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.

Thank you, Marianne. For 2026, we expect the consumer trends to be unchanged for most of our product categories and markets, and broadly similar to historic trends. We do appreciate that uncertainties are elevated and the risk for external disruptions remain high. However, we believe we have established good control of our internal processes and operations following the implementation of the SAP solution throughout Europe, and we are now well prepared to execute on our new strategy. For 2026, we expect group net sales growth at constant currencies to be in the range of minus 2 to plus 2 percent. The expectation reflects that total market volumes for machine-rolled cigars in Europe will decline by 3 percent and consumption of handmade cigars in the U.S. will decline by 4 percent. Improving our market shares, growing our U.S. retail and nicotine pouch businesses are expected to offset the volume declines in our core combustible categories. For 2026, we expect the EBIT margin before special items to be in the range of 13% to 14.5% compared with a 14.9% in 2025. The expectation reflects that 2026 will be a year of stabilization and where we will continue investing to facilitate our long-term ambitions in Focus 2030. Pricing is not expected to fully offset the impact from cost increases, changes in product and market mix, as well as our increased promotional activities to protect and improve our market share positions. On a more technical note, an increase in the amortization of trademarks of approximately one percentage point on the EBIT margin before special items is expected to be largely offset by an expected higher income from certain duty refunds. The increase in amortization reflects the group's new strategic direction with stronger focus on power brands implying that brands outside the scope of power brands going forward are classified with a finite useful lifetime. For 2026, the free cash flow before acquisitions is expected in the range of $950 million to $1.2 billion, reflecting the expectations for mid-sales and margins, as well as the delayed payments from trade receivables, which Mariana talked to, impacting cash flow positively in 2026. with an expected effect on cash flow during the first half of this year. Now, this concludes our presentation for today's call. I'll now hand the word back to the operator, and we're ready to take questions. Thank you.

Thank you so much, dear participants. As a reminder, if you wish to ask a question over the phone, please press star 11 on your telephone keypad and wait for a name to be announced. To withdraw a question, please press star 11 again. Alternatively, you can submit your questions via the webcast. And now we're going to take our first question over the audio lines. Just give us a moment. And the question comes from Nicholas Ackman from D&B Carnegie. Your line is open. Please ask your question.

Thank you very much. First question is regarding the guidance for 2026, because at the Capital Markets Day in late November, you talked about an ambition for a low single-digit growth of EBIT. It looks now like even the upper end of the full year guidance suggests a decline and the low end a quite significant decline. So can you elaborate a little bit on this? Is there anything that has worsened since the capital markets day in November?

So hi, Niklas, and thanks for the question. So when we talk about a low single digit increase in EBITDA, it is over the strategy period. We are believing that 2026, which we also said is the capital market day, is what we call a year of stabilization. We need not only to stabilize the internal disruption that we have seen in 2025, but we also need to stabilize both our handmade cigar business and our machine-rolled cigar business. And that will entail investments. into regaining market share and also in promotions. So we still believe that over the strategy period we will see low single-digit growth in EBIT, but in 2026 we could see a decline.

Can I also ask about your view on margins and potential cost reductions, and particularly given the quite steep margin decline we've seen in recent years? You've now had margins that have dropped below pre-COVID levels, and the guidance for 26 suggests a further decline. Are you in a stage now where you are looking more actively at your cost base again and maybe at initiating more significant cost reductions in order to curb the margin decline? Or what's your view on that?

Yeah, thanks again, Niklas. So if we talk margins in 26, margins in 26 will also be impacted by mixed which means that our nicotine pouch business we expect to grow, but we are also seeing declines in our fine cut business that have very high margins. When we talk about cost programs, we announced at the Capital Markets Day a cost program of $200 million over the coming years. We are, as we speak, executing on these cost programs. We have full plans in place for those 200 million and we will see that coming in during 26 and also 27. I would also say that if we see markets are worsening compared to our expectations, we will of course look at our cost levels.

Okay, very clear. I'm also curious, when I look through the report, you used to talk a lot about the growth enablers, and now you talk more specifically about next-generation products and the retail stores. Is this a definition that you have removed, and is this because you no longer see the international handmade business as a major growth driver?

Yeah, it's a good question, Niklas. I think that With the new strategy, you can say that retail expansion and nicotine pouches still play a central role, but the growth in international handmade cigars is still important to us, but we have prioritized doing well in handmade cigars in the U.S. more, so referring to the growth enablers as we originally defined them makes less sense. We now want to be more focused on on stabilizing earnings in the machine world cigar and smoking tobacco, growing the handmade with a focus on the U.S. and growing nicotine parties. So we will try to articulate the degree to which we succeed with these things in a different way than referring to the growth enablers.

