Earnings Call: Q2 2021

Aug 25, 2021

Good day, and thank you for standing by, and welcome to the Scandinavian Tobacco Group Q2 Results 20 21. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. For your information, this conference is being recorded. Now I would like to hand the conference over to your speaker, Torben Sand. Please go ahead. Yes. Thank you, and 21. My name is Torbjorn Sandd, Head of Investor Relations of Scandinavian Tobacco Group. And I'm, as usual, joined by our CEO, Nels Vareksen And CFO, Marianne Reusliff Bach. The agenda for this webcasted conference call is The highlights for the Q2 of 2021, an overview of the performance in our 3 commercial divisions as well as for the group, including an update on key financial developments. And then finally, we will take you through the outlook for 2021 followed by the usual Q and A session. But before we start, I ask you to pay attention to our disclaimer and forward looking statements in the back of this slide presentation pack. Now please turn to Slide number 3, and I will leave the word to Nils. Thank you, Torben, and a warm welcome and good morning to everyone on the call. Thursday evening last week, We released the full interim report for the Q2 of 2021, almost a week before the scheduled release date. At that time, it became apparent that we needed to upgrade our expectations for the full year, and hence, we informed the market to comply with market rules. With this, let me now turn to the highlights of the Q2. In the Q2, Scandinavian Tobacco Group delivered Another strong financial performance, driven by continued strong demand for handmade cigars as well as a favorable market and product mix. Synergies relating to the Arjo integration also continue to support the financial results. The key financial highlights are: Net sales grew organically by 7.5 percent to DKK2.2 billion. EBITDA before special items was DKK606 million being at 21 percent organic growth versus last year. Adjusted earnings per share increased by more than onethree to DKK 4.1. Free cash flow before acquisitions was DKK 434,000,000 more or less in line with last year and return on invested capital improved to 12.3% for the 6 months ending in June against 7.6% last year. The increase in demand for our products continued to be driven by changes in consumer behavior impacted by the COVID-nineteen pandemic. Higher tobacco consumption across many product categories and markets have turned out to sustain for a longer period than originally anticipated, and we have been able to successfully exploit this opportunity. We've been able to keep factories running. We've continued with a high degree of innovations in the handmade cigar category, And we've seen value from the many professionalization initiatives implemented in the U. S. Online business. I'm very proud and pleased to see that the entire organization has stepped up to the challenges provided by COVID-nineteen delivered. The integration of Arjo Cigars is also progressing according to plan with cost savings on target to deliver DKK100 1,000,000 in 2021 on top of the DKK80 1,000,000 impact in 2020. The total net synergies to be achieved by the end of 20 '22 is maintained at DKK 250,000,000. As part of the Agio integration, we are in the course of 2021, closing down 3 of our factories, 2 in the Netherlands and 1 in the Dominican Republic. At the same time, we are expanding other of our facilities in both the Dominican Republic as well as in Sri Lanka. Based on the strong quarter and improved outlook for the second half of the year, we are raising our full year guidance. At the end of this presentation, We will give you more details on the revised guidance for 2021, so the headlines are organic EBITDA growth in the range of 16% to 20% versus 12% to 18% previously. Free cash flow before acquisitions is maintained in the range of DKK 1,000,000,000 to DKK 1,300,000,000 And adjusted earnings per share growth is revised up to more than 35% from previously more than 25%. Based on this overview, I will leave the word to Marianne, who will take will talk into the recent developments by division and give you a financial overview. Next slide, please. Thank you, Nils. The current high consumption of handmade cigars continues to benefit our company, but compared with previous quarters to a lesser extent for the division North America Online and Retail. The division reported net sales of $703,000,000 in the 2nd quarter, a decrease of 11% versus the same quarter last year, composed by 2% negative organic net sales growth and a negative exchange rate effect of 9%. The dynamics behind the performance in net sales started to change in the 2nd quarter compared with previous quarters as the consumers return to physical trade. Since the outbreak of the COVID-nineteen pandemic, Demand of handmade cigars has increased and demand has remained strong. The number of active customers took off during the Q2 of last year with physical retail being broadly closed, so expected comparisons would be tough. As a consequence, the amount of active customers during the past 12 months declined in the Q2 and with