Scandinavian Tobacco Group

Good day and thank you for standing by. Welcome to the Scandinavian Tobacco Group Q1 2026 results conference call and webcast. 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 need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Alternatively, you may also submit your questions on the webcast at any time by typing them in the question box and click Submit. Please note that today's conference is being recorded. I would now like to turn the conference over to your first speaker, Torben Sand, Head of Investor Relations. Please go ahead.

Thank you. Yes, welcome to the Canadian Tobacco Group's webcast for the first quarter of 2026. My name is Seth Bromsan, and I'm Director of Investor Relations and External Communications. And I am, as usually, joined by our CEO, Niels Frederiksen, and our CFO, Marianne Roeskel-Bock. Before we start, I ask that you pay special attention to our disclaimer on forward-looking statements, which can be found on the next slide in this deck. Please turn two slides to number three for today's webcast agenda. We will start the presentation by giving you a brief overview of the key highlights for the quarter and the results announcements, including a snapshot of the key financial highlights. NILS continues by turning to an update to our strategy focus 2030, including details on the performance of our product categories before Marianne takes over to provide an update on the group and divisional financial performance. Nils will conclude the presentation by giving some insights into the expectations for the full year. After the pre-prepared presentation, we will conduct a Q&A session where we will be pleased to take any questions you might have. Now, let's begin. Please turn to slide number five, and I'll leave the word to our CEO, Ms. Wallach.

Thank you, Torben, and welcome to the call. The first quarter of 2026 marks the beginning of our new strategy, Focus 2030, and hence it's still early days. However, I would like to spend a moment to share my reflections on the initial progress we've made. We are off to a good start, and we follow the plans we outlined in relation to the launch of the strategy last November, and I'm confident that we've set the right direction to deliver on our long-term ambitions for the group. We have laid the first bricks to build a solid foundation for protecting our market positions within both machine-rolled cigars and handmade cigars. We are mindful that one quarter does not change a trend, but during the quarter, our market share positions have stabilized within machine-rolled cigars in Europe. We have grown our handmade cigar business measured by organic net sales and our nicotine pouch brand, XQS, has continued to take market share in Sweden. Furthermore, we have set a clear direction for prioritizing our investments, putting more emphasis on our power brands, we've taken steps to reduce complexity in our organization and in our portfolios, and we started to execute on our plans to deliver cost improvements as part of achieving our financial ambitions. So based on the financial performance in the early months of the year, we maintain our full year 2026 expectations. We still, however, expect it to be a year where geopolitical uncertainty will remain a key market condition and economic growth will be challenging. For Scandinavian Tobacco Group, this means that our main priorities in the year are unchanged. To stabilize earnings in our machine-rolled cigar and smoking tobacco business, to inject new energy and growth into our strong handmade cigar business, and to continue to grow our promising nicotine pouch business. Now, please turn to slide number six, where Marianne will talk to the financial highlights of the quarter.

Thank you, Niels. The first quarter of our financial reporting year is typically the weakest, and year-over-year changes can be significant due to relatively low volumes and sales. while certain costs remain fixed. As a result, underlying financial trends may deviate from the first quarter developments. Having said that, our reported net sales of 1.9 billion kroner were negatively impacted by decline in the value of the US dollar, excluding the 5.2% negative currency impact the organic development in net sales was down by 0.6%. As Niels will discuss shortly, the performance in the consumer market is steady. Volatility, including timing of deliveries, impacted temporarily net sales in our European machine-rolled cigar and nicotine pouch businesses. The EBITDA before special items was unchanged compared to the first quarter last year, despite the decrease in net sales. This resulted in an EBITDA margin before special items of 17.2% compared with 16.1% the previous year. The improvement primarily reflects last year's weak profitability, which was driven by the temporary challenges we experienced for the SAP implementation in our European factories. In 2026, we increased the amortization of trademarks as a consequence of our power brand strategy. In March, we estimated that this change would increase amortization by nearly 75 million kroner, which remains our expectation for the year. For the first quarter of 2026, This resulted in a 0.9% negative impact on the EBIT margin before special items, ending at 10.4% in line with the margin last year. The free cash flow before acquisitions was $158 million in line with the first quarter of last year. We have recovered a substantial part of the receivables postponed from the fourth quarter of last year into Q1 2026, and we continue to expect a full recovery during the first half of the year. Compared to last year, it is important to note that cash flow last year was exceptionally strong. The change from working capital was positive with 41 million kroner marking the only first quarter since our listing in 2016 where working capital contributed positively to cash flow in the first quarter. Typically, we experience inventory buildup during the quarter to prepare for upcoming high seasons. The first quarter of 2026 is the strongest on record, and even when excluding the impact from the recovered receivables, the underlying cash flow is solid and supports our expectation for the full year. Finally, our leverage remained unchanged three times compared with the end of last year. We expect leverage to approach our target ratio by year-end with most improvements anticipated in the second half of the year. Now please turn two slides to slide number eight and I will leave the word back to Niels.

