Good day and thank you for standing by. Welcome to the Scandinavian Tobacco Group Q1 2024 Results Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Torben Sand. Please go ahead.

Thank you and good morning and welcome to our webcast for the first quarter results for 2024. My name is, as said, Torben Sand and I'm Director of Investor Relations and Group Communications. And I am as usual joined by our CEO, Niels Frederiksen; and CFO, Marianne Rørslev Bock. Please turn to slides, to #3 for the agenda for today's webcast. The agenda is as follows. Highlights of the first quarter followed by an update on our strategy and other key events. This should be followed on an update on the performance in our three commercial divisions and then we'll turn to key financial developments for the group including an update on net debt and leverage. And finally we'll give you an update on our outlook and guidance for 2024. We will conclude the webcast with a Q&A session where we will be more than pleased to take any questions you might have. But before we start I ask you to pay attention to our disclaimer and forward-looking statements at the end of this slide presentation. With this, please turn to Slide #4 and I'll leave the word to Niels.

Thank you, Torben, and welcome and good morning to everyone on the call. The financial performance in the first quarter of the year was weak with net sales being slightly down and the EBITDA margin declining to pre-COVID level. A positive net sales performance by Next Generation Oral and Handmade Cigars could not offset lower volumes in our Machine-rolled Cigar business and profitability was negatively impacted by mixed changes as well as the impact from lower volumes. Part of our strategy is to invest more in our Growth Enablers to secure long-term sustainable growth for Scandinavian Tobacco Group and the investments have started to deliver good results, with our Next Generation Oral portfolio now accounting for about 5% of group net sales and with double-digit net sales growth rates for both our U.S. retail stores and international sales of Handmade Cigars. Combined, the Growth Enablers' share of group net sales increased to 11% in the first quarter. Trends for the product categories, Handmade Cigars, and Smoking Tobacco remain broadly unchanged, whereas first-quarter volume data for Machine-rolled Cigars in Europe was below the structural development. In a moment, I'll give a little more insight into these overall trends, but let me first conclude my introduction by giving you a few key financial highlights for the first quarter. Reported net sales decreased by 0.7% to DKK 1.9 billion, adjusting for acquisitions and exchange rates developments, organic net sales were negative by 2%. The EBITDA margin declined to 17.2% compared to 24.1% in the first quarter last year. Free cash flow before acquisitions was negative by DKK 126 million versus minus DKK 179 million last year, and adjusted earnings per share came in at DKK 1.8 versus DKK 3.2 last year. Marianne will go into more details on the first quarter financial performance later. I will now turn to an update on our strategy, so please turn two slides to Slide #6. Less than two months ago, I gave a detailed update on our strategy, and the conclusion is that we have made significant progress in achieving our ambitions as laid out in the Rolling Towards 2025 strategy, and that STG is today a stronger company, well-positioned for the future. Today, I will supplement it with a few additional updates, and let me start by saying that in March, we announced that we are creating one commercial organization with a stronger focus on our core product categories, namely first, Handmade Cigars; second, Machine-rolled Cigars; and Smoking Tobacco; and finally, Next Generation Oral. In this Slide, we have illustrated the share of group net sales for each of these product categories, including Other which comprises accessories, bar sales in our retail stores, and third-party contract manufacturing. Our Handmade Cigars, which include all markets, both the US and international markets, online and retail sales, increased by 4% organically, driven by international markets and retail. Pricing across all channels was positive, and in total, Handmade Cigars accounted for 37% of group net sales in the first quarter. Machine-rolled Cigars and Smoking Tobacco, which is pipe tobacco and fine-cut, experienced relatively high volume decreases. In a moment, I'll give you more detail to these drivers, but for now, let's say category comprise 46% of group net sales, following a 12% organic decline compared with the first quarter of last year. Next Generation Oral, comprising both our own brands like [strength], XQS, as well as third-party distribution, more than doubled net sales and accounted for about 5% of group net sales in the quarter. We expect this share will increase going forward. Please turn to Slide #7. Here, I want to give you a little more color on our plans to maintain the momentum