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Edited Transcript of STG.CO earnings conference call or presentation 29-Aug-19 8:00am GMT

Q2 2019 Scandinavian Tobacco Group A/S Earnings Call

Soborg Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Scandinavian Tobacco Group A/S earnings conference call or presentation Thursday, August 29, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Marianne Rørslev Bock

Scandinavian Tobacco Group A/S - Executive VP & CFO

* Niels Frederiksen

Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board

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Conference Call Participants

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* Karri Rinta

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Niklas Ekman

Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst

* Søren Samsøe

SEB, Research Division - Country Head of Denmark and Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to today's second quarter 2019 conference call. (Operator Instructions) I must advise you that this conference is being recorded today on the 29th of August 2019.

I would now like to hand the conference over to your speaker today, Niels Frederiksen. Please go ahead, sir.

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Niels Frederiksen, Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board [2]

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Thank you, and good morning, and welcome to Scandinavian Tobacco Group's Second Quarter 2019 Webcast Conference Call. With me, I have CFO, Marianne Rørslev Bock; and our Head of Investor Relations, Torben Sand.

Please turn to Slide #2. The agenda for this conference call covers key highlights for the second quarter including an update on Fuelling the Growth, an update on regulatory changes and trends, an update on the performance in our 4 divisions with key financial developments, and before concluding the call, with a Q&A session. But before I start, I will just ask you to have attention to our disclaimer on forward-looking statements. The complete disclaimer can be found in the Appendix.

Please turn to Slide #3. Let me start by summarizing the key highlights for the second quarter of 2019. The group delivered an organic growth in EBITDA of 5.5% in the second quarter and an increase in the free cash flow, both supporting our guidance for the full year. Our U.S. online business delivered positive organic growth in net sales and good margin improvements, with the Thompson integration approaching its completion. We see good traction in our recovery plan for France and we have made good progress in executing on Fuelling the Growth, further supporting improved profitability across the group. And finally, in line with our strategy, we continue to expand our business by selected investments. In the quarter, we have acquired certain trademarks within our pipe tobacco business and we've also made progress in our retail expansion in the U.S. I'll give more details about those later in the presentation.

With this brief introduction, now please turn to Slide #4. On this slide, you can see our financial achievements during the second quarter of 2019. In the quarter, organic net sales was negative by 0.9% driven by negative organic growth in the divisions North America Branded, Region Machine-Made Cigars and Region Smoking Tobacco. For half the year -- for the half year, the organic growth is negative by 1.2%. Organic growth in EBITDA was positive by 5.5% for the second quarter and by 6.2% for the half year and reflects improved operational performance and progress made in Fuelling the Growth. We believe that 6.2% growth in the first 6 months of 2019 makes good support to our full year expectation of more than 5% organic growth in EBITDA despite an organic growth in net sales that currently is lower than our original expectation for the year.

The free cash flow before acquisitions was positive by DKK 243 million in the second quarter and by DKK 360 million (sic) [DKK 316 million] for the first 6 months supporting our expectation to deliver more than DKK 750 million in free cash flow before acquisitions for the full year.

Now please turn to Slide #5. Let me now turn to an update on the progress of Fuelling the Growth and our expectation of delivering net savings from the program of about DKK 250 million by the end of 2021. Last quarter, I addressed the progress in our organizational work stream and the change we have made in relation to our 4 new commercial divisions. In relation to the commercial work stream, I can add that in the second quarter, the market share index in our top 5 European machine-made cigars -- European machine-made markets was slightly down versus the first quarter of 2019, whereas the amount of active customers in our U.S. online business were about unchanged compared to the previous quarter.

The second quarter development in the machine-made cigar market share index is impacted by a lower sell-in share to the trade in France. More importantly, however, we see an improving sellout share to the customers, so we believe this small decline in the market share index is temporary. The stagnation in the amount of active customers in our U.S. online business was expected due to the Thompson integration. And combined, we believe we are progressing well on these key performance indicators for our commercial initiative.