volumes sold also declining compared to last year, the organic net sales growth was negative by 2%. Our retail superstores have performed better than expected and has offset Some of the lower net sales in our online business. Net sales has increased by a high double digit percentage. The strong performance in retail is partly driven by the channel shift back to retail and more Importantly, the expansion of our own retail network. We are convinced that a substantial part of the strong online performance is a result of our intensified focus on improving customer service, for example, by upgrading our website platforms, Extended consumer profiling, introduction of a club model and many other initiatives to professionalize the division further. EBITDA before special items decreased by 20% to 132,000,000 with an EBITDA margin before special items of 18.8% versus 20.9% in the Q2 of 2020. The margin decline was driven by a higher OpEx ratio as the gross margin was broadly unchanged. The increase in OpEx ratio reflects higher sales related costs and the ongoing retail expansion. As we mentioned in Q1, the competitive pressure amongst the online distributors has intensified compared to last year, and we have equally seen an increase in our promotional spending versus last year. Please turn to Slide number 5. Looking ahead, we expect that the high consumption of handmade cigars will continue, but with growth rates reflecting that consumption has started to accelerate during the Q2 of 2020 and thus creating difficult comparisons onwards. Therefore, we expect the organic net sales growth to slow down in the second half compared to the first half of the year. Volumes in the online business remains well above the level from 2019, and we do expect to see permanently stronger level as compared to the pre COVID level, reflecting a structural shift throughout the summer after unusually low activity throughout most of 2020. Consequently, we maintain our expectation that marketing expenses will increase compared to last year. Finally, we expect to open a new superstore in San Antonio, Texas early next year, while the long term for the Q2 of 2021, The development was driven by the continued strong demand in handmade cigars and smoking tobacco. The global retail the global Travel Retail Business remains negatively impacted by travel restrictions. EBITDA before special items increased by 35% to €311,000,000 with an EBITDA margin before special items of 40.9% versus 36.7% last year. The profit increase and the margin improvement was realized with an improved gross margin driven by product and market mix, price increases and an improved OpEx ratio, which decreased due to general efficiency improvements. The mix impact is driven by an exceptionally Good performance in high margin markets such as Canada, the U. S. And Norway. As an example, Demand for pipe tobacco has increased in the U. S. Since the outbreak of the COVID-nineteen and the travel restrictions and border closures has benefited the smoke and tobacco business in Norway. Please turn to Slide 7. North America Branded owns the largest brand portfolio in the U. S. And the increased consumption of handmade cigars will benefit the division for the remainder of the year. The division is expected to deliver positive organic net sales growth, driven by the same dynamics mentioned for Online and Retail division. We are maintaining a Higher inventory position than normal to ensure stable supply during the uncertain demand situation we are in. This is impacting our cash flow position for the year. This brings us to the update for the last division, Eurobrands. Please turn to Slide number 8. During the Q2, the total market recovered further and increased by almost 2% for our top 7 markets. The market growth has been impacted by COVID-nineteen dynamics as the Q2 last year was negatively impacted by close downs and restrictions. The integration of Agilent continued to perform well, and we are on target to deliver the expected savings for the year of €100,000,000 The volume market share in key markets has declined from 33.3% to 32.5% in the Q2 2021 versus last year. We gained share in Belgium, Spain and Italy, whereas we lost share in the UK and in France. The development in the UK is driven by our focus on pricing and margins. We remain by a distance the number 1 in the UK. The decline in France has been driven by an out of stock issue of 1 of our key brands. The issue relates directly to a shortage of temporary workers, which has been an issue across industries. The out of stock issue is expected to be fully solved during the second half of the year. For the division Euro Branded, Both the reported and organic net sales increased by 2%. The termination of a low margin distribution agreement impacted negatively in the Q2, but was more than offset by the overall volume development in the markets and positive pricing impacts. EBITDA before special items increased by 79% to €191,000,000 with an EBITDA margin before special items of 27.6 percent versus 15.7% last year. In the Q2 last year, EBITDA before special items was negatively impacted by