for our Growth Enablers, which are, again, Next Generation Oral, retail stores in the US, and international sales for Handmade Cigars. Since we acquired the nicotine pouch brand XQS in May last year, the sales performance has consistently exceeded our expectations. By rolling out the brand through our existing distribution network in Sweden, we increased the number of selling points considerably, and through a dedicated strategy of launching new products to the market, the brand has almost doubled its market share and most recently reached more than 7% of the Swedish nicotine pouch market. Our strategy, as we've expressed before, is to launch XQS in more new markets in 2024, and two days ago, on May 1st, we launched the product in the UK market. During 2023, we opened two new retail stores in Texas, bringing the total to nine by the end of 2023. This year, we plan to open three more stores, which will add new opportunities for us to continue growing our retail sales in the US in the years to come. We continue to investigate and search for new locations where the superstore format can apply. However, it is not only new store sales that deliver growth for our retail business. During the first quarter, same-store sales, i.e. stores that have been open for more than 12 months, delivered a 4% increase in net sales compared with the first quarter of last year. And finally, our international sales of handmade cigars outside the US continue to deliver good growth, although with variations from market-to-market. We are convinced that we can improve our market share outside the US from the current estimated about 5% market share. The opening of Club Macanudo concept stores, most recently in Jakarta, Indonesia, and Taipei, Taiwan, is one piece in the puzzle to increase the awareness and positioning of our international handmade cigar brands. Please turn to Slide #8. During the first quarter, our machine-rolled cigar business in Europe did not deliver as expected with a double-digit decrease in organic net sales despite sound price increases. The business has our very close attention and we are committed to reverse the trend during the rest of the year and in 2025. Firstly, the total market volume in our seven core markets declined more than in previous quarters. Our preliminary data suggests that the decline rate was 5.1% with the highest decline rates in markets like France, UK, and Belgium. The structural decline rate has been closer to 3%, minus 3% for the past many years. At this point, we maintain the assumption that the total market decline will be close to the structural average also in 2024. And as the chart illustrates, there have been substantial variations from quarter-to-quarter in the past two years. From the first quarter of 2022 and until now, the decline rate has been in the range from minus 1.6% to minus 5.1%. One reason for these variations is that the data partly consists of sell-in data to the trade, for instance, in France and Spain, and this implies that inventory changes in the trade might impact the data and might deviate from actual consumer trends. That is why it is important to look at the trend data and not only at the individual data points. Irrespective, there is no doubt that we are continuing to lose market share and something else needs to happen. This will include further investigations into whether our pricing strategy is appropriate given how competitors are pricing, and not unsimilar to what we did in our U.S. online business in 2023 and where we can today see a more positive development. With this, I will now turn to a brief update of the performance by division. Please turn to slides ahead to Slide #10. I will start with Europe Branded. Reported net sales for the first quarter decreased by 4% to DKK 617 million with organic net sales decreasing 8%. Acquisitions impacted reported net sales by 4%. The main driver behind the negative organic growth is lower volumes in machine-rolled cigars driven by key markets like France, Belgium, and the U.K. Next Generation Oral and handmade cigars deliver double-digit net sales growth, and pricing remained a key contributor to upset volume declines in all core categories, but pricing cannot offset the level of volume decline we saw in Q1. EBITDA before special items decreased by DKK 61 million to DKK 85 million with an EBITDA margin of 13.8%, versus 22.8% in the same quarter last year. The margin development is primarily driven by the scale impact of lower volumes, mix changes, and to a lesser extent, the increased investments in supporting long-term growth for both Next Generation Oral and machine-rolled cigars. With this, please turn to Slide #11. In the quarter, North America Branded & Rest of the World reported net sales decreased by 5% to DKK 681 million, and organic net sales were negative by 6%. The main drivers behind the organic development were a temporary volume impact in machine-rolled cigars in Canada, following the implementation of plain packaging regulation