The 3 other projects for global logistics, operational cost efficiency and global procurement, which are all long-term enablers to the success of Fuelling the Growth, they have all been activated by now. At this stage, the procurement team have already reviewed and renegotiated a large amount of supplier contracts in categories spanning the entire value chain. Such renegotiations and savings include, but are not limited to, professional services, IT and telecom contracts, travels and facilities. Core business contracts are also being reviewed and renegotiated, including third-party manufacturing. The expected impact from the procurement work stream will materialize later this year and in the years to come. All in all, I remain pleased with the progress we have made so far in Fuelling the Growth, and we are on track to deliver the planned net savings for 2019.

So please turn to Slide #6. Regulation has been and always will be part of the tobacco industry. It can be difficult to assess the exact implications on market dynamics and the potential financial impact, especially for legislation that is not even put into effect yet. But let me try to give you a short update on some of the regulatory trends that we are currently facing in order to create an overview. Firstly, in the U.S., the FDA has the so-called regulatory's -- regulatory responsibility for tobacco products, the implementation of the so-called Deeming Regulation that was introduced in 2016 for cigars and pipe tobacco is progressing more or less as intended, although some of the original deadlines have been postponed to 2021.

Earlier this year, a ruling in the District Court in Maryland increased the likelihood that the deadline for submitting substantial equivalent applications will be moved 1 year forward to 2020. Whether the deadline for applications actually will be enforced next year remains uncertain and is being legally challenged, but nevertheless, we believe we are well prepared to comply and to deliver the necessary applications in time. One of the main challenges is the fact that FDA has not yet published the detailed application requirements.

Outside the scope of Deeming Regulation, FDA has announced several other initiatives which have increased the uncertainty for the tobacco sector, especially a potential ban on characterizing flavors in most tobacco products as well as a reduction of nicotine to nonaddictive levels in cigarettes should be mentioned. Our exposure to flavorized tobacco products in the U.S. is limited with nonflavorized products constituting by far the majority of net sales and profits. At this point, the potential reduction of nicotine for cigarettes will obviously not impact our business. So all in all, we currently see limited potential financial impact for our group from these FDA initiatives.

Following the Wayfair ruling, we have seen a gradual introduction of Internet sales taxes from October last year, and this has, as previously discussed, had a short-term impact on the market dynamics. In continuation hereof, we do see a few states trying to also collect state excise tax in a similar way. Whether they will succeed with this remains too early to say, but if successful, this will lead to a lower price advantage for online versus regular retail for those states that have a high state excise tax.

Meanwhile, EU member states continue to implement key aspects of the tobacco products directive, which was last updated and adopted in 2014 and entered into force in 2016. This includes the introduction of track and trace for tobacco products and track and trace for factory-made cigarettes, and fine-cut tobacco went live already in May this year. The EU track and trace for cigars and pipe tobacco will not happen until 2024. We are well prepared for track and trace and we are -- and we have been able to implement track and trace for fine-cut without any disruptions to our operations. The tobacco product directive is expected to be reviewed again beginning sometime in 2021, but the exact timing is not set. Other tobacco-related directives are also periodically updated, and industry is currently focused on the upcoming update to the tobacco excise directive, which sets the definition and rate for how tobacco is taxed in Europe. Initial EU work on this excise directive revision has already begun, but we expect most of the real work to take place in 2020 with adaptation potentially sometime in 2021, but again, the timing is not exact. We also, of course, carefully monitor excise changes in individual member states. And here, the largest issue remain increase -- remains increases currently being implemented in France. After the dramatic impact on market dynamics last year, the increases this year have had far less impact on consumer behavior. And with our strategic shift in the market, we believe we are far better positioned in France today when compared to last year.

So please turn to Slide #7, where we will give some divisional insight. For the division, North America Online & Retail, the highlights for the second quarter include a continued positive organic growth in net sales in the quarter, up by 1.6% and a continued expansion of the EBITDA margin. As we now have reached the point where we approach the completion of the Thompson integration, we will be going forward no long -- we will, going forward, no longer give specific details about the development in net sales by Thompson versus Cigars International simply as it becomes more and more difficult to separate the businesses from each other. One of the key performance indicators for Fuelling the Growth is to improve customer service. One indicator to evaluate the progress is to look at the amount of active customers, as I mentioned in my introduction. For the combined online business, we have seen a slight negative growth in the second quarter compared to the same quarter last year, but an unchanged level compared to the first quarter of 2019. It has been and still is the anticipation that the amount of active customers would slow down as the final steps of the Thompson integration approaches. So this stagnation is as expected.

