Scandinavian Tobacco Group A/S

Thank you. Welcome to Scandinavian Tobacco Group's webcast for the second quarter and first half 2025 results.

My name is, as said, Torben Sand, and I am Director of Investor Relations and External Communications, and I am joined by our CEO, Niels Frederiksen; and our CFO, Marianne Rørslev Bock. Now please turn to Slide #3 for today's webcast agenda.

Niels will start the presentation by giving you a brief overview of the highlights of the quarter, followed by an update on our strategy. The focus will then be switched with Niels giving an update on developments in our core product categories, followed by Marianne, who will give you an update on the financial performance in our 3 reporting divisions.

Marianne will then turn the focus to key financial developments for the group, including an update on cash flow and leverage. Niels will conclude by giving an update to our expectations for the full year 2025.

After the pre-prepared presentation, we will conduct a Q&A session, where we will be more than pleased to take any questions you might have. Before we start, I ask you to pay special attention to our disclaimer on forward-looking statements, which can be found at the end of this slide deck.

Now please turn to Slide #5, and I'll leave the word to Niels.

Thank you, Torben, and welcome to the call. The results in the second quarter did improve compared to the soft start we experienced in the first quarter of the year.

The financial performance, including the development in July, supports our expectations for the full year. Reported net sales were almost in line with the last year.

The inclusion of Mac Baren enhanced reported sales growth, whereas the U.S. dollar and organic growth contributed negatively.

However, as we have pointed out in the previous 3 quarters, organic growth has been significantly impacted by the discontinued distribution of ZYN in the U.S. In the second quarter of this year, the impact was minus 3% to our net sales just as our margins have been impacted negatively.

In addition, the organic performance was also negatively impacted by no sales in the profitable Australian market. Focusing on the continuing business, the 3 product categories all delivered growth in the quarter, reversing the negative trend in the first quarter.

And in a moment, I will talk more to the drivers behind the development in each product category. EBITDA margin decreased to 21.1%, which was impacted not only by ZYN but also by changes in product and market mix, where the high growth of our nicotine pouch brand XQS reduces short-term margins.

Our continued investment in strengthening our market positions in the core categories also affected margins negatively. The free cash flow before acquisitions developed as expected and is on track to reach our expectation of DKK 800 million to DKK 1 billion for the full year.

Please turn to Slide #6. We are approaching the end of the current 5-year strategy, Rolling Towards 2025.

And as we have communicated previously, the plan is to launch a 2030 strategy before the end of the year. Currently, we aim to launch our 2030 strategy on November 20, where we intend to host a virtual capital markets event.

More details to follow on this later, but now let me give you a brief update on the progress we made with our existing strategy. The integration of Mac Baren is progressing according to plan.

In the U.S., we have consolidated the distribution of goods in our Bethlehem facility, and we have closed the pipe tobacco factory. Furthermore, we have streamlined all acquired online sales channels into one single platform, pipes and cigars.

And we have reduced the geographic footprint for the nicotine pouch brands, ACE and GRITT. So overall, the integration is progressing well, and we are on track to deliver almost DKK 150 million in synergies from the integration and to improve the group ROIC when the integration is completed in 2027.

Two of our three growth enablers continue to deliver meaningful growth to our net sales. Retail stores in the U.S.

and our nicotine pouch brand XQS delivered double-digit sales growth, whereas sales of Handmade Cigars to the international market temporarily have experienced a setback. I'll talk more to each of the growth enablers when I turn to the update for our product categories in a moment.

Combined, the growth enablers account for 10% of group net sales in the quarter compared with 9% for the full year 2024. Further, we continue to invest in the future through increasing spending on improving our market share positions in Machine-Rolled Cigars and in the implementation of the ERP system, SAP 4/HANA.

The ERP implementation is progressing as planned with the inclusion of our European factories earlier in the year. And in September, the rollout to all our European sales operations will be completed.

As we saw in Q1, the rollout does create ongoing but manageable issues. Please turn to Slide #8.