in the market, as well as a decrease in smoking tobacco. We expect this trend to reverse in Q2. Handmade cigars in the U.S. continue to experience mid-single-digit volume declines, but this was mostly offset by price increases and international sales of handmade cigars increased as well, as previously mentioned. EBITDA before special items decreased by DKK 64 million to DKK 212 million with an EBITDA margin of 31.2% versus 38.3% in the first quarter last year. The margin was negatively impacted by mix changes like the net sales decrease in Canada and also a weak quarter for our main business. Expect to see an improvement in the margin in Q2 as business mix normalizes. I will now turn the attention to the performance of our North America Online & Retail division. Please turn to Slide #12. Reported net sales for the first quarter increased by 8% to DKK 650 million with organic net sales growth of 9%. The positive development in organic net sales continues to be driven by new store openings in the retail business, a 4% increase in same-store sales, as well as an increase in third-party distribution of Next Generation Oral products. Online net sales of handmade cigars were positive, driven by a stabilization in volume sold and a positive price mix impact. EBITDA before special items decreased slightly to DKK 81 million with EBITDA margin decreasing to 12.5% from 13.9% in the first quarter last year and the decrease is driven by mix changes and some timing effect of OpEx. I will now hand over the word to Marianne. Please turn three slides to Slide #14. Marianne Rørslev Bock: Thank you, Niels. Before moving into the details of the quarter, please let me once again mention the long-term perspective of the financial performance given the high volatility we can experience from quarter-to-quarter. In this slide, we have outlined the development of EBITDA margins in the first quarter over the past seven years since 2018. In the appendix, we have included the full year's trends. These long-term trends give a good insight into the underlying performance as well as the progress in our strategic and financial ambitions. Overall, the first quarter 2024 margin performance for the group and in the three commercial divisions are more or less in line with the first quarter of 2020, but remain well above the level in 2018. The first quarter this year has, as we already have been mentioning, been impacted by mix changes and unusually low volumes in our machine-rolled cigar business. With the expectation of an improvement in both mix and production volumes in the second quarter and onwards, we remain confident of a stronger EBITDA margin in the second quarter of the year and that we will deliver on our expectation for a 22% to 24% EBITDA margin for the full year. Please turn to Slide 15. We've already talked to the development in net sales and EBITDA margins for the first quarter, but let me add a few more comments to these. Reported net sales decreased by 0.7% to DKK 1.9 billion. The effect from exchange rate development, primarily the US dollar, was negative by 1%, whereas the positive impact from acquisitions, primarily Alec Bradley and XQS, was 2% or DKK 39 million. In total, this resulted in an organic net sales development of minus 2%. The EBITDA margin declined from 24.1% to 17.2%. The impact from lower volumes will always be stronger in a small quarter, like the first quarter of the year, due to the fixed cost base, and as volume in our machine-rolled cigar declines more than normal, the margin impact has been severe. Furthermore, the impact from business mix changes, like lower net sales in high-margin markets like Canada, and strong net sales growth in new categories like NGOs with lower margins, all added to the margin decline. We expect the year-on-year comparisons to improve in the coming quarters with a more normal business mix. The special costs in total of DKK 30 million relate to the ERP implementation called OneProcess, as well as the implementation of the new Commercial Organisation. All-in-all, the net profit for the quarter was DKK 125 million compared to DKK 260 million in the first quarter of last year. The adjusted earnings per share was DKK 1.8 versus DKK 3.2 in the first quarter of 2023. The free cash flow before acquisitions was minus DKK 126 million compared with minus DKK 179 million last year. The development was impacted by the operational performance as well as changes in working capital. In the first quarter, these changes were negative by DKK 252 million driven by primarily trade expense. The free cash flow before acquisitions are usually negative during the first quarter of the financial year before turning positive in the second quarter and onwards. With this, now please turn to Slide #16. Before moving to the outlook and guidance, I'll give you a brief update on our net debt and leverage position and the status on the current share buyback program, which was initiated in November last year. During the first quarter, the