The second quarter is the first quarter where reported growth numbers for the division are not distorted by the Thompson acquisition. The integration remains on track, and with the recent transfer of Thompson's IT platforms being finalized, the integration of Thompson Cigar follows the previously communicated time line.

The Super-Store in the Colony, Texas show good results with high customer activity, and the initial performance gives support to our ambition to expanding our retail footprint. The opening date of the second store in Texas has been postponed and is now expected during the first half of 2020. The planning for the opening of 2 additional stores in Florida approaches -- are progressing with the first opening expected to take place by the mid of 2020 and the second to open during the third quarter of 2020.

Now please turn to Slide #8. The North America Branded business had another quarterly -- had another quarter of relatively high negative organic growth in net sales. In the second quarter, the divisional organic decline in net sales was 4.2%, whereas the decline for the product category handmade cigars was 9.7%. The previous negative impact from machine-made cigars in Canada has reversed and now contributes with positive organic net sales growth. The decline in handmade cigars is driven by what we believe are temporary issues like poor weather conditions and inventory rebalancing in the online distribution channel. The market has also been somewhat impacted by the dynamics following the introduction of Internet sales taxes and has been soft. We believe though we have maintained market share, and we still expect the overall handmade category to deliver positive organic value growth over time. But based on the development in the first 6 months of this year and the limited signs of immediate recovery, there is an increasing likelihood that 2019 will be an exception to the long-term structural growth trend for this category. The gross margin declined with a weak volume development and a negative price/mix, and the EBITDA margin was also declining when excluding the impact from the IFRS 16 accounting change.

Please turn to Slide #9. Although the division continues to deliver negative organic growth in net sales, the signs of improvement, I have mentioned earlier, continue. The overall organic growth was negative by 1.4% in the second quarter primarily driven by a 3.7% decline in machine-made cigars. This decline rate was higher than in the first quarter and is explained by what we see as a temporary market share decline for our top 5 European markets. As usual, we've included our market share index in the Appendix to this presentation. The main reason for the lower market share versus Q1 is, as mentioned before, France. There's been a number of new launches by competitors in the premium little cigars segment with a temporary pipeline effect which has led -- which has had a negative impact on our sell-in share. The market share calculation in France is based on our share to the trade, not to the consumers. Measured by consumer data, the trend in France have improved since the launch of Fueling the Growth in October last year, and we improve our performance quarter-by-quarter. The EBITDA margin for the division have improved in the second quarter and for the first 6 months. Despite a declining gross margin in the second quarter primarily driven by geographical mix changes, the EBITDA margin improved by more than 1 percentage point even when taking the change in the accounting principles into account. The underlying improvement is explained by the progress of Fuelling the Growth.

Please turn to Slide #10. For the second quarter of 2019, the Region Smoking Tobacco & Accessories delivered slightly negative organic growth of 1.6%, but an expansion of the gross margin. Germany continued to do well just as Middle East and Africa also had another positive quarter, but the divisional result was impacted by timing of shipments and an expected negative impact of the excise increase on fine-cut in Israel. The EBITDA margin, excluding the impact of changes in accounting principles was positive by more than 1 percentage point and was driven by a positive price/mix impact leading to an improved gross margin as well as an improved OpEx ratio as the implementation of Fueling the Growth initiatives have started to kick in. By the end of the second quarter, we acquired certain pipe tobacco designs from Dunhill, a subsidiary of British American Tobacco. The designs include Early Morning Pipe, Nightcap and others, that was previously sold under the Dunhill brand. The financial impact of the transaction is immaterial, but it strengthens our product range in the premium pipe tobacco segment in the markets like the U.S. and Germany.

With this, I will leave the word to Marianne. Please turn to Slide #11.

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Marianne Rørslev Bock, Scandinavian Tobacco Group A/S - Executive VP & CFO [3]

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Thank you, Niels. In the first quarter of 2019, we delivered, as already mentioned, a negative organic growth in net sales of 0.9% with a positive organic growth in EBITDA of 5.5%. For the 6-months period, organic growth in net sales was negative by 1.2% and organic growth in EBITDA was positive by 6.2%. For the quarter, net sales was DKK 1.8 billion, an increase of 2% compared to the second quarter of 2018. Thompson was acquired by the beginning of the second quarter last year, so the difference between the reported net sales growth and organic net sales growth is purely relating to exchange rate development, which has a positive impact of DKK 55 million. For the 6 months period, exchange rate impacted positively by DKK 118 million and acquisitions by another DKK 137 million.