Thank you, Maja and Annette. The purpose of Focus 2030 is to create value by executing this reality, but it is also to develop a company that is even better positioned to deliver value beyond 2030. So let me start by updating you on each of the three strategic priorities, which all play an important role for us to deliver on the ambitions for Focus 2030. Firstly, to stabilize our machine-rolled cigars and smoking tobacco business. 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. Our power brand strategy is tailored to facilitate this. During the quarter, we have started to roll out the power brand strategy for our machine world cigars. One example, which I will talk to in a moment, is the redesign and rebranding of the power brand Meharis. Now, an essential driver to deliver long-term value in the category will be to strengthen our market share by reversing the downward trend we have experienced over the past years. We have an ambition to increase the share from below 27% in 2025 to more than 29% in 2030. And although the data can deviate somewhat quarter by quarter and year by year from the underlying trends, market share data is an important KPI to evaluate our progress with the strategy. For the first quarter this year, the volume market share in our seven key markets is estimated at 27.9% based on preliminary data. And for the past 12 months, it is estimated at 27%. These data points indicate a stabilization compared with the declining trend we have experienced throughout the past years. This is a good first step, and we are now putting all our efforts behind sustaining this for the coming quarters. Three of our four power brands delivered market share increase, suggesting a good beginning to the execution of our strategy. The second strategic priority is to grow our handmade cigar business anchored in the U.S. and with a stronger global footprint. And based on our power brands, Cohiba, Macanudo, CAO, and Alec Bradley, we aim to increase our market share in the U.S. from approximately 13% to more than 15%. We aim to leverage our strong online and expanding retail distribution platforms to support the growth of our brands with the aim of growing our power brands faster than the overall category growth. With an 8% organic net sales growth in the first quarter, we've experienced a good start although I again must emphasize that the first quarter is a seasonally low volume quarter and fluctuations from quarter to quarter will occur. However, the growth has been delivered from our branded portfolio in the U.S. as well as both retail stores and online. The third strategic priority is to build a larger business in the attractive nicotine pouch category. Although the category accounts for only 5% of group net sales, we expect our nicotine pouch business to deliver a material contribution to our long-term net sales and profit development. Our power brand, XQS, continues to take market share in the important Swedish market. The brand share has grown from 10.7% in the first quarter of 2025 to 13.6% in this quarter. And during the quarter, we estimate that the total market volumes in the key markets of Sweden, Denmark, and UK combined have grown 21%, with our brands growing 38%. So for the first quarter, our net sales development doesn't justify the continued strong development and progress XQS deliver, and I will explain this shortly. Before I do that, let me share a few examples of how we have invested in our power brands over the past months. Please turn to slide number nine. At Cornerstone, The focus 2030 strategy is to be more selective in where we invest to support our brands. And with our power brands, we emphasize the importance of growth and consumer relevance. So to mark its 50-year anniversary in 2026, we redesigned the packaging of Meharis to reflect the quality and craftsmanship behind every single Meharis cigarillo. With this redesign, we're essentially relaunching the brand while staying true to what makes it unique. Our aim is to make Mejais even more relevant to today's consumers by bringing back its strong sense of adventure, sharpening its core product message, and strengthening its offer against future challenges. Mejais account for about 12% of our machine-rolled cigar business in the first quarter, measured by net sales, and with an increasing market share during the quarter. And with an increasing market share during the quarter, we expect the brand to constitute an even larger share going forward. Another example is from our handmade cigar business. Cohiba has partnered with the El Titan de Bronze factory in Miami to produce a new American-made cigar. The cigar, branded as Siriem Reserva Plata, marks the sixth time Cohiba and El Titan de Bronze have collaborated on a limited edition Cohiba Siriem cigars. This is just one example of many more innovative offerings within the handmade cigar category, which we expect to support the growth of our handmade cigar business over time. The third example I would like to give you is for our Nicotine Power brand, XQS. We have partnered with Impaga Racing for the Porsche Carrera 2026 Cup. This partnership is an opportunity for the brand to align with a high-performance platform that strongly resonates with our target audience. Team Parker Racing and the Porsche Carrera Cup provides a highly visible stage to strengthen brand awareness, deepen engagement with our trade partners, and create meaningful experiences for consumers throughout the 2026 season. It reflects our ambition to show up in culturally relevant spaces that both drive brand impact and commercial growth. Please turn two slides to slide number 10. Last year, we introduced more financial data for our product categories with the aim of giving more transparency to the underlying performance for each of the unique categories. In the first quarter, machine-rolled cigars and smoking tobacco delivered a 3% negative organic net sales development, with machine-rolled cigars performing slightly better than smoking tobacco. The gross margin improved by almost 3 percentage points, primarily as a result of the weak profitability during the first quarter of last year, which my Anna mentioned earlier. Handmade cigars delivered solid organic growth through our branded business in the US, as well as our retail stores. And although online also contributed to net sales growth, the business was the main reason for the category margin to decline, as competition within online remains intense. Next Generation Products, which covers our nicotine pouch business, experienced a 23% decrease in organic net sales compared to the same period last year. This development is driven by timing between quarters of deliveries to our trade partners, which impacted the net sales growth negatively in the first quarter this year. This is another example of the precaution needed when looking at individual quarters, especially in our smaller business streams. With this, I'll now leave the work back to Marianne for a review of the financials. Please turn two slides to slide number 12.