Let me now turn the focus to a more detailed update on the performance by product categories, and later, Marianne will talk to the commercial reporting by divisions. In the slide, we have outlined the net sales distribution by product category and by divisions to give you an overview of the structure in our announcements.

Measured by product categories, our Next Generation Products remain a relatively small part of the group net sales with 4% in the second quarter, whereas Machine-Rolled Cigars & Smoking Tobacco, following the acquisition of Mac Baren, now comprises slightly more than 50% of group net sales. Sales of accessories, bar sales, amongst other, which is not directly linked to a product category; is included in Other, as outlined in the interim report.

Please turn to Slide #9. The market for Handmade Cigars in the U.S.

continues to contract. And currently, we project no major changes in the coming quarters.

The volume development continues to reflect the consumer sentiment, which is impacted by overall economic uncertainty as well as higher product prices, a direct consequence of the increasing tariffs for products being imported from the three main cigar-producing locations in Nicaragua, the Dominican Republic and Honduras. However, organic net sales for the category recovered in the second quarter compared to a weak first quarter.

Organic net sales growth was 1% in the quarter and minus 4% for the first 6 months of the year, with the Q1 performance impacted by the timing of the large U.S. trade show and particular bad weather.

The sales of Handmade Cigars to U.S. wholesalers and distributors, the business-to-business market recovered well in Q2, driven by pricing.

Our online sales of Handmade Cigars were slightly down in the quarter, whereas sales of Handmade Cigars in our retail stores continue to increase, driven by new store openings. And sales to our international markets declined for the second quarter in a row, primarily due to lower shipments to our Asian markets.

Please turn to Slide #10. Based on the preliminary data, the total market for Machine-Rolled Cigars in Europe in our 7 key markets is estimated to have increased slightly during the second quarter.

For the first 6 months, total market volumes are estimated to be down by close to 1%. Although the quarterly data has improved for the quarter -- for the category, I must remind you that the data can deviate somewhat quarter-by-quarter from the underlying trends.

And currently, we remain uncertain whether this is only a temporary or sustainable improvement. Our base scenario of 2% to 3% general volume decline rate is maintained.

Measured by our market share, we experienced a temporary setback during the first quarter, primarily driven by delivery issues experienced during our large wave 2 go-live for SAP. However, during the second quarter, our market share recovered as expected.

Our market share index for the second quarter was 27.7% compared with 27.9% for the full year of 2024. We continue to invest in strengthening our positions further as stronger market share positions are crucial for delivering long-term value in this category.

Smoking Tobacco delivered 10% organic growth, driven by fine-cut tobacco, and 42% growth when including the impact from Mac Baren and exchange rate developments. With this, now please turn to the next slide.

Moving on to Next Generation Products, which comprises our nicotine pouch business. As the previous -- as in the previous quarters, the headline performance is significantly impacted by the discontinuation of the ZYN distribution, which in the quarter impacted organic net sales growth negatively by 47%.

However, as ZYN from the third quarter onwards no longer will impact our growth comparisons, I will address the development in the continuing business streams. During the second quarter, the continuing businesses delivered 4% organic net sales growth with the XQS brand delivering 17% growth.

The growth rate continues to be impacted by the streamlining of the nicotine pouch portfolio we took over from Mac Baren, where we reduced the geographic footprint for the brands ACE and GRITT. This impact will also impact growth in the coming quarters.

However, for the XQS brand, volumes and market shares continue to improve. And in Sweden, the brand has now exceeded 12% of the total market.

And in the U.K., we continue to slowly improve our position. With this, I will now leave the word to Marianne for more details on the divisional performance.

Please turn two slides to Slide #13.

Thank you, Niels. We will now turn the focus to look at the financial performance for the 3 commercial divisions.

I'll start the overview with Europe Branded. Reported net sales for the second quarter increased by 10% to DKK 851 million with organic net sales decreasing by 2%.

The inclusion of Mac Baren impacted reported net sales by almost 11%. For the first 6 months, organic net sales growth was negative by 2.8%.

