Scandinavian Tobacco Group

Good day and thank you for standing by. Welcome to the Scandinavian Tobacco Group Q3 Results 2025 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. To withdraw your question, please press star, one, and one again. Please, the advice of today's conference has been recorded. I would now like to hand the conference over to your speaker today, Torben Sand, Head of Investor Relations. Please go ahead.

Thank you, and welcome to our webcast for the third quarter and first nine months 2025 results. My name is Seth Torben Sand, and I'm leading the investor relations and external communications And I'm, as usual, joined by our CEO, Nils Frederiksen, and our CFO, Marianne Røsler-Bock. Please turn to slide number three for today's agenda. Nils will kick off the presentation by giving you a brief overview of the highlights of the quarter, followed by an update on our strategy rolling towards 2025. as well as an update on developments in our core product categories. Then, Marianne will take over and give you an update on the financial performance in our three reporting divisions, followed by an overview of key financial developments for the group, including an update on cash flow and leverage. Niels will conclude the presentation by giving you an update to our expectations for the full year 2025. After the pre-prepared presentation, we will conduct a Q&A session where we will be more than pleased to take any questions you might have. Again, before we start, I ask you to pay special attention to our disclaimer on forward-looking statements, which can be found in the end of this slide deck. I will now leave the word to our CEO, Niels Frederiksen. Please turn to slide number five.

Thank you, Torben. And welcome to the call. The results in the third quarter continue to improve compared to the previous quarters. And overall, the financial performance, including the development in the beginning of the fourth quarter, supports the expectations for the full year we communicated in August. First, the comparisons to the same quarter last year are, for the first time in more than a year, what I will call more clean comparisons. From the third quarter, it is more than one year since we acquired McBarn, and it's more than one year since the distribution of thin nicotine pouches in the U.S. was discontinued. Reported net sales were 3% lower than last year, but measured in constant currencies, organic growth was slightly positive by 0.3%. Both handmade cigars and nicotine pouches delivered growth in the quarter, whereas machine-rolled cigars and smoking tobacco declined. In a moment, I'll talk more to the drivers behind the development in each product category. The EBITDA margin was 22%, a decline compared to the same quarter last year, but an improvement versus the first and second quarter of this year. Compared with last year, the lower margin is primarily a result of changes in product and market mix and investments in our market positions in both machine world cigars and our online business. The free cash flow before acquisitions developed as expected and is on track to reach our expectation of 800 to 1 billion kroner for the full year. The return on invested capital of 8.3% remains impacted by the operational results and a high level of special costs. Please turn to slide number six. We are approaching the end of the current five-year strategy, rolling towards 2025, and in just eight days, on the 20th of November, we will launch an updated strategy where we will host a virtual capital market event. More details to be found on the INVISTA website. Now let me give a brief update on the progress we made with our existing strategy. The integration of our bond is progressing according to plan, with the U.S. business now up and running in a new structure, We've streamlined all acquired online sales channels into one single platform, pipes and cigars, and we are reducing the geographic footprint for the nicotine pouch brands, ACE and GRID. Overall, the integration is progressing well, and we are on track to deliver almost 150 million kroner in synergies from the integration and to improve the group return on invested capital when the integration is fully completed in 2027. This quarter, all our three growth enablers delivered double-digit growth. I'll talk more to each of the growth enablers when I turn to the update on our product categories in a moment. However, I would just like to mention that we, during the fourth quarter, are opening another two new cigar superstores in the U.S., bringing the total to 15 by the end of the year. Combined, the growth enablers accounted for 11% of GroupNet sales in the quarter, compared with 9% for the full year of 2024. Further, we continue to invest in the future, increasing spending on improving our market share positions in machine rolled cigars and the implementation of the ERP system SAP 4 for HANA. The ERP implementation is progressing well with inclusion of our European factories during the first half of the year and in September by the rollout to all our European sales operations. However, the rollout does create ongoing operational issues and have affected our machine-rolled cigar market share negatively in the quarter. We expect to be on top of these problems towards the end of 2025, and we are moving more resources to ensure that what we have implemented is stable and functioning as intended. Now please turn two slides to slide number eight. Let me now turn the focus to a more detailed update on the performance by product categories. And later, Marianne will talk to the commercial reporting by divisions. In the slide, we have outlined the net sales distribution by product category and by divisions to give you an overview of the structure in our announcements. Measured by product categories, nicotine pouches now constitute 5% of group net sales compared with 4% in the second quarter. Machine rolled cigars and smoking tobacco comprises slightly more than 48% of group net sales and handmade cigars, 37%. Sales of accessories, bar sales, which is not directly linked to a product category, sorry, and others which is not directly linked to a product category is included in other and account for 10% of group net sales. Please turn one slide to number nine. The market for handmade cigars in the US continues to contract, but the decline rate appears to have stabilized. Our four different business streams all have achieved positive organic growth during the quarter, resulting in an organic mid-sales growth for the category of almost 6%. For the nine-month period, organic mid-sales were broadly unchanged. Firstly, the sales of handmade cigars to US wholesalers and distributors. what we call our business-to-business market, recovered in the third quarter and delivered a low single-digit growth. Secondly, our online sales of handmade cigars were up in the quarter for the first time during the year. And thirdly, sales in our retail stores continued to increase, driven by new store openings, but more recently also a slight positive same-store sales development. Finally, sales to our international markets increased for the first time during the year, as the impact of lower shipments to Asian markets, as expected, was temporary. International sales delivered double-digit growth. So please now turn to slide number 10. Based on the preliminary data, the total market for machine-rolled cigars in Europe in our seven key markets is estimated to have decreased by 0.6% during the third quarter, whereby the total market decline in the first nine months of the year is estimated to be down by close to 1%. The quarterly data has improved for the category during the past two quarters. However, let me remind you that the data can deviate somewhat quarter by quarter from the underlying trends, and currently we remain uncertain whether this is only a temporary or a sustainable improvement. Our base scenario of 2% to 3% general volume decline rate for machine-rolled cigars is maintained. Measured by our market share, we experienced a setback during the third quarter despite our initiatives and investments to recover market shares. The setback was primarily driven by continued delivery issues following our large way to go live for SAP earlier in the year, impacting especially our performance in Belgium and Netherlands, but also other European markets. Our market share index for the third quarter was 26.2%, compared with 27.9% for the full year 2024. We continue to invest in strengthening our positions further as stronger market share positions are crucial to delivering long-term value in the category. For the nine-month period, our market share index was 26.9% based on the preliminary data. Machine-rolled cigars and smoking tobacco respectively delivered 4% and 5% negative organic growth in the quarter. With that, please turn to the next slide. Moving on to next generation products, which comprises our nicotine pouch business. The third quarter year-on-year performance for our nicotine pouch business is no longer impacted by the discontinued SIN business. In that sense, the headline development better reflects the underlying development of the business. During the third quarter, the business delivered 23% organic net sales growth, with the XQS brand delivering 75% growth. For the nine-month period, XQS delivered 45% growth. The growth rate for the category continues to be impacted by the streamlining of the nicotine pouch portfolio we took over from McBarn, where we have reduced the geographic footprint for the brands ACE and GRID. However, for the XQS brand, So if we consider our nicotine power brand, volumes and market shares continue to improve. In Sweden, the brand has now exceeded 13% of the total market, and in the UK, we continue to slowly improve our position. With this, I will now leave the word to Mayelle for more details on the division of performance. Please turn two slides to slide number 13.

