Scandinavian Tobacco Group

Good morning and welcome to Scandinavian Tobacco Group's webcast for the full year and fourth quarter 2025 results. My name is Seth Torben Sand, and I'm Director of Industrial Relations and External Communications. And I am today, as usual, joined by our CEO, Nils Frederiksen, and our CFO, Marianne Hrøstel-Bock. Please turn to the next slide for today's webcast agenda. Niels will start the presentation by giving you a brief overview of the highlights, including a snapshot of the key financial data. Niels will also summarize a few of the highlights from our new strategy that we launched last year, Focus 2030. Then Niels will move on to share more details on the performance of our product categories before Marianne takes over and give you an update on the financial performance in our three reporting divisions. Marianne will also give more details about the financial performance, including comments on cash flow, leverage, and capital allocation. Nils will conclude the call by giving some insights into the expectations for the full year 2026. After the pre-prepared presentation, we will conduct a Q&A session where we will be pleased to take any questions you might have. Before we start, I ask you to pay special attention to our disclaimer on forward-looking statements, which can be found on page number three in this slide deck. Now, please turn to slide number five, and I'll leave the word to our CEO, Nils Frederiksen.

Thank you, Torben, and welcome to the call. 2025 became a challenging year for Scandinavian Tobacco Group. with a combination of external disruptions and internal operational issues. Tariffs and lower consumer sentiment in the U.S. directly impacted our handmade cigar business and the category experienced fierce price competition both in retail and in the online distribution channels. Our machine-rolled cigar business continued to be under pressure while our investment in our nicotine pouch business delivered good contributions to the group's financial performance. Throughout the year, we have concentrated our efforts on protecting our market positions, integrating McBarn and growing our handmade and nicotine pouch businesses. And given the difficult circumstances, I am satisfied with our results for the year, despite having to reduce our full year expectations in May as a consequence of the increased tariffs. 2025 was the year where we launched our new strategy, Focus 2030. and we released new financial ambitions and we adapted a new, more flexible shareholder return policy. At our Capital Market Day on November 20 last year, we unfolded the new strategy, but today we will also provide a few highlights on this later in the call. We expect 2026 to be a year where geopolitical uncertainty will remain a market condition and economic growth will be challenging. For Scandinavian Tobacco Group, this means that our main priorities in the year will be to stabilize earnings in our machine-rolled cigar and smoking tobacco business and inject new energy and growth into our strong handmade cigar business. We will also continue to grow our promising nicotine pouch business. Now please turn to slide number six. Let me now share a few financial highlights for the year. Marianne will give more details about the financial performance and the quarterly development data in the presentation. But reported net sales were 9 billion and 36 million kroner, compared with our guidance of 9.1 to 9.2 billion kroner, and EBITDA margin before special items was 19.8%, compared with our guidance of 19.5 to 20.5%. Overall, this results in an EBITDA before special items in line with our expectations. The free cash flow before acquisition came in more than 200 million kroner below our guidance due to a delay in the collection of certain receivables due to the SAP implementation in Europe. The issue has been solved, and as the deviation is a facing issue, the free cash flow will be equally positively impacting 2026. Marianne will give you more details in her part of the call. Adjusted earnings per share was 10.8 kroner in line with our guidance of 10 to 12 kroner per share. Please turn to slide number seven. On 20th November, we launched our new five-year strategy in connection with the Capital Markets Day, and you can find a recorded version of the event on our website. The purpose of Focus 2030 is not only to create value by executing the strategy, but also to develop a company that is even better positioned to deliver value beyond 2030. And we are confident that we can do so. We've defined three strategic priorities, each important for us to deliver on the ambitions for Focus 2030. Firstly, to create a sustainable and stable machine-rolled cigar and smoking tobacco business primarily focused on Europe. Secondly, to grow our attractive handmade cigar business anchored in the U.S., but with a stronger global footprint. And thirdly, to build a larger nicotine pouch business with even more upside in an attractive category. And in the process, we intend to turn