Thank you, Niels. In my opening remarks, I already discussed the key developments in the sales, profits, and cash flow. However, I would like to provide a few additional comments on select financial details and key metrics. During the quarter, we recorded 31 million in other income compared with 11 million kroner in the first quarter of last year. Increase was mainly driven by income from certain duty refunds as mentioned in our results announcement in March. Special items for the quarter amounted to negative 76 million kroner compared with negative 70 million kroner in the same period last year. These special costs include 33 million for the focus 2030 reorganization, 31 million for our global SAP implementation and a combined total of 11 million for the McBaron integration cost and for our new service delivery organization. We continue to expect that special cost in 2026 will total approximately 275 million. Finally, I would like to address the decline in the return on invested capital which remains a key KPI as we work toward our financial ambitions. Our ambition is to achieve a return on invested capital above 11% in 2030. However, improvements from the current level of 7.8% will come as special cost decrease, and we start to see underlying improvements in our EBIT before special items as we implement the strategy. Now please turn one slide to slide number 13. I would like to share a few additional remarks about our three reporting divisions. Although reported net sales growth was negative across all three divisions, organic growth was positive for both North America Branded and Rest of the World and North America Online and Retail. Since these divisions have a high proportion of net sales in North America, the reported numbers in dealing with corona are sensitive to changes in the U.S. dollar. Increase in handmade cigars, as mentioned by Nils, was a key driver behind the organic net sales growth for both divisions. For Europe-branded, organic net sales declined by nearly 9%, To reiterate, this was a quarter impacted by low season and by the timing in deliveries in both machine-rolled cigars and nicotine pouches. Because the absolute number are relatively small, even minor changes have a significant impact on quarterly growth rates. Margins in Euro-branded improved significantly compared with a weak first quarter last year. Last year, the volumes were impacted by the SAP implementation at our European machine row cigar factories. Finally, I would like to mention the lower margin in our online and retail business. Although organic net sales are trending upward, ongoing intense competition in the online channel continues to put pressure on margins as achieving adequate pricing remains challenging. Our intensified focus on protecting market share and supporting brands remain a key commercial priority, which means that we do not expect any near-term improvements in market conditions. That said, the first quarter is typically a low-season quarter where margins tend to improve as volume increases through the high season. With this, I'll now hand the presentation back to Nils. Please turn two slides to slide number 15.