For the quarter, nicotine pouches driven by the brand XQS continued to deliver growth, while the product categories, Handmade Cigars and Machine-Rolled Cigars, Smoking Tobacco delivered negative growth compared to last year, though improving compared with the development in the first quarter. EBITDA before special items increased to DKK 207 million with an EBITDA margin of 24.3% compared to 24.9% in the same quarter for 2024.

The first 6 months of the year, the margin was 17.7% compared to 19.9% last year. The margin stabilization during the second quarter largely reflects a more favorable production and sales development compared with the first -- with the weak first quarter as well as pricing.

However, the ongoing expansion of our nicotine pouch business continues to place a downward pressure on margins for the division. With this, please turn to Slide #14.

In the quarter, reported net sales for the commercial division, North America Branded & Rest of the World increased by 4% with a positive contribution to net sales from the inclusion of Mac Baren of almost 9%. Exchange rate developments, particularly the decline in the U.S.

dollar, impacted negatively by 4%. As a result, organic net sales were minus 1% in the quarter compared with minus 7% in the first 6 months.

The main drivers for the organic development in the second quarter were mid-single-digit growth in both Handmade Cigars and Machine-Rolled Cigars, Smoking Tobacco, primarily driven by pricing. Expected lower sales of accessories to Australia impacted growth negatively for the division.

EBITDA before special items decreased to DKK 235 million with an EBITDA margin of 30.2% compared with 36.6% in the second quarter last year. The development is primarily a result of mix changes, with sales decreasing in high-margin businesses like accessories sold in Australia and fine-cut tobacco in Norway.

For the first 6 months, the margin was 30.7% compared with 33.9% last year. I will now turn the attention to the financial performance in our North America Online & Retail division.

Please turn to Slide #15. Reported net sales for the second quarter decreased by 13% compared with 2024 with an organic net sales growth of minus 10%.

The discontinuation of the ZYN distribution, which was operated by our online business, impacted organic growth by -- negatively by 10% in the quarter, which implies the underlying ongoing business delivered a flat development. Although the number of active consumers continued to decline, net sales were stable compared with the second quarter last year.

An improvement in retention rate is offsetting a declining level [Audio Gap]. Pricing in our online business continued to be more tactical, reflecting the competitive environment.

In the Retail business, organic net sales continued to be enhanced by the opening of new stores within the past year. Same-store sales declined slightly compared to last year.

EBITDA before special items decreased to DKK 96 million with an EBITDA margin of 13.1% compared with 18.1% last year. The declining EBITDA margin reflects the discontinued ZYN distribution business as well as a higher level of promotional activities.

I'll now move on to an update on group financial performance, please turn to Slide #16. Reported net sales for the second quarter were on par with last year.

The inclusion of Mac Baren enhanced growth by 7%, whereas exchange rate developments had a negative impact of 3% and the organic net sales growth was negative by 4%. The discontinued distribution of ZYN impacted organic growth by 3%, and the decline in accessories for Australia impact was minus 1%, implying the underlying like-for-like growth was flat.

From the third quarter, ZYN will no longer impact year-on-year comparisons just as the acquisition of Mac Baren, which was included from July last year. Hence, net sales and margin comparisons to last year will become easier going forward.

In the previous comments, we have shared details about the net sales performance, both by product category and by division. So I will now talk to the development in selected parts of the profit and loss and cash flow statements.

Special cost was DKK 35 million in the quarter, primarily related to the SAP implementation. Special costs for the first 6 months were DKK 105 million, primarily relating to the SAP implementation and the integration of Mac Baren.

Net profit for the second quarter was DKK 227 million with adjusted earnings per share, which excludes special items, of DKK 3.30 per share. For the first 6 months, earnings per share was DKK 4.70.

The free cash flow before acquisitions was positive by DKK 119 million despite a negative impact from a change in working capital, impacting the cash flow negative by DKK 238 million. The development in working capital relates to an increase in inventories and trade receivables, which will be reversed in the second half, supporting our expectation of a free cash flow before acquisitions between DKK 800 million to DKK 1 billion for the full year.