the declining earnings trend around that we've seen over the past three years and create value for consumers, employees, and shareholders. The new strategy is anchored in our strong brands and strong market positions across our diversified portfolio. However, the market conditions and the strategy call for us to allocate resources differently going forward to ensure that we focus on and capture what we see as the largest growth opportunities. And our power brand strategy is tailored to facilitate this. The strategy addresses the areas that we need to fix because they're not performing up to expectations but also the areas where we do well and where we need to push further to deliver even better results. All with the combined ambition to build a sustainable and growing company with more potential beyond 2030. We also introduced new financial ambitions, which are to significantly improve the return on invested capital from about 7.9% in 2025 to more than 11% in 2030. to deliver an incremental increase in EBIT and a free cash flow generation exceeding 1.2 billion in 2030. Acquisitions, as well as divestments of less core assets, will continuously be evaluated, assuming these potential transactions support our strategy as well as our financial ambitions. The shareholder return policy has been adapted to a more flexible dividend payout ratio policy based on 40% to 60% payout ratio against adjusted earnings per share, supplemented by share repurchases when the projected leverage ratio allows. Please now turn one slide to slide number eight. To meet our financial ambition and the objectives in Focus 2030, we need to deliver on three strategic priorities. Growing handmade cigars will be defined as growing net sales as well as delivering incremental profit growth to the group. The key growth drivers are expected to be delivered by a combination of increasing our market share of own brands in the U.S. from approximately 13% to more than 15% in 2030, as well as through an expansion in our retail network. This expansion will be driven by our power brands, which in 2025 had 5% overall market share. Stabilizing the machine-rolled cigar business requires a focus on protecting profits and cash flow. The path to success is offsetting the structural volume decline in the categories through price management and market share gains. Mitigating structural market trends through intensified market share focus is reflected in the ambition to increase volume market share in key European markets from 26.8% in 2025 to more than 29% in 2030. And a key component to the over-profit growth will also be through simplification of our portfolio by almost 50%. Finally, accelerating our nicotine pouch business is expected to deliver important contributions to the group's growth in net sales and profits in Europe. We expect to build on existing market share positions in Sweden and in the UK, but also in other markets where our capabilities within distribution and access to the market provide us with an advantage. Now let's turn two slides to slide number 10. Machine-rolled cigars and smoking tobacco comprise 50% of group net sales in 2025, with handmade 35%, nicotine pouches at 5% and others at 10%. Others include accessories and bar sales, amongst others. For the full year, organic mid-sales growth was minus 3%, where handmade cigars delivered flat organic mid-sales, machine-rolled cigars and smoking tobacco minus 1%, and nicotine pouches a negative 17% growth. However, the organic growth for nicotine pouches does not reflect the underlying progress of our power brand, XQS, which delivered a high double-digit organic growth. The negative growth for the category was significantly impacted by the discontinued online distribution of SYN from the second half of 2024. For the first time, we are giving details on the gross margin structure for our product categories. For the group, the gross margin before special items was 44%, for the full year of 2025. The product category machine world cigars and smoking tobacco delivered a 51% margin, handmade cigars 41% and our nicotine pouch business 36%. Going forward, we intend to share these details in order for you to get a sense of the progress we make in our strategic priorities. Now let's move on to each of the categories and please turn to slide number 11. The market for handmade cigars in the US continued to contract in 2025 by an estimated mid-single digit percentage. For 2026, we expect a 4% total market volume decline rate. We still estimate the underlying longer-term decline rate to be a lower single digit number. For the full year 2025, reported net sales decreased by 4% for the category, with organic net sales being broadly unchanged. Reported growth was impacted by the development in currencies. Increasing organic net sales in retail and pricing were offset by underlying volume declines in the U.S. market and by international sales. Gross margin before special items have been on a declining trend for the past two years. By 2025, the margin was 