The organic development in net sales was driven by a positive contribution from North America Online & Retail, whereas our 3 other divisions all delivered negative organic growth in net sales for the quarter and for the 6-month period. Gross profit before special items increased by 2% to DKK 873 million driven by DKK 18 million from exchange rate development. The gross margin before special items increased slightly to 48% from 47.9%. For the 6 months, the gross margin declined from 47.8% to 47.5% due to the lower margin in Thompson Cigar.

EBITDA before special items increased by 15% driven by 2% increase in gross profit and a 6% decrease in operating expenses. The decrease in operating expenses is primarily driven by the profits made in Fuelling the Growth and the impact of IFRS 16. The same explanations describe the 17% decrease in EBITDA for the 6-month period. Net profit was unchanged at DKK 205 million for the quarter but was up by 1% for the 6-month period. The free cash flow before acquisitions was DKK 243 million versus DKK 213 million in the second quarter of 2018 and was driven by operational performance as well as working capital improvement versus last year and despite an increase in outflow from taxes, special cost and financial items. More details can be found in the cash flow chart in the Appendix.

In conclusion, we've had a good first half year of the year, supporting our expectations to the deliver a free cash flow of more than DKK 750 million for the full year.

Please turn to Slide 12. On this slide, I will give a short update on the net debt and our leverage ratio. By the end of the second quarter in 2019, the net interest-bearing debt was DKK 3.184 billion, an increase of almost DKK 600 million versus the end of 2018. The increase is driven by the balance sheet implication of the implementation of IFRS 16 and dividends paid out in April. The adjustment to the net interest-bearing debt due to IFRS accounting change was DKK 215 million. The leverage ratio defined as the net interest-bearing debt over 12 months rolling EBITDA before special items was 2.3x at the end of the second quarter 2019 compared with our target ratio of 2.5x.

Please turn to Slide #13. The guidance for 2019 is unchanged with an organic growth of more than 5% in EBITDA and a free cash flow before potential acquisitions of more than DKK 750 million. The main uncertainties to our 2019 guidance relates to the top line development and specifically to the total market development in France and the total cigar market in the U.S. We believe we are well on track with our efficiency improvement to deliver our expected net savings for the year.

With this, I will leave the word back to the operator, and we are now ready to take any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Søren Samsøe from SEB.

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Søren Samsøe, SEB, Research Division - Country Head of Denmark and Analyst [2]

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It's Søren Samsøe from SEB. I'm sorry, I came a bit late into the call so you may have already talked about this, but I was just wondering, I can see that the -- some of the changes to regulation in the U.S. or at least the change proposals and the moving forward of the deadline has impacted the tobacco industry share price quite negatively. I was just wondering if you could maybe highlight a bit more how much of this is really relating to your core businesses in the U.S.

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Niels Frederiksen, Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board [3]

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I think that the 2 points that we mention here is the characterizing flavor and the -- there's a nicotine reduction in cigarettes related -- going through what we call nonaddictive levels. These are the 2 major initiatives of the FDA Commissioner. And as we said before, the cigarette part is not relevant for us, but of course is a big thing for the cigarette companies, and the second thing with the characterizing flavor's also not material for us in the context of the overall group. So these 2 initiatives would have driven some unrest across tobacco companies is actually less relevant for us. I don't know if that answers your questions, Søren.

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Søren Samsøe, SEB, Research Division - Country Head of Denmark and Analyst [4]

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It does. It does. And regarding -- and yes, it's of course quite difficult to answer for you, but let's say that FDA becomes sort of more hard in terms of how they value the application for the grandfather products. Is that something that is a concern for you? And are you prepared if we should change in how the FDA -- yes...