a fair value adjustment of Agile inventories of 23,000,000 Excluding this fair value adjustment, the EBITDA margin was 19.3% in the Q2 of last year. The strong underlying improvement in the margin is a result of the savings from Arto Integration, fueling the growth and improved pricing. Please turn to Slide 9. Our focus in machine rolled cigars remain to improve our volume market share positions and optimizing the value share further through effective price management. Overall, the division is for the full year expected to realize a slight decrease in organic net sales due to the loss of the mentioned low margin European distribution contract. Furthermore, the next steps of the integration of Actio Cigars remain key priorities. With the announced about €100,000,000 in expected synergies in 2021, where most will impact division euro branded, Profit margins are expected to improve further from the level seen in 2020. Please move to Slide 10, where I'll give you Selected financial highlights for the group. For the Q2 2021, net sales increased by 2 point 8% to €2,156,000,000 Gross profit before special items increased by 14% and EBITDA before special items increased by 24% to NOK606 1,000,000. The increase in net sales was composed by 7.5 percent organic net sales growth and a 4.7% negative contribution from exchange rate developments. The increase in gross profit was driven by the organic growth in net sales as well as mix. The gross margin increased by 4.9 percentage points to 49.7 percent with 1.1 percentage points of this improvement relating to the fair value adjustment of inventories at Atiosigas in the 2nd quarter last year of €23,000,000 All 3 commercial divisions delivered improved gross margins, although North American Online and Retail only did so marginally. The EBITDA margin before special items was 28.1% in the 2nd quarter versus 23.3% last year. Excluding the fair value adjustment, the margin improved by 3.6 percentage points, driven by the gross margin improvement, Arto Integration synergies and the underlying cost efficiencies across our operations. Special items was negative by €24,000,000 with €18,000,000 expensed in relation to the integration of Archer Cigars and €6,000,000 expensed in relation to changes in our manufacturing footprint. Special items was negative by $78,000,000 in the Q2 of 2020, primarily impacted by Arco Integration costs. Adjusted earnings per share was DKK4.1 per share compared with DKK3 per share. The increase was driven by the operational performance, partially offset by higher taxes. Finally, the free cash flow before acquisitions increased by $9,000,000 to $434,000,000 for the quarter. Working capital had a positive impact of €59,000,000 for the quarter, although the cash impact was somewhat lower than in the Q2 of last year as we remain observant to have sufficient supplies to meet customer demand. Please turn to Slide 11. During the Q2, the net interest bearing debt increased by almost $350,000,000 to $3,732,000,000 The net interest bearing debt increased by €458,000,000 versus the end of last year despite the strong financial results We delivered with a free cash flow generation of more than €500,000,000 in the 1st 6 months of the year. The increase in the net debt is attributable to our capital distributions of more than €900,000,000 during the 1st 6 months of 2021, which I'll come back to in a minute. The leverage ratio declined to 1.7x by the end of the second quarter compared with 1.8x at the end of 2020. The decline is driven by the increase in EBITDA. Please turn to Slide 12. Our financial policy states that any excess capital taking into account potential acquisitions and other liquidity needs, will be returned to shareholders. As part of this commitment, we initiated a new share buyback program in March with a total value of 600,000,000 As of end of the Q2 2021, we had purchased almost 1,600,000,000 shares at a total value of 190 €7,000,000 in this program. Including repurchases relating to the 1st program, which was concluded during the Q1 of this year, We have repurchased shares at a total value of €295,000,000 during the first half of twenty twenty one. Following approval by the Annual General Meeting held in April 2021, 2,500,000 shares was canceled in May, reducing the amount of shares by 2.5 percent to 97,500,000 shares. At the Annual General Meeting, the Board of Directors also approved a DKK 6.5 ordinary dividend payment per share, an increase of 6.6% versus last year. The increase reflects both our ambition to increase the ordinary dividend annually, but also that our underlying cash flow capacity has increased with the acquisition of Arcto Cigars. Including share buybacks and dividend payments, we have since the listing in 2017 returned almost yen 4,300,000,000 to our shareholders. Now please turn to Slide 13, And I will now leave the word back to Nils for a word on our revised financial guidance. Thank you, Marianne. And let me now turn to the expectations for the full year and the revised financial guidance. For the 2nd time this year, we have revised our full year guidance upwards. The 2nd quarter