Thank you, Nils. We will now turn the attention to the financial performance of our three commercial divisions, beginning with an overview of Euro-branded. Reported net sales for the third quarter declined by 2%, reaching 829 million, while organic net sales fell by 3%. For the first nine months, organic net sales growth was also negative, down by 3%. During the quarter, nicotine pouches driven by the brand XQS continued to achieve double-digit growth while handmade cigars and machine-rolled cigar smoking tobacco categories experienced declines compared to the previous year. EBITDA before special items remained nearly unchanged at 190 million compared to 189 million in the same period last year. The EBITDA margin increased to 22.9% up from 22.3% in the third quarter of 2014. This marks the first margin improvement for the division in over a year. For the first nine months of the year, the margin was 19.5% compared to 21.3% last year. The margin development during the third quarter, despite continued investments to regain market shares, reflects changes in the market mix compared to the same quarter last year. The ongoing expansion of our nicotine pouch business continues to place downward pressure on the division's margin. With this, please turn to slide 14, where I will address the performance in North America-branded rest of the world. During the quarter, reported net sales for this division declined by 4%, primarily due to exchange rate fluctuations, especially the weakening of the U.S. dollar. As a result, organic net sales were slightly positive for the quarter compared to a 4% decrease over the first nine months. The main drivers influencing organic growth this quarter were high single-digit growth in handmade cigars, while machine-rolled cigars and smoking tobacco experienced a low single-digit negative growth. EBITDA before special items declined by 12% to $265 million with an EBITDA margin of 33% compared to 36.1% in the third quarter of last year. The change was primarily driven by a shift in sales mix with decreases in high margin businesses such as smoking tobacco and increases in sales in handmade cigars. For the first nine months, the margin was 31.5% down from 34.5% last year. I'll now turn the attention to the financial performance in our North America online and retail division. Please turn to slide number 15. Reported net sales for the third quarter declined by 3%, primarily due to fluctuations in the U.S. dollar. However, organic net sales showed a positive growth of 4%. Organic sales increased in both our online and our retail distribution channels. Although competitive pressure remains high in the online segment, our pricing strategies are gradually improving the channel's market share. In retail, we are seeing benefits from the recent opening of new stores over the past year, as well as higher-scale store sales. EBITDA before special items declined to 100 million kroner, resulting in an EBITDA margin of 13.7%, compared to 14.6% in the previous year. The decline in EBITDA margin reflects the higher level of promotional activities. I will now move to an update of group financial performance. Please turn to slide number 16. Reported net sales for the third quarter decreased by 3% compared to the previous year, primarily due to exchange rate fluctuations, which accounted for more than 3% impact. Organic net sales showed a modest increase of 0.3% compared to a 4% decline over the first nine months of the year. The discontinued distribution of SIN negatively impacted organic growth by approximately 2% during the nine-month period. Earlier, we provided a detailed breakdown of net sales performance by the product category and by division, So I'll now focus the development in selected parts of the profit and loss and cash flow statement. Special costs were $41 million in the quarter, primarily due to our implementation of new technologies like the SAP. The expenses were said $31 million of this implementation. Additionally, special costs related to reorganization and the integration of McBaron amounted to $10 million. For the first nine months, special costs were 146 million. Net profit for the third quarter was 227 million with adjusted earnings per share excluding special items of 3.4 kroner. For the first nine months, adjusted earnings per share were 8.2 kroner. The free cash flow before our petitions was positive at 173 million with no impact from changes in working capital. Over the nine-month period, the free cash flow was $448 million with a negative impact of $197 million from working capital. The cash flow development supports our expectations of a free cash flow before acquisitions of more than $800 million for the full year. Before moving to the next slide, I'd like to comment on the 10% decline in reported EBITDA for the first nine months as illustrated in the chart next to the financial data. If we exclude negative impact from the discontinued SIN contract and the impact from the weakening US dollar, where a 10% decrease in the US dollar reduces our EBITDA by 2.5%, then the decline in the operational results would have been less pronounced. We estimate that the underlying decline would have been closer to 6%. Now please turn to slide number 17. The EBITDA margin before special items was 22% for the quarter compared to 23.4% in the same quarter of 24. For the 9-month period, the margin was 19.9%. The reduction in the margin during the quarter was primarily due to a combination of changes in product and market mix, as well as continued investments in regaining market shares for machine-rolled cigars in key European markets. At divisional level, the margin decline was mainly due to lower margins in both online and retail and North America-branded rest of the world, while Euro-branded saw a slight improvement. Now please turn one slide to slide number 18. During the third quarter, the interest-bearing debt decreased by approximately $100 million to $5.6 billion, primarily due to a positive cash flow generation during the quarter. As a result of the slightly lower net debt and a modest decrease in EBITDA for the 12-month period, the leverage ratio remained unchanged at 2.9 times compared with the second quarter. At the end of 2024, the leverage ratio was 2.6 times. Based on our cash flow projections for the remainder of 2025, we expect the leverage ratio to decline during the fourth quarter, though it will still be above our target of 2.5 times. I will now hand the presentation back to Niels. Please turn two slides to slide number 20.