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Niels Frederiksen, Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board [5]

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Yes. I think -- I understand your question and I think the starting point is, which we have mentioned before also is that the more restricted the regulation, the more it actually benefits the larger players in the market because it requires skills to comply with FDA that not every handmade cigar manufacturer has. We have them already in place because we've been complying with FDA since 2011 when we bought the Lane business in the fine-cut area, and we are preparing to make sure that we can meet the various deadlines. But what we also have discussed before is that FDA has mostly been characterized by not meeting any of the deadlines. And as we mentioned here, for example, we now have a deadline to submit applications, but we don't have a description of what we are expected to include in these applications. So it is unfortunately an area where we can say that we are preparing ourselves and we believe we are well prepared, but we actually do not yet have clarity on what we need to eventually submit.

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Søren Samsøe, SEB, Research Division - Country Head of Denmark and Analyst [6]

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Okay. That's clear. And then on the development in the sort of more southern European markets or some of your key markets, where you, in the last quarter, indicated that you had gained market share in some of these markets. If you could just say a bit more on if that development continues? And also your -- you can say new approach to be more commercial or at least put focus on the more commercial parts of your business, lifting up, for example, the commercial responsible into management and those kind of things. If you can talk a little bit about it, if that is already having an impact now?

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Niels Frederiksen, Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board [7]

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Well, I think that the organizational change and the, let's say, our proximity to the individual markets and the development of the markets has improved. So that is the part of the operating model that is working as intended. We also said that our turnaround plan in France is moving forward. There is a little bit of -- we call it a technicality in the sense that when you look at the sell-in market share to the trade, it actually goes down because there has been quite a heavy launch by competitors in the period. But when we look at the sellout share in France, it is increasing month-on-month and quarter-on-quarter. So that's what we are focusing on and then on executing the turnaround plan. We also have growth in market share in Belgium, in the U.K. and in Spain, whereas, Holland is a focus area where we are doing less well at the moment.

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Operator [8]

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The next question comes from line of Niklas Ekman from Carnegie.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [9]

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A couple of questions. Firstly, when you talk about the EBITDA growth target here in excess of 5%, you're already here at 6.2% for the first half. I'm curious, when you look at the savings here from Fuelling the Growth, would you say that a lot of those now are front-loaded and we shouldn't expect kind of accelerated effect in the second half or otherwise, I guess, the target of at least 5% would be rather conservative? So I'm just curious if you can provide any more flavor there on what we should expect in terms of savings sequentially going into the second half.

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Marianne Rørslev Bock, Scandinavian Tobacco Group A/S - Executive VP & CFO [10]

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Thank you for your question. So if we look at the Fuelling the Growth and the impact for 2019, there will be a front-loaded impact, for example, from the organizational track, where we have had vacancies in some positions that we are filling at the moment. So we still feel comfortable with our guidance, where we say EBITDA above 5%.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [11]

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Okay, excellent. Thanks for clearing. And North America Branded, I'm curious why you are so convinced that the decline we've seen here in the first half is temporary? And particularly considering you don't seem to expect any recovery in the second half even though you're talking about weather and destocking, et cetera, but you don't seem to be indicating a recovery in H2. So why should we see a recovery in 2020?

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Niels Frederiksen, Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board [12]

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I think that if we look at the handmade cigar category in the U.S. and our performance within the branded sector over a number of years, we've actually done very well over the past 3 to 4 years and strengthened our position in the market. What we are seeing in 2019, the way we interpret the situation it is a rebalancing of inventory primarily in the online sector. When we look at our comparable sales in the nononline sector, it's actually flat to slightly up, but we are seeing inventories coming down across the board, and that's why we are calling all of the 2019 as a soft year for the handmade category. But as I also mentioned, when we look at this going forward, we are not seeing it as a change in the trend of the handmade market in general, which we still see to be down around 1% in volume year-on-year and then offset by pricing of 2%, 3%, 4%, over time. So that's still how we see the longer-term trend of the category.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [13]

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Okay, okay. And this rebalancing of inventory and online, perhaps not something that you've seen impacting your online business significantly, retail and online?

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Niels Frederiksen, Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board [14]

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Well, I think that the online continue to grow, but also at a slightly less growth rate than we would have anticipated, but it's really a function of 2 things. We've got still [CI] delivering satisfactory development, but as we are taking control of Thompson and doing more initiatives to drive profitability up, we can see that affecting net sales as well. So it's kind of a mixed picture if you want, but even the online business has seen the impact from what we believe is the weather.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [15]

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Okay. Okay. And thirdly, the exposure to flavors. You -- the characterizing the flavors. You mentioned these main numbers before. Can you just remind us what your exposure is in -- both for the branded cigars and for the whole group?