41.4%, with the main drivers for the decline being fierce competition in our online distribution channel and negative impact from increasing tariffs and consumers trading down. The data illustrated in the chart show the development in the last 12 months data, not the specific quarterly data. So the fourth quarter. Our category performance was 1% organic mid-sales growth and was positively impacted by business-to-business sales in the U.S. and continued growth in our retail stores. The sales of handmade cigars to U.S. wholesalers and distributors, the business-to-business market, continued to recover in the fourth quarter and delivered a 6% increase following a low single-digit growth in the third quarter. Sales in our retail stores continued to increase, driven by new store openings, although the same store sales were slightly down due to a temporary rebuild of our largest store in Dallas, Texas. And finally, our online sales of handmade cigars were broadly unchanged, whereas sales to our international markets decreased during the quarter. Now please turn to slide number 12, where we'll talk about machine-rolled cigars and smoking tobacco. For machine-rolled cigars and smoking tobacco, reported growth in net sales was 2% for the full year. The growth was impacted by the acquisition of McBarn from the second half of 2024, while organic growth in net sales was slightly negative by 0.5%. The gross margin before special items was 50.8%, broadly in line with the full year of 2024, but as the graph also indicates, the last 12 months' margin declined significantly throughout 2024, primarily as a result of the high volume decline rates we experienced in machine-run cigars throughout 2024. In that context, the stabilization of the category margin is encouraging, although still not satisfactory. The current margin level remains negatively impacted by changes in product and market mix, as well as disruptions caused by our SAP rollout in Europe. With the financial ambitions we have communicated, we need to protect and improve the margin, not only for machine-rolled cigars, but also for smoking tobacco. For the fourth quarter, organic net sales for the category were unchanged, comprised by a low single-digit growth in machine-rolled cigars and a low single-digit decline in smoking tobacco. Now let me give you an update on the market share development in our machine-rolled cigars. The total market for machine world cigars in Europe is estimated to have declined by 1.2% in the full year of 2025, based on preliminary data for our seven key markets, and with a decline rate for the fourth quarter estimated to be 2.8%. The data can deviate somewhat quarter by quarter and year by year from the underlying trends, and we don't regard 2025 market development as an indication of a sustainable improvement. Our base scenario of 2% to 3% structural decline rates is maintained, and for 2026, we expect a 3% market decline in Europe. Measured by our market share, we experienced a stabilization in the fourth quarter compared with the third quarter. The market share index was 26.3% for the fourth quarter and 26.8% for the full year of 2025. As mentioned with the FOCUS 2030 strategy, we will invest in strengthening our positions as stronger market share positions are crucial to deliver long-term value in the category. With this, please turn to the next slide. So moving on to next-generation products, which comprises our nicotine pouch business and currently accounts for 5% of group net sales and slightly less of gross profits. For the full year 2025, Reported net sales growth was 2% and organic growth was minus 17%. However, these data points do not give the full picture of the positive development we experienced for the category. The full-year growth was significantly impacted by the discontinued distribution of ZIN in the U.S., but the reported growth rates were also impacted by the nicotine pouch portfolio we acquired from McFarland in the middle of 2024 and the ongoing streamlining of the brands ACE and GRID now being sold in fewer markets. Importantly, our brand XQS delivered 55% organic net sales growth, and the market share in Sweden increased from 7.8% in 2024 to 12.3% in 2025. And by the end of 2025, the market share was above 13%. Our market share in the UK also improved during the year, although it is still only close to 1%. The category gross margin before special items was broadly unchanged at the level of 35% for the full year 2025 compared to 2024. As a result of the continued expansion of XQS to new markets and with investments to increase market positions, the EBITDA margin was only slightly positive for the year. During the fourth quarter, our nicotine pouch business delivered 42% reported net sales growth and 37% organic net sales growth. XQS, the XQS brand, delivering 87% organic growth driven by a strong performance in the UK and Sweden. With this, I will now leave the work to Marianne. For more details on the financial performance, please turn two slides to slide number 15.