Please turn to Slide #17. The EBITDA margin before special items was 21.1% in the quarter compared to 24.5% in the same quarter of 2024.

For the 6 months, the margin was 18.8%. The decrease in margin in the quarter relates to a combination of product and market mix changes, the discontinued ZYN distribution and continued investments in regaining market shares in Machine-Rolled Cigars in key European markets.

Measured by divisions, the development in the quarter primarily relates to lower margins in Online & Retail as well as in North America Branded & Rest of the World, whereas the margin was almost unchanged in Europe Branded. Now please turn one slide to Slide #18.

During the second quarter, net interest-bearing debt increased by about DKK 0.5 billion to DKK 5.7 billion, primarily due to payment of dividends in April of close to DKK 670 million. As a result, the leverage ratio increased as anticipated during the quarter.

By the end of June, the leverage ratio stood at 2.9x compared to 2.6x by the end of 2024. Based on our cash flow projections for the remainder of 2025, we expect the leverage ratio to decrease during the second half of the year, although it will remain higher than our target of 2.5x.

I will now leave the word back to Niels. Please turn two slides to Slide #20.

Thank you, Marianne. The financial performance during the first half of the year and in July supports the expectations for the full year of 2025, which were communicated in May.

Our base scenario is unchanged, with the consumption of Handmade Cigars continuing to contract and volumes of Machine-Rolled Cigars in Europe decreasing by a low single-digit percentage. There will be variations from quarter-to-quarter.

And at this point, we don't regard the volume improvement experienced in Machine- Rolled Cigars in Europe during the second quarter as sustainable. And we continue to regard the uncertainty as high in relation to U.S.

consumption of Handmade Cigars. We maintain expectations for the full year net sales in the range of DKK 9.1 billion to DKK 9.5 billion.

And based on the current level of the U.S. dollar, it is more likely closer to the lower end of the range.

We expect to deliver positive organic net sales growth in the second half of the year, driven by the opening of 2 retail stores in the U.S., a continued stabilization of our market shares in Machine-Rolled Cigars, a continued double-digit growth of XQS, and pricing will support net sales performance. And please note that ZYN will no longer impact our organic growth performance in the second half of the year as it's done for the past 4 quarters.

The range for the full-year EBITDA margin is maintained in the range of 18% to 22%. A continued recovery of margins in Machine- Rolled Cigars, integration benefits from the Mac Baren acquisition, pricing and cost discipline are expected to enhance the EBITDA margin during the second half of the year compared with the first half.

However, the relatively broad range for the margin is unchanged as we want to maintain flexibility to protect our market shares and develop our business if deemed necessary. Free cash flow expectation is maintained in the range of DKK 800 million to DKK 1 billion.

And the cash flow generation will be stronger in the second half of the year compared with the first half, primarily as a result of the operational performance and as cash tied in inventories and trade receivables will normalize. Uncertainties to our base assumptions for the year remain high.

And as indicated by our sensitivity to currencies, reported net sales and EBITDA before special items are sensitive to the development of the U.S. dollar.

Now this concludes our presentation for today's call, and I'll now hand the word back to the operator, and we're ready to take questions.

Can I start asking about the sales guidance here? As you mentioned -- even the low end of your guidance range requires an organic growth, according to my calculations, at least 1% in H2.

How confident are you that you can reach this if we look at the trend over the last couple of quarters? That's my first question.

Niklas, good to hear from you. Yes, if we look at the second quarter and the sales guidance, you're absolutely right.

We do expect to see growth in the second quarter. If we look at the Online business, we have new stores that opened last year, that will impact the second quarter, and we will also open stores in the second quarter.

So here, we will also see growth. Further, we do not have any impact from ZYN in the second quarter, which will also help our organic growth.

We have also, in the first half year, been impacted, as we've said many times, by the high profitable Australian market due to changes in distribution model there, but we also expect sales to revert in the Australian market in the second quarter. So yes, we do expect to see growth in the second quarter.