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Niels Frederiksen, Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board [16]

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Sure. What we are saying now is that this is -- a less impact for the total group. If you take kind of what is discussed in the U.S. right now from the FDA, we say this is -- by far the majority of our net sales in U.S. is nonflavorized. So if you look at the percentage numbers, it will not be material for the group level.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [17]

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But you can't give a number? Because I seem to remember you talking about a low single-digit percentage number.

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Niels Frederiksen, Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board [18]

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That is right. If you take what is being discussed by the FDA right now. Yes.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [19]

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Okay. Okay. And the FDA process, is that something when this really goes live, that's something that could lead to a tangible increase in cost? Or is it more of a gradual cost for them and kind of captured already within your current cost structure?

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Niels Frederiksen, Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board [20]

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I think it's too early to say. Currently, we are not seeing, let's call it, material cost associated with this. But as I said before, we do not know exactly what will be required, and hence, we can't quantify it. What we can say again, which are things important to remember, is that if the FDA puts in place restrictive regulation, it will be to our benefit. So it's always a -- with mixed emotions, we look at this because on the one hand, we do not want overly restrictive regulation. On your other hand, it could, in the long term, be to our benefit if certain regulation came into play but not all that easy to comply with.

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Operator [21]

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The next question comes from the line of Karri Rinta from SHB.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [22]

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Karri Rinta, Handelsbanken. A bit of a follow-up, more strategic on the discussion about characterizing flavors and FDA regulations. What would be the sort of your assumption of competitive impact from the fact that the smaller players would struggle with the [SC] applications and then maybe some cigar players that have high exposure to flavored or characterizing flavors what would sort of -- what would be the competitive impact from them having to find other avenues of growth for their volumes? So what kind of sort of contingency planning have you done for a potential flavor then, if we start with that?

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Niels Frederiksen, Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board [23]

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Yes. Again, I think that there are obviously certain competitors of ours that very exposed to flavors in the cigar market, and I'm sure that they are all looking at ways to deal with this if it comes into play. We are actually not spending a lot of time developing contingency plans because we do not really play in any significant way in the machine-made cigar market. So we are spending our time in a dialogue with FDA trying to explain to them the differences across the different categories, and we're of course also looking at whether there are any opportunities coming from a flavor band that we could benefit from.

Let me give you an example of Canada, where we can see that when a flavor band comes into play, there are a lot of consumers that have to revisit what to smoke and if to smoke. And depending on how people behave, they will look for different solutions. And we have to try to position ourselves in that picture. But it's really, really difficult because nobody knows how the consumer will react.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [24]

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All right. That's very helpful. And then maybe in Europe machine made, it seems that especially, the big tobacco companies are keen to get rid of their noncore assets, including their cigar assets, and unfortunately, many of those assets probably are too large for you. But in this kind of a buyers' market, when it comes to cigar assets, how active are you? And I don't know, you can't of course give us any names or time frames, but are you more active in that space? Are you more actively engaged in discussions than you were, for example, 12 months ago?

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Niels Frederiksen, Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board [25]

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Yes, as you correctly point out, we can't really comment on anything that is ongoing. But I think it's fair to say, and I think we've been very clear about this from the beginning that if we are to achieve the vision of becoming the undisputed global leader in cigars and pipe tobacco, we need to make acquisitions within the cigar area. And we basically look at acquisitions that are both natural bolt-on acquisitions and more transformative acquisitions.

The pipeline has been active for quite a while. But as we said also on many occasions, it often takes much longer than people anticipate, and the Thompson acquisition probably took close to 2 years from when we had the first conversations until we closed the deal. So all I can say that this is on our agenda, it's on our radar, and we want to make more acquisitions, but we also want to do it with a financial discipline that is expected from our investors.

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Operator [26]

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(Operator Instructions) Dear speakers, there are no further questions at this time. Please continue.

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Niels Frederiksen, Scandinavian Tobacco Group A/S - CEO, President & Member of Executive Board [27]

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Well, then, I would say thank you to everyone for participating or listening in, and I wish you all a good day. Thank you very much. Bye-bye.

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Operator [28]

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And that concludes our conference for today. Thank you for participating. You may all disconnect. Have a nice day.