net interest-bearing debt increased by DKK 4.4 billion to slightly below DKK 4.5 billion by the end of the quarter as a result of primarily changes in working capital and capital allocations. In the quarter, we have repurchased 1.3 billion shares at a total value of DKK 164 million. By the end of March, our holding of treasury shares was 2.8% of the outstanding share capital and by the end of last week, the holding has increased to 3.7%. At the Annual General Meeting in April, it was approved to cancel 1 million shares, implying that when fully implemented later in May, the outstanding number of shares will be 86 million. The leverage ratio increased to 2.3 times. It was 1.9 times at the end of 2023. We expect the leveraged ratio to be about 2.2 times by the end of 2024. Please turn to Slide #18. Before moving to the expectations for the financial year 2024, I would like to repeat a few of the insights for the longer-term outlook for the Scandinavian Tobacco Group. In the coming years, we expect our core categories, Cigars and Smoking tobacco, to deliver flat to low single-digit annual net sales growth, while the Growth Enablers are expected to deliver double-digit annual net sales growth. Near-term, the financial results, and especially EBITDA margins, will be impacted by our increasing investments in Growth Enablers, but these are important to support our ability to deliver stronger and sustainable financial performance over time. The adverse impact on the group EBITDA margin from the current level of investments in the Growth Enablers is temporary, and we still expect margins to revert towards 24% by the end of the strategy period, so by the end of 2025. Beyond the strategy, Rolling Towards 2025, we expect to continue to deliver annual top-line growth, led by our investments in the Growth Enablers, and with the like-for-like margin enhancements driven by the Growth Enablers, as well as continuous cost efficiencies. We expect to update the market on our strategy plan Beyond Rolling Towards 2025 in the first half of 2025. The largest uncertainties to deliver on our financial ambitions are major changes in the consumer trends and regulations, including acceleration of volume decline rates in our core categories, as well as the financial performance for our NGO portfolio. With this, now please turn to Slide #19. I will now give you more details on the full year outlook, which is unchanged compared to the outlook we released in March. 2024 may be another year with consumption of our core products, cigars and smoking tobacco, declining more than the historical structural decline rates. The market for handmade cigars has not yet fully stabilized, although we have seen slight improvement in recent months. We expect price increases on our products, continued growth in our online and retail distribution channels, as well as in our international markets, to more than offset the decrease in consumption. We expect organic net sales of handmade cigars to increase compared to last year. We assume that the consumption of machine-rolled cigars and smoking tobacco in our European markets would develop close to their structural decline rate. However, the development during the first quarter of the year might be an early indicator. This could be too optimistic. As said, the first quarter is a small quarter and volume developments has been volatile from quarter-to-quarter in the past, but we will monitor development closely to act if required. Net sales from our NGO portfolio are expected to increase by more than 50% driven by market share expansion and roll out to new markets. Based on the expectations for our different product categories, group reported net sales are expected in the range of DKK 8.8 billion to DKK 9.1 billion. The EBITDA margin before special items is expected in the range of 22% to 24%. The margin is being impacted by increased investments in our Growth Enablers, cost-insulation and mix changes. These impacts will only be partly offset by price increases and continued cost optimization. The largest uncertainties for net sales and EBITDA margin remain changes in consumer behavior and end market and product mix. Free cash flow is expected in the range of DKK 800 million to DKK 1 billion and will be impacted by special investments of up to DKK 300 million. These special investments include the retail expansion in the US, track and trace implementation in the EU and the continued roll out of our SAP solution. Working capital is expected to deliver a negative contribution primarily relating to the expected increase in net sales, higher cost prices and the expansion into new product groups. Adjusted EPS is expected in the range of DKK 12.5 to DKK 14.5 including an estimated impact from the current repurchase program of DKK 0.5. As always, the expectations are based on current exchange rates. This concludes our presentation for today's call. I will now hand the word back to the operator and take any questions you may have. Thank you.