It might also be important for me to say, we also wrote it in the report, with the current dollar, we do expect us to be in the lower range of the reported net sales, the lower part of the guidance range.

Very clear. And I guess the same question on margins.

Given a pretty sharp decline here in Q2 with negative mix and investments, any risk that this will continue in H2?

Yes. So on the margin side, we will still be impacted by our growing nicotine pouch business that do have a downward pressure on our margins.

We will also continue in the second half to protect our market shares in key European markets, which will also have an impact on margins. So we expect to see a slight improvement of margins in the second half, but we will not revert to, you can say, pre-COVID levels of margins.

Okay, very clear. And you mentioned here -- on the first question, you mentioned your superstore expansion.

I think you currently have 13 stores. Is that correct?

You didn't open any new stores in Q2. Are you -- how many stores are you expecting to open in H2?

So that's correct. We have 13 stores now, and we expect to open 2 stores in the second half.

Very clear. Can I ask also about the new strategic agenda?

If you could just -- without spoiling too much on your plans here, but given that margins have dropped now by almost 6 percentage points in the last 3.5 years, do you think that this new agenda will maybe be more focused on cost reductions than you've seen in the past? Or do you think growth is going to be a key priority for you going forward?

I totally understand the curiosity, Niklas. I think that we will have to wait until we are ready to announce the new strategy, to be specific.

What I can say in general terms is, of course, when we look at developing strategy, we look at three basic things. We look at how do we drive growth, and this is about looking at our market positions, it's about seeing where we see growth opportunities that we believe we are qualified to approach.

Then it's about driving efficiency across our value chain, which is something we're always occupied with, and that can include a wide range of initiatives. And then it's about making sure we have the organization in place to actually execute.

And those are really the three things that we will talk to when we come back with the 2030 strategy in November.

Excellent. Looking forward to hearing more about that.

And just a final maybe quick question. You mentioned in the presentation or in the results statement, you mentioned a dispute with the Belgian excise authorities.

When was this raised? And have you made any provisions for this?

And can you say anything about kind of the time linehere when we can expect any kind of news on this?

Yes, thanks for the question. So the Belgium authorities have been auditing STG, so we have become aware of this during Q2.

Maybe to put a little words on what it is -- the dispute is about, when we restructured our factories after the acquisition of Agio, we changed some processes with recycling tobacco to being waste processes. And when we had the audit from the authorities, which we have ongoingly, they discovered that some of the waste has not been done under the supervision of authorities, which must happen.

For us, it's extremely important to say that none of these products have ended up in the market without us paying excise, [ has been going to disruption ] as waste. So currently, we are in dialogue with the authorities.

It takes time with such a dialogue but we do expect to be wiser when we come into Q4.

Very clear. And just to be clear, no provisions have been made for the EUR 7 million to EUR 9 million?

That's correct. No provision has been made.

For start, I would like to offer my congratulations to you, Niels. I noted that your team qualified for the UEFA Champions League group stages last night.

So hopefully, you had the opportunity to be there yourself. Now I want to zoom in on the U.S.

market here and dynamics around the U.S. consumers.

It looks like you're able or at least you're willing to pass on price increases in the wholesale division here for [ start ], whereas, as you say, that you remain more tactical in the Retail segment. I guess in my understanding, this means that you're currently absorbing some of these costs yourself from extra costs.

So what are your expectations around the terms of consumer price elasticity once you start passing on price increases here in H2 and going forward? Any sort of comments around the U.S.

segment and trading that would be very helpful.

Yes. Thank you, Sebastian.

Important to acknowledge the good results of SDK, so thank you very much. On the U.S.

area, I can say that we are seeing the industry being quite disciplined with passing price increases on -- to consumers in the form of new price lists. And the tactical aspect of Online is almost a practical thing in the sense that the online channel tend to wait with bringing prices up until they depleted inventory of goods they procured at old prices.

And hence, you get this situation where the relative price advantage of trading in the online channel is higher relative for a period. And currently, we expect those prices to begin to normalize in Q4.

So you can think about it more as a delayed price increase than an actual price increase. We are following consumer reactions to this quite closely.