Thank you, Marianne. The financial performance during the first nine months of the year and in October supports the expectations for the full year 2025, which were communicated in May and confirmed in August. Our base scenario, as we discussed following our second quarter results in August, remains unchanged. The decline rate in the consumption of handmade cigars has stabilized and volumes of machine-rolled cigars in Europe decreased by a low single-digit percentage, abide with variations from market to market. The uncertainty related to the U.S. consumer sentiment, down trading and retailer decisions on inventory across our product categories remain a risk to our full year expectations. However, as we are three months closer to the year end, we narrow the ranges for net sales, EBITDA margin and EPS, and as the U.S. dollar has not changed to a higher level we narrowed the expectation to reported net sales for 2025 to be in the range of $9.1 to $9.2 billion from $9.1 to $9.5 billion previously. The financial development during the third quarter and in the beginning of the fourth quarter was as expected, but as we communicated in August, the reported net sales would end in the lower end of the range based on constant exchange rates for the remainder of the year. and the updated range for reported debt sales reflects that the U.S. dollar has remained almost unchanged since then. The range for the full-year EBITDA margin is also narrowed to be in the range of 19.5% to 20.5%, from previously 18% to 22%, reflecting the higher level of visibility for the rest of the year. Free cash flow expectation is maintained in the range of 800 million to 1 billion Danish kroner, the cash flow generation will be stronger in the fourth quarter of the year as a result of the operational performance and as cash tied in inventories and trade receivables will normalize. Now, this concludes our presentation for today, and I'll now hand the word back to the operator, and we are ready to take questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. to answer your question, please press star 1 and 1 again. We will now take the first question. From the line of Niklas Ekman from DNP Carnegie, please go ahead.