Thank you. [Operator Instructions] Our first question comes from the line of Niklas Ekman of Carnegie. Please go ahead, your line is open.

Thank you. Yes, the first question on the European machine-made cigars. Can you tell us a little bit here, this is a business that has been in a decline for quite a few years now and I think you have done many efforts in the past to reverse this. Can you elaborate a little bit on what you see as the core problem and what makes it different this time? Why will the efforts that you're launching now be sufficient to reverse that trend? That's my first question.

Yeah, sorry, we just have to repeat, it was on mute. So --

Okay, sorry. Thank you, Niklas. So, and it is true that machine-made cigars have been in decline for a while and I think that if we think back a few years, we had the supply issues and then we solved those and we came back in the Q2 last year and realized that as we were fixing distribution and visibilities in the stores, it still did not really help the market share turnaround. Then we have made various efforts in the course of 2023 and we saw in the fourth quarter finally an uptick in market share. But as we can see in Q1 here that market share was not sustainable and it was replaced by another decline. So the efforts we have made have clearly not been enough and the analysis we've done is concluding that we have been too aggressive on some of our price increases and we need to take selected products down in price to be protecting volumes more. So these are the next steps we are looking at is primarily within the relative pricing of our brands versus competition and you can say that we have been surprised not to see competition raising prices and now we are taking the conclusion that we need to take a step back and get a better balance between pricing and volume. This is not unlike what we saw in the online business 12 months ago and there you can say that the initiatives we have done has worked, so we are also hoping that that avenue will work for our machine-rolled cigars. It's certainly one of our highest priorities for 2024.

Thank you, that's very clear. And on the same topic I guess or related, your margins, they rose from some 20% in the quarters before COVID to 27% at most and now you are back to 22.5%, if you look on a rolling 12 month basis. And you mentioned here that 2024 is a year of investment and you expect margins to bounce back in 2025. How sure are you that that will be the run rate margin? Why wouldn't it be to go back to the margins where you were before COVID? What's different now compared to pre-COVID? Marianne Rørslev Bock: So thanks Niklas, and let me try to answer that question. So you are absolutely right that during COVID our margins increased. First of all, pricing was a significant effect in those years but also volumes especially from our online business. When we look forward, there are several things that would imply that our margins would go up. First of all, the situation in general with cigars that Niels just talked about, we need to stabilize that and we need to regain our market shares. On the handmade part, we have our Growth Enablers. We are expecting to grow in the handmade part of the business which will improve our margins as we will add more volumes to our production network. And then, ongoingly, we are of course always looking at optimization. We are looking at optimization in our full network of production of around 5% to 6% annually which is how you would normally also optimize as an industrial company. So we are targeting to revert end of 2025 to EBITDA margins of the 24%, as we have said, which of course also needs to come from improved gross margins.

Very clear, thank you. And also, could you just clarify because you are talking on the one hand, you are saying that you are confident that you are going to see a stronger development from Q2 and on the other hand, you acknowledge that the problems in Europe, it might be an early indicator that you might have been too optimistic. So just trying to merge those two comments into what we should expect and particularly regarding the outlook for 2024. Are we looking at a clear risk that you are going to end up in the lower end of the guidance range or how confident are you at this point that you can actually stabilize operations and come closer to at least the middle of the guidance range?

Well let me start by saying that there is no doubt that with this quarter being weaker, also weaker than we anticipated and with the problems in Europe, we have of course taken a very close look at our year to go expectations and it is based on that assessment or that analysis that we are maintaining our guidance. So it's not up for us to speculate where in the guidance range we are, but we are certainly confident that we will be in the guidance.

Okay, super. Fair enough. And then thank you for taking my questions.

Thank you. We will now take our next question, please stand by. Our next question comes from the line of Sebastian Grave of Nordea. Please go ahead, your line is open.

Hi, Niels, Marianne and Torben. Thanks for the presentation and thank you for taking my questions as well. So first one here, I know that you started to report explicit on what you call Next Generation Oral, which previously was part of the next generation product portfolio. So is it fair to read this as a signal to the market that you are now committed to oral pouch category going forward? And does it also mean that you are leaving out other categories or how should we think of these next generation products going forward?

Thank you for the question, Sebastian. I think that we have as part of the reorganization established Next Generation Oral as part of our regular organization and in the past it has been sitting in what we call our growth incubator. And I think you can interpret the name Next Generation Oral is that our focus right now is on the white nicotine pouches and on the caffeine enriched non-nicotine white pouches. So that's where we are focusing. I think we are acknowledging that we are up against large competitors in these areas and that we need to focus and do well with what we have in the market. So this is what we are concentrating on and this is where we have been starting with a focus on Sweden and we are now expanding to the UK.