financial performance was broadly in line with our expectations, whereas the outlook for the second half is now set to be stronger as the increased demand for handmade cigars seems more persistent than originally anticipated. The organic growth in EBITDA is now expected to be close to flat in the 3rd quarter versus the previous expectation of a decline. Organic growth in EBITDA is still expected to be positive in the Q4 of 2021. However, I would like to emphasize once again that the general risk level remains higher than normal as COVID-nineteen continues to influence the business and consumer behavior. Additionally, we are in the supply chain seeing increasing issues with costs going up and lead times being longer. Given this, our revised guidance is Organic growth in EBITDA in the range of 16% to 20% from previously 12% to 18% Free cash flow before acquisitions in the range unchanged of €1,000,000,000 to €1,300,000,000 and adjusted EPS of more than 35%, up from more than 25% previously. The synergies from the Integration of Arjo Cigars are maintained of about DKK100 1,000,000 in 2021. And guidance range for free cash flow before acquisitions is also maintained despite the increase in EBITDA as the stronger than anticipated activity levels requires more inventories to secure supply. Total CapEx is still seen at DKK 370,000,000. For the full year, the expectations for total CapEx and working capital movements can be impacted by decisions to delay investments to change inventory positions should COVID-nineteen or the development in consumer demand across our product categories necessitate The guidance of an adjusted EPS has, as a consequence of the stronger EBITDA, been revised up to an increase of more than 35% compared with previously an increase of 25%. And as always, the guidance and assumptions are based on current exchange rates. So this concludes our presentation for today's call. I'll hand the word back to the operator and we are ready to 21. We are taking our first question from the line of Niklas Ekmat at Carnegie. Please go ahead. Thank you. Yes, a few questions, if I may. Firstly, if there's any way you could comment on the COVID impact, kind of the lasting impact from COVID here. How much higher is the cigars consumption, Particularly in the U. S. Market, if you can draw any conclusions there. And whether what it sounds like what you're seeing now is Growth rates basically slowing or even stopping, but you're landing at a much higher level in terms of consumption versus 2019. So I'm just curious if you have any input there on kind of the market and also your relative performance. That's my first Yes. Thank you, Niklas. Again, the handmade cigar market in the U. S. Is a niche market with not a lot of data to support it. And so we We're not super eager to put a percentage on the growth we've seen in consumption. But I think it's fair to say that it is of a reasonable size. And we are actually investing some resources at the moment Into trying to understand the exact size of the market more precisely, and I'm hoping we can come back with this In the future, we have tried to establish a more firm tracking of this. But there is no doubt that Consumption level has gone up. It's also true, as you say, that as we lap the full year impact, we see a flattening and we see the dynamics between the retail and the online side, but certainly at a higher level. And I think that We are seeing in the quarter a decline also as expected in the online business, But the business there remains well above the 2019 level suggesting, let's call it, a permanent and structural improvement of our online business. And of course, COVID-nineteen hasn't normalized yet, but we currently see that to be Something we can retain to a very large degree. Very good. And can you remind us what is the Approximate share of online sales in the U. S. Market and also your share of those online sales? Yes. So what we are estimating is that the online channel probably represent around 60% of volume and around 50% of value. Again, these are numbers that We've seen as round numbers because you can say that the online channel moves a lot of boxes and also They tend to move less expensive cigars. When you look at the retail, you have a much higher proportion of cigars being consumed 1, 2, 3, 4 cigars at the time And also generally at higher prices because it's often consumed, let's say, in our particular stores in a social context, We're willing people are willing to spend more. And we're going to add that our share of the online market is about 50%. Very clear. Thanks. And I know we've touched upon this before, but I still kind of moving out of COVID here. I'm just Curious if you could elaborate a bit more on the quite significant difference here in consumption in In COVID impact between the U. S. Cigars business and the European business, where the U. S. Is up significantly while Europe appears to be down in consumption. Can you just elaborate on this and whether you expect Europe moving out of COVID? Is that something that could boost sales volumes going forward or not? Yes. So if we Look at the