And we do actually see some signs that consumers are shifting to the online channel because of the slower price increases. But we are also occupied with trying to meet the U.S.

consumer because you can say that now the situation around tariffs is calming down, and we are hoping and monitoring whether consumers actually kind of accept the new normal and -- which also means that some categories will have gone up in price. So I think when we come to the reporting of the third quarter, we will have a better view of exactly how consumers have responded, have they normalized?

Have they shifted between the channels? Because that is, of course, quite important for us when we look ahead and plan for this category.

Sure, sure. And I guess the big question is, I mean, if they cannot shift to a cheaper online channel, whether they are going to leave the category entirely here due to tariffs.

I guess, time will tell. Maybe a second question on Handmade Cigars here.

Could you expand a bit more on the international operations? And you also alluded to in the presentation that especially the Asian volumes have been lagging here for the last few quarters.

Now my impression was that you are sitting on a fairly good opportunity in the international markets to expand on your position there. So what's not working for you guys at the moment?

Yes. So the international markets does represent a nice opportunity for us, and they also have been growing double digit for quite a number of years.

And I don't think we should put too much emphasis on the declines that we've had for the first and the second quarter. Some of it is phasing of inventory.

Some of it is also inventory availability from our side. And you must remember that we are servicing quite a wide number of markets with low volumes.

So it's complicated. And even though we love to sell more internationally, it's actually more important that we service the U.S.

market well. So we still want to grow in international, we still expect to grow in international, but we've had some phasing and shipment issues into the area in the first half of the year.

Yes. Thank you.

And the first question comes from Daniel, and I'm just talking it out here. Just two quick questions from my side.

Regarding the North America Branded & Rest of the World division, can we expect pricing to continue to offset the volume declines in both Handmade Cigars and Machine-Rolled Cigars for the remainder of the year? You can take that as the first one.

Yes. It's a good and relevant question.

And you can say we always aim to take price increases that can offset volume declines, but the price dynamics in the Handmade and Machine-Rolled Cigar markets are quite different in the past years compared to what we've seen historically. So yes, we are taking price increases, but we are also seeing a need to be more promotional to protect market shares.

So if there is a difference between net pricing and actual pricing, and this is, of course, a main focus of ours, is to make sure we don't promote more than what we need to but then also promote exactly what is needed to protect market shares. And that's also one of the reasons why we're keeping the wider EBITDA margin simply to give ourselves flexibility to do that.

And the second part is for Online & Retail. When we now no longer are to include the impact of ZYN, should we be expecting flat to slightly positive organic sales for the remaining quarters in 2025?

And the answer here is yes. As I mentioned before, with retail stores opening and also ZYN not being part of the equation, we will expect to see a slight positive growth in the second half.

And then we jump to a question from Gus and basically asking regarding nicotine pouches. Is there any chance that the ZYN distribution will be coming back in the U.S.

or is this completely finished?

Yes. So our understanding is that Philip Morris have made a decision not to sell ZYN online in the U.S.

And therefore, we do not consider it an option for ZYN to come back in distribution, unless Philip Morris changes their decision. And even if they change that decision, there's no guarantee that they'll come back to us to look for a partnership.

So we essentially consider the business as gone and we focus on developing our existing business.

And then turning to also nicotine pouches but our XQS brands. Is there an update on progress regarding the launch in additional markets, particularly in the U.S., which is now by far the biggest market for these products?

And were there one industry player or [ were there ] one industry player has just announced a pending product launch without a required FDA approval? So that's also maybe a question for you, Niels.

Yes. So I think maybe it's important to clarify that we own the XQS brands globally but not in the U.S.

So we have no plans regarding launching of the XQS brand in the U.S. We are concentrating on Europe, where we see strong success in Sweden and we are trying to roll it out to more European markets.

That's our main focus.

Thank you, and that basically covers the questions from the web.

Okay. Thank you.

Then I think we will conclude. And thank you all for listening in to our webcast, and we look forward to present for the third quarter in November.

Thank you, and goodbye.