Okay, thank you. I appreciate it and also I appreciate the new reporting structure here.

And I just wanted also, adding some aspect, and I was just think it may be fair to add that -- I think it's important to remember that although we have made this change, it's still early days for us. This is not a significant part of our business today but it is something which we believe can play a role in the future and that's why we are focusing on it as well.

That makes perfect sense to me. Thank you, Niels. Next final question and I know you touched a bit upon it already but it's around the guidance. And I recognize that Q1 is a seasonally small quarter and obviously lumpiness in orders therefore have a severe impact on profitability. However, it's hard to ignore the fact that this was a soft start to the year which obviously sets the bar high for the coming quarters. So something likely within your reach but I guess is it fair to say that you also rely on a little of, you can call it market tailwinds or am I wrong here? And maybe could you expand again on your visibility going forward, what you expect exactly to play out here over the coming quarters which gives you confidence in the guidance? Marianne Rørslev Bock: Yes, Sebastian, let me answer that question and then I can also come back to Niklas' question which I don't think we answered on the Q2 performance. But there's no doubt that this has been a weak and also disappointing Q1 and the main reasons for maintaining our guidance is that if we take them by category, if we take them by division, if we take the online division, they are performing really well. They are growing. We see a significant growth also in new products and we see the growth in the retail expansion. So we do expect them to continue their growth during the year and that will also help margins. If you go to North America Brand & Rest of the World, they have in the first quarter been impacted by low volumes in high margin countries like both US and Canada. Canada is a timing issue simply because of the plain packaging regulation being implemented in Canada and we expect that to fully revert and with the high margins there that would again impact the remaining year. Also, on the US handmade cigars, we are seeing some stabilization in the market trends here. It is still an uncertainty and that is where the visibility kind of is a little dizzy when we look into the rest of the year. If you look at Europe Branded, no doubt that we need to revert the market share development in Europe Branded. The market development, as Niels also alluded to in his speech, was a minus 5% decline in the first quarter. It is a very high decline compared to what we have seen, so we do expect that these will improve during the year, but that is also one of the largest uncertainties. I hope that gave some clarification.

That was very helpful. Thank you so much, Marianne. That was all for me.

Thank you. [Operator Instructions] Please standby.

Meanwhile, I can take one question from the web and that is basically also relating to the performance of our machine-rolled cigar business in Europe. So, basically, the question is whether we think the volume declines are exclusively linked to the price positioning of our brands or is there something else impacting results? To that, can you clarify whether we have already taken price actions in the UK, France and Belgium to address competitive issues? That’s the first question.

Yes. So thank you for the question. The volume declines in Europe are not exclusively linked to relative pricing. I think we’ve explained in the past that STG has a relatively stronger market position in the segments that are declining the most. So we have a structural challenge in our machine-rolled cigar business. We are gaining market share in some of the segments that are growing but it is still not material in the overall context. We also have an element of market mix where some of our really strong markets like France and the UK are seeing a relatively higher market decline. So these are all three things contributing to our challenges in the European machine-rolled cigar business. Now, have we already taken price actions? Yes, we have taken price actions in certain markets but we have tried to be selective about it in the sense that we understand that pricing is also one of the areas which is the most expensive to touch. And what we are saying now is that we will probably need to take more initiatives on pricing and we are looking at that at the moment.

And thank you, Niels. And then there is a question on the EBITDA margin contribution from this Next Generation Oral products, how that is playing out? Marianne Rørslev Bock: Thank you. The question also is related to Europe. I would say the EBITDA contribution in Q1 is about zero for this category and if we look for the remaining year, we do expect the contribution to be negative because we are going into the UK market and we are investing also with additional sales force. So that is part of our clarification on this category. How we should compete and where we can compete, we will invest and then over the next 18 months to 24 months, we need to establish where we believe we can be competitive in the longer run.

And I hope that addresses the questions from the web for now. So, back to the operator.

Thank you. There are no further questions via the phone. Speakers, please continue.

Okay, but then I think we will conclude the webcast for now and thank you for listening in everybody and have a continued good day. Thank you.

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