financial expectations for 2025 that we communicated to the market yesterday, before turning to an overview of the highlights of the quarter and an update on our key strategic achievements. We will then switch focus to an update on development in our cold product categories. Miami will take over with an overview of the financial performance in our three reporting positions before turning the focus to key financial developments for the group, including an update on cash flow, leverage, and capital allocation. After this presentation by management, we will, of course, conduct a Q&A session where we will be pleased to take any questions you might have. Before we start, I ask you that you pay special attention to our disclaimer on forward-looking statements, which can be found at the end of this slide deck. Please turn to slide number five, and I will leave the work to those.

Thank you, Torben, and welcome and good morning to everyone on the call. Yesterday, we released the interim report for the first quarter of 2025, and at the same time, we adjusted our financial expectations for the full year. In a moment, I'll get back to the financial performance during the quarter, but let me start by giving more details to the adjusted expectations. Despite a slow start to the year in the first quarter, the underlying business trends as communicated in the March results announcement remain largely unchanged. Therefore, the adjustment of our expectations relates primarily to the weaker U.S. dollar and as well as the consequences of the tariff increases on imported goods by the U.S. government, which were announced in April, and their expected related impact. For SDGs, the increase in our cost base driven by the tariff increases is primarily relevant for our handmade cigar business, as we import cigars from the Caribbean and sell them in the U.S., The effect from the beginning of this week, we have introduced price adjustments to offset these cost increases. Secondly, the impact from a lower U.S. dollar exchange rate impacts our results for the full year. The U.S. market accounts for approximately 45% of the group's net sales. And since the release of the 2025 financial outlook on 6 March, the U.S. dollar has depreciated by nearly 5% against the Danish kroner. This negative translation effect on reported figures will only be partly offset by the price adjustments we've introduced. And as a result, the group now expects reported net sales for 2025 to be in the range of 9.1 to 9.5 billion kroner, adjusted from the previous range of 9.2 to 9.7 billion. We have adjusted the upper end of the range more than the lower part of the range as the current market dynamics made it unlikely to meet the upper end of the range. The group's EBITDA margin will, as a result of the tariff-related price adjustments, be negatively impacted by slightly more than a half percentage point. To reflect this impact and to maintain full flexibility to protect our market shares and our business, the range for the full year EBITDA margin expectation has been widened and revised to a range of 18% to 22%. In other words, we see a significant increase in uncertainty for a large proportion of our business, and we want to retain the flexibility to react to this without having to worry about a too narrow range for the EBITDA margin. Free cash flow is now projected at 0.8 to 1 billion kroner and has been narrowed from the previous range of 0.8 to 1.8 billion kroner. The adjustment to the upper end of the range reflects the lower EBITDA outlook, while the unchanged lower end of the range underscores the group's commitment to preserving cash flow throughout the year. Adjusted earnings per share has been revised downward by one kroner to reflect the adjusted EBITDA expectation and is now expected in the range of 10 to 13 Uncertainties to our base assumptions for the year remain higher than normal. These include volume and price developments for our core categories, cost inflation, and supply chain stability. However, we remain committed to strengthening our platform, which is important for future growth, although this may temporarily impact profit margins, cash flows, and return on invested capital. Now, please move to slide number 11. Overall, the first quarter of the year was soft and slightly below our expectations. The sales in the first quarter is lower than in the remaining quarters of the year, making the fluctuations in earnings high. Reported net sales was up by 1.3% driven by the acquisition of McBarn and continued strong growth for our nicotine pouch brand, XQS, where organic growth decreased by almost whereas organic growth decreased by almost 9%. The discontinuation of the SIM distribution in our U.S. online business explains about 3% of the organic decline, whereas lower sales of handmade cigars and some phasing in our machine world cigar business explains most of the risk. In a moment, I'll talk a little more to the drivers behind these developments. The EBITDA margin, decreased about 1 percentage point to 16.1%, and was impacted by the lower sales of cigars and mixed changes with more sales of nicotine pouches as the main reasons. Our continued investments in long-term growth opportunities, which includes our growth enablers and strengthening our market positions in the core categories, also affected margins. The free cash flow before acquisitions came in at almost 300 million kroner stronger than than during the first quarter of the last year at 156 million kroner, primarily