Thank you, Nils. In 2025, the commercial division Eurobranded comprised 36% of group mid-sales. North America branded and rest of the world, 33%. And North America online and retail, 31%. For the full year, organic net sales growth for the group was minus 3%. Europe branded delivered minus 1%. North America branded rest of the world, minus 5%. And online and retail, minus 4%. For online retail, growth was impacted by the discontinued distribution of SIN from the second half of 2024. In the table, we have shared an overview of the margin structure for each of the divisions measured by gross margin before special items, as well as EBITDA before special items. For Euro-branded, the gross margin before special items was 48%. North America-branded West of the World delivered 46%, and online and retail 38%. These differences in margin by division reflect product and market mix, and for online and retail business being a direct-to-consumer business, whereas the two other divisions are business-to-business. The group margin was, as already mentioned, at 44%. Measured by EBITDA, the margin differences are even wider with online and retail delivering the lowest margins while North America-branded rest of the world deliver the highest margin, primarily as these markets do not have own sales organizations. We'll now move to each of the divisions. So please turn to slide number 16. I will begin with Euro-branded. For the full year, reported net sales grew by 6%, largely due to the acquisition of McBaron in the third quarter of 2024. Organic net sales growth was slightly negative as increased sales of nicotine pouches were offset by declines in machine-rolled cigars and smoking tobacco. During the year, our gross margin before special items decreased from nearly 49% in 24 to 48% in 25. The decline was driven by changes in product mix with a strong growth in net sales of our nicotine pouch brand, XQS, and lower sales of smoking tobacco. The same factors contributed to a decrease in the EBITDA margin, which fell from 21% in 24 to 19.8% in 25. Overall, profit margins for Euro-branded are affected by shifts in product and market mix, as well as disruption in product availability. Reported and organic net sales growth for the fourth quarter was 6%, driven by both nicotine pouches and machine-rolled cigars. However, declines in both gross margin and the EBITDA margin were due to the rapid growth of nicotine pouches compared to other quarter categories. Now please turn to slide number 17. For the full year, reported net sales decreased by 4% and organic growth declined by 5%. The acquisition of McBaron contributed positively to reported growth, while the weakening of US dollar against the Danish drone has a nearly equal negative impact. The full year graph margin before special items decreased from almost 51% in 24 to 46% in 25, primarily due to changes in product and market mix. This was most notably affected by lower sales of high-margin machine-rolled cigars and smoothing tobacco products. For the fourth quarter, reported net sales for North America-branded and rest of the world fell by 12%. Organic growth was negative by 7%, as growth in handmade cigars could not offset a high single-digit decline in machine-rolled cigars and smoking tobacco. The category Other, which includes sales of accessories and similar items, also experienced negative growth during the quarter. The decline in the gross margin during the fourth quarter was even steeper compared to the full-year decrease as the quarter was compared to a particularly strong fourth quarter in 2024. Additionally, lower sales of machine-rolled cigars were primarily driven by reduced sales in our high-margin markets in Australia and Canada. These dynamics were also the main factor behind the significantly lower EBITDA margin before special items during the fourth quarter, impacting not only North America-branded division, but also the group margin for the period. Now, please turn to slide number 18. For the full year, North America online and retail reported growth in net sales decreased by 8%. Organic growth was down 4%, but excluding the discontinued sin distribution was slightly positive. Underlying organic growth included gains in our retail stores, while our online business experienced a slight decrease. In retail, we are seeing the benefits of opening new stores over the past year. However, same store sales were marginally lower due to a renovation of our largest store in Fort Worth, Texas, as Nils mentioned earlier. Competitive pressure remains strong in the online channel but our pricing strategies are gradually improving our market share. Throughout the year, both gross margin and EBITDA margin were affected by the intensified promotional activities aimed at expanding our market position. For the fourth quarter, reported net sales decreased by 8.6%, primarily due to currency fluctuation. Organic growth was down 0.5%, with retail achieving 7% growth and online business showing a slight decline. Gross margin and EBITDA margin before special items in the fourth quarter were impacted by the high level of promotional activities, which have continued into 2026. I'll now move to an update on group financial performance. Please turn two slides to slide number 20. Throughout the presentation, details regarding developments