handmade cigar category, we are also increasingly confident that consumption outside the U. S. Has gone up. So what we can see is that those more time consuming, more occasion driven Consumption of large cigars seems also outside the U. S. To be going up. But I think that yes, and here, We'll be watching that as we are doing in the U. S. When you look at the machine made cigar markets, and remember, we are not Really active in the U. S. Machine made cigar market. We do see a higher consumption in the U. S. Of machine rolled cigars. We are not seeing it in the same degree in Europe. We believe that one of the reasons is that consumers have really been Lockdown in a different way. And in many countries, we've seen Specific channels also being closed down if they were not deemed to be essential. So getting your hand on a cigar with the same ease as in the U. S. Has actually been more difficult. But so we don't actually have a strong anticipation of a sales rebound in Europe, what we see in Europe is actually and what we are pleased to see is a lot more stability and also higher predictability from our side and Let's call it just an altogether better control of the business when it comes to taking price increases, maintaining cost under control and so So there's good stability in that business today, but we are not necessarily seeing consumption moving either up or down in any particular way. Okay. Thanks. That's very clear. And thirdly, if I can ask a little bit about your guidance, 16% to 20 percent organic growth in EBITDA. In H1 here, you had growth of 35%. So if you look at the low end of your guidance, you are Basically expecting 0 growth in H2. Is that a deliberately conservative assumption? I realize that Q3 here particularly faced tough comps, but is there anything you see that suggests that earnings growth could be 0 in the second half? Well, I think you are spot on. We are seeing the second half to be more flattish. Again, you can say the Q3 is the critical quarter where we had the most difficult comps versus last year. And we just see increased risk. We mentioned in the report some of the disturbances In the supply chain, we see increasing incidences In the U. S. Of COVID-nineteen, still in certain states. We also talked about the out of stock situation we had in France. And remember that While we are trying to deal with COVID-nineteen and I think doing a good job, we are also restructuring our entire factory footprint. So we really have a lot of, let's say, important things to balance up against each other In the second quarter sorry, in the second half of the year. So that is the, let's say, the sum of the parts. But it is up against Higher comparison numbers altogether. And I can add, Niklas, that originally, we were expecting Q3 To be lower than last year, especially because last year was a very, very high Q3. Today, we see that we will come in more or less on par of Q3, which is also part of raising the guidance. Thank you. That's very clear. And can you update us a little bit on the cost savings programs and the synergies? How much of the if we start with the Agios synergies, how much is left for you to deliver in the rest of '21 and then 'twenty two. And this rolling towards 2025 and then the Factory closures that you're doing now, what kind of savings have you mapped in already that you both for the coming quarters and coming years? So for 2021, we've said that we will To an additional synergy saving of in the level of €100,000,000 You should think about it like this that the main part of those €100,000,000 has been realized in the first half of twenty twenty one. And a minor part is coming in, in the second half. And that is, of course, also because in the second half of twenty twenty, We did already start realizing a large part of the synergies. For the factories that we are Closing down in the end of 2021, there will come some synergies in During 2022, but it will not be it would be in the lower level than the €100,000,000 that we have realized this year. I hope that answers your question. Absolutely. Thank you so much for taking my question. Thank you. We are now taking our next question from the line of Gaurav Jain at Barclays. Please go ahead. Good morning. It's Mandi Stangel on behalf of Gaurav. A couple of questions, if I may. You mentioned that your second half outlook for the U. S. Cigar market is More positive than you previously anticipated with seamless checks due to end in September or the second half if they are extended. Do you have any feeling to how this could potentially impact the underlying demand given it has been so strong over the last 12 months? That's my first question. Yes. I think this is an issue we are all debating, what is the impact Of the government subsidies. And for sure, they matter. There's no doubt about that. But in our particular case, We think they probably matter more for our mass market business in the U. S, which is the pipe tobacco and fine cut business, which is more, Let's call it economically driven, whereas we think that the demand for handmade is driven by A combination of people working from