Thank you, Marianne. So overall, our expectations for 2026 remain unchanged compared with the expectations we released in March. For the year, we still expect consumer trends to be unchanged for most of our product categories and broadly similar to historic trends. We do appreciate that uncertainties are elevated and geopolitical risks remain high, And the outbreak of the conflict in the Middle East just after our full year 2025 release in March is an example of this, as is the ongoing uncertainty around tariffs in the U.S. For 2026, we expect group net sales growth at constant currencies to be in the range of minus 2 to plus 2%. The expectation reflects that total market volumes for machine world cigars in Europe will decline by about 3%. and consumption of handmade cigars in the U.S. will decline by about 4%. Improving our market shares, growing our U.S. retail and nicotine pouch business 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. with EBIT margin being negatively impacted by 0.9% from the change in amortization of trade marks. The expectation reflects that 2026 is a year with focus on stabilization and that we will continue investing to facilitate our long-term ambitions as reflected in the Focus 2030 strategy. For 2026, the free cash flow before acquisitions is expected in the range of 950 million to 1.2 billion Danish kroner, reflecting expectations for net sales and margins, as well as the delayed payments from trade receivables, impacting cash flow positively in 2026. Finally, we also maintain our expectation that EBITDA before special items will be more or less in line with the 1.8 billion kroner we delivered last year, supporting that the leverage ratio will approach our target ratio of 2.5 times. Now, this concludes our presentation for today's call. I'll now hand the work back to the operator, and we're ready to take any questions that you may have. Thank you.

Thank you. As a reminder, to ask a question on the phone, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Once again, please press star 1 1 on your telephone and wait for your name to be announced. To remove your question, please press star 1 1 again. If you wish to ask a question on the webcast, please type them in the question box and click submit. Thank you. We are now going to proceed with our first question. The questions come from the line of Niklas Ekman from DNB Carnegie. Please ask your question.

Thank you very much. First question is on the nicotine pouch segment. If you can just clarify here, a 23% decline here due to phasing. And I noticed you had 37% growth in Q4. If you look at the average of those two, that suggests a low single-digit growth, roughly, if you combine them. I was wondering if that's the right way to look at it and how much of this is impacted by the discontinued product lines and what kind of the underlying trend is. That's my first question.

Let me start by saying that some of the trend is affected by the underlying change in mix moving volume from ACE and GRID to XQS. But this is also why we are disclosing, let's say, in-market sales numbers. And then when we look at the first quarter of 2026 and take the three important markets for us, Sweden, Denmark, and the UK, we see the category going 21% and we see our volumes decreasing. growing by 38%. So this indicates different numbers, and I think you have to think about it more along those lines. Similarly, you can say that the last 12 months growth rate of XQS, including the first quarter, is around 35%.

And maybe let me add, Niklas, It's correct. We've had some timing of deliveries in Q1, but we also have a distributor that have lowered their level of inventories, which also impacted us in Q1, but that is temporary.

Okay, very clear. Thank you. And on the same topic, if you look at the Europe branded sales, organic sales down 9% and still Gross margin up 10 percentage points. Your EBITDA nearly doubled. Just curious, and obviously this is on easy comparisons from the year before, but is then the nicotine pouch segment, is that loss making? Is that why when you're seeing a decline here that the earnings are improving? Or can you explain? Because it looks a little bit strange with the sales decline and significant earnings improvements.

It's a very relevant question. So last year in Q1 our gross profit margin for Eurobranded was 41%. And now we are at 49%. The way you should think it is that the level of 49% to 50% is what we expect also going forward in Eurobranded. And if you look from Q2 last year until Q4, that is the level. What happened in Q1 last year was our go live of SAP 1st of February. And even though it is depressing to think about, then we did have issues, as you probably remember, in our go live at that point in time. So that decreased our volume significantly in Q1 last year. So it is primarily driven by the issues that we had in Q1 last year, and now we are back to a level of margins that is more normalized.

Very good. Thank you. Another question just on your full year guidance. Given that sales are opening now with a decline on very easy comparisons, you have slightly tougher comparisons in the quarters ahead, but your EBIT margins are holding up quite well. Would you say that within this range that the risk is on the downside for sales but you are fairly confident on delivering in line on the EBIT or is there any way to elaborate on this or is it too soon to say based on a small quarter?

Yeah, I think it's too soon to say. Q1 is always a smaller quarter. And the reason for us also keeping the wide range is, first of all, the uncertainty that we see in the world around us, but also we like to get through Q3 or Q2 into the high season to be able to say anything more educated around the narrow range.

Fair enough. Very good. And just a final question. I was curious about the competitive situation from Cuban cigars. Has there been any change there? Because a while ago, a couple of quarters ago, Cuban supply was very short and that provided an opportunity for you to expand your international handmade cigars business. And then I understand that Cuban cigars have come back. But given the energy shortage situation in Cuba, is that something you see that could be moving to your advantage in the quarter's ahead?