in net sales, gross margin, EBITDA margin have already been given. Now I would like to provide a few additional comments on select financial details and key metrics. In 2025, special items amounted to negative 200 million compared to 279 million in 2024. These costs can be divided into 130 million for the SAP implementation, and $70 million for reorganizations and the integration of McBaron. We expect special costs in 26 will total approximately $275 million before gradually tapering off in 27. Higher net financial costs were driven by both increased net debt and the refinancing of our corporate bond, which took place in September 24. We refinanced our existing €300 million bond, which matured in 2024 with a new facility of similar €300 million. However, the new bonds were issued with a coupon interest that was almost 3.5 percentage points higher, reflecting the prevailing market rates at that time. Financial costs, including exchange losses, increased by nearly €100 million compared to 2024. We have already addressed the effect of the discontinued distribution of the syn-nicotine-powered product, which negatively impacted group organic next sales by 1.3%. This implies that the underlying decline for the year was 1.8%. Finally, I'd like to address the decline in return on invested capital, which is a key KPI for us as we strive to meet our new financial ambition. Return on invested capital decreased to 7.9% from 9.4% in 24, while our ambition is to achieve a return on invested capital above 11% in 2030. Excluding the impact of special items, which are included in the calculation, return on invested capital was 9.3% in 2025, almost similar to 24. The decline in return on invested capital for the year was primarily due to lower EBIT as invested capital remained broadly unchanged at 14.5 billion kroner. Please turn to slide number 21. Niels mentioned in his opening remarks the free cash flow before acquisitions was approximately 200 million below our guidance. The free cash flow was 595 million compared to $931 million in 2024, and our guidance range was $800 to $1 billion. In the fourth quarter, free cash flow before acquisitions was $147 million compared to $604 million in the fourth quarter of 2024. The lower cash flow during the quarter relative to our expectation was due to delays in collecting of receivables associated with our ERP implementation in Europe. This issue has now been resolved, payments are beginning to be recovered, and we anticipate working capital will return to normal levels during the coming months. The delayed payments are expected to have a positive effect on cash flow during the first half of 2026. The effect on working capital during the fourth quarter resulted in unusually negative contribution from changes in working capital, with a reduction of 17 million in the quarter which was 180 million lower than the positive contribution during the fourth quarter of 24. Typically, working capital changes are positive in the fourth quarter of the financial year. Other factors contributing to the lower cash flow in the fourth quarter included reduced EBITDA and higher taxes paid, which in the illustration is included in investments and other. Now, please turn one slide to slide number In the fourth quarter, the leverage ratio increased from 2.9 times by the end of third quarter to 3 times by the end of 2025. The increase is due to a decline in EBITDA before special items compared to the fourth quarter of last year. Compared to 2024, the leverage increased from 2.6 times. we remain fully committed to lowering the leverage ratio and working towards our target ratio of two and a half times. This is a top priority for us this year, and if our earnings come under greater pressure than anticipated, we will take necessary steps to ensure the leverage ratio is reduced. Now please turn to slide number 23. In November, we announced our new capital allocation policy, which is guided by a leverage target of 2.5 times. This target determined the level of investments and shareholder payouts, giving us the financial flexibility to pursue growth opportunities while delivering shareholder returns. It also emphasizes our commitment to maintaining an investment-grade credit rating. We transitioned to a payout ratio-based dividend policy, ensuring dividend distributions are closely aligned with our underlying financial performance. The dividend payout ratio is set between 40 to 60 percent of adjusted earnings per share. This approach will take effect with dividend allocation related to the 25 financial results and will impact the dividend proposal for the upcoming annual general meeting in April. Since our listing in 2016, we have consistently delivered on our shareholder returns and intend to continue doing so. Given the current leverage ratio, we believe it is prudent to propose a dividend payment of 2025 in the low end of the payout range. The Board of Directors plans to propose a dividend payout per share of 4.5 kroner, corresponding to a payout ratio of 42%. As we normalize our leverage in the coming years, we intend to create greater capacity for share buybacks, which continue to be an essential component in our overall capital allocation policy. With this, I will now hand the presentation back to Niels. Please turn two slides to slide number 25.