home, having more time. And what we can see Here, as COVID-nineteen is beginning to normalize and people can go out again, is we are seeing A very strong return to the retail outlets, reflecting also that people want to go out. So this is part of Our consumers' social life. And we are watching the stores very closely because we think they are good indication of whether Demand will continue at a high level or whether people will start to adapt their consumption as they are returning to work and doing other things. So It's a mixed picture for us, but we are watching the subsidies closely. Excellent. And just a follow on question. You mentioned, obviously, The retail stores reopening and you're seeing that channel really accelerated as lockdowns end. In the Q1 call, I remember you mentioning that At the time, you weren't seeing that consumers were going into retail stores and actually staying at retail stores in terms of actually using the bars and sort of sitting in a store consuming Cigars and the alcohol that you offer, which is obviously a higher margin business for you. How have you seen that change sequentially as sort of lockdowns have ended And accelerated? Yes. They have certainly come back, and we've seen that acceleration in the course of Q2. And also, you can say that it's part of the indications that we've used to, let's say, raise our expectation of demand in the U. S. In the second half of the year. So they're coming back, they're spending and We are actually seeing that. We have the stores in Texas and in Florida, which are 2 of the High incident states in the U. S. We are seeing no indications that people are returning, let's say, or staying more online in these particular areas versus others. So to me, it kind of proves also That people the stores play a role. People may buy the bulk of their Cigars online, but they still want to go into retail stores. And remember, for us, retail stores is also an important Way for us to contribute to the long term health of the category. This is where consumers go when they start engaging with the category, and we think they need Something better than what they're being offered today, and we can see that they appreciate that in our stores. That's very helpful. And just last question For me, if that's okay. Obviously, again, on the retail stores, you're opening your Sempone in San Antonio early next year. How should we start to think about the long term opportunity in stores? I know it seems that you still see as a proof of concept stage, But when do you think you will have a better idea? Is it that once you have 7 stores that is your proof of concept stage and then that's really where The investment ends in the later? Or do you think you're going to continuously be invested in cash? How should we think about that in terms of, obviously, a CapEx exposure as well? So we originally had 4 test stores, let's say, slated for Helping us make the longer term decision. And the first one in Texas Broad Colony Texas, The Colony opened on time, but the 3 others were really delayed and only opened in the second half of twenty So we feel we are a bit behind on the data on the 3 remaining stores. I can be very open and say that the Colony It's doing very well. And it's really the remaining stores that needs to show that they are also part Of the concept. And the reason we opened San Antonio is that we feel that they're confident enough not to stop totally, But just move ahead when we get the right locations in a slow fashion. And I can't tell you exactly when we're ready to come back And give you more, let's say, color on this. But I think still in the overall context of, let's say, of capital That would be needed for this. It's not it shouldn't be a concern versus what we're generating altogether, in my view. Thank you. And we're taking our next question from the line of Magnus Jensen at SEP. Please go ahead. Thank you very much and thank you for taking my questions. I have a couple. First To your gross margin, it's been extremely strong for the first half here Compared to what you've seen in previous years, is there anything that we should take notice of here? Is it I mean, is there any one offs in this? Or is it a level that is actually repeatable if sort of the mix is maintained As it was in the first half. So thank you, Maarten. It's a good question. It's absolutely right that I've seen increased gross margins in the first half, and there is a couple of reasons for that. We mentioned In our call here that we do see both the market and product mix. We have seen very favorable mix Towards the smoking tobacco where we have higher margins and also in those countries where we have higher margins mentioning Both Canada and Norway and U. S. With the smoking tobacco. It's also important to say that on pricing, It's one of our focus areas to focus on pricing and be more disciplined on the pricing, and we have In good effect of that in the first half year. So I think those are the main reasons For that good gross margin. And while that is sustainable, part of the mix is coming From the COVID, for example, on border trading in