Thank you very much. Can I start with a question about the full-year guidance? Correct me if I'm wrong, but this seems to imply expectations of an organic sales growth of at least 2% in Q4. And at the same time, the margin guidance seems to be quite cautious, implying margin contraction of at least two or up to six percentage points in Q4. So can you elaborate a little bit on this? This seems to suggest that you are investing a lot in regaining sales in Q4. Or is there anything else here in phasing or timing effects that we're missing?

Thank you, Niclas. So yes, we are expecting net sales growth also in the fourth quarter, as we did show a slight growth in the third quarter. So on the EBITDA margins where we narrowed the range to sort of the mid of the previous range, We believe that is a realistic range for IFDA margins. We are opening two new stores in the fourth quarter of this year, and they will come with additional costs without having the same level of net sales attached to it. So I believe we will be within this kind of range.

Okay, very clear. Can I also ask about nicotine pouch products? With the strong success you've seen now in Sweden in particular and in Europe, and some relaxed regulation in the U.S. market, what are your thoughts on introducing XQS in the U.S. market?

Thank you for that question, Niklas. I think we have previously explained that we actually do not own the XQS trademark in the US. When we acquired XQS a few years back, we acquired all trademark rights with the exception of the US. So our focus on nicotine pouches is Europe.

Okay, very clear. Sorry if I missed that. Can I also ask about... in handmade cigars and I think the international rollout of handmade cigars, I think this has been enabled partly because of significant Cuban issues, Cuban supply issues. Are those still intact? Are you still seeing a clear shortage of Cuban cigars in the European and Asian markets? And is that still providing a big opportunity for you to roll out your products instead of your Cuban competitors? Or can you just describe the market dynamic if there have been any changes in the past year?

You can say that the supply of Cuban cigars has been somewhat normalized over the past six months, and also you can say the organization that promotes Cuban cigars have also supplemented their portfolio with non-Cuban cigars made out of the Caribbean. So overall, you can see that the organization is let's say, normalizing their market approach. So we still believe that the long-term trend of non-Cuban cigars gaining market share over Cuban cigars will support also our performance outside the U.S., but I think it's also important to remember that even though we are very pleased with the growth we are seeing on the international markets, the U.S. market is by far the more dominant market for us and more important one to succeed in.

Very clear, thank you. And can you, ahead of the CMD here next week, do you have any indication of what kind of topics you are aiming to bring up here? And not least in light of the pretty sharp margin decline that we've seen over the past four years, is this going to be a key topic at the CMD?

I think that what we can say today, Niklas, is that we will keep our powder dry until we get to the capital markets day and then we will try to outline how we will bring the company forward.

Fair enough. Thank you. I look forward to that. Thank you so much for taking my questions. Thank you.

Thank you. As a reminder, to ask a question, please press star 1 and 1. We will now take the next question from the line of Damian McNeill from Deutsche Neumies. Please go ahead.

Thank you. Morning, Niels, Mariano and Torben. Thank you for taking my questions. The first question is on European machine rolled cigars and your loss of market share there. I appreciate that some of that is down to SAP issues, but can you just provide a little bit more colour on whether you're seeing stabilised market share in markets that haven't been impacted by SAP and what your sort of and is going forward to recover market share is the first one. The second one is, can you talk about what's behind the acceleration in growth in your X2S brand in Sweden in the third quarter? What are the market dynamics that are particularly helping that brand there? And then just one last one on investment. I know sort of new store openings require further investment, but it sort of feels from reading the results and listening to the commentary this morning that overall levels of investment seem to be stepping up. And I was wondering whether this is more temporary in relation to specific market dynamics and store openings, or is this something that we should start to factor in into our margin sort of thoughts for the outer years, please? Thank you.