It's a good and interesting question. I think that it's correct that we've seen an improvement in inventory availability of Cuban cigars outside the U.S. We do not see signs that, let's say, the current increased crisis in Cuba is changing that. But it is also important to remember that Cuban cigars has been on a downward trend outside, again, the US for many decades. So it's more a question of how fast the transition to cigars from other regions is moving. And also, you can say that the very high price increases that the Cuban cigars implemented a few years ago and which they are continuing with is also affecting market dynamics. but we still aim to grow our international business in handmade cigars.

Very clear. Thank you so much for taking my questions.

As a reminder, to ask a question, please press star one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star one, one again. If you wish to ask a question on the webcast, please type them in the question box and click submit. We are now going to proceed with the next question. The next questions come from the land of Damien McNeill from Deutsche Bank. Please ask your question.

Yeah. Hey, morning, everybody. Thanks for taking the questions. A couple for me. Firstly, can we just have a little bit more color on the European machine rolled cigar business, please? And obviously it was a decent performance in Q1 and you indicated that you don't want to sort of extrapolate the trend, but can you sort of give us some of your insights into to the extent you're leveraging the new SAP system and your confidence in being able to sort of recover further the market share losses that you've incurred in that business? the first question the second question is is on the sort of online competition and it seems to be consistently a headwind for the business is this just merely sort of price orientated competition or is there something more meaningful in how the other platforms are selling their products online. And just a final one, perhaps on nicotine practices. I know you've got sort of three markets which are your focus, but given the way that the EU TPD is moving, I was just wondering how you think about potential expansion into other markets, given how well XQS is doing in those three markets.

Thank you. Well, let me start by saying that throughout 2025, we kind of chased an acceptable level of inventories for our cigars in Europe and that ended up affecting our full year performance for that category quite significantly. But we also ended the year with a better inventory level across many of our key markets and that is part of what has driven the improvement in market share in the first quarter of the year. So that's important, and that's, of course, what we are focusing on sustaining. There's no material change currently to the, let's say, the pricing picture. So we still see some markets where we need to be cheaper priced than we would optimally like. So I think that what we will see over the coming years quarters is whether we can sustain the positive development into the second and third quarter, which Marianne also mentioned is the higher volume quarters. So that's our focus, whether we will succeed or not. I don't want to predict that right now, but we are trying to really focus also on the two markets that we have highlighted as key, which is Spain and France. And also here we saw solid market share development in the first quarter. So if I move to the online competition question, it is true that in the fourth quarter of last year and the first quarter of this year, we've seen margins significantly below also historic levels, and it's affecting the overall margin from that business. It's a combination of two things. It's a combination of challenges with passing on tariffs and other price increases to consumers, in a, let's say, intense competitive environment. It's also a reflection that last year in October, we took the decision to introduce free shipping for our largest online site. This was a response also to competition. So we did begin to see some margin improvement in the end of Q1, and we are working to sustain that into the Q2 and onwards. So I think we have to look at a few more quarters to see where the earnings of that business stabilizes. But the focus for us right now is protecting market share. And you can consider the free shipping effort an effort there. And then it's about passing on tariffs as quickly as we can to consumers. Also, of course, considering what competition is doing. Then let me finally answer the question on nicotine pouches and how we look at expansion. Yes, our main focus markets today is to continue to do well in Sweden, to get increased momentum in the UK, and then we are actually expanding into a number of other markets. So even though we don't talk so much about it, our geographic footprint for XQS is expanding, and it's still not with sustainable volumes, but it is, of course, an attempt from our side to test out individual markets to see whether there are over and above markets that need more investments. So we do not think about it only as core, we do think about it as Europe, but we do look at geographic expansion as well.

And Damian, let me ask, because in your first question you asked a question about whether we were leveraging our SAP implementation. And a quick status, we are done in Europe and in Asia. We're moving into the U.S. end of this year and beginning of last year. I certainly think that for us, having standardized our processes has given us much more transparency and much more insight also into our data. I think it is too early for us to say that we have achieved the benefits that we have we anticipated from the implementation. However, this is a critical foundation also for us to move forward with more digitalization.

Brilliant. That's great. Very clear. Thank you.

Thank you. There are no further questions at this time on the phone lines, so I'll now hand back to Torben for the written questions. Thank you.

Yeah, thank you. And there are no questions on the web. So I think that brings us to the end of this webcast. Thank you for listening in. And yeah, we will talk again a few months from now in August. Thank you and have a nice day.

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