Norway, where the border between Sweden and Norway has been closed down. So there will be some effect that will be difficult to maintain fully. Okay. Is it fair to assume that, I mean, compared to historical levels, that we should see a higher level, not necessarily on the level that we see this year, but in this first half, But in general, when we look ahead compared to previous year, given you are some of the one of the things you say, it's good On pricing? Yes, there will be several impacts. There will, of course, also be impacts on Our plant closures that go in and impact the gross margins and then the focus on pricing Also will ongoing have a positive impact. Okay. Thank you. And then a kind of Related question actually because go further down the P and L to the EBITDA margin, you did 28% margin for this For Q2, which is rather impressive given the fact that at least when I look back, I can see that Q2 is, in terms of revenue, a fairly good quarter. But in terms of margin, it has never been a particularly good quarter. So very impressive with the 28%. And actually, the question is a long line, so it's one for the gross margin. So is there any one offs aside from what you just mentioned on the gross margin I think we should be aware of or is this just the impact of Vivaceo Fueling the Growth and the other good initiatives that you're making to get you to these kind of levels? And that is correct. The only one you should be aware of is the fair value adjustment In last year's quarter. So if you're comparing to last year, it was fair value adjustment inventories in Agio. Otherwise, it is the it is increasing gross margin with the impact from prices and mix And then our efficient programs, including the synergies from Arjo? So if you look at it on the OpEx ratio level, It is more or less unchanged. So it is primarily driven by the gross margin. Okay. That's great. That sounds promising for the future. The next question or my it's actually my I have 2 more. Second half, you said Q3 is going to be a more difficult comp, Yes, which I, of course, agree with. But let's talk a bit about Q4 because Q4 last year, you flagged some cost Used for preparing for 2022, which didn't end up having exactly the impact that you expected, but it did have some impact on your margins in Q4. And also, there was a timing impact in North America where some of the products were shipped in Q1 instead of Q4. So a couple of things making Q4 seemingly an easy comp. Is that correctly assumed? I think if you look at Q4, correct that there were kind of some one offs in Q4 last year. I think on a high level, you should expect in Q4 to see our online business as slightly below last year, Especially because we will incur increasing costs, both on expanding on the retail side, but also On sales and marketing, we do expect North America branded to come in with a strong Q4 where Euro brand will be slightly positive versus last year. So I think that's sort of the direction I can give you on Q4. Yes. And then of course, you should be aware that the Q3 of the year is from a number perspective Much bigger than the Q4. Yes, of course. Thank you, Zolm. Last Question, actually, yes, sort of a follow-up to the retail, so the physical retail question asked earlier. So I understand that it's too early to sort of make a decision in terms of how much to roll out. But have you sort of mapped The U. S, looking at what kind of potential is there really? You now have 7 stores, but is it is the potential 100 stores Or is it 50 stores? At this point of time, are you able to sort of give any thoughts on how Big this could be. I mean, dollars 50 isn't that much anyway. It's just 1 per state, I guess. But could you give some thoughts on this? Yes. I think what we can say for now is that the way we think about the superstores is that They will not necessarily be suitable for every single state. So like today, we've got 2 in Texas, 2 in Florida. These are 2 states that we believe are high potential states. And we probably think that Because you need a high traffic flow and you need a certain income level and stuff like that. So what we have said before and which is still the case is that we're probably looking for 20, 25 stores more Then what we had today, if they, of course, all meet the hurdle rates and that's still where we are In terms of thinking. Okay. Thank you, Nils. That's helpful. That's all my questions for today. Thank you very much. You're welcome. Thank you. We are taking our next question from the line of Martin Brende, Nordea. Please go ahead. Hi, thank you very much. Just three questions, if I may. First of all, can you maybe elaborate a On the situation with the employee shortages in France, sort of what is driving this shortage situation? And when should we expect you to be out? I hear that it's in the second half, but should we expect you To keep losing market shares in Q3? Or is this going to be resolved sooner rather than later? Yes, that's the first question. Yes. Again, we are seeing multiple Points of pressure on the supply chain. I think it's very important for everyone to remind themselves That