Yeah. Thank you, Daniel. And let me start by saying that it is, of course, super frustrating for us that we have, let's say, again, for different reasons now, supply issues into the European machine world cigar market. And we are confident that these will be resolved in the course of the fourth quarter and being resolved as we speak. So once that is said, I think what we feel is the efforts we are doing on market share recovery when we have inventory is working. The two key markets that we are focusing on is France and Spain, and in Spain where we have been less affected by inventory availability, we also see nice market share progression. In France, where the opposite is the case, that is part of what is holding us back. And then we have some very specific issues in the Benelux that we also need to resolve. So this is also why you can say that even though we are not helping ourselves in this particular case, we are confident that once we have inventory availability stabilized, we should see market share progressing from, unfortunately, from a lower level. but that is kind of where we are right now. It's a high priority for us because our machine world cigar business is still a very profitable business and it's still a business where we are the market leader. If I move on to the XQS question, I think it's maybe more important to focus on the nine months growth rate of 45% as we still have some quarterly fluctuations on on growth rates, so you should not factor the 75% growth in the third quarter into our new growth rate. There is no doubt that Sweden is still the driver. The market is growing and we are growing and we are successfully growing by providing consumers with flavor experiences that they appreciate. And again, you have a very mature market in Sweden, and we are very strong in what you can consider the non-mint flavored segment. And of course, you can say that the major segment in all these nicotine pouch markets is mint, and this is also one of the growth opportunities we see for our nicotine pouch buying over time. We have our strength in the flavor. We would also like to be better in the mint area. On the... new store openings, this is not a new investment level. This is just the practicality of when we open new stores, they tend to draw higher on the cost side in the first three months as we get these shops going. But on a full year basis, all our shops are profitable one year into a launch and beginning to contribute nicely.

And maybe Damian, let me add also, So when we look at investments, we also will have investments from the ongoing McBaron integration. But we are also very occupied about our leverage level, and thereby we will be very disciplined on investments for the coming year.

That's great. Very clear. Thank you very much.

Thank you. There are no further questions at this time. I would now like to turn the conference back to Torben Zahn for closing remarks.

Thank you. There are no further questions.

Sorry, sorry, I was on mute here. We have one question from the webcast that I would like to share. And the one part is on smoking tobacco, which was down in the quarter compared to growth in the past five quarters. So maybe if we can comment on the respective geographic performance in the U.S. and Europe within this category and what the prospects are going forward. A second question is also around little cigars, specifically in the U.K., where crushball-flavored cigarillos have performed very well in the past years. I noticed that SDG have increased the offering in this segment. So how is this performance going, and what's the plan to regain market share in the U.K.? I'll leave that for from this.

Yes, thank you for that question. Let me start by saying that year-to-date, the smoking tobacco is growing. And it is true that the third quarter represented a decline, but when you look at it year-to-date, smoking tobacco is growing. And remember, smoking tobacco is a combination of fine-cut tobacco offerings and pipe tobacco. So we are very pleased with our combined position in this. When you look at Europe, most of the growth in smoking tobacco is driven by Germany, where we have over a number of years successfully grown our brake brand to now have, if I recall, around 7% or 8% of that market, and it's continuing to grow. We also have a... nicely growing business in other parts of that smoking tobacco. Pipe tobacco is a little bit of a mixed picture in the sense that this market is fundamentally declining, but in the early parts of the year, we did see quite high sales in the U.S., where we merged our activities between Scandinavian Tobacco Group and McBarn, and therefore we have seen sales of this products front-loaded in the first six months and we expect a little less sales in the In the last six months of the year, but overall we expect this category to deliver growth for 2025 when you look at The UK it's correct. We have an offering of little cigars with With crush balls as a flavor and This is a market that is growing. I should also be fair to say that we have a very small position in this market that is dominated by other larger secret companies, but our position is growing, and we are quite pleased with the performance we're seeing.

Okay, and I think that from our side then concludes. There's no further questions from the website. And thank you very much all for listening in. I'll just again remind you of our upcoming capital markets event on the 20th, and you will find the registration details both in the quarterly statement we have sent out, but also on the website. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.