Very clear. Thank you. And just a final question. Am I right? to assume that buybacks are quite unlikely in 26. When I look at your leverage ratio and your aim to get net debt below 2.5 times EBITDA, I guess the only way to get there is if you stick to dividends and not buybacks. So buybacks are unlikely in 26. Is that a right assumption?

I think the short answer is yes.

Very clear. Thank you for taking my questions.

Thank you. Now we're going to take our next question. And the question comes in the line of Sebastian Gray from Nordea. Your line is open. Please ask a question.

Hi, Nelson, Mayanna, and Tom. Thank you for taking my questions as well. I apologize for those being broadly in the same line of Nicholas. But I'll start off with a question on the margin here. So for the guidance 26, you're guiding for quite steep margin declines compared to 25. even, you know, from a fairly low starting point in 25. And I know you talk about, you know, increased investments in market shares, but I mean, on the flip side, I would assume that you should see some tailwind from Mac Barron synergies. There should also be some SAP efficiencies and cost takeouts as highlighted in the capsule market today. So at least in my view, it looks like underlying the margin pressure here is way more pronounced than what, you know, is, you know, we can see from the, you know, highlighted numbers here. So could you maybe help me understand how this works and how exactly this aligns with your articulated ambitions of protecting earnings here in the short term?

Yeah, let me start out, Sebastian, and first of all, thank you for asking questions, and then Niels can also elaborate. But if you look at our guidance range, Both when we look at top line and also margins, it is quite wide ranges if you compare to our business. And it is a signal of uncertainty on our total markets, how they're going to develop, but also uncertainty in the external world. So we are anticipating... slight decline in margins in 26 due to the reasons that I mentioned to Nicholas. We are on track on the synergies for McBaron. You talk about SAP synergies. There will also come synergies in on the SAP implementation. But as we are still rolling out, we're focusing on that rather than executing on those synergies for now.

Yeah, I can add, Sebastian. I think when you look at Europe and machine-rolled cigars, you have the area where you have a lot of mix of product and market. The thing that is, let's say, not new, but is more sustained, and we can also see continuing into 2026, is the promotion pressure applied across all sales channels in the U.S. So even though we take price increases and we continue to have a high focus on that, margins are under pressure simply to stay competitive both on a brand level to regular retail and on an online level competing in the U.S. So these are some of the key dynamics that are in play and which we are obviously working very closely to improve, but that is what is reflecting the margin pressure that Mariana also referred to.

Okay, so what I'm hearing you saying, Nils, is that you are in a difficult consumer environment in a structurally declining category with fierce competitions. And hence, is there any reason to believe that these currently elevated investments in market shares that they should taper off in the near term, i.e. in 27, 28?

Yeah, I think that the way to think about this is that market conditions help if I can put it like that, and our strategy aims at protecting and enhancing market shares, and that comes with a higher promotion pressure. Our job over time is to, let's say, improve or lower that promotion pressure and still do well on market shares, but it requires the market conditions to improve. So you can see the combination of total market declines and the, let's call it the fight for market share is what is putting the pressure on the market. And we have, of course, an expectation that over time that will normalize. We've not seen promotion pressure like this and down trading like this for some time.

Okay, that is fair. And my last question is going back to the ambitions of harvesting some 200 million efficiency gains, as you talked about in the CMD. I could understand that some of these ambitions have already translated to initiatives, but can you maybe help explaining how much of these 200 million is already reflected in the 26 guidance and how much we should expect beyond that?

Yeah, so I would, for the 26, I would think it in the level of around 100 million.

Okay, okay, so half of the efficiency gain.

Sorry, Sebastian, then going into 27, we'll be closer to 200 million, but probably not fully, and we'll see the last part coming in in 28.

Okay, okay. That was all from me. Thank you for taking my questions.

Thank you. Dear participants, as a reminder, if you would like to ask a question over the phone, please press star 11 on your telephone keypad. Alternatively, you can submit questions via the webcast. And now we're going to take our next question on audio line. And it comes from Damian McNeill from Deutsche Neumann. Your line is open. Please ask your question.

Thank you. Morning, Niels. Morning, Mariana. Morning, Torben. Thanks for taking the questions. The first one is on... On Canada and Australia, because I think in the press release last night, you called out challenging conditions there and the impact that that's had on the business. You did mention that in the presentation. Can you talk a little bit about what's happening in those markets and what the outlook for this year is, please? That's my first question.