driven by changes in working capital. I'll now give you an update on some of the progress we are making with our strategy rolling towards 2025. Please turn to slide number eight. We continue to make good progress with our strategy. In addition to the comments I gave in relation to the full year results announcement in March, I can add that The integration of McBarn is moving ahead according to plan, and we have taken significant steps in the United States where we have closed the acquired pipe tobacco factory and have consolidated all U.S. distribution in Bethlehem, Pennsylvania. Further, as part of our omni-channel offering, all acquired online sales channels have been migrated into one single streamlined website called Pipes and Cigars. Finally, we have reduced the geographic footprint for the nicotine pouch brands ACE and GRID to reflect their lower priority in our portfolio. Overall, the integration is progressing well. We've not opened new retail stores in the quarter, but the retail channel continues to deliver strong double-digit lead sales growth to our business, emphasizing the value of the investments we are making in this growth enabler. And thirdly, we remain committed to invest in our business, whether in strengthening our nicotine pouch brands with launches into new markets, or by investing in increasing and protecting our market shares within the core categories. Our work with updating our strategy beyond 2025 develops well, and we still expect to announce the details during the fourth quarter. Please turn two slides to slide number 10. The market for handmade cigars in the U.S. remains challenged by negative consumer sentiment and down trading, and the introduction of 10% import tariffs from our major cigar producing locations in Nicaragua, the Dominican Republic, and Honduras have further increased uncertainties. Organic net sales for the category decreased by 9.1% during the first quarter. However, when differentiating between business-to-business developments and business-to-consumer developments, there are important differences. Our sales to wholesalers and distributors experienced double-digit decreases, partly impacted by the timing of the large annual premium cigar trade show, which took place in April this year versus in the first quarter of last year. Sales was also partly impacted by bad weather conditions and increased caution in the trade, given the currently weak consumer sentiment. Stable data indicates that part of the weak performance in the first quarter is facing. Our online sales of handmade cigars were down about 5%, and the sales of handmade cigars in our retail stores have delivered double-digit growth rates, driven by new store opening and slightly positive like-for-like growth. We have implemented tariff-related price increases earlier this week, but we still don't have the full overview of how other industry players will deal with the new tariffs. Therefore, it is important that we retain full flexibility to react to market and competitive developments and protect our market shares. We continue to see cautious consumer behavior and more down trading, and we are also experiencing the need for higher promotional activity, which are putting pressure on the overall price mix for handmade cigars. Please turn to slide number 11. The total market for machine world cigars in Europe in our key markets is estimated to have declined by 2.2% compared with a full year decline rate of 3.5% during 2024 and a 2.8% decline during the fourth quarter of last year. So although the quarter development could be a sign of more modest decline rate within the category, I must remind you that the first quarter is a small quarter so it remains uncertain whether this is only temporary or a sustainable improvement. We will be wiser during the next few quarters. The initiatives and investments we have made to recover market shares continue, although the first quarter delivered a temporary setback to the improvement we have made over the past couple of quarters. Our market share index for the first quarter of 2025 declined to 26.9% compared to 2018, 0.1% in the fourth quarter, and 27.9% for the full year 2024. Shipments were delayed as a result of the SAP implementation we executed during the quarter in our European factories. And in April, shipments have normalized, and we are recovering market shares also into May. Smoking tobacco delivered a 44% increase in reported net sales, mostly driven by the inclusion of Marfan, but also driven by a 7% organic growth, reflecting a strong performance in particular for fine cut tobacco. With this, I'll turn to slide number 12. Moving on to next generation products. And during this first quarter, the category delivered an 18% decrease in reported net sales and a 43% decrease in organic net sales. Importantly, our global drive of nicotine pass brand XQS continues to impress with high double-digit growth rates, up 41%, driven by market share growth in Sweden, which now has improved to more than 11%, and the rollout in the UK and Denmark continues, albeit at a lower pace. The reasons for the overall organic decline in net sales relates to the discontinuation of the SIN distribution agreement in the U.S., and to streamlining the nicotine pouch portfolio we took over from McBarn, where we reduced the geographic footprint for the brands Ace and Grid. With this, I will now leave the work to Marianne for more details on the divisional performance. Please turn two slides to slide number 14.