especially for those of us operating in more geographies, COVID-nineteen is not over. We continue to be managing Access, distance control, sanitary issues across all our factories on a permanent basis. On top of that, we've got increasing lead times, we've got increasing cost of certain materials And we've got the full restructuring of our factory network. So and we are in control. So I'm not saying we're not in control. But it does mean that we will we are running some trade offs from time to time. And what we found this summer was The sum of was that the inability for us to get temporary labor reduced our capacity for a while. And we can see that catching up to this with the restrictions we have is Providing some challenges, but what we're also saying is we've got a solution and what we are doing is we are really prioritizing By how can I say by value, right? So in fact, you can say that France is Unfortunately, not the place we should have run into the problem, and we are trying to manage that as best as we can. And we are currently seeing these problems resolved In the course of the second half, will they have a potential to our market share? It could have. But I also want to say that some of the market Data is not necessarily consumer buying. It is based on data access and some of it is based on our sales to retail. And here, an out of stock situation will hurt us more than if we were measuring to retail. So we are watching this Carefully, but we are not super concerned about it. When did it start the out of Stock situation, was it there by the beginning of Q2? Or was it more towards the end of Q2? As I recall it right now, it started in May. Mid quarter. Okay. Thank you very much. Just my second question would be just to understand the level of competition that you Seeing right now, if we take pre COVID-nineteen as sort of the index 100 and the normalized level, Where is the competition and the promotional activity now versus pre COVID levels? And where do you see it going? Do you see it going back So normal back to the pre COVID levels? Or should we expect still lower promotional activities going forward? Yes. I'm assuming you referred to the online business in the U. S. And here, I would say that We are certainly expecting the promotion pressure to go up. But we also, in parallel, I've been working on what we call the professionalization of the online business, which is all initiatives that should help us Protect margin. And we are also, on an ongoing basis, increasing prices to help protect margins. So What I'm basically saying is we're doing as much as we can to sustain the margin improvements we've seen. But it's also clear that if we think we need to increase it from a competitive point of view to protect our market share, we will do so. And I think the when we report the 3rd quarter, We'll have a good indication of how it's evolving. But I think we need more quarters To figure out whether it will go back to the original levels or whether we can actually, let's say, reduce it altogether By building on what we've seen in COVID-nineteen. And maybe one thing just to add that remember that this business was Highly competitive before COVID-nineteen, but then due to the very dramatic increase in volume and demand, It suddenly almost disappeared during the 1st quarters of COVID. So it's probably more a return back to some sort of normalization. Okay. That makes sense. Thank you. And just the last question, which Sort of more broad question, but you have clearly deleveraged quite a bit. And from a financing perspective, you seem to be Ready for another acquisition. How does it look internally? Would you have the capacity and the capabilities to absorb another company after the Ardu Inspiration has succeeded. So you're right that financially, it looks positive If there are possibilities on the acquisition side. Internally, Onato, I would say we have to close down the 3 plants end of the year. And when doing that from the beginning of next year, we will be good to get a new acquisition. Okay. Thank you. And congrats with the strong quarter. Thank you. Thank you. We're taking our next question from the line of Nicholas Ekma with Carnegie. It's just a quick follow-up, A small detail here. You provide a lot of details here on your buyback program, but it's difficult to monitor still how exactly how many shares are I think you have 97,500,000 shares and then you have another 2 point or out of those, you have 2,750,000 shares in treasury, right? So If I look at the actual number of externally held shares, it's just below 95,000,000. Is that the way to look at it? I think you can put it that way, yes. Great. And since you give so much detail, it would be great if you could be more Detail in the quarterly results as well on the number of shares going forward. Yes. Thank you. Thank you so much. Bye. Thank you. There are no more questions on the line. Please continue. Well then from our side, I think we will Thank you, everyone, for their participation, and wish you all a good day. That concludes our call for today. Thank you for participating. You may all disconnect.