Thank you, Damien. And if I start with Australia, for those that follow the industry closely, it's maybe no surprise that we have seen an explosion in illicit trade. So a lot of tobacco companies, including ours, have seen earnings decline by quite a bit in Australia. And this is, let's say, increased for us in the sense that we had, because of regulatory changes, a relatively higher sales in 2024 than in 2025. So the net impact of Australia on our profitability is quite distinct. So Australia is very much about a total market that is going illicit, and we are not losing market share, but basically losing volume simply because the legitimate market is lower, and it's a high-profit market, as we debated, as we discussed earlier. For Canada, the situation is a little different. Also here, our market share position is strong and broadly unchanged. But in Canada, there is, from time to time, a larger sales into the Indian districts. And the government have restricted some of those licenses they issue for selling in Indian districts. And that has affected our sales in Canada. in 2025. So those are the two main explanations around Canada and Australia, and them being among our highest margin markets does affect the average margin and total profits.

Yeah, and just to follow up on that Canada point, that's likely to remain the case for the medium term, is it?

It's been... Over the years, this has been an on and off issue. So there's nothing wrong with selling in the Indian districts, but they need licenses and sometimes the government takes it away from them and then a period passes and they get reinstated. So we are still of the view that they may come back, but there's no guarantees around it.

Yeah. And so the guidance assumes no return for those? Yes. Yeah. Okay. And then in MRC Europe, it looks like margins have stabilized, but market share losses have continued. I was just wondering whether you could sort of call out some of the competitive dynamics in a couple of the bigger markets that you operate in, just to give us a sense of how the business is performing now that the sort of ERP system has is up and running and fully implemented?

Yes, let me try to give a few examples. So two of the key markets in our strategy is France and Spain. And as we have been resolving the inventory availability issues up until the end of 2025, we are seeing that market share is responding positively into 2026 but it's also us recovering from a low level. So we are still saying we have to be patient around how fast we can regain market share into 2026. But at least in these two markets, you can say that we have inventory availability back to where we would like to have it. When you look at other key markets in Europe, the situation is a little different. We have markets like the UK, where there is a higher decline rate of machine-rolled cigars and there's also a shift from regular machine-rolled cigars where we are strong to increasingly small cigars where we are competing up against some of the larger tobacco companies. So even though those categories grow, the mix in margin become again a net negative. When you then look to the central European markets of Benelux and Germany, Here we are again still concentrating on getting customer service levels back to where they need to be and also here you have in certain markets this new dynamic of consumer shifting between what we call mainstream small cigars and little cigars which are also cigars but sold at a lower price and typically in 10-pack cigarette type packaging formats. So what I'm really saying is that it's quite a complicated picture when you look across the markets. What's important to remember is we have really strong market positions in many of these places, you know, France, Spain, Benelux, UK, and that's what we're trying to leverage to get the market share back up.

And then you were also asking about the competitive... situation. And here we are seeing, which we've also seen over the years, that our competitors are reluctant to take the same level of price increases which we think is necessary to cover both volume decline and cost increases.

Okay. So that hasn't changed at all? No. Okay. And then just on... I guess this is a slightly more philosophical one. You've changed guidance from EBITDA to EBIT margins. I was just wondering if there was anything behind that decision to do that.

Yes, maybe I can answer that. First of all, we believe also now where we have more distinct and clear focus on return on invested capital. It goes more in line with giving a guidance on EBIT. Secondly, the EBIT level also includes what we have seen in the past few years, increased investments and therefore depreciation in especially our retail business. And then we have also noticed from kind of studies we have made with the market that it's a more common practice to guide on the EBIT level. So that's the key reasons for us changing that.

Okay, that's clear. And then perhaps, if I may, one last one just on the XQS brand. Can you just sort of give a sense of the areas of focus for growth? I mean, obviously, Sweden's pretty strong already, do you see increased investment behind the brand through the course of 26?

We are seeing increased investments behind the brand, Damian. If you look at the geography, we talk a lot about Sweden, we talk a lot about the UK, which are two important markets for us, but we also consider, let's say, Scandinavia at large, and we are opening... a new subsidiary in Norway later in the year. They will, of course, also include nicotine pouches in their portfolio. Finland is also in the focus area and certain Eastern European countries. So we are focusing on the European geography to build momentum also outside of Sweden.

Yeah. Okay. That's great. I'll pass it on. Thank you.

Thank you.

Thank you. Thank you.

Yeah.

Sorry. The speakers are not for the questions. Please continue.

Okay. Yeah. Thank you. And I was simply just going to close off the call now. Thank you for listening in. Thank you for the questions. And yeah, we will meet again in May after our first quarter results. Thank you and have a good day.